Established in 2017, InfraCredit provides local currency guarantees to attract domestic capital from long-term investors to lend to infrastructure assets in Nigeria. InfraCredit is a ‘AAA’ rated specialized infrastructure credit guarantee institution backed by the Nigeria Sovereign Investment Authority, GuarantCo (a Private Infrastructure Development Group company), KfW Development Bank, and Africa Finance Corporation, to provide local currency guarantees, and mobilize long term debt financing for infrastructure in Nigeria.
Guarantees are one of four blended finance archetypes identified by Convergence. When a blended finance deal employs a guarantee, a guarantor (in this case, InfraCredit) agrees to pay part of or the entire value of a loan, equity, or other instrument, in the event of non-payment or loss of value. This ultimately serves to attract private capital that would normally not invest in the transaction. According to the Convergence database, approximately one-third of global blended finance transactions (35%) have used a guarantee.
InfraCredit plays a critical role in the infrastructure sector in Nigeria, as long-term capital required by infrastructure projects has historically been unavailable from the domestic banking market. By reducing risk, InfraCredit’s guarantees attract investment capital from risk-averse domestic pension funds and insurance companies, ensuring critical infrastructure projects are realized, while also deepening the Nigerian debt capital markets. We spoke to InfraCredit’s CEO, Chinua Azubike, on InfraCredit’s impact, what makes Nigeria’s market unique, the challenges and opportunities facing a local blended finance actor, and much more.
Can you share a specific example of a blended finance transaction InfraCredit has been involved in?
We supported the first 15-year local currency green bond ever issued in Nigeria. It was issued by a power utility company called North South Power (NSP), which provides about 8% of Nigeria’s grid power, and supplies electricity to about 10 Million Nigerians. As a result of our guarantee, they were able to raise this first time 15-year financing from domestic pension funds.
In addition to the guarantee, we provided technical assistance (TA) to boost the ability of these pension funds to appraise the projects that received our credit enhancement. We did this so that they understand our credit assessment process. The Private Infrastructure Development Group (PIDG) provided part of the grant funding supporting InfraCredit, which underpinned our ability to provide the TA. We also received support from the US Agency for International Development (USAID) to provide technical due diligence for the assessment of the Shiroro Hydroelectric Power Plant– the second largest Hydro Power Plant in Nigeria–for which NSP acquired a 30-year concession. Finally, KfW Development Bank, through the African Local Currency Bond, supported the green bond assessment, which enabled the certification for the Senior Green Infrastructure Bond.
So, you can see how all of these actors enabled North South Power to issue the bond, ultimately mobilizing 8.5 billion Naira (about $23.7 million) in local currency from domestic pension funds in 2019. This transaction is also a great example of blended finance playing its natural role in bridging market gaps. The bond was 60% oversubscribed, making it evident that there is an appetite for credit enhanced transactions.
As a local blended finance actor, what are some challenges and opportunities that InfraCredit is uniquely faced with?
The main challenges we are faced with, and also the reason we exist, are the macroeconomic constraints inherent in the Nigerian market. These constraints include limited access to long-term financing from banks, a high interest rate environment, and high inflation – which all impact the cost of doing business, the cost of infrastructure, and the affordability of the services the infrastructure provides once constructed.
We address these challenges by offering guarantees which unlock long-term financing for infrastructure in Nigeria. So, our role in this environment is to bridge market gaps. This is where tools like blended finance play a critical role in bridging the costs for critical infrastructure that have significant social and economic impact and helping ensure these projects can be completed. The use of blended finance can help provide much-needed public services to improve the quality of life for Nigerians.
InfraCredit has a local currency rating of AAA, the highest financial strength for a local credit institution. On the strength of our rating we guarantee eligible infrastructure projects, enabling them to raise long-term domestic financing from domestic institutional investors.
Unlike some other countries in the region, Nigeria has fairly developed debt capital markets. So, the market for long-term local currency financing exists, but can be deepened. We also have a fast-growing domestic pension fund market that is growing at 15% annually. It is currently valued at about $10 trillion Naira (about $29 billion). Now, if you look at the asset allocation, 70% of these assets are in government securities, and less than 1% is allocated to infrastructure. The opportunity is therefore clear. InfraCredit enables first time borrowers to access long-term debt from the market, and we promote intermediation of domestic currency, while creating a new asset class for domestic institutional investors. This is especially important, given the dearth of credit worthy infrastructure projects.
The North South power project I mentioned shows the appetite is there, but on the supply side. We need to work more collaboratively with our development partners to ensure the risk mitigation tools in the marketplace work in a more coordinated way to unlock a quality pipeline of projects.
One of the reasons we are engaged with Convergence Finance is to get the message out there that there is a huge opportunity for impact capital to play a role in countries like Nigeria, that are unique because of the pool of domestic capital available, and thereby requires viable investment outlets.
Do you measure the impact of your blended finance transactions?
We first track mobilization impact, that is, whether our guarantees actually make it possible for companies to mobilize capital to construct new infrastructure, and how many local pension funds invested in an asset class they otherwise wouldn't have invested in. Today, 15 pension funds have invested in InfraCredit guarantee bonds. In addition to capital mobilization, we measure impact by looking at key outcomes and indicators, such as access to the new infrastructure, capital market development in Nigeria, job creation during and after construction, economic opportunities (especially for local businesses) created from the project, and finally, the demonstration effect of our transactions. In addition, we are in the process of implementing a development impact framework with Dalberg Advisors, funded by the German government through KfW. We hope to have the full framework in place by the end of the year and believe this is a significant step towards unlocking blended finance. Using the Development Impact Framework derived from our refined Theory of Change, InfraCredit will spend the next one year working to institutionalize operational efficiency of our capacity building programme, expanding donor support and multi-stakeholder partnerships, and integrating ESG and SDGs. Milestones will define progress for each workstream in the medium to long run, enabling us to institutionalize development impact, attract blended finance, and scale our impact.
How did you come to lead InfraCredit, what did you do before, and what initially attracted you to this blended finance/development finance space?
Before getting involved in the establishment of InfraCredit, I worked in the Nigerian domestic financial market as an investment banker. That was an interesting career shift, and also a risky one, since nothing like InfraCredit had existed before in Nigeria, and my primary role was to work with the sponsors on the concept to develop the business plan, operational model and establish the institution. But I was motivated by the quality of the sponsors¬–the sovereign wealth fund and PIDG– as well as the opportunity and potential impact of setting up a blended asset facility in Nigeria that mirrored what PIDG had achieved through GuarantCo. Now 2 years later, we see what collaboration, innovation, and commitment can achieve in a country like Nigeria. The outlook is positive, but a lot will depend on the strategic collaborations we can build to unlock this pool of domestic credit to develop the market.