OVERVIEW OF CHAPTERS - Assessment of power infrastructure financing in Nigeria

1 INTRODUCTION

1.12 OVERVIEW OF CHAPTERS

This section focuses on the background of the problem, the rationale or motivation for the study, the significance of the study, problem statement, research questions, research objectives, the purpose of the study, the value of the study, as well as the delimitations, limitations and ethical considerations.

Chapter 2: An overview of power infrastructure financing

This chapter focuses on the related research and theoretical rationale, including research questions, concepts, and perspectives in the context of previous academic research and current discussions. The chapter explores the related literature on the current sources of power infrastructure financing, the effective ways of financing power infrastructure, the challenges facing power infrastructure financing, the effect of economic policies on power infrastructure financing in Nigeria and the role of power infrastructure development on economic growth.

Chapter 3: International literature review: Power infrastructure financing in Brazil and India

This chapter covers an overview of the current sources of power infrastructure financing, the effective ways of financing power infrastructure, the challenges facing power infrastructure financing, the effect of economic policies on power infrastructure financing in Nigeria and the role of power infrastructure development on economic growth in India and Brazil. Related views of scholars and researchers on the same topic are reviewed in this chapter.

Chapter 4: African literature review: Power infrastructure financing in South Africa and Ghana

This chapter comprises an overview of the current sources of power infrastructure financing, effective ways to finance power infrastructure, the challenges facing power infrastructure

financing, the effect of economic policies on power infrastructure financing in Nigeria and the role of power infrastructure development on economic growth in South Africa and Malawi.

related views of scholars and researchers on the same topic are reviewed in this chapter.

Chapter 5: Power infrastructure financing in Nigeria

An overview of the current sources of power infrastructure financing is presented in this chapter, as well as effective ways to finance power infrastructure, the challenges facing power infrastructure financing, the effect of legislation policies on power infrastructure financing in Nigeria and the role of power infrastructure development on economic growth in Nigeria.

Related views of scholars and researchers on the same topic are reviewed in this chapter.

Chapter 6: Research Methodology

This chapter focuses on the research approach and design that the study adopted in order to obtain accurate data. Furthermore, the chapter explains the research area and target respondents for the study and the sampling design and data collection, as well as the data analysis for the study.

Chapter 7: Findings and Analysis

This chapter focuses on the research findings and analysis method used to analyze the findings, including an interpretation of the data collected and the data presentation method.

Chapter 8: Discussion of Findings, Conclusions and Recommendations

This chapter focuses on the data collected and the methods by means of which the findings are analyzed. In addition, the chapter focuses on discussions of the findings and the methods by means of which these findings are presented. This chapter further focuses on conclusions made from the data collected, and the literature review and also provides a concise summary of recommendations. All the findings are used draw conclusions for the study.

9 1.13 CONCLUSION

This chapter introduced the various segments of the research study and the structure of the research was presented. The aim of the research study, motivation, purpose, research questions and objectives were discussed in this chapter. Chapter two will explore infrastructure financing from a broad perspective.

CHAPTER TWO

LITERATURE REVIEW: AN OVERVIEW OF INFRASTRUCTURE FINANCING

2 INTRODUCTION

In this chapter, literature is reviewed in order to comprehend the problem statement and objectives of the study. Literature relating to infrastructure funding is explored. The history and types of infrastructure financing as well as their characteristics are also considered, along with various ideas and effective ways to finance infrastructure. In addition, the challenges facing infrastructure financing, the maintenance of infrastructure projects, the politics involved in infrastructure financing and the philosophical ideal involved in infrastructure financing are also examined. Finally, an overview of power infrastructure financing and ways to finance power infrastructure are presented.

2.1 DEFINITION OF INFRASTRUCTURE

Despite infrastructure having been discussed widely by professionals, there has not been any established definition of infrastructure. Grimsey and Lewis (2002) stated that infrastructure is easier to recognize than to describe. In addition, the World Development report (2014) regards infrastructure as an “umbrella” for diverse activities. After exploring several opinions stated by different authors it can now be established that infrastructure encompasses irrigation, tunnels, roads, power distribution, pipelines for oil and gas, health services, sewage and sanitation services, urban services, telecommunication services, power plants facilities, water services, airports facilities, roads and the like (Kumari and Sharma, 2017).

2.2 HISTORY OF INFRASTRUCTURE FINANCING

The financing of public infrastructure dates back to the “master contractor model” by the Romans. All through history empires have always identified the need to establish infrastructure all through their domains. In 312 BC the Romans started paving a highway known as “appia”

from Rome to southern Italy to improve ties with Greece. The Romans created a link through the 80000 km highway route from the hills of Rome that extends across Europe, Asia Minor and North America and gave rise to the famous saying, namely “All roads lead to Rome”

(Ngowi et al., 2006). At almost the same time the Incas also paved a 55000km highway route that extended into the territories that formed part of northern America and Chile, southern

Columbia, and almost the whole of Bolivia, Ecuador and Peru. (D’Altroy, 2003). It is said that both Romans and Incas learned firsthand that adequate infrastructure is vital for economic growth, although with the rich essential history infrastructure has, there has always been confusion to both economists and socio-philosophers because of the complexity of the relationship between the public sector and private sector. Infrastructure symbolizes industries such as turnpikes, canals, sanitation services, tramways, electricity provision, communication and railways, which are diverse in nature; these are unique because they are different from manufacturing (Ngowi et al., 2006). Firstly, infrastructure are “natural monopolies” because they prevent competition with the rise in size to scale and high fixed cost. Infrastructure establishment’s produces a ‘non-tradable’ utility; examples are road and electricity infrastructure which can only be traded with neighboring countries – it cannot be transported from one nation to other nations. Unlike manufacturing, the producers do not have to contend with importation competition. In the same vein foreign investors not happy with the policies of the government cannot by any means export local production to overseas markets. Therefore, it is advisable for local investors to invest in infrastructure development because of the closen links construction shareholders have with infrastructure projects since investors can play an active role during the project phases (World Bank, 1994b).

Financing infrastructure dates back to the Middle Ages in 1299 when the then English crown financed the projects of silver mines in Devon with the help of an off-balance sheet from an Italian dealer bank that incurred most of the operational and market risks. In addition, concessions started in the sixteen century and were first practised by the French government who granted a concession to a private company to construct the Canal du Midi in 1514 (Rolt, 1974). Financing infrastructure has always been the case of finding the line between where the public interest ends, and where the private interest begins: this has been the case for centuries now. However, it has been established that public sector alone cannot finance infrastructure projects, especially in the case of the developing countries, which cannot cope with the demands of infrastructure development for their ever-growing populations (Ngowi et al., 2006).

2.3 CLASSES OF INFRASTRUCTURE

Infrastructure development plays a significant role in every nation’s quest for economic development. It is therefore very important for both developed and developing countries to

invest in infrastructure development. Infrastructure is classified into two main divisions, namely social infrastructure which consists of health systems and education, while physical infrastructure consists of roads, transportation, water facilities, and power which form the focus of this research as shown in fig. 2.1 below (Kumari and Sharma, 2017).

Figure 2.1: Classifications of infrastructure Source: Kumari and Sharma (2017)

2.4 CHARACTERISTICS OF INFRASTRUCTURE FINANCE

Infrastructure finance projects are different from manufacturing projects because of the higher risk involved in the process of financing infrastructure. According to Mor and Sehrawat (2006) and Smith et al. (2009), the characteristics of infrastructure finance are as follows:

2.4.1 Higher risk

The greater risk that characterizes infrastructure finance makes it different from manufacturing (Esty, 2004). This is due to the large sum of capital invested , and the longer duration of time involved in the completion of an infrastructural project; for example, the shortest duration that is required for the completion of a power project is five years. This is due to demand

uncertainties, environmental surprises, technological obsolescence, government policies and the politics involved (Smith et al., 2009).

2.4.2 Longer maturity

The maturity period for infrastructure involves a minimum of five years and a maximum of 40 years, which can be seen in the design life of infrastructure projects and their period of completion (Khan, 2013). Though it may take long to complete, the lifespan of the infrastructure projects lasts longer. An example is the lifespan of a hydroelectric power infrastructure, which can last up to a period of 100 years or more and takes five years to construct (Mor and Sehrawat, 2006).

2.4.3 Larger amounts

Infrastructure projects usually cost a huge amount of money; this is one of the challenges of infrastructure financing (Mema and Njiru, 2002). The amount required to construct a kilometer of road can cost about 1 million dollars and could amount to about 200 million dollars in total (Mor and Sehrawat, 2006).

2.4.4 Positive returns:

Since the revenue of infrastructure projects are subject to the rate of inflation, returns needs to be measured in “real terms” (Thobani, 1999). Due to the effect that higher pricing can have on the economy and investments, the annual returns and demand could be close to zero but cannot remain negative for a longer period of time, as can be said in the case of manufacturing goods (Smith et al., 2009).

2.5 Risks involved in infrastructure development:

The cost of construction of any infrastructure projects is quite expensive; therefore, before engaging in an investment relating to infrastructure, the risk associated must be considered and analyzed carefully (Matsukawa and Habeck, 2007). Willing investors have been uncertain about investing in infrastructure projects due to different risks associated: if the risk is known and analyzed, there will be reduced rate in investment by investors (Grimsey and Lewis, 2002).

The infrastructure risk is classified into in three categories: financial market risk due to market failures; risk involved in the completion of infrastructure projects and also risk associated arising from policy regulations and public pressure as seen in fig. 2.2 below. These risks are grouped as commercial risk, force majeure risk, capital risk, country and environmental risk and others ( Chapman and Ward, 1997; Kumari and Sharma, (2017).

Figure 2. 2: Classification of risk associated with infrastructure projects Source: Kumari and Sharma (2017)

2.6 WAYS OF INFRASTRUCTURE FINANCING

It is the responsibilities of the government to provide infrastructure facilities, both social and physical infrastructure, to its citizens such as education, health, roads, power, transportation, and water facilities. These provisions will improve the life of the citizens and the country’s economy at large (Alm, 2011).

Dalkmann (2014) explained that one of the three ways infrastructure can be financed effectively is by helping municipalities obtain the adequate capital they need to finance infrastructure efficiently and in a coordinated way through creating a platform for private finance, which reduces spending by the government while at the same time promoting sustainable economic growth. Bevington (n. d) also outlined four steps by means of which infrastructure can be financed effectively, namely positive partnering between public and private investors, focusing on private and projects delivered by local government, admission to relevant financial institutions, effective multicity partnership. There is a need for governments to combine with other factors to realise efficient financing mechanisms for infrastructure projects: the private sector and civil society should be included in these factors.

The public-private partnership, which is inclusive of both the central government and private sector, plays a significant role in the provision of infrastructure projects (Dalkman, 2014).

Alm (2011) further indicates that the collaboration between the public and private sector which is known as a public-private partnership, is effective in the provision and construction of several infrastructure projects. This collaboration can fund infrastructure projects without adding to the fiscal burden of the government. Annez (2006), on the other hand, emphasized that the private-public partnerships have not done enough to fund infrastructure projects as

expected. Instead, the little funding available has to be mobilized for practical, political and personal reasons, due to corruption.

Enright and Newton (2004) indicate that private sector participation in infrastructure development is not limited to the provision of funding for infrastructure only: it also consists of the distribution of built structure and provision of infrastructure services. This is cheaper when carried out by the private sector and more effective than government when the governement finances the same number of projects. Hence, governments need to amend policies to drive private sector participation in infrastructure projects. The involvement of the private sector is well positioned and has the strength economically in the delivery of services, especially when the gains and cost savings exceed the financing amount associated with public financing. The two methods that are required to provide infrastructure through the private sector are public-private partnerships and the privatization of public facilities (Trading Economics, 2016).

2.6.1 International financial institutions (World Bank, International Monetary Funds) The international financial institutions (IFI) provide funding for infrastructure projects in the form of loans, grants and offer technical support to several nations globally inside the infrastructure financial world. This is in the form of public banks (e.g. World Bank), the local development banks and the International Monetary Fund. The central government acts as the controller of government banks and developmental financial institutions. The international financial institutions provide funds globally, locally and nation-wide. Precautionary measure of the government’s intentions to finance public infrastructure projects and the international capital market that allocate financial relief to different states for infrastructure development (Petru, 2014). Tare (2014) relates that effective financing instruments for infrastructure projects are in the form of green funding, incremental tax financing and crowd-funding. Wu (2010), on the other hand, relates that the financing instrument, for infrastructure projects in China arenon-fiscal revenue, budgetary allocations from the central government, self-raised funds and municipal borrowing. The most effective instruments adopted by nations in financing infrastructure projects include investments in the formation of the municipality’s structure:

despite the slow growth and acceptance, it has been seen to bridge the infrastructure-financing gap.

16 2.6.2 Green bonds

Various municipalities have used green bonds to facilitate infrastructure projects that have influenced lives and the economy positively. The infrastructure incentives provided to different communities are focused on forestry, low carbon transport and renewable energy (Annez, 2006). Some of the cities that have been supplied with green bonds over the years include Gothenburg, Sweden, and Johannesburg, South Africa. The green bond advantage which has been utilized by a few states consist of benefits of access to a range of investors and the issuer secures the investor's investment instead of the green infrastructure projects itself (Enright Newton, 2004).

2.6.3 Tax increment financing

This is an instrument used in financing infrastructure projects. It financed by the rise in property tax revenue from the taxes the facilities or projects generate. The provision of improved services of the facilities to the communities tends to raise the property values which results in the rise of the income from the property tax. After the completion of the infrastructure projects the tax is used to service the loan acquired to finance the construction of the projects, and the funds left from the property tax are transferred to the municipalities’ funds (Tomalty, 2007).

Tax increment financing (TIF) is mostly used for purposes such as public transit, public parks and public spaces. Tax increment financing helps to reduce the inadequacy of infrastructure projects. If properly managed, the tax increment financing the funds can be used reduce the stress on capital reserves, can also be used as a source of public infrastructure financing and can help with private sector investment in infrastructure projects. Manitoba and Alberta in Canada are known for using tax increment financing (Petru, 2014).

2.6.4 Crowdfunding

Enright and Newton (2004) explain crowdfunding as a means of financing urban infrastructure.

With the use of the Internet, funding can be generated in small or large forms from individuals and cooperate bodies that have an interest in investing in the project, thereby bringing investors and entrepreneurs together. Examples of crowdfunding are the provision of bike lane and public parks, which studies have been proved to be very effective. Crowdfunding acts as a means of equity capital, which supports the increase in the size of equity and investment. This instrument has been used to help increase the options available to financing infrastructural projects in various municipalities. In political and social arenas, crowdfunding equity helps to lower the total cost of capital, and helps to drive the rates of return down, therefore passing the funding to the public sector in the form of low access payment, and reduced tolls (Alm, 2016).

17 2.6.5 Tax-base sharing

Tax-base sharing in this case is the economically buoyant societies sharing their benefits with the less economically buoyant societies that are located in the same district. These benefits may include both commercial and industrial taxes or total property tax revenue growth. Equalization formulae are used in the distribution of the benefits to the societies. Those societies with the most benefits become net donors, while those with the least benefits become the net receivers of equalization formulae (Tomalty, 2007). The use of this type of instrument of financing reduces the rivalry between neighbouring societies and assists in the expansion of each society by attracting new and improved economic growth and development. It can also bring about harmony between the two societies. Remarkably, this type of financing instrument decreases the movement of businesses and population from highly taxed societies to low tax societies in the same district of municipalities. This instrument of financing also helps to eliminate infrastructural and service differences between municipalities or regions (Doane, 2016). The disadvantages involved in this type of mechanism of sharing is the problem of management and sharing of benefits between the societies in the district. Places which use this instrument to finance their infrastructure projects are Albemarle in Virginia, while in Canada the island on which Montreal is situated uses this instrument to finance urban infrastructure facilities and services (Tomalty, 2007).

2.6.6 Commuter tax

This type of mechanism is mostly used in Canada where the taxes are raised from commuters who do not live in the area but have business interests or work there. This type of tax is called

In document Assessment of power infrastructure financing in Nigeria (Page 30-200)