Project Finance: A Solution to Nigeria’s Infrastructural Deficit

Project Finance: A Solution to Nigeria’s Infrastructural Deficit


Michael K. Bielonwu, MCIArb. (UK), FIDR

Fredrick O. Omatseyin Esq.

Jeremiah E. Aneji Esq.

Margaret E. Ogbonnah

1.0. Introduction

The infrastructural needs in Nigeria are pretty enormous. The Nigerian Government, over the years, has tried without success to meet these needs. Even when efforts are made to embark on a capital project that can impact lives and ease the burden on its citizens, these efforts are often sabotaged by cases of embezzlement of funds, lack of political will, use of substandard construction materials, nepotism over meritocracy in contracts awards amongst other issues.

Thus, external loans and internally generated government revenue have been wasted in the past. This has made it more difficult for the country to bridge the gap in infrastructural development. In 2019, the Chairman of the Nigerian Economic Summit Group, Mr Asue Ighodalo stated that the country needs about $100billion to address its infrastructural deficit.

According to a report published by Moody’s Investors Services in November 2020, Nigeria needs to invest about $3 trillion in the next 30 years to close the infrastructural gap and accelerate economic growth. Since the government does not have this large amount of money, the project finance mechanism should be one of the means through which the government can uplift the burden of bearing these heavy costs alone¹.

Over the years, there has been a rapid increase in the rate at which capital intensive and high risks projects of governments and corporations have been funded through the concept called Project financing. To put the concept into context, take for example if the government has plans to embark on capital projects such as railway construction, bridges, energy projects, airports, power generation facilities, seaports, roads, and telecommunications networks infrastructure etc, these projects usually require huge amounts of funding to embark upon, coupled with the fact that they are usually high risk. These risks might be in the form of construction risks, operational risks, economic risks, environmental risks, maintenance risks amongst others which the government or the corporation might not be able to bear alone. The solution to this in most cases is project finance.

Hence, a project finance deal involves the government or corporation borrowing funds for a capital project through the formation of a specific economic entity known as the Special Purpose Vehicle Company or Project Company. The project company is legally independent of the project sponsor, and the repayment of the funds injected into the project is solely based on the project’s economic returns and assets and not the project sponsor’s balance sheet.

It is noteworthy to mention that a project finance deal is incomplete without the presence of these key players. These are the: Project Sponsor(s) which can be single company or consortium who are the equity financiers in the company; Project company which is the entity that will own, operate, and ensure the maintenance of the project; Lender(s) which might be a commercial bank, a multilateral economic agency or even an investment bank and lastly, the host government. Asides from these key players, other participants in a project finance deal are the construction companies, suppliers of resources needed for construction, off-takers, insurance firms, law firms and accounting firms. Azurra Independent Power Project, Egina Oil Project, Lekki Toll Gate Project amongst others are good examples of Project financing deals in Nigeria and how they played out. Thus, project finance is a way out for the government to get the private sector and multinational institutions on board. Investments from these institutions can help ensure the financing, completion, and effective management of these infrastructures. This offers the country a better chance of having an enabling environment for businesses to succeed.

Dr. Ngozi Okonjo Iweala once stated that “without infrastructure, it is very difficult to attract private investment. Private investors need supportive infrastructures like industrial parks, electricity and access roads.” It is therefore expedient for the government to implement economic friendly policies; grant waivers and incentives to companies; solve the security challenges in the country; adopt a sustainable financing mechanism and regulatory framework to attract increased funding in capital projects.

In this article, we shall take a peep at Project Finance Structure, Project Finance Options, Phases of Project Finance, Parties to a Project Finance, Risk Management in Project Finance, Source of Project Financing and Dispute Resolution in Project Finance.

2.0 Project Finance Structure.

The basis of project finance arrangement is the sharing of various risks and responsibilities inherent and incidental to this kind of investment. These include; completion, resource, operations, market, currency, political risks etc. The approaches and contents of the undertaking typically depend on the contracting parties’ intention. However, project development through practice and experience has evolved some standard formats of engagement and techniques for financing. In all matters pertaining to project financing, the essential preliminary considerations for the contracting parties involve the following:

  1. Full-scale appraisal of the ‘Technical, Financial and Legal viability of the proposed project.
  2. Creation of a separate borrowing entity- either a partnership, subsidiary, nominee, joint venture company or trust i.e. a Special Purpose Vehicle (SPV)that will implement the project.
  3. Deciding on the nature or type of financing for the project.
  4. Structuring and negotiating arrangements between the concerned parties viz: Project Sponsors, lenders, insurers, guarantors etc.
  5. Deciding between the parties on the nature, content, and extent of incentives e.g. tax holidays.

3.0 Project Finance Options

The structure would usually take one of the following forms:

  1. The Build, Operate and eventually Transfer structure with whatever variations in which the lender builds the project entity, thereafter operates it as an economic venture after which at the end of the agreed period transfers ownership of the project entity to the sponsors. It is pertinent to state that this financing structure is very often used to develop family or individual property in many cities and urban centers in Nigeria. The property developer takes a long enough lease of about twenty years, builds a major office block, leases the spaces to tenants and retransfers the ownership to the family at the end of the main lease. Other variations of this type of structure are as follows:

a. B.O.T- Build-Operate-Transfer.

b. B.O.O.T-Build-Own-Operate-Transfer

c. D.B.F.O.T-Design-Build-Finance-Operate-Transfer

d. L.M.T-Lease-Maintain-Transfer

e. B.L.T- Build-Lease-Transfer

f. B.O.O-Build-Operate-Own

The Nigerian government in May, 2001 signed a BOT contract for an Aviation Hanger project for $250 million with AOG International Aviation Overhaul ltd to handle two B747 aircraft and facility for type A,B,C,D comprehensive checks with a 3 years tenure.

  1. Joint Venture- This involves joint financing, operating and ownership of a project. This is a major form of project finance between many multinational companies who usually provide technical and managerial skills, equipment, some finance etc; while the government takes care of all local requirements such as concessions and in some cases finance, certain logistics requirements, etc. Many multinational companies developed a good number of the projects in the oil and mining sector of most of the developing countries in the fifties and sixties on joint venture basis. Many others were by way of bilateral government to government without private sector participation. The government of Lagos State of Nigeria entered into a joint venture contract with the power generation giant ENRON an Independent Power Project (IPP) for the generation of at least 65 Megawatts of electricity. However, the main attribute of the joint venture arrangement is that it makes risk sharing quite easy between the parties.
  2. Leasing- This has been defined as a situation where “all or substantial part of the risk associated with the funding, developing, managing and operating the facility are transferred to the private sector which receives lease payments from the public sector for its use”. Here the entire risks-such as construction, completion, operation risks etc are borne by the private sector. This structure is by its nature not commonly in use since most investors prefer the risk to be shared and managed through some sort of guarantee.
  3. Contracting out of Management/Service- This may take the form in which the private sector is engaged to manage and provide optimum service delivery of the utility, usually for a given period. Under this kind of arrangement, it is usual for the private sector entity to avoid the revenue or financing risks of the venture. A good example is the management contract with the KLM Dutch Airline for Nigeria Airways and Indiana management contract for the Nigerian Railways respectively in the eighties.

4.0 Phases of Project Financing

The phases of project financing may slightly differ depending on nature of the project and the parties involve, however it is generally divided into the following:

1) Pre-Financing Stage – This stage involves the feasibility study and analysis that has to be done prior to actually financing. To actualize this, the following factors would be considered:

a. Identification of the Project Plan – This process includes identifying the project, the nature and structure of the financing, negotiations on returns or projected returns, the possible risk factors and the timelines for completion of the project and of several phases.

b. Recognizing and Minimizing the Risk – Risk management is one of the key steps that should be focused on before the project financing venture begins. Full disclosure at this point is necessary so as to enable the financiers prepare in the event of future risk and make an informed decision to mitigate such factors. Where such facts are not disclosed, the financiers can pass on the risk to the promoters of the project and recover damages in the event of losses. See the case of F.B.I.R v HALLIBURTON (WA) LTD of (2016) 4 NWLR (Pt. 1501) 53 and

c. Checking Project Feasibility- Before undertaking to finance a project, especially innovative models the financiers study to see if it is financially and technically feasible by analyzing all the variables and associated factors some of which ordinarily may have not been contemplated by the promoters of the project.

2) Financing Stage – This is the most crucial part of Project finance, this stage is further sub-categorized into the following:

a. Arrangement of Finances – In order to take care of the finances related to the project, the sponsor needs to acquire equity or loan from a financial services organization whose goals are aligned to that of the project

b. Loan or Equity Negotiation – During this step, the borrower and lender negotiate the loan amount and come to a unanimous decision regarding the same.

c. Documentation and Verification – In this step, the terms of the loan are mutually decided and documented keeping the policies of the project in mind.

d. Payment – Once the loan documentation is done, the borrower receives funds as agreed previously to carry out the operations of the project

3) Post Financing Stage – This stage involves the tasks that has to be carried out after the project financing is made

a. Timely Project Monitoring – As the project commences, it is the job of the project manager to monitor the project at regular intervals.

b. Project Closure – This step signifies the end of the project.

c. Loan Repayment – After the project has ended, it is imperative to keep track of the cash flow from its operations as these funds will be, then, utilized to repay the loan taken to finance the project.

5.0 Parties to a Project Finance

Project finance transactions are complex transactions that often require numerous players in interdependent relationships. Because of this complexity, not all projects follow the same structure and not all of the participants described below partake in all projects.

The description of each of the parties involved is as follows :

a. Project Company The project company is the legal entity that will own, develop, construct, operate and maintain the project. The project company is generally an SPV (Special Purpose Vehicle) created in the project host country and therefore subject to the laws of that country (unless appropriate ‘commissions’ can be paid so that key government officials can grant ‘exceptions’ to the project). A project company can be created in one of two ways:

  • when the host government solicits bids and selects the best candidate among the bidders;
  • or a company or group of companies may initiate a project on their own, with or without soliciting host government involvement.

However, most projects have government involvement and backing. The SPV will be controlled by its equity owners.

b. Sponsors- The equity investor(s) and owner(s) of the Project Company can be a single party, or more frequently, a consortium:

  • Industrial sponsors, who see the initiative as linked to their core business
  • Public sponsors (central or local government, municipalities, or municipalized companies), whose aims center on social welfare
  • Contractor/sponsors, who develop, build, or run plants and are interested in participating in the initiative by providing equity and/or subordinated debt purely financial investors.

c. Lenders-Typically including one or more commercial banks and/or multilateral agencies and/or export credit agencies and/or bondholders.

d. Host Government- It is the government of the country in which the project is located. The host government is typically involved as an issuer of permits, licenses, authorizations and concessions. It also might grant foreign exchange availability projections and tax concessions. It might also be involved as an off-take purchaser or as a supplier of raw materials or fuel.

e. Offtaker-The off-taker is the entity that is the purchaser of the project output subject to a formal contract. Not all projects can have off-takers, for example, infrastructure projects, but where a project can, the goal for the project company is to engage customers who are willing to sign long-term, off-taker agreements.

f. Suppliers- One or more parties provide raw materials or other inputs to the project in return for payment.

g. Contractors- The substantive performance obligations of the Project Company to design and build (D&B), and operate the project will usually be done through engineering procurement and construction (EPC) and operations and maintenance (O&M) contracts respectively.

6.0 Risk Management Methods in Project Financing

It is essential that risk management is the foundation of all project engagement. Generally, the risk manager on site is responsible for ensuring that risk management remains the focus.

Risk management techniques for project finance transactions consist of a combination of five different but interrelated steps. First, all risks affecting a particular project must be duly identified and understood at an early stage by project participants (risk identification). Second, risks must be quantified and assessed to determine their magnitude (risk assessment). Third, risk reduction techniques must be applied to reduce the overall risk facing project participants to the lowest possible level (risk reduction). Fourth, risks must be distributed among the various project participants in a way that is mutually acceptable for them (risk spreading). Finally, each participant may individually choose to further reduce its allocated risks through additional risk spreading mechanisms such as political and commercial insurance and derivative instruments (hedging and insurance). ~

This risk management process is, however, an interrelated process and participants typically go back and forth in their analysis of project risks. At the end of the day, risk allocation generally is determined on the basis of control over a risk, reward associated with that control, role, creditworthiness and likelihood of mitigating such risk. Generally, the participant that can best exercise control over a risk, that can effectively mitigate it or that will realize the greatest reward if a risk does not materialize, typically is allocated such risk.

7.0 Sources of Project Finance

There are several sources of project finance, some of the major sources are:

  1. Commercial Banks: although commercial banks are the main sources of project finance, International banks are by far the largest providers of project finance. These international banks have specialist project finance departments while domestic banks are often not able to provide the necessary amounts and may only lend in local currency to cover local currency costs.
  2. Bond issues: The project may be financed partially by a bond issue to sophisticated investors in the capital markets secured on the project assets.
  3. The security would be held by a common trustee for the banks and the bondholders.
  4. Specialist investment institutions: institutions such as private equity firms which are more accustomed to financing the acquisition of companies and private equity transactions provide high-yield subordinated finance.
  5. Sellers of equipment to the project are also minor sources of funds for projects.
  6. Finance lessors of equipment. Here, lessors of equipment are financed. The project leases equipment rather than buying them.
  7. Multilateral institutions like the World Bank. These multilateral agencies may provide loans or guarantees in cases where commercial banks would not be willing to take the risk. Other examples of multilateral agencies include African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development etc.
  8. Export credit agencies. These are government bodies like The NigerianExport-Import Bank (NEXIM) which was established by Act 38 of 1991 as an Export Credit Agency (ECA) in Nigeria, the Export Credit Guarantee Department in the UK, the Export-Import Bank of the United States etc Government grants and subsidies, and
  9. The project sponsors by way of equity finance and subordinated debt.

8.0 Dispute Resolution in Project Finance

Disputes often arise in the course of project development. This may be as a result of conflict of interest, defaults, or failure of obligation. Project disputes are normally referred to an arbitrary panel and therefore issues such as membership of the panels, status and number of the members, location of the panel while in session, arbitration period etc must be fully negotiated and agreed upon by the parties in the contract document.

9.0 Conclusion

Project finance as we have seen has the potential of facilitating phenomenal economic transformation, particularly under appropriate regulatory environment. It will require the regulatory agencies to engage the international project finance market and cultivate the interest of its major institutions through a more proactive initiative geared towards better focus and a sense of purpose.


  1. Akintola Jimoh & Co.- Nigeria Investment Laws and Business Regulations
  2. Project Finance, Securitisations, Subordinated debt. 2nd edition, by Philip R Wood. Thomson, Sweet & Maxwell, South Asian Edition. 2009.