Transport infrastructure has reached bursting point in many emerging economies. Nowhere more so than in Nigeria whose commercial capital, Lagos, is home to an estimated 16 million people.

Lagos last saw major investment in infrastructure in the late seventies, well before it lost its status as federal capital, and when it had a population of 6 million. The past five years of economic reform and rising oil income have been extremely positive for Lagos, triggering a boom in commercial and residential real estate and car ownership. On the downside, the city has become crippled with traffic congestion.

In 2000, Lagos State Ministry of Works and Infrastructure began investigating how PPP schemes could accelerate the development of road infrastructure in the State. In June 2003, after a request for proposals, the State mandated Asset and Resource Management (ARM) to develop a toll road corridor along the Lekki peninsular. This 50km strip of land is a fast growing residential and commercial area to the east of Victoria Island.

ARM and local co-investor Larue, found themselves on a true path-finding mission and had to overcome a number of challenges, including:

• Opening the first private toll road concession in West Africa

• Being the test case for a new State level concession law

• A difficult urban construction and tolling environment

• An interface with Federal roads and bridges and the related legal and political complexity

• A domestic capital market that was unprepared for long term limited recourse funding

• A sceptical international EPC and O&M contracting market

The parties and the approach

As an asset manager (with experience in property development) ARM went about assembling a team of advisors with experience in transport concessions. Standard Bank and Rand Merchant Bank were appointed financial advisors, Trinity International LLP and Aluko & Ayebode the legal advisors, and BKS and Africon the engineering and traffic advisors. The technical team was later supplemented by HighPoint Rendell and Steer Davis Gleave out of the UK.
The team set about building the technical and financial base case for the project, whilst simultaneously negotiating a concession agreement with the State.

he Concession Agreement grants a 30-year concession to Lekki Concession Company Limited (LCC) to upgrade, maintain and toll the Lekki-Epe expressway and the right to undertake the parallel Coastal Road and the Southern By-Pass. The CA provides the customary protection to the concessionaire along the lines of the South African road concessions, including the provision of delay and compensation events. As in the first SA toll road, the N4 Maputo Corridor, senior debt obligations are honoured under all termination events.

Informed by the practicalities of this process, the State sought to develop a replicable framework for road concessions, and in November 2004 the States Roads, Bridges and Highway Infrastructure Board Act was passed into law. This Act was to significantly influence the concession law later developed by the Federal Government.

A feasibility study and financing plan was released to potential lenders in early 2005. At the time, Nigeria was halfway through the second term of Obasanjo's government, had no sovereign rating and an illiquid bond market with a yield curve out to 5 years. Local commercial banks were occasionally prepared to lend out to 5 years but on onerous terms, and were unfamiliar with limited recourse concession financings. The high cost of contracting in Nigeria, combined with the need to keep toll tariffs affordable meant that debt tenors had to be stretched beyond market norms for the project to be viable. Whilst longer tenors and lower nominal interest rates could be sourced from offshore development banks, this funding would be in US$ and create exchange rate risk, given the project's local currency revenue stream.

 The financing plan called for a 5 + 5 + 5-year mini-perm style amortisation, plus tranches of subordinated debt and mezzanine finance, with a mix of US$ and Naira funding. The market was unimpressed. Despite the 5-yearly roll-over risk being partially covered by a proposed stand-by facility, and the ultimate debt underpin from the State, local banks were not keen to take the refinancing risk. An appetite for subordinated and mezzanine risk had not yet developed in the local market, though investors from offshore were interested.

There were other concerns. Construction challenges included the heavily congested working environment and resistance to relocation by informal businesses along the road reserve. Some questioned the acceptability of real tolling and the tolling strategy itself, which includes both cash payment and the use of pre-paid cards (a technology proven in Nigeria's ubiquitous cell phone industry). Others worried about the support from the Federal Government, which apart from having a history of difficult relations with Lagos State, had done away with tolling certain federal roads – more due to ineffective collections than to any user resistance.

Dealing with the challenges

LCC and its advisors had to address a myriad of issues, and steadily did so. Negotiations were progressed on the Concession Agreement, and the concept introduced of a Federal Support Agreement between the Federal Government, Lagos State, LCC and the Lenders' Security Trustee. Through the FSA, the Federal Government explicitly supports the project, grants certain waivers and consents, ensures transfer and convertibility of funds, and regulates the Project's interface with Federal roads. Most significantly, the FSA contains a mechanism whereby any shortfall in payments by the State on any termination amounts are made good from Federally allocated funds. Thus the Federal Government's support was secured in practical, political and credit terms.

The tender process for the EPC contract was completed with the selection of local contractor Hitech. In addition to providing a fixed price, date certain contract, Hitech's performance is further incentivised with an equity stake of up to  5% equity stake in the project. Under an Early Works contract, funded from local banks under an agreement between LCC and the State, Hitech was able to start construction in the latter part of 2006. Demonstrating performance on the most difficult first two kilometres of the road was critical for LCC to win the confidence of the lenders and the public at large, and maintain political support over the lengthy period to financial close.

Ensuring that the State was able to deliver the road reserve in good time and without upsetting the residents was a feat in itself. LCC's CEO/Managing Director had many years of experience running infrastructure concessions in Latin America and elsewhere and knew a thing or two about stakeholder management. Hence the LCC team, supported by experienced consultants, were able to assist the State in devising a Resettlement & Compensation Plan (RCP) for dealing with the necessary relocations.

The next piece of the puzzle was to bolster LCC's credibility as a manager of complex infrastructure assets. After an extended period of due diligence, the Africa Infrastructure Investment Fund (AIIF) – co-managed by Macquarie – agreed to take a 44% stake in LCC. AIIF's review of the construction plan, traffic forecasts and tolling strategy increased the robustness of the project, although an added layer of conservatism in the cash flows reduced equity returns and debt capacity.

Financing sources

Some fancy footwork on the capital structure was then needed. The capital structure was bolstered by Lagos State agreeing to invest N5 billion ($43 million) in a 20-year mezzanine tranche. The African Development Bank was then convinced to see the project as an important reference case in West Africa, agreed to provide N9.8 billion ($85 million) senior debt over 15 years with a 5-year grace period. Being a dollar lending institution, AfDB required a bespoke currency hedge in order to provide LCC with Naira funding, and Standard Bank was able to structure what is thought to be the longest tenor Naira/US Dollar cross currency swap ever executed.

With the State and Federal Government clearly committed, construction capabilities demonstrated, and a large development bank showing 15-year money, the local lenders came to the party with a 12-year note facility of N8 billion ($78 million). This facility was lead-arranged by United Bank for Africa and FBN Capital. Its precedent-setting tenor reflected the greatly improved balance sheet position of the major Nigerian banks, following the consolidation of the sector triggered in 2005 by the Central Bank's massive hike in minimum capital requirements.

The remaining term funding was provided by Standard Bank who became the sole arranger and underwriter of the N11 billion ($95 million) 15-year international tranche. The provision of such long term local currency funding from an offshore commercial bank in today's credit environment is noteworthy. It required some innovative structuring as well as a developed international distribution network and the participation of Stanbic IBTC Bank (Standard Bank's local subsidiary). It was also facilitated by the Federal Government underpin and the fact the Federal government yield curve had now been extended to 10 years, providing a benchmark yield. 

As is typical in this type of transaction, stand-by debt and equity was required to cover cost overruns and shortfalls in revenue during construction. The local lenders provided a N3.5 billion ($30 million) facility alongside the N1.3 billion ($10 million) of stand-by equity from the shareholders.

Getting to close

Pathfinder deals in emerging markets are never straightforward. The Lekki-Epe Expressway had all the complexity that one could imagine and getting it to financial close required extraordinary perseverance and creativity from the sponsors, LCC management, and advisors alike. The support of progressively minded politicians at the State and Federal level – at times transcending party rivalries – was also crucial in completing the process.

The project had to navigate through 5 years of significant turbulence: these included changes of Government at both State and Federal level, the fundamental reform of the local banking system, significant construction cost escalations, and the global credit crisis of the last 12 months.

In this context, optimising the financial model to address the requirements of 4 very different types of lender and 3 different investors was a painstaking process. This transaction brought a level of structuring and due diligence not commonly seen in the Nigerian market. It also helped to define Nigeria's legislative environment for PPPs, and has encouraged the local banking market to fund a previously unfamiliar asset class.

Most importantly, the LCC project is a public private partnership which aims to deliver an unprecedented level of service to the beleaguered motorists of the Lekki Peninsula, Lagos. It is a service that other state and national governments in the region will want to replicate.