Rich in natural resources and in need of infrastructure, Nigeria is a potential hotspot for investment. The Obasanjo administration, democratically elected in 1999, has initiated a number of economic reforms, encouraging private and foreign investment. With NLNG out in the markets as the country's largest ever project financing, and MTN Nigeria seeking debt to the tune of $445 million, Nigeria is on the map for financiers with emerging market appetite.

?Nigeria is moving forward in terms of attracting private sector involvement and financing,? says Nick Howard, senior adviser, Emerging Africa Advisers, the principal fund management adviser for the Emerging Africa Fund. ?There are signs that developers and sponsors are wanting to do business.?

But caution is still the watchword. The projects in question have specific risk mitigants to provide lender comfort. Such credit enhancements do not extend to all projects and some sectors remain largely a no-go area for international lenders. The power sector in particular, despite needing a lot of new capacity, will have to see restructuring and de-regulation before substantial investment arrives. ?Nigeria still has a long way to go,? says one international lender. ?There are still transparency issues.? Uncertainty has been heightened pending a general election at the start of 2003.

LNG leads

Nigerian Liquefied Natural Gas (NLNG) is an integrated LNG scheme and the largest construction project in Nigeria. Sponsored by Nigerian National Petroleum Corporation (NNPC) (49%), Shell Gas (25.6%), Cleag Limited (15%) and Agip International (10.4%), it is located on Bonny Island, Rivers State. Initially, the plant will be fed from a dedicated field owned by Shell. However, it is anticipated that within a few years half of input will come from associated natural gas. This is gas currently flared by companies extracting oil.

Trains one and two are already in operation and the third is nearing construction completion. All three were funded on the back of shareholder funds. Four and five are to break with this tradition and opt for a non-recourse route, raising funds through special purpose vehicle NLNG Co. Expansion will boost production from six million to seventeen million tonnes a year.

Project adviser Citibank has been appointed as a lead arranger, along with BNP Paribas, Credit Lyonnais, MedioCredito and WestLB, to arrange $800 million of debt on the international markets. A further eight banks have reportedly signed up in a recent sub-underwriting phase. Documentation is now underway and discussions with the UK's ECGD and US Ex-Im over ECA support are said to be in advanced stages. There is no other multi-lateral involvement on the cards and commercial lenders will take full risk on a portion of the debt. A general syndication will follow within the next couple of months.

Complementing this, a syndicate of African banks with dollar lending capabilities, including the African Development Bank, is putting up a $200 million Nigerian tranche. A spokesperson involved in the deal points to the significance of this. ?What is important is that we were able to demonstrate that there are African banks capable of doing something of this size and tenor.? It is a 7.25-year loan.

In a separate transaction, $460 million will be raised by subsidiary Bonny Gas Transport to fund construction of four new ships. CSFB lead arranged two project financings of $400 million and $160 million, which closed in 1999 and 2001 respectively, to fund existing ships.

Market predictions suggest that NLNG's debt will sell down with ease. One player expressed surprise that there was not more multi-lateral cover but, despite this, appetite does not seem to be a problem. ?The environment in Nigeria has changed vastly in the last few years,? says Osman Shahenshah, partner at Taylor de Jongh.

But close of NLNG is not likely to open the floodgates for large-scale financings in Nigeria, and is not indicative of all projects. It is a brownfield expansion of a successful project, producing a dollar-denominated exportable commodity. Offtake agreements have already been signed with Transgas of Portugal, Eni of Italy, Iberdrola of Spain and Shell Western Trading. It also has very strong sponsors, who have already injected a large amount of equity. These factors combine to create a credit profile strong enough to overcome risks normally associated with Nigeria, and indeed the whole region. Ships have an additional advantage ? they can be employed elsewhere if the earmarked project runs into trouble.

?NLNG is not really a benchmark for projects in Nigeria in general,? says Andrew Alli, country manager for Nigeria, IFC. ?Although it could be a precedent for certain types of projects, specifically enclave projects.? Greenfield projects would clearly have additional risks but strong sponsors and completion guarantees could address this.

There is certainly no shortage of investment planned in the oil and gas sector. Oil remains the backbone of the Nigerian economy, accounting for 90% of foreign exchange revenues. Production is dominated by five joint ventures, all majority owned by NNPC. The largest, operated by Shell, produces nearly 50% of Nigeria's crude oil. The others are operated by ExxonMobil, Chevron Texaco, ENI/Agip and TotalFinaElf.

The government has two major funding arrangements for oil producing; JV arrangements, under which all partners contribute according to their equity holding and production sharing contracts, where oil companies fund the operations and profits are shared after expenditure is recouped. A restriction on production in the past has been insufficient funds on the part of the government to finance its share of JV arrangements.

Recent reforms have sought to address this and, with the US increasingly nervous about dependence on the Gulf, the Nigerian upstream oil industry is looking forward to expansion. Oil remains a fairly live political issue in the region, however. The current debate in Nigeria centres on what portion of government revenues, if any, should be received by the oil producing states. For this reason, and because of the preference of the sponsors involved for unencumbered debt, exploration projects are likely to continue to favour a balance sheet funding approach.

It is the new generation of gas projects that would be the most likely contenders for third party debt. Brass LNG, sponsored by NNPC, Agip and Phillips Petroleum, and Escarvos gas-to-liquids, sponsored by NNPC, Chevron and Sasol, are both in pre-approval stage. Shell, Statoil, ChevronTexaco and TotalFinaElf have recently signed an MOU with NNPC for a feasibility study on a floating LNG project for the offshore Nnwa and Nwadora fields. These projects could consider an element of project funding but again, sponsor balance sheets would not necessitate it.

New ground

Outside of the oil and gas mainstay, large-scale investment will remain altogether slower. Domestic projects generating solely local currency simply do not have the same allure. The power sector in particular, despite being in serious need, is one that sponsors are steering well clear of.

There is an estimated 5900MW installed, although the system runs at well below capacity and blackouts are commonplace in much of the country. Some project that, even running at maximum efficiency, a further 2500MW to 3000MW is needed. Talk of restructuring the sector and privatising incumbent National Electric Power Authority (NEPA), has been underway for some time but has not been borne out. New plans include the establishment of a regulatory body and a two-stage progression, through a single buyer phase, to a bilateral contract model. But progress remains slow.

An Emergency Power Project (EPP) program was launched by the government to boost generation pending reform but it has made little impact on the overall deficit. Lagos IPP, majority sponsored originally by Enron and now AES, fell into this category. It has a targeted capacity of 290MW, which it has not reached.

There is limited private participation elsewhere in the power sector. In July 2002, Shell announced that it is to spend $500 million on the upgrade of Afam Power Station over a 15-year lease agreement. A series of MOUs have also been signed between the government and E&P companies, who are under pressure to develop IPPs as part of the effort to reduce gas flaring.

The government has said that it wants to increase foreign involvement but is unlikely to be able to woo many players until significant restructuring starts to bite. ?Unless there is real reform in the sector, starting from the downstream, all IPP projects will need explicit or implicit federal government guarantees,? explains Andrew Alli, IFC. ?NEPA on its own is not seen as a creditworthy offtaker.? Implicit guarantees are secure by oil-company proposed projects. They do not explicitly ask for a government guarantee but want to offset amounts owed to them from oil that they produce on behalf of the government.

One sector that is turning heads is telecoms. Nigeria is potentially Africa's largest mobile market and in January 2001, the government awarded three GSM licences in an auction widely described as transparent. The two new operators, Econet and MTN Nigeria, both launched networks last year. The latter did so on the back of local currency financing. A 12-month loan to the tune of N9.12 billion ($170 million) was sold down on a club basis to Citibank Nigeria, Stanbic Bank Nigeria, Diamond Bank, First Securities Discount House, Investment Banking & Trust Co, Union Bank of Nigeria and Union Bank of Africa.

With the network up and running and the bridge loan drawing to an end, advisers Standard and Citibank have recently issued an information memorandum to banks for a longer-term project finance facility of roughly $455 million. This is likely to be a combination of ECA-backed dollar-denominated debt and local currency financing. IFC are engaged in discussions over credit enhancement.

Nick Howard, Emerging Africa Advisers, also notes heightened activity in the telecoms market. ?Compared to other sectors, telecoms is relatively straightforward in terms of development,? he says. ?And GSM technology is very appropriate for the African continent, owing to widespread underinvestment and moribund fixed-line networks that create significant opportunities for new entrants.?

Local funds

Emerging Africa Adviser, a division of Standard Bank London, is principal adviser to Standard Infrastructure Fund Managers (Africa) Limited, which manages the Emerging Africa Fund from Mauritius. SIFMA is a joint venture between Standard Bank Group, FMO, the Netherlands Development Finance Institution, and EMP, and affiliate of AIG of the US. The fund, initially set up with equity from the UK Department for International Development, will act as a commercial lender, concentrating on infrastructure projects that otherwise find it difficult to secure funding. Other European donor agencies have subsequently put up cash and it is the intention that it will continue to grow.

With a specific aim of providing long-term debt in countries where it is not readily available, EAIF, and funds like it, can play an important role in financing infrastructure projects in Nigeria and other sub-Saharan African countries. EAIF intends to lend between $10 to $30 million per transaction. It will thus generally join with other international and regional lending institutions. However, it is said that EAIF is also looking at smaller infrastructure, namely transport, projects in Nigeria where it would be either be the only lender or one of just two.

Although no firm plans are in place yet, there is also talk of the fund acting as a guarantee facility to support local currency facilities. Local banking markets are liquid, but usually with a maximum tenor of one or two years. Facilitating an extension of local lending tenors would be very beneficial for infrastructure financing in the long-term.

?It is very important that businesses, especially infrastructure sectors that are domestic economy based, are maximising domestic currency financing,? explains Nick Howard, Emerging Africa Advisers. ?Long-term forex exposure over long periods is problematic and ECAs and multi-laterals don't always have the means to address this.?