Channeling Investment into Water and Sanitation in Lagos
USAID is aggregating institutional capital from pension fund administrators into infrastructure investments in Nigeria. Thanks to USAID support, the Lagos State government successfully priced a bond and a sukuk issuance that supports over 200 individual infrastructure projects across the state, with more than half in the water, sanitation, and hygiene (WASH) sector. By investing in projects such as roads, bridges, power plants, and water treatment facilities, institutional investors can both receive a positive return and help improve the quality of life for Lagos residents.
By Natalie Alm, INVEST Communications Advisor
As Nigeria’s population continues to surge and urban centers experience unprecedented growth, the need for robust and modern infrastructure has become more pressing than ever. Nowhere is this need more evident than in Lagos, the nation’s economic powerhouse and Africa’s largest city. The population of Lagos has grown a hundred-fold in just two generations, swelling to over twenty million today. The city could even reach 88 million by the end of the century, making it the world’s largest.
The sheer size and density of Lagos brings serious challenges when it comes to meeting the city’s infrastructure needs, from telecoms to renewable energy to water and sanitation. These services need significant investment, which is not currently being met. The World Bank estimates that if the present level of public investment continues, it would take 300 years to close Nigeria’s infrastructure gap.
The opportunity
Institutional investors — such as pension funds and insurance companies — play an important role in helping to address this infrastructure gap. They are a particularly good match for financing this type of project, since investment terms are well aligned with the patient, risk-adjusted returns sought by these entities.
Despite the opportunities available in infrastructure, institutional investment has only recently begun to gather momentum and remains low to date. This is primarily because institutional investors seek large, diversified investment portfolios rather than single projects. Many institutional investors also have limited familiarity with opportunities in infrastructure and perceive certain infrastructure sectors — such as WASH — as higher-risk investments.
The solution
In support of the U.S. government Prosper Africa and Power Africa initiatives, USAID Nigeria is supporting local institutional investors, including pension funds, to mobilize greater investment into infrastructure projects. Through the INVEST initiative, USAID engaged Chapel Hill Denham, one of Nigeria’s leading independent investment banking, and management firms, for two complementary objectives. First, they are building capacity among Nigerian institutional investors to invest in renewable energy, agriculture, and WASH through awareness raising, training, and key stakeholder engagement. Second, they are facilitating discrete transactions to mobilize capital into these key sectors by identifying and supporting pipelines of opportunities.
In 2023, USAID and partners helped the Lagos State government to successfully price two new bond issuances, which will help the government deliver on its social and economic objectives. The Series I N115 billion bond and Series II N19.8 billion sukuk will finance over 200 infrastructure projects across the state of Lagos, over half in the WASH sector, a priority for the government. These bonds are a good fit for Nigeria’s institutional and pension investors, as they provide exposure to the infrastructure asset-class and help them fulfil their commitments towards impact-forward investments and diversify their portfolios.
Chapel Hill Denham built on their long-term relationship with Lagos State, having supported eight previous bond issuances. They worked with the state on reviewing past investment performance, selecting projects for new issuances, offering expertise on structure and timing of each offering, and preparing relevant documentation. Ultimately, the transaction was oversubscribed by 1.3 times, bringing in a diverse pool of investors including pension funds, fund managers, and other financial institutions.
The impact
The bond issuance is an important win in mobilizing institutional capital into a difficult sector like WASH, which has a different investment model than many other infrastructure areas and is often perceived as risky. Compared to previous issuances, Chapel Hill Denham was able to significantly increase the Lagos State bonds’ allocation to WASH. In a city where the majority of citizens don’t have access to water or basic sanitation, investment needs are massive but projects tend to be small or piecemeal, which makes them difficult to package and sell to an investor.
The pension fund community in Nigeria plays an important role in funding infrastructure projects and issuances from other municipal issuers should have a significant impact in Nigeria, replicating the Lagos State successes.
The transaction also marks several financial landmarks for Lagos State — it is the largest registered debt issuance program in Nigeria, at almost USD $1.3 billion (1 trillion naira); the largest bond issued in the debt capital market so far in 2023, and the largest subnational sukuk issuance, at USD $25.5 million (19.8 billion naira). It is also only the second time that a subnational entity has issued an Islamic instrument, in the sukuk, despite this being a growing market. The Lagos State government can play an important role in creating a larger investment opportunity and providing a guarantee for a number of these projects, with the hope it will catalyze increased investment.
Lessons learned
The collaboration between USAID and Chapel Hill Denham has led to an increase in both the depth and breadth of investors interested in and allocating resources to key infrastructure sectors.
First, the creation of a larger, diversified vehicle attracted more investors to a project-based sector like WASH. None of the projects selected would have received investor support on a standalone basis, since institutional investors are averse to taking on the illiquidity risk of a small project. By packaging these projects together under a single bond, the government can allocate more resources to prioritized sectors. The experience has also shown that there is significant appetite for State credit, demonstrating to others that this model can be scaled or replicated.
Second, USAID’s support in capacity building is encouraging greater participation from a wider range of investors. Investors might not be as comfortable looking at a prospectus in a less familiar sector, such as WASH. USAID can play an important role as a convener and enabler, showcasing new opportunities and facilitating information sharing, so investors can make informed decisions.
Ultimately, there is no greater impact investment than supporting resilient infrastructure in Africa. Infrastructure investments create growth and connect markets, support employment, improve living conditions, and even help preserve the environment. Bringing broader attention to the importance of developing and financing these projects will continue to lead to financial and social dividends.
