Investment bankers warn that Nigeria’s power sector requires economic stability to maintain investor confidence and ensure continued investment. However, the recent drop in global oil prices and its effect on Africa’s biggest economy, in particular, could inhibit this.
“The lower oil price certainly [has an] impact because we’re seeing a devaluation of the naira,” Wale Shonibare, the managing director of investment banking at United Capital, told CNBC Africa.
“A lot of power sector investment was made in dollars and where you have a falling naira, you have to amend the tariff to be able to accommodate your debt restructuring. Even the banks are going to be more reluctant to lend into the sector until we get financial stability.”
Shonibare also stated that getting Nigeria’s transitional electricity market (TEM) on track is crucial to the growth of the power sector.
(WATCH VIDEO: Nigeria’s power sector in need of financing)
“The fact is that the contracts in the power sector have not been given effect and it’s very difficult for financiers to come in when you know that your power purchase agreement and gas supply agreements, and all of those things do not yet have legal effect,” he said.
“I’ll have to be optimistic because I’m a player in the sector – there are quite a number of issues being resolved right now and the sooner we move to TEM, the better for everybody.”
While the decline in the oil price has also led to a drop in government revenue, Shonibare insists that there is still ample opportunity for infrastructure investment.
“If we look at the 2015 budget, government has already reduced the allocation to capital expenditure to about nine per cent. If we’re spending about 91 per cent on recurrent expenditure, it leaves very little room for infrastructure investment,” he stated.
“That said, this offers a unique opportunity for government to restructure. Transportation is the next big sector for reform in Nigeria, after power. That includes airports, railways, toll roads.”
He added that this is a sector that, if properly structured, can actually pay its own costs because of the significant demand for infrastructure.
(WATCH VIDEO: Rail infrastructure investments in Nigeria)
“The appetite certainly is still there because Nigeria is the biggest economy in Africa, with the largest GDP and the oil sector represents only about 17 per cent of GDP, which shows you that there’s a significant amount of economic activity going on in the country,” Shonibare said.
“Maybe government hasn’t done enough to capture the impact of that GDP because of the low amount of taxation revenues we have but there’s business activity happening. Investors may delay taking certain decisions until after the elections but there’s always going to be interest if you have a large market.”