Empirical Relationship Between Energy Infrastructure, ProjectFinance and Other Conventional Sources of Financing UsingGeneralised Method of Moments to Explain the Variations inEnergy Projects Financing (Nigerian Energy Sector).

Nasir KoladeSchool of Business & EnterpriseUniversity of the West of Scotland

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Outlines

1. Research Background & Nigeria Energy Needs

2. Statement of Research Problem

3. Research Questions & Aim

4. Objectives

5. Energy & Economic Growth/ Sustainable Development

6. Growth of Project Finance

7. Finance and Governance

8. Project Finance Structure

9. Research Methods, Hypothesis & Results

Research Background

Conventional finance and energy infrastructure in developing countries, Yescombe(2014).

Finance as a critical success factor, is a central issue concerning various growth(economic, socio-political and cultural) and developmental efforts.

Strategic partnership (majorly finance)between Governments and private sector(Gnansounou, 2007 and UNFP, 2012).

Project finance, Special Purpose Vehicle (SPV), limited or no- recourse,(Ahmed etal., 1999; Esty, 2004 and Girardone and Snaith, 2011). Features: stand alone, largesunk cost. Theoretical Framework-Agency costs, (assets specificity), and informationasymmetries', (Kleimeier and Versteeg, 2010).

Project Finance Overview

Source: Adapted from Yescombe (2014).

1 b Nigeria Energy Needs/Motivation

Close to 60% of the citizens do not have access to energy, Nigeria needs a minimumof 20,000MW (Nebo,2015)

Nigeria, 170 million (World Bank, 2015) power generation capacity of 3,600MW(Gnansounou et al., 2007 and Aliyu et al., 2013), Spain, with population of 45 millionand power generating capacity of 68GW (Eberhard, 2011). Power loss > 25% (such asobsolete power transmission lines, power generating plants, which are non-functional or are operating with reduced output, or non-availability of gas),(Aliyu etal., 2013 and Ley, Gaines and Ghatikar, 2015).

Research Gap:

A large number of existing research studies have mainly focussed on powerconsumption, the impact of electricity consumption on economic growth, theelectricity sector and economic growth, regional integration of electricity.

2. Statement of research problem

Energy development in developing countries through traditional (corporate)finance is not sufficient to provide the finances needed to catalyse the socio-economic development of those countries, Gnansounou (2007) and ECREE (2012) .

Globally the availability of adequate, efficient and economically priced energy is oneof the main requirements (pivotal) for socio-economic and geographicaldevelopment of any region/country desiring good standard of living (Srivastavaand Msira, 2007; Brew-Hammond, 2010 and PWC, 2014).

Nigeria needs a minimum of 20,000MW (Nebo, 2015). CBN economic report (2013)and AfDB (2014) states that, Nigeria energy sector needs between $3.5 -10 billionyearly investments (see diagram below)

IMF (2013) and NDIC(2013) wrote about the conventional financing sources inNigeria (corporate finance and government appropriation). The total assets ofNigeria banks stood at $113.2b. In addition, Igali (2015) states that from 1999 to dateNigeria government appropriated the sum of $5.3b the actual sum released was$4.7billion and $778m intervention funds(Nigeria N converted to US$ usingoanda.com)

Funding Gap

Funding gap using Hodrick Prescot filter inline with Taylor (1993) and Hudson and Vespignani (2015).

3 Research Questions & Aim

Question One; To what extent does project finance reduce the effects of the needs and gaps in energyinfrastructure financing?

AIM (Graphicmania.net)

The main aim of this research work is to critically examine the use of project finance as an alternativesource of financing energy projects in Nigeria, in order to contribute solutions to the challenges ofdeficits in the energy infrastructure that have an effect on economic growth and development inNigeria.

4 Objectives

Objective 1: To critically appraise the use of project finance in financing energy infrastructure projectsin Nigeria;

Objective 2: To critically appraise the governance structure in Nigeria via country risk and how itrelates to investment in the energy sector and

5.a. Energy and Economic Growth /Sustainable Development

Brew-Hammond (2010) and PWC (2014) states that access to energy (adequate) is a key factor for aneconomy growth and development(sustainable). Pollio (1998); Esty (2003) and Kleimeier and Versteeg(2010) argues that project finance have evolved into an infrastructural asset financing. Energy

infrastructure as an enabler of economic growth and development, (Gatti, 2013 and Yescombe, 2014).

5.b Energy and Economic Growth /Sustainable Development

Kouakou (2011) demonstrates that in the history of development economics, energy accessibility hasbeen a key factor in a country sustainable economy growth and development.

6 Growth of Project Finance

Project finance has grown over the years such that in 1994 & 1995 over $74.5billion was invested, so alsoin 1996 and 1997 amount invested was valued at over $236billion while in 1998 it dropped down to $96-111 billion (Ahmed, 1999 and Esty, 1999). This was caused by the financial crises that occurred in mid-1997, the amount invested between 2000 and 2012 are in excess of $375 billion, Yescombe (2014).

Sishanta et al. (2008) shows, the linkage between finance and economic growth. The new paradigm isthat economic growth is a function of increase in real capital (such as physical-equipment and humancapital and financial capital).

7.Finance and Governance

Quantity and quality of capital are critical success factor for growth/development. Financial markets inmost developing countries are not liquid enough or well developed, (Kleimeier and Versteeg, 2010 andEberhard and Gratwick, 2011) .

The local economy and governance architecture are designed and controlled by the host government.Macedo and Pereira (2010) and AFDB (2014), government of ECOWAS (except Cape Verde) lack stronginstitutions.

Project finance has strong mechanisms to protect investors, (Sawant,2010 and Subramanian and Tung,2014).

9. Research Methods, Hypotheses and Results

This study will apply a quantitative approach (multiple methods) to the analysis of quarterly data for a 30-year period (from 1984 to 2014).

This research uses a deductive approach, whereby existing theory (agency cost/theory) is used to develop a hypothesis which will be tested using secondary (econometric) and primary (via questionnaires) data.

The variables considered are project finance, country risk, income from oil/gas as percentage of GDP, Inflation, energy project (energy cost/size), corporate finance (loan) and government budget

Hypothesis 1:

Ho: Project finance is not statistically significant to funding an energy project in Nigeria, 1984-2014.

Ha: Project finance is statistically significant to funding an energy project, in Nigeria, 1984-2014.

Hypothesis 2

Ho: Change in country risk factor does not lead to a statistically significant change in funding an energy project in Nigeria;

Ha: Change in country risk factor leads to a statistically significant change in funding an energy project in Nigeria

Results

Augmented Dickey-fuller Unit Root Test- Table 1

The following equations were estimated:

∆l_Ener_Proj=α + ∆β1l_Ener_Projt_1+ Ɛ-------------------(1)

∆l_Ener_Proj=α + ∆β1l_Ener_Projt_1+ ∆β2l_Corp_Loant +∆ β3l_C_Riskt +∆ β4l_Inflt+ ∆

β5OilInc_GDPt + ∆ β6l_Gov_Budgt + β7Proj_Fint + Ɛ -------------------------------(2)

Equation 1 is used in determining the lag of the dependent variable, shown in Table 4 below.

In order to construct a model to test hypothesis one and two, OLS was used to select the lag

length of the model.

Results

Descriptive Statistics 1984 to 2014-Table 2

Correlation Matrix-Table 3 (The correlation is used to examine the association/relationship between the variables included in the model. The

correlation also shows the sign and magnitude of this relationship)

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Dynamic Dependent Variable Table 4

Dlog ener_pro_1 denotes lag 1 of energy project and e is the error term. The asterisks ***, **, * indicates significance at the 1,5,10% levels respectively, the standard error are in brackets.

Table 5 Iterated GMM-Dependent variable: d_l_Ener_Proj

∆_l_Ener_Proj=α+∆_l_Ener_Proj_1+∆_l_Corp_Loan+∆_l_C_Risk+∆_l_OilInc_GDP+∆_l_Gov_Budg+Proj_Fin+ e------------- -------------------------------------------- Equation 3 The asterisks ***, **, * indicates significance at the 1,5,10% levels respectively, the standard error are in brackets The J-statistic tests the null hypothesis that the instruments are orthogonal/ uncorrelated to the error term of the regression

and they are valid instruments,and the estimation weighting matrix used was HAC standard errors, bandwidth 3 (Bartlett kernel).

Table 6 Iterated GMM-Dependent variable: ∆_l_Ener_Proj

∆_l_Ener_Proj=α+∆_l_Ener_Proj_1+∆_l_Corp_Loan+∆_l_C_Risk+∆_l_OilInc_GDP+Proj_Fin+Infl_1+

e------------- -------------------------------------------- Equation 4 The asterisks ***, **, * indicates significance at the 1,5,10% levels respectively, the standard error are in brackets

The J-statistic tests the null hypothesis that the instruments are orthogonal/ uncorrelated to the error term of the regression and they are valid instruments,and the estimation weighting matrix used was HAC standard errors, bandwidth 3 (Bartlett kernel).

THANK YOU & QUESTIONS