Stimulating Road Development in Nigeria through Tax Credits
Accessing private finance for public infrastructure developments has proved hard to do in many African countries, and Nigeria is no exception. While a number of PPP road projects have been promoted by different Nigerian government bodies in recent years, the Lekki-Epe Expressway PPP was probably the only project to have been successfully closed and delivered on a full public-private partnership basis. Even then, the project structure did not last the test of time, and the project ultimately had to be “bought back” by the Lagos State Government ahead of time.
The public infrastructure deficit remains as large as ever, and it is therefore fair to say that any other approaches that can help to leverage private finance into public road building would be welcome.
In this context, one potentially interesting development for developers, investors and lenders in the Nigerian market is the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme Order 2019 (the Scheme), issued by Executive Order on 25 January 2019.
In principle, the Scheme will allow private companies to recover the cost of constructing new roads by way of a tax credit, claimable against Companies Income Tax otherwise payable.
The Scheme is open to Nigerian companies, institutional investors and pools of companies operating through a special purpose vehicle set up as an infrastructure fund. Eligible roads for the scheme will be under the discretion of a new committee, and there will be a more advantageous scheme for road projects in “economically disadvantaged areas”.
Participants will be entitled to utilize the total cost incurred in the construction or refurbishment of an eligible road construction (the Project Cost) as a tax credit. This tax credit will be used against future Companies Income Tax until full cost recovery is achieved, which is currently 30% of corporate revenue.
As an incentive, participants will additionally be granted a single non-taxable uplift on the Project Cost, which is equivalent to the prevailing Monetary Policy Rate (MPR) of the Central Bank of Nigeria, plus 2% of the Project Cost. With the MPR in Nigeria currently being 13.5%, this uplift reflects a 15.5% increase on the overall cost of the project that will be added to the tax allowance. In principle, this uplift ought to cover all or a substantial part of the financing cost, but since there are limits on how quickly the tax credit can be reclaimed (namely, by not more than 50% per year, unless the project is in an economically disadvantaged area), it is unlikely to fully cover the full financing cost unless funding can be obtained at a materially lower rate, such as from a development bank. Nevertheless, if the existence of the new road would create value opportunities for others, this may bridge the gap. For example, a targeted new road connection could allow a business to set up a new manufacturing facility on a site with substantially lower land costs, and create viability for enterprises that did not previously exist.
Accordingly, there might be some interesting synergies between domestic and international investors and lenders (who have access to finance but may not have a sufficient Nigerian tax burden to benefit directly from the scheme), who could cooperate with Nigerian companies with a material tax burden who have an interest in road construction (like the major construction companies, such as Julius Berger or Reynolds), together with Nigerian companies with a material tax burden who may gain a business advantage from the construction of new roads (such as industrial and manufacturing companies, like Dangote or DUFIL).
In other words, one could envisage joint venture arrangements being set up whereby the future benefits from the Scheme are used to underpin collaborative projects; where debt and equity are provided by investors to fund new road developments, which are ultimately secured on the tax credits to be received by Nigerian commercial partners. It could be structured in a similar way to a project financing or PPP, but in this case the only government involvement would the approval of the project scope, the valuation of the works, and the provision of the tax credit itself under the ambit of the Scheme. In any event, it will be interesting to see whether and how quickly opportunities are made of the new Scheme.
The Inside Africa team would like to thank Areomi Omisore, Associate, for her contribution to this blog post.