Full Project – PROJECT FINANCING: CHALLENGES AND THE WAY FORWARD

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CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

The construction industry is an established industry: the sector regarded as a catalyst for growth while its performance serves as a nation’s economy (Aibinu, & Jagboro, 2002). It comprises of building, civil and engineering works. Oliver (2005) affirm the industry to be a prime motivator of any economy, while in Akwa Ibom State, it represents sixty (60) percent of the capital investment.

According to Esty (2004) there has been a new wave of global interest in project finance as a tool for economic investment. Project financing is not a new financing method. It has been used to finance industrial projects such as mines, pipelines, power stations and oil fields (Finnerty1996; Esty, 2004). In today’s low-yield environment, insurers and asset managers are particularly eager to invest in developmental projects such as infrastructure (Wilkins, 2015).

According to Fight (2006) project finance is generally used to refer to a non-recourse or limited recourse financing structure in which debt, equity and credit enhancement are combined for the construction and operation, or refinancing of a particular facility in a capital-intensive industry. Project Finance refers to the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where projects are paid back from the cash flow generated by the project (Prasana, 2013). Project Finance is used by the private sector companies as a means of funding major projects off balance sheet. The attractiveness of project financing is the ability to fund project in the off balance sheet with limited or non-recourse to the equity investors; i.e if a project fails, the project leaders’ recourse is to ownership of the actual project and they are unable to pursue the equity investors for debt (Graham, 2010). For this reason, lenders focus on the importance of projects cash flow as the main source for repaying project debt. Project financing is being used throughout the world and across a wide range of industries and sectors. This funding technique is growing in popularity as governments seek to involve the private sector in the funding and operation of public infrastructure (Prasana, 2013; Graham, 2010).

As a virtue of fact, the role played by project finance scheme in most economies is very significant to their development especially the emerging economies (Esty, 2004). The Nigerian construction industry as experienced various methods of construction project finance from traditional (Direct Labour, Open Tendering, and Selective Tendering) to Modern methods (Design and Build, Turnkey Project, Contract Management, Public-Private Partnership etc), and despite the failure of Public-Private Partnership (PPP)) in the finance of project in Nigeria (for example, Lagos-Ibadan express way, Guto-Bagana in Nasarawa and Kogi state and Macvis concession projects in all International Airport in Nigeria), the federal government as signified intention to concession two more bridges for private-investors’ development. These bridges are the second Niger bridge between Onitsha and Asaba and River Niger brigde in Nupeko, Niger state (Oyedele, 2013).

Akwa Ibom State infrastructural development has taken a central place in the various development plans or programmes with the ultimate goal of breaking down the vicious cycle of poverty and under development (Punch, 2016). This study discusses the challenges of project financing of construction projects in Akwa Ibom State, it is therefore observed that there are various challenges that hinders construction project financing, thereby making it a major problem in the construction industry as a whole and an adequate process must be involved because contractors, government and shareholders in the construction industry are faced with the consequence of not overcoming these challenges.

1.2       Statement of the Problem

Project delivery process has no stage specifically labeled “funding” yet funding challenges affect each stage of the process which may lead to delay in project delivery or project abandonment. Abandoned projects range from road projects, real estate, water projects and housing projects, which are the basic amenities which any government should provide for its citizens. (Akhanolu, Ekpefan, Ailemen & Chibuzo, 2016). Most of the survey results (Frimpong & Oluwoge, 2003) shows that financial constrain is one of the main causes of delays and project abandonment.

The financing methods have placed Nigerian infrastructure in horrible states across the country and there is yet no harmony in the method of project financing in Nigeria (Oyedele, 2013). The sourcing of funds for investment in project development poses a great deal due to economic instability and stringent measures imposed by most financial institutions. This is compounded by the fact that the Interest rate structure had had an unfavorable impact on funding the development of project financing (Akhanolu, Ikpafan, Ailemen & Chibuzor, 2016). The current infrastructural funding mechanism in Nigeria lack appropriate performance standards. This deficiency brings about cost overrun, lack of ability to complete project over specified contract periods, the associated sharp and corrupt practices within the awarding agencies and the contract officials (Vanguard, 2011). In most cases, personal interest of Nigerian leaders overrides public interest in the financing and management of construction projects (Oyedele, 2013).

According to Ika (2012) with the increase in oil revenue and other natural resources, Akwa Ibom State was viewed to have reached the turning point and set forth in the path to economic growth and industrial development but contrary to expectation, the State is apparently lagging behind its contemporaries. There seems to be missing links in the path to infrastructural development, attempts have been made to explain the rather paradox; one key factor seems to be recurring and to which the backwardness in infrastructural development in the state have been attributed to: this of course is due to lack of sufficient capital. It is this short of negative situation inspite of abundant natural and human resource and this have warrant the investigation into the challenges of project financing in the state, in other to advise contractors, the government and other stakeholders in the construction industry on the ways and means of financing construction projects, particularly in Akwa Ibom State.

1.3       Research Questions

1. What are the sources of project finance?

2. What are the challenges facing project financing in Akwa Ibom State?

3. What are the possible ways of mitigating the challenges facing project financing      in Akwa Ibom State?

1.4       Aim and Objectives

The aim of this study is to investigate the challenges of project financing on construction projects in Akwa Ibom state and to examine ways of mitigating project financing in Akwa Ibom State. The specific objective includes:

1. To identify the sources of project finance.

2. To investigate the challenges of project financing in Akwa Ibom State.

3. To examine various ways of mitigating the challenges of project financing in Akwa Ibom State.

1.5       Scope of the Study

The scope of the study is confined to identifying the challenges of project financing in Akwa Ibom State and the way forward. The study is limited to Akwa Ibom State. Target respondents for this study are the professionals in the construction industry which include: Architects, Quantity Surveyors, Engineers and Builders.

1.6     Significant of the Study

According to UKCG (2009) the construction industry is a driver of growth in other sector due to its heavy reliance on an extended and varied supply chain. All other sector of the economy like manufacturing, education, health, sport etc, depends on the construction industry for performance.

The significance of this study to the construction industry is quite much in terms of improving the performance of project execution and delivery without abandonment. The study will be utilized by the government at both Federal and the state levels in the area of providing sustainable source of funding for government construction projects at all levels. Government will be guided on the various challenges facing project financing which often leads to delay or abandonment of construction projects.

The study will be of great importance to the construction industry by helping the investors, developers, clients, contractors and stakeholders to source for a more sustainable funding option and to avoid the various challenges facing construction project financing in the construction industry. The construction industry will derive benefits from the outcome of this study in the sense that there will be a timely delivery of projects within the contract duration and the pervasiveness of project delay and abandonment will be overcome.

Furthermore, the undergraduates will find the study as a useful tool to further learning and research and to other researchers whom may want to venture into the same subject matter. Finally, it will serve as an additional contribution to the existing body of knowledge which will be of immense and great improvement to construction project execution and delivery in the construction industry.

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Full Project – PROJECT FINANCING: CHALLENGES AND THE WAY FORWARD