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PROJECT
FINANCING: CHALLENGES AND THE WAY FORWARD
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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