Filling Nigeria’s Infrastructure Gap

Obinna Chima and Nume Ekeghe write that Nigeria’s infrastructure deficit is a hindrance to sustainable economic growth but presents huge opportunities to investors

Infrastructure financing plays critical role in promoting economic growth, improving standard of living, poverty reduction, enhancing productivity and in improving competitiveness.

It also contributes to environmental sustainability.

Clearly, Nigeria is currently faced with huge infrastructural gap that has hindered its desire to exploit its rich natural and human resources to stimulate its development.
For instance, in spite of the country’s huge oil and gas, sunlight and hydro resources, Nigeria cannot generate enough electricity to drive its development.

Indeed, the country’s infrastructure deficit has stymied its economic growth. The challenges of the absence of critical infrastructure continue to impact negatively on the cost of doing business, investment, and capital inflow into the country.

To the acting Director General, Infrastructure Concession Regulatory Commission (ICRC), Mr. Chidi Izuwah, the total amount of funds required to provide quality infrastructure in Nigeria over the next six years is about $100 billion.

Izuwah estimated that while about $60 billion would be required for the oil and gas sector; about $20 billion to revamp the power sector; $14 billion for road; and between $8 and $17 billion for rail tracks.

Some other sectors that require huge investments include housing and highways, ports, airports, dams, bridges and tunnels, water and telecommunication.

To this, Izuwah and other experts that spoke at the 2017 annual conference of the Finance Correspondents Association of Nigeria (FICAN) in Lagos at the weekend, stressed the need to evolve creative options to generate long-term finance to tackle Nigeria’s infrastructural challenges.

The Nigerian Situation
The ICRC boss pointed out that Nigeria fairs poorly on domestic savings, investments and government spending compared with her peers.
Izuwah said the federal government’s decision to concession most of the port terminals was a step in the right direction.

According to him, Nigeria’s huge gap in infrastructure has over the years, diminished economic growth and competitiveness.

“At present, the value of Nigeria’s infrastructure is about 35 per cent of Gross Domestic Product (GDP), paling in comparison with 70 per cent for larger economies,” he added.

Izuwah said between 2009 and 2013, Nigeria invested a mere $664 per capita per annum in infrastructure or three per cent of GDP, compared with an average of $3,060 or five per cent of GDP in developed countries.

“Less than 56 per cent of Nigerians have access to electricity compared to 80 per cent for developed countries. This level of access translates to an average of 24 hours in a week.
“For over 75 per cent of businesses operating in Nigeria, power supply is a major constraint. Of the over 10,000 MW of Nigerian power sector generation capacity, between 2,500 to 3,500 MW is available for over 170 million.

“Compares unfavourably with South Africa that generates 50,000 megawatts for a population of about 50 million,” he added.

Izumah pointed out that about 68 per cent of all roads in the country are in deplorable condition, with only about 18 per cent of Nigerian federal roads paved.

“Experiences from other countries show that primary financing by banks and refinancing through bonds is the ideal model for infrastructure funding.

“Through this model, the focus of commercial and merchant banks in infrastructure financing should be on providing funding up to the pre-commissioning stage of projects.

“Given their strong project appraisal and monitoring skills, and their healthy capitalisation, banks are well placed to take up financing in the pre-commissioning phase, when project risk is the highest.

“After commissioning, banks must refinance the debt (through bonds) to long-term investors.
“Refinancing frees up bank funds and enable these funds to be deployed in new infrastructure projects,” he added.
The President/Chief Executive of the Africa Finance Corporation (AFC), Mr. Andrew Alli, also stressed the need for the federal government to create the right environment to be able to attract private capital for infrastructure financing.
Alli pointed out that federal and state governments’ fiscal inflows are grossly inadequate to match the pace of investments required in infrastructure.

Represented by the Vice President and co-head of advisory at the AFC, Fola Fagbule, Alli said that the Nigerian government ability to spend was limited due to its weak earning capacity.
Specifically, the power sector according to him, recently privatised, was still significantly government driven with challenges of transmission, gas supply, tariffs, payment security, and operational limits which has left the industry in critical state regarding suitability for long-term investment.

The overall effect of this according to the AFC boss is that Nigeria still struggles to provide an adequate supply of reliable power to its population of approximately 170 million people, as generation capacity was still about 3038 megawatts at March, 2017.
“If we don’t have a cost reflective tariff, we will not have the kind of investment we want,” he stressed.

Alli further expressed concern that despite its recent unbundling, “this industry is at a critical juncture in terms of privatisation, liberalisation and other conditions for long-term investment sustainability, both by public sector and private financiers. Both the public and private sides have fallen short of requirements to create a bankable and sustainable sector. ”
Similarly, he said the transport sector was largely financed by the federal government hence limited by annual fiscal constraints.

The end result in Nigeria Alli added was that roads and rail typically get the most attention, but funding is “poor and opaque.”

Arguing that money is not the problem of infrastructure financing, Alli said other challenges that needs to be addressed include bad procurement processes, structural problems that make it difficult for investors to get value for money, funding structure, maintenance, tolling, among others.

He also frowned on inadequate attention which Nigeria pays to meeting the needs of specific investors and projects already in progress, or on creating policy incentives that will spur investments.

“Even though the Country has proven gas reserves greater than oil reserves and world class deposits of tin, substantial iron ore and coal resources, unfavorable policies around pricing and access to acreage have limited infrastructure investment and development for several decades in Nigeria,” said the AFC boss.

In proffering solution to poor infrastructure financing, the AFC president said there should be major overhaul in approach, for large ticket billion-dollar projects to work.

“We need to reduce significantly, the level of opaqueness in public procurement. We must establish the framework for private contractors to borrow against a contract. Ministries must spend more time developing contract that private capital can relate with. On natural resource, he said, significant amount of acreage are in the hands of those who have no real interest.

“Everyone involved in the privatisation exercise has some blame to carry. We need to achieve a reset of the privatisation programme. We are not seeing an empowered regulator that can enforce what is agreed. Enforcement will be painful on both sides, but that pain is necessary,” Alli stated.

Also, the Chief Executive Officer, Rand Merchant Bank Nigeria, Michael Larbie, said clearer legal and regulatory framework, improved and efficient competitive bidding procedures, consistent sector policies, (e.g.tariffs regimes, rule of engagement), strengthened management of fiscal obligations and supportive regulatory environment are key in improving the quality of infrastructure in Nigeria.

“Government must build a track record of public private partnership (PPP) performance to attract large sums of long-term funding from pensions funds and insurance.”

He noted that deepening diversification of the Nigerian economy from oil, and development of higher value-added businesses, large consumer market and growing middle income families, were some of the opportunities in the Nigerian market.

According to the RMB boss, resolution of poor electricity output would result in significant increase in productivity.

Towards Better Infrastructure
For Larbie, some of the key success factors required in improving the pallid state of infrastructure in the country include eliminating the financial constraints by building a track record of PPP performance to attract large sums of long-term funding from pensions funds, insurances, etc.
In this regard, significant development of the capital market would be required. He also recommended priority access to forex for support of delivery of strategic public assets as well as the need for a central bank administered funds for infrastructure.

He also suggested that the government allocates “the risk to the party best able to manage it. Political risk must be adequately covered, including policy changes through political cycles.
“Construction, operational, demand/market risk should be borne by the private sector. Forex certain Force Majeure events risk to be shared.

“Government must ensure harmonious approaches among the government agencies and there should be clear role and responsibility with a capacity building for smooth implementation.
“Government must allow for fair returns to private investors and provide budgetary support or guarantees when necessary,” he added.

The RMB boss also called for clearer legal and regulatory framework, improved and efficient competitive bidding procedures, consistent sector policies, (e.g. tariffs regimes, rule of engagement), and strengthened management of fiscal obligations.

Also, the Chief Executive Officer of Viathan Engineering Limited, Mr. Ladi Sanni, said there was need for more private capital to give infrastructure a facelift in the country.

Sanni said: “Part of the problem we have in Nigeria is contract sanctity. The judiciary has a role in interpreting the legal framework. Government needs to demonstrate that private investors can go in to long term investment with them.

“Government bonds limits investment into high risk power project. We would like government to look at the issues of infrastructural bond.”

Izuwah who advocated increased PPP in the country, said private capital sanities corruption.
Citing case studies in India, Kenya, South Africa, and even Zimbabwe, Izuwah said Nigeria requires stable, multi-year funding mechanisms.

“PPPs cannot by themselves bridge the gap. Government spending needs to be more smartly deployed, to achieve the best value for money in any given project,” he added.

He however said there were a number of major policy constraints to private investment inflows into infrastructure in Nigeria, broadly categorised into three areas: tariffs and regulations; public procurement approach and investment climate.

According to him, private capital is a force for good, saying a number of factors prevent Foreign Direct Investment (FDI) and cause diversion of capital to other countries where the investment climate is more favourable.

Political will, according to him remains key to ensuring appropriate tariffs across sectors and projects, adding that most sub-sectors are still not open to investment specially rail and roads .
He added: “Enhancing the investment climate and clearing roadblocks to investor entry is one major area where FGN can make a direct, near-term impact.

“We need a national infrastructure acupuncture plan. We need to choose the areas to put the pin. If we are not careful, our factor endowment can become a problem. Our total broad money is 20 per cent of our GDP.

“Government money is 20 per cent of our GDP. When you combine logistics and lack of energy, your productivity goes south. A developed country is not where the poor has a car, but where the rich use public transport. Time waits for no one, so the concept of African time makes no sense. Transforming Nigeria is doable.”