ECONOMY - 31 JUL 2017

Investing in Nigeria's Infrastructure

Investing in Nigeria's Infrastructure
Infrastructure challenges continues to be a major problem for Nigerian investors and Government. Source: Kunle Ogunfuyi

Like someone trying to walk upright without a backbone, many developing countries have sought to grow without basic infrastructure. The consequent stunted growth has been unsurprising but still damaging. 

There is a strong case for greater infrastructure spending all around the world, more so in Nigeria given the substantial infrastructure gap. Unfortunately, the country has fallen far short in attempting to bridge this gap, a failure that starts from the top – public expenditure. 

 

So Far… Not So Good

Driven by an oil price boom, Nigeria's public expenditure soared in the last few decades. Some reasons for this were obvious: inflation, increasing cost of governance, and growing demands for government spending. But amidst this rise, government capital expenditure failed to follow suit, either in absolute terms or as a proportion of total expenditure. In 2008, total budgeted expenditure was ₦3.3 trillion, and capital allocation was ₦1.2 trillion or 37% of the total. By 2016, total expenditure had nearly doubled to ₦6.1 trillion while capital allocation rose to just ₦1.6 trillion, just over 25% of the total.

We have witnessed a more notable rise in recent years as the present administration implements its rhetoric of counter-cyclical fiscal policy and improving infrastructure stock. Following the appalling situation in 2015 when capital expenditure was merely 10% of budget expenditure, recent years have stabilised around 30%, with a significant jump in absolute terms – 2017 capital expenditure budget is ₦2.3 trillion. 

Despite this, a lot of improvement is needed. First in the proportion of capital expenditure as Nigeria's recurrent costs (salaries and overheads) remain ridiculously high. Put simply, we need to rethink our fiscal stance and place more priority on public investment.

Even more importantly, we must close the gap between allocated figures and what is actually disbursed. For instance, in 2014, barely half of the projected ₦1.1 trillion capital expenditure was spent. In fact, the Federal Government's record on delivering on its infrastructure promises is grim and stretches through different administrations, political lines, and economic cycles. 

The gap in disbursements makes a huge difference in terms of what level of capital development is achieved that year. It matters not how much is allocated, what matters is how it is spent.  

There are numerous ways of addressing this issue. The first would be dealing with the issue of budget delays. Whether it is budget padding, missing budgets or absent presidents, lawmakers and fiscal authorities have made a mess of passing the budget, especially in recent years. Interestingly, a recent constitutional amendment bill, as well as the possibility of an organic budget law, could address this. 

A corollary solution would be to ensure that unused allocations are recalled into a fund tied to core projects, for example, a power plant, to establish continuity. Of course, legislative cooperation would be needed for this to work. 

 

Closing The Gap

The task is an unenviable one. Nigeria's infrastructure stock in 2012 stood at 35% of GDP, compared to 58% in India and 87% in South Africa. The international benchmark is 70% – double our current ratio – and Nigeria has targeted this figure for 2043

Strictly speaking, the government alone cannot attain this. The National Integrated Infrastructure Master Plan suggests that the country needs to spend $100 billion each year for the next 30 years to reach this target. That is almost a third of our annual GDP. 

Therefore, the private sector needs to be involved somehow. This is something the government realises as its Economic Recovery & Growth Plan states it would be "leveraging on private sector capital". So the seriousness of our infrastructural decay requires an agile and globally responsive private sector that sees the need and opportunities for investing in Nigeria.

Engagement with the private sector may come in a variety of ways; direct investment, concessions, public-private partnerships, investment funds, and other arrangements. There is one useful guiding principle though: basic infrastructures that are not economically profitable should be solely financed by the government while the financially viable should be the responsibility of private investment, but the marginally profitable can be handled via public-private partnerships (PPP). 

This is a model being earnestly pursued by the Lagos State government in efforts to develop the state's transport infrastructure. The flagship Red and Blue lines are being financed through PPP arrangements, easing the financial burden on the state. 

For this to work, the government has a vital role in creating an enabling environment, institutions that promote the protection of investment, and deep domestic capital markets to provide lower financing costs for longer tenors. A start would be streamlining the regulatory relationship between the Bureau of Public Procurement and the Infrastructure Concession Regulatory Commission to loosen the bottlenecks hindering current PPP projects. 

 

Bridge to where?

Private sector involvement in infrastructure development will eventually help discipline spending and target it towards the most productive uses. This would ensure that Nigeria avoids white elephant projects and that the structures necessary for the growth of infant industries and entrepreneurial activity can thrive instead. 

Obviously, the experience of the power sector offers a strict warning of the difficulty of balancing the roles of business and state. Prospective solutions abound for more efficient public expenditure and a greater private sector role; the skill comes in determining how to do both. In the same way Nigeria knows it needs roads, it must now decide where it wants them to go. 

 

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Anselem Kadiri

Anselem Kadiri

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