DEVELOPMENT - 16 MAR 2018

Nigeria and the Failure of Capital Expenditure

Nigeria and the Failure of Capital Expenditure
The Minister of Power, Works and Housing (PWH), Babatunde Raji Fashola suggest that his ministry did not complete any capital project in 2017.

To some, the frustrations of constant traffic, inconsistent electricity, and frequent flooding are distinct drawbacks of living in Nigeria. But they all represent one common failing: infrastructure. 

Make no mistake about it, Nigeria's infrastructure is inadequate. Nigeria’s infrastructural regulatory agency, Infrastructure Concession Regulatory Commission (ICRC) estimates that the country loses ₦2 trillion each year due to inadequate infrastructure. Likewise, the World Bank believes that countries like Nigeria can make each citizen 3% richer each year just by closing its infrastructure gap. 

In light of this, it is particularly jarring to hear the Minister of Power, Works and Housing (PWH), Babatunde Raji Fashola suggest that his ministry did not complete any capital project in 2017, despite receiving the largest capital expenditure allocation across all parastatals. 

How does this happen? Before we begin casting stones, let's do a brief check.

 

PPP as the elephant in the room

Budget allocation to the PWH ministry is rarely without controversy. In 2017, the minister claimed that the amount appropriated for the Lagos-Ibadan Expressway was slashed from ₦31 billion to ₦10 billion by the National Assembly. And in July 2017, Julius Berger Nigeria Plc suspended its construction work on the controversial road, as the government had failed to pay debts just under ₦9 billion.

Following his defence to the National Assembly, some commentators suggested that Mr Fashola had turned his back on public-private partnerships (PPP) and their efficacy in delivering large projects. 

But is he really to blame? The Minister had increased the budget of these projects, arguing that the government should assume greater responsibility for the projects because of the inability of private investors to adequately commit to the funding of these projects. But even with this, many projects remain far from realisation.

The truth is that PPPs are necessary. The government simply does not have enough money to bridge Nigeria's infrastructure gap. It has admitted as much. As recently as September 2017, the construction of the Bonny-Bodo road within the Niger-Delta region commenced under a PPP arrangement between the Nigeria Liquefied Natural Gas Company Limited (NLNG) and the Federal Government (FG). The FG has even devised more creative PPP solutions, endorsing a consortium of private companies led by Dangote Industries Limited to rehabilitate the problematic Apapa-Oworonshoki expressway under a tax incentive scheme.  

Moreover, PPP initiatives have succeeded all over the world, including in Nigeria. The Azura Edo Independent Power Project (IPP) and the Murtala Muhammed Airport 2 are success stories of the PPP journey in Nigeria. PPP failures like the Lekki Toll represent a failure of government and implementation, rather than an encouragement to abandon the approach. 

 

Who loses out?

Regardless of where the problem lies, it is clear that every Nigerian ends up on the losing side. The dismal state of Nigeria's roads pushes up the prices of goods and services, making exports uncompetitive, and endangers lives in the process. The inability to cheaply transport goods or people forces us into unnecessary subsidy programs, while the "bring your own infrastructure" culture makes it much harder to do business in Nigeria

Everybody pays for poor infrastructure, and because of this, it is clear that infrastructure ought to be a priority; not just on paper, but in reality. 

That brings us back to the original issue. Despite the Ministry's reports, the Debt Management Office (DMO) stated that it released ₦1.2 trillion to finance capital projects in 2017. Given the size of Mr Fashola's ministry, it is improbable that they received none of these funds. The implication is that the Ministry received these funds too late in the year to execute for that calendar year.

That is highly plausible. Afterall, in December 2017, the Minister of Finance announced the Ministry released ₦750 billion for capital projects. These projects effectively become 2018 projects.

But funding is only one ingredient that goes into the pot. Legacy debts also create inefficiency – some of these funds will be used to pay accrued debts owed to contractors due to the late disbursement of funds. The government must reevaluate their approach to executing these projects and funding models must be reconsidered to allow contractors deliver on time.

Budget passage is also key. Today, the Executive and Legislature remain at loggerheads over the 2018 budget. The result is often a delayed budget, with little time for capital-intensive projects to gather momentum within the calendar year. And with election season nearly upon us, individual interests competing with national goals and personal pockets taking precedence over development becomes even more apparent. 

Budget passage, funding, implementation; all are vital. Nigeria is yet to get any of those right and unless we do so, come 2019, we will be having this discussion once more. 

 

Follow @kunmi_kay on Twitter to get his insight. Subscribe here to learn more from Stears Business.

Akinkunmi Akingbade

Akinkunmi Akingbade

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