ECONOMY - 18 AUG 2019

Rethinking Infrastructure in Nigerian States

Rethinking Infrastructure in Nigerian States
Construction on the Itakpe-Ajaokuta-Warri rail line

It is accepted wisdom that investing in infrastructure is good for the economy, both now and in the future. In Nigeria, the Federal Government’s annual budgets reflect this, with the Ministry of Works, Power & Housing receiving the highest allocation in the past four years.

Despite this agreement, actual spending on infrastructure is still weak—equivalent to 2.3% of GDP in 2018, less than 3.3% in South Africa, based on data from the International Monetary Fund (IMF). One impediment to adequate infrastructure spending is the urgency of competing needs like salaries. For instance, data from Nigeria’s Budget Office shows that recurrent expenditure was 147% of total revenues in 2018, meaning the government must borrow just to cover its recurrent expenses.

Constrained by limited resources, policy-makers must actively prioritise projects to get the most bang for their buck. Should they dedicate funds to an overhead bridge or extending a rail line? Crucially, would the answer differ if we were in Lagos or Ekiti State?

Probably. Since the structure of each state’s economy and resources are vastly different, their infrastructure needs would also differ. Ekiti, with a smaller population and more agrarian economy, infrastructure linking farms to markets would probably have a greater impact on the economy than a rail line.

 

How do states decide what projects to prioritise?

Before looking at how states can make better infrastructure decisions, it is worthwhile to understand how they actually approach these decisions.

Private sector entities usually evaluate projects on a cost-benefit basis, choosing the one with the highest predicted returns. Project selection is more fluid in the public sector as policy-makers need to consider election cycles and a wider range of interest groups. This means that projects are considered for reasons beyond impact (or returns).  

One politically appealing feature of infrastructure spending for public officials is that they are often visible, even when their long-term impact is debatable. For example, while a new road or school building fits these criteria, softer investment in education may not. No surprise then that an IMF study shows that it takes almost twenty-four years for the output from investing in schools to surpass that of infrastructure. There is also the case of politicians compensating communities for contributing to their electoral victory.

At the same time, infrastructure spending is particularly vulnerable to corruption due to the scale and complexity of infrastructure projects. Indeed, one OECD study on Sub-Saharan African countries shows that bribes are mainly concentrated in industries with large infrastructure spend.

Finally, there is the element of prestige, which is why some states build airports rather than fixing the road connecting its major city to an airport only a few kilometres away.

 

The Road Less Travelled

The first thing states need to do is account for the opportunity costs of their decisions. If you build an airport, you are leaving multiple needs unmet, such as access to potable water. For example, in prioritising infrastructure over human capital investment, Nigerian governments incur opportunity costs: low economic productivity due to poor school outcomes and the spread of diseases, which in turn would require higher health spending.

As they do that, states need to consider the particular requirements of their societies and the resources available to them.  

Let us consider Lagos State, with an estimated population of 21 million, and Ekiti State, with just over 3 million people, mainly in rural areas. Lagos seems relatively well-endowed, accounting for 35% of all state IGRs in Nigeria. At the same time, it has much larger infrastructure needs, with an estimated housing gap of 2.5 million units.

Meanwhile, Ekiti may not be in the same financial league, but its housing needs are much more modest. According to the National Bureau of Statistics’ Household survey, homeownership is much higher in rural areas (82%) compared to urban areas (48%). Besides, rural areas have more rooms per capita, and only 5%‌ of rural households rent houses compared with 33% in urban areas.

Likewise, transport infrastructure requirements are a lot steeper in Lagos. Lagos has over 5 million cars on the road, 43% of all Nigerian vehicles, and 227 vehicles per kilometre, compared to a national average of 11 vehicles.

Also, given that the structure of the Lagos economy tilts to services and manufacturing, the need for power and telecommunications infrastructure is greater. Hence, it would make sense to increase investment in these areas. Overall, states with a predominantly urban population and modern economy are better off prioritising the infrastructure that would best raise the productivity of their modern workforce.

In rural states with small populations and agrarian economies like Ekiti, the needs are different. Basic housing is easier and cheaper to access, so there is limited urgency in this area. There is no pressing need for a rail network or big bridges due to substantially lower traffic congestion, while roads from farms to markets provide better value. Likewise, energy needs are more basic.

Investing in schools and clinics by the government may have a greater impact on these communities as private schools and hospitals are lacking. Indeed, Nigeria’s household survey shows that rural households have poorer access to healthcare facilities, with 22% having the proximity of more than 30 minutes compared with 13% for urban areas.

 

Doing More with Less: Case Studies

In thinking about how to do more with fewer resources, several examples serve as lessons when considering infrastructure projects. Ogun State has a large industrial cluster, so roads that could link these industrial areas to markets and attract investors ought to be prioritised. However, this is not the case.

Indeed, this is also the case nationally where infrastructure provided is often determined more by federal character and less by potential value and impact. For example, the government has not prioritised a rail line linking the Apapa port to other parts of the country, even though it accounts for more than 80% of Nigeria’s imports and most of our non-oil exports. As a result, moving goods within Nigeria can be 13 times more expensive than shipping from other countries across the same distance.

Infrastructure is necessary for an economy to fulfil its growth aspirations. But in the face of severe revenue shortages, state governments must prioritise the ones best suited to their economic and demographic profile. Without this, progress in their economies would be slower than expected.

 

Adedayo Bakare

Adedayo Bakare

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