Submerged in an avalanche of political problems, ranging from the mishandled withdrawal of American troops from Afghanistan to the underwhelming economic conditions given heightened inflationary concerns, President Biden has finally secured a desperately needed win with the signing of a trillion-dollar infrastructure bill early this week.
Even for one of the largest and most developed countries in the world, infrastructure spending remains a major priority. The U.S. infrastructure landscape, often viewed as glamorous and advanced by dwellers of low-income nations, has been termed outdated, debilitated, and in desperate need of reforms. Hence, it comes as no surprise that the deep political divide in the U.S. was unable to impede the passage of a bill on infrastructure, given the crucial role it would play in job creation and economic growth.
The devil we know, but barely address
Back at home, you need no major international agencies to convince you of the existence of a gaping infrastructure gap in Nigeria, as the erratic supply of power and the abysmal road network should do the trick. Nonetheless, institutions like Moody’s Investors Service have helpfully provided us with reasonable estimates of the possible infrastructure spending that could plug this deficit, putting the nation’s infrastructure financing shortfall at US$3 trillion over a thirty-year period.
This translates to a yearly deficit of US$100 billion or N41.50 trillion using the exchange rate of N415/$. Similarly, the International Monetary Fund estimates the value of Nigeria’s total infrastructure stock at 25% of the nation’s GDP, while the Debt Management Office has a more generous assessment putting the quotient at 35%. Irrespective, both estimates are significantly shy of the 70% international benchmark and are easily outstripped by the likes of South Africa with a ratio of 87%.
That being said, when you juxtapose the infrastructure challenges with the solutional steps taken thus far, you realize that the portholes on your roads are here to stay (maybe you get a mild patch of these portholes every now and then, but be sure it will open back up at the slightest downpour). For reference, the yearly budget allocation to capital expenditure averaged N1.21 trillion from 2016 to 2020, and the percentage of the total budget expended on capital projects within the same period averaged 15.71%. The government prefers to have the CAPEX budget allocation at 30.00%, but even if that was achieved (which has not been the case in the last five fiscal periods), that would put the average sum for capital projects (based on expenditure projections in the 2022 appropriation bill and the MTEF) at N4.84 trillion annually over the next three years. Recall that we need N41.50 trillion yearly to close the infrastructure gap, the Government does not have the best track record in terms of CAPEX performance, and CAPEX projections in the MTEF are below 30.00% of the budget.
Treble approach to the problem
In my perspective, three simultaneous strategies could help resuscitate Nigeria’s infrastructure state. We have borrowing, foreign direct investments (FDIs), and concessions to the private sector, all of which should be simultaneously pursued.
Borrowing: This is the most contentious approach to plugging the infrastructure gap, and that is because corruption is woven into the fabric of our social-political structure. Nevertheless, should borrowed funds be effectively utilized in building world-class infrastructure, the future will eventually pay for itself and bring us close to our economic utopia. However, if institutions are not equipped enough to tackle the inefficiencies and leakages in government-run infrastructure projects, borrowing to fund infrastructure should be approached with caution.
Foreign Direct Investments: The US$100 billion annual infrastructure investments needed to close the infrastructure gap is roughly six times the nation’s current GDP. Hence, foreign investments through FDIs might just be another great way to address this problem. The infrastructure build-up in the telecom space was mostly driven by FDI inflows in excess of US$20 billion over the last two decades. Hence, we could also introduce policies that seek to attract foreign funds to deficient areas like transportations, power, and energy. Perhaps, the Petroleum Industry Act could serve this purpose in the oil sector.
Concessions: Concession arrangements with the private sector allow corporates to bring their efficiency into the process of building Nigeria’s infrastructure, and the trade-off in terms of the tax credit granted to these corporates is well acceptable, given the public sector’s long history of mismanaging these funds. The Federal Government has sought to leverage this approach in developing our transport system, under the Public Private Partnership scheme. It would be great to scale this initiative further.
Chasing the bag
Back to the U.S., the recent infrastructure bill is a great development that is expected to sustain the international attractiveness of the nation, stimulate growth, and create jobs. Also, with the new bill looking to deploy US$550 billion in new infrastructure spending, nimble investors should start seeking possible opportunities that could arise, particularly in the U.S. equities market. For us, we see an attractive play in the infrastructure stocks below.