Nigeria: Shifting The Infrastructure Needle

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One of the biggest constraints to competitiveness, economic growth, and diversification in Nigeria is the crippling infrastructure deficit – estimated at about $300bn (N30trn) by the African Development Bank (AfDB). They estimate that the gross underinvestment in infrastructure over the years has left Nigeria with a core stock of infrastructure of just 20-25% of GDP – compared to 70% for more advanced middle-income countries of similar size.

This has driven the cost of doing business up significantly and impaired both foreign and domestic investment. The cheapest alternative to the public power supply is at least three times more expensive. Businesses simply need adequate transportation systems (roads, railways, and ports) to receive supplies and access markets for their goods.

Nigeria spent N2.07trn (3% of GDP) on capital expenditure in 2017 and plans to spend N2.43trn (3.5% of GDP) in 2018. This pales in significance to China which spent an estimated 15% of its GDP per year on infrastructure between 1980 and 2005. Attempting to follow the Chinese model will amount to spending N10trn ($33bn) per annum on infrastructure – 16% higher than total expenditure proposed in the 2018 budget. This is simply not feasible given Nigeria’s current revenue profile and the huge burden of recurrent expenditure – much of which already goes into debt servicing. Borrowing specifically to address the infrastructure gap would only push the debt-to-GDP and debt-to-exports ratios – 11.1% and 62.4% respectively beyond sustainable levels.

Efficient Deployment of National Savings

In the last 10 years, with the exception of 2009, the Gross Domestic Savings rate has been consistently higher than the rate of capital formation. In 2014, the Gross Domestic Savings and Capital Formation rates were 21.7% and 15.8% respectively. Increased national savings and its efficient deployment to infrastructural development should be a national priority. Nigeria currently has about N6.5trn (9.5% of GDP) tied up in pension funds. This highlights the sub-optimal deployment of national savings to investment.

External funding sources are crucial for the long-term as huge projects, especially transportation infrastructure, require funding beyond the capacity of the government given its competing priorities. Empirical evidence from across Africa shows that a stable multi-year funding mechanism free of annual fiscal constraints is imperative to galvanize diverse long-term funding sources like pensions, multilateral agencies, and bond markets. Nigeria’s case should hardly be any different. Bridging the infrastructure gap would require sourcing and efficiently allocating an estimated N4.57trn ($15bn) – 6.7% of GDP annually to key infrastructure projects (power and transportation).

Attracting private capital re-quires well-articulated guide-lines and an enabling environment that would create the incentive for private investment – especially through Public-Private Partnerships (PPPs). When well designed and implemented, PPPs have the ability to leverage public funding and harness private sector technology and innovation in public services.

This ensures efficiency and sustainability in addition to optimally allocating risk between the public and private partners on the basis of their capacity to manage it. Enhancing the investment climate and dismantling road-blocks to investor entry should be a major priority for the Nigerian government. Investor confidence in PPP arrangements would be given a huge boost by strengthening the legal and institutional framework to support healthy project preparation, tender processes and contract management.

So far, Nigeria has largely failed at meeting the needs of specific investors and projects already in progress, or on creating policy incentives that will spur new investments. For instance, the recent privatization of power assets is yet to have the desired effect as the government is still well invested in the transmission, supply of gas, and setting tariffs. This has left current investors gasping for breath and deterred further investment as the government’s resolve to achieve the conditions necessary for long-term sustainability remains unclear – especially as regards to cost-reflective tariffs.

 

Finacial Derivatives Company

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