Micro Small and Medium Enterprises (MSMEs) form the biggest chunk of Nigeria’s private sector and that is why it can hardly fund infrastructure, Babatunde Raji Fashola, minister for Works and Housing said.
About 60 percent of Nigeria’s private sector comprises MSMEs and family-owned businesses, Fashola told BusinessDay in an exclusive interview. This means the private sector can’t pool large funds required to meet Nigeria’s widening infrastructure gap.
Additionally, the other 40 percent of the private sector who have the capacity, a good slice of them owes the Asset Management Corporation of Nigeria (AMCON). Their debt profile has weakened earnings and shrunk their ability to develop a deep infrastructure funding base.
“Over 300 of the famous private sector were bailed out by this government in 2015. About N5 trillion was used to bail them out so they won’t pull down the entire system,” the former governor of Lagos State, said.
In 2019, the Federal Government estimated that a minimum of $3 trillion investment would be required for Nigeria to bridge its infrastructure gap over the next 30 years. This comes to about $100 billion per year.
To fix this enormous infrastructure gap, the government has been experimenting with the Public-Private Partnership (PPP) model over the past years to attract private capital.
But several years with the PPP initiative, the country is still mired in infrastructure deficits just as debts mount and budgetary allocations remain insufficient.
In 2008, for instance, the Federal Government created the Infrastructure Concession Regulatory Commission (ICRC) to regulate PPP efforts and address Nigeria’s physical infrastructure deficit which slows economic development.
With an executive order, President Muhammadu Buhari in 2019 also introduced the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme which seeks to encourage PPP intervention in the construction or refurbishment of road infrastructure projects in Nigeria in exchange for a 50 percent tax rebate.
Fashola highlighted several other efforts to spur private capital, however, the funds are hardly enough to match what is required.
“How many businesses make N1 billion turnover? Let’s say profit on a turnover of N1 billion is just roughly about ten percent that is N100 million. Let’s say tax is 20 percent, which road can N20 million build?
Companies such as Lafarge, Nigeria Liquefied Natural Gas (NLNG), BUA, TNTL and Dangote have the level financial strength required to quicken a dominance of private capital in infrastructure development in Nigeria, Fashola said.
Nigeria also faces the challenge of raising capital from abroad as most countries presently struggle with meeting their own funding needs on account of pressure on available lean global resources.
Fashola cited Europe where many businesses have shut down, on the back of the COVID-19 pandemic.
“The only country that was writing development cheque on a continuous basis was China. Europe is borrowing from them. Britain has borrowed some amount in massive billions of pounds. America is spending on stimulus. Where do you think the money is coming from,” he queried.
He said it is important not to create an impression that the government is not putting enough effort.
Fashola said all the economies of the world are struggling. In the United Arab Emirates (UAE), last year – about 20,000 people lost their jobs.
This does not close the door to Foreign Direct Investments (FDI) when there was prosperity, relative to now, FDI flow to real estate and infrastructure was not much.
However, most of the foreign exchange that came into Nigeria was from portfolio investors. This is hot money. It does not stay. It is not patient money and cannot fund infrastructure development.
An economist, Paul Alaje, however, believes that the problem is not entirely with the private sector, but that the country has failed to drive the PPP model due to the shoddy handling of government over the years.
Alaje said, “That we need Public-Private Partnership cannot be overemphasized. We have seen what happened in Lagos, particularly Apapa-Oshodi Expressway, where we have seen the private sector come to partner with the government in road construction. But that has been limited because the credit most cities put has a cap that most companies can’t meet up to.”
Since the tax credit policy came up, the Federal Capital Territory (FCT) has further relaxed the cap for most companies who are in real estate and are thriving to support the government in road construction.
However, government will need to further lower the entry barrier, and the government will need to bring it lower so that more organisation to participate.
The economist argued that the problem is not the lack of a functional private sector. A more critical missing component in piecing together the infrastructure development puzzle is innovation. Innovative thinking is required. Borrowing is also not required with creative and innovative thinking enthroned.
For instance, what should determine where a rail line would be built should be the presence of a cluster of businesses to ensure the rail is sustainable because revenue is guaranteed.
“I think the thinking of those in authority has been aligned to the quick fix, the quick approach to funds that is why we are not generating enough resources and revenue,” Alaje said.
