• Friday, March 29, 2024
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The problem with the debt-for-infrastructure strategy

The problem with the debt-for-infrastructure strategy

Nigeria has serious infrastructure challenges. You see it in the quality of roads, the near absence of rail services, the relatively poor state of many of our airports, and the gridlocks around the ports. All these contribute to our lack of competitiveness and our inability to generate sufficient economic growth and jobs. According to the World Bank in 2011, we needed to spend at least $14.2 billion a year for no less than a decade to start closing up our infrastructure gap. The Federal Government’s (FG) infrastructure plan said we needed about $33 billion a year.

Unfortunately, anyone who has taken a casual look at the FG’s finances can see that it does not have that kind of money. In 2018, the entire FG budget was just under $30 billion at the official exchange rates. That includes record levels of new debt. Actual FG revenue was just under $13 billion. That is all revenue, before you think about salaries and debt servicing and votes to different ministries and all that.

In 2018, according to data from the CBN statistical database, only $3 billion was spent on capital expenditure. Keep in mind that capital expenditure is not just spending on infrastructure but includes things like Prado jeeps and office buildings for federal parastatals. So, the spending on infrastructure was likely less than $3 billion. You can already see the problem; $3 billion spent in a country that requires $33 billion a year, even with record levels of new debt.

If the goal is propaganda then you can always show proof that you are working. That $3 billion will allow you to start projects in every state and take pictures for social media showing that work is being done. But it is still only $3 billion. You can show pictures of the newly paved 10 kilometre on the Enugu-Onitsha expressway but the remaining 120 kilometre will still be a mess.

The Lagos-Ibadan expressway which is only 130 kilometre will continue to take decades to construct. Every government likes to believe that they are the only ones who tried to build roads, but the truth is every regime since 1999 has built something. However, because the funding is not adequate, they can only build a little at a time, while the rest continues degrading. By the time the next regime comes, the ones that the past regime built have started to degrade. And the cycle continues.

Is this a problem that can be solved with debt? Obviously not. Since 2015 the FG has broken its deficit record almost every year. If you add the mysterious line item in the budget implementation report titled “net deficit” then the amounts borrowed, presumably for infrastructure, are at levels not seen since the 1980s. Yet the fraction of all government spending that goes to capital expenditure has been falling consistently.

Between 2010 and 2013 the FG spent about 20 percent of its expenditure on capital projects. Since then it has dropped dramatically. In 2017 the FG spent only 1.7 percent on capital expenditure, the lowest since the CBN started publishing such data. No doubt the collapse in oil prices played a role but oil prices were higher in 2017 than in 2016, and even higher in 2018. In 2018, the FG spent just under 14 percent and for the first 3 months of 2019 spent just over 11 percent.

If you are wondering why the fraction keeps shrinking, it is because debt servicing costs keep piling up. Which should be obvious even to roadside economists. If $33 billion a year is required, then a government which can typically afford to spend $3 billion only, cannot borrow up to that amount. It will go bankrupt very quickly.

The case to borrow for infrastructure is based on the infrastructure project itself raising enough revenue to repay the loans, or the infrastructure generating enough extra economic activity that can be taxed to pay for loans.

We can already rule out the tax part for Nigeria for obvious reasons. The infrastructure paying for itself strategy, has also proved challenging for political reasons. For instance, the Abuja-Kaduna rail line which was built with debt is currently priced so low that it cannot even generate enough revenue to keep itself afloat, not to talk of paying back some of the debt used for the project. Given these two realities, the debt-for-infrastructure strategy is a sure path to FG bankruptcy.

A country with infrastructure problems and a bankrupt government, will unfortunately be worse-off compared to current situation as it won’t even be able to spend the meagre $3 billion.

So, what is the way forward?

As at today there are over $15 trillion of global funds that are desperately looking for where to put their money. That is trillion with a “t” in dollars. They even have to pay some governments to hold their money. If we are able to mobilise just one percent of these to fund our infrastructure every year for the next four years, then all our infrastructure problems will be solved. The obvious policy question then is, how to mobilise global private capital to fund infrastructure projects in Nigeria. That is the question we hope our policy makers will try to answer.

NONSO OBIKILI

 Dr Obikili is chief economist at BusinessDay