Nigeria has an infrastructure problem only private capital can fix

The government may downplay it all it wants, Abuja is too broke to meet the financing needs of an abysmal infrastructure stock that has rendered Nigeria economically non-competitive and put a cap on growth.
Despite being at its highest level since 2011, Nigeria’s capital expenditure as a percentage of GDP was 1.3 percent in 2017 and has averaged 1 percent since 2010, according to data compiled by Business Day. In 2016, when the economy slumped into a recession, capital expenditure as a percentage of GDP crashed to an all-time low of 0.2 percent.
The picture gets worse.
Nigeria’s infrastructure stock of 25 percent of GDP is less than the 70 percent international benchmark; yet, public investment in infrastructure from 2007 and 2017 was about 3.6 percent of GDP, lower than the African average of 4.3 percent.
The impact of weak spending on infrastructure is as clear as day, with the density of Nigeria’s road network only one-ninth of India’s and power output that is 10 percent of South Africa’s.
The decrepit state of infrastructure has pushed up the cost of doing business in Nigeria and made the country less competitive, helping African peers from Egypt to Ghana steal a march on Africa’s most populous nation in attracting foreign capital.

“The reality is that the government alone cannot finance the infrastructure gap in Nigeria, making it difficult to achieve sustainable development,” Ebrima Faal, a senior director at AfDB Nigeria, said during the recent Africa Investment Forum (AIF).
Africa Development Bank (AfDB) estimates that Nigeria needs to spend $100 billion (N30.6 trillion) annually over the next 30 years to get its infrastructure at par with the needs of the country, yet in 2017, the country only spent N1.4 trillion ($3.3 billion) on capital expenditure. That’s 4 percent of the AfDB requirement.
This year, budget estimates show that Nigeria plans to spend only N2.8 trillion ($7.7 billion), which is perhaps a sign that the government can’t meet its infrastructure financing needs without tapping private capital.
“At a time when public sector finances are extremely pressured, there is therefore a critical need to change the current funding mix and create partnerships to finance infrastructure and other projects in Africa,” Faal said.
The need to adopt Public Private Partnerships (PPPs) to bridge a yawning infrastructure deficit is hardly a new counsel in Nigeria; but it has hardly taken off, to the frustration of businesses and households in Africa’s most populous nation.
Millions of small businesses in Nigeria lose large chunks of their profits to generating power independently and move their merchandise on congested roads within a country with insufficient sea ports and limited rail infrastructure.
The country’s crumbling infrastructure not only comes at a steep cost for businesses, it also takes a heavy toll on a cash strapped government faced with record low revenues.
State infrastructural regulatory agency, Infrastructure Concession Regulatory Commission (ICRC) estimates that the country loses N2 trillion each year due to inadequate infrastructure. That’s 74 percent of the Federal government’s total earnings of N2.7 trillion in 2017.
Well-structured Public-Private Partnerships (PPP) could provide higher infrastructure investment efficiency, and at the same time, free up government resources for other areas.
“The truth is that PPPs are necessary. The government simply does not have enough money to bridge Nigeria’s infrastructure gap,” Akinkunmi Akingbade, a development economist, said.
“PPP initiatives have succeeded all over the world, including in Nigeria. The Azura Edo Independent Power Project (IPP) and the Murtala Muhammed Airport 2 are success stories of the PPP journey in Nigeria,” Akingbade said.
PPP failures like the Lekki Toll represent a failure of government and implementation, rather than an encouragement to abandon the approach, according to Akingbade.
Earlier in July, Nigeria Vice President, Yemi Osinbajo while speaking at the Second Capital Market Stakeholders’ Forum said, “the nation requires the capital market to raise long-term funds necessary for infrastructure funding.”
This thinking has been further re-echoed by many other economists in the country who have urged the federal government to turn to private capital to fund infrastructure projects around the country. However, an enormous amount of private funds is already invested in government debt.
Banking assets in the country has flattened out at 30-31 percent of GDP since 2010 with significant amount already invested in government backed securities. Up to 68 percent of Pension funds are currently invested in FGN bonds and treasury bills, leaving the country with limited domestic funds to still invest in more government securities.
“Over 80% of non-bank assets are in FGN debt instruments, if the FG created specific project based infra bonds these funds could be used to fund the infrastructure gap as against financing largely fiscal recurrent deficits,” said Wale Okunrinboye, head of research at one of the biggest pension funds in the country, Sigma Pensions.
Nigeria’s best option to raise investments in infrastructure is to attract foreign capital into the country at a time when there is massive capital outflow of foreign capital from emerging and frontier markets due to tightening monetary policy in US and UK. Since 2013, foreign capital to GDP has dropped from around 4.3 percent to 3.3 percent in 2017.
In fact, foreign capital to GDP was as low as 1.5 percent during the recession in 2016 as investors rushed out of the country.
Nigeria’s infrastructure Master plan shows that the country needs to raise its infrastructure stock to GDP from around 25 percent of GDP to around 70 percent, however with limited options for further mopping up domestic funds, the best alternative seems to be look outward to fund local infrastructure.