“Productive”, “prosperous”, and “the pride of Africa”, are some of the words we have heard and been asked to expect over the next four years. The outcomes of these successes depend substantially on a number of factors including the state of the infrastructure. The quality of the infrastructure of any country is a vital indicator of the quality of life of its people. In this interview with Sina Sipasi, Partner, AELEX, we examine how prepared the legal and regulatory environment is, for the onslaught of economic prosperity the nation is being promised.
1. Could you give us an overview of the salient legislation and bodies governing infrastructure development in Nigeria, and how their roles differ and complement each other?
As a matter of global best practice, public infrastructure is usually developed through public procurement processes. Public procurement for infrastructure development, in Nigeria, may occur as direct public procurement, as public-private partnerships (PPPs), or through privatisation.
The key legislation that governs the direct procurement of public infrastructure assets, using the conventional mode of governmental funding is the Public Procurement Act. The law details the procurement procedures that will guide all government contracts or contracts in which government funding will not be less than 35%. The law establishes the Bureau of Public Procurement and prescribes standards that will entrench transparency in the procurement process.
With respect to PPPs, the key legislation is the Infrastructure Concession Regulatory Commission Act. The Act establishes the Infrastructure Concession Regulatory Commission (ICRC). The strategic objective of the ICRC is to facilitate private sector investment in public infrastructure, using PPP structures. In this regard, the ICRC has, since its inception, been regulating, facilitating, and assisting MDAs in the development of bankable PPP projects.
Since 1999, there has been a massive drive in the privatisation of some government enterprises. This drive has led to private ownership of public infrastructure. The legislation that enables this is the Public Enterprises (Privatisation and Commercialisation) Act. The legislation establishes the National Council on Privatisation (NCP) which through its secretariat, the Bureau for Public Enterprises (BPE) implements the Federal Government initiatives for sector reforms in the infrastructure space and the privatisation of public enterprises.
Apart from the procurement process, a typical infrastructure project would require land acquisition, environmental permits, and sectoral licenses. Thus, they would be regulated by environment ministries and agencies (Federal and States), the Ministry of Land (of relevant states) and other regulatory agencies that regulate the specific market sector in which the infrastructure would operate.
2. Is the legal and regulatory environment aiding or dissuading the appetite for infrastructure investments in Nigeria? What would make the environment more hospitable?
The regulatory framework for infrastructure in Nigeria, largely, accords with what obtains globally. However, the behaviour of the regulators and the inconsistencies in governmental policies make the infrastructure space unattractive to private investment. For instance, the contracting process for infrastructure development takes too long. Regulatory actions or discretions can hardly be questioned or contested. There is also the perception that government can breach both contractual and regulatory obligations and investors will have little or no recourse for redress. Our court system makes litigation slow and expensive. When, eventually, judgement is obtained it is usually insufficient to bring appropriate and timely redress for the losses suffered.
It is necessary for infrastructure development that regulatory actions are predictable. A consistent implementation by the MDAs of the Executive Order E01, issued in May 2017, anchored on the quinque-pillars of transparency, default approvals, entry experience of travellers, ports operations and one government will lead to more predictability and transparency in governmental actions.
3. Four major impediments to transformation in the energy sector have been identified – huge debt and equity servicing challenges; operation and maintenance barriers; lack of new investments; poor credit rating and poor business viability image to investors. From the most impactful, where do we begin?
The major constraint in the energy sector is funding and regulatory risk. In the power sector, for instance, the lack of funding is exacerbated by tariff fixing mechanisms that ignore the pricing framework upon which private investment in the sector is founded. This, over the years, has contributed to the growing debt bubble which has made the sector unattractive to needed investment capital that could be used to rebuild or upgrade both the electricity grid and the distribution system.
In the oil and gas sector, the dearth of funding is impeding the regular replacement and maintenance of upstream infrastructure, especially amongst local companies that have acquired JV assets. This is causing equipment failure, crude spills, and the inability to optimise the production potentials of the different assets. This situation, coupled with the low oil price environment that was the norm until early 2022, and the perennial pipeline vandalisation with its attendant crude losses have made it difficult for upstream players to pay their debts or attract investments.
The funding challenges in the energy sector must be addressed. Not only in the usual way of dedicating CBN funds for concessionary loans to sector operators, but by addressing systemic problems that have strewn operations in the energy sector with uncertainties. As an example, the decision of the government to reverse two decades of policy and legislative efforts which culminated in the removal of products subsidy in the PIA is a counterproductive event that will continue to haunt investment in infrastructure in the energy space.
4. You have been a key part of the major income-producing sector in Nigeria – Energy, Oil & Gas. In your estimation, what is the earliest timeframe within which we can achieve a 24-hours power supply?
If certain initiatives, such as eligible customers initiative, customer clusters billing system and off-grid initiative are pursued transparently and the right tariffs are allowed, several customers can, very quickly, begin to enjoy uninterrupted power. However, 24 hours of power on a national scale will require a massive investment in generation, transmission, and distribution infrastructure. For this to happen, lapses that have hampered investment in the power sector have to be addressed and necessary reforms must be implemented. Customers must also get socialised into the idea that electricity is not ‘public goods’ but a product for which a market price must be paid. In my estimation, this may take about 6 years if I choose to be very optimistic. Otherwise, I do not expect 24 hours electricity on a national scale to occur in less than 10 years.
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5. Would you say that if your suggestions in question three above are implemented that a GDP growth rate of over 10% is achievable?
No. Unlocking the potentials of energy infrastructure alone will not translate into double-digit GDP growth. There are several microeconomic, fiscal, and monetary issues that need to be addressed in order to see real and sustained growth in Nigeria’s GDP. Apart from investment in infrastructure development, it is necessary that Nigeria reduces and, if possible, stops all deficit spending, especially now that the Minister of Finance has sounded the warning that Nigeria’s debt service obligations have exceeded its revenue. The prevalent double-digit lending rate must be addressed. A double-digit lending rate will slow the growth of the manufacturing sector and the competitiveness of our exports, without which any significant GDP growth can be achieved.
6. Should the subsidy be removed? How, and how soon?
The petroleum products subsidy should be removed immediately. A good reason for this is that the government has made it clear that it is using debts to fund fuel subsidy. To underscore this point, it should be noted that OPEC published in its Annual Statistics Bulletin for 2021 that Nigeria’s crude export in 2020 was valued at US$27.73 billion while the import of its refined products was valued at US$71.29 billion. This represents almost US$44 billion in trade imbalance against Nigeria. Failure to remove fuel subsidy remains an existential threat to Nigeria.
However, the government must ease the pain of removal through effective communication, education, and campaign on the dire need for removal of the subsidy. As was done in other climes, a well-conceived and transparently executed cash transfer program aimed at protecting low-income households should be implemented for a limited period. Above all, efforts must be made to build public trust.
At the moment, we import virtually all of the refined petroleum products used in Nigeria. However, when the Dangote refinery with its 650,000bpd, the four NNPC refineries with a combined capacity of 445,000bpd are operating at their full capacity, local production may satisfy local demand.
7. We have several options for project finance in Nigeria including the sukuks, bonds, capital markets, pension funds, PPP, etc. Is PPP the best option for infrastructure finance and why?
It is widely known that sustainable economic growth is linked with infrastructure development. This is validated by the observation that 70% of the GDPs of developed economies are made up of their infrastructure stock. In Nigeria, about 20% of our GDP is made up of infrastructure stock. The National Infrastructure Master Plan estimates that Nigeria will require about US$33 to US$35 billion over 5 years to sustain economic growth in the near term and, over US$30 trillion is needed over 30 years.
It is not conceivable that a larger part of this funding could be procured through debt financing. This is because all levels of government in Nigeria currently face fiscal and budgeting funding constraints in the provision of necessities such as safe drinking water, electricity, roads, rails, ICT, waste management, etc. To provide these infrastructures, private participation is an economic necessity rather than an optional financing solution.
8. References have been made to several projects in the energy and telecoms sector as models for how successful PPP has been in the growth of the sectors. What would you say accounted for these successes and can they be replicated successfully in other sectors?
A good example of a successful PPP project in Nigeria is the NLNG. Key to its success is its public and private shareholding structure (with the government holding the minority share) and the governance framework of the company that entrenches transparency and accountability and a model that shields it from external influences. In addition, the NLNG Act provided incentives, assurances and guarantees that have aided the investment in the project. In addition, the ownership structure enables it to secure regular and long-term offtake contracts, which underpins its revenue stability and its continuous expansion.
The structure can be replicated for infrastructure projects that are related to resource development and the creation of pre-export value addition to raw materials.
9. There have been many promises of radical reforms to the transportation infrastructure from roads to rails to airports and seaports, yet we have seen poor deliveries continually. Is it a case of biting off more than we can chew? Would it be better to focus on developing one type of transport system as opposed to all at once?
Infrastructure development is a long-term and patient enterprise. It requires long-term planning, clear strategy, phased implementation, policy consistency across various governments and building of trust. Promises of radical reforms often fail, because they are based on emotions and not cold assessments of facts. What needs to be done is to plan long-term and stick with the plan irrespective of change in government (with variations where necessary). It should be noted that the successful implementation of a PPP project reduces the risks for subsequent projects and will attract more investment capital.
10. Lagos state alone has infrastructure development laws at the state level. Do we need state-level laws?
Yes. States that will benefit from private sector investment in public infrastructure need to develop a clear regulatory framework that will guide such investment. A clear regulatory framework will give confidence to investors that their investment will not be expropriated by subsequent governments and that the investment terms will not be compromised due to political expediency.
11. In February 2021, President Buhari approved the creation of Infra-Co, which will be backed by an infrastructure fund of $2.63 billion. What measurable impact do you envision that this would have to bridge the infrastructure deficit in the country?
Infra-Co is expected to develop a structure that will unlock private sector funding for public infrastructure projects in Nigeria. Since Infra-Co would be funded 50% by the private sector, it is expected to deliver a high level of efficiency and cost-effectiveness in the structuring and delivery of infrastructure projects. Infra-Co can accelerate investment in public infrastructure by supporting fund managers to mobilise funds for investments in public infrastructure.
12. Do you think renewable sources of energy will have a significant impact on our power supply and economy in the next 4 -8 years?
An IEA report indicates that, on a global level, the use of renewable energy in power generation is expected to accelerate. The report states that by 2026, global renewable electricity capacity is forecast to rise more than 60% from 2020 levels to over 4,800GW. This is equivalent to the current global electricity produced from fossil fuel and nuclear power combined.
In Nigeria, we should expect to see a significant increase in the use of solar technology for electricity generation by households, rural communities, and small businesses. The increasing use of renewables is being driven by unreliable grid supply, the high cost of diesel and the increasing adoption of and affordability of solar technology.
On a utility scale, it is not expected that renewables will make a significant contribution to Nigeria’s energy mix in four years. However, this may change in eight years if the 14 solar projects that have executed PPAs with NBET achieve financial close and proceed to the construction stage.
