Nigeria’s infrastructure gap: The way out

The following statements by the Institutional and Sustainable Development Foundation give an overview of the present state of infrastructure in Nigeria. “At present, the value of Nigeria’s infrastructure is about 35 percent of Gross Domestic Product (GDP), paling in comparison with 70 percent for larger economies”. The effect of this is seen in the power, road network, rail etc sectors of the economy. “Nigeria has an inadequate and dilapidated infrastructure.”

Infrastructure includes fundamental facilities and systems that support the sustainable functionality of households and firms, serving a country, city etc including the services and facilities necessary for its economy to function, for example, buildings, roads, power supplies etc. A modern economy will not function properly without a modern infrastructure system. The state of infrastructure therefore determines the economic growth rate, level of development, and the Human development index (HDI) for a country.

We will take projected capital expenditure figures of the federal government of Nigeria as a proxy for infrastructure investment in Nigeria without focusing on performance. Infrastructure investment by the federal government in Nigeria in the year 2022 is expected to be N4,891 trillion or $39.96 billion which is 29.84% of the budgeted aggregate expenditures of N16.391trillion. The four-year cumulative budget from2019 to 2022 shows aggregate budgeted expenditure of N50.211trillion and capital expenditure of N14.1trillion giving an average of 28.1% of the budgeted expenditure. The total expenditure using the average dollar exchange rate for each year, amounts to $141.52 billion projected and a four year of average of $35.38billion.

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According to the Vice President of Nigeria, Nigeria needs an investment of $2.3 trillion over the next 30 years or a cumulative investment of $150 billion annually to bridge its infrastructure gap. Agusto & Co on the other hand, projects a higher figure of $3 trillion over the next 30 years. From a four-year average of $35.4 billion to an average of $150billion over 30 years shows a huge and almost unattainable gap. In other words, Nigeria needs to spend N15 trillion yearly, approximately, on infrastructure over the next 30 years. At the current pace, an infrastructure gap of $3.4 trillion would have been created in 2051.

The federal government needs to shift its focus from the implementation and execution of infrastructure projects. Instead, it should focus on providing the enabling environment for infrastructure investments to take place

A review of the government’s budgets for the past few years shows very clearly that, the government of Nigeria alone cannot bridge this gap, especially, with its growing debt burden, continued spending on various subsidies and the challenges of a mono product economy, to mention but a few fiscal challenges. How can the gap be bridged? We will look at a few models and discuss s couple of critical issues. These models are based on public private partnerships and include;w

Build – Operate – Transfer (BOT); This model is used to develop sections of a network rather than a complete network. Examples of use are in toll roads which are built operated and then transferred.

Build – Own – Operate (BOO); In this structure the facility is not transferred to the government but the private sector partner is given the right to build own and operate. This is workable for power companies and water treatment companies. The government typically sells the rights for investors to operate in these sectors.

Build – Own – Operate – Transfer (BOOT); This is suitable when the government has large financing gaps. It is usually a longer-term contract with the private sector taking on the equity and commercial risk. The government may pay a residual value for the assets at the completion of such contracts or may enter into an operation and maintenance (O&M) contract with the investors.

Operation and Maintenance (O&M) contracts; this is feasible where the government owns assets that are not feasible for the government to run because of funding constraints. The government typically pays the contractor fixed fees or performance-based fees.

The above structures and a few hybrids will be useful to federal and state governments in Nigeria which explore to create the required funding for infrastructure development.

To make the suggestions of PPP above work, government additionally needs to create an enabling environment for the agglomeration of capital. The only potent source of agglomerated capital at the moment are the private pension funds (PFAs). Other funding structures need to be created to encourage savings from the populace and these can be put into funding public and private infrastructure initiatives.

The federal government needs to shift its focus from the implementation and execution of infrastructure projects. Instead, it should focus on providing the enabling environment for infrastructure investments to take place. This should involve structuring, licensing, regulations and monitoring.

Large capital investments are virtually impossible in an unsecured environment. In order to facilitate the inflow of large amounts of foreign direct investments, the government needs to take investment in security very seriously. The security architecture should be reviewed with the view if expanding capacity and coverage and improving equipment and working conditions of security agencies.

Solving our infrastructure challenges will require a different strategic approach. This will include the use of various PPP models in conjunction with agglomeration of capital, refocusing government infrastructure strategy, and improving security across the country.

Ayoade, (FCIB, FCS) is the Managing Director/CEO, MBC Securities Limited, Trading License Holder of the Nigerian Exchange limited.