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Innovative financing can solve Nigeria's infrastructure dilemma

Nye Longman

After a successful election in 2015 and a handover that astounded the world, Nigeria’s new government now faces an infrastructure dilemma. President Buhari and his team are seeking to overcome the country’s deep infrastructure backlog through an ambitious development programme, but the sharp drop in oil prices has reduced fiscal revenues and led to a weakened currency.

Though these issues are not unique to Nigeria, the timing presents a particularly difficult challenge to the new government as it seeks to implement an agenda for growth and change following many years of underinvestment.

President Buhari’s government has proposed a budget that almost trebles the capital expenditure of previous years, but it will need to identify creative ways to fund this budget against the backdrop of lower fiscal revenues, falling commodity prices, a weakened currency and declining foreign investment, all of which are likely to put a strain on government finances.

Innovative financing solutions, through increased private sector involvement, the privatisation of state infrastructure assets, public private partnerships (PPPs), and the involvement of export credit agencies (ECAs), will be critical levers that government can pull to fund its infrastructure agenda.

The Economist Intelligence Unit forecasts that Nigeria will grow from the world’s 31st biggest economy today to the 12th by 2050 and will have the sixth largest population by then. However, its infrastructure backlog could stunt its growth. The country’s core infrastructure ratio to GDP is about 25 percent to 35 percent, compared to an average of 70 percent for countries such as Brazil, India, China, South Africa, Poland and Indonesia. It has been estimated that Nigeria needs to spend $14 billion per annum on infrastructure to bridge this gap.

The need is greatest in key infrastructure areas such as power generation and transport. Power has been identified as the single most important growth catalyst required by Nigeria’s domestic industry.

Power generation in Nigeria meets only 29 percent of current demand of 15 000MW. While installed capacity is just over 10 000MW – less than a quarter of South Africa’s 44 000MW - the actual power generated is around 4000MW. As a result, Nigeria’s power consumption per capita is among the lowest of comparable countries – 156kWh per person, compared to 4 405kWh in South Africa, 2 790kWh in Turkey and 2 462kWh in Brazil.

The national electricity grid is in urgent need of upgrade. At this stage, it cannot transmit more than 6 000MW and would not be able to support a significant increase in power generation.

Nigeria’s road and rail infrastructure is inadequate to support the effective distribution of goods. For example, its road density of 21km per square kilometre is just one seventh of India’s. Only 23 percent of the 200 000 km network is in good condition. The country has only 3 500km of rail (vs 20 500km in SA and 10 100km in Turkey). Nigeria’s airport and seaport infrastructure is also inadequate.

The Nigerian government is working hard to address this backlog through the Nigeria Integrated Infrastructure Master Plan (NIMP), which aims to raise the infrastructure to GDP ratio to 70 percent over 30 years.

The initial funding requirement for this substantial undertaking is $166 billion between 2014 and 2018, split 52:48 between public sector and private sector investment. This means that up to $86 billion will need to be funded from public sources.

Given the decline in oil prices and pressure on Government earnings, Nigeria needs to explore multiple new sources of financing. In addition to the traditional issuance of sovereign debt, the options include:

Project and infrastructure financing

Export Credit Agency (ECA) financing, which is increasingly used by developed countries and their domestic lenders. These agencies are government institutions in major exporting countries which provide support to facilitate international trade and export transactions.

PPPs - private participation continues to be a key source of infrastructure financing globally and accounts for 50 percent of infrastructure financing in sub-Saharan Africa.

Development Finance Institution (DFI) financing

Nigeria’s proposed $25 billion Infrastructure Fund, which was announced last year, would tap local and international financial sources to address the nation’s road, rail and power infrastructure backlogs.

Recent reforms have brought about improvements in the power sector. The privatisation of generation and distribution assets has largely been concluded, which will bring an additional 6 200MW on stream.

The infrastructure master plan proposes spending up to $775billion on transport infrastructure. In addition, a number of states have established PPP laws, although implementation has not always gone smoothly. Nevertheless, PPPs have proven to be an effective way of financing projects and can be a viable option for Nigeria against the backdrop of dwindling government revenue.

There is a broad range of completed infrastructure projects in Africa that provide useful lessons as Nigeria pursues the delivery of quality infrastructure. These include the Dakar-Diamniadio PPP toll road in Senegal, the $1.7 billion 80km Gautrain rapid rail link in South Africa, the Maamba 300MW independent power project in Zambia, and the 250MW hydro power project at Bujugali in Uganda.

Nigeria also has its own examples – the successful Lekki Toll Road and more recently the 450MW Azura IPP, which reached financial close in 2015. The country has also developed world-class levels of telecommunication infrastructure, all done in our lifetime by African companies.

In addition to innovative new approaches to financing projects, Nigeria will need to focus on creating an enabling environment for private investors to develop and finance projects. This includes improving the regulatory framework and ensuring adequate investor protection.

Nigeria is planning a multi-billion dollar infrastructure upgrade in challenging macroeconomic conditions. It will have to tap new sources of funding, in both the public and private sectors, if it is to overcome a historic infrastructure backlog and ensure continued economic growth.

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