Last month, Nigeria’s data chief, the National Bureau of Statistics reported grim numbers on our economic reality. In the last year, as the country fell into a recession, inflation and food inflation rose 11% and 19% respectively. Wages have stayed roughly the same for those who can find jobs while 44% of the population stays unemployed.
It is safe to say the average Nigerian is finding it harder to meet their basic needs; by all accounts, the situation looks dire, especially post Covid-19.
What does a post Covid-19 economic recovery look like for Nigeria?
The Nigerian economy has been fragile and dependent on the oil industry for quite some time; and the Covid-19 pandemic with the resultant global lockdowns just emphasized the reliance of the economy on commodity export (oil particularly), import of finished goods and services and the actual exposure to the global supply chain.
Actual economic recovery for Nigeria should not be measured simply by growth in gross domestic product (GDP) as this could be achieved simply by the increase in commodity prices, but it should be measured by the process through which we diversify the economy to ensure industrialization, enhanced balance of trade and energy and food security. To achieve these, we will have to pay attention to infrastructure development in Nigeria.
Infrastructure can drive economic growth
Infrastructure is an essential building block of any economy, and it plays a significant role in all spheres of the economy from the affordability of goods and services to ease of doing business. It enables trade, powers businesses, connects workers to their jobs and creates opportunities for struggling communities.
In the past five years, for example, one of the government’s priorities has been reducing the pressure on foreign exchange through import substitution. The Central Bank has played a leading role, banning access to forex for the import of raw materials like maize, sugar etc. One of the arguments for the policy suggests that it can help accelerate Nigeria’s agriculture sector while saving the government precious forex. But this isn’t always the case. The chief executive of a leading food processing company explained recently that it was cheaper for her company to buy mangoes from Cotonou than from Benue state. This follows a trend that ‘Nigerian made’ goods are relatively more expensive.
A closer look will show that the agriculture and manufacturing sectors, like other sectors, suffer from an inflated operating cost due to lack of infrastructure from power to storage through the value chain and down to logistics and transportation. These inefficiencies and the associated cost is in turn pushed to the consumer and captured as food inflation.
Economic growth of any country is hinged on its provision of infrastructure to connect supply chains and efficiently move goods and services. But for all its economic promise, infrastructure development is also a massive employer of labor. In a country with 44% of its young workforce unemployed, investments in infrastructure can provide jobs to engineers, electricians, truck drivers, construction laborers among others, catering to a significant chunk of the nation’s workforce, offering employment opportunities that have low barriers of entry.
Where do we go from here?
Nigerian infrastructural deficit isn’t new information – from poor port infrastructure, poor transport networks, epileptic power supply, huge housing deficit, Nigeria’s infrastructure gap cannot be overemphasized. According to the IMF, Nigeria’s infrastructure stock of c.25% of GDP remains far below the 70% international benchmark compared to 58% in India and 87% in South Africa.
Nigeria is also not alone in thinking about economic stimulation through infrastructure investments. In America for instance, between the two infrastructure plans floating around congress, it’s safe to assume that America will be spending anywhere between $600 billion and $2 trillion, the bulk of which will be financed by the government mainly through new taxes.
In 2019, a Moody’s report stated that Nigeria must spend $3 trillion over the next 30 years to close the infrastructural gap. But a look will show that capital expenditure in the 2021 budget was pegged at N3.58 trillion, barely $ 9 billion of the required $100 Billion benchmark the government set for itself in the National Integrated Infrastructure Master Plan.
For countries like Nigeria, despite the importance of building rails, roads, ports, etc., the government is still responsible for investing in security, schools, healthcare among others and all these must be done with heavily constrained revenue streams and huge debt profiles. In other words, the government must figure out where to prioritize its spending.
So, what happens when you can’t afford your infrastructure bill? Public Private Partnerships are the way to go. As a good rule of thumb, if it can turn a profit, let the private sector build it.
Public-Private Partnerships (PPPs) are a funding solution where the government partners with a private institution on a project or to provide a service. A key advantage of having the private sector provide public services is that it allows public administrators to concentrate on planning, policy and regulation. The private sector, in turn, is empowered to do what it does best, and in particular improve the efficiency and quality of service.
PPPs are not new to Nigeria. The MMA2 PPP by Bicourtney was one of the first Design Build Operate Transfer (DBOT) projects on a 36-year concession. Not too long after that, the Lekki Epe Expressway was completed as the first PPP road project in Nigeria and West Africa. Since then, PPPs have been used around the country in various projects, including the Azura Power Plant, providing 450MWs of power.
After some uncertainty in the early stages of the Buhari administration, the federal government gave a nod to private sector investment in public projects in its 2017 Economic Recovery and Growth Plan.
Despite the acknowledgment of PPPs in the ERGP, the federal government has consistently favored domestic and external borrowing as its go to source of infrastructure funding, sometimes funding unbankable projects that have no real economic impact. Even where PPPs have been deployed, they faced significant push back by the public, decrying high cost and lack of transparency.
Unlike public projects, where governments can recoup the cost of construction from other sources, for example, taxation, PPP projects rely solely on the project itself to generate revenue to recoup its capital and construction cost. This revenue generation is usually charged in the form of tolls often collected from the public upon use of the facilities.
This often exposes these PPP projects to politics and used by opportunistic politicians claiming without empirical evidence that the projects could have been built without passing the buck to the public.
One way around this would be to carry communities along through open and transparent developmental stages, with the project cost benefit analysis made clear to the people and the long-term impact of these projects highlighted – the Nigerian telecoms industry story is a great example of private sector led infrastructure development becoming more affordable by the day after initial high costs. The job creation and poverty alleviation benefits of these projects are also a good way to manage the immediate discomfort that could be borne by users of these facilities.
Creating enabling environment for private capital
Raising the $3 trillion required to bridge the infrastructure gap is no easy task, but it can be done. Around the world, there are investment funds, setup specifically for infrastructure projects but as a rule of thumb, private capital would usually go to the projects with the most manageable risks and highest returns.
This rule does not change because it’s Nigeria
The federal government has the most important part to play in attracting private sector investments into the infrastructure projects in Nigeria. The government must focus on providing the right investment environment by providing that which only it can provide – policy direction, investment incentives, security, rule of law and the sanctity of contracts.
Whilst Infrastructure development is the bedrock for economic growth and a multi-dimensional solution to our socio-economic challenges, it is not the only factor that determines economic growth. In the next series of articles, these other critical factors will be discussed.