Opinion: Bringing back growth to the Nigerian economy (III)
by Tunji Andrews
It may not shock you to learn that Nigeria’s limited infrastructure services tend to be much costlier than those available in other regions. For example, road freight costs in Nigeria are two to four times as high per kilometre as those in the United States, and travel times along key export corridors are two to three times as high as those in Asia.
I would like to start the third piece of my 6-part guilt exorcist-ish penance by saying thanks to everyone that read the first two articles and took the time to send in responses that helped me with the reassure anceme that I am at least making some impact. Now, if you have not read BRINGING BACK GROWTH TO THE NIGERIAN ECONOMY (I), in which I looked at the issue of growing non-oil exports through a strategy of domestic consumption and BRINGING BACK GROWTH TO THE NIGERIAN ECONOMY (II), where I stressed how greater financial inclusion can help reduce lending rates, help facilitate more lending and on the long run, grow the Nigerian economy, then I really think you should read them before reading further, as it forms the foundation of everything you are about to read.
As I said in the first two articles and wish to reiterate that, I do not assume to know all the answers, theses are my views and I passionately believe that should Nigeria fix these six issues, she would be able to consistently pull a 15% GDP growth (minimum) every year for the next 10 years. I call them my 6-point growth agenda:
Trade – Both foreign and domestic
Cheap and accessible Capital
Having looked at Trade, Financial inclusion/cheap and accessible capital, this article would attempt to tackle the issue of INFRASRUCTURE CHALLENGES IN AFRICA.
It is very obvious that Nigeria lags behind other developing regions on most standard indicators of infrastructure development, prompting calls from everywhere within the economy to the government to get it fixed. By far the largest gaps arise in the power sector, with generation capacity and household access in at around half the levels observed in South Asia and about a third of the levels observed in East Asia and the Pacific. Unreliable power supply leads to losses in industrial production valued at 6% of turnover. It may not shock you to learn that Nigeria’s limited infrastructure services tend to be much costlier than those available in other regions. For example, road freight costs in Nigeria are two to four times as high per kilometre as those in the United States, and travel times along key export corridors are two to three times as high as those in Asia.
Recently, I attended a Nigeria-British Chamber of Commerce breakfast meeting where the Executive secretary of The Nigerian local content development and monitoring board, Engr. Ernest Nwapa gave a talk on The Nigerian local content development fund. Amongst many things, he made it known that prior to the local content development act, the International Oil Companies (IOCs) really couldn’t care less about creating any sort of legacy in the land where they generate their income. Infact, he said it was as bad as many of them having ships that had workshops, hospitals and other basic amenities onboard; and of course, in the event that Nigeria’s oil dries up, they just raise anchor and sail away. He said the act would ensure that the IOCs create legacies, in terms of industrial pipe manufacturing factories, factories to produce bolt & nuts, hospitals, workshops, etc. The part that worried me was when he said, the act would reduce the tax required of the IOCs, in the push for them to create these legacies. The question I couldn’t seem to answer was, were these funds (less tax) that the IOCs would use in creating these legacies, not paid as tax to the FG prior to now? Was the FG giving indications that the future of Nigerians was safer in the hands of these foreigners, than the government of The Federal Republic of Nigeria? But, let’s not go there. My focus here is in the validity of government and private sector working together to create these legacies.
Public Private Partnerships (PPPs) are in my opinion some of the most fascinating setups in nation building, as for decades it has played crucial roles in bridging the infrastructure gap. These partnerships, in which the private sector builds, controls, and operates infrastructure projects subject to strict government oversight and regulation, tap private sources of financing and expertise to deliver large infrastructure improvements. When managed effectively, PPPs not only provide much needed new sources of capital, but also bring significant discipline to project selection, construction, and operation.
The Federal Government of Nigeria recently approved a National Policy on Public Private Partnership (PPP) as part of efforts to address infrastructure deficits in the country. It was said to have been created to complement the Infrastructure Concession Regulatory Commission Act of 2005 and to provide the legislative, regulatory and institutional framework for PPPs to thrive. According to the Vice President Namadi Sambo, the Federal Government is committed to promoting PPP as a viable business model, adding that government’s Transformation Agenda placed a high premium on PPP for the rapid modernisation and expansion of the country’s infrastructure. He said, but sadly, as every other meaningful policy, it’s yet to be implemented.
PPPs, like the one between Lagos state government and The Lekki Construction Company (LCC), involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types of PPP, the cost of using the service is borne exclusively by the users of the service (As in the LCC scenario) and not by the taxpayer. In other types (notably the private finance initiative), capital investment is made by the private sector on the basis of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government.
Typically, a public sector consortium forms a special company called a “Special Purpose Vehicle” (SPV) to develop, build, maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it is typically (but not always) allotted an equity share in the SPV. The consortium is usually made up of a building contractor, a maintenance company and bank lender(s). It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. In the infrastructure sector, complex arrangements and contracts that guarantee and secure the cash flows make PPP projects prime candidates for project financing. A typical PPP example would have been that between the Federal government and Wale Babalakin’s Bi-Courtney, and though the later could not find financing for the Lagos –Ibadan road, I am very sure few would frown at paying tolls to journey a safer more accessible road (like that in Lekki). What happens is that in such cases the private developer then acts as landlord, providing housekeeping and other essential services while the Federal Ministry of Works and Housing provides transport related services.
A few had their opinions on the aforementioned saga, not realising that the road was to be re-constructed with Bi-Courtney sourced funds and not FG funds. A key motivation for governments considering public private partnerships is the possibility of bringing in new sources of financing for funding public infrastructure and service needs. It is important to understand the main mechanisms for infrastructure projects. The principal investors in developing countries, sources of finance (limited recourse, debt, equity, etc.), the typical project finance structure, and key issues arising from developing project financed transactions. Some governments utilize a public sector comparator for calculating the financial benefit of a public private partnership.
On the other hand, in recent years, a number of emerging economies have begun to play a growing role in the finance of infrastructure in sub-Saharan Africa. These non-OECD financiers include China, India, and the Gulf states, with China being by far the largest player. This is as a direct result of the rise of the Chinese and Indian economies having fuelled global demand for petroleum and other commodities, and with Africa richly endowed with these and still facing challenges to harness its natural resources and invest the proceeds to broaden its economic base for supporting economic growth and poverty reduction. The Asians see Africa as the easiest market to exploit.
Chinese finance often goes to large-scale infrastructure projects, with a particular focus on hydropower generation and railways. At least 35 African countries are engaging with China on infrastructure finance deals, with the biggest recipients being Nigeria, Angola, Ethiopia, and Sudan; this will continue.
Like you, I am wondering why the FG is not better exploiting these avenues, as they are already there to be exploited. Imagine if the pension funds (which supposedly is in the stock market), was channelled into infrastructure development as the financiers of a PPP. Imagine if it was such funds that recreated the Lekki expressway, with pensioners, seeing their funds going into a good cause to better the life of Nigerians and at the same time securing their funds in a more stable and worthwhile venture. Imagine if insurance firms joined the party, with banks also assisting. The truth is we can only imagine, but, the government must act now.
Tunji Andrews tweets @Tunjiandrews
Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.