With its road, power and water in bad shape, analysts say it is becoming difficult for Nigeria to attract investments into the country; BENJAMIN UMUTEME reports.
Nigeria has been experiencing weak growth in recent years owing to the reduction in infrastructure investment. The country’s infrastructure is in a deplorable state due to poor government policies, which impede her ability to mobilise revenues, allocate them effectively and manage innovative funding model.
The World Economic Forum’s 2019 Global competitiveness index ranks Nigeria 116 out of 141 countries, a ranking which is far below average due to the poor state of the country’s infrastructure.
Buhari’s avowals
When President Muhammadu Buhari assumed office in 2015, he promised to, among other things, address the country’s failing infrastructure which continues to be a disincentive to businesses.
He said his administration would approach the issue with all the seriousness it deserves. And this is partly the reason for the quantum leap in federal government’s allocation to capital expenditure in its yearly budgets.
“To deliver our development objectives, we have increased the capital expenditure portion of the budget from N557 billion in the 2015 budget to N1.8 trillion in the 2016 budget. For the first time in many years, capital expenditure will represent 30 per cent of our total budget. In future years, we intend to raise the percentage allocation for capital expenditure,” he said.
President Buhari said further that the measure became necessary in fulfillment of the government’s promise to align expenditure to long-term objectives and government’s commitment to sustainable development.
Credit to the present administration, it has indeed increased allocation to capital budget. According to the data from the budget office of the federation, allocation to capital project in 2017 was N2.24 trillion, before it came down to N2.03 trillion, Capex got N2.43 trillion in 2018, N2.03 trillion in 1019 and 2.93 trillion in 2020, respectively.
Sustained expenditure
Addressing the nation’s infrastructure challenges will require sustained expenditure of almost $14.2 billion per year over the next 10 years, or about 12 percent of GDP. (As a point of comparison, China spent about 15 percent of GDP on just infrastructure investment in the mid-2000s.) About $10.5 billion is needed for federal infrastructure alone, most of it for capital spending and power.
Nigeria already spends $5.9 billion per year on federal infrastructure, equivalent to about 5 percent of GDP. Existing spending patterns are heavily skewed toward investment, with little provision for operations and maintenance. A further $2.5 billion a year is being lost at the federal level due to inefficiencies of various kinds, most of them associated with the power sector.
The under-pricing of electricity is by far the single-largest source of inefficiency, even though cost-recovery tariffs would be affordable for the majority of the population. Low capital budget execution is also an issue across the infrastructure sector.
When spending needs are set against current spending—and potential efficiency gains – an annual funding gap of $3.6 billion per year, or around three per cent of GDP, is revealed. With its abundant oil revenues, Nigeria is relatively well placed to raise additional public finance for infrastructure.
Inadequate allocation to capital projects
Despite the increase in allocation to capital projects, analysts say it is too small to bridge the huge infrastructure gap. For instance, roads which are key to movement of goods and services are largely dilapidated and crying out for repairs.
However, with dwindling revenue and competing needs, allocations for road repairs and construction are not cash-backed and money released to contractors.
For economist, Mr. Friday Efih, the amount of money allocated to road construction and rehabilitation is small compared to the deplorable state of the country’s roads. While acknowledging the massive improvement in capital expenditure (capex) allocation since the present administration assumed power, Efih likened the amount to a drop in the ocean compared to what is needed to fix the country’s roads.
He said, “When you travel round the country you will discover that the country does not have roads. Name it, from the North to the West, the South and the East, the story is the same. Bad road is making travelling a nightmare for Nigerians that use the road.
“In all fairness, one cannot blame this administration because if past governments’ allocation was as high as what this administration allocates to capital expenditure; maybe the roads won’t have been as bad as they are at the moment.”
The IMF report
Analysts are of the opinion that Nigeria’s near infrastructure collapse is partly responsible for the depressing report of the International Monetary Fund (IMF) following the conclusion of its annual Article IV Consultation discussions on Nigeria’s economy.
According to its senior resident representative and mission chief for Nigeria, Amine Mati, “The pace of economic recovery remains slow, as declining real incomes and weak investment continue to weigh on economic activity.
“Under current policies, the outlook is challenging. The mission’s growth forecast for 2020 was revised down to 2 percent to reflect the impact of lower international oil prices. Inflation is expected to pick up, while deteriorating terms of trade and capital outflows will weaken the country’s external position.”
Discouraging FDIs
In his view, the managing director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said poor investment climate, significant infrastructure deficit, and Nigeria’s stringent government policies continue to discouraged foreign direct investment (FDI) into the country.
Rewane said bureaucratic bottlenecks for securing permits, high finance costs, low foreign exchange availability, and weak legal framework has continued to deter investments.
According to him, a key challenge to investments in Nigeria is the country’s huge infrastructure deficit, noting that between 2014 and 2018, FDI flows fell by 57.36 per cent from $4.69 billion to $2 billion and two key factors that led to this drop are a poor investment climate and the significant infrastructure deficit.
“The level of infrastructural development in a country plays a key role in attracting foreign investors. The epileptic power supply, poor road and rail infrastructure, and gridlocks at the ports have all increased the cost of doing business in the country. Manufacturers must resort to alternative energy sources and pay more on demurrage due to delays at the port,” he said.
Way forward
For Nigeria to attract more investment flows, an efficient forex market priced in line with market fundamentals is imperative, as this will make transaction settlement seamless, reduce transaction costs, promote transparency in the forex market and boost investor confidence.
He said Nigeria has a huge deposit of human and natural resources that are capable of attracting FDI flows into the country.
He said for Nigeria to maximise its potential, especially with the signing of AfCFTA, it is important that the government addresses the underlying structural bottlenecks that make Nigeria such a difficult country for business investment.
SEC boss’ advice
To change the trend and make Nigeria attractive to investors, the director-general, Securities and Exchange Commission (SEC), Ms Mary Uduk, said there is need for the government to develop infrastructure,.
Uduk said it was critical that government leverage on the capital market for sourcing of infrastructure development financing. She said government cannot be the sole provider of infrastructure, noting that active private sector participation is also needed to bridge the gap.
She said, “We believe that the establishment of an active infrastructure fund via the capital market, as being pursued by stakeholders would be immensely beneficial in closing the infrastructure gaps in the country.
“A report by the African Development Bank on Nigeria’s Infrastructure Plan in 2013, estimated that Nigeria would need to invest about $350 billion in its infrastructure sector in 10 years to be at par with its peers.
“There are other estimates that have put this figure at slightly higher. The government, in recognition of this is doing its best to close the infrastructure gap as outlined in the Economic Recovery and Growth Plan (ERGP) for 2017-2020.”
For the head, Debt Capital Markets, FBNQuest Merchant Bank Limited, Oluseun Olatidoye, the capital market represents a very good platform for raising funds for infrastructure development. According to him, the market has funded over 26 roads across the six geopolitical zones in Nigeria with about N200billion on the FGN Sukuk I and II.
“We have raised N11.4 billion for the development of primary, middle, and secondary schools facilities in Osun state, we have funded the development of affordable housing on the Mixta Real Estate Plc Bond Issues, and we have developed a number of roads, bridges, health facilities using the opportunity presented by the capital markets,” he said.
