TELL Magazine

The often loud claims of infrastructure development by the current government

has not resonated well with the Nigerian public, because what has been delivered, is too little to cheer about, mainly because of the wrong financing strategy, with all the associated limitations.

These limitations have led to delayed delivery, higher cost and overall inefficiency and ineffectiveness. What we have seen in the last 7 years could have been achieved in 4 years and even more could have been done, if the right financing strategy was employed.

Using government budgets to finance large infrastructure projects is old fashioned. The only reason it is still popular here, is the associated corruption, to line pockets with contract bribes. Click To Tweet

The large infrastructure development projects like railways, express roads, airports and seaports, are largely now financed outside of governments. There are infrastructural development companies all over the world looking for these kinds of opportunities in Nigeria. The tiny budget allocations we devote to building the infrastructure are actually misplaced and therefore depriving other areas of government interventions with higher priority, like Education and Health.

The budget allocations should go to critical areas where the need is greatest. What we are doing now, is starving critical projects of needed budget allocations and wrongly diverting money to projects that can finance itself, more efficiently.

The monies put into some of these projects are lost, because they are now stranded, because they don’t have sufficient resources to complete them, the cost run ups are astronomical and yet we are now burdened with the foreign loans we did… Click To Tweet

The very first thing to note is that the days of using budget allocations to finance these large infrastructure developments are long gone. Those who argue against it, should take a look at the crisis we have with our electricity today. The reason we are here is because we were too late in getting the government out of the electricity business and letting the private sector handle it.

40 years ago, the idea that electricity, for instance, will be provided by the private sector was unheard of. It was considered a utility too important and should be left only to the government. Today’s reality has shown this to be different. It is now commonplace that the private sector is providing the public energy requirements and the public is willing to pay for it.

There are particular reasons why we should never have taken this financing route, especially given that we have a great example of having done one of the most successful infrastructure projects in Nigeria that has zero Government Budget… Click To Tweet

Pouring money into projects that can be better done by the private sector is not an efficient way to do this anymore. Using government budgets to finance large infrastructure projects is old fashioned. The only reason it is still popular here, is the associated corruption, to line pockets with contract bribes.

All large Infrastructure developments that have commercial potentials, and can generate revenues have no business being financed with budget allocations. The budget allocations are even insufficient to do these large infrastructure projects, it is causing delays and resulting in higher cost. Budget allocations should be left to provide for more important services like the soft social infrastructure in Education and Healthcare that have long term benefits that are not immediately visible. Education, for instance, has multiple benefits to all of society and keeps giving long after the investment has been made. The investments, like free education, state grants and student loans of the 1960s and 1970s are still paying dividends today.

Taking Chinese loans and diverting budget allocation to do what can be done more effectively and efficiently outside of government is actually fraudulent. Click To Tweet

Its multiplier effects cannot be easily quantified, so is health. As they say, health is wealth. A healthy and educated populace will always have a way to over- come its deficiency in physical infrastructure.

The biggest mistake this Government has made was to devote such large budget allocations to do infrastructure developments, and yet, it has not been able to do it properly, instead it has deprived the essential budget allocations to the most needed social infrastructure.

Everything about our current effort in building a large railway infrastructure is bad. Similar issues can also be seen with our highway development, they are badly financed because of the government's involvement and using the same bad… Click To Tweet

The monies put into some of these projects are lost, because they are now stranded, because they don’t have sufficient resources to complete them, the cost run ups are astronomical and yet we are now burdened with the foreign loans we did not need.

It is like a person who starts a large house project, that he has devoted all his resources but is unable to complete and cannot get out what is already committed.

Even the Abacha loot repatriations, are now also committed to completing these same infrastructure projects that never finish.

The bad financing model has even challenged the Minister for Works, Mr. Raji Fashola who is considered a good and proven administrator. … He has come up with some new ideas in letting the private sector participate in some of these road… Click To Tweet

These recoveries and foreign debt service payments we are making to China should have been added to our Reserves at the Central Bank. The increased Reserves Balances, will increase our capacity to earn better credit ratings and access bigger loans to develop our manufacturing sector. This will improve our economic productivity, increase employment and improve overall development that will strengthen the Naira.

What we are doing today, in infrastructure, is neither here nor there. Take a look at the very large infrastructure developments this government inherited or started, none has been completed today, yet it has gulped billions in budget allocations. The Lagos/Ibadan Expressway has taken upwards of 10 years and still not completed, so is the 2nd Niger Bridge we keep hearing is 90% completed, it is now obvious that it will not be completed in the life of this administration, ditto for the railways. These stranded projects that keep consuming our budgets with very little benefits are now a source of drain.

There are particular reasons why we should never have taken this financing route, especially given that we have a great example of having done one of the most successful infrastructure projects in Nigeria that has zero Government Budget input.

To make [the Dangote Refinery/government] model of joint financing efficient, the government can impose a caveat, that once it is completed and running, government will sell all its shareholdings plus a 10% minimum from Dangote group to the… Click To Tweet

The Telecom / GSM infrastructure development we have today in Nigeria, is one of the best in the world and has been financed totally from non-Government sources. The transformation it brought, cannot be ignored. It has changed personal lives, everyone is in touch with everyone.

Today, people communicate almost at zero cost to any one, and anywhere in the world. The development has transformed businesses, banking for example, to levels we never thought possible. Even government administration, where they have allowed it, has also gotten a boost. The transformation in the telecom industry has created jobs, skills, profits and huge taxes for the government with zero budget allocation as investment. The success in the Telecom industry is possible because the government completely got out of the way and instead, strengthened the regulatory environment. The results have been Excellent.

So the question to ask is, why is the government using valuable budget allocations that can transform other more needing public services, that will have a bigger impact in doing things that can be done differently with better results?

Take the case of railways, why did we need to take Chinese loans and take large parts of our budget allocations to put rickety refurbished coaches on antiquated tracks in the name of railway development? This was completely unnecessary because railways are public infrastructure that the public need and can generate revenue to repay their development cost and pay for operations.

The Nigeria railway industry potentials are enormous, if properly thought through and harnessed. We have a huge deficit in transportation, we have a large country to cover, we have a huge population to utilise it. It is one of the safest transportation modes. It is entirely financeable outside of government. It is not different from the telecommunication financing model we have done before. So taking Chinese loans and diverting budget allocation to do what can be done more effectively and efficiently outside of government is actually fraudulent. What the government claim they have achieved here, is minimal and actually creates burdens that will take many years to clear. This was completely unnecessary.

What the (Goodluck) Jonathan administration started in railway development is actually what needed to be improved on. They started by designing a complete railway plan for the country. It actually even won awards for the quality of the design and plan. I think it was PWC that gave the award, I cannot now recall. If the new government was serious about railway development, all it needed to do was remove itself from awarding contracts and taking loans and using scarce budget allocation to finance railway development that can be done otherwise. If the plan was to truly provide railway infrastructure quickly and efficiently, it only needed to throw open bids for the different sections of the already available railway infrastructure plan and design. The government can require every bidder to be a Nigerian company, with a known foreign Infrastructure company with international experience, as a bidding partner. This will ensure commitment.

The winning bids will be encouraged to raise railway development bonds from local and foreign investors, to enable it to happen quickly. Government can provide guarantees for all the bonds and give long leases in 30 to 50 years range, to enable these companies to recoup their investments and also allow them to spread the investments in such a way that it will make fees charged to users, to be low enough and not constitute a burden for the average user. There can also be concessions on taxes to ensure quick delivery. Government will also put in place a Railway Development Authority to give direction and proper regulation to the industry.

Just imagine the overall transformation this will create for the economy, apart from removing pressure on our roads because of the heavy duty containers daily carried on these roads that is doing damage to the few roads available, it will also create a construction boom with jobs all over the country.

The new industry will enlarge the role of the Capital Markets in helping to raise the needed capital. The construction industry as a whole, will get a boost and huge taxes and fees will come to the government.

The entire economy will boom, and not the case now, where the jobs have been exported to Chinese companies in China and importing back the burdens of foreign loans that we will be saddled with, for years to come.

To ensure orderly development, the government should put all the fees from the bidding companies and initial taxes aside for the new Railway Development Authority, to help it build capacity, and properly regulate the new industry.

This current budget financing model is wrong and will never work for so many reasons. For instance, the delays in the projects due to the insufficiency of budget provisions, increases the cost of doing these projects, with the endless cost variations that come with such large projects, whenever government is involved.

The African Development Bank, AfDB for instance, has long established that projects in the North African countries of Algeria and Tunisia come in sometimes one third of the cost of similar projects in Nigeria. A case in point is the current light rail project the Lagos state Government is executing, apart from the unusually long delays it is experiencing, it is also unusually expensive per kilometre. When compared to the one started long after the Lagos one, and with a longer range in Ethiopia, the project has the same Chinese contractor as that of Lagos. They have long since been completed and now in use. It is even a heavy duty line that carries everything. Containerized goods and passengers.

Everything about our current effort in building a large railway infrastructure is bad.

Similar issues can also be seen with our highway development, they are badly financed because of the government’s involvement and using the same bad model of budgetary allocations to do the financing that can be done by the private sector more efficiently.

In the case of roads, for instance, Nigerians were already getting used to tolling our roads and they were working, until the (Olusegun) Obasanjo administration at the time, decided to politicise it and wastefully destroyed the existing Tolls Gates because they felt it was benefiting their opponents. The viable roads can be given the necessary tax concessions that will make it attractive for infrastructure companies. East- West road, the Abuja-Kaduna Expressway, Lagos – Ibadan and the 2nd Niger Bridge are good examples of where we need the right model of financing.

Despite the involvement of our Sovereign Wealth Fund in financing the 2nd Niger Bridge, nothing substantive has been achieved.

The bad financing model has even challenged the Minister for Works, Mr. Raji Fashola who is considered a good and proven administrator. He has now come to understand that the government in its present involvement in roads development cannot be effective. He has come up with some new ideas in letting the private sector participate in some of these road projects. One of such is the Murtala Mohammed Airport/ Oworonshoki road in Lagos. It has been completed in time and in use. The Dangote group and its Brazilian partners can do more of these types of roads. The wonderful thing about this model, is that it completely takes the government budget allocations out of it, and has used Tax credits as financing mode. This is efficient, because apart from not using government budget outlays to do this, it also ensures effective tax collection, up front. The only companies that can do this, will be profitable companies with taxes to pay. This in itself, provides efficiency in choosing companies that can participate.

The overall point being made here is that there are better ways to finance large public infrastructure projects, without putting forward government budget allocations that are insufficient to do these projects properly and efficiently in the first place. They also trap valuable budget allocation spend that can be more effectively utilised in other areas where they are really needed, like in education and healthcare.

We see the new deep seaport developments in Lekki and Akwa Ibon state, for instance. They are being executed without government support. We also note the Dangote Refinery project which is a future model for private sector / government infrastructure development. The government should immediately auction off the 3 antiquated refineries that are essentially a drain pipe to the government now, and invest the proceeds in the Dangote Refinery to quickly finish it and start reaping the benefits. The project is too important, and is now a national project that should be given priority. To make this model of joint financing efficient, the government can impose a caveat, that once it is completed and running, government will sell all its shareholdings plus a 10% minimum from Dangote group to the public and make it a listed company on the public Exchange. That way, it will be a win-win for all. This will solve the alleged nepotism some have attributed to the NNPC investment in the project. Nigeria will retrieve its investment and Nigerian investors will now be co-owners with the Dangote group.

The success of the project will finally solve our problem of petroleum products shortages and stop its importation and save Foreign Exchange.

In fact, increased FX inflows from exports will come into the economy, this makes the refinery a national project, with long term benefits for the Dangote Group and Nigeria and its investors.

Ogiemwonyi, a retired Investment Banker writes from Ikoyi.

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