Revitalising Nigeria’s infrastructure

August 2014 | EXPERT BRIEFING | SECTOR ANALYSIS

financierworldwide.com

There is now official recognition that Nigeria is one of the leading economies in the world and the largest economy in Africa. Nigeria must redouble its efforts to improve productivity, economic growth and eradicate poverty. To do so, the country must upgrade its infrastructure – transportation, power, communication, healthcare, education, water supply and sanitation. Improved infrastructure has been identified as a factor that will have a catalytic effect on productivity and economic growth.

Infrastructure development must focus not only on the installation of required infrastructure but also on creating an environment that supports proper planning, maintenance and sustainability of infrastructure. There are several challenges impeding Nigeria’s infrastructure development, two of which will be addressed here: (i) funding and (ii) project preparation.

Funding

The Nigerian government’s awareness of the need to focus on infrastructure is evident in the Nigeria Vision 20:2020 Economic Transformation Blueprint (NPC 2009) and the Transformation Agenda which include a commitment to investing in infrastructure and human capital and creating an enabling environment for domestic and private investment.

It is estimated that an investment of over US$2.9 trillion (NGN 460 trillion) is required for the next 30 years in Nigeria’s infrastructure and that a yearly average of US$25bn (NGN 4 trillion) investment is required over the next five years, according to the National Integrated Infrastructure Master Plan launched in December 2013. The Federal Government’s allocation to capital projects (which include infrastructure) in the 2014 budget stands at 27 percent, representing NGN 1.1 trillion.

The government funding available for allocation to infrastructure development is clearly limited and it is unrealistic to expect the funding gap to be filled by further allocations in subsequent budgets. To address the deficit, the government has encouraged investment by private sector investors and has promoted public-private partnerships as a vehicle for channeling private sector investments into infrastructure development. The level of private investment has, so far, not been encouraging and vast opportunities exist for participation by domestic and foreign investors.

Private sector investment in infrastructure requires the growth of domestic investment markets across all sectors including the debt capital markets and the alternative investment markets. Particular emphasis must be placed on increasing the participation of domestic private investors in Nigeria’s infrastructure development projects. Such investment by domestic investors will boost confidence in the Nigerian infrastructure sector and act as a catalyst for the participation of foreign private investors.

Additional funding for infrastructure projects could be generated from Nigerian pension funds and the savings of average Nigerians (who regularly save money for the education of their children, health care, retirement and more). In order to channel such pension funds and savings into infrastructure projects, investment products that match the appetite of investors must be made available and it is imperative that there is an environment that encourages investors to buy investment products.

To give Nigerian pension funds and others the confidence to invest in the country’s infrastructure projects, we believe that Nigerians should: (i) build trust in the country’s corporate affairs by embracing transparency, accountability and good corporate governance; (ii) strengthen rules and regulations regulating the investment process and enforcement of the same; and (iii) strengthen laws and procedures for enforcing contractual rights.

Greater confidence by domestic investors will generate greater interest in Nigerian investment opportunities among foreign investors and this will inevitably lead to increased funding sources.

Project preparation

A complaint often made by potential investors in infrastructure is that there is a lack of projects that have been subject to adequate preparation. These investors note the absence of a pipeline of bankable infrastructure projects to invest in.

Infrastructure projects need detailed studies that establish the project’s feasibility in terms of its social and economic desirability, environmental impact, technical and administrative implications and cost-benefit analysis. Such studies need to be preceded by a formulation of the concept, the creation of consensus around a project’s purpose, preparation of the initial designs and action plans and a structuring of the project (which includes assessing the public and private options and a structuring of the financing arrangement). These steps, in turn, are often preceded by preparing the enabling environment, which includes designing enabling legislation and regulatory framework and building capacity to support the bid process and other aspects of the project. It is only with such studies that a financier would be able to establish whether an infrastructure project is financially viable or not. It is also through such studies that a determination may be made as to which projects may be financed by the private sector and which projects must be funded by public resources.

The work involved in project preparation requires expertise and skill, which is in short supply in the public service and is expensive and risky. This is because the work may or may not result in a closed deal and consequently, it is possible that the costs incurred may never be recovered. This is unattractive to private developers (who have to recover development costs from completed deals) and is unappealing for donors (who must justify expenditures with tangible results that promote development objectives). Therefore, if we are to tackle Nigeria’s infrastructure deficit, we must address the challenges of funding project preparation and invest in building capacity in the public sector to properly prepare and structure future infrastructure projects.

One solution is to allocate government funding specifically to project preparation and to schemes designed to build public sector capacity. A fund should be set up particularly for this purpose. This should be a fund that would generate a return from projects that prove to be bankable and gets funding in the markets. In addition, investors serious about investing in infrastructure projects must set aside money for investment in project preparation so that there may be projects available to invest in.

With Nigeria’s new position in the global order, the country must hasten to address its economic development challenges by providing the infrastructure that will allow Nigerians to work their way up to a better future. Nigeria must employ strategies that will deliver adequate, viable and sustainable infrastructure. The drive to revitalise Nigerian infrastructure must be relentless.

Elizabeth Uwaifo is a partner at Fasken Martineau LLP. She can be contacted on +44 (0) 20 7917 8500 or by email: euwaifo@fasken.com.

Elizabeth Uwaifo

Fasken Martineau LLP