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The Need to Invest in Nigeria's Infrastructure

Proshare

Monday, October 16, 2017  08.20PM / FDC

 

There is a strong case for increased infrastructure spending around the world, more so in Nigeria, given the substantial infrastructure deficit. The se-verity of the downpour in most parts of the country in early July was unexpected. The high level of flooding from the rain exposed the precariousness of Nigeria’s basic infrastructure. Increased spending on roads, railways and power plants will benefit Nigeria greatly as the spending boosts economic activity, creates jobs and improves the general quality of life. One can even say that infrastructure development is politically expedient as any progress gives the ruling administration an invaluable record of achievements.

 

Unfortunately, Nigeria has fallen far short in attempting to tackle its infrastructure deficit, a failure that stems largely from insufficient public expenditure. Driven by an oil price boom, Nigeria's public expenditure soared in the last few decades. Government capital expenditure failed to follow the same trend; instead, the focus was on recurring costs. In 2008, the total budgeted expenditure was 3.3trn, while the capital allocation was 1.2trn or 37% of the total budget. By 2016, the total expenditure had increased significantly to 6.1trn while the capital allocation rose to just 1.6trn, falling to just 25% of the total. In the 2017 budget, the allocation for capex was increased to N2.24trn.

 

President Buhari recently sought approval from the Senate to borrow $5.5bn from the international capital market in the form of Euro-bonds. The government in-tends to use the proceeds to finance infrastructure projects such as the Mambilla hydropower dam and a second runway for the Abuja airport In order for Nigeria to realize opportunities that come with improved infrastructure spending, it needs to prioritize capital expenditure over recurrent expenditure, close the gap between budget allocations and actual disbursements, and engage the private sector for additional investment. Doing so will create a business operating environ-ment more conducive to growth, which will in turn in-crease private investment and encourage foreign business travelers and tourists to come to the country.

 

Infrastructure develop-ment is critical for economic diversification bridging the infrastructure deficit will be a difficult task. Nigeria’s infrastructure base in 2012 stood at 35% of GDP, com-pared to 58% in India and 87% in South Africa. The international benchmark is 70%, double our current ratio.

 

The good news is that we have witnessed a notable rise in recent years as the present administration implements its expansionary fiscal policy. Following the appalling situation in 2015, when capital expenditure was merely 10% of the budget expenditure, the government has stabilized the allocation around 30%, with a significant jump in absolute terms. The oil price crash in 2014 precipitated a technical recession in 2016, highlighting the fragility of the Nigerian economy once again. To trans-form the country from an oil dependent economy to a diversified economy, the government must continue to increasingly prioritize infrastructure development that will support other key sectors such as manufacturing and tourism.

 

More importantly, the Federal Government of Nigeria (FGN) must bridge the gap between allocated amounts and what is actually disbursed. For in-stance, in 2014, only 50% of the projected 1.1trn capital expenditure was actually spent, due primarily to delays in budget ratification. Incessant cases of either budget padding or missing budgets have complicated and extended the process of passing the budget, particularly in recent years. These delays leave little time for civil servants to actually spend the allocated money before the fiscal year comes to an end. The hope is that a recent constitutional amendment bill will address this issue, reducing the ability of the president and state governors to withhold assent for bills passed by lawmakers and setting a time limit requiring the president and governors to submit annual budgets to their respective legislatures.

 

It is important to note that the FGN cannot bridge the deficit alone. The National Integrated Infrastructure Master Plan (NIIFP) suggests that Nigeria needs to spend $100bn each year for the next 30 years to reach this target. That is almost 33% of our annual GDP. It is clear that the gravity of our infrastructural decay requires a responsive private sector that sees the need and opportunities for investing in Nigeria. The government’s Economic Recovery and Growth Plan states it will leverage private sector capital to achieve results. Engagement with the private sector may come in a variety of ways: direct investment, concessions, public-private partnerships (PPPs), investment funds, and other arrangements. A guiding principle is that basic infrastructure that is not economically profitable should be solely financed by the government while financially viable infra-structure should be the responsibility of private investment. The marginally profitable can be handled via PPPs.

 

For this strategy to work, the government has a vital role in creating: an enabling environment; maturing institutions to promote investment protection; and modernizing domestic capital markets to provide lower financing costs for longer tenors. A start would be streamlining the regulatory relationship between the Bureau of Public Procurement and the Infrastructure Con-cession Regulatory Commission to loosen the bottlenecks hindering current PPP projects.

 

Private sector involvement in infrastructure development will eventually help discipline spending and target it towards the most productive uses. This would ensure that Nigeria avoids politically motivated projects and that the structures necessary for the growth of infant industries can thrive instead.

 

A well-developed strategy for infrastructure re-newal and development will change Nigeria. Not only will it create jobs and put money into the economy in the building phase, it will enable the country to attract investment (foreign and domestic), develop tourism, increase the ease of doing business, and strengthen the country’s human capital. The government needs to make this a focus of its planning and budgeting, and ensure that the process allows the strategy to be successful. 

 

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