Incentivizing Private Investment in Nigeria’s Infrastructure

The importance of infrastructure development to the prosperity of any nation cannot be overstated. The National Integrated Infrastructure Master Plan (NIIMP) (issued by the National Planning Commission and approved by the Federal Executive Council in September 2014) states that Nigeria’s current infrastructure stock as a share of GDP is about 20-25%, which is below the international benchmark of 70%. This is also lower than emerging markets like South Africa (87%), India (58%) and China (76%). (Infrastructure, Power and Utilities: McKinsey & Company, August 23, 2013). This article seeks to provide highlights on the current state of Nigeria’s infrastructure, while exploring options for making infrastructure investment more attractive to the private sector.

The following are the key indices regarding Nigeria’s core Infrastructure:

         i.  Roads: It is estimated that 40% of the Federal road network is in poor condition (in need of rehabilitation); 30% is in fair condition (requiring periodic maintenance); and about 27% is in good condition (requiring only routine maintenance). In the case of State roads, 78% are in poor condition, and 87% of local government roads are also in poor condition. (Niimp.gov.ng). According to the NIIMP, an estimated investment of $350 billion (₦70 trillion) is required for road construction over the next 30 years. Recently, the Minister of Power, Works and Housing, Babatunde Raji Fashola, also mentioned that about ₦2 trillion is urgently required to fund ongoing road projects. (Vanguardngr.com, December 9, 2015).

       ii.  Railway: According to the NIIMP, an investment of $75 billion (₦15 trillion) is required for construction of more than 6,000 km of standard gauge rail, rehabilitation of existing rail network, construction of new stations, and linking all important seaports and airports to the national rail system.

     iii.     Power: Over 50% of the population (80-90 million people) currently have limited or no access to electricity. (Statement made by the former Minister of Power, Prof. Chinedu Nebo, Vanguardngr.com, June 25, 2014). Nigeria generates an average of 4000MW, which is less than 50% of the nation’s demand, despite the privatisation of the sector. The power sector requires an estimated investment of $23 billion (₦4.6 trillion) over the next 5 years to increase generation capacity to 20,000MW, and to increase transmission and distribution capacity.

     iv.   Housing: The current estimated housing shortfall is around 17 million units, which is largely due to the underdeveloped credit market for mortgages, and the inability to afford the lifelong credit needed to buy property by majority of Nigerians.

In demonstration of the current government’s commitment to infrastructure development, ₦1.84 trillion has been budgeted for capital expenditure in the 2016 proposed Budget. (2016 Appropriation Bill, Budgetoffice.gov.ng). This represents an increase of ₦1.28 trillion (about 130%) from the ₦557 billion in the 2015 budget and a record high of 30% of the total budget.

From the proposed budget, we can deduce that the critical areas for infrastructure are: Works, Power and Housing (₦433.4 billion), Transport (₦202 billion), Federal Government Special Interventions Programmes (₦200 billion); Education (₦37 billion) and Health (₦35.6 billion).(As at the date of writing, the 2016 budget is yet to be passed by the National Assembly; therefore these figures are subject to change).

The present government’s commitment to infrastructure is clear from the ₦1.84 trillion (30%) allocation to capital projects in the proposed budget for 2016. However, there still exists a large deficit based on already stated spending requirements (approximately $500 billion or ₦99 trillion over the next 10 years).

The deficit between the budget allocations and the spending requirements may be funded via the following broad options:

         i.  Public Debt: The government can raise additional funds through debt financing as Nigeria’s public debt to GDP ratio (10.5% according to the IMF’s Debt Sustainability Analysis Report – February, 2015) is one of the lowest in the world. Indeed, it is lower than other emerging economies such as India (66%), Brazil (66%), Malaysia (52%), and South Africa (39%). However, in light of dwindling government revenues, the ability of the government to increase the ratio of public debt to GDP is restricted. The budgetary allocation for debt service in 2016 is about ₦1.47 trillion, which accounts for about 24% of the proposed 2016 Budget. Therefore, there is a need to increase government revenue to fund the repayment of any additional debt incurred.

       ii.   Private Sector Investment: The government can increase private investment in infrastructure via Public Private Partnerships (PPPs) by opening up more sectors of the economy to private participation and creating an enabling environment to encourage private investment.

There is an urgent need for the government to create a more enabling environment to encourage more private sector participation in infrastructure development. This has never been more critical. Some of the possible measures are:

There is a need to review the current existing legal and regulatory framework for private sector participation in infrastructure projects in Nigeria. Some of the issues with our laws are as follows:

a)      There is an overlap and uncertainty between the functions of the Bureau of Public Procurement (BPP) and the Infrastructure Concessions Regulation Commission (ICRC). The Procurement Regulations (Sections 69 and 70, Public Procurement Regulations) made under the Public Procurement Act 2007 (PPA) contemplates PPP project structures including Build Own Operate Contracts, Build Operate Transfer Contracts andBuild, Own, Operate and Transfer contracts in a very general manner, and broadly makes participation in such arrangements subject to BPP Guidelines. The ICRC Act also makes provisions for public procurement of concessions and regulates procurement. (Section 4 and Section 5 of the ICRC Act contain procurement provisions).

b)     Currently, both agencies – BPP and ICRC have oversight on PPP procurement at the Federal level, which creates a bottleneck for PPP transactions as both ICRC consent and the BPP “No Objection” is required before it goes to Federal Executive Council for approval.

It is recommended that the relationship between these two agencies should be streamlined and the supervision of all PPP procurement should be vested in the ICRC as the sole PPP regulator. This is more so, as ICRC already deals with other PPP related issues including issuing the Outline Business Case and Full Business Case for PPP projects.

There is a need to improve access to funding for infrastructure projects particularly funding required during the early stages of projects. This can be achieved by creation of an intervention facility to fund project development costs and provision of long-term finance for refinancing existing short-term infrastructure loans.

An innovative idea proposed by the Nigeria Sovereign Investment Authority is the creation of Nigerian Credit Enhancement Facility (NCEF). The purpose of the NCEF is to provide credit enhancement for critical infrastructure projects. This will enhance the credit rating of projects and attract investment interest from a wide range of sources such as insurance companies, pension funds, Sovereign Wealth Funds, and other international sources.

Furthermore, the responsibility for funding project development costs may be assumed by the government as part of its contribution to projects. This will improve overall bankability of the project and enhance the ability of the private investors to obtain finance for other stages of the project, as the risk associated with early stages of the project would not be a concern for potential financiers and lenders.

There is a need to resolve the uncertainty of timelines for processing required approvals and consents. The following recommendations are for reducing bureaucratic inefficiencies and improving processing timelines:

a)      Implement a service level protocol that ensures each agency treats matters relating to private investment in infrastructure within a given turnaround time; and

b)     Create a PPP Functions Flow Chart in consultation with the relevant agencies, for each agency to see their distinct functions within the full picture of how transactions move from conception to completion.

To attract private sector investment in social infrastructure sectors like healthcare and education, the government should consider Availability Payments and off-take structures whereby the project will be financed and operated by the private sector, and government will be the main off-taker. (Availability Payments are payments made for performance or provision of service irrespective of demand). This will better allow private investors meet their revenue requirements, and will guarantee a return on their investments.

There are currently a few incentives such as the Infrastructure Tax Relief, Pioneer Status, etc. available to private investors. (Infrastructure Tax relief is granted under section 3 of the Companies Income Tax (Exemption of Profits) Order 2012 to any company that incurs expenditure on infrastructure or facilities of public nature. Such company will be entitled to an additional 30% income tax exemption for the cost of provision of the infrastructure.)  However, these incentives have failed to encourage sufficient increase in private sector investment in infrastructure projects. Therefore, there is a need to provide more fiscal incentives such as investment tax credits, cheaper or no concession fees, import duty waiver for the equipment to be used for the project, assumption of currency fluctuation risks, and other incentives that will reduce project costs and provide comfort to private investors.

The process for obtaining these incentives should also be streamlined as this will encourage private investors’ particularly foreign investors who are currently taking a ‘wait and see approach’. These incentives may also be set out in the Expression of Interest (EOI) or Request for Proposals issued to potential investors in order to generate more interest for proposed projects.

One of the key concerns for private investors is the uncertainty surrounding the foreign exchange (forex) market. Though the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995 guarantees convertibility and unconditional transferability of forex, the reality is that investors are currently experiencing severe delays in obtaining forex through the CBN official market. This is due to the current shortage of forex in Nigeria. Implementing the following recommendations will provide comfort to investors:

a)      Assumption of currency fluctuation risk by the government;

b)     Prioritising the supply of forex for infrastructure projects; and

c)      Providing indemnity to investors for losses incurred as a result of delays or inability to obtain forex.

With Nigeria’s growing middle class estimated at 23 million in 2014(Business Day, August20, 2014) (larger than other sub-Saharan countries) and the increasing rate of urbanisation, Nigeria’s housing market will continue to present a good value proposition to long-term investors. However, to deepen the availability of credit for mortgages, there is a need to develop a regulatory framework for the establishment of the secondary mortgage market by the passage of the draft Securitization Bill which provides the legal framework for the securitization of mortgages. Further, the National Housing Fund can be restructured as a credit guarantee or equity loan scheme for first-time homebuyers to enable the Fund have a wider impact in bridging the over 17 million housing unit deficit.

Nigeria’s growth potential and the value it represents to willing investors have never been in doubt. Though government’s inability to fund the required infrastructure investment creates ample opportunity for the private sector, the required increase in private sector participation will only be possible by creating a more enabling environment. Implementing the measures recommended above will go a long way in achieving this.