Nigeria railways highly vulnerable as debt service, revenue in mismatch

• N218.7bn debt service vs. N20.8bn revenue

• Concession, market-reflective tickets suggested

• Will China pounce?

About 125 years after the first railway was opened in Nigeria by colonial Britain, the severely underperforming railway system’s vulnerability is seriously exposed by figures showing that debt service obligations being incurred by the federal government, on loans taken largely from the Chinese, are not anywhere near being matched by revenues from its services.

In fact, analysts in the financial services industry say were it to be a private sector business the Nigeria Railway Corporation (NRC) would have been in receivership or be allowed to go totally bankrupt and be sold either for its scraps or for savvier managers to bring it to better performing and profit making positions.

After decades of neglect Nigeria’s central government, which constitutionally has rail transportation under its control and supervision, has spent some 15 years trying to revive this mode of transportation in a country with a high population estimated to be over 210 million and which experts say requires a means of mass transportation that rail provides. But after borrowing billions of dollars and spending the same on the rehabilitation, reconstruction and construction of additional lines in a modernisation programme, progress has not hit levels that were envisaged.

Analysts say that Nigeria’s railway revival process, in the past at least 10 years, has been marred in corruption as the borrowed funds have not been justified by what has been delivered. Besides, the past government led by former military dictator, retired major general Muhammadu Buhari, who returned as president after being elected in 2015 on his fourth attempt to rule the country via election not the gun, is accused of ignoring the South East and South-South in his railway modernisation programme.

Huge investments were deployed in the successful rehabilitation and completion of the Abuja-Kaduna and Lagos-Ibadan railways. Most of the funds were obtained in the form of infrastructure-backed loans taken from China.

But the underperforming railway’s and Nigeria’s vulnerability is now unravelling, especially in regards to the country’s loan exposure to the Chinese, say finance industry analysts who have looked at the numbers.

Analysts at investment banking house, FBNQuest Research, in a note on the Nigeria railway loan exposures, flagged what they observed as “a disparity between the sub-sector’s revenue growth in recent times and the level of investments made by the federal government.”

For instance, figures from the office warehousing and managing the country’s debt, the Debt Management Office (DMO), in its report on its foreign debt service payments revealed that the central government spent $528.7 million on servicing railways debts in five years between 2017 and 2022.

Using each year’s official exchange rates to arrive at its naira equivalent, it produced a whopping N218.7 billion.

Further details showing the precarious situation of the loan service versus railway revenue mismatch, hence vulnerability, include the fact that the accumulated debt service payment is made up of the principal and interest fees.

In more specific terms, the principal cost, which is said to have accounted for 58 percent of the total debt service payments, amounted to $307.7 million or N128.4 billion equivalent, while the interest fee, which represents 48 percent of debt service payments stood at $221 million or N90.3 billion equivalent, during the period.

The vulnerability of the Nigerian treasury to the railway loan exposure becomes stark when the revenue numbers are brought into relief, say FBNQuest analysts, especially going by the numbers released by the National Bureau of Statistics (NBS).

For instance, in the 5-year corresponding period of the debt service period, NBS railway transportation data shows that the Nigeria railway system and its managers grossly underperformed as total revenue generated by railway traffic between 2017 and 2022 was just N20.8 billion.

When the country’s railway loan service payment released by the DMO is placed against the NBS data on railway transportation, the revenue shortfall  in the five year period of 2017-2022 is N197.9 billion.

Even more worrying is that the precarious situation of the five year period (2017-2022) regarding the unfavourable numbers does not appear to be going away. Data show that the declining revenue trend, FBNQuest analysts note, registered in the first quarter of 2023.

According to NBS data on railway transportation, the total revenue generated by rail traffic decreased -42 percent quarter-on-quarter and and -56 percent year-on-year to N984 million.

However, the government’s debt service costs on railway infrastructure rose marginally by one percent (1%) year-on-year to $62.7 million in the first quarter of 2023 or the Naira equivalent of N28.2 billion based on an official rate of N450/$ during the period.

Such a wide mismatch between debt service and revenue is concerning to the analysts who said, “The wide disparity between the revenue generated by the sub-sector and the rising costs of servicing railway loans raises concerns about its debt sustainability.”

While the general management of the entire railway ecosystem, especially being fully in the hands of the federal government, has been one of the major reasons for the railway’s underperformance, wider issues surrounding the polity have been blamed for such a huge revenue shortfall.

The analysts at FBNQuest, in their note, said a combination of factors, including security issues, high expenditures, and non-market reflective pricing of travel tickets have led to the continued revenue underperformance of the sector.

“Following concerns around security, the FG [federal government] suspended operations along the Abuja-Kaduna route in March ’22.

“These challenges have resulted in weak revenue growth in recent years, creating a substantial deficit between the revenue generated by the mode of transportation and the costs spent on servicing railway debts,” they wrote.

It is not yet clear how the government intends to tackle the situation of the railway especially because of all the modes of transportation that had once been under government management, it is only the railways that has not totally gone out of existence.

For instance, Nigeria Airways, the moribond government airline, was once a behemoth in Africa’s aviation with a large fleet of aircraft until the government ran it aground.

Analysts say it is time the government took a dispassionate look at its role in railway management with a view to having a proper system that will leave it in a financially healthy position.

But while the government continues to run the railway, analysts suggest that it applies a market approach to managing the railways.

“To enhance the sub-sector’s performance, we recommend that the authorities implement market-reflective pricing and adopt the use of technology for ticketing and revenue collection,” said the analysts.

They would also like to see the government, additionally, explore the concessioning of the existing railway infrastructure in order to attract private sector investments.