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Highlights poor government CAPEX for decades
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Private sector investment in fixed assets rises
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PPP in road construction an opportunity
Onome Amuge
Nigeria is falling short in its efforts to support critical sectors like infrastructure, power, healthcare, and education, which are key to the country’s long-term development, according to a new report by Coronation Asset Management.
The report just released by Coronation, a leading financial services firm, observed that while the government has made progress in allocating funds to these sectors, the country’s annual population growth rate of 2.5 percent is outpacing these investments, leaving many citizens without access to the basic services they need.
The research team, led by Guy Czartoryski and including analysts Blessing Ishola, Gbemisola Adelokiki, and Goodluck Tamunotonkaye, highlighted the need for increased private sector investment to bridge the gap between Nigeria’s population growth and its public spending.
In their analysis, the team cited the country’s poor track record in capital expenditure, noting that even when funding was made available, it was often not used efficiently.
“The record of the Nigerian government in capital expenditure over several decades underscores the need to increase private-sector investment. Public expenditure on transportation, education, hospitals, power, housing, and other essential infrastructure has not kept up with the needs of a population growing at a long-term rate of c.2.5% pa,” the report stated.
The Coronation research team noted that between 1981 and 1990, the federal government spent an average of 3.6 percent of GDP on capital expenditure. This figure rose to 5.2 percent during the decade from 1991 to 2000, a sign of the government’s increasing focus on infrastructure investment.
However, the next decade saw a sharp reversal, with the average falling to 2.5 percent during 2001-2010. This period coincided with a boom in oil prices, which one might have expected to translate into higher levels of capital expenditure. Sadly, the government’s failure to invest a significant share of its oil revenues in infrastructure projects represents a missed opportunity for the country. This failure not only reflects poorly on the Nigerian government’s priorities, but also raises questions about its ability to effectively utilise its resources for the benefit of its citizens.
The Coronation research pointed out that there are multiple estimates of Nigeria’s total infrastructure deficit, and while the methods used to calculate this figure differ, they all agree that the deficit is significant.
The report explained that one reason for this is that Nigeria’s infrastructure deficit is cumulative, meaning that past shortfalls have added up over time. As a result, even if the government were to increase its infrastructure investment, it would still take a long time to catch up to where it should be.
Dwelling further on this, the report explained: “One demonstration of this is Nigeria’s long-term record of annual electricity generation. This rose by just 19.6% over the 11 years from 2010 to 2021, according to data from the National Bureau of Statistics (NBS), or a compound annual growth rate (CAGR) of 1.6%.
“In 2021 annual generation (which excludes amounts generated by diesel units at business and domestic premises) was 36.4 terawatt hours (TWh) per annum. A nation with a similar population, Brazil (with 203 million inhabitants), generated 663.0 TWh. A nation with roughly half Nigeria’s population, Egypt (104 million), generated 202.0 TWh.”
The report highlighted the need for increased private sector investment in Nigeria’s infrastructure, noting that the trend of government investment has been inadequate for many years. It also pointed to the growing involvement of the private sector in infrastructure projects through public-private partnerships and the launch of infrastructure funds as signs of progress. However, the report also cautions that the regulatory and legal environment in Nigeria remains a significant barrier to private investment.
According to the report, gross capital formation, which is a measure of the amount of money invested in fixed assets such as infrastructure, has been consistently lower in sub-Saharan Africa than in the rest of the world. However, the data also suggested that Nigeria’s gross capital formation began to improve after 2017, potentially reflecting increased private sector investment in fixed assets. This trend is encouraging, but according to analysts, it will take time and further reforms for Nigeria to reach the levels of gross capital formation seen in other parts of the world.
The Coronation analysts attributed the recent rise in gross capital formation in Nigeria in part to an increase in public sector capital expenditure, though they noted that this increase is coming from a very low starting point. The report highlighted the role of the private sector in infrastructure development, noting that private companies have been involved in road construction projects in exchange for tax breaks and other incentives.
The report indicated that this type of public-private partnership can be an effective way to increase infrastructure investment in Nigeria.
“In total capital formation increased on railways, airport terminals, a refinery and roads. These initiatives made tangible improvements but, we believe, did not themselves significantly overcome the historic infrastructure deficit,” it noted.
The infrastructure report also highlighted the challenge of “catch-up” that Nigeria faces in terms of infrastructure investment, noting that while the country’s recent gross capital formation has been improving, it still lags behind other countries in the region, including Angola, Kenya, and Ghana. This lag is concerning given that Nigeria is the most populous country in Africa and has significant infrastructure needs.
To further examine Nigeria’s infrastructure needs, the report recommended looking at the country’s pipeline of public-private partnership (PPP) projects. It pointed to the Infrastructure Concession Regulatory Commission (ICRC) as a valuable source of data on individual PPP projects, and suggested that by aggregating this data by sector, a clearer picture of Nigeria’s infrastructure needs can be obtained.
The report highlighted the crucial role of private capital in Nigeria’s future infrastructure development, noting that the government alone does not have the resources to meet the country’s needs. It noted further that the total value of the pipeline of public-private partnership projects for 2022, as reported by the ICRC, was N6.7 trillion naira, or about 40 per cent of the federal government’s total budget for that year. Of that budget, only N5.5 trillion was allocated to capital expenditure, less than the value of the PPP pipeline.
It argued that for private sector infrastructure investment to be successful, dealmakers must find a way to structure projects that offer an attractive risk-return profile. This, it stated, can be done by mitigating risk through guarantees provided by infrastructure investment vehicles, such as Infracorp, and by creating a compelling case for institutional investors to participate. It noted further that institutional investors can then provide much-needed liquidity, which in turn can support the development of infrastructure projects that generate long-term returns with a low correlation to public markets.
