Nigeria’s revenue crisis and challenge of funding infrastructure

Although the Nigerian government keeps reminding everyone that cares to listen that its debt to GDP ratio is still low and it has “headroom to borrow” and is “doing so aggressively in the short to medium term in order to address our infrastructure deficit and to stimulate growth,” the reality is more nuanced. Due to its low revenues, it has a higher debt servicing to revenues ratio, which is estimated to stand at 33.6 percent. What this means is that the country is spending approximately one third of its revenues in servicing its dept. To compound the problem, the country spends the rest two thirds of its revenues as recurrent expenditure. This is not surprising since we run one of the most expensive systems of government in the world with over bloated overhead costs. So, in effect, the country has no money for capital expenditure or investment in infrastructure except it borrows. And that is why, for instance, Nigeria is aggressively courting China for loans to expand its infrastructure especially in the railway sector.

But this is not sustainable. There is a more sustainable approach, which, besides drastically reducing recurrent expenditure, involves the funding of infrastructure through robust public and private partnerships or PPPs. And Nigeria is desperately behind in its infrastructure stock. The international benchmark for infrastructure stock as a percentage of GDP is 70 percent, but Nigeria currently stands at 25 percent. This, perhaps, explains the country’s low ranking in the Africa Competitiveness Report by the World Economic Forum, which ranks Nigeria’s infrastructure 134th out of 144 countries. Again, the World Bank’s latest Ease of Doing Business Index ranks Nigeria 169th out of 189 countries.

It has been estimated that for Nigeria to close its infrastructure gap and bring itself up to the international benchmark for infrastructure stock, it needs to spend as much as $2.9 trillion in the next 30 years and 48 percent of this sum, representing $1.4 trillion, has to come from the private sector. A breakdown of the $2.9 trillion shows funding sources that include private sector contributing 48 percent, which equals $1.392 billion; Federal Government, 29 percent, $841million; states and local governments, 23 percent, $667 million, and donor agencies, 0.4 percent, $11.6 million, giving a total of $2.911 trillion

This realisation that both the government and the private sector must contribute their quarter towards building Nigeria’s infrastructure is now mainstream and all progressive governments are designing policies to ensure a robust public-private partnership where the private sector can invest massively in infrastructure. But not so with the Nigerian government.

This is a country where the president came out to say matters-of-factly that he does not trust individuals in the private sector. In his words: “We are averse to an economic team with private sector members” because such persons “frequently steer government policy to suit their narrow interests rather than the overall national interest”. Buttressing the president’s position further, the media adviser to the vice president, Laolu Akande further explained that the presidency considers economic management as purely “a government affairs”.

Sadly, PPPs have not been very successful in Nigeria basically because the government has shown over the years that it does not regard validly executed contracts as sacred.

In many cases, the government has resorted to self help in a bid to do away with contracts that it considers not favourable to its interest. The result is a lack of trust in government and therefore reluctance by the private sector to participate in PPPs. With low interest in PPPs, the government is forced to fund infrastructure from its low revenues budget that could easily be funded through PPPs and from borrowing, sometimes, at exorbitant interest rates.

There is just no running away from the reality that the government must partner the private sector to provide modern and world class infrastructure.  The government must begin to rebuild trust and get the private sector on-board efforts to invest in Nigeria’s infrastructure. Private capital has alternative uses and many countries are competing for them. The sooner we develop an attractive PPP model the better for us.