Infrastructure spending as a proportion of Gross Domestic Product (GDP) is a crucial indicator of an economy's long-term prospects. Economists worldwide recognise it as a critical driver of short-term growth. Robust infrastructure facilitates the efficient movement of labour, goods, and services over the long run, enabling a country to harness its economic potential fully. This realisation has spurred emerging economies to prioritise infrastructure investment. A case in point is China, which invested 12% of its multi-trillion dollar GDP in physical infrastructure during its remarkable economic growth phase from 2003 to 2016.
In this regard, the Nigerian economy faces a significant disadvantage. The nation's infrastructure deficit is estimated at a staggering 40% of its $490bn GDP size, and to catch up, it would need to invest $3 trillion by 2050. These figures underscore a reality that Nigerians grapple with daily–from dilapidated roads riddled with potholes to a non-functioning rail system for passengers and goods. Alarmingly, Lagos, Nigeria's largest city and a powerhouse contributing to approximately 30% of the country's economic activity, is the only global megacity devoid of a rail network.
The government acknowledges this challenge and primarily contributes to the nation's infrastructure development, with little private sector involvement. Traditionally, it has relied on project finance as the primary approach to address the infrastructure deficit, with infrastructure financing in Nigeria being predominantly driven and spearheaded by the government.
Current Landscape
Nigeria's infrastructure financing is a major challenge due to a low revenue-to-GDP ratio, which is one of the world's weakest. At only 7%, the government cannot generate enough funds for spending. In contrast, Ghana and Ivory Coast have ratios in the 13-17% range. Nigeria’s low revenue-to-GDP ratio has impacted its development index, which underperforms compared to its African counterparts.
Even when the government raises financing, a sizeable portion is encumbered by public sector expenses, pension obligations, burgeoning interest payments, and defence allocations (See Exhibit 1). This severely constrains the fiscal space for public investment in critical physical infrastructure, mainly when reasonable resource allocation toward essential sectors such as health, education, and social welfare is urgently needed.
Despite the country’s large economic size, the Nigerian government cannot raise enough funds to finance its investments. Whatever funds it raises are bogged down by significant recurrent expenses, which explains the low levels of infrastructure financing.
While the size of funds available for physical infrastructure investment remains a pertinent concern, the government needs to spend better on physical infrastructure. There needs to be more strategy and cohesion regarding the physical infrastructure the government attempts to build for the citizens. It remains evident that there are no clear plans in air, rail, sea, or road to provide infrastructure that unlocks the most significant value for Nigerians. Instead, there is a focus on building vanity projects that merely boost political profiles (See Exhibit 2).
There are multiple anecdotal examples of this, such as airports. Grand plans are being made to build an airport in Gusau, Zamfara state, even though neighbouring states, i.e., Kebbi, Sokoto, Kaduna, and Katsina, have airports to accommodate travel. Some of them, like Kebbi, face such limited capacity that air operators have terminated their agreements to fly in.
Even in the tactical implementation, there is a concerning focus on building large new projects, while cheaper alternatives for renovating and expanding current infrastructure exist. Billions of dollars are being invested into expanding Nigeria’s deep sea port capabilities in Lagos. At the same time, existing ports have a limited network to support the transport and storage capacity of Nigeria’s leading import and export—petroleum products—to make them effective and unlock economic value. This predicament has far-reaching implications for the country, impeding trade and imposing prohibitive transportation costs on the economy. Nigeria lacks the requisite physical infrastructure to facilitate seamless trade across its vast expanse. While private operators have enabled frequent road and air connectivity between major cities like Lagos, Ibadan, Kano, and Abuja, other urban centres remain isolated and unable to access efficient modes of transportation for the movement of goods.
The disparity hits the agricultural sector particularly hard. Farmers in Northern Nigeria suffer substantial economic losses due to diminished crop yields and missed opportunities for arbitrage, as formidable transportation barriers prevent them from accessing lucrative markets in the western region. Furthermore, logistics costs in the country remain exorbitant compared to other emerging trade markets, further exacerbating the economic burden.
Addressing Nigeria’s Infrastructural Financing Challenges
Nigeria does not lack a comprehensive plan to address its infrastructural challenges; however, it grapples with a lack of continuity, political will, and sincerity in rigorously implementing it. In 2014, the (NIIMP) was approved to set in motion a blueprint to modernise Nigeria’s infrastructural stock for the next 23 years. It is estimated that $150 billion would be needed annually (from both public and private sectors to finance infrastructure investment in the medium term (2021-2025).
The NIIMP identified four potential sources for public sector infrastructure financing:
- government budgets (federal and state)
- public debt or government borrowing
- other government-controlled sources like sovereign wealth funds and pension funds, and
- Public-Private Partnerships (PPP).
To this end, the Nigerian Infrastructure Debt Fund (NIDF) was created in 2016 and is managed by the private investment management firm, Chapel Hill Denham, which oversees the ₦200bn fund. While it has recorded modest success, Nigeria’s infrastructural gap makes the total asset size a mere drop in the ocean. There is an urgent need to scale such investment vehicle sizes. Infrastructure financing must be more aggressive and prudently managed to make significant progress over the next three decades.
Revamping Nigeria’s infrastructure requires a significant amount of funds, and the government must work towards raising the $3 trillion needed to close the gap. Revenue collection agencies must become more efficient, and the significant base of the Nigerian economy left untaxed cannot remain if this gap is to be filled.
Much of Nigeria’s economy happens outside of taxable sources, and raising revenue does not come from increasing taxation levels but from reaching the untaxed bases. Only ¬10% of Nigeria’s workforce exists in formal sectors, and about 58.2% of Nigeria’s economy happens in the shadow economy and, as a result, cannot be taxed by taxation authorities. This encompasses everything from labourers to large exporting and importing enterprises. There is no path to fixing Nigeria’s infrastructure gap if a large part of the population is not contributing to the common good. Expanding the tax base using tailored initiatives with significant enforcement abilities for the Federal Inland Revenue Society (FIRS) is one way to reduce the size of the untaxed economy.
Even then, $3 trillion cannot be raised by the government alone, and it must look towards new avenues of raising funds by including the private sector. Good examples are PPP initiatives like how Kenya financed the 27km Mombasa-Nairobi highway, impact investing, and the reissuance of diaspora bonds to finance this gap. The private sector's confidence in the Nigerian economy is low; therefore, transparency for investors in financing and earning returns is needed. Empowering an effective and independent infrastructure monitoring and evaluation agency, as well as strengthening public procurement and contract management, is crucial. In this regard, South Africa’s Presidential Infrastructure Coordinating Commission (PICC) is an example worth emulating.
The government must conduct a comprehensive audit of all its major projects dating back to the previous administration. For instance, it is economically unsustainable for a railway project's debt servicing to . Hard decisions have to be made regarding .
Nigeria can also look to Hong Kong, whose Mass Transit Railway Corporation (MTRC) employs an innovative or the "Rail plus Property" (R+P) model. Like Lagos, Hong Kong is a densely populated coastal city with high real estate value. The MTRC operates without government subsidy and is highly profitable. Between 1998 and 2013, property-related operations generated almost twice ($11 billion) the money spent on railway line construction. Revenues are derived from profit sharing with private developers in real estate sales and renting and managing MTRC-owned properties. The path forward is clear but demands a resolute determination to overcome the stated challenges and embrace a holistic approach. While the NIIMP provides a strategic framework, its successful implementation rests on unwavering commitment, stringent project oversight, and a willingness to explore innovative funding sources. By taking decisive actions such as improving revenue collection, conducting comprehensive audits, prioritising high-impact projects, disincentivising corruption, repairing the social contract, and fostering public-private partnerships, the government can finance the infrastructure gap for sustainable development.
References:
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