Nigeria - Infrastructure Development Assessment

1 Infrastructure Development IN Nigeria The paper also attempts to provide an overview of the current state of Infrastructure in Nigeria ROAD MAP TO SUSTAINABLE Development in relation to Nigeria 's vision 2020. To this end, it is hoped that this paper will 1. Muyiwa Akinyosoye , MSc; PMP stimulate further discussions among public sector officials, the financial sector and the Nov 22, 2010 industry. WORKING PAPER Key words: Private-Public Partnership; External Risk; Policy reforms. ABSTRACT. Objective: This paper presents a macroeconomic outlook The overall objective is to highlight the on the benefits of a strong Infrastructure base importance of Infrastructure Development to to the Nigerian economy. economic growth and the need for government to take a more strategic approach to tackling its It provides an informed perspective on the dearth in Nigeria . Infrastructure Development economic impact Infrastructure Development should be a key priority in the country's journey has on nation building.

2 Though Infrastructure towards Development . linkage to an economy may come in a multiple of ways, it is often known to be complex and Introduction sometimes convoluted, creating both positive Infrastructure and Economic Development and negative add-on effects, due to the large Infrastructure contributes to economic flow of expenditure. Attention is given to the Development by increasing productivity and impact Infrastructure has on economic growth. providing amenities which enhance the quality of life. The services generated as a result of an Special focus is given to the strategic position adequate Infrastructure base will translate to an the Construction industry takes in bridging the increase in aggregate output. gap between - a state of underdevelopment Two categories of derived benefits to direct (economic-anorexia) and economic prosperity. investment are: A look at strategic procurement options through the use of Public Private Partnerships - Investment in Infrastructure services, (PPP) as a viable alternative to Traditional such as transportation (roads), procurement is also discussed.

3 Electricity and water are intermediate inputs to production. 1. Muyiwa Akinyosoye holds an MSc degree in International - Infrastructure services tend to raise Construction Management. A management partner at an productivity of other factors. Infrastructure consultancy firm (Greenhill Technical Servives Ltd) where professional consultancy is provided in Infrastructure is often termed the the area of Infrastructure Development through Public- unpaid factor of production . Private Partnerships; Policy formulation and sector consulting. His experience also includes oil & gas project Investment in Infrastructure in a given Development and execution having worked in Nigeria , Canada and the US.(email: 2|Page location often attracts additional flow route to go. Traditional procurement2 methods of resources. remain the major vehicle for procuring Infrastructure projects within Nigerian and Both effects contribute to economic growth by Africa in general.)

4 However there are risks stimulating aggregate supply as well as demand. inherent with them often in the areas of schedule completion delays and cost overruns. However, these contributions on aggregate More long term strategic impact includes: output, take time for the benefits to be realized. In a paper by Canning and Fay (1993), it was Poor maintenance cultures of concluded that developing countries showed a governments preclude efficient and high rate of return on transport Infrastructure adequate maintenance and operation comparable to those of developed countries. of Infrastructure . Conclusive evidence linked increased output to Financial risk: Excessive advance increased investment in transport payment (mobilization) to contractors Infrastructure , but little evidence with that link places a huge risk on public funds in being immediate (ibid). From the foregoing, it light of weak public institutional was concluded that Infrastructure was not to be capacity responsible for providing considered a factor of production, but rather a contractual oversight.

5 Condition for higher rates of economic growth. Short term gains. Traditional approach provides minimal post construction From the above, the outputs of Infrastructure to service after the defect liability period economic growth are wide and far reaching. Far (Uff, 2005). reaching that there impacts should never be Long term revenue generation risks due underestimated. Ability to foster Infrastructure to undercollection. High amongst Development is best tackled at a strategic level inefficient government run from where the necessary energy lies to drive infrastructures like the power sector. its implementation. The result is inadequate funding for operations and maintenance. (V. Foster Strategic planning combined with a strong and C. Briceno-Garmendia, 2010). political will needs the right procurement approach to achieve long term results. Public- Primarily because of the above, there has been Private Partnerships will not only meet such a global move towards models which are able to goals but have been found to accelerate them.

6 Optimally share risks with the private sector. PPP allows governments to free up fiscal funds The generic procurement term for this is for use in other pressing areas. defined as Public-Private Partnerships (PPP) . involving public bodies (governments) and Infrastructure Procurement Strategies private companies (Howes & Tah, 2003). This The huge cost associated with Infrastructure investment could be overwhelming. To address 2. Traditional project procurement (design-bid-build) features the this, a procurement strategy different from the dominant role of the owner (in this case Public sector). Much of traditional approach, seems a more optimal the risk is held by the owner from the project conceptual stage, through project finance up to operation, maintenance and ownership. 3|Page method started in Australia in the late 1980s3 known to be better managers of such risk and and found its way to the UK in the 1990s.

7 The control it more effectively (KMPG, 2007). UK government in 1992 announced its support for a new policy known as Private Finance Risk factors affecting Private investments Initiative (PFI) encouraging public-private joint However, certain reforms have to be in place to ventures and promotion of opportunities for attract private investment. External risks appear private sector financing (Uff, 2005). Broken to be the main risk preventing organizations /. down further, it came in various forms such as financial institutions from investing in long BOOT4; BOT5 DBFO6 est. concession contracts in Africa. PPP procurement strategies could come To attract private investors, the right business through bilateral or multilateral funding climate must be available. Governments need assistance such as the World Bank, European to identify and reduce external threats;. Commission in collaboration with the private otherwise they become the main bottleneck to sector.

8 Countries can benefit tremendously flow of investment. through such schemes. In return, the nation will enjoy access to strong Infrastructure base, There are those that are widely known and are which has a multiplying effect on Development listed below: and aggregate output. Such as: - Political risk - Increased agriculture output of farmers - Economic risk through improved roads - Social risk - creation of a sea ports - Technology risk - Rail links. - Legal risk - Electrical generation, transmission and distribution. Political risk: - Water and irrigation projects (a) Confiscation, Expropriation and - Increase quality of life of its citizens Nationalisation - Creeping - Urbanization of different areas. expropriation, series of acts that over time have an expropriatory effect. PPP allows for the finance and operational Government must be able to burden to be transferred from the public to the demonstrate, through a reformed legal private sector.

9 In return government is able to system, limits to their influence and focus on strategic areas like policy making, power. This will promote investor planning and demand risk. This is important as confidence and flow of capital. governments have better leverage on demand (b) Breach of Contract - Breach or through attractive policies. Governments are repudiation of a contractual agreement with the investor/lenders by host 3 government. Source: 4. BOOT Build Operate Own Transfer (c) Regulation imposing requirements. 5. 6. BOT Build Operate Transfer Government's ability to impose new DBFO Design Build Finance and Operate (Procurement Strategy) regulations that could have negative 4|Page effect on business decisions of private (b) Arbitration and conflict resolutions investors. methods must be of international standards and widely accepted. Economic risk: (a) Currency fluctuations: This could be a These risk factors may appear low in frequency major factor especially in concession of occurrence but their impacts are usually high.

10 Contracts spanning many years. Having sometimes to the demise of organizations and a steady economy to mitigate such risk strategic objectives. As such, they are to be is essential. Use of currency devaluation adequately addressed to encourage private adjustment factors is another. Other participation in Infrastructure Development mitigating actions include the use of programs. Institutional reforms will help forward exchange rate agreements on mitigate such risks. These risks are not future transactions (Howes & Tah, insurmountable but require strong political will 2003). from governments to reduce their likelihood of occurrence. Social risk: (a) Real and perceived inequalities Nigeria 's Current Infrastructure Base amongst various social strata within a country pose threats to stability. According to Nigeria National Bureau of Stability of government through the Statistics, Construction accounted for of GDP in 2007 and only of GDP8 over the address of social needs reduces the burden on private sectors to bridge that last decade.