Stand on a beach in Lagos and look offshore. On the horizon, you will see the shadows of dozens of ships, each waiting patiently to dock in the city’s sea port. Lagos is Nigeria’s commercial capital, and the port at Apapa is a trading hub for West Africa. Boats wait for days for their turn to dock. When they finally do, they unload their cargo onto trucks, which must queue for hours – drivers sweating, horns honking – before they clear Apapa’s desperately congested roads. It’s a painstaking, expensive business. Few places could give a better picture of the challenges posed by Nigeria’s vast infrastructure deficit.

Nigeria is a country of vast economic opportunity. It famously became the biggest economy in Africa in 2014, after an economic rebase almost doubled the size of its gross domestic product (GDP). At about $510bn, its economy is now bigger than South Africa’s (and among the top 30 in the world). That news came as a profound endorsement for Nigeria, which – if it wasn’t already – is now the centre of the African growth story; a nation impossible for investors to ignore.

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Vast hydrocarbon riches, and an enormous population of 170 million people are providing compelling investment opportunities. Oil riches have created a dizzyingly wealthy elite, but the middle class is growing too. It multiplied more than six-fold between 2000 and 2014, according to a recent report by Standard Bank. In 2014, Nigeria will account for 45 percent of the total $360bn in household consumption expenditure across 11 sub-Saharan countries, which were surveyed as a proxy for the continent.

However, Africa’s biggest economy still faces major challenges. Chief among them is the state of its infrastructure. From roads and rail, to irrigation systems and water pipelines, to mobile and broadband networks, and housing and energy, the current supply is desperately inadequate.

In fact, Nigeria’s core stock of infrastructure is estimated at only 20-25 percent of GDP. “The level for middle income countries of this size should be around 70 percent,” says Ousmane Dore, country director of the African Development Bank (AfDB) in Nigeria.

As in other African countries, poor construction, bad maintenance and underinvestment are among the reasons for that. But in Nigeria, the huge population exerts extra pressure. “The population has grown… but the energy stocks have not increased since the 80s,” argues Kunle Oyinloye, CEO of The Infrastructure Bank.

Today, the nation generates about about 4,000 MW, and has installed capacity of about 5,900 according to the last figures from the United States Energy Information Administration in 2011. Compare that with South Africa, the continent’s other major economy, which has an installed capacity of 44,000 MW, according to the Department of Energy, serving a population of 53 million.

The pains of poor infrastructure

The effects of that deficit on the macro economy and on the living conditions of Nigerians are stark. The country grew at 5.4 percent in 2013, but AfDB estimates that its expansion rates would be about 2 percent greater with adequate infrastructure in place.

“Our economy has been growing on average 6 percent annually for the last five years, yet more than 50 percent of the population has no access to electricity,” says the minister of power Chinedu Nebo. “Imagine what would happen in terms of economic growth when we attain sufficiency in power supply.”

Weak infrastructure exerts a huge burden on foreign and local businesses. Difficulties accessing markets via crumbling roads or clogged up ports, and vast expenditure on generators required to avoid blackouts, are regularly cited as being among the biggest challenges to investors in the country.

“The shortage of infrastructure means that a great deal of businesses are having to self-generate electricity at vast cost, which puts them at a competitive disadvantage,” explains Phillip Ihenacho, CEO of Seven Energy, which is investing heavily in the Nigerian power sector.

It also lowers the quality of life for millions of Nigerians. The majority of citizens, who cannot afford diesel generators, have no access to electricity. Because of poor roads and heavy traffic, Lagosians spend hours commuting distances that should take only minutes. Poor infrastructure causes post-harvest losses that can stretch to as high as 40 percent, destroying the livelihoods of millions of farmers.

It also hampers vital job creation and poverty reduction. “Because of lack of infrastructure, industrialisation and manufacturing – which are known to create jobs – have not really grown,” AfDB’s Mr Dore says. “As to what it the infrastructure deficit costs Nigerians, we can only really imagine,” concludes The Infrastructure Bank’s Mr Oyinloye. “It translates into an atrocious environment for doing business; poor quality of life; low national productivity; a very thin industrial base; and over-dependence on imported products. All of these perpetuate poverty, unemployment and underdevelopment.”

A plan to plug the gap

This is a situation that Nigeria’s current government, led by President Goodluck Jonathan, recognises. Fixing it will be a monumental task, but one that the leadership says it is ready to confront.

A new blueprint for infrastructure development devised by the National Planning Commission, entitled the National Integrated Infrastructure Master Plan (NIIMP) estimates that $3tn will be required in the next 30 years to build and maintain adequate infrastructure supplies.

It lays out investment requirements for key infrastructural sectors including energy; transport; agriculture, water and mining; housing and regional development; information and communication technology; social infrastructure and security. Of those, energy and transport will take the lion’s share of funding. They require $1tn (a third of the total) and $775bn respectively over the next three decades.

The government and development partners agree that public money can never plug that deficit alone, particularly now that falling oil revenues are putting pressure on public revenue. The answer, it is agreed, is in private investment. “The private financing of infrastructure is not nice to have, it is a ‘must have’. Without that, Nigeria’s infrastructure investment is going to be constrained and the country will grow more slowly than it is capable of growing,” says Mark Tomlinson, director of the UK Department for International Developmentfunded Nigeria Infrastructure Advisory Facility (NIAF).

The government has proved there is appetite for investment in Nigerian infrastructure by ushering through a multibillion dollar privatisation programme for energy generation and distribution assets.

Completed in 2013, this is the largest power reform ever seen in sub-Saharan Africa. It aimed to improve the notoriously opaque management of the former state power monopoly the Power Holding Company of Nigeria (PHCN), whose acronym entered common parlance and came to be jestingly referred to by many Nigerians as “Please Hold Candle Now”; and to make blackouts a thing of the past.

“It is a feat that looked impossible in the past… It wasn’t easy to pull off,” Mr Nebo says. He argues that it was made possible because, for the first time, there was political will for change. “It was achieved… through sheer determination, focus, and a comprehensive, integrated long-term plan across the entire value chain.”

The precedent is an important one, according to Mr Tomlinson: “It changes power development in Nigeria and gets it onto a much more encouraging trajectory.”

Investors are now being encouraged to enter through the value chain, from gas-topower to the still-public transmission sector. “If you are looking for a home [for foreign direct investment (FDI)] – then I would say power is… where you have the biggest opportunity,” says the country’s minister of industry, trade and investment, Olusegun Aganga. “In power alone, we have commitment of more than $60bn over the next five to eight years.”

Beyond the bright lights

That process has had a significant impact on thinking in other sectors, generating a greater focus on leveraging private investment for infrastructural development. It has also taught different arms of government to work together more effectively, according to Mr Nebo: “[It] turned out to be a practical demonstration of what is achievable when different segments of government collaborate,” he explains.

Drawing on that experience, the NIIMP outlines private investment opportunities ranging from aviation and rail facilities, to agricultural processing and irrigation, to broadband fibre optic networks.

Second to power, a focus on transportation infrastructure is absolutely crucial, all stakeholders agree. “Nigeria relies a lot on road infrastructure for economic development,” says the minister of works, Mike Onolememen. “The development of rail lines is very important because of the huge population of our country. We need to leverage for mass transit… [to] reduce the pressure on the road.”

A pipeline commitment of $59bn is already secured for sectors excluding power, according to Mr Aganga. “With an average return on investment of over 36 percent, that compares to over 6.6 percent globally,” he states. “So the opportunities in Nigeria are huge.”

Power to the PPP

Recognising the relative strengths of government and business, public private partnerships (PPPs) are being tabled as one model to deliver those critical investments. “Authorities in Nigeria increasingly believe in relying on PPPs to close the infrastructure gap,” says Jaime Ruiz-Cabrero, a partner with the Boston Consulting Group (BCG).

Raising Nigeria’s investment profile by completing a few such projects, structured to international standards, will help put the country on the map for international investors, says NIAF’s Mr Tomlinson. He cites the Second Niger Bridge, a $700m project that is being financed by the Nigerian Sovereign Investment Authority (NSIA) and construction company Julius Berger, as an example.

“This has been turned around in 18 months from a project not able to be funded with private money, to something that is moving forward with a lot of international interest,” he says. “It will be a PPP done to international standards.”

Other such transport projects are also being prioritised. “[Road infrastructure] is a very big priority for the government…. But we realise it would be too huge for the government to develop the sector alone,” says the minister of transport, Idris Umar. “We therefore need to partner with the private sector under [a] public private partnership arrangement to develop the sector.”

The Lekki Expressway, a toll road in Lagos that avoids some of the worst of the city’s famous traffic, is one such example. Talks are now under way for investment in the Lagos-Ibadan Expressway, a transport route of arterial importance. Another example is the Lagos metro line, designed to carry 1.6 million passengers daily, which is in the early stages of construction, Mr Oyinloye says.

Proof of problems

As the bumpy road to power privatisation has shown, there will be challenges. Power investors, for instance, have been confronted with inadequate supplies of gas to power the newly privatised plants. But in such difficulties lie further opportunities for investors. “Nigeria is well endowed when it comes to natural gas, which is the logical way to generate the bulk of its power needs, but there is a shortage of infrastructure for gas,” says Seven Energy’s Mr Ihenacho, pointing to opportunities in gas supply via pipelines and road. His company recently invested $100m in gas-to-power infrastructure, in partnership with the NSIA.

For companies like his to prosper, the pricing of gas must be addressed by government. To date, it has not been competitive enough to incentivise investors to supply the domestic market. The government has gone some way towards tackling that by increasing the price of gas-to-power from $1.50/mcf to $2.50, but private investors say that will have to rise still further to make their business viable.

Deteriorating transmission networks can lose up to 30 percent of generated electricity, and are preventing Nigeria from being lit up, even if more electricity is generated. They will also open up to private investment, Nigerian officials say.

Not everything in the PPP arena is transpiring as planned; there can be issues that need straightening out and which can be
subject to controversies. For instance, Lagos State Government recently bought back the concession rights to Lekki Expressway from the Lekki-Epe Concession Company after it discussed hiking tariffs by 20 percent.

But a growing number of states now have PPP laws in place to ensure best practice, The Infrastructure Bank’s Mr Oyinloye points out. AfDB is currently establishing a PPP hub aimed at building capacity on the public side. It will help establish a stronger legislative base for PPP initiatives in the country, Mr Dore explains.

“PPPs will benefit the country, the people, and attract FDI. The question is working out how to structure it to make it attractive to both the public sector, the private sector and the people,” BCG’s Mr Ruiz-Cabrero said.

Show me the money

One of the major inhibitors to investment in Nigerian infrastructure has been an absence of funding. Banks have not traditionally been keen to lend to the sector. Much of the problem lies not in the appetite to lend, but in the absence of bankable projects. “Nigerian banks are only waiting for bankable projects to put the money in,” Mr Oyinloye argues. In an effort to address that, The Infrastructure Bank has
a mandate to provide advisory services to turn ideas into such bankable projects.

Where opportunities exist, lenders are increasingly confident, according to Seven Energy’s Mr Ihenacho. “The history isn’t good, but there is a lot more willingness to lend to infrastructure than there used to be,” he says.

Other sources of domestic finance are becoming available. Growing pension assets are being targeted for infrastructure investment. The $1bn sovereign wealth fund – the NSIA – is already investing heavily in infrastructure. “These are resources that can be mobilised for infrastructure development,” says AfDB’s Mr Dore. “Then there are infrastructure bonds and diaspora bonds. There are all mechanisms to plug the funding gap.”

A plan beyond politics

As Nigeria learns from its experiences in the power sector, and gains a reputation for world-class public private partnerships, its government is hoping that more local and international capital will be forthcoming. Improving the energy supply “will guarantee
industrialisation, with the natural consequence of generating more jobs and higher GDP,” says Mr Nebo. “This is expected to translate into higher standards of living and better social security for the populace.”

Better transport infrastructure will facilitate manufacturing growth, and catalyse a retail boom, says Mr Oyinloye. “Imagine the growth of the consumer market, as witnessed by the growth of the malls that we now have, if we had adequate infrastructure to move goods,” he says. “It would explode.”

There are miles left to run, but the NIIMP provides the country with an encouraging trajectory, not least because it commits the nation to ambitions bigger than those of any single government.

“We believe that now the government has a plan and wants the private sector to invest along with them, there is no sector you look at where there are not opportunities,” Mr Oyinloye says. “There is a lot of interest in Nigeria, and in the next five years, if the current effort is anything to go by, we will have significantly reduced the deficit in the infrastructure space.”

This feature is part of a special report published by This Is Africa (www.thisisafricaonline.com), a sister publication to fDi Magazine. The report was sponsored by the National Planning Commission of the Federal Republic of Nigeria; reporting and editing were carried out independently by This Is Africa, in association with fDi Magazine.

To download a copy of the full report, click here: