Key con­sid­er­a­tions be­fore start­ing new pub­lic in­fra­struc­ture projects

Be­tween 2019 and 2023, we should not build a sin­gle new road, plant, fac­tory, re­fin­ery or build­ing. We should sim­ply spend our cap­i­tal bud­gets on main­tain­ing ex­ist­ing in­fra­struc­ture.

Financial Nigeria Magazine - - Contents - Cheta Nwanze is Head of Re­search at SBM In­tel­li­gence.

There are many schools of thought re­gard­ing how to sort out Nige­ria’s enor­mous in­fras­truc­tural deficit. A lot of peo­ple think we should ac­quire some sort of tun­nel vi­sion, which would en­tail pick­ing just one sec­tor, and de­vel­op­ing it. When we reach crit­i­cal mass in in­fra­struc­ture in that sec­tor, it would then catal­yse de­vel­op­ment in other sec­tors.

Some ex­perts and com­men­ta­tors think the fo­cus should be on roads; oth­ers think it should be power. An­other school of thought sup­ports the idea that we should fo­cus on ed­u­ca­tion. Based on my ob­ser­va­tions, I’d say most city-dwelling Nige­ri­ans would choose power in this tun­nel vi­sion of in­fra­struc­ture de­vel­op­ment. But I am par­tial to roads.

Two thou­sand years ago, when the Ro­mans con­quered a ter­ri­tory, one of the first things they did after paci­fy­ing the in­hab­i­tants was to get young peo­ple to work on road con­struc­tion projects. The Ro­mans knew that roads fa­cil­i­tated the flow of trade and the main­te­nance of those roads helped to solve the un­em­ploy­ment prob­lem. More­over, in the event of a cri­sis, proper road net­works made it easy to de­ploy the se­cu­rity forces.

Trans­porta­tion, of which roads are a key com­po­nent, has his­tor­i­cally been the ma­jor tool for con­nect­ing peo­ple and mar­kets, and open­ing up places that were pre­vi­ously cut off from trade. Trade en­hances eco­nomic growth, and makes it prof­itable to in­vest in all other pro­duc­tive ac­tiv­i­ties and sec­tors, in­clud­ing, yes, power.

But un­for­tu­nately, the grim facts about roads in­fra­struc­ture in Nige­ria shows that only 18 per­cent of the coun­try’s 197,000 kilo­me­tres of fed­eral roads, used by 90 per­cent of per­sons mov­ing across the coun­try, is paved. The sit­u­a­tion is worse for state and lo­cal gov­ern­ment roads.

I spent a sub­stan­tial part of the last two months com­mut­ing in La­gos, which is my base, and trav­el­ling to Port Har­court, Ow­erri, Umuahia, Cal­abar, Onit­sha, As­aba, Benin, Lokoja, Abuja, Ijebu-Ode, and Abeokuta. One thing that is com­mon in all of th­ese places is that there are con­struc­tion ac­tiv­i­ties go­ing on, in­clud­ing res­i­den­tial or com­mer­cial build­ings, and roads. Dur­ing my visit to Port Har­court, I found out that a Gen­eral Elec­tric power project was on hold, more or less, for months be­cause GE was re­port­edly wait­ing on the Fed­eral Road Man­age­ment Agency (FERMA) to fix the road be­tween Onne, where GE’s equipment was off­loaded, and Afam, the project site.

To my mind, this pro­vides con­clu­sive ev­i­dence as to why road in­fra­struc­ture is cru­cial. The de­layed GE project is an ex­am­ple of how the crum­bling state of our roads af­fects busi­ness.

Lack of main­te­nance is also a ma­jor is­sue that has ex­ac­er­bated the Nige­rian in­fra­struc­ture dilemma. A lot of the new in­fra­struc­ture com­ing out of the pipe­line sim­ply do not last ei­ther due to their sub­stan­dard qual­ity or poor main­te­nance. This has led to my left field idea that be­tween 2019 and 2023, we should not build a sin­gle new road, plant, fac­tory, re­fin­ery or build­ing. We should sim­ply spend our cap­i­tal bud­gets on main­tain­ing ex­ist­ing in­fra­struc­ture.

Here is how things work in coun­tries that have world-class in­fra­struc­ture and pub­lic ser­vices. Ev­ery project starts with some­thing called a busi­ness case. You build a strate­gic case for why you want to com­mence and fin­ish a project. Then you enu­mer­ate the ben­e­fits of the project to the com­mu­nity it aims to serve or the na­tion’s econ­omy.

You then go on to con­sider al­ter­na­tive op­tions on how to achieve the same set goals un­der the busi­ness case. You can also have the (some­times fail-proof) op­tion of do­ing noth­ing at all. This should be se­ri­ously con­sid­ered as some­times do­ing noth­ing is the safest op­tion.

Fol­low­ing that, you build an eco­nomic case for the life­span of the project (usu­ally a decade). This in­volves get­ting pro­fes­sion­als to an­a­lyse the ex­pected eco­nomic ben­e­fits of each op­tion in the busi­ness case, as well as the po­ten­tial risks. In other words, you out­line the crit­i­cal suc­cess fac­tors and risks, and cre­ate con­tin­gen­cies to man­age those risks.

The next step is to cre­ate a fi­nan­cial case for the op­tion you have picked. This is where you out­line pro­jected costs and rev­enue and the cash flow im­pli­ca­tions of your cho­sen op­tion. If, for ex­am­ple, you’re pro­vid­ing ₦1 bil­lion in ini­tial in­vest­ment, you could also bud­get ₦100 mil­lion in an­nual main­te­nance costs for the fol­low­ing decade, and ad­just for in­fla­tion.

One crit­i­cal point to note here is that when you pro­vide fund­ing for a project, it is not only fund­ing for the ini­tial cost, but also the fund­ing for run­ning costs for the next decade (if that in­vest­ment has a 10-year value), or quar­ter cen­tury (if it has a 25-year value).

You also have to con­sider how the project will be de­liv­ered. Even after you have com­pleted the project, for as long as the out­put ex­ists, you must con­tinue to track the ac­tual ben­e­fits de­rived against the ex­pec­ta­tions out­lined in the busi­ness case.

When a gov­ern­ment has com­pet­ing pri­or­i­ties in a port­fo­lio of po­ten­tial pub­lic in­vest­ments, one ques­tion it must al­ways con­sider is this: Which of the many in­vest­ment op­tions in front of it has the high­est ex­pected life­time ben­e­fits, con­sid­er­ing both the ini­tial and on­go­ing costs?

Cru­cially, most pol­i­cy­mak­ers, when they make tri­umphant an­nounce­ments of plum new projects, they fail to de­ter­mine the eco­nomic cost of the new in­vest­ment in re­la­tion to let­ting ex­ist­ing in­fra­struc­ture to de­cay with­out main­te­nance. Hence, all the eco­nomic value of the ex­ist­ing in­fra­struc­ture is lost as a re­sult.

To put it dif­fer­ently, if you choose to build a new road to con­nect Point A to Point B, also con­sider the ini­tial and on­go­ing costs of that new road. And if the fund­ing of the new road means you will not have money to main­tain an­other road con­nect­ing Point C to Point D, the eco­nomic value of the new road had bet­ter ex­ceed the value lost from let­ting the road from Point C to Point D to de­grade.

Nige­ria badly needs all its in­fra­struc­ture to work. If one analy­ses the port­fo­lio of Nige­ria’s in­fra­struc­ture, what is ev­i­dent is that if all the crit­i­cal pieces of in­fra­struc­ture the coun­try is com­mit­ted to are fully op­er­a­tional, they should de­liver mas­sive ben­e­fits to the econ­omy and to the Nige­rian peo­ple. The World Bank says ev­ery 1 per­cent of gov­ern­ment funds spent on in­fra­struc­ture leads to an equiv­a­lent per­cent­age in­crease in Gross Do­mes­tic Prod­uct (GDP). This in­vari­ably means that there is a cor­re­la­tion be­tween any mean­ing­ful in­put in in­fra­struc­ture de­vel­op­ment and eco­nomic growth.

And ac­cord­ing to Na­tional Bureau of Statis­tics, over the past decade, Nige­ria’s in­fra­struc­ture spend­ing con­trib­uted on average 1.9 per­cent (ap­prox­i­mately $4 bil­lion) per an­num to the GDP. But more in­vest­ment is needed to achieve an ap­pre­cia­ble level of growth and de­vel­op­ment. A 30-year in­fra­struc­ture de­vel­op­ment plan, known as the Na­tional In­te­grated In­fra­struc­ture Mas­ter Plan (NIIMP), projects that Nige­ria re­quires at least $2 tril­lion (₦398.1 tril­lion) for in­fra­struc­ture de­vel­op­ment over the next three decades. The laun­dry list of stuff to be done is daunt­ing.

Ac­cord­ing to the Africa Fi­nance Cor­po­ra­tion, for a sus­tain­able in­fra­struc­ture de­vel­op­ment to hap­pen, gov­ern­ments must first ad­dress pol­icy in­sta­bil­ity, an un­pre­dictable le­gal and po­lit­i­cal frame­work, lack of a holis­tic view on na­tional plan­ning, lack of co­or­di­na­tion be­tween gov­ern­ment agen­cies as well as the lim­ited ca­pac­ity of civil ser­vants.

My ar­gu­ment is sim­ple: con­sider the main­te­nance of all new projects along­side the ini­tial costs. If new projects are not go­ing to be main­tained, they should not be built. If new projects will hin­der the main­te­nance of ex­ist­ing ones, then we should not just take a plunge into start­ing the new projects. Some Nige­ri­ans who should know bet­ter have a ten­dency to er­ro­neously be­lieve that best prac­tices don't ap­ply to the coun­try. Nev­er­the­less, the na­tional in­fra­struc­ture deficit con­tin­ues to ex­pand as new projects are hardly de­liv­ered while ex­ist­ing projects fall into dis­re­pair.

But of course gov­ern­ment’s re­sources are lim­ited. While ev­ery­one agrees that pri­vate in­vest­ments are needed to close the in­fra­struc­ture deficit in the coun­try, the poli­cies that are re­quired to build in­vestors’ con­fi­dence are weak.

Here is how the head of ARM Harith In­fra­struc­ture In­vest­ment Lim­ited, Opuiyo Oforiokuma, suc­cinctly put the chal­lenges of de­liv­er­ing projects in emerg­ing mar­kets: “In emerg­ing mar­kets, reg­u­la­tors just hap­pen to be gov­ern­ment and they don’t al­low the trans­parency that gives in­vestors con­fi­dence. If in­vestors do not have con­fi­dence in your en­vi­ron­ment, it may take many years for them to take cer­tain de­ci­sions.” This is why Nige­ria con­tin­ues to be left be­hind.

Road closed for main­te­nance

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