EL-RUFAI ON FRIDAY

Still on Infrastructure Deficits (2)

By

Nasir Ahmad El-Rufai

elrufai@aol.com

JULY 21 2011

Nigeria’s infrastructure deficits have held our attention for two weeks. Today, we will round up by looking at other critical infrastructure and explore possible ways where government policies and interventions can best utilize our resources to create jobs, enhance living standards and attract foreign investments through infrastructure development.

Nigeria has no meaningful participation in the maritime industry on which it depends both for exports and imports.   Practically all Nigerian exports are shipped “Free on Board” (FOB), while its imports are shipped ‘Cost Insurance Freight’ (CIF).  The oil rigs in our petroleum industry, and the ships and vessels in Nigerian waters which service them are owned and controlled by foreigners.  Statistics show that Nigeria pays over $2 billion in freight each year to foreign ship owners either to export our crude oil and LNG or to import raw materials and finished goods.  The value of vessels engaged in the three areas of Nigeria’s shipping business namely: offshore rigs and support vessels, coastal cabotage trade, and import and export trade amount to well over $20 billion. Very little of that sum is retained in Nigeria, though the potentials in job creation, foreign exchange earnings and wealth creation are enormous. 

Efforts in the recent past by the National Maritime Authority (now NIMASA) to fund acquisition of ships by Nigerian companies have failed because those that accessed the 'ship acquisition fund' failed the nation and have not as at 2007, acquired the ships to make an impact, or paid back enough of the loans to keep the intended revolving fund growing. The government knows what to do about this situation, but the will to act appears absent.

On housing, we have not been able to provide the basic modern infrastructure (roads, water and electricity, which constitute some 30% of the cost of housing estates) that would drive a vibrant mortgage platform which will in turn aid house ownership. At present, the only hope of Nigerians becoming home owners is through the traditional tortuous method of self purchase and direct labour from life savings. Except for those lucky 24,000+ public servants that had access to the pilot mortgage system we established in the FCT in 2006 to facilitate the sale of Federal Government houses in Abuja, and the employees of financial services, telecom and oil companies, few Nigerians can acquire houses through their legitimate earnings. The pilot mortgage system was unfortunately not mainstreamed as planned, by our successors so the nation has no sensible mortgage system to date.

Public intervention in housing by the Federal Government has been inadequate. The Federal Housing Authority of Nigeria (FHA) which has the statutory responsibility of providing housing for Nigerians has only built about 36,000 houses nationwide since its inception in 1973. This has resulted in an estimated housing deficit of between 16 and 25 million houses in the country.  Assuming that about 30% of the population are working class, that is about 48 million people; based on the world average of 45% of the working class being qualified for mortgage facilities of a two-bedroom flat each, not less than 22 million houses of that kind alone are currently needed all over the country.  On a projection that a modest 2-bedroom flat would cost about N2 million to build, and have a market price tag of N3 million; about N66 trillion in mortgage funding over 10 years if we aim to close the supply gap. Since we will be making more babies in the period, construction of more and more housing will be needed on a continuous basis. There are roles here for the private sector or as well as all tiers of government. Mainstreaming the pilot mortgage system started in Abuja is the key to unlocking the huge opportunities in the housing sector - not only jobs will be created and capital formation enhanced, but studies have shown that societies with high rates of home ownership are more secure and less prone to arson and riots! After all, who would want to burn his own house?

The deregulation of the telecommunications sector spearheaded by the BPE in 2000 started with the rewriting of the National Telecommunications Policy and the steering through the National Assembly of new enabling legislation. The BPE also made the case for a cost-reflective tariff increase of 144% in May 2001, which amongst other measures made the GSM market space more attractive for license auction by the NCC. The deregulation has been very successful in addressing the scarcity of basic telephony services at the time, and the NCC must be commended for maintaining regulatory certainty in the sector. However, issues of quality of service, universal access and very low data and video capability remain due to insufficient investment in infrastructure.

Insufficient telecommunications infrastructure development is causing the underutilization of the value-added derivable from information, communications and technology (ICT). The cost of the infrastructural bottlenecks to telecommunication service delivery in Nigeria is high. This stalls further sector advancement and decreases affordability of services, as subscribers own multiple phones to be better assured of more reliable service. The phone companies experience high operating costs due to other infrastructure deficits, most notably security, electricity and transportation. Their profitability is under pressure as average revenue per user (ARPU) has declined from about $40 per month in 2001 to about $9 per month this year. Also, the rural telephone program that was meant to create parity between urban and rural tele-density is yet to have meaningful impact. It is projected that voice telephony subscriptions will surpass 128 million by 2014 anyway, and in the past decade post-deregulation, approximately $16bn has been invested in projects related to mobile services to serve the estimated 80 million or so customers.  This suggests that another $12bn may be required for the next generation of broadband data and video delivery infrastructure in the coming three  or four years. The case for the merger of the NCC and the Nigeria Broadcasting Commission is strong due to the technological convergence of voice, data and video and the compelling need to free up some frequency spectrum bands for this purpose. We hope to address this issue in some detail in the near future.

So what are our chances of closing the infrastructure deficit in the next 10 years? What should the authorities be doing in terms of policy making, legislation, improving the regulatory environment and direct interventions?

Nigeria's annual budget in the last few years of high oil prices has been in the region of 30 billion dollars at Federal level. The other tiers - 36 States, the FCT and 774 Local Governments combined budget an estimated 40 billion dollars annually. The private sector's role in infrastructure provision has so far been limited to the telecommunications and housing sectors. The bulk of the infrastructure burden lies, and would continue to be shouldered by the State in the medium term, and this has been the point of this column, only about a quarter of these funds  - less than 20 billion dollars nationwide go towards capital investment - infrastructure and human capital. Physical infrastructure investments hardly get more than 10 billion dollars per annum nationally. So every year, we are failing to invest some 20 to 30 billion dollars in infrastructure in our country.

A look at the 2010 and 2011 Federal Budgets illustrate how far we lag behind at the Federal level in terms of infrastructure investments. Power got N151 billion in 2010 and N91 billion in 2011. Ideally, we should be investing three to four times these in generation and transmission alone, assuming distribution assets can be privatized sometime soon. Works and Transport together were allocated N439 billion in 2010, which collapsed to N280 billion in 2011. Aviation's N45 billion in 2010 was reduced to N36 billion in 2011. Investments in water - dams, irrigation systems, etc. by the federal government was reduced from N117 billion in 2010 to N74 billion in 2011. Only the Niger Delta ministry (excluding NDDC statutory transfer) but adding the cost of the Amnesty programme increased from a total of N152 billion in 2010 to N154 billion in 2011. 

In contrast, the Defence budget increased from N264 billion in 2010 to N348 billion. The direct budget under the NSA's office increased from N80 billion to N110 billion - more than the provisions in each of the Power, Aviation, Water Resources and Transport ministries. What is commendable though is that the Health and Education budgets were increased, even though a lot of increases were in recurrent spending. The provision for education increased from N271 billion to N357 billion, while health was beefed up from N165 billion to N257 billion. Virtually every infrastructure expenditure has been cut this year compared to 2010, while recurrent spending was generally increased - an interesting choice of priorities!

Clearly we have a funding challenge, but is funding the only issue, or is there more to consider? Some would argue quite rightly that project management is a bigger problem. Addressing that requires money and professional capacity to design and supervise complex investments within budgets and on time!

It is true that funds are needed to address each of these problems, but the solution is therefore not simply increasing budgetary allocations. As a quantity surveyor, my experience has shown that poor project management is responsible for cost over-runs, delays and project failures in addition to funding constraints and corruption. To successfully bridge the infrastructure gap, we must implement reforms that profoundly shift the balance of responsibility between governments, officials, businesses and individuals. The truth is that our public service is neither organised nor capable of managing complex projects on time and within budget. Private sector expertise is badly needed which is always resisted by our public servants. This attitude has to change.

The infrastructure burden on the federal government must be reduced to enable the states to take more responsibility. Possible areas include reduction of the number of federal roads, and transferring some water projects to other stakeholders. It is illogical that the federal government is drilling boreholes in communities, when in reality, that function belongs to the local government councils. Private sector participation is critical, and the Infrastructure Concession Regulatory Commission must do more to promote this concept and reduce the financial and project management weight on the government. There is no reason why states with coal, hydro, solar and wind resources cannot invest in captive power generation.

The days of waiting for an over-stretched federal government for solutions are over, though this government, from its spending patterns and priorities underrates the urgency of our infrastructure deficits. Everyone - other tiers of government, businesses and social enterprises - must put all hands on deck to begin to address our infrastructure deficits. Unless this is done, Vision 20:2020 will become yet another Nigerian dream unfulfilled.