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Asia-PacificApril 6 2008

A state of disrepair

The dire state of Nigeria’s transport and power sectors are hindering the country’s growth. President Yar’Adua has made tackling the problem a priority for his administration but the sheer size of the task makes international investment crucial. By John McCarthy.
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Nigeria’s transportation, utilities and communications infrastructure is extensive, but in many respects decrepit and often critically overburdened. The rehabilitation of existing infrastructure and its ongoing expansion has repeatedly been identified as one of the critical challenges facing the country’s government. For this it will need foreign investment on a huge scale, as even the windfall oil revenues that the country has enjoyed in recent years are not equal to the task.

President Umaru Yar’Adua has vowed that his new administration will continue the infrastructure improvements begun by his predecessor Olesegun Obasanji. His budget for 2008 reflects the importance the government attributes to this, with some N225bn ($1.95bn) – nearly 7.8% of total expenditure – dedicated to the power sector alone.

Government investment infrastructure, however, represents only a small proportion of overall requirements. Private financing is therefore being sought from multiple directions. Domestically, banks such as First Bank of Nigeria have spotted lucrative financing opportunities, establishing partnerships with Nigerian entrepreneurs tendering for major infrastructure contracts. For the time being, however, international investors backed by international banks still offer the greatest potential in terms of investment volume. They continue to tender for the vast range of government contracts, but in an era of increasing corporate environmental, social governance and auditing concerns, many have grown more risk-averse in a country that has become a byword for corruption.

Chinese influence

Yet Nigeria is no longer the preserve of foreign investors from the West. Replete with dollars generated by its booming economy but starved of the hydrocarbons and minerals to feed it, China has sent its state-funded corporations on an investment and construction spree in Africa, seeking privileged access to raw materials in return.

Chinese bidders have secured an $8.3bn project to rebuild the neglected Lagos-Kano railway, as well as agreeing a further $4bn worth of contracts for refineries and power infrastructure in return for oil concessions. Meanwhile, the China Development Bank (CDB) has struck a major deal with Nigeria’s United Bank for Africa (UBA) to jointly fund infrastructure projects, with the recent reports suggesting CDB is seeking a $5bn stake in UBA itself.

China is not alone in such state-driven investment and quasi-state development aid. India too has begun to make its presence felt. A deal granting oil exploration blocks to ONGC Mittal Energy in return for rebuilding the Port Harcourt-Kano railway and constructing a coal-fired power station, worth a potential $6bn, has been in place since 2005. Meanwhile, Russia’s Gazprom has recently signalled its interest in the country, offering to invest billions of dollars in Nigeria’s underdeveloped gas sector.

Contrary to early optimism and rapid progress elsewhere in Africa, however, Chinese-backed infrastructure projects in Nigeria have not progressed smoothly.

Despite fewer scruples, lower labour standards and abundant state subsidies – which have often enabled China’s enterprises to prosper where western investors have feared to tread – Beijing’s protégés are increasingly running up against the same problems of corruption and politics that have long dogged other investors in Nigeria, a situation they may only overcome through extended negotiations or fresh cash injections. Similarly, ONGC Mittal’s project has stumbled amid reports that its acquisition of oil exploration blocks could be re-examined by the energy ministry.

Power struggle

Industrial enterprises, public services and households across Nigeria have long suffered dismal electricity supplies. Inadequate power affects all aspects of life, from basic water supplies, to the functionality of schools and clinics, to transport safety.

The government has injected $10bn into the construction of new generating plants since 2000, but corruption and management failure in the National Electric Power Authority – now reconstituted as the Power Holding Company of Nigeria (PHCN) – repeatedly thwarted former president Obasanjo’s ambitions to boost Nigeria’s available generation capacity from a lowly 1750 mega watt (MW) to 10,000MW during his eight-year rule. By the end of his tenure, it had reached 3500MW, enough for each Nigerian to light a dim 25 watt bulb at best.

Independent thinking

The problem is still so acute that construction projects of all kinds routinely incorporate independent power supplies into their design from the outset. Meanwhile, blackouts remain a daily feature of Nigerian towns, with grid outages countered piecemeal by the widespread use of private diesel generators and open fires, which in turn contributes to chronic air pollution in urban areas. Ironically, all the while Nigeria continues to flare enough gas to power half of Africa.

Little is known about the country’s total energy requirement, yet generation capacity is incontrovertibly deficient and poorly maintained. The transmission system, besides being radial and unable to support more than 5000MW, suffers from poor planning and weak dispatch and control systems. Meanwhile, distribution systems are typically worn out and subject to high levels of power theft.

In reserving the portfolio of energy minister for himself, Mr Yar’Adua has signalled his intention to tackle the power crisis head-on, including related gas supply issues. The government acknowledges that the task will require huge foreign investment to complement its own efforts. On the positive side, unbundling the PHCN is already under way, with the Indian Power Grid Corporation lined up to take over transmission responsibilities.

While the Federal Government concentrates on resuscitating the conventional power infrastructure, state and local governments will be charged with expanding rural access to electricity using non-conventional sources: solar, wind, biomass and mini-hydro. Wind mapping around the country suggests that wind farms in the megawatt class are viable and several pilot projects are planned to prove the concept and encourage emulation by private investors.

Yet no quick transformation of the sector looks likely, not least because of the ongoing absence of a co-ordinated strategy and the apparent lack of commitment to thoroughgoing reform. Among the knottiest of issues deterring investors is the absence of an adequate tariff model to enable the transition from heavily subsidised public utilities to unsubsidised commercial operations.

As this would shift the burden of pain increasingly onto the shoulders of consumers, the government has been reluctant to bite this particular bullet. Unsurprisingly, corruption also continues to be a stumbling block. Nigerians, however, remain optimistic. A recent poll showed that 57% thought President Yar’Adua would deliver on his promise of 10,000MW of new generation capacity by March 2009.

Mobile population

With about 1.7 million fixed-line and 33 million mobile telephones in use, Nigeria has an overall teledensity of 25%. Nigeria Telecommunications (Nitel), the country’s monopoly fixed-line provider until 2002, had a miserable reputation before its part privatisation, having installed a mere 720,000 lines – one-third of them still analogue – to serve a population of 140 million. Competition tripled the number of fixed-line subscribers within six years, but ample opportunities for further expansion and modernisation remain. Several mobile telephone companies operate nationally, exploiting the manifest shortcomings of the fixed-line network.

The purchase of a 51% stake in Nitel and its mobile arm MTel by Transnational Corporation (Transcorp) in 2006, with the associated promise of a technical partnership with the UK’s BT and substantial new investment, held considerable hope for the future. But since the deal with BT fell through, various reports have suggested that privatisation might be reversed, although the government insists that Transcorp will retain its 51% stake until a new core- investor is found. The affair has nevertheless led some to question the robustness of the government’s commitment to reform.

By the end of 2007, Nigeria had nearly 2000 internet service providers and more than eight million end-users. Although this is the highest in Africa, representing more than 18% of users on the continent, internet density is relatively poor at only 5.9%, compared with 7.5% in Kenya, 9.9% in Zimbabwe and 11.6% in South Africa. Besides better information flows and access to education, internet access may tend to underwrite transparency and ameliorate corruption through automating payments due to state bodies, and thereby avoiding depredation by intermediary officials.

Road blocks

In the absence of adequate alternatives, Nigeria’s roads carry about 95% of all freight and passenger traffic. Most are unpaved and were never designed for the capacities they now carry. They are consequently crumbling, slow and dangerous. Since 2004, the Federal Road Maintenance Agency (Ferma) has been undertaking an urgent roads rehabilitation programme.

In 2008, Ferma will receive $600m in addition to its annual $350m road-maintenance budget to prevent what it describes as an “imminent collapse” of Nigeria’s road infrastructure. The extra money will allow some 3500 kilometres (km) of roads to be upgraded annually, with the entire federal roads network scheduled for attention over the next eight to 10 years.

The sector continues to suffer from weak strategic planning, while value for money from competitive private sector tendering has been compromised by dubious contracting procedures and inadequate quality control. Attempts to address these problems have not been rigorous, although the government’s recent indication of its willingness to consider road pricing schemes might attract a new round of foreign investment.

Nigeria’s rail system comprises some 3500km of mostly 3 foot 6 inch-gauge single track, with main lines running inland from Lagos and Port Harcourt to Kaduna, Kano, Kaura Namoda, Nguru and Maiduguri. The network has been plagued by decades of under-funding and poor maintenance.

Under President Obasanjo, the government took major steps towards rehabilitating the existing network, offering investors 25- to 30-year concessions for operating sectors of the system. Most importantly, the China Civil Engineering Construction Corporation has been contracted to modernise 1300km of the decrepit western region. Similarly, ONGC Mittal will upgrade a large section of the eastern region. In an attempt to move freight more efficiently, both domestically and internationally, inland container depots serving extensive hinterlands will be built at Ibadan, Jos, Abia, Kano, Maiduguri and Funtua.

Investment in new rail lines has also been sought. China’s Guangdong Xinguang International Group plans to invest an initial $2bn in building a high-speed railway between Lagos and Abuja. Another high-speed rail line is planned across the eastern Niger delta, linking Port Harcourt and Yenegoa, the capital of Bayelsa state. Meanwhile, the long-planned extension of the central region’s standard gauge line to an expanded port at Warri would dramatically increase freight and passenger capacities in the densely populated south.

Water solution

Waterways have also long been an important part of Nigeria’s infrastructure, particularly in the south, where the Niger and Benue rivers constitute the main arteries of 8600km of navigable rivers and creeks, although much of it impassable during the dry season. Coastal shipping is also significant. In order to relieve congestion on the overburdened road system, the government has invested heavily in the construction of small ports and jetties along the waterways. Major ports at Lagos, Port Harcourt and Calabar handle most international trade. To attract investment for upgrading outdated facilities, the Nigerian Ports Authority has offered operating concessions to the private sector.

Emerging from turmoil

Nigeria boasts 22 major airports, four of which (Lagos, Kano, Abuja and Port Harcourt) handle international flights, while a further 50 smaller airfields serve outlying districts. Passenger traffic has more than doubled since 2000. However, the country’s aviation industry is only slowly emerging from a decade of turmoil in which undercapitalisation and corruption led to safety compromises and infrastructure deterioration. During 2005 and 2006, three domestic aeroplane crashes killed more than 300 people, exposing what one industry insider called “systemic failures”.

In response to these shortcomings, the government has ploughed $150m into overhauling runways, navigational systems and other infrastructure and mandated the recapitalisation of all airlines by 2007, leaving the country with 10 operators. Internationally, most hopes rest with Virgin Nigeria Airways (VNA), a joint-venture between Nigerian institutions and London-based Virgin Airways.

This new national carrier has rapidly developed a network of domestic and west African regional routes connecting with its long-haul flights. However, VNA’s strategy of developing Lagos as a hub for west Africa – a key dimension of its establishment and ongoing profitability – has been set back by the government’s insistence that the airline divides its domestic and international operations between two terminals at Lagos airport. Successive Nigerian administration’s have proved themselves adept at convening committees, analysing problems and promulgating grand strategies; but much less so at instigating effective action in the face of vested interests.

The willingness of Mr Yar’Adua’s government to square up to corruption, both within its own ranks and beyond, could well make the difference between success and failure for its ambitious, much-needed and globally backed infrastructure programmes.

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