How does Lagos state spend its money?

Year after year, Lagos generates the highest revenue, attracts the biggest foreign investment and borrows the largest amount of money among Nigerian states. But living conditions in the city are worsening. Should they?
 

I live thirty minutes from Lagos’ border to Ogun state, yet it takes me at least four hours to get to work at Lekki in Lagos on the morning of any weekday. If the weather isn’t great, I might not even finish the journey to work because floods will keep vehicles at standstill traffic. The journey back will take another four hours if I make it to work, so that’s at least eight hours on the road in one day.

You might think my travel time is long and hectic because I live outside of Lagos. The irony is that I spent roughly the same time commuting when I lived in Lagos, but thankfully, I now work mostly from home.

Commuting is one of the most striking examples of how bad it can be to live in Lagos. But the latest Economist Intelligence Unit (EIU) report on liveable cities shows there is more to be wary about in Lagos.

For the 3rd time in a row, Lagos bagged the title of the second least-liveable city in the world.





Yet, the southwestern city remains “Nigeria’s economic capital”. Lagos was just a little above Syria’s war-torn capital, Damascus, and a place behind Libya’s Tripoli. Both cities are hotbeds of wars, conflicts and terrorism. The other cities at the bottom of EUI’s report ten are Karachi, the largest city in Pakistan, and Algiers in Algeria. Others are Port Moresby, Dhaka, Harare, Doula and Tehran, the capital of Iran.

Still, the state is famed for its economic prowess based on monetary terms, like an output of $145 billion in 2016. According to official estimates, this represented more than a third of Nigeria’s gross domestic product and about half of non-oil GDP.

The city is also the centre of Nigeria’s investment activities—think of the stock market, seaports, and airports. It’s home to most of the country’s manufacturing activities, a pan-African banking industry, and a music, fashion and film scene reverberating around the continent. More recently, Lagos has become a tech hub to rival Nairobi’s Silicon Savannah.

However,  lived experiences in Lagos suggest that the title: “Nigeria’s suffer-head capital”, sits better. Whatever you gain in Lagos is usually under significant duress. And most of the admiration for the state reduces when you realise effective governance contributes little to Lagos’ economic label. The title is just being slapped on by the efforts of people enduring life and pumping funds into one of the worst places to live on earth.

This raises a paradoxical situation.

How does Lagos manage to fall short of its mega city status even as the city continues to attract huge inflows of capital and revenue generation?

Unpacking this question will require further probing. But first, some context on the EIU report.  
 

Was Lagos judged sensibly?

It might seem unfair to produce a ranking that compares Lagos to other global cities in well-developed countries. Naturally, you could argue that the results are skewed towards cities with richer economies. As such, multiple critics, including the World Economic Forum, have questioned the EIU’s methodology citing problematic metrics such as culture that cannot be objectively measured. Regardless, this index is one of the few comprehensive attempts at quantifying an individual’s lifestyle challenges in selected cities worldwide.

For instance, the index ranked 173 cities worldwide on social stability, culture and environment, healthcare, education and infrastructure in 2022. Based on the survey, a score of 100 indicates that liveability in a city is ideal, and 1 means that it is intolerable. Also, some of the things the index tracks aren’t that controversial, for example, crime rates and the efficiency of transportation networks. All are important and improve one’s experience of a city.

Each metric gives a clearer picture of how a city is faring. On infrastructure, the EIU measures the quality of the road network, public transport, international links, housing etc., basic infrastructure for which Lagos often borrows funds. Here, the state scored 46.4 out of 100—its highest score across the surveyed categories. Although the state beat seven of the ten least liveable cities with its 46.4 score, it was still a little shy of the median mark and lower than Pakistan’s 51.8 points.

One argument against this metric, especially for developing countries, is that progress is unlikely to change significantly from one year to the next. That is, the metric is static. Again we see how the index might place developing countries’ cities at a disadvantage.

This thinking is true considering the time it takes to implement infrastructure development. But should such a change be invisible even after four years? I mean, that’s a whole political term, going by most democratic election standards.

Going by the report, Lagos has not recorded any change in its infrastructure score since 2019. Sadly, the same or a worsening performance is what we see for other indicators.

On stability which primarily measures crime, terror, and conflict, Lagos scored the lowest score of 20 same as four years ago and similar to Syria’s Damascus and Pakistan’s Karachi. 

Stears has sounded the alarm bells of worsening insecurity in the country since last year. Lagos accounted for the fourth-highest reported violent incidents in the country between 2017 and 2020, according to the Armed Conflict Location & Event project (ACLED).
 

On healthcare which measures the availability and quality of private and public health care, including general health care indicators, Lagos scored 20.8—the lowest and a 16.7 points drop from its 2019 score of 37.5. Again, we only need to look at where the state’s top politicians receive services as slight as a medical check-up to know how well they think Lagos’ hospitals and clinics are faring.

The education metric indicates Lagos won’t rank highly on any child’s dream city list. This year, Lagos bagged 25, eight points lower than the 33.3 secured in 2019.

Generally, the EIU’s metrics spotlight how others (read: foreigners) perceive Lagos as a city. That’s why it’s not surprising that the indicator for weather conditions might not score so well (44.9 compared to 95.4 for Denmark’s Copenhagen). That leaves out the opinions of actual residents in the city. But if you recall my detailed commuting experience within Lagos, you will see that the EIU might not be too far off.

As such, the EIU, even with its limitations, reveals one striking fact—as Lagos continues to attract over 80% of the country’s foreign investment, this wealth does not translate to broader economic gains across the city. 
 

Lagos’ wealth

Essentially, you expect that people move to a state like Lagos because it is safer and has more social opportunities—hence more people to tax. Historically, this was the case. With the state being closer to trading opportunities, people migrated from the rural areas to rapidly develop Lagos. Also, businesses are drawn to set up there because it’s easy to reach their customers, receive their raw materials, or find workers—again, more state revenue-generating opportunities.

The problem is that only the revenue side of this assumption is proving true.

In the last six years, the state has raised over two trillion naira from citizens and companies resident within its borders in the form of internally generated revenue (IGR), predominantly taxes.

The next Nigerian state to have made significant IGR in the same period was Rivers at ₦602 billion—just a little over a quarter of what Lagos raised.
 

Nigeria’s federation account allocation committee (FAAC) is another popular source of state income, and many Nigerian states will be bankrupt without it.

As Dumebi, Stears’ economic analyst, explained a few weeks ago, solely depending on FAAC to run a state is irresponsible because FAAC can be likened to the pocket money you get from your parents. It has tragic ripple effects when things go wrong with a parent’s business (as it is currently doing with Nigeria’s federal government). As you might know, FAAC is mainly funded by oil and taxes. But oil revenue is no longer promising, and taxing people who have fallen deeply into poverty or businesses struggling to survive is not particularly lucrative.

However, IGR and FAAC are almost always focused on when analysing how states make money. No surprise there—IGR helps us understand how well a state uses internal resources—from people to raw materials—to generate income, and FAAC can be likened to a windfall. 

But one more income source gives us a state’s total revenue potential.
 

Going by the infographic above, the final and arguably most important money source for states is capital imports. This revenue category doesn’t come from within the state’s coffers per se.

Investors from outside the state or country are the usual source of imported capital. So, think of foreign direct investment (equity), foreign portfolio investment (equity, bonds, money market instruments), and loans.

The National Bureau of Statistics (NBS) puts these three parameters together, gives them the tag: “Capital Imports”, and releases a report on their status every quarter. The FDI, in particular, is another reason the EIU's report matters. Remember, the EIU’s metrics spotlight how foreigners perceive Lagos as a city, which may influence investors' interests in setting up businesses in the city.

Again, it’s no surprise that Lagos still reigns supreme among other Nigerian states when assessing these funding areas.

Lagos accounted for more than 90% of capital importation in nearly all months of 2016. And even though Abuja (the country’s political powerhouse) is generally the state to import the second-highest capital value, Lagos’ import is always far higher. Between 2019 and the first quarter of this year, Lagos imported roughly $33 billion, while Abuja came in at a very distant second position after importing $9 billion.

When a state has as much revenue as Lagos does, the general expectation is that the state is thriving on the facilities it has put in place. You expect minimal challenges as an individual or business, so you are happy to pay the levies and tax the state dishes. Investors are happy to pump in money either by buying the state's infrastructure bonds, loaning it capital (FPI), or setting up businesses (FDI) because they are confident of returns.

So far, we’ve established that Lagos has loads of money compared to other states. The kind of money that is reasonable enough to drive steady and identifiable improvements in living conditions. 

So why is Lagos not showing progress?

 

Building liveable cities

The irony is that the state also borrows stupendously to avoid a situation where it is seen as unliveable.
 

Last December, the state raised over ₦130 billion, from the capital market for infrastructure. This figure brought the total amount of bonds issued for infrastructure to ₦378 billion or 76% of its planned ₦500 billion debt issuance programme.

“Proceeds from this bond will be used to finance infrastructure projects, primarily in roads, environment and healthcare,” Sanwo-Olu, the state's governor had said, echoing words similar to his predecessors.

The state’s past governors have raised, earned and borrowed significant amounts to rehabilitate, construct and maintain projects that are still undergoing rehabilitation or construction today. For instance, between 2010 and 2017, the state borrowed ₦225 billion part of which was claimed to be used for road construction projects like the Lagos-Badagry dual carriageway among others. A quick check on google earth will show that as of 2017, the project hadn’t been completed. I took that route last December and still faced inconveniences caused by materials meant for construction that were abandoned on the road. Part of the funds was meant to develop the state’s blue rail line, but it's more than ten years and Lagosians are still wondering when they will see at least one line of the light rail work. 

As of March 31, 2022, Lagos’ domestic debt stock was ₦780 billion—16% of total domestic debt, according to the Debt Management Office, DMO. The state’s foreign debt was $1.4 billion—30% of total foreign debt taken by states and the FCT (excluding the federal government). 

While capital raised for infrastructure makes it the most indebted state in the country, the state’s capital expenditure is still the largest in the country. And capital expenditure per person living in the state is also almost the largest despite the state’s huge population.

Capital expenditure or Capex represents the money spent by the government to acquire or build fixed capital assets, invest in projects like schools, hospitals, and roads, or buy security equipment.

But even these figures provide a false sense of accomplishment because if Lagos has these challenges despite such investment, there is little hope for other cities in Nigeria. The truth is that Lagos does not spend enough to make its city liveable.
 

Going by the state's recent audited financial statements, you’ll see that Lagos typically spends more on operating expenses than capital expenditures that have been proven to yield the kind of results that would make a city liveable. 

The world bank has a  benchmark that suggests governments should spend at least 5% of their GDP on capital expenses like energy, transport and water.

Lagos’ GDP figures for 2016 (the latest) compared with the state’s capital expenditure for the same year falls far short of the World Bank's recommendation. In 2016, Lagos spent ₦215 billion on capital projects, which was 0.79% (less than 1%) of its ₦27.1 trillion GDP officially recorded for the same year.

It appears that the state might need to spend loads of money to at least compete with the kind of infrastructure we see in cities like Johannesburg, Accra, and Nairobi. But as we say at Stears, the government need not build alone. When there are accommodating policies and operating environments, businesses will come from overseas and build. MTN, Shoprite, Deloitte, etc., are examples of foreign businesses that have been headquartered in Lagos, built businesses and contributed to infrastructure growth. For example, MTN built and donated the popular Lagferry terminal in Ikoyi to Lagos. Shoprite malls also famously have centres that boost recreational activities within the city.

With all of its wealth, and the potential to attract more, what we should expect from the state is certainly not the world’s second-worst livable city.