How should the government spend on infrastructure?

What is Buhari’s legacy as president?

Depending on who you ask, some might say that he successfully bankrupted the Nigerian economy in less than eight years. Others, however, might point to the numerous infrastructure projects he achieved over the period he was president.

One primary theme of the current administration is its focus on infrastructure. This explains why capital expenditure (capex) in the current administration (from 2015 to date) has tripled compared to other administrations in nominal terms. In real terms, however, capex has declined significantly compared to past administrations—which means that capital projects are more expensive, partly because of higher inflation rates. 

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Although increased capital expenditure shows the government’s willingness to improve infrastructure in the country, it doesn't paint the entire picture of whether its approach to infrastructural development was the best for Nigeria.

Now, infrastructural development is critical for the government at all times. But when should the government spend within its means and splurge? When should the government save, and when should it exceed its resources and even borrow to improve its infrastructure?
 

Carrying the weight of the world

Infrastructure is one of the key expenditures the government will spend on. There’s never a time when a government completely stops spending on infrastructure—it’s either creating new or rehabilitating existing ones. So, “saving” doesn’t mean that the government will shut its purse and not spend on infrastructure. Instead, the government decides to take on a few infrastructure projects, while shifting the burden of the rest of its infrastructure spending to the private sector. That is, it chooses not to overburden itself with debt while creating new infrastructure or maintaining existing ones. Splurging, on the other hand, is the opposite. The government chooses to go out of its way to spend and incur significant debt to increase its infrastructure.

So, back to our question: when is the best time for the government to save or splurge?

There are two schools of thought when it comes to infrastructure spending.

The first assumes that the government’s role is to fund the economy, while the other assumes that the government’s role is simply providing an enabling environment for private investment. For the latter, the government doesn't leave the job of infrastructure development to the private sector alone because not all infrastructure is profitable for the private sector. The government will still be engaged in providing strategic infrastructure, which may not be financially viable for the private sector. 

Infrastructure is a public good, so many countries have an implicit assumption and expectation that the government is responsible for infrastructure investment. It’s why we often blame the government for not fixing roads or not solving the drainage problem in various parts of the country—you hardly blame a private organisation for that.

That’s because the government is usually the sole infrastructure provider in many countries. According to the World Bank, 95% of infrastructure investment in Sub-Saharan Africa in 2019 was public-sector-led. Likewise, the Chinese government—through its state-owned organisations—funds most of its infrastructure (and that of other parts of the world). The government funds about 79% of the Asian country’s infrastructure. This is expected, given that China is a socialist country. In more capitalist economies like the US and other European countries, private sector investment in infrastructure is typically higher than public investment. 

However, even when the government decides to take on a significant chunk of the burden of infrastructure financing, the International Monetary Fund (IMF) recommends that some critical criteria be in place for infrastructure investment to be financially viable for the country.

They are a loose monetary policy atmosphere, efficient delivery of public infrastructure projects and reduced spending. I’ll explain.

First, there must be loose or slack monetary space—that is, the cost of borrowing must be low to reduce the impact of the government’s debt. Emerging economies like Nigeria typically have high inflation rates and interest rates(with the lower band typically above 5%, compared to advanced economies, which have an upper band of 2-3%. This means that the best time to invest in infrastructure is when the interest rates are relatively low. 

From the chart above, it is clear that the Monetary policy rate (MPR), which informs the cost of borrowing, has been relatively high, which makes it harder for the government to borrow locally to fund its infrastructure projects or any projects for that matter. Given how expensive its borrowing has become, the government should be pushing to share the burden of infrastructure financing with the private sector.

Indeed, the Buhari government has made some attempts at this. For example, the Road Infrastructure Tax Credit (RITC) scheme was introduced in 2019 to encourage private sector companies to take on road construction and rehabilitation in exchange for tax rebates. This project, which about 25 companies have taken advantage of, led to the construction of over 1500km of road across the country at the end of 2021. 

The second criterion for a viable government-led infrastructure drive relates to efficiency. Efficiency here refers to getting high returns for the funds imputed in the infrastructure project. It also means that the infrastructure has to be essential and commercially viable. There’s no point investing in building a road that won’t translate to improved commercial and social benefits for the country.

White elephant projects are quite common for the Nigerian government, regardless of the administration. The Ajaokuta steel mill, established in 1979, has yet to produce enough steel to justify the billions of naira pumped into it every year. There have also been several attempts at reviving the public refineries in the country. On the other hand, this administration has completed some milestone projects like the rail line projects (Lagos-Ibadan and Abuja-Kaduna), the second-Niger bridge and much more.

Have these projects been the best use of Nigeria’s money? Let’s use the railway projects as an example. Measuring the efficiency of the rail lines in Nigeria involves looking at critical areas like cost, commercial viability and time to market. Cost efficiency answers the question: is the project being made at the cheapest possible rate that will guarantee the quality we need? Commercial viability means that the project is likely to unlock significant economic growth in the country or that it is exactly what the country needs to achieve its short-term growth. Time to market means the government aims to complete the project in the shortest possible time without compromising quality.

We’ll consider the cost alone in this article.

Currently, Nigeria has about 4332km of narrow gauge rail line—the lines constructed by the British—which runs from Lagos to Kano (western line) and Port-Harcourt to Maiduguri (Eastern line). So, the government could either rehabilitate the existing line or build another. The government decided to rebuild a new one for some parts of the Western line and opted to rehabilitate the Eastern line.

The rehabilitation covering about 1,433km costs about $3 billion, while the Lagos-Ibadan (143km) portion of the Lagos to Kano (1,343km) costs $1.5 billion alone. Therefore, taking cost alone, it appears that rehabilitating the rail lines might have been a much better option for the Nigerian government.

The efficiency criterion has more to do with prioritisation than anything. Essentially, the government must ensure that it’s not only spending on any project but choosing the most relevant and efficient project for the country's benefit.

Finally, the third thing that will guarantee maximum viability for an infrastructure project is reduced spending. When the government borrows to fund the infrastructure, it must reduce its spending or increase revenue, to compensate for the debt it’s incurring. 

As the chart below shows, the current administration has taken on a significantly higher budget deficit than previous administrations, primarily due to incurring more expenses while revenue has been too low. 

Going by these criteria, it is glaring that the Nigerian government should not be splurging on infrastructure. Borrowing was expensive, and the government was not very cost-efficient in choosing its projects. And even while borrowing rapidly to fund the projects, the government did not reduce its spending to make up for the increased debt expenses.

But the current administration has been so consumed by its goal of improving Nigeria’s infrastructure that it has sabotaged the country’s fiscal health.  You probably know that the government has taken on significantly more debt than previous administrations. Still, just as a reminder, the chart above shows how the government’s budget deficit (financed by debt) has increased significantly over the years. 

This is a far cry from the fiscal prudence and conservatism of the previous administrations (1999-2014), which aimed to restore Nigeria’s fiscal stability. Between 1999 and 2004, the President at the time went on a Public Relations (PR) spree seeking debt forgiveness and advertising Nigeria as an ideal investment destination. Previous administrations were keen on keeping their budget deficit low and, in some cases, even maintaining a balanced budget while unlocking growth through the private sector by creating an enabling environment for private investment.
 

Crowding in the private sector

One legacy of the Obasanjo administration was the privatisation of various sectors. For instance, privatising the telecommunications sector led to the creation and maintenance of critical infrastructure for the telecoms—from submarines to terrestrial fibre optic cables in Nigeria.  For instance, the impact of MainOne’s infrastructure, coupled with the influx of Internet Service Providers (ISPs) into Nigeria, led to an 80% decline in the price of internet connectivity in the country. Likewise, the progress of telecoms giants like MTN, Glo and Airtel cannot be denied in improving the growth of the Nigerian economy.

Therefore, although the administration at the time was not too keen on burdening its budget with infrastructure spending, it transferred the burden of infrastructure development to the private sector through its market liberalisation policies.

It’s important to consider that the Nigerian economy was in distress in 2016 and 2020,  and this threatened private investment. Foreign investment in both years declined significantly. Theoretically, when investment is low, the government is advised to step in to unlock growth by spending on labour-intensive sectors such as infrastructure to unlock economic growth. This appears to be the strategy the present administration has adopted, considering that it has splurged on infrastructure by spending more (nominally) on capital projects than the previous other administrations. However, even with the increased investment in infrastructure, that hasn’t induced commercial activity—which should translate to economic growth.

The IMF estimates that the private sector can contribute $50 billion (3% of the GDP) to developing the economic and social infrastructure in Sub-Saharan Africa. In 2019, private infrastructure funding in the region was about $5 billion, from $15 billion in 2012.

However, the right incentives need to be in place. An environment where private investors are willing to invest in, as one where “interest rate is low, inflation is low, exchange rate is stable, there is not a significant amount of insecurity, the regulatory environment is safe, stable and well understood,” Fola Fagbule, a Deputy Director, and the head of financial advisory at the Africa Finance Corporation says in a conversation with Stears.  Therefore, putting these factors in place will create an enabling environment which will incentivise private investment.

Another kind of incentive is viability gap funding. This is when the government gives private sector investors some kind of grant or tax rebate for taking on infrastructure project financing. This is a policy route the present administration has taken through its introduction of the Road Infrastructure Tax Credit Scheme (RITC), which gives companies a tax holiday when they take on road construction on the government’s behalf. However, the Senate has requested that the ministry of finance review these waivers to ensure compliance by the private sector.

Summarily, the present administration had options to transfer the burden of infrastructure funding to the private sector. While it has done this, like in the case of the RITC, it has also taken on more infrastructure projects and even incurred significant debt in the process.

To answer whether the government was right to splurge on infrastructure from 2015 to date, the answer is no.  All the factors identified in this article point to the need for the federal government to stop attempting to save the country by taking on the burden of infrastructure development. Rather it should create the right atmosphere for the private sector to come in, and it would usher in more funding with less pressure on the national budget.