Is Nigeria’s capital expenditure meaningful?

Never in the history of Nigeria has government spending been so high or risen so rapidly—at least in nominal terms.

Budgeted (planned) expenses for this year (2022) alone were over ₦16 trillion—23 times higher than in 2000. Government (actual) spending has also averaged ₦6 trillion in the last decade, thanks to the spike witnessed during the Buhari administration (see above chart). Compare this to an average of ₦500 billion spent annually between 2000 and 2010.

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But there is nothing wrong with spending money or spending it in huge amounts. What matters is how money is spent—and for the federal government, its spending is in two broad areas: capital (e.g. building schools) and recurrent expenditure (e.g. paying back interest on loans).

Economists favour more capital project spending because it often has a significant positive impact on economic growth both in the short and long run. This is unlike recurrent expenditure, which still has a positive but often insignificant impact on economic growth. 

The Buhari administration claims its increased spending is due to aggressive investment in critical infrastructure. To its credit, the FG has delivered several capital projects, from trains to roads and electricity infrastructure. 

Yet, Nigerians are also familiar with the alarming inability of the federal government (FG) to dedicate adequate funds for capital projects. Yesterday, we showed how most of the federal government’s spending is unproductive, with very little earmarked for capital projects. And when the FG borrows, most of the borrowed funds are for maintaining recurrent positions. For instance, of the ₦1.4 trillion the FG borrowed as domestic debt as of June 2020, it only spent ₦446 billion on capital items.

With next year’s upcoming elections, funding for capital projects will not be different. Projections from the 2023-2025 medium-term expenditure framework (MTEF) show that capital expenditure (capex) will be lower than in previous years. If the government retains the petrol subsidy, budgeted capex will drop by 44% next year to ₦3.3 trillion from ₦5. 9 trillion planned for capex in 2022. Even if the government implements a subsidy reform, capex will still decline, but just by 25% to ₦4.4 trillion.

But why does capex matter, how has capex fared in the past, and is the FG’s capex adequate to drive infrastructure improvement in Nigeria?

To answer, we will look at Nigeria’s capital expenditure over time and review how much Nigeria should spend on these projects to deliver its economic growth objectives. Afterwards, we will contrast how much Nigeria spends with how much it should. Finally, we will examine the factors influencing capex to deliver infrastructure improvement in Nigeria.

Why does capex matter?

Nigeria’s need to invest in capital projects has never been more urgent. For instance, about 45% of us don't have access to grid electricity, and even those that do, don't have reliable electricity. Consequently, Nigerians spend $14 billion on generators yearly, which is alarming.

Infrastructure gaps such as poorly funded hospitals or lack of electricity reinforce poor living standards and constrain critical linkages between communities and markets. Yet, these capital goods are essential in improving output across economic sectors. Without them, businesses can’t grow, their losses pile up, and many eventually shut down.

Every year, Nigeria loses huge manufacturing firms with the ability to employ hundreds due to poor infrastructure. According to the manufacturing association of Nigeria (MAN), at least 75 out of 150 manufacturers in the southeast shut down their operations due to bad access roads and other poor infrastructure in 2017.

In addition, inadequate infrastructure influences international firms’ preference for neighbouring countries like Ghana when choosing where to invest and setting up African offices. For instance, a few days after Twitter, the micro-blogging site, announced plans to set up Africa headquarters in Ghana, the German government said it had chosen the former Gold Coast country as the location for the West African Centre of Global Health.

Although other factors, such as bureaucracy, affect these decisions, Nigeria’s underlying structural issues, from inadequate transport to power infrastructure, still discourages much-needed investment in the country.  India, the world’s poverty capital less than five years ago, became the world’s fifth largest economy last week. The country achieved this feat because it could attract and cater to global manufacturers and service providers.

Consequently, the Nigerian federal government has reinforced its need to invest in the health, housing, education, security, and transportation sectors. Last year (2021), the government introduced the National Development Plan (NDP) for  2021 and 2025, which outlines processes to bridge its infrastructure gap.

This plan, which will cost ₦350 trillion to implement, shows that the Nigerian government (federal, state and local) must invest ₦49.7 trillion—roughly ₦10 trillion yearly to tackle our ailing infrastructure. However, the federal government’s share amounts to ₦30 trillion or ₦6 trillion per year.

 

With effective implementation, which includes allocating at least 30% of the budget to capex, the plan is expected to achieve average economic growth of 4.6%, lift 35 million people out of poverty and create 21 million full-time jobs.

Nigeria has similar recommended spending plans to close its infrastructure gap. For instance,  the African Development Bank (AfDB) recommended spending $3 trillion over 30 years—about $100 billion or over ₦30.5 trillion annually, which is 3x bigger than the NDP’s projections.

To be frank, these capex projections sound unrealistic, especially when you remember that the federal government’s average budget (total expenditure) since 2015 has been just ₦8 trillion.

However, the projections make sense after considering the value of capital goods (infrastructure such as hospital equipment) in the country that the government and private sector must maintain and the infrastructure vacuum the government still needs to fill. 

A good metric for determining the level of infrastructure investment developing countries need is gross capital formation (GCF). It captures a country’s domestic investment in infrastructure such as roads, schools, hospitals etc. Generally, the higher the GCFof an economy, the faster an economy can grow.

So, it's a useful gauge that countries aiming for growth need to know the level of investment required to replace their older capital goods and get new ones to efficiently produce goods and services. According to the World Bank, Nigeria’s GCF as of 2021 was $74 billion (₦34 trillion at official rates of ₦416/$1), significantly higher than other African peers. 

At ₦34 trillion, Nigeria’s 2021 GCF value is close to the NDP’s projected ₦50 trillion investment in capital infrastructure. This matters because production declines if a country cannot replace or create capital goods as they reach the end of their useful lives, again think of roads, hospitals, schools etc.

To recap, capex is important for improving Nigeria’s infrastructure. While there’s no universally accepted benchmark, available estimates from the NDP and GCF show that we need about ₦34 trillion to ₦50 trillion worth of capital investment to close Nigeria’s significant infrastructure gap. So how is the government meeting up with its infrastructure funding projections?
 

How much is the FG spending on capex?

Looking at nominal capex figures, one can argue that capex is faring well. Similar to total government expenditure, nominal capital expenditure (capex) picked up during the Buhari administration.
 

According to data from the Central Bank of Nigeria (CBN), capex more than tripled between 2015 (₦800 billion) and 2021 (₦2.5 trillion).

The numbers from the budget office are slightly different, but they tell a similar story. The actual amount spent on capital expenditure appears to have improved so much that Nigeria’s capex in the first four months of 2022 (₦1.8 trillion) was almost five times larger than capex for the whole of 2015 (₦380 billion).

When we compare the pace at which capex is growing to total expenditure, capital expenditure also appears to be growing much faster.
 

For instance, while the FG increased capital expenditure in 2021 by 95% from 2020, total expenses for the same period grew by 20% only.

So far, we see that capital expenses appear to be rising. Still, when we account for inflation, one of Nigeria’s most violent economic variables, the capex story takes an interesting turn. 

We all know how badly inflation has eroded the naira’s value. We can’t complete a two-kilometre road project today with the same ₦500 million it would have cost us ten years ago. So, as the currency depreciates, the naira value of capital projects grows too.

Unsurprisingly, rebasing Nigeria’s capital expenditure shows the federal government is simply spending the same amount of money (in real terms) or even less than it spent a decade ago, as seen in the chart below. 

When we account for inflation by rebasing the nominal capital expenses, the federal government spent less on capital projects in 2021 (₦613 billion) than it did in 2011 (₦729 billion). So, even with the federal government improving the amount of money spent on capital expenditure, the reality is that this improvement needs to be higher to account for inflation.

More importantly, nominal and rebased figures don’t come close to Nigeria’s proposed capital expenditure target. Remember, going by the NDP, FG’s capex should be at least ₦6 trillion yearly.

But other metrics beyond the NDP projections also dictate how the federal government should spend on capex. For instance, the federal government proposes capex in the budget that the national assembly often reduces. Still, when even the reduced funds get approvals, capex suffers. Let’s see how. 

How the FG keeps capex inadequate

It’s hard to find a universally accepted benchmark for deciding on adequate capital expenditure. But as discussed earlier, the federal government aims to dedicate 30% of the total budget to capital projects. However, the share of total expenditure that goes to capex has remained roughly at the same level in the past decade—17% in 2021, compared to 16% in 2011.

And despite failing to make capex at least 30% of the budget, the government still ends up spending even less than it eventually proposes—either due to a slashed proposed amount or poor implementation. Let’s look at examples of the latter.

The chart below shows that the actual money spent on capital expenditure is often much smaller than the approved budgeted amount.
 

Bear in mind that even the approved budget amount is a smaller piece than the amounts MDAs, and the FG has initially proposed. This situation is often responsible for the lack of funds excuse we often hear when a capital project has been abandoned or not properly done.

Yet, government officials allow duplicated and white elephant projects to eat into tiny available capex funds. For instance, BudgIT fished out nearly 500 duplicated projects in the 2022 budget, amounting to  ₦380 billion.

One example of such projects is the Ministry of Environment which wants to construct “Gun Armouries” in four recreational parks with ₦68 million in Cross Rivers, Kaduna, Borno & Yobe States. Yet, the Ministry of Environment is not a security agency. Neither is the nation at war. 

This is not a first, either. Last year, BudgIT identified 316 duplicated projects in the 2021 FG Budget approved by the national assembly. However, the Budget Office confirmed the existence of only 185 duplicated projects worth ₦20 billion and informed the public that funds were not released for those projects in 2021.

So, even when capex increases, there are no guarantees that the spending will be on projects that matter. Also, despite these reactionary steps to boost capex where it matters, recurrent expenditure, already three to four times bigger than capex, still goes overboard. For instance, in 2021, actual recurrent expenditure (like debt payments, salaries and pensions) of ₦9.1 trillion was still ₦55 billion higher than its approved expenditure.

Essentially, the average actual capital expenditure (₦1.4 trillion) since 2014 is ₦1 trillion lower than budgeted or approved capital expenditure (₦2.4 trillion). And when we account for inflation, the figures are nowhere near how much we should spend to preserve our capital goods. 

Another vote to boost capex

While the FG claims its aggressive investment in critical infrastructure has led to expansionary fiscal policies, as evidenced in the ballooning budget and the rise in total expenditure in the recent past, they’ve had little impact on capital expenditure in real terms. 

However, capital expenses must grow and be impactful to see tangible economic growth and development. Improving capital expenditure entails approving bigger allocations to capital projects and ensuring approved funds are not syphoned.

The bulk of the FG’s capex still goes to its ministries, departments and agencies (MDAs) instead of the more efficient and transparent method of tying capex to specific projects. This shows government officials have a significant role in boosting infrastructure in Nigeria. For instance, capital expenditure to MDAs was ₦2.9 trillion or 85% of the total ₦3.4 trillion capital expenditure disbursed in 2021.

Unfortunately, MDAs are where capex often goes to die. Just a few years ago, a former National Security Adviser (NSA), Sambo Dasuki, was embroiled in a scandal of $2.1 billion meant to procure arms that should have helped our defence personnel fight insecurity. About 78 companies allegedly collected various sums from Dasuki without executing any contracts.

In contrast, capex tied to specific projects that can ensure accountability are very little. Of the total ₦3.4 trillion capital expenditure disbursed in 2021, only ₦370 billion was tied to specific capital projects.

Frankly, economic growth requires intentional actions, one of which is investing in the economy through capex. When I asked Gbemisola, our senior development analyst, about the secret behind India’s enviable economic growth and what we could learn, she answered, "To replicate India’s growth, Nigeria first needs to fix the structural issues such as the infrastructure deficit that prevents investment and cripples growth”.