This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.
Nigeria should have a world class infrastructure considering how much oil revenues it has had. This is not the case however, Nigeria has the lowest energy per capita production of any of the frontier markets. The roads are facing maintenance problems, railways see very little commercial volume due to their bad condition and the electricity shortages have become a part of daily life.
With the income of oil, there never was any real initiative to address these issues with an urgency. The urgency is now coming, there is a national infrastructure master plan that has private investment as one of the keys for addressing the infrastructure problems the country faces. There is no doubt there will be a huge opportunity for foreigner investors in the infrastructure sector. There is a lot of talk about how one of the opportunities in the capital debt markets will be the infrastructure bonds and if this is to be the case, the infrastructure investments might even see some levels of liquidity.
With increasing population and increased usage volumes for the infrastructure, the maintenance fees are increasing yearly. It’s also common to work at increasing the capacity of the infrastructure, as well to adjust to technical growth. Some of the inflation the country sees is due to the infrastructure expenses, as there are no real incomes apart from oil, taxing the big companies and in some instances the import tariffs, resorting to printing out more money to address the infrastructure costs. These expenses are a burden to the government, creating an urgency to advance with the infrastructure plans.
Nigeria is expected to grow from spending $23bn on infrastructure in 2013 to $77bn in 2025 according to a PwC report. These are high cost and long term investments that are essential to the economic development of Nigeria. Many industries depend on infrastructure development – there is a lot of late stage manufacturing potential in Nigeria as well as agriculture potential, but it cannot be fulfilled at the moment due to the low levels of infrastructure. Infrastructure development is also considered a job creating exercise by the federal government.
Most of the domestic capital consists of pension funds and banks, they are invested in the two digit percent inflation beating federal bonds and it’s generally assumed that there is not enough domestic capital to finance the infrastructure, so the outlook is abroad. The capital that is required simply cannot be raised domestically.
One of the biggest obstacles that the country face is creating a maintenance culture. An Asset Management Policy type of government initiative would ensure international standards of maintenance, resulting in minimized life-cycle costs and reduce the replacement costs, ensuring the best returns on infrastructure investments. An increased awareness of maintenance culture could also increase the returns from the current infrastructure investments. Infrastructure investors should be following and evaluating the progress with maintenance programmes.
The successful implementation of any infrastructure development plans are highly dependent on low corruption levels in these projects. Projects that have World Bank’s or other major organizations association will see less corruption, due to the overseeing of the organization. Big investors have a tendency to put their own teams on ground to determinate the level of support required and inspect the existing assets. This was the case with the Chinese government’s investments in some road projects.
Apart from financing the infrastructure development, there is another side to the infrastructure projects – the actual building, project managing and sourcing for these projects. There are enormous opportunities in investing at the companies that will be doing or delivering materials for these projects. The domestic cement industry will see increased demands and it’s perceived that there will be a complete change in the gas sectors value chain due to the enormous demand electricity plants will require.
Nigeria has the lowest energy per capita production rate of any of the frontier markets. The economic growth and the achievement of Nigeria’s economic potential depends on successfully tackling the power issues the country faces.
The power sector is compared to the early telecoms sector, where the early investors made a lot of money and then the industry saturated leaving no space for new entrants. With energy, the supply is so bellow the demand and the demand is growing so quick, that the power sector could see itself growing way longer than the telecoms industry did.
The power sector could be the biggest opportunity in Nigeria for the long term investors – there is little competition, the returns will be huge and the industry won’t mature for a long time. Everything needs power to run – offices, factories and stores. The power shortages are felt by the vast majority of Nigerian citizens – it is one of the top priorities for the government. Internationally -world organizations such as World Bank and other governments recognize the need for energy in Nigeria and are willing to help.
Nigeria currently produces around 4,000 MW of electricity and the expected demand at 2020 is at 88,000 MW. It’s expected that the energy will be at the 30,000 MW level by 2020. If it’s to be achieved, the natural gas levels used by the plants will increase 8 times of the current levels. This is expected to have considerable effects across the entire gas-to-power value chain. The regulatory framework will have to face changes, same as the operating environment for both sectors. The two industries will need to become coordinated to some extent.
The opportunities from energy are, therefore, transferred also to the natural gas sector. The country will need to straighten and expand its gas infrastructure. The logistics industry will also see increased demands – special machinery from abroad will need to be delivered at the Nigerian plants. The natural gas itself will need shipping as well, creating good opportunities for domestic firms.
The energy sector is most likely to be financed by debt and bonds, creating space for investors across the spectrum.
The low oil prices are helping the country with its electricity issues – generators can now run on cheaper diesel. There is a level of instability with this, as when the oil prices go up, the business costs will also go up.
The energy sector of the country was developed before, it didn’t see much success due to corruption and bad management. The Buhari administration has been able to increase the power production. There has been vandalism on the gas pipelines that has now been tackled.