MASSIVE INVESTMENT IN INFRASTRUCTURE AS KEY TO ECONOMIC DIVERSIFICATION
A Paper Presented as Invited Guest Speaker to the Finance Correspondents Association of Nigeria (FICAN) Third Quarter Forum on Tuesday, 20th September, 2016
Engr. Otis Oliver Tabugbo ANYAEJI FAEng, FNSE
FNIMechE, F.Val, FAutoEI, FCostE, FIMC, FSESN, FNISET, FEEcon
President of the Nigerian Society of Engineers
I feel highly delighted to be invited as the Guest Speaker to the Finance Correspondents Association of Nigeria (FICAN) Third Quarter Forum. The theme of the forum which is on Massive Investment in Infrastructure as Key to Economic Diversification is apt especially at this time in our development when Nigeria as a country is going through a recession.
I am further delighted to note that your decision to invite me as the Guest Speaker is based not only on my current position as the President of the Nigerian Society of Engineers but is based also on my footprints in the engineering profession in Nigeria and beyond and that my coming as President of NSE will be a watershed in the role of engineering in the growth of the national economy.
I cannot agree with FICAN more being an umbrella body of journalists covering activities in the financial and business sectors of the economy with your membership cutting across print, electronic and on-line media houses in the country. It will be the pleasure of the NSE to partner with FICAN to carry the message to all and sundry that the key to economic diversification is massive investment in infrastructure.
2. ECONOMIC DIVERSIFICATION TO SUPPORT FUTURE GROWTH
The success of economic diversification strategies is key to overcome resource dependence and safeguard long-term sustainable economic growth in resource-rich countries like Nigeria. Natural resources are finite and face huge fluctuations in prices, making economic diversification critical to decouple from volatile government revenues that are highly dependent on commodity exports. Fluctuations in global prices and demand since then have presented several challenges making economic diversification a top economic agenda for countries that have foresight. Diversification for resource-rich economies had become inevitable to reduce risks associated with high dependence on commodity export-growth models and to limit the impact of fluctuations of commodity prices on domestic economies.
The UAE for example has successfully diversified away from energy with modern infrastructure that includes a seaport among the largest in the world, a number of world-class hotels and a business-friendly environment. Azerbaijan is another success story developing new sectors in its economy, fostering successful private sector-led growth and lowering its dependence on mineral fuel exports. Exports of mineral fuels made up 93.8% of Azerbaijan’s total exports in 2013 but the government announced in late 2014 it will completely eliminate its oil and gas dependence in the next five to seven years.
In Nigeria, growth in the non-oil sector has remained weak. Investment in education to improve skill sets of domestic populations remains paramount and policy reforms to create non-oil growth and job opportunities will remain a big challenge even as the rapid development of shale oil and gas production in the USA will further impact global oil prices and demand, which will also play a key role to further push diversification efforts.
2.1 Diversification as Part of an Investment Strategy
Nigeria has for a long time been a mono-economy highly depended on oil exports without any protection from a market downturn through diversification. Diversification as part of an investment strategy offers the following advantages:
Risk Reduction – You can’t eliminate risk completely, but you can manage your level of risk. Diversifying into safer fixed income infrastructure assets may have helped Nigeria to reduce their risk and maximize their returns in this period of low oil prices and revenues. Using diversification as investment strategy can reduce investment portfolio risk.
Infrastructure Appreciation – Infrastructure investments continue to appreciate in value with time and the appreciation of such assets are used as an investment strategy by investors. Even when not all assets appreciate in value, investing in a variety of assets reduces risk and hedges your portfolio when you employ diversification as an investment strategy.
Ability to Hedge Investment Portfolio – Diversification can enable a portfolio to grow both when markets boom and returns crumble in one sector. If Nigeria had diversified their portfolios to include investing in a variety of infrastructures, their portfolios would have experienced greater returns. Diversification gives an investor the chance to achieve positive returns in one market when another market is generating negative returns.
3. AN INFRASTRUCTURE ACTION PLAN FOR NIGERIA: CLOSING THE INFRASTRUCTURE GAP AND ACCELERATING ECONOMIC TRANSFORMATION
The Federal Government of Nigeria has initiated a project to develop a National Integrated Infrastructure Master Plan (NIIMP), which stems from the Federal Government’s effort to meet Nigeria’s infrastructure needs. While various sector plans have focused on infrastructure development in the past, these plans were developed independently of each other. The NIIMP hopes to provide an integrated view of infrastructure development in Nigeria, with clear linkages across the key sectors.
The objectives of the NIIMP are to:
Adopt a coordinated approach to infrastructure development
Strengthen the linkages between components in the infrastructure sector and the national economy
Review, upgrade and harmonize existing subsector master plans and strategies in the infrastructure sector, to ensure they are consistent with national development aspirations
Prioritize projects and programs for implementation in the medium to long term
Promote private sector participation in infrastructure development
Strengthen the policy, legal and institutional frameworks for effective infrastructure development
Enhance the performance and efficiency of the economy
The Interim “National Integrated Infrastructure Master Plan” (NIIMP) published by the National Planning Commission in May, 2013 captures the current state of infrastructure in Nigeria as follows:
“The backbone of any national economy is its stock of infrastructure. Sound traffic networks and modern ports reduce transportation costs. High-capacity telecommunication networks facilitate fast communication and efficient flow of information. Pipelines for oil and gas ensure constant energy supply and export,
while ample generation capacity and functioning transmission networks secure disruption-free production of goods and provision of services. All of these components of infrastructure also contribute significantly to the well-being of the population, the productivity of the workforce, and facilitate broader access to education and health services. According to international benchmarks, more developed countries typically have a “core infrastructure” stock (roads, rail, ports, airports, power, water, ICT) equal in value to about 70% of GDP, with power and transportation infrastructure usually accounting for at least half of the total volume. However, Nigeria’s core infrastructure stock is estimated at only 35-40% of GDP – the equivalent of less than USD 100 billion in 2012. This low value has been driven by historically low public and private spending on infrastructure. Building and maintaining sound national infrastructure also comes at a high cost. However, these investments substantially and sustainably increase a country’s competitive strength – especially if coming off a relatively low base. With economic performance more and more closely tied to global competitiveness, building infrastructure that meets world standards has become a primary requirement for achieving ambitious growth targets. Nigeria’s infrastructure has long been a bottleneck for economic growth, and its infrastructure is underdeveloped compared to that of other fast-growing emerging countries. Road density in Nigeria, for example, is only about a fifth that of India. The Nigerian population’s access to sanitation and mobile telecommunications both compare unfavorably with Brazil and South Africa (mobile penetration is about half and access to sanitation is ~40% of these countries’). Nigeria’s five hospital beds per thousand people ratio is lower than India’s (at nine) and much lower than South Africa’s (28). The effect of weak infrastructure is most striking in the energy sector – Nigeria’s per capita energy consumption of 136 kWH per annum is less than 3% of South Africa’s 4,803 kWH.”
The NIIMP Report had recommended compartmentalized infrastructure development strategy for Nigeria into seven key areas:
Transportation – Roads, Rail, Aviation, Maritime, Urban, Sea Ports, Inland Waterways
Energy – Oil and Gas, Power (Generation, Transmission and Distribution)
ICT – Mobile Telephony, Internet and Broadband, e-Governance
Agriculture, Water & Mining
Social Infrastructure – Health, Education, Youth & Sports, Women Affairs, Social Development, Labor, Productivity, Information, Environment, and Tourism
Vital Registration and Security – Vital Registration (Birth & Death, etc Registration, Immigration), Security (Nigerian Police Force, Nigerian Prison Service, Federal Fire Service, Nigerian Army, Nigerian Navy, Nigerian Air Force, Federal Road Safety Corporation, DICOM, Immigration, Security and Civil Defence Corporation, and Nigcomsat)
The African Development Bank Summary Report published in 2013 captioned “An Infrastructure Action Plan for Nigeria: Closing the Infrastructure Gap and Accelerating Economic Transformation” had recommended infrastructure investment in the following four sectoral areas:
Transport – Roads, Road Transport, Railways, Ports, Inland Ports, Shipping, Inland Waterways, Civil Aviation, Air Transport, Pipeline for Transport of Natural Gas and Urban Transport
Energy – Generation, Transmission, Distribution, Rural Electrification and Access
Water Resources and Water use – Irrigation, Water Supply & Sanitation
Despite several efforts and plans at investing in infrastructure, there have been little implementation strategies of the plans backed by budget and funding options for infrastructural development in Nigeria.
4. CONTEMPORARY INFRASTRUCTURE INVESTMENT OPPORTUNITIES IN PERSPECTIVE – AN ECONOMIC & TECHNICAL SUSTAINABILITY AGENDA
4.1 Nigeria-China Bilateral Agreement on Revamping Nigeria’s Economy
President Muhammadu Buhari on China Marble:
President Muhammadu Buhari said that Nigeria must not be seen as a consumer market alone, but an investment destination where goods can also be manufactured and consumed locally.
He decried the trade disparity between Nigeria and China which he said was only in the favour of the Asian country. He made this statement in view of the fact that business and trade relations between Nigeria and China in the last 10 years had increasingly appreciated, with bilateral trade volumes rising from $2.8 billion in 2005 to $14.9 billion in 2015. Of this figure, Nigeria accounted for 8.3 per cent of the total trade volume between China and Africa and 42 per cent of the total trade volume between China and the Economic Community of West African States (ECOWAS) countries in 2015.
He challenged the business communities in both countries to work together to reduce the trade imbalance and also imbibe the spirit of having a mutually beneficial relationship in business transactions.
At the Nigeria-China Business/Investment Forum, President Buhari said trade and economic relations between both countries must be mutually beneficial and reciprocal. He called on the Nigerian and Chinese business communities to work harder to reduce the trade imbalance between both countries. He said: “Although the Nigerian and Chinese business communities have recorded tremendous successes in bilateral trade, there is a large trade imbalance in favour of China as Chinese exports represent some 80 per cent of the total bilateral trade volumes. This gap needs to be reduced”.
The President lauded China’s readiness to assist Nigeria to rapidly industrialize and join the world’s major economies.
President Muhammadu Buhari directed the immediate establishment of technical committees to finalize discussion on infrastructure projects discussed with the Chinese government.
He further directed the technical committees to expedite action and conclude their assignments before the end of May, 2016.
President Xi Jinping of the People’s Republic of China offered
$15 million agricultural assistance to Nigeria for the establishment of 50 agricultural demonstration farms across the country.
to increase its scholarship aides to Nigeria from 100 to 700 students on a yearly basis.
to provide Nigeria with infrastructural support while agreeing that economic diversification was one sure way of achieving prosperity
These developments were followed by the signing of a plethora of mutual agreements and Memoranda of Understanding, MoU, between Nigeria and China in Beijing:
Framework Agreement between the Federal Ministry of Trade and Investment of the Federal Republic of Nigeria and the National Development and Reform Commission of the Peoples Republic of China.
Memorandum of Understanding on Aviation Cooperation Between the Ministry of Transportation (Aviation) of the Federal Republic of Nigeria and the Ministry of Commerce of the Peoples Republic of China.
Memorandum of Understanding between the Federal Republic of Nigeria and the Government of the Peoples Republic of China on Scientific and Technological Cooperation.
Mandate Letter Between the Industrial and Commercial Bank of China and the Central Bank of Nigeria on Renminbi (RMB) Transactions
4.2 Enhancing Local Content in Nigeria’s Infrastructure Development for Sustainability
The reason for raising these issues derives from the colossal loss resulting from the exclusion of Nigerian Engineering firms and other Local Businesses from the major Infrastructure projects being developed by our Government today.
Typical of such projects are:
1. Airport facilities development nationwide- Abuja, Lagos etc.
2. Railways Rehabilitation and Upgrade Western & Eastern Narrow gauge lines.
3. New Abuja- Kaduna Standard Gauge Railway Line, which is just being opened.
4. Abuja Light Rail Project.
5. Lagos Light Rail Project etc.
It is unfortunate that in expending so much money on infrastructure in this modern age, our national economy did not benefit from enhanced local activities; neither did the Engineering sector benefit any! The fact that the projects are ultimately financed by our National resources (albeit as a loan in the meantime), and that neither the economy nor the Technical sector have so far benefitted any, is cause for regret! No one else can be blamed for this than ourselves. The losses are compounded by the fact that we also ignored the aspect of applying global best practice in procurement processes for the projects.
4.3 The Nigerian-Chinese Bilateral Agreement
Capacity Building and Job Creation: Nigerian Engineering firms and other business concerns should participate in the various practice areas, in either joint venture or as sub-contractors. Therefore, opportunities should be deliberately created for the indigenous Nigerian Firms to participate throughout the projects life cycle for maximum impact to our economy:
As strategy towards attaining at least 50% local content in the first instance, specific incentive should be created to ensure the building capacity of the local firms
Nigerian firms already engaged in manufacturing of products necessary for implementing the projects should be identified for capacity building necessary to the stringent requirement of the candidate projects. Engineering firms are in the categories of:
• Consulting engineering • Engineering contracting
• Manufacturing • Engineering services
• Maintenance, Repairs & Fabrications
• Vendoring of machinery, equipment & materials
Expatriate Quota should be granted for a defined period only in fields where the qualifications and competency of Nigerian Nationals cannot be ascertained for purposes of capacity development and job creation.
Industrial and Manufacturing Development of Nigeria: The inputs for the implementation of the candidate projects should be sourced locally as much as possible from existing (even if dormant) facilities or new facilities with such enterprises operated on a joint venture basis between the Chinese and Nigerian entrepreneurs. These inputs include, just mentioning a few:
Cement and Concrete Products
Iron and Steel
Asphalt or bitumen, etc
It is not too late to wake up to our responsibilities as a nation who is procuring infrastructure to be paid for now or later. We must move to ensure that the bilateral relationship can benefit our nation maximally. Experience shows that the best way forward is to prepare existing corporate organizations i.e Engineering Consultants, Contractors, Fabricators, Industrialists, material suppliers etc ready for engagement on the project as may be required. We must demand that the projects be disaggregated and possibly in partnership with the Chinese unraveled into components and with a view to opening up local practitioners, and service providers etc to complement the Chinese.
All participants being held to the strictest standards stipulated for the project as in the Oil & Gas Sector. The project designs must be domiciled in Nigeria and Nigerian organizations must be incorporated in the design processes. Materials such as Steel, Cement, etc must be locally sourced as much as possible. This can lead to new industry and expansion of existing fledgling ones. Assembly Plants for locomotives and wagons should also be sited in Nigeria to encourage backward integration. This will create an avalanche of job opportunities for our youth and may even attract further FDI. Multilateral Development Banks, W.T.O and Major UN Agencies, recognize the need to involve local labour, goods and services (Local Content) in the delivery of infrastructure. This will assure inclusive growth, poverty alleviation and Sustainable Infrastructure services.
Process: It is expedient to develop economic diplomacy along the above lines in order to be able to realize the aims of this Advocacy.
Project Sustainability: All projects from conception and design, through procurement to post construction management should be implemented in a manner that will ultimately achieve in country competency as a guarantee to full life cycle sustainability.
Codes and Standards: The projects must be implemented in line with Nigerian Codes and Standards and where other codes and standards are to be used, they should be mutually agreed upon by both parties.
Main Issues: The subject of the bilateral agreements is Infrastructure Procurement! It should be clearly seen as such. If so, what happens to our Procurement law in this regard?
There must be a project initiation process. This is the owner’s responsibility.
The procurement proper must be conducted by the owner’s expert.
Preliminary Design – Preliminary cost estimates
Feasibility studies must follow
After feasibility is ascertained
Detailed Engineering Designs
Method of procurement must be developed. If EPC is progressed, the procurement of the EPC contractor must be based on Front End Engineering Design (FEED) to guarantee level playing ground for bidders. It is at the stage of bid evaluation that the best price for the EPC contractor be ascertained. Any other process is not guaranteed to yield the optimum result. All the process above must reside with the owner. It is clear that In-house capacity is not strong enough to cope with a project of that magnitude. A consortium of Nigerian Consulting Engineers will be able to garner the capacity even along with selected international consulting companies. If that process is omitted in any procurement exercise, it may render that process flawed.
Local Content Development: The template of the Nigerian Content Act for oil & gas sector should be adopted pending the passing into law the Nigerian Content Development Commission, now before the National Assembly. Therefore, all designs should be domesticated by the Chinese in this bilateral agreement.
Localized Design and Implementation: All project designs should be domiciled in Nigeria and Nigerian organizations must be incorporated in the design processes.
4.4 Rail Line Project
The Rail Line projects present a unique opportunities for growing our manufacturing/services sector. It is the only way the Chinese loan will impact directly in our economy. The South African Model which aims for 70% local content initial and ultimately 100% in the near future is hereby recommended. The key features of the South African model are:
Developing in-country rail line technology competency
Developing in-country competency for rail line manufacturing and services
Encouraging the existing suppliers and manufactures to diversify towards railway services and products.
Encouraging direct foreign investment especially railway suppliers to partner with Nigerian local investors in the rail sector
The possible business opportunities that can be domiciled in the country by the Chinese include steel castings, static converters, machining, adhesives, batteries, brakes, capacitors, couplers, electrical integrators, flooring systems, fans, fastenings, ERTMS/CBTC Odometry, etc.
4.5 Nigerian Industrial Revolution Plan (NIRP)
This is a very laudable initiative of the Federal Government of Nigeria that needs to be speedily implemented in line with the change mantra of the present administration. We are aware of the four pillars of the NIRP namely:
Metals and Solid Minerals
Oil & Gas Industrial Activities
Construction, light manufacturing and Services.
Specifically, construction, light manufacturing and services should be synchronized with the NIRP. The Nigerian Chinese bilateral agreement presents veritable opportunities for accelerating the fourth pillar of the NIRP – construction, light manufacturing and services. We note that for any Industrial Revolution to succeed it must start with establishment of capacity to produce machines that make machines – MACHINE TOOLS. Thereafter motor vehicles, and electrical components ought to have priority over these four pillars. However, there is a need for wider consultation and further stakeholder buy-in in order to improve and articulate the policy for smooth implementation.
Hence, the participation of NSE in the governance and implementation of the Committee established by the policy is highly desirable.
It is the hope of the Nigerian Society of Engineers that learning from the global industrial policy models, Nigeria must take giant strides towards enhancing local content in our national quest for infrastructure development and these two initiatives present a glowing opportunity:
The Nigerian-Chinese Bilateral Agreement
Rail Line Project
It will amount to a colossal lose to a Nigerian economy and our future generation if we miss the opportunities presented by the bilateral agreement, in particular the loans. Our capacity to meet the repayment obligation rests squarely on the diligent implementation of our recommendations therein.
One again, I want to thank the Finance Correspondents Association of Nigeria (FICAN) for inviting me as the Guest Speaker to the Third Quarter Forum. I hope that you will spread this message to all policy and decision makers in Nigeria so Nigeria can begin to build a solid and sustainable future for our generations yet unborn.
God Bless the Finance Correspondents Association of Nigeria
God Bless the Nigerian Society of Engineers
God Bless the Federal Republic of Nigeria.