Incentivising investment: Transport systems are set to be overhauled as a result of increased funding and regulatory reforms

As anyone who has spent time in a Lagos go-slow will attest, transportation can be a complicated issue in Nigeria. Underinvestment has led to a shortage of capacity for a country of nearly 170m people, and as GDP growth continues to surpass 7%, the resulting increase in both consumption and production means there is sizeable scope for investment in the country’s roads, ports, bridges, airports and other facilities.

In 2011, the federal government estimated that N54trn ($340.2bn) in spending on the transport sector would be necessary by 2020. Of that total, about $285bn would be required to fix existing infrastructure and build new additions; $50bn for fleets of vehicles; and $15bn for capacity building and technical studies, according to a report by the African Development Bank. Nigeria hopes that much of that investment will come from the private sector, and the government is working to ensure that the players that build these projects are incentivised to manage and maintain them.

CASH INJECTION: Capital spending on key infrastructure has been growing in recent years, and the government is edging closer to the right mix of policies and regulations necessary to make transportation infrastructure one of the country’s key competitive advantages. Indeed, while there is still plenty of work to be done, overall efficiency is improving, and several public-private partnerships (PPPs) have already been completed, while others were in the implementation or negotiation phases as of mid-2013.

The size and scope of the PPP programme stands in contrast to many other African emerging and frontier markets, where such projects remain fairly limited. In Nigeria, operations concessions and management contracts are also a part of the mix, and in many cases are bundled in with construction contracts, typically within build-operate-transfer structures (see analysis). Reforming the government’s handling of transportation issues is a multi-pronged process at various stages of implementation: ports have already been handed over as concessions to private operators, for example, and the market thrown open to new entrants, but liberalisation of other segments – like rail – has yet to come.

NEW BILLS: There are four transportation-related bills that may be voted on by the legislature in 2013 that pertain to the railway segment, the ports segment, regulation and supervision of inland waterways, and road funding. A theme running across the management of modes of transportation is an effort to clarify government roles, such as separating regulation from operation, and these bills should help to do that. Even with the pending changes, many opportunities are present for the private sector and firms are looking to seize them. Nigerian and foreign companies alike are spotting gaps in the market, ranging from demand for smaller maritime vessels – which is on the rise thanks to offshore oilfield services – to refrigerated warehousing.

CONTINENTAL CONTEXT: Within sub-Saharan Africa, economic growth is likely to be strong for the foreseeable future, with the continent’s small middle class poised to grow and spend. As imports to Africa increase, the expectation is that a handful of countries will emerge as transit gateways through which the rest of the continent or a region within it can be supplied with consumer goods. Port capacity along both Africa’s east and west coasts is due to increase significantly in the next decade, based on current or announced projects, and while not all of those plans will come to fruition, many of them envision catering to regional traffic.

The rise in consumption creates a new and important supply chain that will be heavily reliant on transportation networks in Africa, and Nigeria is certain to be a destination for this market. Countries that can offer retailers an efficient and cost-effective logistics environment will be more likely to host storage, handling and manufacturing entities to supply the retailers. The domestic logistics market currently is valued at roughly $50bn, according to Eric Opah, CEO of Fortune Global, one of a growing number of locally owned and operated logistics providers. Another such domestic company is TRANEX which handles both domestic and international deliveries, amongst other logistic services. Although indigenous players are making headway in this segment, larger foreign firms continue to have a strong role to play. “There are still key advantages to having one’s own overseas network or partner with a reliable network when making foreign shipments,” Chidinma Iheme, TRANEX’s managing director, told OBG. “Relying on agents without the required international spread means that shipments sometimes get delayed.” For Nigeria, the opportunity is larger than for any other African country because it has more than double the population of any other. Thus, retailers can find more economies of scale in Nigeria, and that presents an opportunity for builders of infrastructure.

However, there are already rivals for transit and transshipment traffic within the region: a planned new terminal operated by French firm Bouygues at Côte d’Ivoire’s Abidjan port, already one of the region’s largest, alongside a new dredging project to deepen draft at the Ivoirian port will provide stiff competition.

CAPACITY DEMANDS: The emphasis on expanding capacity – not just in terms of shipment volumes but also in terms of vessel size – is important, given the increase in cargo coming from Asia. In 2012 inward cargo from South Africa amounted to about 10,000 twenty-foot equivalent units, according to port figures, which has been less than expected and indicates a greater reliance on goods from Asia than from warehouses in South Africa. For fresh produce however, markets are more local. Builders of toll roads and bridges, owners of cold-storage supply chains and operators of railroads, for example, are certain to win business from these growing markets. Multimodal connectivity is also a big focus for the sector, and crucial to help improve turnaround and processing times at the country’s ports. Congestion along Creek Road, the primary access in and out of Apapa container terminal, located in Lagos, constrains activity, for example.

More positively, rail links are improving, as progress is made rehabilitating existing assets. A contract worth N860.66bn ($5.42bn) was completed in November 2012 to improve the railway network at the port, which comprises a 1.5-km double-tracked route, as well as the signal works, according to a May 2013 update on the sector from the Federal Ministry of Transport (FMT).

POLICY & REGULATION: The National Transport Policy (NTP), a draft government document introduced in 2010, is the latest in a series of ambitious visioning exercises for the sector in which goals are articulated and processes for meeting them outlined. The policy includes common themes such as boosting efficiency, establishing competitive options that will enhance Nigeria’s ability to serve as a regional hub, and finding incentives to encourage growth and private investment. It has yet to be ratified. Though it is not an official policy, the NTP lays out some of the same objectives seen elsewhere in government, such as the pending legislation and efforts to encourage private sector participation: it advocates separating operational and regulatory functions, privatisation and concessioning assets when and where possible. As of 2013 there were an additional four bills before the legislature that could also implement changes that comprise part of the NTP strategy.

The FMT oversees the execution of the country’s transport policy and is responsible for managing and coordinating the sector regulators. Furthermore, there are a number of other key government agencies that influence transportation policymaking and implementation. Until legislative changes are introduced, regulators include the National Ports Authority (NPA), the Nigerian Railway Corporation (NRC), the National Inland Waterways Authority (NIWA), and the Federal Airports Authority of Nigeria (FAAN). However, there is no dedicated regulator for roads. Other bodies have a degree of regulatory influence or control, such as the Lagos Metropolitan Area Transport Authority (LAMATA).

OPENING THE MARKET: Two of the most important sector agencies are the Infrastructure Concession Regulatory Commission and the Bureau of Public Enterprises (BPE). The former is the federal government’s main body in charge of promoting PPPs and a first point of contact for potential private partners. The latter is engaged in a government-wide process of remapping bodies and responsibilities to reduce bureaucratic redundancy and streamline operational efficiency.

REGULATORY ROLE: The BPE is focusing heavily on removing the state from active market participation and leaving it with a primarily regulatory role. This means removing monopoly privileges from government operators such as the NRC, for example, and privatising public assets in some cases, corporatising public agencies, and concessioning operating rights to public transportation assets in PPP deals.

In some areas this will mean deregulation, but in others it will necessitate the setting up of agencies with additional regulatory powers – road building is one activity widely considered to be under-regulated. “We want to separate the role of policymaking from regulation and from operations,” said Benjamin Ezra Dikki, director-general of the BPE. “That’s the theme. We need to deregulate and de-monopolise as well where it is needed”. The ports authority is an example of how this might work across all modes of transportation.

The NPA is a landlord and technical regulator only, and not a comprehensive one. It was an owner and operator of ports until 2006, when operations were concessioned out to private companies. Port users are nearly unanimous in saying that although costs remain high and Customs procedures time-consuming, operations have become more efficient and dwell times reduced since the concessions were made. At the Ministerial Platform in June 2013, the minister of transport, Senator Idris Umar, said that concessionaires have invested $476m for terminal development since the 2006 arrangements. The process is still ongoing, however. The FMT has set a goal to make Customs clearance a 48-hour process, and to reduce the number of government agencies operating in the ports from 14 to seven. “The decrease in the number of agencies overseeing the ports has brought visible improvements to clearance at the ports,” Ademola Ogundare, managing director at NES Shipping, told OBG. “Despite this, better coordination among these agencies is needed.”

REFORMS: The BPE’s efforts in other sectors of the economy have sought to consolidate regulatory power under a single body, but this task has proved difficult, as different modes of transportation require different regulatory expertise. The plan for the sector, Dikki told OBG, is now for an umbrella regulator to handle economic matters and then for separate technical regulators to oversee each mode of transportation.

For ports, both the NPA and the Nigerian Shippers’ Council could potentially take up the role of technical regulator, as could the Ports Harbour Authority. For road transportation, however, the regulators will likely be the owners of government assets, Dikki told OBG, so they will then have the authority to concession them out to private operators or offer management contracts. Under the draft legislation targeting the country’s rail sector, the BPE aims to rehabilitate existing assets in order to attract buyers in a privatisation process, with a view to then reforming the NRC into a technical regulator (see analysis).

JURISDICTION MATTERS: As in the US, under the draft NTP Nigeria’s states are also allowed to establish their own ministries of transportation and develop their own management contracts, public work projects and PPPs; not unexpectedly this has led to confusion over jurisdiction. In Lagos, the country’s most populated state, the Lagos Ministry of Transportation sets policy for public transport and state routes, which is then implemented by LAMATA. LAMATA is now working on putting into place a master plan for public transportation that involves seven metro lines as well as two monorails, nine bus-rapid-transit routes, 11 water routes for passenger ferries, and a ring road for the city as well as smaller surface additions (see analysis).

However, the uncertain legal status of the NTP document has left inter-agency activity on transport projects somewhat unclear. One example of this is the Lagos-Badagry Expressway, a project to turn a crumbling road to Nigeria’s south-western border into a 10-lane superhighway. The road exists entirely within Lagos State and the project was initiated by the state government. However, the federal government intervened, stating that because the road leads to the border with Benin, it counts as a road under national jurisdiction. This dispute was resolved by classifying the road as a federal one and allowing Lagos State to operate it as a concession. Similarly, internal waterway transport has been affected by a lack of clarity in terms of oversight. In addition, attempts to revive an inland ferry system for public transport in Lagos State – where lagoons and waterways offer an attractive alternative to crowded roads – have been slowed by uncertainty over whether oversight rests with the state or NIWA.

AVIATION: Nigeria already has one of the most lucrative private jet markets in Africa, and its commercial aviation sector offers sizeable potential in light of both of the 170m-person captive market and the population’s increasing purchasing power, alongside the comparatively limited ground links (see analysis).

However, 2012 was a tumultuous year for the air transport industry in Nigeria, following the grounding of Air Nigeria, the crash of a Dana Air passenger flight in Lagos and a faulty take-off of a Nigerian-flagged cargo flight in Accra, Ghana, within days of each other in June of that year. Still, while these incidents do highlight some of the sector’s weaknesses, the market for air travel is expected to grow robustly over the medium to long term. Nigeria lacks a flag carrier, but is home to several domestic budget airlines, including Dana Air, whose flight privileges were reinstated in September 2012, Aero Nigeria, IRS Airlines, Arik Air, Med-View Airline and FirstNation Airways. International routes are served by the foreign carriers save for a handful for which the budget airlines compete, including Arik Air.

Airports in Nigeria are regulated by FAAN. There are four international airports (Lagos, Abuja, Kano and Port Harcourt), seven other domestic airports it considers “major” (Yola, Maiduguri, Sokoto, Calabar, Enugu, Jos and Kaduna) and 11 other domestic facilities, all of which are owned and operated by FAAN save for Lagos’s domestic terminal, Murtala Muhammed Airport 2, which is operated under a concession held by Bi-Cortney Aviation Services. There are a number of other airstrips in the country generally closed to public use, and typically built by the military or for companies in the oil and gas sector. Other key government actors operating in the aviation sector include the Federal Ministry of Aviation, which sets policy; the Nigerian Civil Aviation Authority, overseer of safety and economic regulation; and the National Airspace Management Agency, which handles air navigation services.

SEGMENT UPGRADES: Nigeria is looking to boost aviation capacity in several ways, including improving airports and undertaking additional maintenance, repair and overhaul services, which would cater to both commercial airlines and the growing number of private-jet owners. “In order for third-party maintenance companies to enter the industry in Nigeria, the timing must be right,” Evarest Nnaji, managing director at OAS Helicopters, told OBG. “Aircraft maintenance carries with it a great deal of responsibility and risk. Strong market fundamentals must be in place to support such a business venture.” The private-jet market has gone from about 20 planes in the country in 2007 to more than 150 in 2012, according to a local media report in September 2012. Air cargo capacity is small but also presents an opportunity for market entrants, particularly domestically, although the export-import imbalance is an obstacle for cross-border carriers. The volume of incoming air freight is generally between 6.5m and 7m tonnes a year, whereas the total outgoing is roughly 750,000-800,000 tonnes, making one leg of the journey unprofitable for cargo services.

Passenger totals slid in 2012, with total travellers numbering 14.4m, down from 14.9m in 2011; however, this still came close to double the 2007 total of 8.5m, an indication of the pace of growth. FAAN is projecting 20m passengers annually by 2016.

ROADS: As in nearly all African countries, roads remain the dominant mode of transport, both for people and goods. Nigeria’s network of roads stretches 200,000 km and includes 37,242 km of federal roads across all surface types, according to a 2012 survey by the Federal Roads Maintenance Agency, of which about a third are considered to be in poor condition. Nigeria needs to spend N500bn ($3.15bn) by 2015 to fix existing roads, Mike Onolememen, the minister of works, told local media, but in recent years the government has not provided his ministry with all the funds budgeted to it. In 2011, around N130bn ($819m) had been allocated to highway projects but only N88.7bn ($558.8m) was released, he said at a government hearing in late 2012. In 2012, N143bn ($900.9m) was allocated in the budget but just N110bn ($693m) was provided.

The poor quality of many of the rural trunk roads – a legacy of underinvestment and mismanagement – is a major constraint on revenues and growth. For the agricultural sector, for example, harvested produce often rots before reaching markets because road journeys are long and occur over potholed roads that can damage cargo – an estimated 30% of goods perish on the way to market, according to market data.

CONSTRUCTION REFORMS: Additionally, contracts signed with road builders do not conform to the standards of the International Federation of Consulting Engineers, whose model contracts mandate that the builder take responsibility for maintenance. Amending the content of future agreements to do so would bring the construction of conventional roads, often undertaken by large qualified local contractors, closer to the process for toll roads, in which the concession relationship makes maintenance the responsibility of the builder-operator. Nigeria has had success with toll roads built on a PPP basis, such as the Lekki-Epe Expressway in Lagos. The 30-year concession to build and operate the road is held by Lekki Concession, which is owned by ARM Asset Management, a local investment firm. Sections are open now, and the entire 49.6-km planned route is expected to be available to motorists by 2014.

The drive to expand PPPs in the road transport sector has received a push from donor institutions, to both improve connectivity overall and strengthen the efficiency of public spending. According to research from the Africa Finance Corporation (AFC), a multilateral finance institution established in 2007, the government should allow the private sector to build roads where potential operators perceive them to be profitable, and save its own road-building budget for noncommercial routes. For a concession to be profitable, roads need baseline traffic of at least 30,000 vehicles per day, according to the AFC, and several potential routes in Nigeria have been identified as candidates. They include a route from Abuja to Kaduna, Kaduna to Kano, Lagos to Ibadan, and Benin City to Sagamu.

RAIL TRANSPORTATION: Nigeria was left with a small railroad network upon gaining independence from the UK in 1960, but the sector has received little in the way of investment since then. Both fixed and moving assets have deteriorated to an extent that nearly all railway activity has ceased. However, rail transportation will likely see traffic volumes increase in the years ahead as the government is in the midst of a revival programme. The project aims to rehabilitate the assets if necessary, remove monopoly rights, and open up to private investment through privatisation, concessioning or other PPP methods. If the current draft legislation – which would amend the 1955 Railway Act – is passed, the NRC would offload its exclusive rights to own and operate railroads in the country and become a candidate for privatisation. Currently, Nigeria has 3505 km of narrow-gauge track (1067 mm) and a single and unfinished standard-gauge (1435 mm) line of 274 km. There are two north-south trunk lines: from Lagos to Kano to serve the west and central areas of the country, and from Port Harcourt in the south to Maiduguri in the north on the east side (see analysis).

PORTS: Nigeria has a coastline of about 420 nautical miles and an exclusive economic zone of 84,000 sq miles, along with an extensive network of inland waterways, starting with the Niger and Benue rivers, which meet south-west of Abuja in the middle of the country and flow to the Gulf of Guinea through the Niger Delta area in the south-east. Most container traffic goes through the Lagos Port Complex, which comprises six terminals in central Lagos and is commonly known as Apapa, and Tin Can Island, a port located next to Apapa that also has a roll on/roll-off terminal.

The Rivers Port Complex is based in Port Harcourt, traditionally the staging and administrative base for the oil-and-gas industry in Nigeria. The port has jetties built for refined petroleum products, as well as facilities for bulk cement, alongside several other jetties. The Delta Port Complex, west along the Gulf of Guinea Coast, is made up of facilities at Warri, Burutu and Sapele, as well as crude oil terminals at Escravos, Focados and Pennington. It is the closest port to seven south-eastern states. The Onne Port Complex, around 25 km south of Port Harcourt, is located in a free zone dedicated to oil-and-gas activities, and its main use is to serve Nigeria’s offshore exploration-and-production companies. Calabar Port Complex is at the far eastern edge of Nigeria’s coast, and has a draft of 6.8 metres, too shallow to support significant activity.

All of the ports are owned and regulated by the NPA, but concessioned in 2006 to private operators. Maritime commerce is a growth area, not just in terms of the transport of goods to and from the country, or within the country, but also in terms of ancillary services for oil and gas exploration and production efforts offshore with supply vessels, equipment rentals and other services. Lastly, ports such as Nigerdock, the Onne Port Complex and LADOL Deep Offshore Logistics Base, are specialised for the energy industry.

SECTOR WATCHDOG: The NPA acts as the owner and administrator of land and water on site; plans and develops port operational infrastructure and, when complete, leases it; handles marine incidents and pollution to maintain safety and security in common port areas; enacts, monitors and enforces port regulations and by-laws; and undertakes day-to-day monitoring of operations and enforcement of respective agreements governing the ports. Private sector operators are to manage cargo handling, stevedoring, warehousing and deliveries; develop and maintain port superstructures; maintain safety and security within their terminals; and oversee all towage, mooring, bunkering, chandelling and repairs. The FMT’s role is policy formulation and planning at the national level for basic marine infrastructure, and handling relevant aspects of international relations. The Nigerian Maritime Administration and Safety Agency (NIMASA) was created in 2007. NIMASA was created by merging two other relevant bodies, the National Maritime Authority and the Joint Maritime Industrial Labour Council. Its four-point agenda includes an objective to have 20% of seaborne cargo carried by local ships by 2015 and establishing a domestic shipbuilding industry, although multiple changes of leadership have limited progress.

CUSTOMS: However, issues remain in several areas. According to World Bank research from its 2013 “Doing Business” report, “Excessive document requirements, burdensome Customs procedures, inefficient port operations and inadequate infrastructure all lead to extra costs and delays for exporters and importers, stifling trade potential.” According to industry players, dwell times range from 21 to 22 days, against a regional average of eight days. The federal government’s stated goal is to reduce cargo clearance to a 48-hour process, and as part of that effort ports are now open 24 hours. According to the FMT’s update of reforms in the first half of President Goodluck Jonathan’s four-year term, along with halving the number of government agencies operating in the ports there are several other steps to be implemented to achieve a reliable two-day clearance rate. They include decongesting cargo areas by removing old containers and improving traffic management entering and leaving the ports.

TARIFFS REVISION: Another possible boost to port efficiency and Customs clearance could come from an overhaul of the tariffs regime. Import taxes are currently calculated according to formulas set by the 1958 Customs and Excise Management Act (CEMA), and do not fully capture the changed structure of import products and systems. A simplified tariff structure, in which goods fall into a single-digit number of taxation bands, could help simplify and expedite the process.

Port users say that the 2006 decision to privatise operations improved the experience of using the ports but not the cost, which remains high, albeit within comparable levels of other major West African ports. Reasons for the high costs include the inefficiency and long dwell times, petty corruption, the importance of Customs revenue to government (second in volume only to oil-and-gas income), as well as the lack of regulation. At most ports, berth depth is an issue or has been in the past. “Ship-to-ship transfer is often necessary in the Nigerian market mainly due to infrastructure shortcomings at the ports. Large international ships cannot berth in the shallow ports along the Nigerian coast,” Charles Anusim, CEO of Serene Greenfields, an energy services company with a focus on shipping, told OBG. Dredging is ongoing to increase capacity for larger ships. Apapa, now at a depth of roughly 13.5 metres after recent dredging, is able to handle WAFMAX ships which have specifically been designed to facilitate trade between West Africa and Asia, in line with other major ports in the region, including Abidjan and Tema in Ghana. According to a study performed by Copenhagen Economics, a Danish advisory firm, shipping lines using this vessel boosted productivity by 20% at Apapa, and saved $131m on reduced inventory and congestion costs. Dredging in and around Lagos is the responsibility of Lagos Channel Management, which was created in 2005 and is 60% owned by the NPA, with 40% held by Swiss-registered Depasa Marine Group.

INLAND WATERWAYS: Authorities at the federal level and within the Lagos State government are seeking to revive inland waterways as a transportation mode for passengers. This is opening up new opportunities for domestic maritime activity, and NIWA has been dredging rivers to encourage it. “When compared to regional transport by road, rail or air, transport by waterways poses far fewer soft infrastructure challenges. Transporting goods on the water goes a long way in protecting the profit margins of a producer or trader, and enhances the volume of trade flows for the country,” Roberts Orya, CEO of NEXIM Bank, told OBG.

The Lagos State master plan for transportation includes 11 passenger-ferry routes designed to ease the pressure on land transportation networks. Services would be oriented toward bringing workers from mainland destinations to Lagos Island, Ikoyi, Victoria Island, Lekki and the other commercial and high-end residential districts situated on an east-west strip of land between the inland lagoons and the Gulf of Guinea. Improving urban water routes would add to several small-scale services already in existence.

Vegasirius is another Nigerian company stepping up to meet demand for maritime transportation, with plans to purchase ships suitable for calling on inland ports in the eight or nine states within Nigeria’s federation that can be accessed by inland waterways. “There’s a sizeable opportunity with cargo in the agricultural sector and elsewhere as well,” said Emmanuel Omotade, manager for shipping and marine operations for Vegasirius, a company shifting from energy importing to maritime transportation and logistics.

OUTLOOK: Experience in recent decades proves there is no quick fix for transportation in Nigeria. The government has thus embarked on the process of eliminating institutional obstacles and incentivising private investment, with the hope for steady improvement for the long term. Concessioning at the ports has been a successful early step, for example, as is a revitalised railway system. Indeed, reforms are also happening on a higher level, as agencies with influence across sectors and modes, such as the BPE, seek to implement a more systematic approach to regulation and ownership of transportation assets. Moreover, establishing clearer roles for regulators, and removing conflicts of interest, will promote a more progressive sector overall.