Liberalisation of Nigeria's transport sector set to enhance connectivity

Upgrading and developing new transport infrastructure is essential to unlocking Nigeria’s undeniable growth potential. Without adequate infrastructure to move people and goods into and around the country, many of the attributes that make Nigeria a production and consumption base primed for sustained expansion could be negated. Given that state coffers are strained, and multiple sectors are competing for funding, the government is looking to reduce public control of its transport network and hand over development, management and maintenance responsibilities to the private sector.

Pent-Up Demand

For a country of nearly 170m people spread over 900,000 sq km, there is pent-up demand for better access across all modes of transport, presenting a strong business case for the take-up of some potentially attractive concessions. Many of the world’s major infrastructure firms have already expressed interest in and/or are currently bidding for work. The onus is on the government to create the right enabling framework for public-private partnerships (PPPs), with key reforms to solidify legislative certainty at different stages of being passed through parliament and enacted into law.

While privatisation, mainly in the form of PPPs, is taking place in varying degrees for rail, road, maritime and aviation infrastructure, each mode of transport has its own set of regulators and participating state agencies. As such, a move to consolidate the sector under fewer oversight bodies should help improve coordination and lead to more integrated and holistic planning going forward.

There is also a marked difference in the pace of infrastructure construction taking place at the federal and state level, with competing and overlapping oversight contributing to bottlenecks in some strategic projects. Lagos State stands out as a jurisdiction in which things are progressing more smoothly, with a new port, ring roads, and metro and ferry lines being delivered. “Lagos has the most coordinated view between its rail, water and road networks and has been the most successful at attracting private investment,” Chinedu Onyia, managing director at advisory firm Parsifal Partners, told OBG.

In the lead up to the 2015 elections, the passing of new legislation and the final go-ahead on some big-ticket projects invariably faced delays. But in the long term, Nigeria stands out as one of Africa’s most attractive markets in terms of anticipated transportation infrastructure rollout.

According to PwC, infrastructure spending in the country is expected to increase by nearly 11% annually until 2025, from $23bn to $77bn – by which point Nigeria, along with South Africa, will account for three-quarters of sub-Saharan Africa’s total expenditure. “Nigeria comes with its immediate challenges, but in the long run, if you are patient and persistent, there will be a nice pay-off,” Tola Sapara, business development manager for the French rail solutions firm Alstom, told OBG.

Banking on Reform

Nigeria is no stranger to privatisation, and the liberalisation of its transportation backbone is set to follow the lead of the power and telecommunications sectors – both of which have undergone a successful deregulation process that has attracted international capital and expertise, and brought about market efficiency gains.

In the telecommunications space, a gradual liberalisation of the sector beginning at the turn of the century has led to the likes of South Africa’s MTN, the UAE’s Etisalat and India’s Bharti Airtel entering as operators. This has increased competition in the sector and contributed to better service quality and reduced tariffs. At the same time, it has also helped to facilitate the development of indigenous service and equipment providers. Towards the latter half of 2013, some 15 state-owned electricity companies were sold off for a total of some $2.5bn to joint local and international consortia that included the likes of Germany’s Siemens and India-based Tata Power.

Facing a budget deficit, the decision to sell off some existing transport assets and place proposed new projects up for tender should free up budgetary resources for much-needed spending on health and education. Given the huge demand for logistics infrastructure, as long as rates are not excessive, there should be an ample market willing to absorb tolls and other user fees. This provides prospective investors the opportunity to earn a fair return while competing on free market principles.

“Nigeria is a highly densely populated country in desperate need of more infrastructure. So long as the operating environment is truly liberalised, there is no need for the government to offer subsidies or intervene, as end-users won’t mind paying for new and upgraded transport systems over the old, obsolete and, in the case of rail, virtually non-existent services they have experienced until now,” said Sapara.

There are eight sector-related reform bills that have been drawn up and put before the Cabinet. These include the National Transport Commission Bill; the Nigerian Ports and Harbour Bill; the Nigerian Railway Bill; and the National Inland Waterways Bill. At the crux of each are stipulations that leading parastatals will have their assets divested so that they re-focus their attention as regulators and no longer compete as operators. The eight bills were approved by the Federal Executive Council in mid-February 2015 and are expected to be forwarded on to the National Assembly to be passed.

Policy & Direction

The Federal Ministry of Transport (FMT) sets policy for and coordinates the sector, and oversees a set of sector regulators that, pending some of the reform bills being passed, currently 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). The overarching policy document that articulates the sector’s long-term vision is the National Transport Policy (NTP), which aspires to boost efficiency, transform Nigeria into a regional logistics hub and encourage more private sector investment.

The Infrastructure Concession Regulatory Commission (ICRC) and the Bureau of Public Enterprises (BPE) are two cross-sector agencies charged with accelerating investment by fostering an environment that is conducive to private partnerships. The ICRC lends support and offers best practice guidelines to ministries, departments and agencies in their structuring of PPPs for infrastructure development across a wide variety of sectors.

For its part, the BPE aims to reduce bureaucratic redundancy and streamline operational efficiency by removing the state from active market participation. This can entail removing monopoly privileges from government operators, privatising public assets, corporatising public agencies and concessioning operating rights for public assets into PPP deals.

Consolidating Power

Another of the BPE’s mandates is the streamlining of regulatory power under fewer bodies. This is a particularly complex task in the transportation sector, as the multiple agencies already in place have a strong legacy, with each having its own agenda and technical expertise. “There are too many laws and regulators involved in the logistics sector, which leads to delays in delivery time and raises costs,” Oluranti Shobande, the managing director of Marflex Logistics, told OBG.

While the restructuring framework will be fit for purpose for different modes of transportation, the general approach will be to form an umbrella regulator for the sector that will handle economic matters, with separate technical regulators to be put in place to oversee specific sub-sectors. In the case of maritime transportation, for example, the NTC has proposed a single, independent maritime authority that will absorb the NPA, the Nigerian Shippers Council (NSC), NIWA, and the Nigerian Maritime Administration and Safety Agency (NIMASA) into one umbrella body. At the time of print, the NSC appeared to be playing the role of technical regulator in an interim capacity while the National Assembly was in the process of formally passing the NTP into law.

Overlap

The challenge of overlapping authority is particularly apparent in projects that intersect the federal and state governments’ jurisdictions. Nigeria’s 36 states – plus the federal capital territory of Abuja – are each entitled to form their own transportation ministries, embark on their own public work projects and issue their own PPPs. What arises from this redundancy in turn are instances such as that which took place with the reconstruction of the Lagos-Badagry expressway.

Spearheaded by the Lagos Metropolitan Area Transport Authority (LAMATA), the Lagos-Badagry project aims to expand the highway connecting the commercial capital with the country of Benin by six lanes to 10 in total, with two of the new lanes allocated for exclusive use by the Lagos bus rapid transit system. While the highway runs within state lines, the federal government intervened, claiming that the road belonged to the national government on the grounds that it can be classified as “transnational”, since it connects to a border posting.

Eventually, a compromise was reached and the road was reclassified as federal; however, Lagos State was able to retain operational authority under a concessionaire framework. “There is at the moment some federal authority overlap over right of way related to our ring road proposal which is also leading to delays,” Frederic Oladeinde, technical advisor and head of the transport planning unit at LAMATA, told OBG. “We are submitting an alignment study, but this can be a slow process.”

Port Progress

The transport sector’s first major foray into privatisation took place in 2006, when cargo operations at eight major ports and oil terminals were handed over to private operators through concessions. Cargo throughput at Nigeria’s two main seaports in Lagos (Apapa and Tin Can Island) and Port Harcourt (Rivers Port Complex) has grown 10% per annum since the transfer, with improvements in dwell times, charges and loss reductions also cited as a result of the shift. For example, in the case of Apapa Port, annual container volume handling has more than doubled since being sold off to the Danish shipping conglomerate, the Maersk Group, from approximately 250,000 twenty-foot equivalent units (TEUs) to around 630,000 TEUs.

“Since liberalisation in 2006, productivity at the ports has seen a vast improvement, although we are still facing sporadic congestion. Yard management has also advanced as a result of more effective physical space management and better entry control and traffic management,” Peter Bleasdale, the former managing director of the container shipping company CMA CGM Delmas Nigeria, told OBG. “Gate outperformance has unfortunately not improved to the degree that was hoped for, and even though container dwell times have fallen from 35 days to between 22 and 25 days, they are still amongst the highest in West Africa,” he added.

In other areas of the throughput chain beyond the operator’s control, improvements have not kept pace. Customs clearance and congested access roads in and out of the ports have been deemed the main bottlenecks (see analysis).

With the two main container ports experiencing high utilisation rates and pushed to their limits, new capacity is needed to keep pace with rapidly rising cargo volumes. To that end, there are seven new port projects in either the proposal or construction stage. The most advanced of these is Lagos’s new seaport at Lekki, which is expected to be operational by the year 2018 (see analysis).

Despite these positive trends in the transportation sector, the devaluation of the naira and the drop in crude prices in the latter half of 2014 have largely resulted in weaker consumer spending and lower shipping volumes in the country. Indeed, according to a shipping traffic report by the NPA, the number of ocean-going vessels bringing both containerised and break bulk goods into the country was down 63% in the three months to February 2015. Likewise, local importers are being confronted with overstocked warehouses due to lower spending.

River Routing

Nigeria has no shortage of water access, with 825 km of coastline connected to an extensive network of inland rivers that includes the River Niger, West Africa’s largest river and the 11th largest in the world. The total navigable distance of interlocked rivers, creeks, lagoons and lakes in the country is estimated at 10,000 km, with interconnectivity covering some 20 states and extending into neighbouring Cameroon and Benin.

The federal government, through NIWA, has revealed that some N49.4bn ($301.3m) will be allocated towards refurbishing and creating new inland waterway infrastructure across the country. Milestones to date include the dredging of around 527 km of the Lower Niger River, running from Warri in Delta State to Baro in Niger State, as well as the rehabilitation of the Onitsha River port, which was commissioned in August 2012. While inland maritime transport does not match rail or road in terms of carrying capacity, it is helping to ease the burden on an already strained land network. It is considered a fast and cost-effective solution, as it is less capital-intensive than traditional hard transport infrastructure.

Road congestion and the need to exploit all possible transport alternatives are particularly acute in the country’s largest metropolis, Lagos. The Lagos State master plan for transportation calls for the launch of 11 passenger ferry routes, with services to target commuters who reside on the mainland and work in one of the commercial and industrial centres of Lagos Island, Ikoyi, Victoria Island and Lekki. “We are working with NIWA to incorporate our planned routes within their national waterway master plan,” Oladeinde told OBG. NIWA has already indicated some local and foreign investor interest in operating private ferries in Lagos, which would help take some of the pressure off the state operator. NIWA currently runs 126 jetties in 18 locations, at significant operating and maintenance costs.

Back on Track

Nigeria’s rail system has remained virtually untouched since the country gained independence in 1960. Some 3000 km of railway was inherited from the British, to which only 500 km of new track had been added, and a lack of investment in maintenance and repair has led to most passenger and freight rail activity ceasing.

In the 1960s some 11m passengers were being carried by rail each year, a figure that dropped to 2m by 2008. While freight rail capacity was measured at 3m tonnes per annum in the 1970s, according to the FMT, that figure has since dropped to 150,000 due to neglect and a lack of funding. As a result, most heavy freight is being carried on a congested and dilapidated road network, and the Federal Road Safety Commission of Nigeria has warned that under current projections, the number of trucks on local roads is likely to increase substantially in the future.

Better Coordination

According to the NRC, which has held full control over federal rail ownership and operations since the introduction of the Railway Act in 1955, some $10bn has been committed to rail projects in the six years leading up to 2013, with the focus split amongst modernising running railway lines, recommencing services on dormant lines and constructing new ones.

The 25-year rail system master plan is now in its second phase of development. The first phase centred on the rehabilitation of existing narrow-gauge lines across the country, now around 90% complete, while the second through the fourth phases are focused on developing standard-gauge, moderngauge and eventually high-speed railway systems.

In the same vein as legislative developments for other modes of transport, a new railway bill has passed through the Senate that calls for the removal of the NRC’s monopoly privileges, with a view to reforming the entity into a purely technical regulator. Existing and proposed rail lines are set to either be given out as concession lots or sold outright; however, this has not progressed as rapidly as intended due to delays in converting the bill into law.

“The railway bill has been tabled going on two years, and we will not see anything further until a new government comes in,” Alstom’s Sapara told OBG. “As it stands it contains some very general statements about privatisation, but there is not enough transparency about the specifics that the bill will contain,” he added.

Careful Planning

In addition to more regulatory clarity, when it comes to attracting investment in rail infrastructure, deliberate planning is needed to ensure that gauge and rolling stock, which often need to be ordered years in advance, are integrated and standardised. In general, concessionaires feel more secure operating freight lines, as fixed contracts with bulk customers can be negotiated in advance.

In Nigeria’s case, new freight lines will mostly be dedicated to carrying oil, coal, steel and agricultural products – each of which comes with its own specifications for safety and sanitation. In terms of passenger lines, intercity routes are generally less attractive, as demand is less predictable than on shorter-distance urban mass transit lines that receive a steady flow of daily commuters.

Historically, rail lines that were put in place by colonial powers have predominantly been focused on exporting commodities to, and receiving finished goods from, their European home bases. As a result, lines aimed at servicing intra-country trade within West Africa are few and far between.

In addition to planning for intermodal connectivity in terms of rail lines connecting ports with last-mile road links, collaboration within ECOWAS to ensure that new rail lines are built according to preagreed standards is essential to achieving seamless rail connectivity across borders. “We see a lot of talk amongst governments about regional connectivity, but not much has come about in terms of policy or actions in this direction. There is a need for more platforms for policy synergy,” Sapara said.

On a domestic level, federal and provincial governments need to coordinate more efficiently and effectively when planning their urban and national rail projects. “Some of the delays Lagos has been experiencing in constructing its metro lines are due to hold-ups in receiving right of way approvals from the federal government in instances where planned routes overlap with national rail projects,” Parsifal Partners’ Onyia told OBG (see analysis).

Aviation

Turning to the sky, only around 5m Nigerians out of a population of 170m have flown on aeroplanes, underlining growth prospects as disposable incomes rise and mobility expands. Air links, especially domestic ones, remain limited, though this is less pronounced than in other modes of transport. Recent years have been particularly testing for the indigenous airline industry, starting with the grounding of the national carrier Air Nigeria in 2012, followed by a string of incidents that brought industry safety into question. More recently, the regional Ebola outbreak led to lower passenger volumes and some flight cancellations across West Africa.

These incidents aside, the medium- and long-term projections for future air travel demand in Nigeria remain strong. The Federal Ministry of Aviation (FMA) is in the midst of a transformation programme, backed by a $500m loan from the China Export-Import Bank aimed at renovating and upgrading 22 federal airports across the country. New terminals are being constructed at Nigeria’s four international airports, and a new international airport is set to open in the south-eastern city of Enugu.

The new terminals at Lagos, Port Harcourt, Kano and Abuja will be built by the China Civil Engineering Construction Corporation as part of a 21-year build-operate-transfer agreement with the Chinese government. The FMA has stated that 200,000 jobs will be created in the process, while the direct and indirect contribution of the aviation industry is expected to reach N300bn ($1.8bn) by May 2015, up from the current N200bn ($1.2bn).

Between 2010 and 2013 total passenger air traffic grew at a compound annual growth rate of around 14.3%. In 2013, air passenger numbers increased by 1.37% year-on-year (y-o-y) from around 14.08m to 14.3m, according to figures from the FAAN. This number could soar to 50m in the coming decade if capacity keeps pace with demand. FAAN figures also show that airports in Lagos and Abuja were responsible for 50% and 25% of total passenger air travel between 2012 and 2013, respectively.

In an effort to re-establish a national carrier, the government has partnered with consultancy KPMG to identify potential strategic partners for the endeavour, reportedly shortlisting South African Airways, Ethiopian Airlines and Lufthansa. The latter two have a track record in Nigeria going back 50 years.

Carrying Cargo

In addition to targeting higher passenger figures and generating associated revenue increases, airport upgrade and expansion plans also include cargo as well as maintenance, repair and overhaul (MRO) services components – two areas that are proportionately underserved. At present, there is a marked imbalance between imported and exported air freight, with the quantity of incoming air cargo generally hovering between 6.5m and 7m tonnes per year, compared to an outgoing load of between 750,000 and 800,000 tonnes per annum. “We face some of the highest cargo rates in the world as planes return empty,” Eric Opah, managing director and CEO of logistics provider Fortune Global Shipping & Logistics, told OBG.

Although Nigeria has a large agricultural base, its fresh produce exports are constrained by the logistical challenges of transporting perishable items by sea to distant markets. Through the construction of 15 dedicated perishable cargo terminals, the FMA believes it can tackle two shortcomings at once by providing a platform for farmers to send produce to international markets while also ensuring cargo planes are carrying full outbound and inbound loads.

These terminals should also help facilitate the development of ancillary support industries like packaging and storage. That said, a successful export-processing zone will require more than just physical infrastructure. “When importing perishables, you need a one-stop agency that handles everything and sets and ensures standards. If, for example, a Nigerian yam is to make it to a European supermarket shelf, there needs to be quality control tracking all the way back to the farm it came from,” Opah said.

MRO

As the market for commercial and private air travel grows, so too does the potential to undertake additional MRO services. “If the government could reduce the duties and fees for spare parts, it would allow for further development of an MRO industry that would subsequently create a greater value chain in the aviation sector and lead to more jobs,” Ohis Eimiaghe, regional manager of North, West and Central Africa at South African Airways, told OBG.

The Federal National Civil Aviation Policy, which was published in April 2013 by the Ministry of Aviation, identifies a growing aircraft fleet, the availability of technical manpower and geographic advantages as factors to be exploited in positioning Nigeria as an MRO hub. The policy also includes several tax incentives for investments in MRO facilities.

On the Road

While other modes of transport are being built out, the bulk of the movement of people and goods – as much as 95%, according to the FMT – still takes place by road. Measured at 200,000 km, Nigeria’s road network is the largest in West Africa, but it is facing pressure to keep pace with economic and population growth, falling short of global benchmarks for paved road-to-population ratios.

According to a 2013 National Integrated Infrastructure Master Plan report, on average 68.3% of the roads in Nigeria are in poor condition, or roughly 40% of federal government roads, 78% of state roads and 87% of local government roads. These figures are particularly stark, as federal roads account for around 80% of all vehicle traffic despite representing just 17% of the national total, making them particularly susceptible to wear and tear, a 2012 Federal Roads Maintenance Agency survey found.

“Most roads are not drivable, which hinders movement, especially during the rainy season. Freight that should be delivered by rail is being delivered by road, which is worsening the conditions of the road network,” said Marflex Logistics’ Shobande.

The FMT estimates that N500bn ($3.1bn) will be needed annually over the next decade to fix, build and reconstruct the road network in line with international standards, substantially in excess of the annual budget allocation of around N100bn-150bn ($610m-915m). In turn, private sector involvement is being sought, and a number of routes are being packaged as PPP toll-road concessions.

Outlook

The port concessions show the PPP model can work and demonstrate the possible efficiency and performance gains from privatisation. Across all modes of transport, a mismatch between demand projections and current capacity is evident, making a strong case for interested bidders, given the right regulatory framework and operating conditions. The outgoing administration made a clear commitment to reforming the transport sector, and has signalled that the role of the state in asset ownership and management will be reduced as the private sector is invited to take on greater responsibility.

While the election of a new president adds an element of uncertainty to the equation, in his acceptance speech, Muhammadu Buhari also expressed a commitment to infrastructure renewal. “We shall implement a national infrastructure master plan that will provide construction and related jobs across the land. Furthermore, by improving our transportation infrastructure through road, rail and port construction we expand the outer bounds of economic growth, as no economy can grow beyond the capacity of its infrastructure,” Buhari said.

Prospective investors will be eagerly waiting to see how the transition impacts the passage of key bills – like the NTP – and the confirmation of the revised roles and remits of the various regulatory bodies and state institutions operating in the sector.