Structural reforms open up Nigeria's transport systems to private investment

With Africa’s largest economy and its biggest population, Nigeria’s growth potential has been widely reported; however, long-term bottlenecks have prevented the country from realising that potential. The transport sector has been identified over the years as one of those bottlenecks. As a result of decades of poor maintenance and underinvestment in new capacity, the sector is marked by congestion, inefficiency and high overheads. Therefore, transport infrastructure and the logistics sector were identified as key elements of the March 2017 Economic Growth and Recovery Plan (EGRP) – President Muhammadu Buhari’s strategy for the country’s post-recession development. Indeed, there have been ongoing calls for significant capital spending in Nigeria (see Economy chapter).

A 2014 study by consultancy firm McKinsey estimated that Nigeria would need to invest $839bn into infrastructure by 2030 to allow the economy to realise its full potential, with the bulk of this investment required in transport and power systems. The study, which based its analysis on the expectation that a series of ambitious and efficient projects would be rolled out in the coming decades, noted that the nation’s infrastructure requirements were heavily dependent on economic growth and the ability to successfully execute planned projects.

Officials have stated that public sector spending alone cannot address all of the challenges facing the sector, however, leading to a shift towards improving the business environment in order to attract new private investment in rolling stock, infrastructure and facility management. The proposed reforms include an end to state monopolies, the privatisation or concession of assets to operators, and the establishment of independent technical and economic regulators. While these proposed legal reforms have long been on the table, 2017 could see progress on the matter.

Upgrades

The need for improved transport infrastructure and processes in Nigeria has been well documented, with roads in the main commercial hub, Lagos, often suffering from significant traffic delays. Congestion issues on the city’s roads are in part a reflection of the lack of alternative passenger and freight transport options, particularly in terms of rail transport. Nigeria’s road network accounts for 90% of the transport sector’s contribution to GDP, with the network itself in need of improvement. There are 22 km of road per 100 sq km in Nigeria, compared to 28 km in Kenya, 62 km in South Africa and 158 km in India, according to the EGRP.

On top of these concerns over road coverage, infrastructure penetration is even more limited in other areas. The rankings for railway show that Nigeria has 4 km of railway per 1000 sq km, against 6 km in Kenya, 17 km in South Africa and 23 km in India. Such a shortage has a noticeable impact on the efficiency of distribution activities, with Nigeria ranking 90th out of 160 countries on the World Bank’s Logistics Performance Index in 2016, trailing other African countries such as Ghana, South Africa, Burkina Faso and Kenya.

Roads

As the primary conduits for the country’s internal trade and movement, roads are a high priority for federal, state and local spending projects. Nigeria’s network contains about 200,000 km of various road types, of which 19% is paved. The Federal Roads Maintenance Agency (FERMA) considers less than 30% of the network to be in good condition, while the Nigerian Society of Engineers estimated the value of the system at N4trn ($14.1bn). About 35,000 km of the total are designated federal roads, some 30,000 km are state roads and the remaining 135,000 km are under the supervision of local governments. Much of the system is in poor condition and suffers from significant road delays, which has an impact on the estimated 11.5m vehicles using the country’s roads. Around 54% of these vehicles are used for commercial transport, with the damage from poor road infrastructure resulting in high vehicle maintenance costs, estimated at N134bn ($473.6m) annually. More than half of respondents in a recent survey reported damage to their vehicles due to the condition of roads, with severe potholes among the most common concerns.

Road Network Oversight

At the federal level, responsibilities for road building and maintenance are divided roughly along the lines of capital and operational expenditure. The minister of power, works and housing handles new building and major rehabilitations, while FERMA oversees maintenance, which can be carried out directly or through private contractors.

In order to help prioritise future spending priorities, the Adam Smith Institute partnered with the public Nigeria Infrastructure Advisory Facility to monitor the road network, including a software package designed to analyse the quality of roads.

In June 2017 the Senate approved a bill to close FERMA and replace it with a semi-autonomous agency, the Federal Roads Authority, in part to reduce uncertainty over responsibility for project implementation. Babatunde Fashola, minister of power, works and housing, said the new authority would become “the biggest construction company” in Nigeria, with plans to hire 47,000 people to work on improving the road network.

Spending

In terms of infrastructure development, the Ministry of Power, Works and Housing has prioritised national highways that hold key commercial importance. The ministry has also allocated N150bn ($530.1m) of its 2017 budget on high-volume corridors, including the expansion and rehabilitation of the Lagos-Ibadan Expressway, as well as the construction of a second bridge over the Niger River at Onitsha. Second-tier priorities include roads that feed into the national network, with N43bn ($152m) allocated in the current budget. Of this, N25bn ($88.4m) has been set aside for roads offering access to major commodity hubs and ports, including a new access road for the Lagos Port Complex. The road to the port is potholed and often congested, which has served as an obstacle to moving goods smoothly.

The federal government is also allocating N8.9bn ($31.5m) to rural roads, which are used to transport agricultural produce to local markets and storage facilities. These developments offer potentially substantial benefits to rural development, given that as much as one-third of total agricultural output destined for local markets perishes before it reaches the point of sale – a significant loss for farmers (see Agriculture chapter).

Financing

While direct budgetary spending is a major component of the country’s infrastructure development, the extent of financing requirements has meant that there are opportunities for more innovative approaches. At the state level, the more notable projects in Lagos include the construction of a fourth bridge connecting the mainland to the isthmus and islands south of the Lagos Lagoon, along with improvements to the road linking the city with its airport. Financing for these projects is expected to come in part from public infrastructure bonds. Used to raise finance for specific projects, infrastructure bonds are a commonly used instrument in other markets, such as Chile, but are rarely employed in Africa.

The government has also unveiled plans to convert major roads, such as the Lagos-Ibadan Expressway, into toll roads, in an attempt to attract private investment for operational management and maintenance. A concession to reconstruct the Lagos-Ibadan route was previously awarded to Bi-Courtney Highway Services as a public-private partnership (PPP) in 2009, with the deal to be completed as a build-operate-transfer arrangement. While the agreement was cancelled in 2012 due to an alleged violation of some of the terms of the contract, local media reported in May 2017 that the deal could be revisited following a meeting of government officials and Bi-Courtney management.

Maritime

While roads serve as the primary conduit within the country, most of Nigeria’s external trade – whether bulk, commodities or containers – occurs by sea. The vast majority of containers arrive at either Apapa Port or Tin Can Island in Lagos, with the two ports achieving a 97% market share in 2016. Other major container ports include the Rivers Port Complex in Port Harcourt, Onne Port and Delta Port.

Port usage has fallen in recent years, according to the Nigerian Ports Authority (NPA), which owns the eight port complexes across the country. While throughput rose by 0.8% to 196m tonnes in 2015, the latest period for which full-year figures are available, cargo traffic (excluding crude-oil terminals) fell by 9.6%, general cargo handled at the ports dropped by 26.6% and laden container traffic decreased by 12.6%. Container traffic was down 30% in the first nine months of 2016, and the number of vessels arriving in the country dropped to an 11-year low. Meanwhile, Non-oil export commodities accounted for less than 10% of total export volume, with most of that consisting of cocoa beans and palm kernels.

External Headwinds

Much of the decline in port usage has been a result of external factors. The drop in the price of oil, which led to a fall in the value of the naira against other currencies, has reduced domestic demand for imports. Similarly, import bans on certain consumer goods – part of a government effort to encourage domestic production and reduce the country’s trade deficit – has also had an impact.

Import substitution policies, including bans on the import of certain products, are designed to increase value addition and domestic production, and this is supported by the fact that ships calling into Nigerian ports typically leave empty, as was the case for 86% of container traffic in 2015, according to the NPA.

Although at least three new port facilities have been proposed by the NPA in the past few years, progress on them has been generally slow.

In May 2017 International Container Terminal Services, Inc. (ICTSI), the Philippine concessionaire for Nigeria’s Lekki Port upgrade, finished operating a container terminal at the site. The NPA, along with Lagos State, had signed the concession agreement with the company in 2012 to invest a total of $225m in a container port – to be developed by Singapore’s Tolaram Group – and to operate it for 21 years. However, ICTSI cited delays in execution for what was described as a mutual decision to cancel the agreement.

Maritime Regulation

The government is looking to make changes elsewhere in the maritime industry, particularly in terms of regulatory oversight and procurement. In addition to the NPA and the Nigeria Customs Service, the main public bodies overseeing the maritime sector include national regulator the Nigerian Maritime Administration and Safety Agency, and the National Inland Waterways Authority, which overseas river ports and transport.

This roster of actors may be about to change, however, as lawmakers look to reform the operating environment. The Nigerian Ports and Harbours Authority Bill, a long-awaited legal reform, would transform the NPA into a commercial regulator, and more clearly codify concessions arrangements. The push to transform the role of the NPA originally began in the mid-2000s, when port operations shifted from the authority to a concessions system, with operators responsible for cargo handling as well as terminal upgrades.

Concessions

The benefits of further improving the concessions system are expected to be significant, given the progress made in recent years by contracting out operations at the country’s ports. There are 25 concessionaires holding leases ranging from 10 to 25 years, while turnaround time for vessels has improved, dropping from 6.5 days in 2011 to 4.9 days in 2015.

Despite the progress made by the industry, challenges remain. A study commissioned by the US-based Centre for International Private Enterprise found that inefficiency and corruption costs Nigeria an estimated $3bn per year, and that illegal payments account for more than half of a company’s costs of importing and exporting goods. Similarly, local participation in the sector is limited, as Nigeria lacks a domestic fleet to transport its own crude oil.

In addition, maritime security is also a concern, with more than half of the sailors kidnapped globally abducted off the coast of West Africa, according to the International Maritime Bureau.

Aviation

Nigeria’s aviation sector has faced a number of external challenges in recent times, ranging from slowing passenger volumes to rerouting due to infrastructure issues and currency depreciation.

Total passenger traffic was down by 31% quarter-on-quarter in March 2017, while international traffic fell by 18%. This was compounded by the fact that Nnamdi Azikiwe International Airport in Abuja – one of the country’s principal international airports – was closed for six weeks for runway repairs over March and April 2017, with flights rerouted to Kaduna, approximately 200 km to the north.

Broader macroeconomic headwinds have also weighed on the aviation sector. As of March 2016 Nigeria owed airline carriers $575m in outstanding airfares, as a slump in US dollar reserves prompted the Central Bank of Nigeria (CBN) to preserve foreign exchange in order to protect the naira from further depreciation. The CBN’s efforts to prioritise the allocation of foreign currency made it difficult for airlines to repatriate income. The currency issues intensified in June 2016 when the CBN allowed the naira to depreciate, subsequently pushing the price of jet fuel to record highs, with some paying as much as N200 ($0.71) per litre for fuel. Prior to the currency float, fuel prices already comprised 40-50% of an airline’s operational costs, with the reduction in value of the naira making many services unsustainable.

According to international media, some foreign airlines were forced to develop alternative solutions when flying to Nigeria, such as loading up with extra fuel on inbound flights, or landing in nearby Accra, Ghana, for refuelling stops.

The CBN announced specific market intervention to support airlines in September and October 2016; however, by that time a number of airlines, including Kenya Airways, United Airlines, Iberia and Emirates, had either scaled back or temporarily suspended services due to currency issues.

Domestic Carriers

There are 23 companies offering domestic airline services in Nigeria, although most have fleets of fewer than 10 planes, and are thus vulnerable to service interruptions. Two of the larger airlines, Arik Air and Aero Contractors, are now under government control due to solvency concerns. Arik, the largest carrier, accounting for 55% of domestic passenger traffic, had a debt of N375bn ($1.3bn), according to the Asset Management Corporation of Nigeria (AMCON), the state institution created to absorb troubled ventures deemed systemically important.

The government has taken strong action to stabilise the airline, however. As of May 2017 AMCON had injected N1.5bn ($5.3m) of capital into Arik, and was importing spare parts to fix planes, as only 10 aircraft out of a fleet of 30 were in operational order. The government has also held talks with private equity investors in a bid to solicit interest in potential stakes in the airline. According to local media, Joseph Arumemi-Ikhide, the chairman of Arik Air, said the airline was in talks with investors from the Middle East.

Aero Contractors had been the longest-running domestic airline in Nigeria, having been established in 1959 to service the oil and gas sector before branching out. The airline suspended services in September 2016, citing challenges to operations. Meanwhile, local media has reported that government officials have discussed a possible merger between Arik and Aero.

The challenges affecting domestic carriers have not stopped new firms from entering the sector, however. Among the new arrivals is locally owned JetWest, which aims to begin services by the end of 2017. The company plans to operate as a low-cost carrier, with basic, unbundled fares available at base rates.

Some industry stakeholders believe the sector will rebound in the near term. “A large number of operators in the aviation sector have suffered from dwindling revenues as a result of the economic situation, with several having to cut costs,” Seyi Adewale, chief commercial officer of the Nigerian Aviation Handling Company, told OBG. “However, we expect the sector to bounce back quickly as the economy improves.”

Infrastructure Oversight

At present, the Federal Airports Authority of Nigeria operates all of the country’s 20 airports. The Nigerian Civil Aviation Authority handles safety, while the Nigerian Airspace Management Agency deals with navigation and air traffic control issues. Both agencies are under the control of the federal Ministry of Aviation.

Infrastructure improvements include the construction of a new terminal at Lagos’ Murtala Muhammed International Airport, which accounted for 41% of domestic passengers and 77% of international traffic in the first quarter of 2017. The development, expected to open in the fourth quarter of 2017, will expand capacity at the airport from 15m to 30m passengers. Upgrades are also under way at Nnamdi Azikiwe International Airport, where capacity will more than triple, increasing from 5m to 16m passengers. The improvements are partly funded by a $500m loan from the Export-Import Bank of China, with construction for the projects being undertaken by Chinese state firms.

Rail

The country’s rail sector offers immense potential for improving efficiency, as well as lowering transport and distribution costs. While the government has undertaken a number of projects to help achieve this potential, it will be some time before tangible results are realised, given the scale of the undertaking.

The Nigerian Railway Corporation (NRC) is the federal owner of rail assets in Nigeria, including track, rolling stock and other fixed assets, and it also acts as the industry regulator. The NRC operates routes totalling 3534 km over narrow-gauge tracks, with the main line connecting the commercial hub of Lagos to Kano, the most populous city in Nigeria’s north. In addition, the NRC operates a standard-gauge line of 277 km.

Similar to many rail networks across Africa, Nigeria’s system has suffered a decline in quality in recent decades. Prior to the current round of investment, the most recent rail route was opened in 1964, with the NRC having undergone a number of bankruptcies and restructurings. Today, only two main lines, along with additional branch lines, are available for service.

Fresh Approach

The plan for modernising the system relies on soliciting private investment through PPPs and concessions, strategies which feature heavily in the Nigerian Railway Corporation Bill. The legislation, which as of June 2016 had passed the Senate but needed final approval before becoming law, would end the NRC’s monopoly of the rail sector and ease the signing of PPPs with investors. In 2017 US giant General Electric was awarded a $2.2bn concession to manage the two narrow-gauge rail lines crossing sections of the country.

Investment In New Tracks

The ongoing legal and regulatory changes have not stopped the NRC from rolling out new infrastructure and looking to improve usage of existing corridors. The authority announced that its current narrow-gauge system would be dedicated to cargo transit, with passenger traffic shifting to new standard-gauge routes that are currently under construction.

The main standard-gauge line will run from Lagos to Kano, though on a different path to the existing narrow-gauge line. The new line is being built in sections, with the first, 187-km passage between Abuja and Kaduna opening in July 2016. This project was initially part of an $8.3bn deal signed in 2006 with the China Civil Engineering Construction Company (CCECC) to revamp the whole line, but this umbrella project was later separated into different parts. Costs for the Abuja-Kaduna section are estimated at $874m, while the next phase will connect Lagos to Ibadan. This project, estimated at $1.53bn, will convert that line to standard gauge, upgrading the existing single-track line to a double track. There are also plans for a standard-gauge line linking the south-east and south-west of Nigeria, stretching from Lagos to Calabar. The connection is estimated to cost $3bn, with Chinese state construction firms expected to undertake the project.

Metro Work

Short-distance light rail projects are also under way. Lagos, Abuja and Kano all have plans to offer urban light rail lines to ease road congestion. Abuja is planning a 45-km route with 12 stops, with the CCECC working on the project. By March 2017 some 90% of the project was complete, while additional construction has also begun on both tracks and stations in Lagos. A range of smaller-scale solutions, such as bus rapid transit systems, traffic calming measures and other less-costly reforms, are also being implemented to support tram and light rail projects.

Logistics

While affected by the 2016 recession and overall challenges faced by the economy, Nigeria’s logistics sector has experienced steady growth over the long term, growing by an annual average of 10% and worth an estimated N200bn ($706.8m) as of 2016, according to local media reports. Despite this, the sector – which hosts a range of local and multinational carriers, including DHL, UPS and Bolloré – is still grappling with challenges, including a large informal sector and a fragmented trucking industry. As much as 60% of the goods imported through the country’s ports make their way to informal wholesale markets, which in turn are distributed through informal channels, often resulting in inefficient movement and congestion.

The congestion, particularly in Lagos, the country’s primary entry point, can complicate the movement of goods, and there has been discussion about how to spread traffic around the other ports. “If port usage can be diversified, that will be a big opportunity because Lagos is becoming more congested by the day,” Muyiwa Adeseyoju, managing director of DHL Express Nigeria, told OBG. DHL is considering establishing a logistics hub in Ondo State, as well as additional facilities in Port Harcourt and Warri, to help access.

Considering Postal Reform

One potential solution to improve the efficiency of the logistics sector is to reform state mail carrier the Nigerian Postal Service (NIPOST). Concerns have been raised over the responsibilities of NIPOST, given that it is both an operator and regulator of courier services. The National Assembly is considering a bill to reform NIPOST, which would see it retain its role as an operator and create a new body to oversee regulation of the sector. “This is a massive opportunity for the logistics sector,” Adeseyoju said. “NIPOST goes to the most remote places in the country, so we could partner with them to do last-mile services.” Currently DHL uses more expensive private options for delivery, which pushes up prices.

Outlook

With transportation a priority for both public and private operators, efforts to reform the sector have taken on increased urgency. The overhaul of state agencies, along with the separation of operator and regulator mandates, are expected to yield significant benefits. However, as evidenced by efforts to streamline other sectors in Nigeria, these adjustments can take time to be fully realised. For example, the proposed Nigerian Ports and Harbours Authority Bill, which aims to reform port operations, has now been before Parliament for a decade.

Current efforts focusing on improving the quality of roads and upgrading the nation’s rail connections should ease traffic congestion in Nigeria’s commercial centres and lead to greater efficiency for logistics operators. These improvements, along with attempts to reform key institutions in the maritime industry, offer significant growth potential for the sector.