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Nigeria hopeless infrastructure: Can’t spend, won’t spend

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[caption id="attachment_542" align="alignnone" width="640"]Flickr: AlvaroBad road in Nigeria[/caption]

TO UNDERSTAND THE impact of Nigeria’s hopeless infrastructure on its businesses, look at Gloo.ng, a fast-growing startup that has already become the country’s largest online supermarket.

In a crowded office young programmers huddle around MacBook computers, designing the website and intelligent-mapping systems that look for the most efficient routes to guide delivery vehicles through the perpetual gridlock which Nigerians call “go-slows”. Its slick website is hosted in the “cloud”, the massive international data centres run by internet behemoths such as Amazon and Microsoft. Yet at the back of this cutting-edge office sits a pile of fuel cans to keep delivery vans on the road during the regular shortages. And near the front is a sparkling white generator, neatly branded with Gloo’s logo, chugging away to keep the lights and the computers going. “This is my primary source of power,” says the firm’s founder, Olumide Olysanya, adding only half in jest: “The grid is my backup.”

Nigeria ought to be able to generate about 5.5 MW of electricity, but because of breakdowns, gas shortages and decrepit transmission lines, it struggles to churn out more than half that amount. Large areas of the country are left without power for weeks at a time. Even the luckier ones generally get only a few hours a day. Political connections are no help. In 2012 the governor of Sokoto, enraged by the regular power cuts and suspecting they were deliberate, was reported to have summoned a regional manager of the state-owned power company and beaten him and some colleagues with a horsewhip. In response the power company cut off the entire city for a few weeks. The governor dismissed the allegations as false and said he had merely handed over the power workers to police for proper investigation.

 

No power to your elbow

The economic consequences of this power shortage are catastrophic. Experts reckon the economy could be growing by two to four percentage points faster each year if it had sufficient power. A large brewer explains that energy accounts for about 5% of his total costs, ten times as much as at similar outfits in other countries. At banks, where each branch needs its own generator, fuel accounts for about 6% of total costs, and at mobile-telephone companies, which have to provide power to each of their cellphone masts, it can be 10% of total costs.

Many other basic bits of infrastructure are also falling apart. The main ports in Lagos are overcrowded and inefficient. Cargoes can take weeks to be unloaded and moved from the port. Railways that once linked the north and south of the country, moving raw materials and finished goods to and fro, are now overgrown and rusted. The 3,500-plus km of track Nigeria had in 1960 has shrunk to almost nothing, though some has recently been refurbished. Petroleum pipelines built to move fuel from refineries and oilfields near the coast to the interior stand idle. All the country’s petrol and diesel is now transported by road, at huge cost. On the highway from Lagos to Ibadan, hundreds of fuel tankers belch smoke and thousands more are parked by the side of the road as they wait to collect their cargoes from one of the country’s main depots. The lorries are brightly decorated and hand-painted with colourful logos, but many lack licence plates or working lights. And that is just on the paved roads, which make up less than 20% of the total, half as much as in the rest of sub-Saharan Africa.

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The lack of decent transport links has pervasive consequences. In the north factories and farms have stopped producing. This part of the country is a big tomato grower, producing large, firm, bright red fruit. But without roads to move it and a network of refrigerated warehouses to store it, about half the crop is lost on the way to market. So a country that should be exporting tomato paste (a staple in the region’s cooking) on a large scale imports about half of what it needs.

High transport costs mean that food is expensive, whether home-grown or imported. That in turn drives up factory wages, pushing up production costs. With big cities bursting at the seams, workers have to travel for hours to get to work, wasting time and money, so Nigeria is missing out on many of the productivity gains that usually come with urbanisation.

Setting things right will not be cheap. The World Bank reckons that Nigeria needs to spend some $30 billion-50 billion a year on infrastructure, which is about three times more than it currently spends. Little of that is likely to come from the public purse: the drop in oil prices caused the government’s capital spending to be lopped by two-thirds this year.

One solution is privatisation, for which the mobile-phone industry offers a model. Back in 1999 the government-owned telecommunications utility had installed a mere 450,000 phone lines, of which up to a third were not working. Yet when the government liberalised the telephone industry and auctioned off mobile-phone licences in 2001, the effect was stunning. Within six years 38m mobile phones were in use, a number that has now increased to well over 140m, or nearly one for each Nigerian.

The power industry, too, has been experimenting with liberalisation. The Power Holding Company of Nigeria (PHCN), a state-owned power monopoly that became jokingly known as “Please Hold Candle Now”, was broken up and privatised in 2013. But electricity production has barely increased since, mainly because the new generating companies cannot get natural gas to fuel their power stations, not least because the pipelines carrying gas are regularly blown up by militants in the Niger Delta.

The biggest problem with gas, though, is that the government has been meddling with the market. It has set regulated gas prices so low that oil-and-gas companies simply burn (flare) it as it comes out of the ground because that is the cheapest option. More than $1 billion-worth of such gas is thought to go up in smoke each year. But the message seems to be hitting home. In January 2014 the government raised the gas price from $1 to $1.5 per 1,000 cubic feet (still only about half the international price), and last August it increased it by another $1. Importantly, it also allowed gas companies and electricity generators to set their own prices, which triggered a spate of new investment.

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Cheap at the price

Most firms in Nigeria, of whatever size, are forced to generate their own power at a cost ranging from $0.35 to $0.5 a kilowatt-hour (kWh), a little less if they run large, efficient generators, more if they have small, inefficient ones. You might have thought that a reliable supply of power at anything less than that would be pounced upon. But when the national electricity regulator earlier this year tried to raise grid prices to about $0.2 a kWh to encourage investment in generation, manufacturers were outraged. After much lobbying and legal sabre-rattling, the regulator quickly issued a new maximum price of about $0.1 a kWh, which put an instant blight on investment in new electricity generation. “They were cutting off the legs of people like me who are trying to build power plants,” says Najim Anamisham, who has been trying to establish an independent power generator.

To show what private investors and competitive markets can achieve, take a short boat ride across Lagos lagoon towards Tin Can Island, where the Teras Conquest, a massive oil rig, rises almost 100 metres above the Lagos skyline. Hard-hatted workers are buzzing about, refuelling it and doing essential maintenance so it can head back out to the oilfields as quickly as possible.

Construction workers nearby are completing west Africa’s largest shipyard, a $300m joint venture between South Korea’s Samsung Heavy Industries and Ladol, a Nigerian oil-services firm. Plans have been drawn up to build a dry dock close by, the first in west Africa, that will allow Nigeria to repair ships and oil rigs that would otherwise have to travel to Cape Town, Houston or Portugal. Other investors are waiting to pour billions of dollars into port and other infrastructure.Yet even here vested interests get in the way.

The local market for servicing and refuelling oil rigs and the like is dominated by Intels, which is a private company but operates almost like an arm of the Nigerian state. Its investment in new port facilities has been underwritten by the government, which also guarantees the returns it earns on them. Shipping firms say it offers an efficient, if pricey, service, but it has little reason to become more competitive because the government has pushed oil firms to use its terminals instead of rival ones. Mr Jonathan’s outgoing administration in effect granted Intels a monopoly by forcing shipping companies to use its terminals for oil- and gas-related cargoes. A court ruling swiftly put a stop to that, but investors were taken aback. If the new government wants to rebuild the country’s tattered infrastructure, it needs to offer stable rules to encourage private investors. Equally importantly, though, it will have to tackle the endemic corruption that has led to so much public investment being squandered.

 

Source: (The Economist)

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