Tag

Infrastructure

Browsing

On Wednesday September 23rd 2020, the Federal Executive Council (FEC) announced the decision that the Federal Government had approved the construction of a $1.959 billion 284-kilometre single track standard gauge rail line from Kano to Maradi  in Niger Republic with a 93-kilometre branch line from Kano to Dutse, the capital of Jigawa state. The 377 km rail line will have stations in Dutse, Gaya, Wudil, Dambatta, Kazaure, Daura, Shargale, Marshi, Katsina, Jibia and Maradi in southern Niger republic.

Based on the official announcement, the 387-kilometre single track rail line will cost about $5million per kilometre according the official announcement, which is in the same range as the  dysfunctional dual-track rail line from Lagos to Ibadan that costs about $10.1 million per kilometre  and includes 4 extra-large bridges, 11 large bridges, 4 medium bridges 2 steel bridges, 10 frame bridges, 207 culverts, 40 railway crossings, no level crossings, and 31 pedestrian overpasses.[i]

While the approval of the project has been heavily criticised as a misplaced priority by many, it did not come as a surprise. President Buhari had earlier announced it to the public in his 2018 New Year’s speech when he said that “negotiations are also advanced for the construction of other railway lines, firstly from Kano to Maradi in Niger Republic passing through Kazaure, Daura, Katsina, Jibia to Maradi”.[ii] Provision for the project had also already been made in the 2019 Appropriation Bill.

A European contractor and a Chinese loan

The rail line is scheduled for completion within 36 months and is arranged under a 14-year buyer credit and long-term commercial loans. Financing will be provided by China, no surprise there. Contract details such as the interest rate on the loan or enforceable repayment clauses are not known or readily available in the public domain.[iii] Borrower and guarantor is the Federal Ministry of Finance of Nigeria on behalf of the Federal Government. Financial advisors to the project are KfW IPEX-Bank and Africa Finance Corporation (AFC).[iv]

The contractor handling the Engineering-Procurement-Construction (EPC) project, which leaves all the risk of the project with the Federal government, is Mota-Engil, a Portuguese company listed on the Portuguese Exchange, Euronext Lisbon. The company was designated as preferred bidder for the project in October 2018 after a due diligence mission conducted by a delegation composed by the Ministry of Finance (MoF), the Nigerian Railway Company (NRC) and the Infrastructure Concession Regulatory Commission (ICRC). [v] Mota-Engil also recently formed a joint venture with the Nigerian oil company Shoreline Group. Under the new venture, Mota-Engil will hold 51% of Mota-Engil Nigeria. [vi]

Positive social and economic effects for the population

Quoting Mota-Engil “the new railway line will impact a population of approximately 8.8 million people with many positive social and economic effects, including encouraging economic development through ease of access to goods and services, facilitate transport of raw materials and manufactured goods, and creation of employment for a wide range of personnel.”[vii] What these positive social and economic effects for the population are, will have to be put to the test in the future.

So far, the Government’s justification for the project has been underwhelming for Nigerians. The rationale for constructing infrastructure deep into foreign territory remains unknown to the people – who are the ones ultimately paying for this. The public announcement  was made by the Minister of Transportation, Rotimi Amaechi on Independence Day, only days before the Spokesperson to the President Garba Shehu had denied this fact via his Twitter handle, where he wrote that the rail project is part of an agreement between Nigeria and Niger that has been coordinated by the Nigeria-Niger Joint Commission for Cooperation and is part of the 2015 ‘Kano-Katsina-Maradi Corridor Master Plan, (K2M).[viii] This Master Plan needs to be made accessible to the public.

Purely economic reasons as rationale

Back in 2018 the public was told that the rail line, when completed, would assist the supply of crude oil from Niger Republic to a new refinery being built in the border town between both countries.[ix] [x] Selling the project has also been linked to a refinery project in Mashi, Katsina State,[xi] and to a planned refinery in Maradi. Why crude should be moved to a refinery by rail has neither been disclosed or justified yet.

The Government’s latest justifications for the rail line are economic and commercial benefits for Nigeria. The attempt by the Minister of Information and Culture, Alhaji Lai Mohammed, to explain the rail extension by citing “economic advantages of import and export of Niger Republic, Chad and Burkina Faso, which are landlocked countries” also stating that “there has been a lot of disinformation and total lack of information” over the rail line amounts to no more than a statement as he did not specifically state how Nigeria stands to benefit. Fair enough to inform the people that Niger to date has no functioning rail line at all. Neither has Chad, while Burkina Faso has a rail line with a narrow gauge that is not compatible with the narrow gauge in Nigeria.

It is not clear if the minister was airing an opinion when he implied that Nigeria will be able to take over the imports and exports from the mentioned countries with the rail link by connecting them to Nigeria’s ports. The simple reason, is to strengthen the economy of Nigeria he said. [xii] Days before, spokesperson to the President Garba Shehu had written on Twitter that the objective of the rail is the harnessing of raw materials, mineral resources, and agricultural produce.

The Maradi region is known as the breadbasket of Niger – predominant crops there are millet and sorghum.[xiii] But the country imports food to meet its needs and is on the FAO list for countries in crisis requiring external assistance for food. As the justification for the rail line is predominately premised on purely economic grounds, one should ask what quantum of trade is needed with Niger, a very poor country of 24 million inhabitants, to justify a US$2bn investment in economically difficult times. Nigeria imported mainly mineral fuels, oils, distillation products from Niger with a net worth of $75.53 million and exported mainly agricultural goods worth around $110 million in 2018. [xiv] A mere 5 per cent of Nigeria’s intra West African trade passes through the border with Niger Republic.

The question how the 8.8 million people in the region will benefit also remains to be seen. The railway will have a station in every little town between Dutse and Maradi but the internally generated revenue of Kaduna, Katsina, Kano and Jigawa will be around $300 million in 2020 which translates into $30 for each of the 8.8 million people Mota-Engil had talked about. How many people will be able to afford a rail ticket in that region at a price that allows the National Railway Corporation to break even on the route? Difficult to see the economic justification from this perspective.

A question of interest

While many justifications for the project have been shared, it is therefore not clear how it is in the interest of Nigerian people and that is why Nigerians have every reason to be ask questions. The country is re-developing its railways since 2002. Guiding documents are the 25-Year Strategic Vision of the Nigerian Railway System formulated under the Obasanjo presidency and the 2015 National Integrated Infrastructure Master Plan (NIIMP). As the new rail line is not mentioned in the NIIMP, people should be permitted to question the rationale behind the project that was inaugurated in the absence of recommendation on the viability.

The money now spent for the new rail line could also have been used on building and connecting the much-needed dry ports, food processing zones and existing industries to the nation’s growing rail network. A rail network that lacks locomotives, coaches, waggons, trained staff, and money to entertain it. As Donald Duke said on Saturday at a 60th Independence Day Celebration Symposium, “As long as we continue to outsource our development, we will never gain the confidence to develop our nation. It has to be developed by ourselves. …We need to take it head-on, be prepared to make the mistakes, build those rail lines, build the things that you require. We talk more of investment in infrastructure than skills and that ought not to be and the skills also should involve technology.” That is what money should be spent for.

An uneconomic explanation for the newly announced rail line is, that in the usual practice of Nigerian leaders, it is just a part of Buhari’s personnel legacy to his homeland, the Daura Emirate. That it is a gift to connect his hometown, and the North with no real benefits? A gift like the Federal University of Transportation, the Air Force referral hospital or the National Directorate of Employment (NDE) that all went to Daura. [xv]Ironically, Buhari came in on the argument of integrity and propriety and as such should have put an end to this tradition. This sort of wastage of national resources and bequeathing legacies that potentially cost future generations large sums must stop if the country itself is to move forward.  


[i] https://guardian.ng/features/towards-completion-of-old-rail-road-projects-in-another-four-years

[ii] https://punchng.com/full-text-muhammadu-buharis-2018-new-year-address/

[iii] https://leadership.ng/2020/10/03/kano-maradi-rail-line-eases-transportation-of-cargoes-goods-amaechi/

[iv] https://www.s-ge.com/sites/default/files/event/downloads/kama_project_presentation.pdf

[v] https://www.bloomberg.com/news/articles/2018-07-11/mota-engil-africa-eyes-1-8-billion-building-projects-in-nigeria

[vi] https://guardian.ng/business-services/shoreline-mota-engil-agreement-births-trade-infrastructure-firm/

[vii] https://www.s-ge.com/sites/default/files/event/downloads/kama_railway_project_information_31.7.2019.pdf

[viii] https://twitter.com/GarShehu/status/1309181698958069760

[ix] https://punchng.com/kano-to-niger-republic-rail-line-to-cover-248km/

[x] https://www.railwaygazette.com/infrastructure/nigeria-plans-railway-northwards-to-niger/47495.article

[xi] https://guardian.ng/news/nigeria-niger-refinery-train-link-favours-north-against-south/

[xii] https://www.thisdaylive.com/index.php/2020/10/03/fg-highlights-gains-of-extending-railway-to-niger-republics-border/

[xiii] http://www.fao.org/giews/countrybrief/country.jsp?code=NER

[xiv] https://tradingeconomics.com/nigeria/exports/niger

[xv] https://dailytrust.com/for-buharis-sake-so-many-projects-go-to-daura 

If Nigeria is to address its dire economic realities, it must diversify and intensify production activities. Transportation is crucial to this. Development of transportation infrastructure must be prioritised, and the focus should be on moving people and goods cost-efficiently and swiftly. Rail has an edge over road because of the economies of scale.

In recent times, rail infrastructure in Nigeria has received a lot of attention, largely due to the controversial loans being taken up for its construction. Concerns about the practicality of the routes and economic viability have been expressed, these concerns are of course valid. The question foremost in the minds of most is: Why is the country taking out loans for projects that are of questionable feasibility and viability?

The justification adduced for the specific projects that are being developed is that the existing lines are being expanded to carry more passengers and more cargo, and new routes will be added to enhance the system, which would ultimately aid economic development. However, when looking at the plans and structure in place, this does not seem to be the case. Undoubtedly, there is need for rail infrastructure, but can we really say that the form proposed serves the interest of the people or promotes economic growth? Take for instance the Abuja- Kaduna rail line, the commercial or economic rationale behind its existence is difficult to see. It has no haulage provision, which means cargo cannot be transported even assuming there were bulk goods to move this way or that. It simply conveys a fraction of the passengers that travel between Abuja and Kaduna at high operational costs that cannot be justified or recovered – even with the recent 100 percent price hike.

The existing rail infrastructure must be understood within the context of British colonial rule. In fact, to understand rail infrastructure in Nigeria in its entirety one must go back to its inception towards the tail end of the 1800s and in the early 1900s. Two major routes were built – the Western Line and the Eastern Line. These were not for the benefit of the country, but rather to facilitate the transportation of agriculture produce and mineral resources such as coal from the hinterlands to ports for ships bound for Britain, a model the British deployed in all their ‘colonies’ and which greatly helped the British economy develop. It is worth noting that the Jos-Kaduna spur, for example, was built solely to move tin from the mines in Jos to port in Lagos. The tin companies requested the track be laid, and the investment soon paid off. Over a hundred years later, with the affairs of the country in Nigerian hands and with a completely different take on what would make the economy thrive as opposed to what would favour those at the helm, the country surely should be building a railway system that will enhance production, expedite movement of goods and people, and have a positive impact on prices.

The Eastern Line, also known as the Port Harcourt – Maiduguri Rail Line, is another problem child. It was originally built to transport coal mined in Enugu to ports, in Port Harcourt, specifically created for the export of coal. The coal mines have long since been moribund and perhaps more pertinent is the fact that no exportation of coal will take place in the foreseeable future due to environmental concerns. It is quite difficult to see the bulk goods to be moved south from Maiduguri or Bauchi in the North East of the country. Is the project to resuscitate the Eastern Line linked to a focus on opening up the mineral reserves in Bauchi and Gombe, perhaps as part of the much talked about economic diversification? Based on the recent antecedents, it is safe to assume that emphasis has been placed on passenger traffic. The pertinent question is: How many passengers actually move regularly from Maiduguri southwards to justify the enormous investment, and more to the point, in order to recoup it? It is important to note that the estimated cost of the Port Harcourt- Maiduguri rail is US$15 billion, a non-insignificant amount for a project with questionable viability.

Rail infrastructure should not be built for its own sake or to give a semblance of development. The primary purpose of infrastructure is to aid economic growth; this is one of the key drivers in investing in transport infrastructure. Therefore, when embarking on any project, clarity on the purpose, who the infrastructure will serve, its positive impact on the economy, economic viability, etc. must be ascertained at the conceptualisation stage. It is important to make sure that these certain conditions are in place before embarking on such projects.

To achieve the above, transportation infrastructure (road networks, rail, ports, etc) must be planned and constructed to connect areas of production to markets. Achieving this will enhance trade as well as reduce waste, and there would be a marked increase in production. Imagine the economic implication of moving a staple such as tomatoes from farms in Maiduguri to markets in the south at minimal cost and optimal level of freshness due to increased speed of delivery. This simple action would invariably reduce cost as high transportation cost increase prices and drive inflation. Even as appealing as the arguments on quality and cost are, it is still important to undertake the viability studies to ascertain that  the volume of tomatoes (and other commodities for that matter) that can be grown in Borno State and others along the rail corridor justifies the multi-billion-dollar investment.

Apart from improving quality and cost efficiencies, an effective working transport system also promotes competition and market development and would create a multiplier effect spurring the creation of warehousing, logistics, manufacturing business growth, etc. As such, studies and analyses should perforce focus on reducing the cost of transportation and ensuring inter connectivity of routes for viable trade and carriage of passengers and commodities, job creation and poverty reduction. Other factors that as a matter of routine be considered before embarking on such investment include pricing and recovery of investment, not to mention regulation and coordination. It is not until these conditions are fulfilled that viability of the infrastructure can be ascertained. This way, there would be certainty in meeting debt obligations without adding more to the growing debt burden Nigeria is dealing with. To date, sadly, there has been no mention in the public domain that such serious studies have been made or how best to deal with contingent liabilities that default poses.

Photo by Johannes Plenio from Pexels

A vital aspect of economic success in any developing country is the development of its infrastructure as this spurs industrial growth and socio-economic development. This has been FG’s justification for the Ajaokuta-Kaduna-Kano (AKK) gas pipeline project it embarked upon earlier in the year and for which a US$2.51 billion loan was taken up. The project is expected to be completed by mid-2022. The project financing structure is 15% equity, contributed by NNPC, and 85% debt, provided by China’s Sinosure at 3.7% (repayable over 12 years, with a moratorium of 3 years) – meaning the total repayment is US$ 3.1537 billion.

Although it is ostensibly NNPC repaying the debt (it cannot meet its cash-call obligations to the IOCs most of the time), the Ministry of Finance has issued a sovereign guarantee for it. The most compelling of reasons given for the construction of this gas pipeline is that it will drive economic growth by providing gas for generation of electricity for towns and industries in its general vicinity, bring to life collapsed and moribund industries which would in turn have a multiplier effect on commercial activity in the area. This certainly seems appealing as it is meant to be 614km long and would cut across at least 3 major states – Kogi, Kano and Kaduna. How exactly does it intend to deliver on all it has promised?

Is the AKK pipeline project commercially viable and will it pay for itself? Claims have been made that the project will pay for itself within a 10-year period, long before the 15-year repayment term as contained in the contract. The reason for this optimism is that if implemented properly, gas pipelines are very lucrative, there are the tariffs to be paid by those who use the pipeline to transport gas and on the other hand the money to be earned from the gas off-takers. Clearly, the very premise on which its viability rests is dependent, however, on so many external factors and conditions.

Firstly, the gas off takers would need to be in place. Talks about power plants meant to be built by NNPC that would provide 3,600MW of power to the area are part of the equation, so also are the methanol and fertilizer factories, the textile factories and so on.

The NNPC press release claimed that the pipeline would “support the addition of 3,600MW of power to the national grid and revitalize textile industries which alone boast of over 3 million jobs in parts of the country.” All very laudable. The release added that the AKK project would support “the development of petrochemicals, fertilizer, methanol and other gas-based industries thereby generating employment opportunities and facilitating balanced economic growth.”

However, without these in place this project would quite simply be another white elephant project embarked upon by government. And if these conditions are not in place the country would be making a loss at the outset and that loss needs to be factored into the sum total of the loan as the government is paying the mortgage.

Consider this: Power plants cannot be designed and built anywhere near that fast and there has not been any ground-breaking for NNPC’s own claimed power plant. The average construction time for comparable projects worldwide is 54 months, factoring all the red tape, completion of tenders and so on we can realistically round its delivery up to 5 years.

Considering that the project would be complete in 2 years the pipeline would therefore make a loss for at least the first 3 years of its existence as the operators will not be able to sell any major gas volume. We need to know: does FG have to reimburse them for their losses? If so, then that figure needs to be added to the total. Another point to consider is whether NNPC can find customers for its 3,600 MW in the vicinity. Presumably, if it does not, but is still injecting the power into the grid, then NBET will have to reimburse NNPC and will end up in a far worse condition than it is in presently. Would it not be better to take the money and build hydropower plants and other renewables? After all, the north is well endowed with hydro resources that can be harnessed for power generation, irrigation etc. Building more on existing architecture does not take cognisance of the limitations of the grid that undermine its viability. The economics on which the project is based should be made public, and if one does not exist, it is not too late to work on one. This way, we know exactly what we are dealing with: an eagle or albatross.

What started out as a seemingly straightforward loan of US$2.51 billion may amount to a much greater figure when all is said and done. Sadly, it may very well end up being a millstone around the country’s neck. If the raison d’etre for infrastructure of any kind is economic growth, and the pathway to growth is not clearly defined from the outset then it makes no sense to further embroil the country in debt. This again is discussion for another day.

Interest on debt grows without rain: or so the old chestnut goes. This has certainly been the case for Nigeria over time and it seems no lessons have been learnt for all the angst and anguish debt and debt servicing have caused in the past.

Nigeria has been doing a lot of borrowing in recent times and between 2015 and 2020, Nigeria’s debt profile rose from US$9.7 billion to US$27 billion. Interestingly, these figures only show the amounts taken up as debt, the principal, and do not depict the full picture which should include the amount that the country has to pay as interest on loans.

Interest on loans is most times overlooked and not given the proper consideration it ought to receive as discussions on loans by the government and indeed the entire country is always at net price. This is less than ideal for a country like Nigeria which is neck-deep in debt. Take for instance, the P&ID case which was not properly handled and ended up costing the country an additional US$3 billion, in addition to the initial amount of US$6.6 billion, on interests accrued.

Borrowing to fund infrastructure projects is not itself wrong but it is important for the government to study the feasibility of loans taken up, and consider the interest that will be owed as an important aspect of the transaction, looking at the entire picture in a holistic manner and understanding the real implications of what it is getting into.

Earlier in the year, Nigeria entered into an agreement with Chinese lenders to fund a big gas pipeline project estimated to cost US$2.5 billion known as the AKK natural gas pipeline. This pipeline when complete would be a full 614km long and would pass through Ajaokuta- Kaduna- Kano hence the name AKK. The Ministry of Finance stated that the loan required for the project was US$2.51 billion, at a 3.75% interest rate over a period of 12years; in other words, the total sum the country will need to pay is actually approximately US$3.15billion. And that is the figure which should be talked about in the public space, because that is what the project will cost the country directly.

A similar approach should be taken to all project loans, so the country knows exactly where it stands in the real scheme of things. Yet strangely it is not. Consider the current loan in contention in the public space namely the US$500 million from China’s Exim bank for railway construction and other transport-related infrastructure. There is public outrage because of a clause in the agreement waiving immunity as a sovereign state. The Minister of Transport has tried to downplay the enormity of the implication of defaulting asserting that FG has the capacity to repay the loan within the 20-year timeframe as the incredibly low interest rate of 2.8 percent is favourable to Nigeria.

However, if one does the maths, at the 2.8% interest rate, repayment of the loan would mean payment of a total of US$659.79 million, factoring in annuity of US$32.99 million and interest of US$159.79 million. This might not be the most pragmatic of decisions as there is no guarantee that the railway would recoup even its operating costs (ticket prices have just been hiked by 100%, which can be read as a sign of the difficulties) and government would have to subsidize the project from oil revenues, further diminishing the treasury.

That is a discussion for another day- the possibility of the rail infrastructure paying for itself. Whilst the public worries about the sovereign clause it would do well to have the entire picture, as interest always mounts up over time and if ignored will at some point in the future invariably take the nation by surprise.