NIGERIA is modernising its obsolete rail network and the latest line between Lagos and Ibadan, the third largest city after Lagos and Kano, is being upheld as a bright spot on President Muhammadu Buhari’s second term in office, writes Adedayo Ademuwagun.
Yet this comes at a heavy price to the state as projects like these rely heavily on external borrowing. Legislative reforms to stimulate private capital and lower political risk would ease the pressure on government debt but the political will to change the status quo looks to be adrift.
Main findings – government initiative
Transport Minister Chibuike Amaechi has announced that a standard-gauge line between Lagos and Oyo State capital, Ibadan, 130km away, will be launched this month. The line is built parallel to a colonial-era rail track that stretches 2,700km up to northern Maiduguri. This line is part of Buhari’s flagship projects to rebuild the country’s 3,500km rail network. Other segments of this network have been in various stages of development since 2015 when he took charge. These include Abuja-Warri and Port Harcourt-Maiduguri, which are under construction and in pre-construction respectively.
These projects are being funded mostly with external loans. For example, Lagos-Ibadan was funded by the Exim Bank of China. Similarly, the model for Abuja-Warri is that Exim Bank once again will fund 75 percent of the capital, while the China Railway Construction Company will supply 10 percent equity in exchange for a 30-year concession of the railway and a new port that it will build in Warri. Nigeria will put down the 15 percent balance.
There is strong basis for the government to put more private capital behind its railway ambitions because these projects have piled on the country’s debt stock. In 2020, Buhari asked the Senate to endorse a proposal for $23bn in external loans for transport infrastructure, and this year the Debt Management Office raised its borrowing limit from 25 percent to 40 percent of GDP after total public debt doubled in four years. The impact of this borrowing trend on fiscal sustainability is evident. Around 60 percent of federal revenue went into interest payments in 2020, while volatile oil prices threatened public finances and GDP growth remained below 3 percent.
On that note, there have been recent efforts to privatise rail development. A consortium including South Africa’s Transnet was chosen as the preferred bidder for a 30-year concession in 2017. The proposed concession would be for the bidder to refurbish and operate the obsolete narrow-gauge network in place since the colonial era. However, the bid was derailed by the exit of General Electric (GE) from that consortium when GE began divesting from transport.
For now, the government continues to take the initiative in modernising the rail sector. Still, there is room for private investments in retail at train stations and real estate along rail lines, as well as services such as electronic ticketing – which was introduced just this year for one line: Abuja-Kaduna. The existing rail network is also being extended to ports in order to draw more freight to railways. The government has markedly prioritised connecting port and rail developments, and other transport programmes such as the Highway Development and Management Initiative are being promoted for public-private partnerships.
Outlook – reforming the framework
A key political risk is that rail projects are arbitrarily restructured as political priorities shift with electoral cycles, and the colonial-era legislation is outdated without a framework for private investment. A reform bill to incorporate private capital in rail regulation was passed in 2016, but it did not get Buhari’s approval and has been put aside.
Legislative reform will be critical for mitigating risks associated with electoral transitions and will be an important signal of the political will to broaden the role of the private sector. But with two years left on Buhari’s final term, the regulatory framework is unlikely to change in the medium term and the government will maintain its current approach for operating and financing rail infrastructure.
Adedayo Ademuwagun is a Consultant at Songhai Advisory, an African-owned and managed firm delivering local knowledge supporting transformative and sustainable strategic decision-making.