Nigeria seeks new investments to keep rail reform on track
Port inefficiencies cost Nigeria 4% of its GDP every year, and this is partly due to the deficient rail infrastructure that forces businesses to move consignments by road while navigating around gridlocks and potholes. Nigeria is looking to rail reform to rectify this problem, but the highly political nature of the policymaking involved means significant risks to the operating environment and the commercial viability of proposed rail projects.
Situation Report
The Nigeria Railway Corporation (NRC) is seeking investments to remodel existing train stations, while the federal government is building a new standard gauge railway that will run eventually from the southern port city of Lagos all the way to Kano, the business hub of the country’s north. NRC officials tell us there is also an investment opportunity in developing facilities that will provide ancillary services to the revamped train stations, from warehouses to cafés.
There is significant political will and popular backing to push through this reform. One Abuja-Kaduna standard gauge railway completed by the Muhammadu Buhari administration in 2016 enjoys heavy patronage and is often fully booked, partly due to increased insecurity on the alternative road route. Rail development was also a major part of President Buhari’s 2019 election campaign and he is now backed by a parliament led by his allies.
However, Nigeria has a history of policymaking that has posed risks to the operational environment and also put into question the commercial viability of railway deals. For example, since 1999 there has been political flip-flopping about whether to refurbish the dilapidated narrow gauge line running from Lagos to Kano or build a new standard gauge line parallel to it. In 2010, a refurbishment plan was aborted after the then-president Umar Yar’adua died in office and power changed hands. Such reversal occasioned by a change in government also manifests at the state level. Lagos shelved an ongoing light rail project after a new governor took charge in 2015, opting instead for a bus reform program.
At the West Africa Port and Rail Evolution event held in Lagos last month a senior official, who advised the Yar’adua government on the rail talks, said about the political decision-making, “We had done our research on how best to reform the rail sector—narrow or standard gauge—and found that the more viable, less expensive option was to fix the old railways. President Yar’adua agreed to do this, but his successor chose to do things differently and the plan was scrapped.”
The current Buhari government agreed to concession the country’s 3,500km narrow-gauge rail network to a consortium comprising General Electric and three other foreign firms in April 2018, but the deal was set back when General Electric exited seven months later, saying it was closing its transport business. In the past, transport PPP deals have produced limited success in Nigeria due to a goal conflict between political leaders wanting to determine pricing and investors seeking profitability.
A case in point is the Lekki Concession Company (LCC), which was a PPP between the Lagos state government and a foreign consortium to build and then operate the Lekki-Epe toll road for 30 years. Amid changing market conditions, Lagos bought over the private partner’s stake in 2014 and assumed full ownership—just three years after the firm began collecting tolls. LCC now says the move was for the government to “take full control over the determination of toll rates in order to continue to make it affordable for road users.”
At present, local discussions and government statements about ongoing rail projects have not been chiefly around operational issues such as management, economic impact and commercial viability, but around the electoral value of these projects. The rail projects featured strongly as campaign materials in this year’s presidential election, and in 2018 the transport minister Rotimi Amaechi was quoted in the local press urging his audience at a Kaduna event to vote for his principal because their train fares are subsidized. This suggests that the government’s focus remains political optics, not necessarily creating a favourable environment for investors.
Outlook
Nevertheless, the next four years look promising for Nigeria’s rail development. A 156km segment of the 1,500km Lagos-Kano standard gauge line will expectedly become operational this year, and a deal to build an additional segment in three years has been agreed with the China Civil Engineering Construction Corporation. But it is not yet clear how the new line will be managed alongside the existing narrow-gauge network described above, for which a concession has reportedly been granted to a consortium.
Despite expectations of continued developments, investors would be well advised to remember that policymaking in this area has been mostly political in purpose and vulnerable to political changes around elections. We expect this pattern to continue, with the evident gaps leaving potential rail projects further prone to government flip-flopping and interference that could hamper effective control over investments.