Nigeria woos private investors to improve road infrastructure

In January, the Nigerian government launched a public-private investment scheme to leverage private investment for the construction and improvement of the country’s roads. Linus Unah reports

Troubled by the state of the national road network, President Muhammadu Buhari of Nigeria is trying to woo private investors.

In late January, he signed an executive order which created a 10-year scheme that offers tax credits to private firms to build or refurbish roads approved by the government.

Bad roads are a major problem in Nigeria. Travelling through major interstate highways, Nigerians have to endure bumpy rides along routes marked by twists, bends, flooding, potholes and traffic backlogs resulting from the closure of sections of highway.

In 2013, a survey conducted by NOI Polls on the safety of Nigerian roads found that 82% of Nigerians believe that bad roads are the leading causes of road deaths and injuries.

In May, Nigeria’s Federal Road Safety Corps said 540 people died and 3,953 were injured in 950 road traffic accidents in January this year.

Around 68.3% of Nigeria’s 194,200km network of roads are unreliable and in poor condition, according to the 2013 National Integrated Infrastructure Master Plan Report.

The report found that only about 65,000km of the total national road network is paved in bitumen, even though 95% of passenger and freight traffic travels by road.

The problem is not limited to Nigeria. According to the World Bank, “[b]etween 60,000 and 100,000 kilometres of roads are required to provide intra-continental connectivity” in Africa.

Several factors have combined to create the problem in Nigeria, including an explosion in the number of vehicles (from only 150,000 vehicles in 1983 to around 11.5m now), poor road maintenance, and inadequate investment and neglect. Some highways are today on the brink of collapse. 

“Unfortunately, budgetary allocation to road projects has repeatedly proven to be insufficient to meet road infrastructure demands.

“In 2018, for instance, the FGN [federal government of Nigeria] allocated approximately 12% (about N344bn [$954m]) of its planned capital expenditure for the year to the construction and rehabilitation of about twenty roads nationwide,” wrote KPMG tax partner Wole Obayomi in an appraisal of the new scheme in January.

Reduced taxes

“Through this scheme, companies that are willing and able to spend their own funds on constructing roads to their factories or farms, will recover their construction costs by paying reduced taxes, over a period of time,” President Buhari told CEOs and governors during the ceremony for the signing of Executive Order 007, also known as the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme.

Nineteen “eligible” roads have been identified under the pilot phase of the scheme. They will cover about 794.4km across 11 states.

Dangote Industries, Lafarge Africa, Unilever Nigeria, Flour Mills of Nigeria, Nigeria LNG, and China Road and Bridge Corporation Nigeria have been selected to drive the initiative in partnership with the national government.

The government said the programme will be implemented through a management committee headed by the minister of finance which is intended to cut off the bureaucracy involved in getting approvals to build roads.

Every Nigerian company is eligible to participate in the programme. Companies can apply alone or work with other companies to pool resources together to take on the road projects.

Participants will receive tax credits yearly in line with construction landmarks reached, and companies who do not wish to use their tax credit can sell or transfer them to any buyer.

The government is targeting companies within an economic hub or industrial cluster so that they can work together to develop critical roads around them.

Opportunities for business

In an appraisal published in March, consultants EY Tax Insights were broadly positive about the scheme, describing it as an “innovative plan”.

“The scheme presents an opportunity for companies, especially manufacturing companies, to channel funds towards the construction and/or repair of eligible roads, including feeder roads and highways, which are most critical to the movement of inventory and products, shortening supply lead times, optimizing the manufacturing supply chain and ultimately enjoying the tax incentive,” wrote the firm.

However, EY Tax Insights also flagged up gaps in the executive order that could present challenges to implementation of the scheme and limit the benefits participants receive from it.

The firm says that the government should clarify the expected impact on roads managed by state and local governments, develop strategies to mitigate bureacracy and administrative bottlenecks, and reveal further details around the applicability of the tax credits.

Yet the programme appears to offer better incentives than the previous Infrastructure Tax Relief of 2012, which offered a 30% relief for expenditure incurred on fixing public infrastructure, including roads.

If implemented successfully, the scheme will help government raise funds to develop roads across the country, reducing pressure on a budget constrained by mediocre growth.

Since the companies will be building or refurbishing roads vital to their operations, ministers hope that there will be a higher chance of project completion. This matters in a country where thousands of partly-completed projects have been abandoned. 

For the initiative to succeed, analysts are urging the government to ensure that issues such as full cost recovery, transparency and ease of participation are well implemented to facilitate quick uptake.

“While this initiative is a laudable one, the pervading problem of transparency might affect it,” says MacHarry Confidence, a political analyst with Lagos-based consultancy SBM Intelligence. “The award of contracts for road construction has not really been transparent, and so there should be a measure to ensure that such financing is done legally.

“Companies are known to evade tax, and I’m afraid this new incentive might give them a leeway to evade tax, and pressure the government into allowing them more incentives.”

Nevertheless, in his January appraisal, KPMG’s Wole Obayomi found that the scheme could be transformative if managed correctly.

“Adequate road infrastructure should improve the conditions for business operations in Nigeria, increase business profitability, enhance employment and, by extension, tax revenue in the long run,” he wrote.

“In our view, the potential upfront diminution of tax revenue to the FGN should be more than adequately compensated for by a short to medium term improved performance of the economy and the overall long term multiplier effect.”