Nigeria’s capital expenditure challenge in the face of huge infrastructure deficit
Last week, on 26 September, the Minister of Finance, Kemi Adeosun released details of how much money has been disbursed for capital expenditure in respect of the 2017 budget. The press statement disclosed that N336 billion has been disbursed so far as capital expenditure.
This release was for the first quarter of 2017. There is still a balance of N14 billion outstanding, which the Minister said would be released as soon as the respective ministries and parastatals submit the needed documents. Total projected capital expenditure for 2017, as proposed in the 2017 budget is N2.2 trillion. The N336 billion released for the first quarter represent just 15 percent of the proposed capital expenditure for the year, which means that three months to the end of 2017, 85 percent of the planned 2017 capital expenditure is yet to be cash backed. However, practically, the 2017 capital budget disbursements will continue up to May 2018.
The 2017 budget was not passed until June and is actually still undergoing an amendment process. The National Assembly, which just resumed from a seven-week recess is yet to consider a N136 billion virement proposal sent to it for consideration. So basically, the 2017 budget is not yet a final document until that virement proposal is passed. Nonetheless, all indications are that the country is heading for another year of under-performance in terms of implementation of capital expenditure proposals in the country. It is on record that the Federal Government is never able to fully cash back the capital components of its budget proposals. In 2016, the first full year of budget implementation of the President Buhari administration, only about 75 percent of the capital budget was cash backed. Of the N1.6 trillion proposed as capital expenditure in 2016, the Ministry of Finance confirms that only N1.2 trillion was released. Previous administrations have also always struggled to cash back their capital expenditure.
If the disclosure of what has been cash backed in the first quarter is anything to go by, then this year’s record of capital budget release is even going to be worse. Assuming an equal quarterly disbursement of the N2.2 trillion capital expenditure for 2017, the minimum cash for capital expenditure in the first quarter should have been N550 billion, about N214 billion more than what was released. But considering the delay in the approval of 2017 budget, the expectation would have been for the government to frontload capital expenditure, that is, release more money in the first quarter and less in subsequent quarters, especially knowing that the Federal Government’s domestic borrowing was frontloaded by the Debt Management Office (DMO). That does not seem to be the case right now. Front loading of the capital components of the 2017 budget would also make sense considering that we are expecting that the 2018 budget will be passed by the National Assembly on time and implementation starts January 2018.
However, the budget implementation report for half year 2017 as published on the website of the Budget office of the Federation gives some insight into how paucity of funds is incapacitating the government’s ability to release cash for capital expenditure as both oil and non-oil revenues underperformed in the first half of the year.
Gross oil revenues received into the Federation account in the first six months of the year stood at N1.59 trillion and this was 40.47 percent lower than projected for the period in the 2017 budget. Non-oil revenues were also far below target revenues. Gross non-oil revenues for the first half of 2017 stood was N1.24 trillion, representing a shortfall of approximately 54 percent of budgeted revenues. Net distributable revenues in the second quarter to all tires of government was also down 53 percent to about N1.0 trillion. The trend basically shows that the government is bleeding revenues from all sources. This can explain the significant borrowing that the government has had to engage in a bid to fund its N7.4 trillion budget for 2017.
The Federal Government received a total of N506 billion as its share of revenues in the second quarter of 2017. This represented a shortfall of N765 billion or 60 percent from the 2017 budget estimates. The whole of the Federal Government’s revenue of N506 billion is not enough to fund the average quarterly capital expenditure estimate of N550 billion. This means that the whole of the government’s revenues in the second quarter would not be enough to fund its capital expenditure for the same period. This is besides the fact the government’s needs to service its rising debts and meet equally high recurrent expenditure costs.
With an estimated infrastructure deficit put at N200 trillion, even if the government were to fully cash back its N2.2 trillion capital expenditure this year, the government would need to spend the same amount for an average period of 91 years to close the infrastructure gap as it exists today. Even if we assume that the other two tiers of government at the state and local government levels could add another N1.8 trillion to the federal capital expenditure, taking total annual capital expenditure to N4 trillion, it would still take an average of 50 years to close the infrastructure gap as its exists today.
But the infrastructure gap will keep widening as the country’s population grows. The infrastructure gap in the housing sector is estimated at 17 million housing units currently. Assuming, we use an average cost of N3 million for an affordable house, the deficit could be valued at about N51 trillion today for a country with an estimated population of 180 million. However, with Nigeria’s population estimated to hit 400 million by 2050, that could easily see the housing deficit double to about 34 million housing units considering current housing delivery trends and that would raise the country’s infrastructure gap even further, unless the government can significantly scale up expenditure to close the gap.
Sadly, current expenditure trends by all the three tiers of government does not look good. All tiers of government are not able to fully cash back their annual capital expenditure in any year. Most states and local governments can hardly meet their overhead cost currently not talk of meeting their capital expenditure needs. With such a huge and widening infrastructure gap, the government must stop pretending it has the capacity to close the gap. The nation’s capacity to ramp up revenues in the short and long run actually depends on its capacity to provide the required supporting infrastructure. Without buoyant revenues, the government has no chance of providing the needed infrastructure. This means that the current focus on ramping revenues will not yield the desired results considering the poor state of infrastructure. There is no doubt that the profitability of firms operating in the country and consequently the tax revenues of government would significantly go up, if the power situation in the country were significantly resolved.
The present administration has opted to raise borrowing to try and bridge the infrastructure gap. But it is also known that a good chunk of that borrowing is being eaten by recurrent expenditure. Besides, the efficiency of government spending is still low, reducing the positive impact of any borrowed funds that finds its way into infrastructure. Privatisations, Concessions, Public Private Sector Partnerships and Pure Infrastructure Bonds are all viable options that should be intensified or explored to close the infrastructure gap.
An ideal strategy should be for the government to use its budgeted capital expenditure as seed or equity capital for major infrastructure projects that private capital can leverage on. The current inclination of the government to think that it has the capacity to close the country’s infrastructure gaps is not practicable. There has to be an urgent shift in thinking.
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