Why Does Nigeria Use VGF in PPPs Infrastructure Projects?

From 1960 to 1984, Nigeria underwent significant infrastructure development, with several key projects initiated. These included the Ajaokuta Steel Company, the Nigeria National Shipping Line, Murtala Muhammed International Airport in Lagos, various power plants, numerous low to medium-housing schemes, transport projects, and refineries. Here are some specific examples:

1. National Electric Power Authority (NEPA) Investments: Major investments were made to enhance Nigeria's hydroelectric power capabilities, including the construction of the Kainji Dam.

2. Road Construction And Rehabilitation: The Federal Government initiated the construction of major highways to improve connectivity and support economic activities.

3. Water Supply Projects: Various initiatives aimed to improve access to clean water. In the old Mid-West Region, for instance, my village enjoyed a constant supply of clean water in the 70s and so it was for others.

4. Healthcare Facilities: Functional dispensaries and primary health centres were established across the Western Region of Nigeria.

5. Port Development: Investments were made to expand port facilities, ensuring efficient operations in Nigerian ports.

6. Agricultural Development Projects: The River Basin Development Authorities were established to enhance agricultural production and irrigation in various regions. A notable example is the Hadejia-Jama’are River Basin Development Authority, created in the 1970s.

7. Housing Schemes: Various governments launched housing projects to address urban housing deficits and improve living conditions. A prominent example is the Jakande Housing Estates in Lagos.

8. Universities And Higher Institutions: The establishment of new universities and institutions became a focus of infrastructure development. Nigerian graduates were recognised globally.

9. Transport Infrastructure: Numerous roads were constructed and railway systems were expanded, along with the building of airports to improve the movement of people, goods, and services.

10. Oil Infrastructure: The Federal Government developed oil refining capabilities, e.g. the construction of refineries in Port Harcourt, Warri, and Kaduna to process crude oil in Nigeria.

During this period (1960 - 1989), there were two political superpowers in the world, the USA and the USSR, which helped balance political influence in Nigeria. The Nigerian government practised a mixed economy, where the government played a substantial role in infrastructure projects. It is important to note that there were no public-private partnerships (PPPs) at the time. From 1960 to 1980, when the Federal Government first took foreign loan, graduates from Nigerian universities were in high demand globally. Additionally, the Nigerian naira was accepted in various parts of the world, and visas were granted to Nigerians upon arrival in the UK. There was little interest in leaving Nigeria; those who went abroad for education usually returned after their studies - such was Nigeria's situation.

However, from 1985 to 1998, the collapse of the USSR had ripple effects on infrastructure projects in Nigeria. The country gradually shifted to a market economy without adequate mechanisms to manage the negative impacts of this transition. For example, in the US and UK, elementary and secondary education is tuition-free, with books supplied, and in some cases, food is also provided for the less privileged.

In 1986, the Federal Government devalued the Nigerian naira and opened its borders to globalization. This policy led to the closure of many major companies across Nigeria, leaving millions unemployed. Consequently, there was an increase in brain drain and crime.

In 1999, Nigeria returned to civilian rule and began experimenting with PPPs in 2000. However, without adequately studying the pros and cons of PPPs, Nigeria adopted the concept wholesale rather than engaging in pilot schemes to evaluate its viability as a tool for infrastructure financing. Many national assets were concessioned under the assumption that private efficiency would bring improvements. When these companies struggled to manage the enterprises, the government once again provided grants - one notable example being Nigerian Airways. As a result, Nigeria suffered twofold: first, it sold national assets at discounted prices, and second, it provided grants. Furthermore, some companies/individuals that acquired these assets sold them in piecemeal, leading to even more employees being laid off and a decline in economic activity.

I have taken the liberty of your time to provide this historical background so that my readers can understand the contextual practice of VGF in Nigeria. Now, let us return to the benefits of using VGF.

The Benefits of VGF in PPPs Infrastructure Projects?

This is how VGF began in Nigeria. Although initiated with good intentions, the approach has shown that a nation with weak institutions, low savings, and limited capabilities should not entrust its assets to a frail private sector. A pertinent example is the concession of the energy sector.

Viability Gap Funding (VGF) is intended to enhance the commercial attractiveness of PPP infrastructure projects in Nigeria by reducing financial risks for private sector investors. The practical impacts of VGF are multifaceted:

a) Private Investment: VGF serves as an incentive to draw private sector investors by alleviating some of the financial risks associated with social infrastructure projects. In practice, this is often a mixed grill.?

b) Economic Growth: The Nigerian government aims to use VGF to stimulate economic growth, create jobs, and improve the overall quality of life for its citizens. However, this goal has not been consistently realized in practice.

c) Project Viability: VGF helps bridge the gap between the cost of providing services and the revenue generated, making projects more appealing to private investors. However, without strong institutions, it is challenging to assess the true impact of this policy on infrastructure outcomes in Nigeria.?

d) Infrastructure Deficits: Nigeria faces significant infrastructure deficits that hinder economic development. VGF is meant to make projects more financially viable, encouraging private sector participation in developing essential social infrastructure such as roads, hospitals, schools, bridges, and power plants. However, tangible results are still lacking.?

e) Public Interest: VGF can ensure that critical social infrastructure, which serves the public good - is implemented under the PPP scheme. Evidence suggests that public interest is sometimes compromised by the behaviour of the involved actors.?

f) Risk Sharing: VGF assists in distributing financial risks between the public sector and private investors. In Nigeria, there is no evidence to support that VFG is utilized to its full potential.

In theory, Viability Gap Funding is essential for making Public-Private Partnership (PPP) infrastructure projects in Nigeria financially attractive and feasible for the private sector. However, without strong institutions, achieving this remains a distant dream.

Empirical evidence seems to suggest that a mixed economy has produced the best infrastructure in Nigeria. Neither pure socialism nor pure capitalism is practised anywhere in the world. A combination of social infrastructure with an active public sector, implementing appropriate rewards and punishments, would enhance infrastructure delivery in Nigeria.

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