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Why Nigeria’s rail projects may fail

By Geoff Iyatse, Helen Oji (Lagos), Joke Falaju, Anthony Otaru (Abuja)
13 February 2022   |   3:50 am
With the Federal Government’s legacy Railway Modernisation project, among other infrastructure, largely financed by loans from China, the hopes of millions of Nigerians...

Lagos-Ibadan train | Image: Twitter/CCECC8

Stakeholders Skeptical Of Securing Fresh Loan In Europe.
• $318m Paid To CCECC, $1.2b Needed For Next Phase Of Kaduna-Kano Line
• We’re Pressurising Money-lending Institutions For New Funds To Complete Projects – Amaechi.
• Chinese Loans ‘Political,’ ‘Expensive,’ Lack Sound Business Reasoning – Ataguba• ‘Govt Approach To Modernising Railway
Not Best Practice, Unsustainable’ • Loan Embargo’ll Worsen Unemployment, Living Standards – Economists

With the Federal Government’s legacy Railway Modernisation project, among other infrastructure, largely financed by loans from China, the hopes of millions of Nigerians looking forward to the ease that the project would bring to livelihoods and its impact on the economy when completed, may be dashed.

This was the conclusion drawn by transport industry stakeholders, development economists and infrastructure finance experts who reacted to the disclosure by Minister of Transportation, Rotimi Amaechi, that China had stopped granting loans to Nigeria for its rail project and that government was now vigorously seeking loans from new sources in Europe.

Some of the experts expressed worry over the new stance by the Chinese government on loans for development of Nigeria’s infrastructure, saying the move will further impoverish the common man.

They argued that the move would not only add to the number of abandoned projects across the country, but would also aggravate socio-economic challenges such as unemployment and diminishing living standards confronting Nigerians.

Amaechi had told The Guardian that the Chinese government, which was providing funds for the numerous ongoing railway projects had stopped. And to avoid the projects being stalled, the government is now seeking alternative means to fund the projects.

Also, while speaking during the inspection of the Kaduna-Kano Standard Guage rail line, the minister said: “We are putting pressure on all the necessary institutions that used to give us funds. And hopefully, before May we will be able to get enough funds to complete this project.”

The Federal Government said about $318million had been paid to the contractors, China Civil Engineering Construction Company (CCECC), with the hope that by the time China finally approves the $1.2billion loan requested for the construction of the standard gauge line, the work would have reached an appreciable stage.

According to experts, the decision by China to stop funding may be connected, on one hand, with the switch by the China Belt and Road Initiative from investing in transport infrastructure development to smart investment such as digital infrastructure, 5G network, and telecommunications, among others, that do not require heavy investment. More so, as the China economy is also facing a lot of challenges due to the Coronavirus pandemic that has limited trade relations among countries.

Stakeholders stressed that, on another hand, the stoppage of the loan may be as a result of the outcry by Nigerians amid fears that Nigeria may end up giving up its sovereignty to China due to loan terms and conditions perceived to be unsavoury.

Currently, only two railway projects have been completely financed by China. They are the Abuja-Kaduna standard gauge railway at the cost of $500million, and the Lagos-Ibadan at the cost of $2.5billion. The initial plan was for them to fund Lagos to Kano railway at the cost of $8.1billion.

Industry experts have, however, applauded China’s decision to reduce funding of the Nigeria Railway Modernisation project, describing it as the best approach for the country to fully develop its railway system.

The Chief Executive Officer, African Railway Round Table, Mr. Olawale Rasheed told The Guardian that although the minister Amaechi has good intentions for the railway subsector, the approach to building the railway was not in line with best practice and was unsustainable, adding that the Minister was not doing the right thing as regards the railway modernisation project.

According to him, the best approach is private sector involvement in the design, construction and operation of the railway.

“Railway operation is a business and not a development project. The Nigerian government must treat it as such if it must make any meaningful progress in the railway modernisation project,” he said.

Olawale noted that Egypt, Tanzania and Senegal have the most developed railway systems in Africa, which uses electric trains. He observed that the rail projects were not funded by the Chinese but private sector investors.

He said: “For instance, Brazilian government invited its private sector to identify the railway project they would want to invest in and today, there are about 41 ongoing railway projects in the country. So also in Tanzania, the government partnered with a financial institution to raise $1billion from the private sector to construct their railway.”

He noted that the beauty of private sector engagement in the sector is that they will invest, recoup their investment and also pay tax to the government, while the government’s role is to provide enabling environment for the private investors to thrive.

On his part, Chief Executive Officer of Bethlehem Rail and Chairman of Federal Government committee to unbundle the Nigeria Railway Corporation (NRC), Rowland Ataguba, said he is not surprised at the withdrawal of China from funding Nigeria railway projects as the country had been re-evaluating its approach to Africa and its engagements across the continent.

According to him, many of the loans China has been granting to the railway sector have been what you may call cheap (but ultimately expensive) or “political loans” as the loans lack sound business cases.

Alleging that in some situations, the Chinese contractors were even responsible for retrospectively writing the feasibility studies for contracts for which they had vested interest in securing or had secured, he said most of the contracts were undermined by conflicts of interest and failed to fully realise their promise.

Ataguba, who is also the Chairman of the Technical Advisory Committee (TAC) on the Railway Bill and the National Transport Commission Bill in the House of Reps, while reacting to the government’s approach of the West for the credit facility, said Western conditions are more stringent and take more time to make shovel ready. He said loans from the West were, however, more durable for the African people and China would be better served by adopting similar criteria.

He added: “The West, who are no angels themselves, had gone to town accusing China of debt-trap diplomacy in Africa. But it was not until Sinosure, China’s state-owned insurer lost a whopping $1bn from underwriting the Djibouti-Addis Ababa railway and Tanzania’s then-incoming President Magafuli cancelled multi-billion dollar contracts awarded to Chinese contractors, that China realised it had a big problem on its hands.”

He pointed out that the problem of the existing contracts is that the government signed commercial contracts with contractors, mainly from China, without caveats on the funding. So, now that China Exim funding is not forthcoming, we have left shopping elsewhere for loans. “The problem is US Exim will not lend you money to give to a Chinese contractor. Neither would Standard Chartered, Credit Suisse or even HSBC. It’s a self-inflicted quagmire.”

Ataguba noted that the impact on the economy could be significant as can be seen from the slowing down of the pace of business activities hitherto ascribed to the COVID-19 pandemic.

Olawale said government’s plan to approach European countries to fund railway projects may not yield much fruit as most of them are cash-shrunk due to the COVID-19 pandemic, saying the best bet is the private institutions like Siemens, the largest railway construction company in Germany, Coleman and several others.

He maintained that for the private sector to thrive, it was important for the government to amend the Railway Act as no private investors will want to invest in an opaque environment that is not in line with modern-day realities.

Some economic experts attributed the development to both political and economic reasons. Director, Institute of Fiscal Studies (IFS), Godwin Ighedosa said that the Chinese government’s decision to stop further loans was informed by political and economic reasons.

He explained that China was aware that the country is edging towards an election year, hence they are being careful to grant more loans while watching what the next leadership will stand for. “It is only wise on their part to walk on the side of caution while evaluating their position as they look at the political environment,” he noted.

On the economic side, Ighedosa argued that “Nigeria might have borrowed too much based on the size of her economy and capacity to pay, but you know, borrowing too much is relative, are we borrowing for consumption or for infrastructure development that will reverse all economic situation of the country? You have to also look at the capacity to pay back.”

Professor Ajayi Omo-Ogun of the University of Calabar, Cross River State, said the option for Nigeria depends on the terms of the loans it has entered into in the first place.

“If the government have some specific clauses that allow it a source for loans from other countries to complete ongoing projects, that may be fine. If not, the country may be in mess. There is no doubt that some of these contract agreements are shrouded in questionable terms that may not augur well for the country,” he said.

An economist, Johnson Chukwu said the willingness of China to grant concessionary loans to African countries is mostly driven by the prospects or understanding that China will gain access to critical mineral resources.

He stated that where or when such access is denied or withdrawn, China losses the appetite for granting of these concessionary loans.

Chukwu, who is the Chief Executive Officer of Cowry Assets Management Limited, pointed out that it will be very difficult for Nigeria to access similar loans from western countries given the strict governance standard imposed by the European and American governments on bilateral and multilateral loans, which Nigeria at present is unlikely to meet.

According to him, while Chinese loans come with minimal conditions obviously due to compensatory benefits, western countries insist on a high level of transparency, competitive bids and value for money as well as thorough social, economic and environmental impact assessment.

“Unconfirmed report has it that China decided to stop further disbursement of loans granted to Nigeria after our country revoked the production sharing contract between NNPC and Addax Petroleum, a company acquired by China for the sole purpose of the contract it had with NNPC. So basically, China had their eye of juicy contracts involving crude oil lifting as a reward for the concessionary loans she has been extending to the Nigerian government.”

He insisted that options available to the federal government are very few, considering that they do not have the financial resources to continue with the execution of these projects.
ON options available in view of the development, the Federal Government may have started exploiting the possibility of tinkering with its memorandum of understanding with its Chinese partners to salvage the working relationship with them, The Guardian learnt at the weekend.

The country’s contractual arrangement with the Asian giant is built on the engineering, procurement and construction plus finance (EPC+F) model. EPCF is a Chinese traditional route to the international infrastructure market. While it helps the country to take charge of projects from start to finish, including funding, it does not give them full operating rights. Experts said this model, coupled with the legendary failure in public infrastructure management in Nigeria might have left China, which is also battling a financial crisis triggered by failing property, wondering if Nigerian infrastructure projects are a priority to them.

Sources close to the discussion said China is gradually losing confidence in the ability of the country to manage the projects efficiently and be able to offset the facilities extended to the country. A source said China is concerned about the rising debt profile of the country. Hence, they are reviewing their relationship.

Back home, China is currently prioritising its relationship. The country is struggling to rescue the economy blighted by Evergrande crisis. In the last quarter of last year, Chinese property developers faced $10.2 billion in offshore debt. The figure is almost double this quarter, analysts have said.

A professor of economics, Ken Ife, told The Guardian, yesterday, that China could not close its eyes against facilities it is not sure would be repaid when due, hence the re-assessment of the Nigeria facilities.

If China pulls the rug, Ife said there are options before Nigeria. But he is sure Nigeria can stem the tension caused by the crisis of confidence by changing the contract to build, operate and transfer (BOT) to build, own, operate and transfer (BOOT) to give the Chinese companies more stake in the projects.

“BOT and BOOT will give them more confidence that they will recover their money. That is what I feel will make a difference. In Mozambique and Zambia, they seized their seaport and airport for failing to honour their agreement. They took over those facilities to operate. Why wouldn’t you have a design abinitio that allows them to run the facilities for a period of time to recoup their investments?”

“The challenge is that these guys don’t have the confidence that we would be able to run the facilities efficiently and pay back the debts,” he said.

In the event that the government is unable to salvage the relationship with China, the government is open to exploring other sources. Already, the government is said to be in discussion with Standard Chartered Bank and other lenders for assistance. But another economist, Dr. Chiwuike Uba said what mattered was the conditionality of offers and economic viabilities of the projects involved.

He also called for proper cost and benefit analysis of the projects, noting that funding is the least if the associated issues are sorted out.