16 March 2015

Nigerian land transport infrastructure deficits and regulation

This article was written by Dr Gbolahan Elias (Partner, G. Elias & Co., ALN - Nigeria) and Ukamaka Okoli (Associate, G. Elias & Co., ALN - Nigeria).

According to a 2014 McKinsey study (the “McKinsey Report”),[1]  Nigeria has a massive infrastructure deficit, not least in the land transport sector. The sums that need to be spent to address the deficit are unlikely to be forthcoming until the regulatory regime for land transport infrastructure is significantly improved. This paper seeks (a) to highlight a number of the key issues arising on the subject of improving the regulatory regime and (b) to outline suggestions for addressing those issues.

Introduction

The McKinsey Report found that Nigeria needs to spend at least US$839 billion by 2030 on infrastructure. The expenditure needed has tremendous job-creation and GDP-growth potential.  The Federal and each of the 36 States’ governments understands the need for more money and incentives to be made available for this purpose than is currently the case. 

Further, a recent Federal subsidy reinvestment and empowerment programme has been funding major road-building projects such as the second East-West Niger Bridge and the proposed extensions to the Lagos-Ibadan Expressway. To the point, there is a 5-year income tax holiday for road and rail infrastructure companies (Industrial Development (Income Tax) Relief Act (1971)).  In addition to that, there is an income tax exemption (30% of the cost of providing infrastructure) for companies that invest in road and rail infrastructure that is made available for the use of the public.  (Companies Income Tax (Exemption of Profits) Order (2012)). Furthermore, most States in Nigeria have issued bonds to pay for transport infrastructure development.

All of the foregoing are steps in the right direction, but they are not enough.  Public sector investment is necessary but not sufficient. Private sector investment, both local and foreign, is also needed. It is unlikely that the volume of private sector investment that is needed to redress the deficit will be made as long as the regulatory regime for the land transport sector remains as poorly-developed as it currently is.  Investors like clarity. There is an urgent need for the regulatory regimes to be strengthened.

The Nigerian regulatory regimes for road and rail transport need much work. The key issues arising are the need to make regulations for pricing and standards and the enforcement of those regulations.  Prior to and pervading these three issues are the background issues of the Nigerian Constitution (the “Constitution”), policy and the ownership of the infrastructure. It is important to first highlight these issues before we consider the core regulatory ones.

The Current Regulatory Regime: Background

The Constitution permits both the Federal and State governments to spend money on road and rail infrastructure.  Each of the Federal and State governments can grant concessions of infrastructure that it owns, and each of them can own road and rail infrastructure.  However, only the Federal Government can (a) regulate road traffic on federal roads;[2] and (b) grant or regulate the concessioning of Federally-owned roads.[3] Arguably, only the Federal Government can grant or regulate rail concessions.[4] The law on these matters is not entirely free of doubt. There are co-ordination issues inherent in the reality that Nigeria has a Federal Government plus 36 State governments.

To change or clarify that law fully would need an amendment to the Constitution. That cannot be done either in a hurry or without controversy. The possible conflicts of jurisdiction that are present in the current law will have to be managed on an ad hoc basis with political compromises on specific issues made from time to time as is currently the case. Nowhere is the need for an ad hoc approach and political compromise more evident than on the matter of land transport policy.

The Federal Government has issued elaborate separate policy statements for rail and road (a 25-year Strategic Vision for the Nigerian Railway System and Road Sector Development and Maintenance Program respectively). These statements are not necessarily binding on the States as a matter of law. On roads, policy relating to physical development is made by the Minister for Works while operational regulatory policy is made by the Minister for Transport.  Ideally, to manage the risk of disagreements between the Ministers, both aspects of policy should be in the same Ministry. Policy at State level varies from State to State, and it is not sufficiently well-documented and publicized to be worth commenting on in this paper.

Further, especially in metropolitan areas where there may be significant cross-elasticity of demand for road and rail transport services, it makes sense to give a single agency authority over both kinds of service. The Lagos area has developed such an authority (Lagos State Metropolitan Area Transport Authority), but it is for the moment the only metropolitan area to do so.  Moreover, some grey areas remain as to the extent to which the powers of the agency encroach on those of the Federal Government.

Further, all land outside the Federal Capital Territory - more than 95% of the land mass of the country - is controlled by the States rather than by the Federal Government, with two exceptions. The exceptions arise where the Federal Government has acquired title by (a) voluntary purchase or (b) compulsory acquisition: (i) by itself under previous constitutions or (ii) with the assistance of States’ governments under the Constitution. Today, the Federal Government acting autonomously has limited power to acquire and develop land for transport infrastructure.

The Current Regulatory Regime: Content

The Nigerian Railway Corporation (“NRC”), established by the NRC Act owns the Federal Government railroad infrastructure.[5] There is no Federal rail prices or standards regulator independent of the NRC. At least one State (Lagos) has a statute establishing a regulator of rail prices and standards with powers of enforcement.[6] That State has worked closely with the Federal Government to vest outside the NRC, the ownership and regulation of much rail infrastructure within its metropolitan area. However, questions remain as to the constitutional efficacy of attempting to have a State-level rail regulator acting outside Federal legislation.

The Federal Government owns many roads located in the States, but the States too own many roads in their own right. For example, the first regulated toll road in the country is owned by a State (again, Lagos). That State has statutes establishing (a) a regulator of roads concessioning, prices and standards;[7] as well as (b) a public-private partnership entity to concession roads and rail. (Office of Public Private Partnerships.) Intrinsic to the latter is a clear commitment to encouraging and supporting private sector investment in land transport infrastructure.

The Federal Government and other States need comparably far-reaching statutes. As matters currently stand, the regimes in place range from those of States that have hardly any statutes on these matters to the Federal regime, which has a patchwork of coverage. The basic particles of the current Federal regime are: 

  • An agency advising the Federal Government on, and apparently with a veto over, concessioning, but not quite a regulator (the Infrastructure Regulatory Commission)
  • A Minister of Works with powers to build and “control” roads and charge tolls on Federal roads (Federal Highways Act (1971), sections 1 and 2)
  • Another agency to sign road concession agreements and maintain Federal roads (Federal Roads Maintenance Agency)
  • The NRC (above).

The Way Forward

What Nigeria needs for road and rail infrastructure at both the States and Federal levels are clear statutes establishing:

  • An agency for public ownership with private concessioning of immovable assets
  • Another agency to regulate prices, standards and enforcement. 

Without that, the quest for greatly increased private sector investment in land transport infrastructure is likely to remain elusive. It is to be regretted that the bills currently before the National Assembly on road and rail regulatory reform (Federal Roads Authority Bill (2013) and Railway Bill (2013)) do not directly address some of the key issues that need to be addressed. These bills need to be amended to do so. There are reports that on February 11, 2015, the Federal government forwarded to the National Assembly four new transport sector bills, (i) the National Transport Commission Bill (2015), (ii) the National Roads Fund Bill (2015), (iii) the Federal Roads Authority Bill (2015), and (iv) the Nigerian Railway Authority Bill (2015). These bills are not available for public review yet. The bills may well recognize and address the current deficits in the land transport sector regulations and further scrutiny will be required.

It is interesting that statutes on the agencies in the air transport and marine transport sectors already address these needs more satisfactorily than those on the land transport sector do. For example, the immovable assets “owner” agencies (the Nigerian Port Authority; the Federal Airports Authority of Nigeria) are established under statutes which are independent of the statutes which establish the “regulator” agencies (the Nigeria Civil Aviation Authority; the Nigeria Maritime Safety and Administration Agency). It is not surprising that there has been a significant surge in private sector investment in the air and water transport sectors in recent times.

Two main features lacking in the regulatory regimes for marine and air transport are clearly-articulated rules and policies on price-regulation and the independence of the regulator from the Minister. In at least these two respects, the regulatory regimes for marine and air transport are less well-developed than those for electric power and telecommunications.  It is to be hoped that all of Nigeria’s transport sectors’ regulatory regimes will come to have the two features. It is revealing that Nigeria’s telecommunications and electric power sectors have attracted more new private sector investment and that their regulatory regimes command more respect than those of Nigeria’s transport sectors.

[1] Nigeria’s Renewal: Delivering Inclusive Growth in Africa’s Largest Economy, McKinsey & Company (July 2014)

[2] Federal Highways Act (1971), section 1

[3] Infrastructure Concession Regulatory Commission (Establishment, Etc) Act (2005), section 1

[4] Nigerian Railway Corporation Act (1955) (the “NRC Act”), section 17

[5] Nigerian Railway Corporation Act (1955), section 35

[6] Lagos Metropolitan Area Transport Authority Law (2007)

[7] Public Private Partnerships Law of Lagos State (2011)

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