In the wake of Nigeria’s economic recession and the need to provide energy and infrastructure for its teeming population, the Nigerian Government has decided to look past its traditional Western trading partners and look East, more specifically China for trade and investment. This also coincides with China’s commitment to establish a strong trade and economic presence in Africa and invest heavily in the continent.
Nigeria is reported to require US$166 billion to provide energy and infrastructure for its growing population. According to the African Development Bank, Nigeria has an infrastructure deficit of US$300 billion. In fact, overall infrastructure spending (and in turn demand for financing) in Nigeria is expected to grow from US$23 billion in 2013 to US$77 billion in 2025.
With this is view, and the reluctance of Nigeria to increase its’ debt profile to Western Institutions like the International Monetary Fund (IMF) and the World Bank, economic, technical, trade and investment partnerships with other economic giants like China have become imperative. Infrastructure funding from China is hoped will bridge the funding gap (caused by dwindling oil prices and dollar scarcity) and support businesses which now need competitive, cheaper and longer term financing to fund infrastructure and other related projects in Nigeria.
Chinese Infrastructure Investments
Nigeria has secured a US$6 billion loan commitment from China to fund infrastructure projects in Nigeria. The Nigerian government can access this credit facility by identifying and putting forward the relevant projects to the Chinese presumably through a series of tranches in respect of each identified project.
Furthermore, it was reported in April this year that Nigeria and China have entered a currency swap deal. The swap deal is designed to facilitate the settlement of Nigeria-China trade by removing the dollar from transactions and trading instead in yuan, whilst also boosting imports from China, whose exports represent some 80 per cent of the total bilateral trade volume. This deal will also enable Nigeria to diversify its foreign reserves It is hoped that this in turn should reduce the demand for dollars on the Central Bank of Nigeria and improve the value of the Naira.
There have also been various agreements on infrastructure agreements between Nigeria and China. They include:
a. North South Power Company Limited and Sino Hydro Corporation Limited (“SCL”) signing an agreement valued at US$478 million dollars for the construction of a 300MW solar power in Niger State;
b. Granite and Marble Nigeria Limited and Shanghai Shibang signing an agreement valued at US$55 million for the construction and equipping of a granite mining plant;
c. Infrastructure Bank of Nigeria and SCL signing an agreement for the construction of a greenfield expressway for Abuja-Ibadan-Lagos valued at US$1 billion;
d. the signing of a US$2.5 billion agreement for the development of the Lagos Metro Rail Transit Red Line project in Lagos State;
e. the signing of a US$1 billion facility for the establishment of a hi-tech industrial park in Ogun-Guangdong Free Trade Zone in Ogun State.
There are also significant investments in the energy sector as well. In June 2016, the Nigerian National Petroleum Corporation (NNPC) arranged a road show in China to source for investments in the Oil and Gas sector resulting in the signing of a Memorandum of Understanding between NNPC and several Chinese counterparties worth approximately US$80 billion.
Chinese Infrastructure Investment is being driven by “cheaper financing models”. The Chinese through their financial institutions such as the ICBC export credit agencies (like China Exim Bank) and development finance institutions like China Development Bank and China-Africa Development Fund part finance these specified infrastructural projects on the condition that the contractor services are Chinese (mostly state-owned companies). The contract binding the Chinese Contractor and the borrower government is the Engineering, Procurement and Construction Contract (EPC Contract). These loans like most other external loans are guaranteed by a Sovereign Guarantee provided by the Nigerian Ministry of Finance and security is taken, where applicable, over the commodity offtake arrangements.
The implication of this arrangement is that the Nigerian government is bound to execute the contract to which the loan was obtained for. This will go a long way to curb “white elephant” projects and corruption which has long plagued Nigeria. However, the Chinese government benefits massively as Chinese labour, machinery and expertise is exported to other developing countries thereby improving their Gross Domestic Product(GDP).