Why Lagos works

Just to the east of Lagos, in the rapidly expanding new city of Lekki, a huge industrial project is taking shape. The Dangote oil refinery, with a capacity of 650,000 barrels a day, will cost at least $12bn to complete and be the biggest refinery of its type in the world.

As well as producing enough petrol and kerosene to meet the entire demand of Nigeria’s 180m people, there will be some left over for export, according to Aliko Dangote, chairman and chief executive of the company behind the project. A separate fertiliser plant will start producing 3m tonnes a year of urea in the next few months, enough to meet the current needs of Nigeria’s farmers, while a petrochemicals factory will make a combined 1.3m t/y of polyethylene and polypropylene.

The scale and audacity of a project that will suck up a third of Nigeria’s daily oil production and tilt the country’s import-export balance has invited naysayers. Some doubt whether even Mr Dangote can pull off a feat that has long eluded Nigerian governments. Yet Mr Dangote, whose company dominates Nigeria’s — and much of Africa’s — cement industry, has a formidable record of delivering at scale.

If all goes to plan, when the refinery enters production in the first quarter of 2020, it will address many of the structural problems that have cursed Nigeria since it discovered huge quantities of oil 50 years ago. Because the country exports crude and imports refined products that are subsidised by the state, a plethora of dealers and middlemen has sprung up to make easy fortunes out of the arbitrage opportunities.

Aliko Dangote is the chairman and CEO of a company that is building a $12bn oil refinery © Bloomberg

Mr Dangote says his refinery will save Nigeria billions of dollars in foreign exchange and remove the pickings that have benefited generations of entrepreneurs diverted from production to speculation — something that is likely to make him enemies. “Nigeria has been trying to make refineries work for a very, very long time,” he says. “I’m a great believer in Nigeria because the opportunities here are enormous. But we need to have consistency in government policies.”

That it has taken a Lagos-based businessman — and not an Abuja-based politician — to tackle so fundamental an issue says much about what is wrong with Africa’s biggest economy. Yet it could also hint at what is going right. Mr Dangote is a symbol of what private enterprise can achieve if it is provided with the right incentives. Though a northerner by birth, he also represents a real Nigerian success story: Lagos.

Since the federal government moved to Abuja in 1991, Nigeria’s former capital and commercial hub of roughly 20m people has taken off. Starting in 1999, with the election of Bola Tinubu, a former Mobil Oil executive, Lagos has had three administrations that have harnessed the private sector to turn the city into the most productive and dynamic part of Nigeria’s economy.

It was by offering Mr Dangote tax incentives in the Lekki free trade zone that the state persuaded him to build his refinery in Lagos. Lagos state output in 2017 was $136bn, according to official estimates, more than a third of Nigeria’s gross domestic product. The city is the centre of most of the country’s manufacturing that reverberates around the continent. More recently, it has become a tech hub to rival Nairobi’s so-called Silicon Savannah.

The Lagos economy is significantly bigger than that of the whole of Kenya, east Africa’s most dynamic country, with a nominal per capita income of more than $5,000, more than double the Nigerian average. The population, just 1.4m in 1970, has nearly doubled from 11m a decade ago as thousands of people arrive each day to seek a better life.

“In the past 18 years, Lagos has transformed,” says Lamido Sanusi, a former central bank governor. “In terms of roads, in terms of infrastructure, in terms of governance, in terms of a general investment environment, in terms of security, the government has given people a greater opportunity to thrive.”

Mr Sanusi, who is now the Emir of Kano, a city in the less prosperous north, says Lagos has provided a template for the whole of Nigeria. “That is what we need at the national level.”

Tayo Oviosu is chief executive of Paga, an electronic banking service and one of dozens of start- ups that have taken root in the city. Many are concentrated in the Yaba district of Lagos, where the state government installed a fast broadband network to help start-ups. He traces Lagos’s dynamism back to the turn of the century when the federal government, under President Olusegun Obasanjo, was refusing to pay Lagos its full allocation of oil revenue. “That forced Lagos to look within,” says Mr Oviosu. “It had to focus on raising its own revenue and doing its own thing.”

The relative success of Lagos, a city as dynamic as many of the booming cities of Asia, has mostly been lost in the less uplifting story of Nigeria. The potential economic powerhouse of the continent, the country has all the ingredients for success. A huge population gives it the scale other African economies lack. It is a coastal trading hub and the world’s sixth-biggest oil exporter.

Yet time and again, it has fallen short. Even in the boom years, when oil revenues were pouring in, the state failed to provide the basic building blocks of development. Largely on the back of high oil prices, the economy grew rapidly for the first 15 years of this century, which coincided with the re-establishment of civilian rule from 1999. But successive administrations, either through incompetence or corruption, have missed the opportunity. Few ordinary Nigerians felt the impact of fast growth.

State education has been starved of funds. The health system is a shambles and the elite,

Physical infrastructure is just as poor. Generation capacity of about 7,000MW brings sporadic power to a fraction of the population, leaving at least half of Nigerians without electricity supply. Businesses need their own generator to secure a reliable supply. The oil industry has sucked oxygen from the economy and pushed the naira to uncompetitive levels. At 3.5 per cent of GDP, the tax base is pitifully low and most of the country’s 36 states, with the exception of Lagos, depend almost entirely on federal oil revenue.

The security situation is not much better. Though Mr Buhari has prioritised the defeat of Boko Haram, the militant Islamists who had taken territory in the north-east, they are far from defeated. Mr Buhari has also had to contend with attacks on oil installations in the oil-rich Delta region, a secessionist movement in the south-east and violent clashes across the country between herdsman and settled farmers.

As if this were not bad enough, Nigeria is recovering from its deepest recession in 25 years, a result of a fall in oil prices from 2014. Anaemic growth returned last year, but output is still below 2014 levels, according to Yemi Kale, head of the National Bureau of Statistics.

Kingsley Moghalu, an academic and former deputy governor of the central bank, regards Mr Buhari as the latest in a long line of politicians who have failed to grapple with the country’s structural problems or unleash its potential. “He seized every opportunity to miss an opportunity,” he says.

Against this backdrop, the relative success of Lagos, which pulled out of recession earlier than the rest of Nigeria, looks all the more remarkable. Akinwunmi Ambode, governor since 2015, has doubled down on infrastructure projects and made bold promises to transform the city. This year, he signed into law a pledge to bring uninterrupted power to the whole state, something inconceivable almost anywhere else in the country. The idea is to use the state’s balance sheet to provide guarantees to private electricity generators so that they can build mini- power plants around the city.

“They are literally going to yank themselves off the National Grid,” says Bunmi Akinyemiju, chief executive of Venture Garden Group, a Lagos-based venture capital company. The city, he says, already runs self-contained grids powered by gas, solar and even waste material. “I really believe that, in the next five years, Lagos will have 24/7 power,” he says. The past three governors, he says, have “focused on creating the enabling environment for Lagos to be the mega city it can be.”

Toni Kan, a writer and entrepreneur who styles himself as “the Mayor of Lagos”, agrees his adopted hometown has made huge strides. The paved road network, including some world- class toll roads, has expanded significantly,he says, and the city’s once notorious gridlock has eased, although critics complain that the biggest improvements have come in wealthy neighbourhoods. Old yellow buses have been phased out and a more integrated transit system adopted.

Culturally, says Mr Kan, Lagos is unrecognisable from even a decade ago. Restaurants and music clubs are flourishing. Artists and musicians perform in thriving public spaces such as Freedom Park. A city once considered dangerous is now among the safest in Nigeria. Successive administrations belonging to the same All Progressives Congress party have installed more street lights and beautified the city. “I won’t say it’s gentrified,” says Mr Kan of a conurbation that was once a byword for dysfunction. “But you get the sense of a modern city.”

Certainly, Lagos has legacy advantages on which the governors have built. These include its status as the former federal capital, which brought money and talent, and its role as a transport hub with three ports and west Africa’s most important international airport.

Yet Lagos still has terrible congestion and huge disparities of wealth. Apapa Port and Lagos International Airport can be maddeningly inefficient, putting off potential business. According to a 2016 World Bank report, two out of three people in the city live in slums.

Lagos mirrors Mumbai, the commercial capital of India: it is an economic engine and a magnet for both the ambitious and the desperate. Nigeria’s millionaires and billionaires share a city with people living in indescribable squalor. Its unemployment rate may actually be higher than the national average, says Olayinka David-West, a senior fellow at Lagos Business School, because its relative success and the perception of opportunity draw in floods of Nigerian migrants every day. Many are disappointed.

Mr Ambode, the governor, estimates that, by 2040, Lagos will be the world’s third-largest urban conurbation after Tokyo and Delhi, with 30m people. The city has expanded physically, and is now shifting to an east-west axis in contrast to its traditional orientation from north to south. But it will struggle to accommodate the influx.

“The government is doing what it can to plan the city, to lay the electricity and so on,” says Bongo Adi of the Center for City Solutions at Lagos Business School. “But people create new [informal] suburbs that are not served by roads or schools or hospitals. They are not covered by the planning budget and won’t be catered for.”

Still, says Bismarck Rewane, chief executive of Financial Derivatives, a consultancy, Lagos’s progress is undeniable. He cites a more educated electorate less tolerant of poor performance. “People in Lagos demand service from their government,” he says, adding that the city’s fans are notorious for booing off the national football team. “That’s why Lagos works. If you don’t perform, you’ll be out.”

 

Bola Tinubu (left)

Governor 1999-2007

Born in Lagos in 1952 when the city was capital of what was then British-controlled Nigeria. Forty-seven years later, after a career at the likes of Arthur Andersen and Mobil Oil, he was elected governor of the state of Lagos. After a clash with the newly democratic federal government over revenue allocation, Mr Tinubu began to improve state tax collection, raising money on the basis that he would spend it on education, roads and housebuilding. He courted private capital for large projects, including shopping malls and gated communities. A political godfather and skilful party operator, he was crucial in the 2015 presidential election victory of Muhammadu Buhari.

Babatunde Fashola (centre) 2007-2015

A lawyer and technocrat shielded from the rough-and-tumble of city politics by Mr Tinubu, who still dominates the city’s politics from behind the scenes, he raised consumption tax, cracked down on crime and started a project to protect Victoria Island, an exclusive part of the city, against flooding. He also initiated a land reclamation scheme that is supposed to become the site of Eko Atlantic City, with office complexes and 250,000 homes. Seen as a highly effective governor of Lagos, when his term ended he became a less obviously successful federal cabinet minister.

 

Copyright (c) The Financial Times Limited 2018. All rights reserved

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