Bloomberg News

Nigeria Seeks Farming Boom With $3 Billion Rail Plan: Freight

December 05, 2012

Nigeria is pushing to reverse years of neglect of its agriculture and mining industries by revamping railways in a bid to reduce the economy’s dependence on oil.

The West African nation, the continent’s top crude producer, is spending more than $3 billion to build about 300 kilometers (186 miles) of rail lines in the next three years. That will help move more of everything from peanuts to coal from the northern Sahel belt to ports on the Atlantic coast, as well as serving Nigeria’s growing consumer class.

Oil has dominated the economy since the 1970s, now making up 95 percent of export earnings and 80 percent of government revenue. Agriculture and non-oil mining have shrunk by more than 40 percent, making Nigeria more vulnerable to oil price shocks. President Goodluck Jonathan plans to reverse that by expanding and rebuilding railways, ports and power plants, benefiting companies including Dangote Cement Plc (DANGCEM), the nation’s biggest company, and Flour Mills Nigeria Plc (FLOURMIL), the largest miller.

“Profitability will increase and economic growth will be achieved faster,” Ayo Teriba, chief executive officer of Economic Associates Ltd., a business consulting firm in the commercial capital, Lagos, said in a phone interview. “Rail is necessary to grow Nigeria’s very diversified internal economy.”

Dangote, Flour Mills, Oando Plc (OANDO), a fuel retailer, and Guinness Nigeria Plc, the second-biggest beer maker, have agreed to transport contracts with Nigerian Railway Corp., operator of the lines.

Chinese Builders

Still, rail expansion faces a lack of planning, as well as corruption and violent conflict. Nigeria is ranked 143rd on Transparency International’s Corruption Perceptions Index of 182 nations. While an armed insurgency in the oil-rich southern Niger River delta region that cut oil production has eased since 2009, a wave of bomb and gun attacks in the mainly Muslim north and in Abuja has killed more than 1,500 people, according to New York-based Human Rights Watch.

“A lot more needs to be done,” Teriba said. The government needs the “political will” to push through with its rail plans, he said.

China Civil Engineering Construction Corp., or CCECC, on Aug. 30 signed an agreement to build a 157-kilometer double carriage railway between Lagos and Ibadan, Nigeria’s third- largest city. CCECC is building another 186.5-kilometer double carriage link connecting the northern city of Kaduna to Abuja, the capital, at a cost of $875 million. The projects are partly financed with loans from China’s Export and Import Bank.

Light Rail

The government is also building a two-line light rail network for Abuja at a cost of $500 million to help ease congestion.

Rail improvements “will break a lot of supply bottlenecks and lower a huge chunk of manufacturing cost,” Chibuzo Ivenso, head of research at Lagos-based ARM Equity Research Ltd., said in a phone interview on Dec. 3. “It will also help create markets that are much further off.”

ARM has a buy recommendation on Dangote, which has gained 8.2 percent to 121.5 naira in the past six months. Flour Mills has climbed 12 percent to 66 naira in the period, while Oando has dropped 23 percent.

Nigeria needs about $10 billion over the next five years to repair and build new railways, according to James Milne, an analyst at Frost & Sullivan in Cape Town. Years of neglect of railways while Nigeria was in political flux during military rule that ended in 1998 resulted in freight-rail capacity dropping to 15,000 tons a year in 2005 from 3 million tons in 1964, Milne said in a phone interview on Dec. 3. Most freight is transported on worn-out and congested roads, he said.

Bigger Part

“The structure and network is still there for 3 million tons of freight to be moved, but a large part of that has fallen into disrepair,” he said. “If the rail network is improved, it increases the likelihood of agriculture playing a bigger part in the economy.”

Nigeria has gone from growing enough food to feed itself in the 1960s to the world’s largest importer of rice and sub- Saharan Africa’s biggest buyer of wheat and sugar. More than half of the population of 160 million live in rural areas.

The government wants “to resuscitate and revamp the railway” to become a “major component of economic development and social integration,” Transport Minister Idris Umar said on Aug. 30.

Rail investment will help benefit retailers and consumer- goods companies, such as soap-maker PZ Cussons Nigeria Plc (PZ), trying to tap a growing middle class in Africa’s most populous nation, said Milne. Nigeria’s economy is set to grow 7 percent this year and 6.7 percent in 2013, according to the International Monetary Fund.

“It’s such a huge population, and accessing the population is very difficult,” Milne said. “A large part of the market is informally structured, so easing transport problems is going to give better access to that huge population.”

To contact the reporter on this story: Elisha Bala-Gbogbo in Abuja at ebalagbogbo@bloomberg.net

To contact the editor responsible for this story: Nasreen Seria at nseria@bloomberg.net


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