To make its impact felt, government at all levels has adopted an initiative which it believes will work.Through the Public-Private Partnership (PPP), the Federal, State and local governments have been addressing many public needs. But more needs to be done, reports DANIEL ESSIET.
Governments face challenges in the construction and maintenance of public infrastructure. Some of these challenges stem from bureaucratic bottlenecks in the civil service.
To overcome the bureaucracy, which accounts for delays, high cost of projects, the Public-Private Partnership (PPP) model is now being embraced by governments.
It is a contractual agreement between public agencies and private sector entities, for faster delivery of infrastructure, projects and services.
In such partnerships, public and private resources are pooled and responsibilities divided so that the partners’ efforts are complementary. In general, PPP borders on collaboration between public authorities and the private sector to finance, construct, renovate, manage, operate or maintain an infrastructure or service, which also involves risk sharing between the public and private sectors.
Origin
PPP arose from pressure to change the standard model of public procurement following concerns about the level of public debts, which grew during the macroeconomic dislocation of the 1970s and 1980s.
Until recently, there was simply no regulatory framework for PPP in Nigeria. There was a gap in regulations dealing with issues. The government has filled that gap with the passage of the Infrastructure Concession Regulatory Commission (ICRC) law.
The first known Federal Government project executed under PPP is the Bi-Courtney. The National Council on Privatisation also concessioned some seaports in Lagos, Warri and Port Harcourt under the PPP arrangement.
The Federal Ministry of Agriculture under the National Food Reserve Agency (NRFA) is undertaking PPP in its silos and reservation facilities. At the state level, the Lagos State Government has a special office coordinating PPP activities in the Ministry of Finance.
Importance
Stakeholders in the economy speak glowingly about the benefits of PPP. At a seminar on PPP in Lagos organised by ICRC, the Head, Centre for Infrastructure Policy, Regulation and Advancement (CIPRA), Lagos Business School (LBS), Dr. Ernest Ndukwe, said private investment in municipal waste management has been successfully mobilised through PPP.
He highlighted the importance of understanding the skills and motivations of private sector partners and the impact they can have on long term development of utility systems. The government, he said, is promoting the involvement of the private sector in the development of public infrastructure. This policy is partly driven by the need to finance the provision of infrastructure, but also by a strongly held belief that the private sector will be more disciplined than the public sector in designing and constructing infrastructure related projects and be more commercially minded in operating them.
Ndukwe said the development of a national PPP competence centre is an advantage for the development of national know-how and provision of assistance to local authorities.
A faculty member of LBS, Dr Bongo Adi, said the PPPs can reduce development risks, provide more cost effective and timely infrastructure delivery, offer the potential for better ongoing maintenance, and leverage limited public sector resources, while maintaining the appropriate level of public control over the projects.
He noted that a strong and functional institutional framework is the primary success factor for any PPP arrangement. Also, the PPP initiative demands a transparent process, which is necessary for confidence-building among the participants in the initiative, particularly on risk sharing.
States are executing PPP projects. For instance, Lagos State Government not only hosted an international workshop on the Public-Private Partnership initiative, it also has a special Unit in the Ministry of Finance which coordinates PPP-related activities.
The Lekki Concessioning Company (LCC) is undertaking the construction of major roads in Lagos, such as the Lekki-Epe Expressway, Lagos under the Build, Operate and Transfer (BOT) terms for 30 years. Many local governments in Lagos State have also latched on to the PPP initiative to combat rural infrastructure challenges.
Rotimi Amaechi’s administration in River State has resorted to the Public-Private Partnership scheme to fund its public health and housing programmes.
Caution
In mainstreaming PPP initiative, cognizance must be given to the social character of the policy. Thus, while the PPP arrangement should guarantee profit for the private investors on their investment, it should not repudiate states’ social responsibility to the citizenry.
Despite the advantages, there are misperceptions about PPPs that lead to criticism and quick dismissal without proper evaluation. He said a complete and proper evaluation of project delivery incorporates a number of considerations that provide a more comprehensive look at the total costs associated with procurement than is traditionally conducted.
Many public agencies have multiple PPP arrangements that have been in place for more than a decade. Furthermore, they continue to invite the private sector to compete for the opportunity to develop, finance, operate, and maintain public facilities for terms ranging from 30 to 50 years.
Adi said a successful PPP will include appropriate performance measures for the maintenance and condition of physical infrastructure, as well as management of user charges and rates, where applicable.
An Executive Director at the Centre for Infrastructure Policy, Regulation and Advancement, Dr Ese Owie, said governments revenues are finite and PPPs complement government’s investment in infrastructure, adding that PPPs are the most effective and efficient ways of improving public infrastructure and stimulating economic development.
Adoption and
achievements
Owie said governments started adopting PPP following pressure to change the standard model of public procurement which arose initially from concerns about the level of public debt, which grew rapidly during the macroeconomic dislocation of the 1970s and 1980s. According to him, citizens get access to best services from private sector entities collaborating with government.
He said there has been resistance to using PPPs in some areas. The resistance comes in part because of a misunderstanding of how much control the public sector has over the partnerships, a focus on a few poorly structured PPPs, as well as an attitude by public officials that “this is not the way we do it,” which can lead to unnecessary process delays and even the failure to reach an appropriate deal.
He listed laws supporting PPP to include Public Enterprises(Privatisation & Commercialisation) Act 1999, Infrastructure Concession Regulatory Commission Act 2005, Public Procurement Act 2007, Lagos State Public Private Partnership Law 2011 and the Edo State PPP Policy 2010.
He said the Infrastructure Concession Regulatory Commission was conceptualised as an agency that would engender a comprehensive, competitive and attractive PPP industry in Nigeria, to attract significant private sector resources for infrastructural development.
Specifically, he said the ICRC handles PPP at the national level, while state PPP offices handle such programmes at the state level. The key strategic objective for the ICRC is to accelerate investment in national infrastructure through private sector funding by assisting the Federal Government and its Ministries, Departments, and Agencies (MDAs) to implement and establish effective PPP process. The scope of the Federal Government’s programme for PPP is the creation of new infrastructure and the key expansion and refurbishment of existing assets at the federal level.
Owie, who is an experienced international trade law and policy lawyer, said the government should use all the tools at its disposal to facilitate private investment financing for the development of infrastructure. This, he noted, include bringing in new investors into the nation’s infrastructure; introducing new sources of revenue, such as tolling; allowing local authorities more flexibility in the way they use local receipts to fund major infrastructure in specific circumstances; and being willing to consider guarantees against specific risks that the market cannot bear.
He said the Edo State Government established a PPP office in 2010 headed by a cabinet ranking executive director. Apart from developing a state PPP policy, the office has attracted over $3 billion worth of investments since inception; successfully incubated all PPP projects; developed critical human capital and competence in the conceptualisation and structuring of PPP transactions and interfacing with the private sector more effective and efficient on sustainability strategy.
Owie listed PPP projects in the state to include Edo-Azura 450MW IPP, Ultra-modern Shopping Centre, star-category Hotel, Agbado Shopping Mall, Ihonvbor Industrial Estate, Benin Airport Concession, Trailer Park and Urhonigbe Rubber Plantation.
Also the River State Commissioner for Finance, Dr Chamberlain Peterside, said there was a substantial need for investment in infrastructure and this requires the harnessing of all viable investment methods.
He said the parties must access the most effective type of PPP for a given project with the appropriate parameters, balanced distribution of risks, appropriate duration, and clarity of responsibilities within the various regulatory environments.
He highlighted the need for rigorous preparation and planning to ensure that the PPP approach delivers value for money and is sustainable. He said governments must justify the use of PPP’s, which includes a demonstration that the structure will be more cost-effective than the traditional procurement methods and that it will deliver superior value for money. This, Peterside observed, is important for justifying a PPP approach, but also generally for assessing whether the project design is the most effective and where the strengths and weaknesses of the project lie.
Peterside said conducive legal, regulatory and financial framework would help the development and implementation of PPPs.
Speaking on the topic, “Addressing the Infrastructure challenge in Nigeria: The PPP imperative,” the Director-General, Infrastructure Concession Regulatory Commission, Mansur Ahmed, said the ICRC is working to ensure that economic operators have better access to the various forms of public private partnership in a situation of legal certainty and effective competition. Ahmed, who spoke through the Head of Communications, Olugbenga Odugbesan, said the commission encouraged private sector involvement in the upgrade of public utilities and infrastructure through PPPs. In most cases, PPPs have been implemented either through ‘design-build-operate’ (DBO) contracts or ‘design-build-finance-operate’ (DBFO) contracts, in which the private sector had also contributed to finance the assets.
He said the commission has also undertaken considerable work to define the principles of PPP and to assist in their application. The considerations that influence the form and structure of PPPs include the project’s size, scope, complexity, regulatory and operational requirements, application of user charges and risk allocation. The degree of risk transfer, he noted, is a crucial issue to the success of PPP projects.
In many cases however, Ahmed observed that a comprehensive evaluation is neither contemplated nor completed, leading many decision makers to dismiss a project delivery option that could potentially protect the public interest while maintaining cost-effectiveness.
He said the ICRC wants government agencies to undertake realistic and rigorous project preparation,particularly on affordability and financial sustainability factors, as these are critical to project success.
According to him, the main objectives of the PPP are to enhance the quality and the efficiency of the services to the public by attracting the best technology and expertise available.
He said there was need for a coherent legal environment essential to support the development of effective PPPs. This should be coordinated with a policy and strategic approach to overall financing of infrastructure and service provision.
Considerations
To build a successful PPP in any sector, Ahmed said a diligent and sophisticated cost-benefit and competition analysis must be carried out, which ensures the long-term viability of the project without public financial support. He said problems arise when government agencies which do not possess sufficient understanding of the PPP process or the analytical framework required to assess the true costs and value for money of a PPP solution carry out such assignments. Ineffective structuring of projects, Ahmed noted, could lead to substantial costs to the state, which could have been avoided through better analysis and more effective tendering.
The Managing Director, Lekki Concession Company (LCC), Opuiyo Oforiokuma, said successful PPPs require an effective legislative and control framework and for each partner to recognise the objectives and needs of the other.
He said road construction by PPP represents the largest capital investments. This is to be expected given the scale of projects and the investment requirements. Again, he said that road construction represents the longest project contract durations often over 20 years. This is inherent of the relationship between the size of capital invested, degree of private sector involvement and length of time required to ensure investment and profit recovery.
According to him, risk transfer is a key factor, which is at the heart of effective PPP design and if a good balance is not achieved, it will result in increased costs and the inability of one or both parties to fully realize their potential. For project to be sustained, he said the private contractor must be selected through international competitive tendering standards. The terms and conditions of the agreement are considered consistent with international best practice. The agreement would help create a source of capital to support an upgrade and extension of the system.
He said political and public pressures can play a negative role on the further expansion of PPP projects or the further expansion of private sector participation. According to him, the potential disruptive effects of public outcry should also not be underestimated.
Citing the example of the Lekki Express Way, Oforiokuma said a PPP approach was considered necessary. To run the project, Oforiokuma said experienced technical, traffic, financial and legal advisers were involved to achieve a satisfactory allocation of risk and an appropriate revenue support mechanism. Oforiokuma explained that the financial viability of a capital-intensive road project is dependent on achieving loan maturities of acceptable length. Even without the improvement on overall economic position, he said the rate of return to investors would have been significantly improved by refinancing the initial borrowings, once construction risks had disappeared and the financial results for a number of the early operating years can be made available to lenders.
He said LCC project is a good example of what can be achieved through a pragmatic approach to developing infrastructure projects through PPPs.
Delivering a paper entitled: “Strategies for promoting Public-Private Partnerships,” the Chief Knowledge and Responsibility Officer of Chiers Company Limited, Mr Kehinde Sogunle, said PPP is a win-win relationship between the government and various private sector players. It shares the risks and rewards of the venture under a contractual obligation.
Challenges
Speaking on some of the challenges in PPP, Sogunle said many PPPs have left the contractual parties dissatisfied. This indicates that either the authorities or investors may have had too high expectations to what could be achieved. Conceivably, some contracts have been granted under circumstances subject to corrupt practices or contingent upon political links. This makes them susceptible to changes in the political environment.
Sogunle said bona fide PPPs have also suffered from inflated or unrealistic expectations. He said award procedures often lack transparency and are not based on objective evaluation criteria. He said many private investors have had to contend with conflicting public authorities, for instance, central versus sub- national governments, or regulatory bodies versus ministries. In addition, non-existent or inexperienced regulators created avoidable uncertainty about price and tariff setting.
Risk reduction – Given the size of many infrastructure projects, cost overruns and delays are common, especially if there are subsequent modifications to the design as a result of political or environmental concerns. The private sector typically bears this risk, even when the project will, ultimately, be run by a public entity.
Currency Risk – Perhaps the greatest risk to the profitability of a project involves the risk of devaluation. Infrastructure projects are often financed in part through international lending. These debt repayments, together with payments of dividends, must be made in foreign currencies while profits usually accrue in the local currency.
As a result, any sudden devaluation can modify the profitability of a project. Therefore, there is need to understand the challenges of PPPs and to be committed to continuous improvement in the delivery model. There is a substantial private investor base with a significant appetite for investment in public infrastructure projects, thus making PPPs a viable option in spite of a ‘turbulent’ capital market.
PPPs have consistently been found to deliver more projects on time and on budget than traditional arrangements. Particularly for large-scale, high-value projects, the use of private funds for capital expenses can mean that PPP-based projects achieve faster groundbreaking and more rapid construction once negotiations are complete, rather than waiting to secure public financing.
