PPP: Way Out of Infrastructure Deficit in Nigeria
Iyiola Omisore
Since the advent of globalisation, much promoted by internet technology, some twenty years ago, the world, outside of its southern hemisphere, the era of government, at every level of nation’s political economy, being solely responsible for the total conception, financing and management of public projects has since ceased to be the norm, as there has been much and involving contractual relationships between the public and the private sector of the polity in the procurement of public utilities under an arrangement known as public private partnership [PPP]. Although, PPP is seen as new and novel that has come on stream in the last 20 years, the idea, historically, has not been absent, since governments, as authorities of states, has had to procure utilities for the people, hundreds of years, since. The reality is that the private sector has always been involved whenever it has become necessary for governments, or their agencies, to provide public services for their people. The arrangement prevalent most societies is the design and finance [by government], build and deliver [by private contractors] and manage [by government].
Hitherto, before PPP became the norm, this was the arrangement by which roads, railway, electricity and water services were provided, the world over.
Whereas, countries outside of sub-regional Africa has had a major paradigm shift in public procurement, countries within the sub-regional African continent, Nigeria inclusive, are yet to avail themselves of the opportunities and advantages in the provisions of public services and utilities, as offered by the PPP model, for their peoples, thereby expanding the scope of their socio–economic developments.
While it is recognised that the PPP model has been deployed to execute a few public projects in Nigeria, its utility value has been mostly felt in Lagos state where the authorities has partnered with private sectors for design, finance and management of public utilities. Even then, the projects involved are hardly ones that can recommend themselves to a sustainable management status under an ideal PPP model. Outside of Lagos State, cursory survey of the infrastructure procurement by state governments is still largely tied to the old model of contract awards to private firms to execute a project designed and financed by governments. Thus, on the average, Nigeria has fared, rather poorly, especially in view of the country’s need for requisite infrastructure for nation’s potential developmental capacity.
My intervention in the following submission is anchored on a very straight forward argument to the extent that, even with real needs and potential returns on investment by investors, inadequate provisions in the legal framework to sufficiently safeguard investors and financiers’ interest may continue to constitute major road blocks for Nigeria, at all levels of the Nigerian authorities in the country’s PPP drive for the much needed public procurement of utilities and services. The critical point to be made here is that, though, there seems to be shortage of investable funds in the International Market, but Nigeria’s crisis seems compounded by the integrity profile of our legal framework for an ideal PPP model.
In the final analysis, and without going into the details of the shortfalls in the legal framework, as has been identified in many studies, see, for instance, Essia and Yusuf, 2013, suffice to say, however, that the Infrastructure Concession Regulatory Commission [ICRC] Act of 2005, the Public Procurement Act 2007 regulations issued by ICRC governing the PPP process and various state laws as described in each State’s PPP policies falls short of necessary regulatory framework for proper implementation of PPP projects, most importantly with respect to dispute resolution during the tenor of the contract. Yet, the apex bank should make concerted efforts to offer assistance to commercial and industrial banks to enable them offer financial skills required in PPP management.
Conceptual Clarification
PPP has become a generic term to describe plethora of contractual business relationships and management indices between governments [national, state and local, including their respective agencies] and private sector that may be promoters and financing Institution, i.e. banks.
In some PPP model, project financiers [banks] may be part of contractual arrangement as investors, thereby part of the risk-sharing, with a view of participating in the accruing profit and also losses from such business undertakings. It suffices, however, that this arrangement is not popular in ideal PPP model for public procurement, as some financial regulations preclude banks from getting involved in business ventures beyond their statutory function of managing public funds, committed to the procurement of public infrastructure.
Operational Models Under PPP Arrangement
In the public perception, any contractual relationship between government and a private sector is deemed to qualify as a business model under a PPP arrangement. However, there seems to be some consensus around the following business arrangements as qualifying for PPP business relationships.
1 BRT –Build –Operate- Transfer. Under this arrangement, private investors access funds to build a public facility/utility, sells the output to the public and transfer at the end of the contract arrangement.
2 BRT-Built-Rent-Transfer. This is a model where private investor builds a facility, rents it out to recoup investment, and, thereafter transfer the facility to the authority [government] at the end of contract duration.
3 BTO –Build –Transfer –Operate apply to a contractual agreement where a private vendor builds facility, transfer to government who either operates directly or contract such facility out to a Third Party. The investor either gets full payment at the end of contract, or share in the earnings from operation, thereafter.
4 Concession is a model, whereby the private vendor, otherwise called the concessionaires may or may not build a facility, but is allowed to operate an already existing facility on which he may have refurbished. He is allowed to charge users a fee or toll for use of the facility for a period of the contract.
5 DBB-Design- Bid-Build is a model where government agency provides a design, put out tender for private investors to bid and build upon winning by a private investor.
6 DBFO-Design, Build, Finance and Operate. Under this PPP model government design an Infrastructure facility, private vendor finances building and, thereafter, operates of cost recovery.
7 DBMF-Design, Construct, Maintain and Finance. Under this arrangement, government takes the responsibility for the design and the finances of the facility, while the private sector do the construction and maintenance of facility, with returns to government, based on some sharing formular.
8 EPC CONTRACT –Engineering Procurement and Construction. This is, perhaps, the most complex and expensive of the PPP models because it involves a situation whereby the contractor provide a complete installation to specification at a fixed price and at a fixed schedule of facility delivery. A typical example of this PPP model is the installation of power plant.
9 FRANCHISE. Under this PPP arrangement the service provider, called the franchisee is allowed to charge a fee on the public for the use of an infrastructure facility which has already been built by government for which the franchisee pays a periodic lump sum to government after making allowance for maintenance cost and profit margin.
(10) Lease/Maintain is a typical arrangement, whereby private vendor pays rent for use of facility owned by government. The vendor is responsible for maintenance of the utility.
(11) ROT-Rehabilitate-Operate-Transfer is a model, whereby a private investor rehabilitates facility, operates it to recover cost of investment and the transfer to government at the end of contract.
(12) RLT-is a PPP arrangement under which private enterprise rehabilitates a facility, signs a lease agreement with a government agency for use, with a view of cost recovery, thereafter transfer, facility to government at the end of contract.
General Features of PPP Schemes
Irrespective of the model adopted, there are common features that define the essence of any contractual business relationship assumed to be PPP. The infrastructure or service must be funded, in whole or in part by the private partner, and this, in essence, influence on how risks are distributed between the public partner and the private investor. To be sure, PPP are complex structures, involving multiple parties and relatively high transaction costs. But whatever the cost, a PPP model must relieve government of the yearly burden in budget provisions for a public utility, because PPP must become a procurement tool where the focus is payment for the successful and efficient delivery of services. Here, the performance risk is transferred to the private partner.
PPP is an output/performance based arrangement, as opposed to the traditional input-based model of public service delivery where the focus is payment for the successful delivery of services. (i.e. Design, construction, maintenance and operation), with a view to increase synergies and discourage low-capital/high operating –cost proposals.
In general, a PPP model must offer a new and dynamic approach to managing risk in the delivery of infrastructure and services.
In a typical PPP arrangement, the private sector is compensated through either: user- based payments (i.e., toll roads, airport or port charges). Availability payments from the public authority (i.e., pfl, power purchase agreements (PPAS), water purchase agreement ( WPAS). A combination of the above user based payment structures, the government or public authority often needs to provide some financial support to the project to mitigate specific risks, such as demand risks, or to ensure that full cost recovery is compatible with affordability criteria and the public’s ability to pay.
PPP Lock-jam
Until very recently, there was simply no regulatory framework for PPP in Nigeria. PPP in line with the different methods of financing same was to a large extent an alien concept. In fairness to the public service, there were no precedents or reference points. And, as suggested in my introductory remarks, there was clearly a serious knowledge deficit on the part of the regulators in dealing with issues. And these posed major problems to both sides of the transaction which may have accounted, to a large extent, for some of the challenges in the early period of the PPP arrangements. For example, the insufficient knowledge of the nature of PPP is largely responsible for the perception that the scheme is primarily for revenue generation, rather than to provide infrastructure or services required by the public, as quickly as possible and in the most efficient manner. While the infrastructure Concession Regulatory Commission Act 2005 is in place, a cursory examination of the Commission has very little effective powers, so much that it is becoming largely a monitoring and policy-making entity without the capacity to enforce compliance, particularly on the side of government.
The slow pace at which the justice delivery system works is also a major impediment to doing business in Nigeria, and which continue to cause serious delays in PPP projects. In other climes, a 3-stage approach to dispute resolution is available to parties under PPP arrangement before approaching the court, where all parties involved in dispute are assured that their respect complaints would be satisfactorily resolved. Perhaps, a resort to this may be a viable alternative to litigation. The point to be made here is that when dispute resolution costs and uncertainties are high, private participation in infrastructure may be held back. Judicial systems ought to play a major role here, but in many developing economies, Nigeria inclusive, they tend to be cumbersome, slow and expensive. Yet, they are perceived as pandering to the public party in dispute.
Conclusion
In bringing this address to a close, it is important that we do not gloss over the political and cultural issues that often constitute major disincentives to public procurement, via PPP arrangement.
One of the issues is absence of political will on the part of an administration to see through the policies of a previous administration. And because concessionaires are aware of a negative tendency by a new administration not to honour, to the lather, all the tenets of an arrangement by a departed administration, they are often inclined to speed up the commissioning of projects before the date of departure of a sitting administration, with avoidable increase in the cost of project. Yet, except there is a determination that a PPP succeed, there are offer sufficient vested interests in a country, especially in a multi-faith and multi-ethnic country like Nigeria to ensure that the governments initiative to promote PPP as a policy fail.
Public-private partnership projects often encounter serious resistance from labour unions, civil service employees and sundry socio-economic interest groups. Also, present is the negative understanding by the general public, borne out of ignorance, on the strategic importance of PP in a nation’s socio-economic development. Whereas, PPP, are meant to be partnership contractual arrangement between the public and private sectors of the economy, in which responsibilities, risks and obligations, are to be shared by both sides in order to grantee the greatest benefits to the public, but regrettably, in Nigeria, a segment of the public service operators tend to see the private sector concessionaires as the enemies that would deprive them of their jobs, therefore, to be overcome at all cost. And this is often achieved when some extant rules in the civil service are exhumed to advice the government on why all of a PPP undertaking, or some aspects of PPP project agreement should not be honoured, thereby leading to government unilaterally rebiding on contracts voluntarily entered. And with a weak legal framework, under which concessionaires can be protected, the tendency is for the private sector operators, both from within and from outside of the country, to be wary of doing business with government. Thus, timely procurement of public utilities suffers and the socio-economic development and the country is the worst for it.
– Senator Iyiola Omisore (Ph.D), a former chairman of Senate Committee on Appropriation, is CEO, Chrisore Engineering Limited
