ECONOMY - 19 APR 2019

Public Private Partnerships: in the absence of infrastructure

Public Private Partnerships: in the absence of infrastructure
Mr Raji Fashola at the Azura Edo 450 MW plant near Benin City

Nigeria needs to invest $3 trillion over the next 30 years to plug the gap. That is about ten times our annual GDP and more than the entire French and British economies. Meanwhile, Nigeria’s annual budget is about $30 billion; so, even if the Federal government spent all its money on infrastructure, it would take 100 years for us to fill the gap.

 

Before the start of the millennium, Nigeria's national delivery service was appalling, marked by delays in mail delivery, high service charges and generally unreliable services.

Fast forward nearly 20 years, and there are many positive reviews of the Nigerian Postal Service (NIPOST): within three days, at an affordable cost, mails can be couriered to any part of the country.

What changed? The answer is private sector intervention.

In June 2000, former President Olusegun Obasanjo launched the National Mail Route Network (NMRN) which outsources our mail delivery service to private transport operators to enhance the mail distribution system of NIPOST.

Public-Private Partnerships (PPPs) like the one above, where the government partners with a private institution on a project or to provide a service, have been instrumental in improving public service. PPPs have also been used to address Nigeria’s infrastructure deficit. The recently completed Azura-Edo power plant which provides 450 megawatts (MW) for on-grid power is an example of the power of PPPs in infrastructure.

Although PPPs have been used to bridge Nigeria’s wide infrastructure gap, the capacity of the government to undertake sustainable PPPs remains weak. According to the Economist Intelligence Unit’s 2015 Infrascope Index which measures the enabling environment for PPPs in infrastructure across the world, Nigeria ranked 12th among 15 African countries with regards to its ability to efficiently implement infrastructure projects. Most of the concerns are that the country suffers from weak regulation, a poor investment climate, and credit unavailability.

At the moment, Nigeria has two key regulations that guide PPPs: The Infrastructure Concession Regulatory Commission (ICRC) Act (2005) and the National Policy on PPPs (2009).

One notable aspect of the 2009 Policy is that it states that procurement procedures should be “transparent, efficient and competitive”. Meanwhile, local authorities have also tried to improve transparency in the procurement process by setting up the ICRC PPP Contracts Disclosure Web Portal which provides important information on PPP projects. However, the procurement process of some contracts has been shady and lacked transparency.

A notable case involves the National Ports Authority (NPA) and a private capital and maintenance dredging company where contracts valued at ₦717 billion were awarded using a single bid—which is contrary to Nigeria’s Public Procurement Law.

Rather than publicly advertise the contract and invite other companies to bid, NPA gave maritime contracts in Rivers and Onne ports to the private company for over ten years. In the absence of open competitive bidding, the contract may no longer be awarded at market price, the government's options are narrowed, and collusion and corruption can thrive.

Beyond opacity in procurement and awarding contracts, the existing regulations also fail to account for all relevant risks when negotiating contracts. In some cases, major risk factors such as exchange rate fluctuations are ignored. Failure to account for these risks could lead to distressed or uncompleted projects as the cost of completing or running the project may significantly increase leading to losses.   

A classic case was the move to increase the Lekki-Epe Expressway toll fee due to the exchange rate fluctuations. Although the agreement states that LCC, the private partner involved in the project, can increase the toll tariff based on the country’s inflation rate and other factors every quarter, it did not state by how much the toll should be increased as inflation or in this case, exchange rate depreciation, exceeds a specific threshold.

Regulation aside, the investment climate remains unattractive to private investors, as it is characterised by bureaucratic bottlenecks, policy summersaults, and a high cost of doing business. Nigeria ranks 146 out of 190 countries in the World Bank’s Ease of Doing Business Index, despite concerted efforts to boost our ranking in the past two years.  

One prominent example of the challenge faced by private institutions is the agreement between the Federal Government and Bi-Courtney Aviation Services Limited for the firm to operate a private terminal at the Murtala Muhammed Airport 2 (MMA2).

Despite approval from the Nigerian Civil Aviation Authority (NCAA) to Bi-Courtney to begin regional flight operations from its terminal in 2003, NCAA as at 2017, failed to provide final clearance for flight operations to commence. Weak contract enforcement and policy reversals make potential private investors apprehensive of entering the market and increases the transaction cost of existing investors which reduces the returns on investment. 

Finally, there are not many attractive financing options available to private investors. In Nigeria, banks and the capital market offer limited financing facilities for PPP projects as the market for private infrastructure finance is not fully developed. One stumbling block is the perceived lack of bankable projects, i.e., projects that will generate enough cash flow to repay interest. A good example is the energy sector: the fact that electricity tariffs are regulated and power distribution companies struggle to collect fees from customers means that power generation companies cannot count on steady cash flows from power generated.

All these issues have limited the influence of PPPs in Nigeria, even though the parlous state of the government’s finances creates a clear opportunity for PPPs. Potential private partners are apprehensive of exploring even bankable projects, for fear of running afoul of erratic government policy.  

However, things have to change quickly, as Nigeria’s infrastructure deficit is damning. The National Integrated Infrastructure Master Plan best captures the scale of the problem: Nigeria needs to invest $3 trillion over the next 30 years to plug the gap. That is about ten times our annual GDP and more than the entire French and British economies. Meanwhile, Nigeria’s annual budget is about $30 billion; so, even if the Federal government spent all its money on infrastructure, it would take 100 years for us to fill the gap.

Amid constrained government finances and rising debt, Your Nigerian Economist opines that the government has few alternatives in delivering infrastructure projects. Ultimately, the political will for encouraging private sector participation will need to be developed, and very quickly too.

 

Mma Amara Ekeruche

Mma Amara Ekeruche

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