Adopting the Public Private Partnership Model
As Nigeria aggressively seeks to close its huge infrastructure gap, Obinna Chima highlights the need for the country to leverage on public private partnerships to achieve its goals and attract foreign direct investments
Notwithstanding the challenges confronting Nigeria, the importance of quality infrastructure is essential for economic growth.
Addressing the country’s infrastructure deficit will require a substantially larger annual level of investment in infrastructure, a significant increase in annual allocations for routine and periodic maintenance to ensure reliable infrastructure services, and increased attention to the institutional arrangements that support the infrastructure network of the country and the related services.
The long-term issue of funding and the option(s) for financing of infrastructure are becoming hugely important questions for policy makers and the government officials also, especially with the significant reduction in the country’s revenue.
But spending on infrastructure offers a lot of benefits and, if wisely directed, such investment can deliver improved quality of life to the affected citizenry.
However, nowadays, public-private partnerships (PPPs) are increasingly considered to be an attractive development instrument and are often being used in development programmes globally.
PPPs are increasingly envisaged as an attractive proposition for involving the private sector in infrastructure development. It is generically known as a form of cooperation between government and the private sector which sometimes also involves voluntary organisations (NGOs, trade unions) or knowledge institutes – that agree to work together to reach a common goals or carry out a specific task, while jointly assuming the risks and responsibilities and sharing resources and competences.
While it is expected that with the signing of the 2016 budget into law, the focus would be on how best to develop the country’s pallid infrastructure, funding remains a challenge.
For instance, the Minister of Power, Works and Housing, Mr. Babatunde Fashola said recently that the federal government will need as much as N1.7 trillion to complete about 206 road projects. Fashola however noted that the three ministries under him have only N433 billion earmarked for them in the 2016 budget.
He explained in this light that the ministry decided to phase the road projects and complete them over the next three years starting from high priority roads.
According to Fashola, to overcome extant challenges in sustainable road infrastructure development, the government upgraded the budget to finance infrastructure from 15 per cent he said was the situation in the past to 30 per cent.
“This is the first step to sustainability. But it is not enough to budget. It is important to implement the budget and use the finances properly,” he said.
He stated: “Today, with about 206 road contracts already awarded in the past and not completed, it does not make sense to start any new roads when the amount needed to complete is about N1.7 trillion and the budget for the three ministries is N433 billion as proposed by the Executive.”
Why Turn to PPP?
According to a recent White Paper from the PwC and the Dubai Investment Development Agency, (DUBAI FDI), PPPs have become a popular tool for funding new infrastructure projects around the world. The report showed that states typically tend to turn to PPPs when facing: Budget deficits; the need to protect against project delays and cost overruns; a desire to diversify the economy by stimulating private sector investment; and a desire to maintain the pipeline of projects when government funds are constrained.
It pointed out that using PPPs to develop infrastructure gives governments the opportunity to shift large upfront capital spending off their near-term financing commitments. For example, Oman’s Energy Sector Law, in effect a PPP law, had removed billions of dollars of spending to develop power and water production facilities from the state budget. This cost was then spread across decades through a payment to a private sector company which has taken on the ownership, construction and financing of the plants.
“Because payments by the government to the private sector are based on performance standards, it encourages competition and efficiency in the provision of services, and drives value for money. It also helps minimise project delays and cost overruns as these would eat into the profit margin of the private sector partner.
“In addition to driving some element of competition into public services, it also has the potential to encourage knowledge transfer between some of the most sophisticated international private sector firms and the government,” the report added.
Lessons from Dubai
When Dubai announced its PPP law last August (published in September) the key aim was transferring knowledge and experience from the private sector to the public sector and the training and qualifying of Emiratis in the management and operation of projects. Dubai has succeeded in turning itself into the undisputed business hub for the Middle East by creating a business friendly environment that welcomes investment from around the world. It has also spent heavily on infrastructure to create a physical working environment including modern office and residential space, a stable power supply, and transport infrastructure easing links within the city and between neighbouring cities.
To keep playing this role, it outlined plans to develop as a tourism, aviation and trade hub, but continuing to invest in these areas, as well as the supporting sectors of power, transport, utilities, health and Education will be challenging during a period of economic weakness in the region, and the Emirate needs to find new ways to fund its investment programme. It is only by doing so that Dubai will maintain its pre-eminence as the region’s business hub.
Dubai wants to have 20 million visitors and add 35,000 new hotel rooms by 2020, while its population continues to expand. All this requires more to be spent on providing power, transport, and other infrastructure that makes Dubai a welcoming and attractive business and travel hub for the region.
Up until around 2010, Dubai financed the bulk of this on the government balance sheet.
This was done either directly by government grants, or by borrowing in the loan markets and debt markets with an assumed government guarantee. This mismatch between short- term borrowing and the long-term infrastructure that was being built caused financial problems for the Emirate when the ability to refinance loans disappeared during the financial crisis.
This led to the creation of its PPP law to strengthen public-private partnerships in the country.
Setting the Right Platform for PPP
Therefore, in order to significantly raise the level of infrastructure in Nigeria and enhance foreign direct investments (FDIs), experts have stressed the need for policy makers to embrace PPPs. They noted that Nigeria’s huge infrastructure deficit cannot be tackled by government alone, considering the significant drop in earnings to the three tiers of governments.
Specifically, the Senior Transactor, Infrastructure Financing, Rand Merchant Bank Nigeria (RMB), Rachel More, stressed the need for a conducive environment for PPPs to thrive in the country, saying that the financing opportunities in Nigeria are huge.
She also said there must be transparency, consistency of policy and regulation in the system to encourage investors.
“There is a funding gap in Nigeria, given the state of the country’s infrastructure space. There is absolutely no way that the government can provide these infrastructures relying solely on public funds. So there is an opportunity to partner with the private sector to make those projects reach fruition and for the people to benefit.
“Yes, there are many hurdles such as inconsistencies in policies, the legal framework, so we need to create an enabling PPP environment. A lot depends on our policy makers and regulators. There are obviously constraints on the financing side.
“But you can unlock those constraints if there is certainty about what to expect going forward. So, if there is clarity, consistency and transparency, then you have investors more willing to throw monies at projects hoping that they would get fair returns on their investments,” she added.
More, noted that competition for global FDI has become stiffer, urging government to tackle militating hurdles and implement macroeconomic policies that would be accommodating.
On his part, a Director at FBN Quest, Patrick Mgbenwelu pointed out that FDIs plays a critical role in accelerating infrastructure growth in any economy. He also noted that an encouraging environment remains a building block for the growth of any economy.
Once there is the right environment, investors would be willing to come in and banks would be willing to lend, he said
Mgbenwelu added: “FDIs will only flow where there is a stable government, clear and consistent policy, and an investor-friendly environment. So, looking closely at each of these, the foregoing remains the direct correlation of these with what is required for driving the growth of infrastructure in Nigeria.
“According to one of the leading African regional banks, Nigeria’s infrastructure gap currently sits at $350 billion to be extended over the next 10 years. There are different figures however. This represents a significant opportunity for investors and financiers alike in the Nigerian economy. This would result to creation of jobs and growth in the non-oil sector.
“One of the major constraints is that the Nigerian banks is still not able to provide long term funding no matter how much liquidity you have if you cannot finance infrastructure that is so much highly capital intensive, if you do not have long term liquidity, you can as well change the subject,” he added while speaking at a seminar organised by Akindelano Legal Practitioners (ALP) recently.
Also, the Director-General, Infrastructure Concession Regulatory Commission (ICRC), Mr. Aminu Dikko described PPP as the best option to finance Nigeria’s wide infrastructure gap.
Dikko said the concession of the projects through PPP was to resuscitate infrastructure decay.
The director-general pointed out that slump in the country’s revenue as a result of the drop in crude oil prices has made the case for PPP stronger.
Dikko added: “The public private partnership should not be seen as privatisation; PPP allows the private sector to repair and rebuild infrastructure as well as recoup their investment for a stipulated time. The ICRC is involved in the monitoring of the projects to ensure delivery at the expected time.
“Similarly, in the port, you have people who have been given concession of some terminals; they do not use it and they sublet to other people. If you look at the magnitude of the initial investments, you see that they have been seriously under-utilised,’’ he said.
The ICRC boss said that all investments and equipment bought at the end of a concession period belong to government and not the private sector.
But the Investment Director for West Africa, African Infrastructure Investment Managers, Olusola Lawson, stressed the need to have a proper legal framework.
“Investors should always know that the system will be able to protect their rights. As a foreign investor, you should be able to move capital in and out of a jurisdiction without trapped for PPP to succeed,” he said.
The Head of Special Project at the ICRC, Emmanuel Onwudi, however noted that a lot of people have the impression that PPP is about borrowing money from the private sector. That, he said is not true. “PPP is about partnership, where the private sector brings in its expertise, efficiency and they both share risk and reward. The second thing is that PPPs are not about the public sector acquiring assets. I need to make it very clear that it is about service.
“There are certain models where you have build-operate-and own. So, at the end of the asset’s life, there is nothing to transfer. But there are certain other models where you have a build-operate-and-transfer model. So, it depends on how you are looking at it,” Onwudi explained.
Fashola had noted that the rationale for PPP is improved management of scare resources, better risk allocation and more efficient and cost-effective delivery of public services.
He had said: “There are number of good reasons for public sector using PPP to assist to develop its infrastructure. PPP offers both strategic and operational choices to government.
“Strategically, the use of PPP fosters economic growth by developing new commercial opportunities and increasing competition in the provision of public services, thus encouraging crowding-in of private sector or foreign investment.”
Furthermore, he stated that PPP allows governments to set policy and strategy and where appropriate, to regulate economic activities, while leaving service delivery to the private sector. He also declared that operationally, PPP provided opportunities for efficiency gains (better quality and more cost-effective delivery of services), better asset utilisation and quality, clearer customer focus and accelerated delivery of projects.
“In addition, PPP is an instrument that government can use to reform and restructure certain strategic sectors of the economy to bring in competition, which will increase investment and efficiency, reduce prices and expand the range of services available,” he added.
Shortcomings of PPPs
According to a report titled: “The Hidden Cost of PPP,” no PPP in the world can rescue a poorly planned infrastructure project. It stated that infrastructure schemes – whether PPPs or not – often suffer from governance problems including poor planning, low administrative capacity of public officials to oversee projects, and lack of transparency.
The report argued that PPPs can make these problems more difficult to uncover and resolve because of their complexity and lack of transparency.
“Many officials are insufficiently committed to wide consultation and consideration of all alternatives. Public access to information is often poor and consultation processes are invariably carried out as a formality, at a late stage, and with no real intention of taking public opinions into account. Corruption remains a problem. Examples of suspected corruption in PPPs include the Trakia Highway in Bulgaria, and the Moscow-St. Petersburg motorway in Russia.
“The novelty with PPPs is that they can, when handled badly, multiply the usual problems that plague infrastructure construction. Due to the complexity of PPP arrangements and contracts, and the possibility of hiding behind ‘commercial confidentiality’ as an excuse for failing to provide public information, there is very little space for public scrutiny during the preparation of the projects,” the report added.
Therefore, just like most countries that have been able to give the state of their infrastructure a facelift, Nigeria needs to start communicating with the market its prospective PPP projects and must demonstrate transparency in its plans. This may help the country attract FDIs and save valuable public finances to rebuild its fiscal buffers, create jobs and encourage the transfer of skills to the public sector.
