Public-Private Partnership In Nigeria: An Overview
Public-private partnership, also known as PPP, is a cooperative arrangement between the public and the private sector of an economy, typically of a long nature. Over the years, various governments have used such collaboration between both sectors. However, the late 20th and the early 21st century have seen a clear trend toward governments across the globe making greater use of various PPP arrangements. Nigeria is not left behind in this development; the country has adopted this arrangement in the development of its infrastructure in its various sectors like transport, energy social & health, etc.
PPP is an evolution of the traditional procurement of public infrastructure like commercialization and privatization. The advent of PPP does not however rule out the existence, efficiency and suitability of the traditional means of public procurement. PPP is only considered more suitable and more efficient and effective means to carry out public projects than the traditional means of public procurement.
In this arrangement, one or more private company come together to form a company/consortium, which is known as a Special Purpose Vehicle (SPV) to carry out the project proposed to them by the government or vice versa.
The agency responsible for PPP in Nigeria is the Infrastructure Concession Regulation Commission, ICRC. The Commission was established by the Infrastructure Concession Regulation Commission (Establishment, etc.) Act 2005. Section 1 of the ICRC Act is the basis of PPP in Nigeria and it provides to the effect that “any Federal Government Ministry, Agency, Corporation or body involved in the financing, construction, operation or maintenance of infrastructure, by whatever name called, may enter into a contract with or grant concession to any duly pre-qualified project proponent in the private sector for the financing, construction, operation or maintenance of any infrastructure that is financially viable or any development facility of the Federal Government in accordance with the provisions of this Act.”
The basic elements determining the success of PPP projects are projects suitability to PPPs’ proper evaluation and selection of correct PPP form on case-by-case basis. Prior to engaging in PPPs, public authority needs to assess the benefits and the efficiency of a PPP model with the view of achieving a viable and sustainable economy.
The adoption of PPP as a method of public procurement ensures the necessary investments into public sector and more effective public resources management; ensure higher quality and timely provision of public services. Also, investment projects are implemented in due terms and do not impose unforeseen public sectors extra expenditures. The private sector expertise and experience are utilized in PPP projects implementation. In addition, appropriate PPP project risks allocation help to reduce the risk management expenditures.
It is pertinent to state at this point that infrastructure or services delivered could be more expensive, the PPP project public sector payments obligations postponed for the later periods can negatively reflect future public sector fiscal indicators. PPP service procurement procedure is longer and costlier in comparison with traditional public procurement. PPP project agreements are long-term, complicated and comparatively inflexible because of impossibility to envisage and evaluate all particular events that could influence the future activity. These factors do not however overrule its advantages.
Service contracts are legally binding arrangements between a properly empowered government authority and a private partner to perform specific, usually non-core tasks within infrastructure systems. These contracts are typically competitively bid and are for short periods of few months to two years, after which they are re-bid. The responsibility for provision of the overall service, as well as any capital investment, remains with the public authority. Service contracting can be an attractive form of PPP where there is strong political or community opposition to wider involvement of the private sector, opposition to price increases, or where the government is seeking to shed responsibility for non-core functions.
Operation and Management Contracts
Operation and management contracts transfer responsibility for the operation and maintenance of government-owned entities to the private sector. Under such contracts, ownership of the entity and responsibility for service provision remain with government. Likewise, the bulk of the commercial risk and all the capital and investment risks remain with the public authority. Management control and authority, however, is transferred to a private partner, which applies its expertise to improve management systems and practices. Management contracts are generally three to five years in duration. Compensation may be in form of a fixed fee, as in the case of a fixed fee management contract, or it may be linked to performance indicators, as in the case of a performance-based management contract. However, under both models, the public authority still bears the financial risk associated with its responsibility for capital investment. Operation and management contracts are most beneficial where the main objective is to rapidly enhance a public enterprise’s efficiency, or to prepare for a deeper level of PPP, but they are not recommended if a government has as one of its main objectives accessing private finance for new investments because they do not necessarily transfer financial risk to the management contractor.
Under a lease, a private firm (Lessee) leases the assets of an enterprise from a properly empowered government authority (Lessor) and assumes full responsibility for operations and partial responsibility for investments for a period usually between ten and fifteen years. Typically, under a lease, the user fee, or tariff in the case of utility services, is used to pay the “lessee fee”, which remunerates the Lessee for his costs, plus a reasonable return. The remainder of the tariff goes to the government and is used to fund capital investments. Under a lease, the government retains title to the assets and bears the responsibility for financing and planning capital investments and rehabilitation of assets. Leases are most appropriate where there is scope for large gains in operating efficiency but only limited need or scope for new investments. Leases have also sometimes been advocated as a stepping stone toward a deeper level of PPP in the form of concessions. Their administrative complexity and the demands they place on governments are nearly as great as those of concessions. Thus, a lease is a much bigger first step than a management contract.
Under a concession, the private partner (Concessionaire) bears overall responsibility for the services, including operation, maintenance, and management, as well as capital investments for rehabilitation and renewal of assets, and the expansion of services. Concession can be contracted for an existing facility or for new one. The fixed assets either remain the property of the public authority or revert to public ownership at the end of the concession period. Concession contracts usually last for between twenty to thirty years, depending on the level of investments and the period required for the Concessionaire to recover its investments plus a reasonable rate of return. The Concessionaire is paid for its services directly by the consumer, based on the contractually set fee or tariff, which is adjustable over the life of the contract. The main advantage of a concession is that it passes full responsibility for operations, maintenance, rehabilitation, renewal and service expansion to the private partner and so creates incentives for efficiency in all the utility’s activities. Therefore, concessions are an attractive option where large investments are required. Concessions are administratively complex undertakings for governments, because they confer a long-term monopoly on the Concessionaire and thus require rigorous monitoring and enforcement. The Lagos State Government adopted this model in the construction and management of the Lekki- Epe Expressway in Lagos.
Build-Operate-Transfer (BOT) Contracts and its variants
BOT (Build Operate Transfer) designates the way of contracting the building of large infrastructure facilities with the involvement of the private sector. The organizers of the building, normally called sponsors, take over the financing, the organization and the responsibility of the construction of such a facility and then, after it has been built, the responsibility for its use, maintenance and management for a certain period, mostly between 15 and 30 years. At the expiration of such a period, the sponsors return the facility to the government for future usage. BOT is a short term for the most frequent form of such contracting. However, in practice, there are many variants to the model.
Besides BOT, there are other short terms arrangement for the procurement of public infrastructure such as BOOT, DBOOT, DBFO or PFI, BOOST, BRT, BLT, BTO, BOO, BBO, BT, ROO, DCMF, all these are variants of BOT and each of them has its specific characteristics and features and as such it is for the government to undertake the one that best suits the project at hand.
Benefits of PPP
The importance of PPP in Nigeria cannot be overemphasized. This is because it closes the gap of providing fund and required expertise and other lapses on the part of the government. The Director-General of the ICRC, Mr. Aminu Dikko described PPP as the best option to finance Nigeria’s wide infrastructure gap: “The public private partnership should not be seen as privatization; 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”
The Head of Special Project at the ICRC, Emmanuel Onwudi, however, noted that “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.
“There are certain models where you have build-operate-and own (BOO). 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.
The Minister for Power, Works and Housing, Mr. Babatunde Fashola, noted that the rationale for PPP is improved management of scarce resources, better risk allocation and more efficient and cost-effective delivery of public services. He 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.
Fashola stated further that, “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.”
Also, 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 utilization and quality, clearer customer focus and accelerated delivery of projects. 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.
Nigeria as a country has embraced the new trend of developed countries by adopting one or another PPP models in executing majority of its projects and this has enabled the country to achieve the best at a minimal or no cost at all while the private sector has also benefitted immensely from the PPP projects that has been executed. The adoption of PPP brings about a win-win situation for both sectors such that none of the parties is not short changed.