Wale Babalakin
26 September 2008
analysis
Lagos — The Public-Private Partnership (PPP) concept which is relatively new has gradually gained grounds in terms of implementation and in recent years, the volume and number of projects which are implemented under this arrangement have increased significantly worldwide.
This is not unconnected with the fact that it is now an accepted fact that Government at all levels is unable to exclusively provide all the infrastructure and amenities needed for the well-being of the populace and to develop the economy.
Nature of PPPs
PPP is a system through which public sector deliverables are provided by the private sector under a pre-arranged system. Under a PPP arrangement, Government uses the resources and expertise of the private sector to deliver services of the best quality and at the best price thereby releasing Government's scarce resources for other projects.
Public Private Partnerships (PPPs)
- Sustainable access to socio-economic services and products can be achieved through PPPs where the private sector is permitted to bring skills and core competencies to bear in its collaboration with the government to deliver these services.
- The collaboration between the government and the private sector in PPPs is especially productive in promoting poverty alleviation and enhancing healthy partnership.
- Where properly regulated, PPPs allow for flexible risk sharing between the public and private sectors.
Design of PPPs
There are varied models of Public-Private Partnerships and they are useful in describing the relationship between the public and private sector as it relates to the implementation of projects.
- Design-Build (DB) - The private sector designs and builds infrastructure to meet public sector performance specifications, often for a fixed price, so the risk of cost overruns is transferred to the private sector.
- Operation & Maintenance Contract (O & M) - A private sector, under contract, operates a publicly owned asset for a specified term. Ownership of the asset remains with the public entity.
- Design-Build-Finance-Operate (DBFO) - The private sector designs, finances and constructs a new facility under a long-term lease, and operates the facility during the term of the lease. The private partner transfers the new facility to the public sector at the end of the lease term.
- Build-Own-Operate (BOO) - The private sector finances, builds, owns and operates a facility or service in perpetuity. The public constraints are stated in the original agreement and through ongoing regulatory authority.
- Build-Own-Operate-Transfer (BOOT) - A private entity receives a concession to finance, design, build and operate a facility (and to charge user fees) for a specified period, after which ownership is transferred back to the public sector. A classical example of this arrangement is the Concession Agreement between the Federal Government of Nigeria through the Federal Airport Authority of Nigeria on one part and Bi-Courtney Limited and Stabilini Visinoni Limited on the other hand for the design and construction of the Murtala Mohammed Domestic Airport Terminal 2.
- Buy-Build-Operate (BBO) - Transfer of a public asset to a private or quasi-public entity usually under contract that the assets are to be upgraded and operated for a specified period of time. Public control is exercised through the contract at the time of transfer.
- Operation Licence - A private operator receives a licence or rights to operate a public service, usually for a specified term. This is often used in IT projects.
- Finance Only - A private entity, usually a financial services company, funds a project directly or uses various mechanisms such as a long-term lease or bond issue.
Implementation of PPPs
- Although a PPP is based on overlapping goals, there is much potential for conflict, especially where the PPP involves long-term arrangements between two or more parties. This is because PPPs can involve a myriad of complex legal arrangements, the interpretation or misinterpretation of which can lead to conflict between the parties to the agreements.
Challenges to Successful Implementation of PPPs
- There are numerous other challenges that may arise in the course of a PPP, particularly in a developing economy such as Nigeria's. Some of the challenges that may give rise to conflict are enumerated below:
-Absence of Policy Framework
-Inadequate Regulatory and Legal Framework
- Inadequate Judicial Processes
- Bureaucracy and Red-Tapism
- Corruption
- Policy Instability
- Tariffs, Revenue and Cost Recovery
- Vested Interests
Policy framework plays an essential role in a PPP enabling regime. A clear well articulated policy will be found in the form of a governmental endorsement which will typically state the Government's vision of PPP development in the country, its objectives, the principles it sets to promote including the legal and regulatory regime, institutional framework and possibly training policy and educational campaign where necessary.
Inadequate Regulatory and Legal Framework
- Until very recently, there was no regulatory framework guiding the operation of PPPs and in Nigeria. However, in 2003, the Federal Government adopted the National Economic Empowerment Development Strategy (NEEDS) which has highlighted our socio-economic developmental aspirations to be reform of the public sector, enabling a robust private sector-led economy and the implementation of an effective social charter for the purposes of reducing poverty, creating wealth, generating employment and re-orientating national values.
- A fundamental feature of NEEDS is that it clearly delineates responsibilities between government and the private sector in its component strategies, plans and targets; Government would provide the enabling business and regulatory environment while the private sector is to invest in and manage ventures that would stimulate and support socio economic development. NEEDS is therefore a broadbased Public Private Partnership (PPP) initiative which all stakeholders in the developmental process are expected to buy into for optimal success in implementation.
- In 2004, the National Assembly passed the Infrastructure Concession Regulatory Commission (Establishment Etc) Act into Law.
- The Act provides a legal basis for any Federal Government Ministry, agency, incorporation or body involved in financing, construction, operation or maintenance of infrastructure to enter into a contract or grant concession to any duly pre-qualified 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.
- The Act also establishes the Infrastructure Concession Regulatory Commission which has general supervisory powers over concessions granted by the Federal Government and its Agencies to private investors.
- The Act however forbids any Government Ministry agency or corporation to give any letter of comfort or undertaking in respect of any concession agreement made pursuant to the Act without the approval of the Federal Executive Council.
- Prior to the enactment of the Act, there was no regulatory framework in respect of PPP and BOT in Nigeria. The Murtala Mohammed Domestic Airport Terminal 2 was therefore a journey into largely uncharted waters.
- In addition, the Government's commitment and support is required to successfully complete a PPP project in order to avoid the adverse consequences of opportunistic and arbitrary actions by government agencies.
- The Government must also demonstrate a strong commitment in terms of preventing delays in implementation and grant of permits and approvals in order for such projects to be and remain on schedule. This because the existing administrative framework is inefficient and ingrained with complex and often unnecessary bureaucratic constraints which occasion delay.
Even where the legal framework conforms with International standards, there must still be a general rule of law climate and institutional framework which will permit projects to be implemented effectively. The reasons for that includes the inefficient court system and poorly trained public officials as well as the parties' negative attitude towards international arbitration.
Although both the policy and legal frameworks are essential for the workability of PPPs, it can be argued that the policy framework is the starting point and more critical of the two.
Furthermore, where there is an absence of a legal framework for concessions or significant restrictions permeate such existing framework, projects can still be implemented fairly successfully where several good precedents exists and an efficient institutional framework which is essential for day-to-day implementation and enforcement is in place.
Inadequate Judicial Processes
- The Judicial Process in Nigeria is notoriously slow, and disputes can take many years before reaching a final resolution
- The lack of specialised knowledge by Judges and other Adjudicators in respect of PPPs is also a major obstacle to the successful execution of projects. One injunction in the lifetime of a project can terminate the vision driving the project and the project itself.
Bureaucracy and Red-Tapism
- IGNORANCE OF PPP PROCESSES:
The relevant government agencies do not have the requisite knowledge and experience on PPP projects. PPP is a novel arrangement in Nigeria. For instance, the Murtala Mohammed Domestic Airport Terminal 2 project is the first of its kind in the Aviation and Construction sectors of the Nigerian economy.
- RESISTANCE AND OPPOSITION FROM PUBLIC SERVANTS:
There are often delays, frustration and overt hostility and resistance from public servants resulting from a fear of the usurpation of their functions and loss of employment.
- UNNECESSARY DELAY:
There are typical unnecessary delays occasioned by unnecessary replication of tasks.
- The combination of these factors has created a dysfunctional system which is a major challenge to the successful implementation of PPP in Nigeria and might deter prospective investors.
Corruption
The prevalence of corruption in Nigeria, like many other third world countries, is also a major obstacle to PPP. The establishment of anti-corruption agencies like the EFCC and the ICPC have made an appreciable impact on the level of corruption in the country, evidence of which can be seen in Nigeria's improving Corruption rating with Transparency International.
Policy Instability
- Social, economic and political instability are factors which are inimical to successful implementation of PPP projects. Nigeria has been relatively stable since the re-emergence of Democracy in 1999.
- However, a continuing threat to PPP in Nigeria is policy instability resulting from changes in government. Over the years, the trend of successive governments has been to reverse policies and decisions of their predecessors upon assumption of office.
- Often times, the same administration starts a policy and midway through the implementation of these policies, reverses itself causing substantial losses to investors.
- It is imperative that such policy reversals be reduced to the barest minimum, and where exigencies demand that such reversals be made, there must be a framework in demnifying and compensating investors who have committed themselves to such policies.
- Disputes arising from such reversals must also be managed in a manner that is expeditious and cost effective, while ensuring that the project is not interrupted or unduly delayed.
Tariffs, Revenue and Cost Recovery
- The Government has an obligation under any PPP, to the public on the one hand and to the private investor on the other hand. The government must balance its obligation to provide public infrastructure and services with the imperative need for the recovery of the investors costs and profits and the need to protect citizens from potentially extortionate cost of providing public services by private investors and the need to ensure safety and security.
- This is undoubtedly one of the greatest potential areas on conflicts in PPPs.
- Tariffs are usually heavily regulated but these must be done in a manner which allows the investor to make a reasonable return on investment. This is a veritable source of potential dispute in PPP projects.
Conclusion
- PPPs remain the most effective means by which Nigeria can provide the necessary infrastructure to meet its development goals.
- A lot has been done to encourage PPP in providing the necessary infrastructure but a lot is still required to be done.
- There are several potential areas of conflict in PPPs in Nigeria. Effective and reliable dispute resolution mechanisms are imperative for the success of any policy thrust on PPP.
-Dr. Babalakin, SAN, made this presentation at the First Infrastructure Summit organised by the Akwa Ibom State Government of Nigeria last week.
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