21 November 2013

Nigerian Public Private Partnership update

Nigerian Public Private Partnership update

We reported in our June 2012 newsletter on PPP in Lagos State and the progress of the Lagos State Public Private Partnership Law. PPP has continued to be a key political focus for Nigeria and its States, recognising a pressing need to develop and improve infrastructure in order to support and stimulate growth.

With the lack of infrastructure growth opportunities in the West and the detrimental impact of the Arab Spring on North African projects there remains capacity among investors to enter into viable infrastructure investments but foreign investors need to have sufficient political and economic confidence to do so.

Lagos State has been pursuing a bill to repeal and re-enact the Lagos State PPP Law, with a view to correcting some typographical errors and to legislate for a more attractive regulatory framework from the investor perspective. The PPP Bill 2013 was heavily debated at its second reading in the Lagos House of Assembly in Spring 2013. The core issue in debate was how much the administrative executive which is responsible for letting contracts should be free from approval and influence of the legislature. The concerns expressed in the House being that once assets are the subject of PPP arrangements that they would be outside the influence and control of the legislature, who are there to check that the interests of the electorate are being protected. The outcome was that the Bill was not passed and in April 2013 an ad hoc six-man Committee was established to liaise with the Attorney-General and the Executive and report. It is hoped that the result of this process will be a more considered response to the new legislation.

From an investor perspective one of the key risks with PPP projects is the political risk. Investors and funders want to know that Government has the legal capacity to enter into PPP contracts and concessions and that once those contracts and concessions have been let they can continue with very limited risk of challenge or interference, so that the investment is protected. This is crucial to attracting private sector equity and debt investment and at a Federal level has been recognised by the President of Nigeria Dr Goodluck Ebele Jonathan GCFR who has stated “If Nigeria genuinely seeks to attract private sector investments to upscale our infrastructure, we must adhere to the rule of law and the sanctity of contracts as enshrined in the ICRC and other relevant laws”.

PPP regulation in Nigera takes the form of dual Federal and State regimes. At Federal level the principal legislation was enacted by the Infrastructure Concession Regulatory Commission Act of 2005 (ICRC) and on 30 July 2013, the President inaugurated a new ICRC board with the former Senate President, Sen Ken Nnamani, GCON as Chairman and Mr Aminu Diko as Director General.

Given the infrastructure demands, the potential pipeline for a range of levels of PPP projects within Nigeria remains immense. Lagos State is the 7th fastest growing city in the world with a power deficit of 3,000 MW. Nigeria has predicted GDP growth rates for 2013 of 6.5-7.5% and infrastructure deficits are estimated at $20 billion a year.

The principles for PPP have been based on the UK PPP model and practice but as in the UK Nigeria is open to partnering between the private and public sector at its widest including equity/joint venture participation, leasing, franchising, concessions and BOT. Lagos State has said that 70% of on-going and planned projects will be PPP but other States such as Rivers, Cross Rivers, Akwa and Niger are also focusing on PPP projects. The World Bank also has a Nigeria PPP programme. The areas of PPP focus identified at a State and Federal level include transport (road, rail, ferries, ports), water, waste, social infrastructure (education, health, housing), agriculture, gas and petroleum.

It is a list of great potential with the biggest projects so far being predominantly transport related – airport development, light rail, roads, the Lagos Badagry Expressway and on the real estate side the Eko Atlantic City land reclamation project. There is a smaller pipe stream on the social infrastructure health side. Some projects are identified as being at outline business case but there is no doubt that the market would like to see more and more clarity on the bigger potential projects.

In 2012 Lagos State continued its groundwork with the publication of an Investor Handbook for investment in the State covering PPP and wider investment issues such as tax and free trade. The Governor’s foreword highlighted reducing the extent of Government regulation as essential to encouraging investment and the recognition of female entrepreneurship being one of Africa’s underutilised resources. The aim of creating a Lagos Investment Action Plan was also recognised.

At the end of August 2013, Lagos State announced that it was buying back the rights relating to the 30 year DBOT Concession for the 49km Lekki Expressway by purchasing shares in the LCC.

A statement issued on 28 August 2013 from the Office of the PPP confirmed that this was exercise of a settlement option provided in the Concession Agreement exercised after consultation with stakeholders including the House of Assembly and not a termination or cancellation. The statement also explained the exercise of the rights as being taken because of drastic changes in assumptions including devaluation of Naira and increases in costs of construction which impacted interest rates on local loans and would have led to increases in and commencement of additional tolls.

The viability of PPP projects at a technical, financial and legal level is crucial and assessment and allocation of risks and structures during the initial stages is crucial and that can include the need for the parties to have the ability to respond to changes which are out of line with expectation as in the case of Lekki.

Nevertheless the drivers for private sector investment remain. The benefit for the public sector of PPP arrangements or other partnering with the private sector is not only obtaining investment to bridge funding shortfalls but also the ability to transfer to the private sector development and operation of assets and to tap into private sector skills in these areas. Both at Federal and State levels Nigeria has stated that it is open to private sector proposals provided they can demonstrate feasibility and value for money and the possibility is there for dialogue between the sectors to identify opportunities and develop structures which will balance their respective financial aims.

With elections in Nigeria in 2015, PPP outcomes are not likely to be immediate but this is nothing new for those involved in PPP and infrastructure which requires participants to play the long game.

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