Infrastructure Concession in Nigeria: Challenges and Opportunities

The topic of this paper is one that should ordinarily elicit interest. All over the world, the demand for infrastructure is outstripping supply and new strategies are being devised to address the deficit. In Nigeria, the situation is pathetic. Decades of poor maintenance, underinvestment and outright roguery have left the country with an outrageous infrastructure deficit.

The abysmal infrastructure deficit in Nigeria is, basically, a direct consequence of leadership failure – successive regimes failed to take proactive action to march the boom in our population growth over the years with corresponding development in infrastructure and allied services. Current estimates of Nigeria’s infrastructure deficits put the figure in excess of $200b (over N30trillion).

Given this scenario and given the constraints on the public budget of financing the ever growing infrastructure needs and in keeping with the practice in other nations with similar predicaments, the government has sought to shift part of the burden of new infrastructure development and investment to the private sector as part of Public Private Partnerships (PPP or P3) policy. The philosophy behind this policy is to meet the challenge of developing and maintaining critical infrastructure by attracting massive private sector led investments beyond the means available to government.

Modern P3 is held to have begun in Britain in 1992 when the Conservative government of John Major introduced the Private Finance Initiative (PFI) which became the first systematic programme aimed at encouraging public–private partnerships. This innovative programme focussed on reducing the Public Sector Borrowing Requirement. The Labour government of Tony Blair, elected in 1997, persisted with the PFI but sought to shift the emphasis to the achievement of “value for money,” mainly through an appropriate allocation of risk.

Since then, PPPs have been used to develop large electric power projects, transportation Infrastructure networks including roads, railways, transit systems, seaports and airports. They have also been used in the water, wastewater and gas sectors, as well as for asset-based projects in health care, education, borstal facilities and defence. Examples of such projects abound in the United Kingdom, Australia, Ireland, the province of British Colombia, Canada, India, USA and countries of Latin America and Caribbean (LAC).

A concession, simply put, is a government grant for specific privileges. As defined in the ICRC Act 2005, infrastructure concession means “a contractual arrangement whereby the project proponent or contractor undertakes the construction, including financing of any infrastructure facility and the operation and maintenance thereof and shall include the supply of any equipment and machinery for any infrastructure and the provision of any services”

Basically, infrastructure concession allows participation of the private sector in financing the construction, development, operation and maintenance of public infrastructure, development project or network for a stated period. The concession process allows private investors and operators to inject much needed capital into upgrading and maintaining infrastructure. In some types of infrastructure concessions, the cost of using the service is borne exclusively by the users of the service. In other types (notably the private finance initiative), capital investment is made by the private sector on the strength of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government.

In practice, a private sector consortium forms a special company called a “special purpose vehicle” (SPV) to develop, build, maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it is typically (but not always) allotted an equity share in the SPV.

The legal framework for the operation of infrastructure concessions in Nigeria is principally the Infrastructure Concession Regulatory Commission (Establishment, etc) Act 2005 and the Public Procurement Act 2007. These laws set out the requirements for competition and private sector participation in all public procurement as well as specifies requisite approvals for all PPP contracts.

The Infrastructure Concession Regulatory Commission (ICRC) drives and regulates infrastructure concessions in Nigeria. The Commission was set up in 2008. Engr. Mansur Ahmed, serves as pioneer D-G of the ICRC. The ICRC Board consists of one member from each of Nigeria’s six geopolitical zones. By the provisions of the ICRC Act, ex – officio members that also serve on the Board include the Secretary to the Government of the Federation, the Attorney General of the Federation, the Minister of Finance, the Governor of the Central Bank and the D-G of ICRC.

Essentially, the ICRC is empowered to provide general policy guidelines, rules and regulations for the operation of P3 projects in Nigeria: to take custody of every concession agreement entered into by the Federal Government and any of it’s agencies, to ensure efficient execution of concession contracts, and to ensure strict compliance both with the Act and with the terms of the concession contract.

Under the ICRC Act 2005, the scope of opportunities for investment in infrastructure in Nigeria exist in virtually every sector of the economy: power plants, highways, seaports, airports, water supply, telecommunications, railways, etc as well as other infrastructure and development projects as may be approved, from time to time, by the Federal Executive Council.

There are several types of contractual obligations that may be entered under infrastructure concession contracts. These include Build, Operate and Transfer (BOT), Build, Operate and Own (BOO), Build, Transfer and Operate (BTO), Build, Own, Operate and Transfer (BOOT), Design, Build, Operate and Transfer (DBOT), Design, Build, Finance, Transfer (DBFT), Design, Build, Finance, Manage (DBFM), Etc. Some of these are pure concessions (concessions stricto sensu) while others are hybrids. The key difference between various concession arrangements lies in the nature and extent of the risk they transfer from the public agency to the private concessionaire.

The settlement of disputes is an important element in infrastructure concession contracts. The confidence of private parties (concessionaire, financiers and contractors) is boosted and they are encouraged to participate in concession projects when they know that disputes arising at any point in the transaction would be resolved fairly and efficiently.

Of course, not everyone accepts concession as the panacea for resolving infrastructure deficiencies. Some sceptics think that the burden of providing infrastructure rests squarely with the government which husbands public resources and, consequently, that the role of any private interest should be marginal. Generally, most objections simply reflect a sincere desire to protect the public interest and get the most value for taxpayers. However, some of the concerns often raised by sceptics seem to be driven by a misunderstanding of PPPs, or, in many cases by fallacious reasoning based on defective data or information.

Notable PPP Transactions in Nigeria include the Murtala Mohammed Airport (MMA2) Airport Concession BOT contract agreement between the Federal Airports Authority of Nigeria (FAAN) and Bi-Courtney Limited (BCL), the 1st Toll Road PPP in Nigeria signed in 2006 – 30 year concession between Lagos State (LSG) and Lekki Concession Company (LCC), the DBOT Toll Road agreement between the Federal Ministry of Works and Bi-Courtney Consortium, signed in 2009. Other projects in progress or in the pipeline in the Federal Capital Territory include the FCT Light Rail Project LOT 2 (OBC), Kuje Water Works – supply and reticulation (OBC), etc.

Infrastructure conces

sion in Nigeria is fraught with challenges. Some of these are systemic being products of the socio-political environment. Others arise from lapses in the legal framework and operational environment. The first of these challenges is the lack of basic infrastructure. The statistical realities of the investment environment in this regard are unnerving. A few examples will suffice:

– Out of Nigeria’s 198,000 kms of roads, less than 20% are paved and over 65% are in bad condition compared to South Africa’s total of 362,099 km with 73,506 km paved (2002) and the rest in good motorable condition. The cumulative investment of the Federal government in the road sub-sector since independence is mind boggling. Yet the net asset value of Nigerian roads has continued to decline embarrassingly.

– Out of 40,000 mw (megawatts) of electricity required to power the nation, less than 10% (ie less 4,000 mw) is being currently generated. In consequence, many urban based Nigerians are forced to live with epileptic power supply even when they are prepared to pay more for the service. Even that is a luxury: most of the 65% or so of Nigerians who are rural dwellers live from day to day with no electricity at all! Our economy is virtually powered by generators. The estimated cost of running innumerable generators of various makes and sizes polluting the atmosphere across the nation is put at over $15b PA.

– Nigeria’s telecommunication system with a teledensity of 65% or 91 million subscribers virtually subsists on mobile phones. Nigeria is probably the only country in the world where business is carried out, not with land phones that attract lower tariffs, but mobile phones that incur maximum user charges!

– The Nigeria Railway Corporation (NRC) which was established in 1955 exists in name only. The 3,798 km Nigerian rail network comprising of 3,505 km obsolete narrow gauge rails and 293 km standard gauge carries less than 1% of freight traffic compared with a global average of 46%!

– With a population in excess of 150m, not up to one dozen of Nigeria’s 54 airports are functioning as standard airports properly so called compared to South Africa which has 146 fully functional airports with paved runways to service it’s 45m population or Libya that has 137 airports serving a population of 7m!

But a discerning investor would also see that each infrastructural lacuna is also an investment opportunity waiting to be harnessed.

Written by
Uche Ohia
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