Many Nigerian states have identified public private partnerships (PPP) as the most effective way of improving infrastructure and stimulating economic growth; but how do these partnerships work and how can private companies actually make money from them? Jaco Maritz looks at Lagos State's PPP strategy.
Years of neglect and high population growth has left Lagos' infrastructure in tatters. The present administration has made it its commitment to improve the transport network, water supply, waste management and commercial infrastructure of Nigeria's commercial capital. This will however require substantial financial input which the state government is unable to fully pay for out of its own pockets. It has therefore decided to adopt a public private partnership model to address these problems.
The thinking behind Lagos State's PPP initiative is to involve private companies to assist the government in fulfilling its mandate to the people. PPP projects can be structured in a variety of ways, but in most cases the financial burden is transferred from the state to the private sector. Projects are however structured in a manner which allow the private sector to realise a reasonable return on investment.
Another advantage of involving the private sector in infrastructure development is that government don't always have the necessary technical skills and experience to execute these projects successfully. PPPs have been implemented successfully in countries such as Canada, the United Kingdom, Australia and the United States for projects ranging from road construction, bus rapid transport systems and monorails to health care facilities and schools.
Babatunde Fashola, Lagos State governor says: "A vital plank in the policy of the Lagos State Government is the Public Private Partnership. Through this initiative, which is already bearing fruits in many areas of public service delivery, the investor is granted very favourable conditions in which to make a return on investment while the people of Lagos receive a reliable and efficient service."
It is estimated that Lagos State needs US$2 billion to expand its water supply, $715 million to provide an efficient road network, $185m for new housing stock, $100m to improve its waste management system, $100m for a new Bus Rapid Transit System and millions more to rectify power supply problems.
The state's PPP initiative is open to various investment options, ranging from equity participation, various leasing options, a Build Operate Transfer (BOT) system and concessions. Both foreigners and local Nigerians are allowed to participate.
Case Study: The Lekki Concession Company
Lagos' flagship PPP project is the construction of the US$300m Lekki-Epe expressway. It is a partnership between the Lekki Concession Company (LCC) - a special purpose vehicle and a subsidiary of Toll Systems Company Limited (TSC) - and the state government. It includes the upgrading of the first 49.4 kilometres of the Lekki-Epe road. Phase Two of the project involves the developing of the first 20 km of the Coastal Road with an option to do the southern bypass as well.
According to the agreement, LCC will build, operate and maintain the road for 30 years, after which the asset will be handed over to the state government. LCC will earn a return on its investment through raising toll.
Benefits of the project to the population of Lagos State will be traffic decongestion and a number of services that will be available on the road such as street lighting, breakdown assistance, an ambulance service, and a customer call centre. The expressway will also have much improved security which should decrease the occurrences of hijackings. The project will have spill-over effects such as employment creation and higher real estate values in the area.
Prospective investors are already keeping a keen eye on this project and the successful execution thereof should spur a wave of interest into similar ventures in Lagos State.
Risks associated with PPPs
The PPP model does however have a number of risks. One of the concerns often cited by investors is the risk of significant changes in government policy. A solid legal system to protect their investments and honour contracts are also essential to investors. Given Nigeria's somewhat negative image around the world, Lagos State’s job would be to allay these fears and give proper assurance to investors.
Rotimi Oyekan, Lagos State Commissioner for Finance, says: "We are improving areas like taxation, business registration, justice and security. We are improving all these areas to ensure that the general environment for doing business lives up to the highest level of expectation internationally. Other areas we are working on include the granting of land rights and transfer – all to encourage a large flow of foreign direct investment."
"Nigeria has previously had a negative image and people are sceptical. They need to see commitment from the state and world-class standards," he says.
Lagos State has opened up a dedicated PPP office which serves as a one-stop-shop for investors. The PPP unit has also been placed under the supervision of the Commissioner for Finance to ensure sound financial analysis and quick implementation of projects.
It seems as if Lagos State is determined to make its PPP strategy work and foreign investors in all sectors are likely to turn their radars to the host of opportunities in this mega-city.