With the advent of falling oil prices and its enormous impact on the Nigerian economy, the Nigerian government must consider strategies to increase productivity in other sectors of the economy like agriculture. The majority of Nigerians live in rural areas and engage in subsistent farming, so roads are the primary means of transportation. It is estimated that more than 80 percent of all traffic is through road transport. According to the Global Infrastructure Hub, Nigeria has a $221 billion investment gap in infrastructure, and road transport constitutes $84 billion of it. Given this considerable deficit, the government must seek non-traditional project finance models that leverage medium to long-term funds from banks and development finance institutions. User-pays PPPs or concessions can be an effective procurement mechanism to solve Nigeria’s lag in delivering much-needed road infrastructure.
Federal expressways connect the major cities and seaports and stretch from the Southern part of the country to the North. Because urban centers depend on local farmers for agricultural produce, these roads are a critical part of food supply chains. Conversely, the rural communities depend on the urban areas for processed goods and machinery, which are mostly transported by road; thus, good roads are essential. However, the persistent dilapidation of Nigerian roads coupled with inadequate road networks cripple this flow and undermine efforts towards growth.
Transportation infrastructure increases productivity and leads to improvements in standards of living and growth. A recent World Bank report indicates that the Nigerian economy could increase by up to 4-percentage points if there were an increase in infrastructure investment.
The Problem
The government has cited budget constraints and competing needs as significant impediments to delivering infrastructure. Presently, government-pays models are popular for Nigerian infrastructure projects. However, past projects reveal that this model hasn’t yielded the desired outcomes. Most roads are poorly maintained or not maintained at all, and road networks remain inadequate to serve the burgeoning population.
Although previous user-payer concessions such as the Lekki-Ikoyi toll bridge have been criticized for toll increases, the project provided an essential infrastructure for people living in the city. Rather than fixate on its shortcomings, the focus should be on mitigating the challenges of such PPPs. Nigeria’s infrastructure sector needs a funding model that ensures that project partners reap benefits commensurate with the risk that they are shouldering, as stated in the contracts, with minimum resistance from users, including citizens, local communities, and politicians.
Most times, when new governments, especially of opposing parties, take over, there is a tendency to resist previous concession arrangements. They often create obstacles mostly for political reasons, and because the new governments do not get any direct financial benefit. The solution here is to establish a proper level and structure of tariffs before a concession is awarded, with clear tariff readjustment rules.
Concessions should also be awarded to qualified bidders by auctioning the lowest subsidy if necessary. Qualification conditions should include a minimum balance sheet, a solid financial performance track record, and experience and technical capability. For example, companies with the size and track record like Julius Berger would not only have the ability to raise long term financing for road projects in Nigeria but would also likely deliver quality projects that could drive down maintenance costs. The qualification conditions should be unambiguous and capable of being answered with a simple “yes or no” to avoid disputes.
Because potential bidders will probably apply a higher discount rate to payments made throughout the life of the contract than the government would, the net present value of the concession fee to the government is likely to be higher if it is structured as an annual payment. Structuring lease payments as a flow of payments over the concession’s life, rather than a single lump-sum disbursement at the beginning of the concession, is a better approach. Moreover, this will facilitate new governments’ buy-in for the concession arrangements, because they will also benefit from the concession. Also, the resistance from the people toward toll projects will be minimized where the benefits are perceived to outweigh the cost of the toll fees. When the toll is capped, the government can issue complementary payments for low-income users or subsidies to investment after construction. The defining characteristic should be payment contingent on performance.
User-pays PPPs have been used to fill deficits and increase service delivery in road infrastructure in many other countries with budget constraints. The success of these partnerships hinged on the professionalism of the contracting agency within the public sector. For instance, the Second Vivekananda Bridge and Tollway, Kolkata-Howrah project in India, which was executed through a public-private partnership, using a design-build-operate-transfer (DOBT) model. The 3.8-mile six-lane tollway project completed in 2007 is lauded as the world’s first multi-span, the cable-supported bridge with short pylons. It was part of the country’s national program to upgrade essential infrastructure. To speed construction and achieve a faster return on investment, the Indian National Highways Authority opted for private financing, awarding the special purpose vehicle (SVBTC), the right to operate the revenue-producing bridge and tollways under a 30-year agreement.
PPPs are unlikely to eliminate traditional public procurement mechanisms for the financing and development of infrastructure; they are not a panacea for all infrastructure projects. However, optimizing the advantages of private sector participation in infrastructure construction and management depends on the government’s effective contracting and procurement. Stakeholder management and communication are also vital. A mechanism that ensures that the stakeholders, including the users of the asset, are duly consulted and informed of decisions that affect them, should be set up for every project. There is an imperative for transparency. Citizens should have access to easy-to-understand information about projects, and accountability and redress mechanisms should be installed to give voice to the Nigerian people and allow them to lodge complaints related to the projects.
Wofai Ibiang is an International Development Professional and a Master of International Public Policy (MIPP) Graduate of The Johns Hopkins University School of Advanced International Studies, Washington D.C