Tuesday, March 31, 2009

Much Ado About Debt Repayment

One of nation’s former economic managers has seized the opportunity of the current economic downturn to highlight her achievements, which somewhat implies that we could have been in a worse situation. I refer to the recent comments attributed to the Former Finance Minister Mrs Ngozi Okonjo-Iweala on the global financial crisis.

The former Minister was quoted in the media saying , the debt relief granted under the Obasanjo regime is one of the most critical things that is currently helping Nigeria’s economy in the current economic climate. She also noted that the debt relief has lifted a burden from the neck of Nigerians. I agree that the debt repayment has helped improve our foreign reserve, and credit-rating, which has consequently opened to doors for some form of foreign investment. I however find it hard to believe that it has made any iota of difference to the life of ordinary masses. We should probably be asking if the economy has ever been better in the 20 years.

I do have great respect and admiration for Mrs Okonjo-Iweala. As we may recall Mrs Okonjo-Iweala was the ‘architect’ of President Obasanjo economic reforms. ‘Due process’ was the flavour of the day during her tenure as Finance Minister. Recent probe of the energy sector however indicates that, adherence to the principle of ‘due process’ by the Obasanjo administration is still very much questionable. She masterminded the repayment of the nation’s debt owed to the Paris Club of Nations.This consequently brought down Nigeria’s total foreign debt from $35 billion to $5 billion.

There are no economic indices to suggest that an average Nigerian is in anyway better off than he was during the pre-debt relief period. The money could have been spent in developing the nation’s infrastructure. In fact there were rumours that appointment of Mrs Okonjo-Iweala was a conspiracy between the World Bank and nation’s creditors to facilitate the debt repayments Is there anything fundamentally wrong with being in debt? It is common knowledge that successful businesses thrive on availability of credit.

The wealth of a nation can only be measured by the quality of life of its citizens and not by how much it owes or does not owe in debts. And the ‘quality of life’ can only be improved through sustained infrastructure development. The US is a good example. Also, the ability to manage and service debts is the most important thing and not the debt itself. We should remember that Nigeria’s debt ballooned to $35 billion as a result of default payments and penalty charges. We did actually stop borrowing from the Paris Club since 1992.

This implies that if we have been able to service our debts regularly, we wouldn’t owe as much in the first place. Therefore, if the $12 billion paid to the Paris Club was invested in the nation’s infrastructure, it might have helped put our feet on the path of economy recovery, and thus make it less onerous to service the debt. Let’s not be deceived, the fact that a nation is debt free, does not make it anymore developed.

Good leadership, political stability, sound economic polices, with underlining infrastructure growth are the key to long term sustainable development. These key principles are however lacking in Nigeria. Our leaders have either forced themselves into power through military coups or fraudulent electoral processes. Our economy has been tarnished by years of political instability and institutionalised corruption. We run a non-diversified economy that is 90% dependent on crude oil. The recent announcement by the Nigeria National Petroleum Corporation (NNPC) that oil revenue has fallen from an average of N330 billion ($2.2 billion) recorded in 2008 to an average of N150 billion about ($1 billion) in January 2009, is therefore a major concern.

The government has not been able to develop any sound economic policy. They make rash economic decisions that are devoid of any rational thinking. When faced with challenges, the government prefers to bury its head in the sand, and pretend its all business as usual.

Unfortunately, we are now drifting into a nation of Oligarchs. The economy of the nation is now concentrated in the hands of very few individuals, who have profited immensely from the inefficiencies of the government. They have amassed so much wealth through investments in services that should ordinarily be provided by the state. This situation only reminds me of the Russian experience following the collapse of the Soviet Union.

Saturday, March 28, 2009

Lekki-Epe Expressway Road Toll Charges

The contract for the rehabilitation and upgrade of approximately 50km Lekki-Epe Expressway was recently awarded to the private firm ‘Lekki Concession Company Limited’ (LCC). The project is being executed under Public-Private Partnership (PPP) with Lagos State Government. Under the terms of the contract, LCC will build the infrastructure (i.e. additional lanes), operate it for 30 years and later transfer it to the state government. This model in PPP/financing vocabulary is known as Build, Operate and Transfer (BOT). Like most PPP, this project is being funded through private finance, which means LCC will charge tolls on the road in order to recover its costs and make a decent profit.

However, it was recently reported that communities bordering the stretch of Lekki-Epe Expressway in the Eti-Osa council- area that is to be subjected to tolls- rose up in arms against the plan, protesting what they deem to be unfair financial burden. The issue according to the representatives of the groups is that two of the three proposed toll gates would be located in Eti-Osa, thereby subjecting residents in the area to payment of tolls each time they needed to leave their homes.

The toll road sector is evolving rapidly and has become increasingly global, as entities with the expertise to build, operate, maintain, and finance these facilities have lent their services across international boundaries. LCC for example is a ‘special purpose vehicle’ set up by a group of Nigerian and South African companies. Proponents of toll roads believe that the private sector can bring a level of competition and efficiency that can benefit road project development and operations.

Toll road financing, construction, revenue generation, and operation can be undertaken through several organisational structures and frameworks. Revenues can be generated through traditional ‘direct user’ charges, in which motorists using the facility pay a toll, or through third-party payments. Third-party payments are typically from a public sector sponsor to a private sector concessionaire, either in the form of shadow toll payments based on facility usage or availability payments based on the concessionaire's ability to meet certain performance benchmarks. With regards to the Lekki-Epe project, traditional ‘direct user’ charging regime will be employed. Under this system, a vehicle makes a payment via cash or an electronic method for the use of the road facility.

On face value, the Lekki-Epe project PPP mechanism seems laudable, as it has facilitated the delivery of a key transport infrastructure. But from a technical perspective, I find it hard to understand the rationale behind the PPP arrangements and therefore share local residents’ concern.

It is inevitable that these tolls will have a huge impact on local road users. When asked about the likely toll charge, LCC representatives noted that “an amount will only be fixed when the road construction is completed”. Experience shows that private toll operators have had greater success at regularly imposing toll rate hikes in order to maximize their profit. The management of toll operating companies are also less concerned about the political or social implications of such price hikes. When concessions are initially granted, toll rates tend to be lower than revenue maximisation levels. Nevertheless, once under concessionaire control, toll rates will likely increase to maximum economic or legal revenue levels.

Tolling of Lekki-Epe expressway is not in anyway appropriate for many reasons. Why will the Lagos state government enter into a PPP contract that will allow tolling on a strategic road, in an area without an alternative road access or decent public transport system? It’s been reported that three tolling booths are proposed on the road corridor at Maroko, Sangotedo and Epe. If that’s case, the question needs to be asked about the concessionaire tolling strategy. Is the toll been targeted towards local traffic or long distance travellers? Why should a local resident making a short trip between Sangotedo and Ajah be subjected to a toll, in the absence of an alternative road access? Compelling local residents to payment of roads in the absence of an alternative raises serious equity issues. This makes the concessionaire (LCC) a monopoly service provider, and therefore it’s likely to create a serious distortion in the market.

As we all know, continuous urban sprawl in Lagos has made the Lekki-Epe corridor, one of the fastest growing corridors. The road is only link between towns along the Lekki axis and Victoria Island. The govt has allowed intensification of development along this corridor to perpetuate over the years without a long term strategy of how it will improve key infrastructure. Instead of the government to grapple with this issue, it has decided to hand it over to the private sector for solution. The toll will have a massive impact on local residents, some of whom are currently struggling with everyday life. The lack of alternative road access can only result in the concessionaire making a ‘killing’ out of this project in terms of financial returns. It would have been more appropriate if the private sector is encouraged to finance the construction of a ‘bypass’, which can be tolled appropriately. Road users who value their time and do not want to be stuck in traffic will use the bypass but at a premium.

However, if the government feels a desperate need for a PPP, a better approach could have been through ‘shadow tolls’. This is a situation where a LCC will receive payments over time for the successful construction and operation of the facility from a state government, and road users will not responsible for a payment. The amount of payment that is received from government will be a function of a theoretical toll rate per vehicle with revenue minimums and maximums. I consider this method appropriate in this situation because of lack of alternative free roads in the area, and likely community backlash, which will arise with direct user charging.

Whilst I agree that Lekki-Epe Expressway is a critical transport infrastructure that is in dire need of rehabilitation and upgrade, the way and manner the contract has been structured however needs to be called into question. It’s either there’s been ‘foul’ play in the award of contract or an error of judgment on the part of Lagos State Government. I want to believe it is the latter rather than the former.

Whatever be the reason, it is high time some of the PPP contracts signed by the government (either Federal or State) come under scrutiny. PPP should be aimed at delivering ‘value for money’. Prior to entering into PPP contracts, the government should endeavour to assess infrastructure projects against a ‘public sector comparator’, as part of its project appraisal. This should determine if the most cost-effective way of delivery is through a PPP. It is likely that sometimes, that certain projects could be delivered cheaper by the public sector.

Sunday, March 22, 2009

Transport - Private Sector Participation

The use of the term Private Sector Participation (PSP) is now widespread within all tiers of Nigerian government. Government officials are always quick to defer to the private sector following their failure, which is sometimes is due to endemic corrupt practices. It is generally agreed that the private sector are better managers of certain infrastructure and services. However, their participation in delivery of infrastructure and services, should not absolve the state from its statutory responsibilities. A forward thinking government needs to have a clear vision. It must strive to create an environment that will encourage private sector investment, through appropriate regulations and policies.

While surfing the internet, I came across a trade and investment website (www.tradeinvestnigeria.com). The purpose of the website is to showcase investment opportunities in Nigeria. Investment opportunities in all sectors of the economy from retail to oil/gas are list on the site. While on the site, I searched for opportunities in the transport sector. However, I was totally disappointed with the type transport investment opportunities listed on the site. Can you imagine a state government, calling for 'expressions of interest' from private investors interested in operating bus services (!)?

It is very disappointing that most of our state executives lack innovative ideas. Don’t get me wrong, the bus service industry in the Nigeria needs serious investment. The industry is dominated by large proportion of single vehicle owner-operators. Some of the buses are so shabby that you need to have a take out a life insurance prior to travel. There are no policies that regulate how private buses are used for commuter transport. These vehicles are not subject to any form of safety or maintenance check. To make matters worse, the National Union Road Transport Workers (NURTW) is seen as more powerful than the government. The NURTW is a big stakeholder in the nation’s electoral process; because it is the umbrella association for political thugs and ‘area boys’.

These issues beg the question of how state government will attract the private sector in operation of bus service. The major public transport operators such National Express, Stagecoach etc of this world, will never attempt to invest in the current environment of totally deregulated market. I have always said that public transport cannot operate efficiently in a totally deregulated market. The government still needs to have policies that will regulate activities of operators, and not just creating a ‘free for all’ environment.

From an overseas perspective, provision of bus services in the England is ‘unregulated’ except for London. The deregulation only means that the local government (as it is the case), are not responsible for funding or operation of bus services, except services that are considered to be ‘socially necessary’. Planning and operation of bus services is entirely in the control of the private sector. However private bus operators are required by UK legislation to give 40 days notice to the Traffic Commissioner prior to commencement of their bus operation. Also, they are required to give 28 days notice prior to suspension/cancellation of bus services. The Traffic Commissioner is also responsible for licensing public carriage vehicle, and he must ensure that they meet minimum safety standards.

However in Nigeria, Joe Bloggs can purchase a bus tomorrow and start operating it from point A to B. He doesn’t need to notify anybody about his operation. Nobody is interested to know whether his vehicle meets any sort of safety standard. As a bus driver, he doesn’t need to undertake any test to assess his competency and mental stability.

The Lagos state government was able to deal with this challenge through effective traffic management in its Bus Rapid Transit scheme. The state government prevented the rickety ‘danfo’ and ‘molue’ buses from using the segregated busway. Road transport union members whose buses meet set criteria were also encouraged to travel on the BRT lane. For me, this is a step in the right direction, in the absence of proper legislation to regulate mainstream private bus operators. And unlike other state government, the Lagos State Metropolitan Transport Authority (LAMATA) has a set vision. Continuity and stability within the organisation as also demonstrated that a lot can be achieved with proper planning and professionalism.

In view of these challenges, I will suggest that the first practical exercise will be for the state government to undertake studies that will identify existing transport problems, some of which are institutional as I have mentioned. This would reinforce the need for an integrated transport vision. Current stakeholders in the industry such as transport unions should be made to buy into such a vision. Our leaders need to think beyond short term policies or projects which only provide opportunity for them to cut ribbons but serve no public benefit.

Without implementation of appropriate policies that will ensure a sustainable transport framework, private sector participation in the transport industry will only remain a dream.

Monday, March 16, 2009

Is Gov. Gbenga Daniel Serious At All?

I wrote last week about we can start to reposition the transport sector, if Pres. Yar’Adua is really serious about his Vision 20-20 Agenda. However I seem to always get distracted by other issues, some of which are not totally unrelated to the transport system.

We are a nation with visionless leadership. Our leaders have failed in every tier of government. When you read about projects been proposed or undertaken at national, state or local government level, you can’t help it but laugh. Instead of developing long term strategy for infrastructure development, our leaders waste tax payers on stupid grandiose projects that lack any sort of public benefit. The short-sightedness of our leaders is one of the main reasons Nigeria has failed to develop.

As an example, I read in today’s edition of the Punch Newspaper that Gov Gbenga Daniel of Ogun State distributed 500 taxi cabs in Abeokuta under its Gateway Metro Transport Scheme. The state government intends to distribute 800 taxis under the scheme – which is in its fourth phase.

The Governor was noted to have said that the increasing commercial activities had stretched the transportation system in the state to a critical level, and that the system required a more proactive approach.

According to the Governor, “The new economic posture assumed by our state has continually stretched to almost its unbearable limits the transportation system in the state, especially in the metropolis. The people have had to wait long hours to get vehicles to convey them and their goods from one place to another as demand continue to outstrip supply with prices of commuting resultantly becoming more expensive.”

What manner of proactive transport planning policy is distribution of taxi cabs? How will taxi cabs help contribute to improvement of the transport system? Who actually advises the Governor on transport matters? Who are the bureaucrats advising these politicians? I wouldn’t be surprised if the beneficiaries of taxi scheme are either his cronies or member of his political parties.

According to the 2006 census figures, the population of Ogun State is estimated as 3.7 million. I want to believe that this number is grossly underestimated. Rapid urbanisation of Lagos has spread into some Ogun state townships. There are a significant number of people who live in towns like Sagamu, Ibafon, Mowe, Otta etc who travel to Lagos daily for work. Is Gov Daniel aware of how many commuting from places like Otta, Odogunyan into Lagos daily? The Lagos-Benin expressway corridor is one of the fastest growing parts of the country.

His counterpart (Gov Fashola of Lagos) has left indelible mark in Lagos within two years of assuming office. Whether go or bad, the Bus Rapid Transit has now been operating for about year. He his also on the verge of implementing, what I will say is the biggest infrastructure project in Nigeria in the last three decades (i.e. light rail). However, what can Gov. Daniel show for his six years in office? 500 taxis!

The Governor should be partnering Lagos in areas of transport infrastructure development. For me, Lagos and Ogun is a sub-region. It is for this reason that the Lagos Mega City Project includes Ogun state. Both states should be developing a joint transport strategy. Some of their key priorities should include areas, I have mentioned. Urban planning in the Lagos-Benin corridor also needs serious attention. The state government cannot continue to create new towns along a major highway with national strategic significance without any plan on how it will deal vehicle access issues. Development of key infrastructure should be done objectively and should be devoid of partisan politics.

Unfortunately, the likes of Gov. Daniel encapsulate the mediocre leadership structure that exists in our nation.

Saturday, March 14, 2009

This is Criminal!

That former President Obasanjo has not been charged for corruption and misappropriation of public funds beggars belief.

Firstly, it was series of allegations on corrupt practices on the power projects. And as if that was not enough, another bombshell was dropped at the ongoing Public Hearing on the $8.5 billion Lagos-Kano Rail Modernisation Project.

The Nigerian government entered into a loan agreement with the Chinese government in order to finance the rail project. In return, the contract was awarded to the Chinese firm CECCC. Under the arrangement, $1.2 billion was dedicated as soft loan to Nigeria for the execution of the first phase of the double track Lagos-Kano rail project covering 1,315 kilometres. However, the Chinese government decided this year to commit only $500 million concessionary loan instead of the $2.5 billion it has earlier agreed with Nigerian under the past Nigerian government. The $2.5 billion was to have attracted an almost zero percent interest rate spread over about twenty years. But, according the Minister, the Chinese government changed its mind advising that that Federal Government may obtain the balance of $2 billion from Chinese Banks at prevailing interest rates. And to add salt to injury, the Federal Government is under obligations to pay between $1.1 billion and $1.4 billion for the cancellation of the project.

I have previously queried the need for upgrading the 1,315km of rail track between Lagos and Kano at a phenomenal cost of $8.5 billion. As far as I am concerned the rail upgrade will serve no useful purpose, and the money could be better spent on developing transport infrastructure in our major cities. The proposed Light Rail in Lagos is only costing a fraction of the Lagos-Kano project and it offers more benefit to commuters in a city of 17 million people.

The way and manner this project has been handled by the Obasanjo government is nothing short of being ‘criminal’. There are two key facts that emerged from the hearing which I consider very serious.

Firstly, it came to light that the project was awarded to the Chinese firm without any regard for the ‘competitive tendering’. It was alleged that President Obasanjo was in a hurry to the give the contract to CCECC as a 'thank you' project for the promised loan concession.

Secondly, it was confirmed that the rail contracts were awarded by the administration of Obasanjo without feasibility study and initial engineering design preparatory for the bill of quantity as required for a contract of such magnitude.

I find it hard to believe that a government will award a contract for $8.5bn without undertaking a feasibility study on its economic viability and also not bother to undertake a competitive tendering process. Why all the rhetoric about ‘due process’? How does the government know that it is getting ‘value for money’? I have once queried the reason behind procuring rail expertise from China, when the Chinese themselves import rail expertise from Europe. What is the track record of the Chinese firm in handling multi-billion dollar infrastructure projects?

It is plausible to argue that we wouldn’t be where we are if a feasibility study was undertaken in the first place. As a rail planner, decisions on whether to construct railways are not taken lightly. Railway infrastructure can be very expensive takes years from concept to implementation. Rail projects are subject to feasibility studies, which include rigorous cost-benefit analysis. I’m positive that if a cost-benefit analysis is undertaken on the Lagos-Kano project, the numbers will never stack up. What sort of patronage level will the rail corridor attract to justify the $8.5 billion cost. The govt should not be investing in long-distance railways at this point, until the transport infrastructures in our major cities are developed. Nigeria is not France, Japan, or Italy. If you check the history of these countries, they have developed a good network local transport infrastructure prior to building long-distance railways. .

Anyway, for Obasanjo to have entered into this contract without following ‘due process’ and undertaking proper ‘due diligence’ is a national tragedy and at the least, he should be prosecuted for misappropriation of public funds.

Monday, March 9, 2009

Reforming the Nation's Transport Sector

There seems to be growing interest in the development and rehabilitation of the Nigeria’s transport infrastructure. The railway sector for example, has in someway come to the fore of public debate. Stakeholders in the transport industry (both private and public) have being drumming up support for rail development in the country. The Lagos State Government is also currently pursuing the development first Light Rail Transit system in Africa. The challenge that will be faced by Lagos Government will be how to attract private investors in the face of the current global economic recession. Whatever happens, history will judge the State Governor by the passion and the zeal he has demonstrated in terms of solving the traffic menace in Lagos.

What is happening in Lagos can only be seen as positive development for Nigeria. However, it gives a cause for concern that the Federal Government has lost its way in terms of setting up the right framework for the development of a sustainable transport agenda. Proactive state governments such as Lagos are beginning to set the benchmark in the absence of the proper transport leadership from the Federal Govt. This laissez-faire attitude has now resulted ad-hoc transport policies and schemes being propagated across the country. An example is the recent announcement by a private firm Oracle Nigeria Limited that it intends to develop a High-Speed Rail system between Lagos and the Niger Delta at an estimated cost of $7.5bn. This project is expected to be funded through a mix of private capital/equity and public funding/guarantees. The proposed corridor for the HSR is Lagos, Ondo, Edo, Delta, Bayelsa, Rivers, Abia, Imo, Akwa Ibom and Cross River states. According the CEO of Oracle, “this mode of transportation will create relief in a country fraught by road accidents, which according to the World Health Organisation account for over 32,000 deaths in Nigeria every year.” I sometimes wonder if these proposals are well thought through before being put in the public realm. What is the rationale for spending such a colossal amount on developing a HSR between Lagos and Cross River? For what purpose? If it is to cut accident rates on the highway, then what is the function of the Federal Road Safety Corps? Why can’t money be spent on rehabilitating the major highways and make them safer? And also, who says that railway is safer than road transport? A badly maintained railway system can cause as much havoc, if not worse. Ask the Brits about the Paddington train crash of 1995, which killed thirty one and injured over 520 people.

We have also seen the recent ‘flip flops’ by the Federal Government on the proposed Lagos-Kano rail modernisation project. This comes under review once there is a change of Minister. This attitude demonstrates a government that lacks vision and does know what it wants. More importantly, it sends a message to foreign investors about the risk of doing business with the government. And in this current climate of credit crunch, confidence is vital to private sector participation.

It is important now than ever before that the government through the Federal Ministry of Transport assumes its leadership role in terms of re-focusing of our nation’s transport system if President Yar’Adua (and big IF!) wants to achieve is Vision 2020 and Seven Point Agenda. The nation is in the dire need of a Strategic Transport Plan. The plan needs to set out the long term vision of how all sectors (ie rail, road, air, and water) of the nation’s transport system will be developed. I appreciate that there are current challenges been faced in the energy sector, which in someway has a role to play in transport infrastructure development (ie use of electric trains etc). However, the government needs to articulate how the current transport assets will be managed, whilst looking into the future. In fact, such as a strategic plan could inform the debate on power generation because of their interdependencies. There is need for ‘joined up’ thinking across of sectors of government in developing an integrated transport vision.

It beats my imagination that Private Sector Participation has now become a buzz word in government circles. As soon as a government owned corporation has been ‘wrecked’ by corrupt government official and politicians, Ministers start talking about ‘concessioning’, PPP etc. While I’m total support of Private-Public Partnerships because sometimes it is only way you can get things done, the government needs to realise that the private sector, who fundamental aim is to maximize their profit will not set up a vision for state. Instead, the private sector should be engaged and stirred towards helping the nation achieve its vision through proper regulatory mechanisms.

Without being a purist, I will suggest the part-privatization of the Nigeria Railway Corporation. The maintenance and operations of the rail network should be separated. The government should still be tasked with the responsibility of track maintenance, which either can be undertaken in house or out sourced to private companies. The operation of services should however be fully privatized. The existing non-rail assets of the NRC could be used as incentive to attract private investors. There will also need to be a major overhaul of the NRC workforce, which currently consists of unmotivated and ageing staff, who lack skills in modern railway operations and maintenance. The government will need to develop a rail network strategy which will sets out the function and role of existing and proposed rail lines. At present there seems to be no clear distinction commuter rail lines and long distance. Development of commuter rail lines in our growth cities should be a matter of priority. Focus should be on developing corridors along Lagos-Ogun-Oyo, Niger-Kaduna-Kano, Warri-Port Harcourt, rather than high speed rail between Lagos and Kano or Lagos and Niger Delta.

The government also needs to set out a plan for the development and funding of major highways and trunk roads. The ineptitude of the federal government in this area has seen state government taking responsibility for managing federal highways. Maintenance of federal roads should not be politicized. The federal government should handover roads which it considers are not of national significance to state governments. As an example, I will suggest an alternative corridor for the Lagos-Benin expressway. The proliferation of vehicular access by churches and residential development along this corridor has undermined its role and function. The corridor is also a major growth area and intensification of vehicular access will only make it worse.

To be continued……………..