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.


Anonymous said...

I agree with you ojare oga seyi. I have always and still maitain that those in leadership positions in the nigarian stata have no allegiance whatsoever to the peoples of that state so even when they concoct so called people oriented programmes, it is stuffed whith personal objectives.

We all know that the current gov is a stooge of the previous one and so carries out his objectives one of which is the continiued enrichment of the former boss and the new enrichment of the new boss call it noe or new colonialism. Do you know that the new man recently acquired an estate in London? lets leave it there for now. cocession ko concession ni we know who is concessioning and where the concessionin is being concessioned to

Anonymous said...

My fellow Nigerians, please wake up. The reason we are in our situation is that we expect everything to be free. Why not give this arrangement a hance and see how it works. In other nations, their are toll roads and the roads, particularly when managed by the private sector is used to maintain the road and the mangement makes money also. Are we not tired of waking up at 5:00 am to travel a few miles to work a few miles down the road at Marina? If we've been doing same thing and it's not working, let's try something else. Time is the greatest asset we have and the rturn on that asset is zero if we are spending all the time on the road.


@Anonymous 2,

Thanks for taking time to read my blog.

I'm not an Economist/Finance expert but as a Transport Planner, I totally understand the role of private sector investment in infrastructure delivery.

As a matter of principle, I'm not against PPP's, but my concern has always been about how these so-called PPPs have been structured. The idea of PPP was imported from the western world - and that is not a problem. But I can tell you that none of the western nations go about it the way we are.

These contracts raises questions about probity and transparency. The govt cannot afford to be creating private monopolies, it is just not acceptable anywhere in the world. If we complain about public monoploy, where do we think private monopoly will be better.

The bottom-line is, LASG cannot to force motorists to pay road tolls. Especially if that toll is collected by a private company. There should always be an alternative. As I sugested, why not encourage the private sector to build a bypass instead, and charge accordingly.

We need to make sure that things are done properly.