Just over a year ago, I wrote a piece on the Lekki-Epe Expressway Public-Private Partnership contract between Lagos State Government and Lekki Concession Company. My criticism at the time was informed by the decision of LCC to install three toll booths on the 44km arterial road. I couldn’t understand the concessionaire (LCC) tolling strategy. Why for example would a local resident making a short trip between Sangotedo and Ajah be subjected to a toll. I asked the question if the toll is targeted towards local traffic or long distance travellers?
Fast forward to 2010, only 2km of the proposed 44km road widening project has been completed, even though we were told in 2006 that the project will be completed within three years. The concessionaire, LCC put the construction cost of the 2km upgrade at N5billion. However, some of the tolling booths have been constructed, and there are “unconfirmed” reports that LCC intends to start charging commuters for using a road that is technically, “still under construction”.
The concept of Public-Private Partnership is not “Nigerian”. It’s a concept that was developed in the western world. However, it’s become common practice for governments in Nigeria to borrow a foreign concept and turn it on its head.
As PPP has now become a “buzz word” in government quarters, it is important that the government realise that concessions can sometimes create a private monopoly or extreme dominance, with consequent market power, which is prone to be abused. This makes the design of the concession agreement important so that adequate protection is given to consumers.
The Lekki-Epe contract defies the basic principles and world’s best practice on Public-Private Partnerships. From my experience in the transport industry, I’m yet to come across a PPP contract that involves the tolling of a road without an alternative. As we know, there is no alternative “passable” road along the Lekki-Epe axis. Therefore, handing this road over to a private company to upgrade under a 30-yr concession is contrary to principles of social equity. The concessionaire, LCC, has basically become a private monopoly by default.
.It’s been noted that there are plans by the LASG to build an alternative road along the Lekki shoreline. So why was LCC not encouraged to build the alternative road under a PPP agreement? And what’s the timeframe for the completion of this alternative road? Ideally, toll roads in major urban areas are aimed at making available a priced ‘premium’ service as an alternative to competing congested roads on the unpriced network, while covering full costs, including a target rate of return on capital.
The allegations by a local community group that, LCC is planning to commence road user charging soon on a road that is still under construction is also quite disheartening. It calls into question, the openness and transparency of the project procurement process.
The key questions we need to ask LASG are, was the project subject to competitive bidding? What was the agreement between LASG and LCC in terms of toll charges and commencement of tolling? As we know, the project was meant to be completed in 2009, however, only 2km of road has been completed(!). So what does the contract say about completion date? Are they are clauses in the contract that imposes penalty on LCC for failure to complete the project in time?
One of the key benefits of Public-Private Partnerships is speedy, efficient and cost-effective delivery of projects through integration and cross-transfer of public and private sector skills, knowledge and expertise. But if the private sector can’t deliver within the specified timeframe, as it’s currently the case, then what’s the purpose of the agreement and to whose benefit? It is ludicrous to subject commuters to endless months of road works without any form of compensation from the concessionaire.
Some have argued that the global financial crisis may have affected LCC’s ability to secure loan, hence delay in the project. And perhaps, the reason for early introduction of toll charges. Whilst I agree that the global economic crisis might have had an impact, one would have expected LCC to have undertaken a “due diligence”.
The reason why PPP have long concessions periods and different from traditional contract, is because there is a broad range of uncertainties and risks associated with PPP. The concessionaire assumes far more responsibilities and much more and deeper risks than a traditional contractor. And that’s why in most cases, the project delivery cost in PPP projects can be quite expensive.
And also, what if the concessionaire goes ‘burst’ before the completion of the project? Does the state government have any mechanism in place to make sure that the road is completed? This is not an unlikely scenario, considering that LCC seems to be struggling financially. Or will it become an ‘abandoned’ project?
There’s no doubt that LASG and LCC are in for a hard time from local residents on this project. The local community initially complained about the need for LCC to have three toll booths on the road – which I totally agree with! Following that, they are allegations of fraud against LASG/LCC because of alleged plans by LCC to start charging tolls on the yet to be completed road. All these allegations only point to the fact that the local community and key stakeholders have not been duly consulted on the project.
This has been the common practice with most of the PPP contracts. The operator of MMA II, Bi-Courtney Airservices Ltd, was also recently fighting labour union over the take over of the General Aviation Terminal.
Proponents of PPP projects need to understand that extensive consultation and open communication with all stakeholders is necessary to ensure success. Stakeholders include employees and their trade unions, the public, the people who will use the assets and services provided, local community groups and sector interest groups. It is also important that the economic, social and environmental concerns of those directly affected at local level should be taken into account along with the statutory rights and legitimate economic interests.
Whilst the plan by Lagos State Government to upgrade Lekki-Epe Expressway is laudable, the way and manner in which this project is executed remains controversial.
There’s no doubt that private sector participation is necessary, if a sustainable infrastructure development is to be achieved - especially in a country like Nigeria with massive infrastructure deficit. It is however important that it is done in a fair and transparent manner.
Showing posts with label PPP. Show all posts
Showing posts with label PPP. Show all posts
Monday, March 29, 2010
Tuesday, September 22, 2009
FG, Bi-Courtney and the General Aviation Terminal
As we know, in 2003 the Obasanjo regime signed a Build, Operate and Transfer (BOT) Public-Private Partnership (PPP) contract with Bi-Courtney Aviation Services Limited (BASL) for the construction of the second terminal at Murtala Mohammed Airport (MM2). The new airport terminal was opened in 2007. However following the approval of the PPP agreement, the status of the General Aviation Terminal (GAT) – whether or not it’s part of the agreement - has been subject of controversy. But after years of argy bargy and legal fireworks, the FG finally handed over the General Aviation Terminal of the Murtala Mohammed International Airport to BASL.
Stakeholders in the Aviation industry have expressed their concern on the government decision. According to the National Union of Air Transport and Engineers (NUATE), the handover of the terminal by the FG to BASL was undertaken without regard for “rule of law” and “due process”. In protest, the Union threatened to shut down the terminal, noting that the handover will inevitably result in job losses. In the same vein, Arik Air through its Counsel Chief Assam E. Assam, told newsmen that the airline – who operates 50% of domestic flights in Nigeria - might stop operation because it could not operate in any facility that is “under the control and monopolistic management of Bi-Courtney Aviation Services”. FAAN on its part is had held the position that GAT was not part of the property given to Bi-Courtney in the PPP agreement it has with the organization and had sided Arik Air in the struggle to retain GAT as FAAN entity as it has been the major source of revenue to the agency. According to FAAN, the handover of the GAT would result in about 40% shortfall in revenue for FAAN.
Based on the foregoing, it is evident that all is not well with the MMA2 PPP Agreement. I have always expressed my concerns about how PPP contracts are negotiated in Nigeria. I have specifically queried the purpose of the exclusivity clause in the MMA2 PPP Agreement –which is also been contested by FAAN, - that prohibits development of an airport in Lagos for 36 years. Many have disagreed with my viewpoint on this issue. Some have argued that it is in the “commercial interest” of BASL to have such a clause (i.e protect its investment). Some even insinuated that I have a personal grouse with BASL. Firstly, l will state categorically that I do not have any personal issue with BASL. I respect and appreciate BASL position as a commercial entity that is looking to maximise its opportunities and protect its financial investment. And if I were in their shoes, I would probably be seeking the inclusion of such a clause, if not more. However, my criticism is directed to the government for their ignorance and short-sightedness in agreeing to such a clause. The inclusion of such a clause in contractual agreement does not encourage competition. It only creates a private monopoly, and does not offer consumers “value for money”. The role of the government is to make sure that public interest in protected in signing such contracts. The clause also does not offer any incentive for BASL to be innovative. With guaranteed income for 36 years and no other competing airport, passengers and airline operators can be expected to be at the mercy of BASL.
Also, such a clause makes mockery of the government so-called Vision 2020. How can nation that intends to be one of the world’s top 20 economies prohibit airport development for 36 years? How can an aspiring G20 nation prohibit airport development in a city predicted to emerge as the third largest city in the world with a population over 20 million people by 2015? Whatever anyone thinks, I’m of the view that this sort of arrangement cannot be right.
In terms of the GAT handover and threats from Arik Air and NUATE, there are few questions which need to be answered by the FG. FAAN denied that GAT was part of the PPP contract, and its handover means loss of revenue. My question is, as a major stakeholder, what was the role of FAAN in the contract negotiation? Was the decision to concession GAT as part of the MMA2 contract taken unilaterally by the FG without following due process? Who were the government advisers on the contract? Arik Air also threatened to halt its operations. But since the PPP agreement predates the commencement of Air Arik operations, was Arik Air not advised of the PPP agreement and imminent transfer to BASL? As for NUATE, did the FG consult with the Union during the contract negotiation?
Whatever be the case, there are important lessons to be learnt from the MMA2 Agreement. One of the keys to success of any PPP is “communication”. It is inevitable that more people will be affected by a partnership than just the public officials and the private-sector partner. Affected employees, the portions of the public receiving the service, the press, appropriate labour unions and relevant interest groups will all have opinions, and frequently significant misconceptions about a partnership and its value to all the public. It is therefore important to communicate openly and candidly with these stakeholders to minimize potential resistance to establishing a partnership. If the FG has taken its time to educate all stakeholders, then the reported protest by Union wouldn’t arise. Also, there would not be the need for the threats from Arik Air.
The government should also implement mechanisms that will guarantee transparency at all stages in the tendering process. These mechanisms must include setting procurement specifications, open public hearings for major government contracts, and the final selection of contractors; and Involvement independent agencies to oversee the bidding process. Unfortunately most of the PPP contracts in Nigeria are announced on the front pages of newspapers. The process of awarding these contracts is shrouded in secrecy. A classic example is the Lagos-Ibadan Expressway N89billion concession contract. Up till now, the public is yet to be advised of the process that led to the selection of Bi-Courtney Ltd. Where was the tender for the procurement advertised? How many companies bidded for the contract?
Interestingly, the notion of public-private partnership has been touted in some government circles as a magic formula that will fix the country’s infrastructure blockages. The complexity of PPP contracts and the high costs involved means care should be taken in the way it is approached. PPPs are not a panacea for development. The principles that underlie successful PPPs are affordability, cost effectiveness, value for money, transparency and risk management.
Stakeholders in the Aviation industry have expressed their concern on the government decision. According to the National Union of Air Transport and Engineers (NUATE), the handover of the terminal by the FG to BASL was undertaken without regard for “rule of law” and “due process”. In protest, the Union threatened to shut down the terminal, noting that the handover will inevitably result in job losses. In the same vein, Arik Air through its Counsel Chief Assam E. Assam, told newsmen that the airline – who operates 50% of domestic flights in Nigeria - might stop operation because it could not operate in any facility that is “under the control and monopolistic management of Bi-Courtney Aviation Services”. FAAN on its part is had held the position that GAT was not part of the property given to Bi-Courtney in the PPP agreement it has with the organization and had sided Arik Air in the struggle to retain GAT as FAAN entity as it has been the major source of revenue to the agency. According to FAAN, the handover of the GAT would result in about 40% shortfall in revenue for FAAN.
Based on the foregoing, it is evident that all is not well with the MMA2 PPP Agreement. I have always expressed my concerns about how PPP contracts are negotiated in Nigeria. I have specifically queried the purpose of the exclusivity clause in the MMA2 PPP Agreement –which is also been contested by FAAN, - that prohibits development of an airport in Lagos for 36 years. Many have disagreed with my viewpoint on this issue. Some have argued that it is in the “commercial interest” of BASL to have such a clause (i.e protect its investment). Some even insinuated that I have a personal grouse with BASL. Firstly, l will state categorically that I do not have any personal issue with BASL. I respect and appreciate BASL position as a commercial entity that is looking to maximise its opportunities and protect its financial investment. And if I were in their shoes, I would probably be seeking the inclusion of such a clause, if not more. However, my criticism is directed to the government for their ignorance and short-sightedness in agreeing to such a clause. The inclusion of such a clause in contractual agreement does not encourage competition. It only creates a private monopoly, and does not offer consumers “value for money”. The role of the government is to make sure that public interest in protected in signing such contracts. The clause also does not offer any incentive for BASL to be innovative. With guaranteed income for 36 years and no other competing airport, passengers and airline operators can be expected to be at the mercy of BASL.
Also, such a clause makes mockery of the government so-called Vision 2020. How can nation that intends to be one of the world’s top 20 economies prohibit airport development for 36 years? How can an aspiring G20 nation prohibit airport development in a city predicted to emerge as the third largest city in the world with a population over 20 million people by 2015? Whatever anyone thinks, I’m of the view that this sort of arrangement cannot be right.
In terms of the GAT handover and threats from Arik Air and NUATE, there are few questions which need to be answered by the FG. FAAN denied that GAT was part of the PPP contract, and its handover means loss of revenue. My question is, as a major stakeholder, what was the role of FAAN in the contract negotiation? Was the decision to concession GAT as part of the MMA2 contract taken unilaterally by the FG without following due process? Who were the government advisers on the contract? Arik Air also threatened to halt its operations. But since the PPP agreement predates the commencement of Air Arik operations, was Arik Air not advised of the PPP agreement and imminent transfer to BASL? As for NUATE, did the FG consult with the Union during the contract negotiation?
Whatever be the case, there are important lessons to be learnt from the MMA2 Agreement. One of the keys to success of any PPP is “communication”. It is inevitable that more people will be affected by a partnership than just the public officials and the private-sector partner. Affected employees, the portions of the public receiving the service, the press, appropriate labour unions and relevant interest groups will all have opinions, and frequently significant misconceptions about a partnership and its value to all the public. It is therefore important to communicate openly and candidly with these stakeholders to minimize potential resistance to establishing a partnership. If the FG has taken its time to educate all stakeholders, then the reported protest by Union wouldn’t arise. Also, there would not be the need for the threats from Arik Air.
The government should also implement mechanisms that will guarantee transparency at all stages in the tendering process. These mechanisms must include setting procurement specifications, open public hearings for major government contracts, and the final selection of contractors; and Involvement independent agencies to oversee the bidding process. Unfortunately most of the PPP contracts in Nigeria are announced on the front pages of newspapers. The process of awarding these contracts is shrouded in secrecy. A classic example is the Lagos-Ibadan Expressway N89billion concession contract. Up till now, the public is yet to be advised of the process that led to the selection of Bi-Courtney Ltd. Where was the tender for the procurement advertised? How many companies bidded for the contract?
Interestingly, the notion of public-private partnership has been touted in some government circles as a magic formula that will fix the country’s infrastructure blockages. The complexity of PPP contracts and the high costs involved means care should be taken in the way it is approached. PPPs are not a panacea for development. The principles that underlie successful PPPs are affordability, cost effectiveness, value for money, transparency and risk management.
Sunday, May 17, 2009
Bi-Courtney and MMA2 Terminal - What a Mess!
Recent revelations about the details of the MMA 2 Terminal Private-Public Partnership (PPP) agreement between the Federal Government and Bi-Courtney Aviation Services are disheartening – to say the least. Following my observation of the PPP contracts signed to date, I have come to a conclusion that the Nigerian PPP framework has been designed to legitimise state corruption. In this current climate of overwhelming infrastructure need, the government is using PPP to enrich few individuals at the expense of the general public. I’m now beginning to ask myself where public interest lies in all this.
As some of you maybe aware, in 2000 the Obasanjo regime signed a Build, Operate and Transfer (BOT) contract with Bi-Courtney Aviation Services for the construction of the second terminal at Murtala Mohammed Airport (MM2). The new airport terminal was opened in 2007. However, the PPP contract is now subject of controversy.
There is an ongoing row between the FG and Bi-Courtney on the duration of the PPP concession. While Bi-Courtney is insisting that it has 36 years to run the terminal, the FG through the Federal Aviation Authority Nigeria (FAAN) noted that the concession is only for 12 years. Whether it is 12yrs or 36yrs, there are other details in the contract which I find really disturbing.
According to media, the PPP contract contains an ‘exclusivity’ clause which “forbids the FG from improving or expanding the old terminal at the Murtala Muhammed Airport. And that that all scheduled domestic flights in and out of Airport in Lagos State shall during the Concession Period operate from MM2 and that no new domestic terminal shall be built in Lagos State”. The question is what is the intent of this clause?
The single most important public interest concern with PPP transactions is the inherent tension that is created when governments view t leasing of assets as a potential income source. If such PPP are properly structured, they can provide large public benefits. However, PPP contracts in Nigeria are structured to grant concessionaires substantial monopoly power, ultimately at the cost to the users of the system. The MMA2 agreement, Lekki-Epe Expressway and Lagos-Ibadan Expressway PPP contracts are no exceptions in this regard. When I raised the same issue on the Lagos-Ibadan Expressway PPP contract, some thought I had a personal ‘beef’ with Bi-Courtney Ltd. For your information, I do not have anything personal against Bi-Courtney, but I believe the right thing should be done. The exclusivity clause agreement that forbids the FG from improving or expanding the old terminal at the Murtala Muhammed Airport and prohibits construction of a new domestic terminal in Lagos State limits the prospect of competition and runs counter to the public interest.
Thank goodness that President Yar’Adua is currently reviewing the terms of the agreement. How can we be sure that corrupt individuals have not been involved in the deal? Let even assume that the concession is for 36 years. Does that mean that the govt cannot build any domestic airport in Lagos for a period of 36 years because of Bi-Courtney? Come on! So where are the public benefits? How does the govt intend to encourage competition? How can a company hold the monopoly on where local flights depart or arrive for a period of 36 years? Whoever must have advised the government to accept such a clause needs to have his head examined by a Psychiatrist.
In any public-private contractual arrangement, there is always a risk of corruption. For agreement like these and many other where large of amount of money or lengthy concession period are involved, such risk must be well managed. The govt has however failed to run open and transparent processes, when it comes to PPP deals. PPP agreements are signed without any regard for competitive tendering or proper tender evaluation process. To put it bluntly, our PPP framework is a sham. The govt does not seek input from third parties before entering into such contracts. Legislators do not hold the executive accountable on these agreements. Most of the agreement offers little or no public benefits. Most of the PPP agreement undermine competition and lack consumer protection provisions. The agreements are only successful at mortgaging our future away to few privileged individuals.
In my opinion, all PPP agreements have so far failed. The govt needs to go back to the drawing board. In fact, we need a moratorium of PPP agreement until the govt introduces a ‘consumer and competition’ legislation. Some may argue that PPP has helped delivered some key infrastructure like the new Airport Terminal, I will note that the devil is in the detail. By the time people wake up to the reality of this daylight robbery, it might be too late.
Anyway, my advice is that in cases where a contract or concession was inappropriately awarded, members of the public needs to push for provisions that will allow for contract termination.
As some of you maybe aware, in 2000 the Obasanjo regime signed a Build, Operate and Transfer (BOT) contract with Bi-Courtney Aviation Services for the construction of the second terminal at Murtala Mohammed Airport (MM2). The new airport terminal was opened in 2007. However, the PPP contract is now subject of controversy.
There is an ongoing row between the FG and Bi-Courtney on the duration of the PPP concession. While Bi-Courtney is insisting that it has 36 years to run the terminal, the FG through the Federal Aviation Authority Nigeria (FAAN) noted that the concession is only for 12 years. Whether it is 12yrs or 36yrs, there are other details in the contract which I find really disturbing.
According to media, the PPP contract contains an ‘exclusivity’ clause which “forbids the FG from improving or expanding the old terminal at the Murtala Muhammed Airport. And that that all scheduled domestic flights in and out of Airport in Lagos State shall during the Concession Period operate from MM2 and that no new domestic terminal shall be built in Lagos State”. The question is what is the intent of this clause?
The single most important public interest concern with PPP transactions is the inherent tension that is created when governments view t leasing of assets as a potential income source. If such PPP are properly structured, they can provide large public benefits. However, PPP contracts in Nigeria are structured to grant concessionaires substantial monopoly power, ultimately at the cost to the users of the system. The MMA2 agreement, Lekki-Epe Expressway and Lagos-Ibadan Expressway PPP contracts are no exceptions in this regard. When I raised the same issue on the Lagos-Ibadan Expressway PPP contract, some thought I had a personal ‘beef’ with Bi-Courtney Ltd. For your information, I do not have anything personal against Bi-Courtney, but I believe the right thing should be done. The exclusivity clause agreement that forbids the FG from improving or expanding the old terminal at the Murtala Muhammed Airport and prohibits construction of a new domestic terminal in Lagos State limits the prospect of competition and runs counter to the public interest.
Thank goodness that President Yar’Adua is currently reviewing the terms of the agreement. How can we be sure that corrupt individuals have not been involved in the deal? Let even assume that the concession is for 36 years. Does that mean that the govt cannot build any domestic airport in Lagos for a period of 36 years because of Bi-Courtney? Come on! So where are the public benefits? How does the govt intend to encourage competition? How can a company hold the monopoly on where local flights depart or arrive for a period of 36 years? Whoever must have advised the government to accept such a clause needs to have his head examined by a Psychiatrist.
In any public-private contractual arrangement, there is always a risk of corruption. For agreement like these and many other where large of amount of money or lengthy concession period are involved, such risk must be well managed. The govt has however failed to run open and transparent processes, when it comes to PPP deals. PPP agreements are signed without any regard for competitive tendering or proper tender evaluation process. To put it bluntly, our PPP framework is a sham. The govt does not seek input from third parties before entering into such contracts. Legislators do not hold the executive accountable on these agreements. Most of the agreement offers little or no public benefits. Most of the PPP agreement undermine competition and lack consumer protection provisions. The agreements are only successful at mortgaging our future away to few privileged individuals.
In my opinion, all PPP agreements have so far failed. The govt needs to go back to the drawing board. In fact, we need a moratorium of PPP agreement until the govt introduces a ‘consumer and competition’ legislation. Some may argue that PPP has helped delivered some key infrastructure like the new Airport Terminal, I will note that the devil is in the detail. By the time people wake up to the reality of this daylight robbery, it might be too late.
Anyway, my advice is that in cases where a contract or concession was inappropriately awarded, members of the public needs to push for provisions that will allow for contract termination.
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.
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.
Thursday, January 15, 2009
Lagos Rail Mass Transit Project
Lagos with an estimated population of 17million or 9million (whichever you believe!) is one of the so-called ‘megacities’ without a mass transit system. The population of state has grown significantly over the last few decades mainly due to urban migration. The high concentration of manufacturing, commercial and financial industries has continued to fuel the growth and traffic congestion in the city.
The Lagos Metropolitan Area Transport Authority as part of its effort to tackle congestion recently developed a Rail Master Plan, which proposes an extensive network of rail lines connecting most parts of Lagos metropolitan area. The urban rail system is proposed to be implemented through a Public Private Partnership scheme (PPP).
It is heartening to see for the first time – since the civilian administration of Alhaji Lateef Kayode Jakande – we will see a State Administrator with a vision of how to deal with the menace of traffic congestion in Lagos State. Much commendation should also be given to the Ex-Governor Asiwaju Bola Tinubu for setting up the necessary institutional framework that is currently driving the state's transport agenda.
Whilst I fully support the principle of delivering of transport infrastructure through Public –Private Partnerships, however if not properly negotiated it can leave the government out of pocket and not serve any public good.
PPP describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. PPP has been used as a mechanism to deliver major transport infrastructure (toll roads, light rail etc) in most parts of the western world. It is based on the principle of transferring investment risk to the private sector, and also on the notion that delivery and operation of infrastructure and services can be undertaken 'cheaper and smarter' by the private sector, thus providing cost savings to the Government coffers. However, this is not always the case, as there are examples of 'how not to undertake a PPP'.
With specific regards to the Lagos rail project, the private sector is expected to Design and Build the infrastructure which will be financed by the State government. The operation of the system is also expected to undertaken by the private sector (under a 25 year concession). In return, the private sector operator will be expected to provide rolling stock, maintenance depot, and control systems.
One major concern with the Lagos Rail Mass Transit PPP is the liberty that will be given to the private sector operator to set fares and collect revenue. If the private operator is given absolute control over pricing, this could impact on passengers negatively and consequently affect patronage. It is plausible to assume that the private sector will be keen to recover its operating cost, repay bank loans and also make a return on their investment. It is common knowledge that construction of rail system is an expensive expenditure and the maintenance cost (rolling stock, staff, etc) can be significant. This is the fundamental difference between investment in road and rail infrastructure. If the private sector operator is allowed to charge passengers the real cost of operating the service plus their profit margin, it is very likely that the fares will be set at a cost that will be prohibitive to commuters. This begs the question of - ' who will use the service'. I'm sure it's not the government's agenda to provide high-quality public transport system only for the 'middle class'. There is no where in the world where passenger rail service operates at a profit – that is cover its real cost. Even in a densely populated city like Hong Kong with a populaton of 7 million and an efficient mass rapid transit system - which carries about 3 million passengers a day. The Hong Kong transport authority makes more money from leasing air rights over train station than it collects from the fare box. Also as an example, the cost recovery on public transport in the state of Queensland, Australia is just 30%.
Public transport is a social utility that is needed to provide access to services, jobs etc and help encourage social inclusion. There are social equity issues that need to be considered in planning of transport systems. Provision of public transport cannot be allowed to operate in a totally deregulated environment. This is the reason why Government around the world subsidize public transport provision. While one could argue that public transport subsidy defeats the purpose of a PPP, I tend to believe that it is in the best interest of the Government to subsidise the rail service when it becomes operational. The subsidies should however be linked to service level agreement and minimum service standards that will be expected from the operator.
On the other hand, if the fare levels are set too low without Govt top-up, the operator will be running the services at a loss. This could result in the private operator going into administration. If this happens, Govt will either have to 'bail-out' the company or take over the operation of the service. This could come at a significant cost to the State.
The delivery and operation of the proposed urban rail network can result in a situation, where different companies will be operating rail services on different parts of the network (that is, Blue Line – operator A, Red Line – operator B). This then brings me to the second issue of 'integrated ticketing' across the rail network. I will note that this also has an implication of fare pricing. The principle of having an integrated ticketing system is great, as this provides seamless travel journey. In fact, the integration should not be limited to rail; LAMATA should be looking at integrating the BRT Lite service as well. Having said that, giving operators total control on fare pricing and expecting integrated service across the network flies in the face of reality, and can result in price fixing by train operating companies. For passengers to enjoy the benefit of having an integrated ticketing system, LAMATA will need to have some control pricing structure.
Lastly, the issue of track maintenance seems unclear from the project briefing documents. Considering that part of the new rail line will be utilising the existing Nigeria Railways Corporation rail corridor, then one will assume that the NRC will be responsible for maintaining its own tracks. However, will the private operator be responsible for maintaining the new tracks or will it be the Govt through NRC?
Anyway, I believe the authorities involved in the negotiation of PPP contract will be brave enough to make sure that the Govt is getting 'value for money' from the PPP. Also, the social, economic, and safety interest of commuters should be central to the contract negotiations.
The Lagos Metropolitan Area Transport Authority as part of its effort to tackle congestion recently developed a Rail Master Plan, which proposes an extensive network of rail lines connecting most parts of Lagos metropolitan area. The urban rail system is proposed to be implemented through a Public Private Partnership scheme (PPP).
It is heartening to see for the first time – since the civilian administration of Alhaji Lateef Kayode Jakande – we will see a State Administrator with a vision of how to deal with the menace of traffic congestion in Lagos State. Much commendation should also be given to the Ex-Governor Asiwaju Bola Tinubu for setting up the necessary institutional framework that is currently driving the state's transport agenda.
Whilst I fully support the principle of delivering of transport infrastructure through Public –Private Partnerships, however if not properly negotiated it can leave the government out of pocket and not serve any public good.
PPP describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. PPP has been used as a mechanism to deliver major transport infrastructure (toll roads, light rail etc) in most parts of the western world. It is based on the principle of transferring investment risk to the private sector, and also on the notion that delivery and operation of infrastructure and services can be undertaken 'cheaper and smarter' by the private sector, thus providing cost savings to the Government coffers. However, this is not always the case, as there are examples of 'how not to undertake a PPP'.
With specific regards to the Lagos rail project, the private sector is expected to Design and Build the infrastructure which will be financed by the State government. The operation of the system is also expected to undertaken by the private sector (under a 25 year concession). In return, the private sector operator will be expected to provide rolling stock, maintenance depot, and control systems.
One major concern with the Lagos Rail Mass Transit PPP is the liberty that will be given to the private sector operator to set fares and collect revenue. If the private operator is given absolute control over pricing, this could impact on passengers negatively and consequently affect patronage. It is plausible to assume that the private sector will be keen to recover its operating cost, repay bank loans and also make a return on their investment. It is common knowledge that construction of rail system is an expensive expenditure and the maintenance cost (rolling stock, staff, etc) can be significant. This is the fundamental difference between investment in road and rail infrastructure. If the private sector operator is allowed to charge passengers the real cost of operating the service plus their profit margin, it is very likely that the fares will be set at a cost that will be prohibitive to commuters. This begs the question of - ' who will use the service'. I'm sure it's not the government's agenda to provide high-quality public transport system only for the 'middle class'. There is no where in the world where passenger rail service operates at a profit – that is cover its real cost. Even in a densely populated city like Hong Kong with a populaton of 7 million and an efficient mass rapid transit system - which carries about 3 million passengers a day. The Hong Kong transport authority makes more money from leasing air rights over train station than it collects from the fare box. Also as an example, the cost recovery on public transport in the state of Queensland, Australia is just 30%.
Public transport is a social utility that is needed to provide access to services, jobs etc and help encourage social inclusion. There are social equity issues that need to be considered in planning of transport systems. Provision of public transport cannot be allowed to operate in a totally deregulated environment. This is the reason why Government around the world subsidize public transport provision. While one could argue that public transport subsidy defeats the purpose of a PPP, I tend to believe that it is in the best interest of the Government to subsidise the rail service when it becomes operational. The subsidies should however be linked to service level agreement and minimum service standards that will be expected from the operator.
On the other hand, if the fare levels are set too low without Govt top-up, the operator will be running the services at a loss. This could result in the private operator going into administration. If this happens, Govt will either have to 'bail-out' the company or take over the operation of the service. This could come at a significant cost to the State.
The delivery and operation of the proposed urban rail network can result in a situation, where different companies will be operating rail services on different parts of the network (that is, Blue Line – operator A, Red Line – operator B). This then brings me to the second issue of 'integrated ticketing' across the rail network. I will note that this also has an implication of fare pricing. The principle of having an integrated ticketing system is great, as this provides seamless travel journey. In fact, the integration should not be limited to rail; LAMATA should be looking at integrating the BRT Lite service as well. Having said that, giving operators total control on fare pricing and expecting integrated service across the network flies in the face of reality, and can result in price fixing by train operating companies. For passengers to enjoy the benefit of having an integrated ticketing system, LAMATA will need to have some control pricing structure.
Lastly, the issue of track maintenance seems unclear from the project briefing documents. Considering that part of the new rail line will be utilising the existing Nigeria Railways Corporation rail corridor, then one will assume that the NRC will be responsible for maintaining its own tracks. However, will the private operator be responsible for maintaining the new tracks or will it be the Govt through NRC?
Anyway, I believe the authorities involved in the negotiation of PPP contract will be brave enough to make sure that the Govt is getting 'value for money' from the PPP. Also, the social, economic, and safety interest of commuters should be central to the contract negotiations.
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