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 road tolls. Show all posts
Showing posts with label road tolls. Show all posts
Monday, March 29, 2010
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.
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