PUBLIC PRIVATE PARTNERSHIPS: AN APPROPRIATE ALTERNATIVE FOR A SUSTAINABLE WATER SUPPLY IN NIGERIA

By

Chukwuma Katchy PhD, MBA, M.IoD, FNIM

Certified PPP Specialist

chukwumakatchy@hotmail.com

ABSTRACT

In the face of serious budgetary constraints, various governments in Nigeria are increasingly making use of Public Private Partnerships (PPPs) to provide services to their citizens. It is suggested that providers of water services key into this new concept of service provision i.e. PPP. Thus rather than seeking government contracts to be paid from budgetary provisions, water services’ providers should seek for partnerships with government to provide water services and recover their investments from output-based payments.

This Paper covers the following areas, the history of Private Sector Participation (PSP), PPP & Privatization, definitions of PSP, PPP, Privatization, Comparison between PPP & Traditional Procurement, fundamental forms of PPP and requirements for a successful PPPs.

1.1 INTRODUCTION

Infrastructure is a large & relatively complex part of an economy. Affordable power, good schools, hospitals, potable water supply, good communication & road network, affordable & effective means of transportation are vital to a country’s economic growth and improved quality of life of its citizens. Therefore, in the quest by governments to fulfill their service delivery mandate, they strive to regularly make significant investments. In time past, governments (Public Sector)

were the sole providers of these infrastructures. However, in modern times, this scenario has changed. Today, both the Public Sector & Private Sector are deeply involved in the provision of infrastructure.

This involvement of the private sector in the provision of infrastructure is referred to as Private Sector Participation (PSP).

Governments allow Private Sector Participation mainly in two ways,

1. Privatization &
2. Public-Private Partnership

Privatization is the first form of PSP used by governments

2.1. PRIVATIZATION

Privatization is the changing of an enterprise from state to private ownership.

Note that if the control only is changed but the ownership remains with the public sector then it is generally a PPP.

2.1.1  Origin of PSP(Privatization)

In developed countries such as US, UK, there were macroeconomic dislocations in the 1970s & 1980s. Investigations disclosed that the problem was caused by the existence of too many State Owned Enterprises (SOEs). In order to reduce the number of SOE, the governments decided to privatize them (SOE). This is referred to as the first Wave of PSP.

In1980s privatization gained worldwide momentum. Thanks to Margaret Thatcher  in UK, and  Ronald Reagan in US.

However, at the same time in the 1980s, in Africa, Latin America etc there was debt crisis. Countries in these continents couldn’t meet their debt repayment obligations. They were compelled to meet their creditors namely, London Club (private lenders) & Paris Club (govt. lenders) to reschedule their debts. Investigation showed that the debt crisis was caused chiefly by too many SOEs with bloated over-head costs. For example, in Nigeria it was discovered that while the SOEs had a total of 50,000 employees, the Board members were 5,000 i.e. one Board member for every 10 employees!

Just as it happened in US & UK it was decided that the solution was privatization. Thus, Nigeria and other African & Latin American countries joined in the first wave of PSP.

2.1.2 First Build Operate & Transfer (BOT)

In 1984, the Bechtel Group, a USA private EPC  made an unsolicited proposal to the Government of Turkey (GOT) to build a power generation project in Ismir. Although GOT appreciated the need for the power plant, it regretted its inability to finance the project due to lack of funds. Bechtel then suggested a novel alternative i.e. that it can finance the project and recover its investment from the sale of the power generated.

Luckily, the Prime minister of Turkey Mr. Turgat Ozal, being an ex-World Bank economist understood what Bechtel was saying. He then recommended the new form of proposal to the Parliament who gave its approval in principle. Betchtel and the GOT continued with the process. Unfortunately, this first proposed BOT didn’t materialize. It never even got to the contract signing stage let alone financial closure. All the same the term “BOT” and its concept & process became known to the world. This is the origin of modern BOT and consequently modern PPP. However, note that the Suez Canal was constructed through BOT, and that even in medieval times, travelers obtained gold and iron mining rights form kings and recovered their investment from the sales of the mines’ products.

2.3 PPP in European Union

Consequently, from late 80s, developed countries commenced using PPP to provide infrastructures in the economic sector.

   In 1992, John Major UK Prime Minister introduced PPP in the UK and christened it private finance initiative(PFI).  From 1990 to 2009 nearly 1,400 PPP deals were signed in the European Union, representing a capital value of approximately €260 billion. The use of PPP to provide infrastructure in the economic sector is the second wave of PSP.

2.4 Three waves of PSP

The three waves of PSP are

1. 1^st Wave – Privatization
2. 2^nd Wave – PPP in the economic sector
3. 3^rd Wave – PPP in the social sector

Nigeria participated in the 1^st Wave, and is just commencing to participate in the 2^nd Wave. Nigeria is not participating in the 3^rd Wave, although half hearted efforts are being made in the health sector to that effect.

2.5 Why PPP gained momentum

1. Debt crises & lack of funds for public investment

As earlier stated, the debt crisis of the 80s forced countries to look towards PSP & at the same period Bechtel Coy introduced modern PPP to the world.

• Emerging Market Growth & the Global Construction & Equipment Market

New markets emerged in Asia, Africa and Latin America and at the same time Companies that were into construction or equipment manufacturing being in fierce competition were ready to provide construction services and the required equipment on credit.

• Linking infrastructure with international competitiveness

The state of a country’s infrastructure became a very vital factor that was considered by International companies who were considering which countries to invest in.  

• The PPP Demonstration Effect

Countries, that saw other countries successfully using ‘other people’s money’ (OPM) to provide infrastructure were encouraged to do the same.

3.0 WHAT IS A PUBLIC PRIVATE PARTNERSHIP (PPP)?

There is no legally accepted definition of PPP world-wide. In various countries PPP is known by various names such as,

1. Private Participation in Infrastructure (PPI) by the World Bank
2. Private Provision of Infrastructure (PPI) by the World Bank
3. Private Finance Initiative (PFI) in UK
4. Private Provision of Services (PPS) in Mexico
5. Concession in Nigeria. The Act that governs PPPs in Nigeria is the Infrastructure Concession Regulatory Commission Act. However, the Act covers only Concessions. It doesn’t cover other forms of PPP.
6. Joint Venture in Indonesia up-to 2005.
7. Institute of Public Private Partnership defines a PPP as “ a form of legally enforceable contract between the public sector and the private sector, which requires new investments by the private contractor (money, or technology, or expertise/time, or reputation, etc.), which transfers key risks to the private sector (design, construction, operation, etc), in which payments are made in exchange for performance, for the purpose of delivering a service traditionally provided by the public sector

Note that in some countries the definition of PPP includes privatization.

3.2 Forms of Procurement or Service Delivery

Today, in the world, there are generally five forms of procurement namely,

1. Conventional or Traditional procurement
2. Contractor
3. Direct construction/shopping
4. Privatization
5. Donation (PPPP)
6. Grant
7. PPP procurement
8. PPPP – Public Private Philanthropy Partnership

3.3 Key elements of a PPP

From the definition of a PPP by ip3, the following five elements can be distilled,

• Public sector and the private sector are involved. The Private sector usually consists of an Investor & a Lender (Financier).
• Investments are made by the private sector
• Key risks are allocated to the private sector
• payments are made only for services delivered
• The services which are the subject of a PPP transaction are services traditionally provided by the public sector

3.4 What PPP is not

Not every transaction between a public sector and a private sector is a PPP procurement. None of the following is a PPP transaction:

• a simple outsourcing of functions where substantial financial, technical and operational risks are still retained by the public institution.
• a donation by a private party for a public good.  A Director in ip3 David Baxter refers to a donation as a PPPP i.e. Public Private Philanthropy Partnership.
• a privatization or a divestiture
• a ‘commercialization’

3.5 PPP in a nut shell

In a nutshell structuring a PPP project is the act of transforming a government’s desire to provide an infrastructure into an investment opportunity that is attractive to the private sector.

From this, three elements can be distilled as follows,

• Government must desire the infrastructure
• A PPP must be structured as an Investment opportunity
• The investment opportunity must be attractive to the private sector
• Market Testing or Market sounding (Investor’s Survey, interview) is a method used to confirm that investors are interested in the PPP project.

Note that an Interview should not be designed to tailor the project to the taste of the interviewee or to serve as a request for proposal.

3.6 Can all projects be procured through PPP?

Not all projects can be procured through PPP. For a project to be successfully procured using the PPP procurement, the following conditions must exist,

1. Sources & levels of revenue must be clear, predictable and profitable.
2. Output must be capable of being clearly defined usually quantitatively
3. Tariff must be affordable to payers
4. Risks must be within Risk Tolerance Thresh-hold
   1. CONVENTIONAL vs PPP PROCUREMENTS

There are many differences between a Conventional Procurement and a PPP procurement namely,

1. A Conventional Procurement is Input based but a PPP procurement is Output based
2. A Conventional Procurement has a single Contract Agreement but a PPP procurement has web of Contract Agreements woven around a main Agreement.
3. In a Conventional Procurement  Technical experts e.g. Engineers, Architects are most important but in a PPP procurement, Economic, financial, legal experts are most important
4. Conventional Procurement has a short term contract duration but a PPP procurement has a Long term contract duration
5. In Conventional Procurement Unsolicited proposals are rare but in PPP procurement  Unsolicited proposals are common
6. In Conventional Procurement Public fund is at risk but in PPP procurement private fund is at risk.
7. Generally in a Conventional Procurement, project is implemented immediately after the Contract Agreement is signed between public & private entities but generally in a PPP procurement, project implementation commences after Financial Closure, i.e. when the private entity has fulfilled all conditions precedent for the first tranche of fund to be released.

4.1 Why create a PPP UNIT?

• There are many differences between Traditional procurement & PPP
• Critical solutions require building new institutions or organisational restructuring. The Min. of Women Affairs, Niger Delta, etc., the Nigeria Police new outfits of  Border Patrol Section, Anti-Terrorist Squad are examples of such.
• Demonstration effect – Philippines, Malaysia, and South Africa which are countries with successful PPP projects created separate PPP units worthy of emulation.

4.2 Advantages of PPP

1. It taps into private funds and thus frees up public funds for use in other areas such as security and welfare.
2. It enables a government to embark on more projects at the same time rather than waiting till the government has all the money.
3. A PPP project is usually completed within budget and schedule
4. It improves the efficiency of service delivery
5. It provides services of higher quality
6. It improves accountability
7. it ensures sustainability of projects

4.3 Disadvantages of PPP

1. A PPP project takes a longer time to structure and execute. So it is not advisable to use PPP for a project that is urgently required.
2. In the short-run, it may be costlier to procure a project through PPP than through Conventional procurement namely because of provision of costs for time overrun and  Independent Engineer/Expert.                        

5.0 FUNDAMENTAL FORMS OF PPP

Generally, there are six fundamental forms of PPP namely, Service Contract, Management Contract, Lease/Affermage/Franchise, Joint Ventures/Partnerships, Concessions/BOT and Licensing/BOO

Note that Privatization is not a PPP.

5.1 Service Contract

This is also referred to as ‘outsourcing’ or as ‘contracting out’. In a Service Contract, a private sector company provides a service to a public enterprise but does not finance any capital investment. The objective of a Service Contract is to reduce a firm’s operating costs. Outsourcing is usually targeted at non-core functions. Typical duration 1 – 2yrs

• Management Contract.  In a Management Contract, a private organization takes over the entire responsibility for running the public entity. The private organization is at liberty to take day-to-day management decisions. The objective of a Management Contract is to improve the internal management and operations of a public entity. Typical duration 3 – 5yrs

5.3 Lease/Affermage/Franchise. Under a lease contract, a private entity takes over the responsibility for the operation and maintenance of the facilities leased to it. The private entity pays a lease fee to the government, but in affermage, it is the government that pays a fee to the private entity.

The objective of a lease contract is, while attracting limited financing from the private entity, to improve the operating performance and thereby improve the quality of service of a public enterprise. Typical duration 5 – 10yrs

5.4 Joint Ventures/Partnerships. In a Joint venture or a Joint partnership PPP, a private entity and a government entity share the risks, responsibilities and rewards of the project. In addition, the expenditures are shared on pro-rata basis as enshrined in the JVC agreement. No typical duration

• Concession/BOT. In a concession the private entity finances, designs, builds, operates and maintains the facilities used for providing a service. The objective of a Concession is to, while attracting limitless financing from a private operator, improve the operating performance and quality of output of a public enterprise. Typical duration 10 – 30yrs

5.6 Licensing/BOO. Licensing and Build Own Operate (BOO) are similar in that in both, the government transfers the responsibilities for operations, maintenance and capital investment to the private sector.  The GSM revolution in Nigeria is an example of Licensing/BOO. The private entity owns the assets and doesn’t transfer them to the government. No duration

6.0 DIVESTITURE/PRIVATIZATION

In a PPP, both the ownership of the facility and the responsibility for service provision still remain with government. Only the operation or management is transferred to a private entity. But in Privatization the infrastructure for providing the service is sold off to the private sector, and with it, both the ownership and the responsibility for service provision. No duration

7.0 9 KEYS TO SUCCESSFUL PPPs – PPROBESTT

1. Public Sector Champion:-Public Sector should identify with PPP advocates outside the project team who will champion the case and help minimize misperceptions
2. Pick Your Partner Carefully: – Public Sector selection of Private Sector partners should be based on the “best value” principle to avoid failure
3. Revenue Stream: -Both parties should identify clear and predictable revenue sources with acceptable rate of return and growth
4. Organized Structure: – Public and Private Sectors should establish dedicated teams to handle PPP projects.  
5. Business Plan:-Both Parties must insist on a Business Plan and detailed contract so as to increase the probability of success.  
6. Environment: – Procurement environment should be transparent, fair and competitive.
7. Stakeholder Support: – Public Sector should communicate with stakeholders transparently to minimize resistance. Stakeholder support is usually obtained through Stakeholders’ Management and Public Participation.
8. Transaction Adviser. Governments embarking on or introducing PPP need not, and should not do so unaided. Transaction advisers are individuals or firms with expertise in the field of PPP who are hired to act as third party advisers to government throughout the process of PPP design, procurement, negotiation, and contract award. Depending on the size and complexity of the PPP project, the transaction advisers may be an individual with broad experience across a range of PPPs, or a firm or consortium of firms that assemble a multidisciplinary team of individuals with expertise in such fields as economics, law, engineering, human resources, communications, accounting, financial management, and more.
9. Top level political commitment.

8.0 CONCLUSION. A properly designed PPP can yield positive results for government, end users and the private partner. However, many PPPs have been poorly designed with the attendant consequence of failure and this experience has in some cases eroded support for the concept of Public Private Partnership. With a better understanding of what PPPs are, it is expected that the private sector will be more emboldened and equipped to undertake such projects. Therefore, rather than seeking government contracts to be paid from budgetary provisions, water services’ providers should seek for partnerships with governments’ Ministries, Departments, and Agencies to provide water services to communities,  police barracks, schools, hospitals etc. and recover their investments from output-based payments.