Challenges in Meeting Public Sector Financing Needs – Financing Key PPP Projects.

Challenges in Meeting Public Sector Financing Needs – Financing Key PPP Projects. A Paper Delivered at the 2008 Perchstone & Graeys Annual Lecture by Jide Ogundana(Austen-Peters & Co) on Friday 25 April 2008

PPP DEFINED (1): • Public-Private Partnership is a long-term collaboration between a public sector authority and the private sector – a Marriage of sorts! • The collaboration creates a new approach to risk management in projects by combining the skills and expertise of each partner in the delivery of public goods and services.

PPP DEFINED (2): • PPP is usually executed through such schemes like: • “BOOT” – Build, Operate, Own and Transfer; • “DFBT” – Design, Finance, Build and Transfer; • “DFBO” – Design, Finance, Build and Operate etc. • PPP is a relatively new global trend - definition is subject to varying interpretations by different people.

PPP DEFINED (3): • PPP is novel in Nigeria. • Concession is the more familiar form of PPP in Nigeria - the Public authority grants a Private investor the concession to manage a public service such as the ports, airports or roads.

FINANCING PPPS… • Project Finance is employed in financing key PPP projects such as: • Infrastructure; • Transportation; • Power Projects; and • Natural Resources. • State Procurements – Schools, Hospitals, Prisons…

FINANCING PPPS…2 • XTERISTICS OF PROJECT FINANCE: • Admixture of Equity & Debt financing goes into a project – usually, there should be more equity than debt; • Long term collaboration – 15-20 years. • Financing based on project cash flows; • Secure source of revenues and proven technology to be identified at the conception stage; • A game of allocation of risks.

FINANCING PPPS (3)… • PREREQUISITES FOR PROJECT FINANCE: • Large Capital Investment; • Secure source(s) of revenues and proven technology; • Controllable capital and operating costs; • Sourcing of finance locally for local projects.

1. SPONSORS: initiate the projects & provide Equity Funding and support for the project. Appoint core advisors for the project. Involved for the entirety of the project 2. Other Equity Providers: Provides high-risk funding for the project; Expects long-term pay back PROJECT FINANCE PLAYERS…

3. SENIOR DEBT PROVIDERS: Provide most of the funding; Negotiate core contracts; Interests expire when the debt is paid off. 4. JUNIOR DEBT PROVIDERS: Subordinated to senior debt; High risk/High returns; Often linked to the senior lenders. PROJECT FINANCE PLAYERS (2)

5. PURCHASERS: Commit to purchase of the products/services. Trade for long term; Interest starts only upon completion. 6. OPERATORS: Operate the project; Renewable Operation contracts; Contract controlled through a pain-pleasure mechanism – incentives & penalties for performance. PROJECT FINANCE PLAYERS (3)…

CONCLUSION ON PPPS… • There is a natural attraction to PPP by governments because of the prospect of delivering public goods and services to the people, without having to fund or supervise the projects – the politician’s delight! • Quixotic – why is the landscape not awash with PPPs?

CHALLENGES…(1) • CORRUPTION: • The fear of being compromised is the beginning of wisdom for financial institutions. (Boys on one side, girls on the other side of the ballroom – an unlikely relationship prospect unless the gap is bridged). • A global problem as a result of different working ethos in the Public and Private sectors.

CHALLENGES…(2) • POLITICAL WILL: • Government needs to articulate, through its policies and constant public discourse, a clear vision on PPP – its perception and what it hopes to achieve by adopting PPP. • Long term commitment by the Government to PPP would go a long way in boosting the confidence of the financial institutions – the Private Sector. • Collapse of the Local Government system in Nigeria through emasculation by the State Governments – Local Governments in other parts of the world provide the much needed collaboration with the Private Sector.

CHALLENGES…(3) • LEGAL & INSTITUTIONAL FRAMEWORK: • Legality of PPP in Nigeria: The primary consideration for the operation of PPP in any entity is the legality of the collaboration; there ought to be a law permitting a public authority to delegate its constitutional role of providing particular public services. • The Infrastructure Concession Regulatory Commission (Establishment, Etc) [ICRC] Act 2005 is the principal legislation that governs concessions in Nigeria. • The Act relates only to the Federal Government through any of its ministries, agencies, corporations or bodies involved in the financing, construction, operation or maintenance of any infrastructure.

CHALLENGES…(4) • LEGAL & INSTITUTIONAL FRAMEWORK cont… • Only Lagos State has a semblance of a law on PPP in Nigeria [Lagos State Roads, Bridges and Highway Infrastructure (Private Sector Participation) Development Board Law]– this has limitations, as it relates to road infrastructure alone. • Likelihood of policy and law reversal on PPP where and when the laws are in place, which could lead to a creeping expropriation.

Challenges… (5) • POLITICAL RISK: All these challenges amount to political risk, which ordinarily would be controlled by taking out of political risk insurance by the Development Banks involved in the project. Insurance premium is based on the host country rating.

CONCLUSION • PPP is not a short-cut to development; it calls for serious consideration and commitment from the Government to be able to woo the private sector into any form of lasting and meaningful collaboration in Nigeria…

END… THANK YOU FOR YOUR KIND ATTENTION!

Challenges in Meeting Public Sector Financing Needs – Financing Key PPP Projects.