ABSTRACT

The transformation process of infrastructure development in most countries is often characterized by full government ownership of entities engaged in the provision of services such as water, telecommunications, power, and transportation. Most of these services have cost structures which inherently make them naturally monopolies, the provision of these services has usually been subjected to inefficiencies. These services are usually viewed as entitlements necessary for survival, governments have intervened in their markets from time to time, subjecting these services to moderate, to severe price distortions, with such conditions persisting for long periods of time. Unfortunately, postponing compensating adjustments in the pricing or rationing of these services to avoid political and popular upheaval has usually come at the expense of state-run utilities and firms. Eventually, the financial strains these conditions create in public utilities turn into full-blown and growing fiscal time bombs. When uncompetitive conditions are allowed to persist for long periods of time, the cost to the present and future generations of potentially bailing out the ailing firms constitutes a significant overhang on the national government, which may eventually have to be passed onto taxpayers anyway, and may even undermine efforts at genuine sectorial reforms.

Countries wishing to avoid the increasing fiscal strain of continued public sector provision of infrastructure services are increasingly turning to several modes of privatization, in order to pass on the challenges of infrastructure services provision to parties in better positions to assume the risks involved. Aside, from the desire to cut actual and potential fiscal costs encouraging private sector participation in infrastructure development has been driven in other countries by rapid economic growth, sometimes outpacing the government’s capability to

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provide services exclusively and efficiently. Bureaucratic system and inefficient structures are increasingly being phased out in favor of private operation, ownership or which is perceived to be more efficient. There is a widespread move towards a shift to Public Private Partnership, this is driven by successful private participations in housing, telecommunications, agriculture, transportation and waste management services where Private provisions have increased access and led to quality services. Beginning with the privatization program me in Nigeria in the 1980s and momentum gained since 1999 when the present democratic phase commenced, the trend is to allow Private sector to provide infrastructure. This move is not peculiar to the Federal Government alone but other tiers of Government as well. Most State and Local Government have established Public Private Partnership units in their area of jurisdiction. One of the most recent Public Private Partnership in Nigeria is in the power sector that was recently partially privatized by the federal government in which the Transmission arm is still under the government control while the Generation and Distribution arms have been privatized by the Goodluck Ebele Jonathan administration.

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CHAPTER ONE

1.1 INTRODUCTION

Public Private Partnership is a contractual arrangement which is formed between public and private sector partners which involve the private sector in the development, financing, ownership, and or operation of a public facility or service. In such a partnership, public and private resources are pooled and responsibilities divided so that the partner’s efforts are complementary. The private sector partner usually makes a substantial cash or equity investment in the project and the public sector gains access to new revenue or service delivery capacity, and this arrangement between the public and private sector differ from service contracting.

Public Private Partnerships relate to perceptions and practices affecting public private sector relationships in ensuring national/global health, development and well-being of the society, and the conceptual aspects of such relationships, including the role of the key players in collaborating to make these partnerships successful or otherwise.

Though no single, universally accepted definition for public private partnerships, Public Private Partnership are often termed to mean different things to different people, which can make assessing and comparing international experience in such partnerships difficult. In general, Public Private Partnership refers to form of cooperation between public authorities and the private sector to finance, construct, renovate, manage, operate or maintain an infrastructure or service. At their core, all Public Private Partnership involve some form of risk sharing between the public and private sector to provide the infrastructure or service. The allocation of sizable and, at times significant, elements of risk to the private partner is essential in distinguishing a Public Private Partnership from the more traditional public sector

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model of public service delivery. There are two basic forms of Public Private Partnership: contractual and institutional. Although institutional Public Private Partnership have been quite successful in some circumstances, particularly in countries with well-developed institutional and regulatory capacities, contractual Public Private Partnership are significantly more common, especially in developing economies.

Although there is no universal consensus about the definition of public private partnerships, the following elements typically characterize a Public Private Partnership: The infrastructure or service is funded, in whole or in part, by the private partner. Risks are distributed between the public partner and private partner and are allocated to the party best positioned to manage each individual risk. Public Private Partnership are complex structures, involving multiple parties and relatively high transaction costs. Public Private Partnership is a procurement tool where the focus is payment for the successful delivery of services (the performance risk is transferred to the private partner).

Public Private Partnership is an output-/performance-based arrangement as opposed to the traditional input-based model of public service delivery where the focus is payment for the successful delivery of services. Public Private Partnership typically involve bundled services (i.e., design, construction, maintenance and operation) to increase synergies and discourage low-capital/high operating-cost proposals. In general, Public Private Partnership offer a new and dynamic approach to managing risk in the delivery of infrastructure and services. Although Public Private Partnership is considered a new concept that has gained prominence in the last 20 years, Public Private Partnership have actually been around for hundreds of years, wherever the private sector has been involved in the delivery of traditional public services (i.e., water, roads, rail and electricity).

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In Public Private Partnership arrangements, the private partner is typically compensated through either: User-based payments (i.e., toll roads, airport or port charges) Availability payments from the public authority [i.e., Private Finance Initiatives, Power Purchase Agreements (PPA), Water Purchase Agreements (WPA)] A combination of the above in user-based payment structures, the government or public authority often needs to provide some financial support to the project to mitigate specific risks, such as demand risk, or to ensure that full cost recovery is compatible with affordability criteria and the public’s ability to pay. Government support mechanisms can take many forms, such as contributions, investments, guarantees and subsidies, but they should be carefully designed and implemented to allow for optimal risk allocation between the public and private sectors. When government supports are present, the objective is to increase private capital mobilization per unit of public sector contribution. Availability payments are at the heart of one form of Public Private Partnership, the Private Finance Initiatives model. This system provides capital assets for the provision of public services. Developed in the U.K., this model is used for a large number of infrastructure projects and gives the private sector strong incentives to deliver infrastructure and services on time and within budget. Private Finance Initiative’s simultaneously allow governments and public authorities to spread the cost of public infrastructure projects over several decades. This creates greater budget certainty, while also liberating scarce public resources for other social priorities.

Government Support Mechanisms hosting governments can provide financial support to or reduce the financial risk of a project in many ways. Common forms of government support mechanisms include Cash subsidy. The government or public authority agrees to provide a cash subsidy to a project. It can be a total lump sum or a fixed amount on a per unit basis,

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and payments can be made either in installments or all at once. Payment guarantee: The government agrees to fulfill the obligations of a purchaser (typically a publicly owned enterprise) with respect to the private entity in the case of non-performance by the purchaser. The most common example of this is when a government guarantees the fixed payment of an off-take agreement (e.g., Power Purchase Agreements or Water Purchase Agreements) between a private entity and the publicly owned enterprise.

Debt guarantee: The government secures a private entity’s borrowings by guaranteeing repayment to creditors in case of default.

Revenue guarantee: The government sets a minimum variable income for the private partner typically this income is from customer user fees. This form of guarantee is most common in roads with minimum traffic or revenue set by a government.

1.2 BACKGROUND TO THE STUDY

The evolutionary process of infrastructure development in most developing countries is often characterized by full Government ownership of entities engaged in the provision of services such as water, electricity, telecommunications, power, and transport. Most of these services have cost structures which inherently make them naturally monopolies, the provision of these services has usually been subjected to inefficiencies. These services are usually viewed as entitlements necessary for survival, governments have intervened in their markets from time to time, subjecting these services to moderate, to severe price distortions, with such conditions persisting for long periods of time. Unfortunately, postponing compensating adjustments in the pricing or rationing of these services to avoid political and popular

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upheaval has usually come at the expense of state-run utilities and firms. Eventually, the financial strains these conditions create in public utilities turn into full-blown and growing fiscal time bombs. When uncompetitive conditions are allowed to persist for long periods of time, the cost to the present and future generations of potentially bailing out the ailing firms constitutes a significant overhang on the national government, which may eventually have to be passed onto taxpayers anyway, and may even undermine efforts at genuine sectorial reforms.

Countries wishing to avoid the increasing fiscal strain of continued Public sector provision of infrastructure services are increasingly turning to several modes of privatization, in order to pass on the challenges of infrastructure services provision to parties in better positions to assume the risks involved. Aside, from the desire to cut actual and potential fiscal costs encouraging private sector participation in infrastructure development has been driven in other countries by rapid economic growth, sometimes outpacing the Government’s capability to provide services exclusively and efficiently. Bureaucratic system and inefficient structures are increasingly being phased out in favor of private operation, ownership or which is perceived to be more efficient. There is a widespread move towards a shift to Public Private Partnership this is driven by successful private participations in Telecommunications, Banking and Waste Management Services where private provisions have increased access and led to quality services. Beginning with the privatization program me in Nigeria in the 1980s and momentum gained since 1999 when the present democratic phase commenced, the trend is to allow private sector to provide infrastructure. This move is not peculiar to the federal government alone but other tiers of government as well. Most state and local government have established Public Private Partnership units in their area of jurisdiction.

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Nigeria’s policy on Public Private Partnership is to the effect that it will develop regulatory and monitoring institutions so that the private sector can play a greater role in the provision of infrastructure, whilst ministries and other public authorities will focus on planning and structuring projects. The private sector will be contracted to manage some public services, and to design, build, finance and operate some infrastructure. It is the government’s expectation that private participation in infrastructure development through Public Private Partnership will enhance efficiency, broaden access, and improve the quality of public services. This policy statement sets out the steps that the government will take to ensure that private investment is used, where appropriate to address the infrastructure deficit and improve public services in a sustainable way; and it will ensure that the transfer of responsibility to the private sector follows best international practice and is achieved through open competition [Foundation for Public Private Partnership Nigeria March 2013].

1.3 STATEMENT OF THE PROBLEM

The constant increase in the need for public services and infrastructural facilities in Nigeria and several other countries has given rise to more collaboration between the public and private sector, this has led to a substantial increase in Public Private Relationship.

In Nigeria, we have witness a lot of projects and infrastructural facilities that has been initiated and paused or abandoned by the public sector. In recent times, the delay in the construction of the Lagos-Ibadan Expressway, Kuto-Bagana Bridge, Lekki-Epe, Kuto-Bagana in Nasarawa and Kogi States, Maevis concession projects in all International Airports in Nigeria, the railway system project across the country that was awarded and

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abandoned by the Obasanjo administration, the second Niger Bridge between Onitsha and Asaba and River Niger Bridge in Nupeko, Niger State has been some of the projects that the public sector has been facing problems in completing, this is primarily due to the reason being that the public sector does not having sufficient or absolute financial and other necessary resources and technical know-how to complete the projects and to conveniently provide and cater for the total needs (public goods and services) of the citizens of their country alone.

1.4 RESEARCH QUESTIONS

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