Diagnosis

Infrastructure Deficit

Infrastructure Deficit

What is Public Private Partnership?

―A public-private partnership (PPP) is a long-term contract

between a private party and a government entity, for

providing a public asset or service, in which the private party

bears significant risk and management responsibility, and

remuneration is linked to performance.‖

Source - PPP Knowledge Lab

The Need…

PPP in Nigeria’s Power Sector

• Governments need to enter into public-private partnerships

(PPPs) to increase the availability, quality, and resilience of

infrastructure in the power sector, while sharing the risk

involved in providing them with the private sector.

• Additional funding for infrastructure

• Improved planning, coordination and power projects

• Regular maintenance of power infrastructures

• Better value for money

• Ensure transparency

• Reduce construction time and costs

• Improve service delivery

Well structured PPP can help achieve

PPPs: The better alternative

Source - Public-Private Partnerships Policy and Practice: A reference guide (Version 2.0)

PPP Investment in the Power Sector

The privatization of the generation and distribution assets in

Nigeria‘s Power & Energy sector narrowed the 3 possible area of

PPP investments to:

• Fuel Supply for Power production

• Power generation and

• Power transmission

Note:

Power distribution is not a place for PPP investment.

Because Government continues to hold a percentage of distribution assets

despite the privatization program saw the sale of all the gas fired plants in

the country, the concessioning of all the hydro-power plants, and the sale

of distribution infrastructure such that only the private owners are

expected to invest in them.

Core Areas of PPP Investments

• Gas production and transport - Many power plants being

developed in Nigeria that do not have visibility for gas supply. Yet we have

fields with associated and non associated gas which can be utilized for

this purpose.

• Trunk pipeline for transportation of gas - to various parts

of the nation for power generation as well as other industrial processes.

• Hydros-power plants

• Coal plants

• Transmission Infrastructure - Building the network especially at

higher tension, including a super grid network for both intra (internal)

and inter (between nations).

Other areas include: Investments in large maintenance workshops,

training facilities etc. (Private sector can do much better on their own provided such

projects are financially sustainable).

FINANCING the PPP Investments

• Equity provided by the project‘s company shareholders

• Debt provided by emerging economies such as China through EXIM

bank

• Government loans or Grant Finance

• Bonds

• Development Finance Institution e.g African

Development Bank (AFDB), etc.

Finance Structure

Non- Recourse Financing • lenders can be paid only from the project company‘s revenues,

without recourse to the equity investors.

Adapted Non- Recourse Financing • usually by smaller PPPs; used to achieve greater contractual

flexibility, or lower the financing cost.

INVESTOR PARTICIPATION IN THE PROJECTS

The government as well as the private sector proponent can take certain

steps to enable projects attract adequate financing:-

• Proper Project Appraisal - emphasis on identified public

needs that will provide the requisite cash-flows from which private sector

investment will be recouped

• Government Intervention - providing support (guarantee

continuity of project – which assures investors; raising bonds for projects)

• Viability Gap Fund - a sovereign grant to close the commercial

gap on a PPP infrastructure development project usually necessary where

the cost of infrastructure financing is so high that the revenue stream

therefrom may be insufficient to yield sufficient returns

• Excellent Legal Framework - risk allocation and mitigation

strategies, institutional roles and responsibility.

PRIVATE SECTOR MOTIVATION for the projects

• Large and lucrative market - for infrastructure finance

from a vibrant population yearning to leverage on better

infrastructure.

• A considerable number of projects with varying risks

to choose from.

• International investors see the growing power sector

needs in Nigeria as a unique opportunity to invest long

term capital.

• Banks preference to finance stable long-term

infrastructure development projects.

RISK IDENTIFICATION on the PPPs projects

• Design, construction and commissioning: risk of construction

delays construction, cost overruns, or poor design or construction quality

• Operation: the risk of interruption in service or asset availability, or that

costs are higher than expected

• Demand, and other commercial risk: risk that demand for the

service is not as predicted or revenue collection

• Legal, Regulatory or political: risk that laws or regulations or

political winds will change that affect the project

• Default: risk that the private party is not financially or technically

capable of implementing the project

• Economic or financial: risk of changes in interest rates, exchange

rates, or inflation

• Force Majeure: risk from natural disasters, war or civil disturbance

• Asset value: risk that the value of the assets at the end of the contract is

not as expected.

The Risk register includes:

ALLOCATING RISK on the PPPs projects

2 main goals of Risk Allocation: • To create incentives for the parties to manage risk well—and thereby

improve project benefits or reduce costs.

• To reduce the overall cost of project risk by ‗insuring‘ parties against

risks they are not happy to bear

The Risk Allocation Principle:

Allocation is based whoever can manage it best.

“management” is defined as: • Best able to control the likelihood of the risk occurring

• Best able to control the impact of the risk on project outcomes, by

assessing and anticipating a risk well and responding to it.

• Able to absorb the risk at lowest cost, if the likelihood and impact of

risks cannot be controlled.

(To achieve better value for money)

Proposed Risk Matrix for PPPs projects in

the Power Sector Nigeria

RISK Private Partner Public/Government

Construction ●

Operation ●

Commercial Risk ●

Legal/Regulatory ●

Default ●

Economic ●

Asset Value ●

Force Majure ● ●

Note: This risk matrix is my proposition based on the information available having considered successful

completed PPP projects in Nigeria and other sub-saharan African countries.

The Bidding Process for the PPP

The bid evaluation should involve a two-step process to

ensure value for money considering Price, Quality,

Risk & Whole Life Cost

• Bidders must satisfy certain minimum threshold requirements

in six areas: Environment, Land, Commercial and Legal,

Economic Development, Financial, and Technical.

• Bids that satisfied the threshold requirements can then proceed

to the second step of evaluation, where bid prices can count for

70 percent of the total score, with the remaining 30 percent of the

score given to a composite score covering job creation, local

content, ownership, management control, preferential

procurement, enterprise development and socioeconomic

development.

Institutional Roles of the Public in the PPPs

• Right level of public involvement in the PPP process

and program can make or break the legitimacy of a

PPP program, and directly contribute to good

governance.

• Direct public participation by service users/other

stakeholders in the PPP process helps improve project

design and performance.

• Making PPP projects transparent enables PPP

performance to be a factor in public policy debate,

and in the formation of public opinion on the

government‘s overall performance.

Ensuring a successful PPP in the Power Sector

Economics - Sound economic fundamentals; basic elements of the business case

have to work

- Structure & choose the right partnership that optimizes cost, quality &

service.

Politics - High level political support and commitment by the government

- Building stakeholder support

- Attention to Social & Environmental impacts

- A stable and supportive regulatory environment.

Execution - Using a disciplined approach

- Securing the right mix of global and local experts

- Supporting a transparent and competitive bidding process

- An effective plan for ongoing contract monitoring and review.

3 Basic Ingredients

This artifact does not profess to be anything more than a thought

provoker regarding the delivery of better infrastructure in Nigeria’s

power sector leveraging on Public-Private Partnerships It should

also be pointed out that the thoughts shared in this artifact may

also be applicable outside of the Nigerian context.

South Africa's Renewable Energy PPP program provides a

valuable opportunity to learn how to procure energy projects

quickly and effectively in developing countries. Of course, not all

of the success factors can be easily duplicated, particularly in

Nigeria. Some can be replicated with proxies; others may be

ignored.

Lessons from South Africa : PPPs projects

Email: olaniyandamilola@gmail.com