COMPLETION OF AJAOKUTA STEEL COMPLEX THROUGH CONCESSION
Recently, the completion of Ajaokuta Steel Complex (AJC) has been on the national front burner with opinions differing on whether the steel complex should be completed and managed through a concession or through traditional procurement.
As a Public Private Partnership expert, I shall strive to identify the issues of concern raised and address them.
First to fire the salvo was the Honorable Speaker of the House of Representatives, Hon Yakubu Dogara who after an oversight tour of Ajaokuta Steel Complex (AJC) with some members of the House declared, and “if we complete this plant, Nigeria will be better for it.
We are here for Nigeria. So, no more concessions of our assets to strippers. You can’t concession your future. We will not repeat that mistake of concession. Anyone who attempts to outsource will run into problem with us.”
With this statement, the Speaker foreclosed any plan to concession the Plant. The Punch Newspaper aptly captured the Speaker’s stance with the headline “Law makers will resist plans to concession Ajaokuta Steel Plant.”
The Federal Government responded through the Minister of Mines and Steel and said “a machinery is already in place to conduct an open, transparent and credible bidding in line with the extant laws and rules governing privatization in the country and any company, including the one favored by Natasha can participate.
The House of Representatives should support the Federal Executive through its legislative output in discharging its mandate to govern and not use their oversight function to impermissibly intrude upon executive matters to disastrous effect”.
To enable us have a better understanding of this discussion, let us ask ourselves the question “Why do governments embark on PPPs such as concessions?” There are several reasons that governments commonly cite for entering into concession contracts and these can be grouped into four namely, those related to financial reasons, those related to project efficiency and effectiveness, those related to government efficiency and those related to ideological purposes. Government may seek private financing because it is “off balance sheet” of the government or out of pure cash motivation, that is, the government wants to access private resources to tackle a financing shortage for infrastructure development, regardless of whether or not this is considered, in the respective accounting system, as public debt.
The “cash motivation” is usually the main driver in the case of many Emerging Markets and Developing Economies (EMDE) such as Nigeria. Government may be motivated to use concession as an alternative tool to both finance and procure infrastructure because of concessions’ potential long-term gain in terms of efficiency (when applying PPP to the right projects and under the right structure and procurement process)and effectiveness (when using PPPs for achieving the desired outcomes in a time and cost effective way).
For PPPs, the long-term expected cost to the public sector may be lower under a PPP structure than with conventional procurement (and/or the expected benefits may be higher).
This is the case even after considering the higher cost of capital (financial costs) associated with the private financing that forms part of the PPP. For user-pays PPPs, the efficiency might also result in lower charges to users.
The efficiency of government in delivering infrastructure is highly improved because waste and corruption commonly associated with traditional procurement method is highly reduced using PPP route.
The examples of Abuja CCTV project and the award of contract for the removal of invasive plants with fund set aside for Internally Displaced Persons readily come to mind. A government may adopt the PPP method for ideological reasons e.g., to have a lean government.
The advantages of concession are too many to be ignored. PPPs have many advantages over traditional procurement. Firstly, PPPs tap into private funds and thus free up public funds for use in other areas such as security and welfare. Secondly, they enable governments to embark on more projects at the same time rather than waiting till it has all the money.
Thirdly, they are completed within budget and schedule. Fourthly, there are reduced whole life costs because of private sector efficiencies since public sector officials often lack the skills required for efficient management of resources, a problem chiefly caused by lack of incentives for efficiency and sanctions for waste in the public sector.
Fifthly, there is a better incentive to perform because contractual provisions link the private operator’s remuneration with performance and consequently, failure to perform means that payment is not received by the private entity.
Sixthly, additional revenues from other sources outside the project are usually generated as a result of the business acumen possessed by the private sector.
Seventhly, control over the private partner in a PPP coupled with the involvement of users in the planning and operation of service delivery improve accountability and lastly, the presence of many participants and public profile of a PPP lead to greater accountability and transparency.
However, concessions are usually controversial in an immature PPP market such as Nigeria. In such a market PPPs are usually politically controversial with its consequential opposition.
This controversy is caused by four factors namely; people see the immediate burden of paying fees but don’t see the future benefit of sustainable high quality services; there is a change in stakeholder behaviour and shift in existing economic and political power network and losers in the shift prefer that the status quo is maintained; public officials prefer public spending and are opposed to PPPs because they erroneously believe that the use of PPP procurement methods means the end of traditional procurements and finally, the public is always suspicious of the motive of the private sector because of the belief that it is only profit and more profit that drives the private sector.
Having noted the reasons for engaging in concessions contracts and the inherent challenges, we can go back to the raging controversy over the completion of AJSC
The Nigerian Metallurgical Society (NMS) who are the acclaimed experts in the steel industry added its voice to the debate by advising the Federal Government to concession Ajaokuta Steel Company to Tyazh Promo Export (TPE), the Russian company that constructed and installed the plant.
My response to NMS is that a concessionaire is different from a contractor. While a concessionaire, i.e. an investor puts his money into a project and waits to recoup it with profits over a period of time, a contractor executes a project, gets paid and moves over to another project.
A contractor does not wait to be paid over a period of time. The Russian company, TPE is a contractor and not a concessionaire and so the Government cannot concession AJC to TPE. A rights lawyer Natasha Ipoti at the public hearing on AJSC at the House of Assembly was in partial agreement with the advice of the Nigerian Metallurgical Society and equally suggested that the contract for the completion of AJC should be awarded to TPE.
In addition she quoted copiously from the Nigerian Constitution where it was stated that the Government should not allow the concentration of wealth in a few hands. At this juncture may I state that Concession is an alternative method of procurement of infrastructure that attracts private finance.
It is an alternative to traditional procurement method which is the direct award, financing and supervision of a project by the Government. A Government in the quest for service delivery to its citizens executes projects.
The Government may directly award and finance the contract for the execution of the project to a 0contractor(traditional Procurement) or the government may award the contract to an investor(Concessionaire) who finances and awards the contract to a contractor (concession).
Therefore, concession does not imply the exclusion of TPE as a contractor in the completion of AJSC. The concessionaire can on its own award the contract for the completion of AJSC to TYE or can be made to do so by making it a condition (absolute or preferred) for the winning of the concession. Such a provision would be included from the outset in the Requests For Proposals (RFP).
It is not uncommon to include in RFPs preferential procurement requirements of a government, such as the use of local labour and materials. On the issue of fear of concentration of our wealth in a few hands, may I allay that fear by stating that It is not in all cases that a Concessionaire would be a Company comprising private persons only. In some cases and for strategic reasons a government can be an equity investor in a Concession Company, provided that the private sector is the majority shareholder.
Therefore, an Ajaokuta Concession Company (AJCC) can be constituted as a Special Purpose Vehicle (SPV) in which the Federal Government and all State Governments and Federal Capital Territory can be equity investors. A tentative allocation of shares may be as follows; FGN 10%, 36 States and FCT 1% each making a total 37%, the citizens through the Stock Exchange 18%, the private investors 35%.
However, in order to avoid conflict of interest, the Federal and State Governments, and the FCT would not be allowed to invest directly in AJCC but through Investment Companies owned by them. For example, in the case of FCT it would invest through Abuja Investment Company.
The Punch in its editorial opinion of Saturday, 30th March, 2018 recommended privatization citing the privatization of British Steel Company(BSC) in 1986 as a precedent. However, it is germane to allude to the fact that as at 1986 when BSC was privatized, Concession was not in vogue, hence the British Government decided to privatize and not concession BSC .
In the 80s and early 90s, privatization which is the selling off of government assets, swept through the world like a wild fire during harmattan but was heavily criticized by the public who saw it as selling off their collective patrimony.
Even prominent citizens engaged in the fierce criticisms and sometimes outright condemnation. Sir McMillan, a past British Prime Minister in criticizing Margaret Thatcher’s privatization actions called it the “selling of our family quicksilver”. However, PPP (concession) started in the late 1980s – thanks to the botched Built Operate and Transfer (BOT) Izmir Power Plant project between Betchel EPC Company and the Government of Turkey in 1984.
The world immediately took to concessions since they do not involve outright sales of public assets but a temporary handing over of such assets to a private proponent for an agreed period. With public opinion heavily stacked against privatization, it starting losing steam and Concession which was more acceptable to the public took over from where privatization stopped. Secondly, Concession is easier to finance and consequently easier to implement successfully. Thus, in modern times concessions are preferred to privatization in deference to public opinion.
It is estimated that about Eight Billion dollars ($8B) have so far been spent on AJSC and its privatization will entail buyers paying this amount at the minimum and thereafter complete it with the sum of Five hundred million dollars ($500M). On the other hand, if AJC is handed over to a concessionaire, he will need to source for only five hundred million dollars ($500) to complete the project.
Between sourcing for Eight Billion Five hundred million dollars ($8,500M) and Five hundred million dollars ($500M), which assignment will be easier to complete? It is pertinent to draw our attention to the fact that the Independent Power Plants (IPP) were privatized in March 2014 at an average price of $500 million each.
As at today i.e. four years later, the buyers are still sourcing for the $500 million dollars each to pay for the plants. Why then do we believe that investors who have failed to source for “mere” $500 million will be able to successfully source for $8.5 Billion?
Thirdly, if AJC is privatized, the Government washes off its hands completely and negative public opinion may not allow the government to execute any complementary projects that would increase the AJC’s effectiveness. For example, if there is a need to build a small port beside the Complex, public opinion may insist that since the Concessionaire is running his private business, he should do it by himself and should not depend on government budgetary provision.
One more comment on the Punch Editorial, the on-going effort by the National Assembly (NASS) to enact a law on the completion of AJC is not an abuse of power. It is the province of NASS to make such laws.
There is precedence in America. When a Company with some Arab connection emerged as the Preferred Bidder for the concession of a port in America, its citizens protested against the concession on the grounds that terrorists would infiltrate into America through the port. The American Senate commenced steps to enact a law to outlaw that particular port’s concession but stopped when the Preferred Bidder “willingly” withdrew from the transaction. However, I believe that the option being proffered by NASS that the Government should directly complete AJSC is wrong and will not lead us to the promised land.
From the statements of NASS members, their greatest fear is corruption in the concession procurement process.
It is universally known among procurement professionals that any transaction of high value will attract corruption whether it is a conventional procurement or concession procurement.
Completion of AJSC being a transaction of high value will definitely attract corruption irrespective of the procurement method use. Therefore, the solution to corruption in a high value transaction such as AJSC is not to choose conventional procurement over PPP procurement. In reality corruption is easier and more monumental in a conventional procurement than in PPP procurement. The solution to the problem of corruption is to put in place extra measures to rein in corrupt tendencies.
NASS should go ahead and enact a law on the completion of AJSC but the Act should include extra control measures in the concessionprocurement process. Issues of concern should be identified and provisions inserted in the Act to address them.
For example, the issue of lack of transparency and competition (a prevalent issue in Nigeria) in the selection of a Preferred Bidder can be addressed by introducing the use of Probity Advisers and Procurement Watchdogs. In addition, the Act should provide for a strong and diverse Project Steering Committee containing strong-willed and independent minded persons, a Tender Evaluation Committee that is expanded and containing persons outside the influence and control of the Minister of Mines and Steel.
The Act should also provide that the Ministry of Mines and Steel provides all bidders with the results of the PPP procurement process, including the grounds for the selection of the winning proposal and that there must be standstill (or pause) period after the intent to award the contract has been shared with the bidders and before the contract is awarded to allow unsuccessful bidders to challenge the award decision. All these provisions for stricter control must be specified from the outset in the Request for Proposals (RFP) documents and intent to award notice. It is common knowledge that reputable investors will not tender if they perceive that the procurement process will be opaque and tailored to arrive at a predetermined destination.
There is nothing wrong with the section of this new Bill providing for a Special fund to complete AJSC but I advise that the fund be applied to AJSC as a loan to the Concessionaire using a consortium of banks as the loan vessel.
In addition this special fund should not be the sole source of finance but should be used in addition to debts from lenders. This is to put the lenders’ fund at risk and thus make the Project to benefit from lenders’ project management expertise and oversight.
In conclusion, it is safe to say that a concession is the only viable option for the successful completion and running of Ajaokuta Steel Complex.
Author: Chukwuma Katchy PhD, MBA, M.IoD, FNIM
Certified PPP Specialist