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COMPLETION OF AJAOKUTA STEEL COMPLEX THROUGH CONCESSION

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

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ECONOMIC RECOVERY AND GROWTH PLAN (ERGP) 2017 – 2020– COMMENTS ON THE PUBLIC PRIVATE PARTNERSHIPS COMPONENT

First of all let me congratulate the Executive arm of the Federal Government of Nigeria for producing this great plan, the Economic Recovery and Growth Plan (ERGP) 2017 – 2020, a plan that if religiously followed, will make Nigeria become a major player in the global economy by virtue of its human and natural resource endowments.

 As with all human plans, there is always room for improvement. As an expert in Public Private Partnerships, (PPPs), my comments are on the public private partnerships component of this laudable blue print.

ERGP under the heading “Building a Globally Competitive Economy:  Investing in infrastructure” stated as follows, “ The ERGP emphasizes investment in infrastructure, especially in power, roads, rail, ports and broadband networks.

It builds on ongoing projects and identifies new ones to be implemented by 2020 to improve the national infrastructure backbone. Given the huge capital layout required to address the massive infrastructure deficit in the country, the private sector is expected to play a key role in providing critical infrastructure, either directly or in collaboration with the Government under public private partnership (PPP) arrangements”.

Experience worldwide has shown that successful PPP transactions occur in appropriate Legal, Investment, Policy and Operating frameworks.

This is why it is very important that Nigeria gets it right at the Policy level because it is the policy framework that largely determines the other frameworks.

In the ERGP, one of the deliverables is   “Review the Infrastructure Concession Regulatory Commission Act to resolve conflicting legislation with the Bureau of Public Enterprises and Bureau of Public Procurement Act and strengthen the Commission’s regulatory mandate to facilitate private investment”.

The ERGP further states under 7.5 “CREATE AN ENABLING POLICY AND REGULATORY ENVIRONMENT  – The right policy, legal, and regulatory environment is required to accelerate implementation of existing and new priority strategies.

The Federal Government will work with the National Assembly to ensure the passage of legislation to support the ERGP.

For example, unifying legislation may be required to resolve overlapping and conflicting legislation, e.g., between the Bureau for Public Enterprise Act, the Bureau for Public Procurement Act and the Infrastructure Concession and Regulatory Act, that may inhibit private sector participation in strategic sectors.

The introduction of a unifying legislation that encompasses all others would streamline requirements and make it easier for potential investors to participate”.

While I agree with the decision to resolve overlapping and conflicting legislation, among the Bureau for Public Enterprise Act, the Bureau for Public Procurement Act and the Infrastructure Concession and Regulatory Act, I disagree with the decision that there should be one unifying legislation to achieve the desired effect of streamlining requirements and making it easier for potential investors to participate in PPP projects.

 I will explain myself later but let me for now treat three critical success factors seemingly omitted in the PPP component of the ERGP. Although there are many factors necessary for success, these three factors being very important need to be loudly and expressly mentioned.

These three critical success factors are a strong public sector capacity, willingness to pay by the public and having a transparent, competitive and fair procurement process.

Therefore, the ERGP should contain loud and express provisions to build a strong public sector capacity, use strategic communication to effect a favourable disposition of the citizens to PPPs and hence ensure that there is willingness to pay for services, and assure investors and financiers that any PPP procurement process will be transparent, competitive and fair.  

Building a strong public sector capacity is crucial to having successful PPP transactions because practitioners in the field are of the consensus that government officials constitute the greatest obstacle to successful PPP transactions in Nigeria.

Firstly, among public officials there is lack of understanding of significant differences between PPP procurement and Traditional Procurement and the impact of these differences in terms of the need to acquire new skills, create new departments and new processes.

Secondly, government officials view a PPP project as a contract and not as an investment which it rightly is. I accept that technically a PPP project is a contract because it has the four cardinal points of a contract .i.e. offer, acceptance, consideration and intention to enter into a binding legal agreement but then a PPP project is actually an investment.

Therefore, it is necessary that government officials should not think in this manner “ AB Nig Ltd has been awarded a concession contract of LX – MX Express Road at a contract sum of N100 Billions. Rather, the government officials should think in this manner “AB Nig Ltd wants to invest N100 Billions in LX – MX Express Road.

This change in attitude is very important if we want to experience huge success with PPP transactions in Nigeria. Portugal pursued its first PPPs in the mid-1990s. Unfortunately, the government PPP unit with its inexperienced staff suffered from lack of experience with PPP projects.

  Consequently, Portugal’s early PPPs were subject o constant delays and cost overruns and by 2003, the country’s PPP-related liabilities amounted to 10% of its GDP.

 Weak public sector capacity manifested itself in many ways chiefly were  that there was insufficient risk transfer to the private sector and avoidable but damaging delays in giving government approvals on essential land and environmental aspects.

The second critical success factor seemingly omitted is the use of strategic communication to highly improve on the public’s willingness to pay. It is common to hear members of the public including highly educated ones saying “we are already paying our taxes and so why are we required to pay for these services again?”

One common reason for failure in PPPs is public resistance. In 1999, the Bolivian government attracted private capital into the running of the water system in Cochabamba by granting a 40-year concession to an international consortium called Aguas del Tunari.  

However, in the previous year, precisely in October 1998, groups had gathered in protests, which led to an outbreak of violence. The Bolivian army in the quest to maintain law and order, killed as many as nine persons, injured hundreds and arrested several local leaders.

The citizens’ disapproval continued until the Concessionaire, Aguas del Tunari announced that the consortium was withdrawing from the project.

Though we do not expect a repeat of the Bolivian experience in Nigeria, we may end up having the same result with Bolivia because an avalanche of court cases will scare away investors. According to HRH Lamido Sanusi Lamido III, it is not the presence of rules and regulations per se that makes investors put in their money in a system but the confidence they have in the system.

Every single court case or even an investigation erodes investors’ confidence in a system.

The third omission is the non-loud and non-express provision that government shall ensure that the PPP procurement process shall be fair, competitive and transparent.  

Reputable investors simply watch askance any PPP procurement process that is opaque. Having concluded the discussion on these three seemingly omitted critical success factors, let me go back to the wrong decision that there should be one unifying legislation.

Firstly, let us consider the privatization contracts governed by the Bureau for Public Enterprise Act and concession contracts governed by the Infrastructure Concession and Regulatory Act.

In a privatization contract government cedes both the ownership and management (running) of an enterprise to a private organisation. The private organisation becomes the new owners of the assets.

 In a PPP contract governmnent cedes the management (running) only of an enterprise to a private organisation over an agreed duration but government retains the ownership of the asset.

At the end of the agreed duration the private organisation hands the assets of the enterprise back to the government. Needless to say, it is obvious that one law should not govern these two kinds of contracts operating under different situations.

Secondly, let us consider traditional procurement contracts governed by the Bureau for Public Procurement Act and concession contracts governed by the Infrastructure Concession and Regulatory Act.

There are many differences between a project by traditional procurement and a project by PPP procurement. Some are these differences are,

  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 the most important persons but in a PPP procurement, Economic, financial, legal experts the most important persons.
  4. A Conventional Procurement has a short term contract duration but a PPP procurement has a long term contract duration.
  5. In a Conventional Procurement unsolicited proposals are rare but in PPP procurement unsolicited proposals are common.
  6. In a Conventional Procurement public fund is at risk but in a 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

By mere observation, one can say that a single legislation cannot govern these two widely different processes. At different fora where I had the opportunity to be a resource person, I always advocated that the PPA be amended to exclude PPP projects while the ICRC Act should be amended to live up to its new responsibility of being the sole procurement law that will govern PPP projects. It is obvious that the ICRC Act was hastily cobbled together and this has negatively affected its efficacy in driving the PPP process in Nigeria. Unfortunately, the new PPP Bill before the Senate is equally defective and will provide a weak legal platform for PPP transactions.

The new Bill just as the present ICRC Act equates PPP with concession. No attempt was made to effectively capture the other five fundamental forms of PPP namely, Service Contract, Management Contract, Lease/Affermage/Franchise, Joint Ventures and Partnerships and Licensing/BOO. Rather the new PPP Bill under “its Clause 45.  states “concession agreement” includes; BOO, Management Contracts – a provision that will create an enabling environment for future legal battles.

In the light of the above, I respectfully suggest that the ERGP be adjusted to accommodate the observations that I have made in this write up.

          CHUKWUMA C. KATCHY PhD,psc FNIM, M.IOD

COMMISSIONER OF POLICE (rtd)

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