A decade of MMA2 operations: The beautiful, ugly face of a PPP arrangement

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*Babalakin

In a situation where resources at the disposal of government to meet heavy demand for financing and effectively execute infrastructure is finite and lacking, the resolve to encourage Private Public Participation (PPP) in public business cannot be over-emphasised.

PPP was established in United Kingdom in 1992, through Private Financing Initiative, (PFI) the programme aimed at encouraging public private partnership in the country.

Toeing the same line, the Federal government of Nigeria during the administrations of Generals Ibrahim Babangida and Abdusalami Abubarkar engaged private sector to participate in government business by introducing the Public Enterprises Decree which later became (Privatisation and Commercialisation) Acts 1999.

While it became obvious that the need for PPP in the country has become the real way to pursue if the nation has to bridge the infrastructure gap and advance economic and social development, the Federal government conceptualised an agency that would engender a comprehensive competitive and attractive PPP industry in Nigeria with the view to attracting significant Private sector resources for infrastructural private sector resources for infrastructural development. This however led to the establishment of Infrastructure Concession Regulatory Commission (ICRC) by Chief Olusegun Obasanjo’s administration through Infrastructure Concession Regulation Commission (ICRC) Act of 2005 and later the Public Procurement Act of 2007 (Due Process).

The ICRC with key strategic objective to accelerate investments in national infrastructure through private sector funding, by assisting the federal government and its Ministries, Departments and agencies (MDA) to implement and establish effective PPP process. The scope of the federal government’s programme for PPP is the creation of new infrastructure and key expansion and refurbishment of existing assets at the federal level.

The ICRC is the designated national authority for the regulation of PPP in Nigeria. It is to foster inter-agency collaboration in the delivery of PPP.

Experts who argued in support of PPP option over traditional public procurement claimed that its introduction is the most effective and efficient ways of improving public infrastructure and stimulating economic development in an increasingly interdependent global economy. They claimed that Government revenues are finite and PPPs compliments Government’s investment in infrastructure.

In Nigeria, PPP was initially conceived to attract Foreign Direct Investments (FDIs). Nigerian PPP network is designed to bring all states of the federation together and address the PPP in their domains for the good of the nation.

In a PPP, the private sector partners with agency of government to finance the development or rehabilitation of public infrastructure and or deliver social services typically provided by public sector.

PPP takes on a variety of concession models such as Build Operate and Transfer (BOT), Build Operate and Own (BOO) Loan Build Operate and Transfer (LBOT) etc.

Components of PPP include service contracts, management contracts, affermage or lease contracts, build operate and transfer and similar arrangements, concessions and joint ventures.

Ideally every option of PPP implies varying levels of responsibilities and risks to be undertaken by the private operators together with difference in structure and contract forms.

In practice, concession makes the private sector operator (concessionaire) responsible for the full delivery of services in a specific area including operation, maintenance, collection, management and construction and rehabilitation of the system.

Importantly the operator is responsible for capital investment. All though the operator is responsible for providing the assets such assets are publicly owned even during the concession period.

The public sector is responsible for establishing performance standard and assuring that the concession meets the standards. In essence the public sector’s roles shift from being the service provider to regulating the price and quality of service.

The concessionaire collects tariffs directly from the system users. The tariff is typically established by the concession contract which also includes provisions on how it may be charged over time.

In rare cases, the government may choose to provide financial support to help the concessionaire fund its capital expenditures. The concessionaire is responsible for any capital investments required to build, upgrade or expand the system. And for the financing those investments out of its resources and from the tariffs paid by system users. The concessionaire is also responsible for providing working capital.

A concession contract is typically valid for 25 and 30 years. This is so, for the operator to have sufficient time to recover capital invested and earns appropriate returns over the life of the concession.

Where or if necessary, the public authority may contribute to the capital investment. This can be an investment ‘subsidy’ (viability gap financing) to achieve commercial viability of the concession. Alternatively, the government can be compensated for its investments by receiving a commensurate part of the tariff collected.

Looking at the concession agreement between Federal Airports Authority of Nigeria (FAAN) and Bi- Courtney Aviation Services Limited (BASL) operators of the Murtala Muhammed Domestic Airport Terminal two popularly referred to as MMA2,on the bases of the aforementioned conditionality one could see clearly that the beautiful and ugly side of concession in Nigeria.

One clear fact about the concession agreement which all the parties involved are pleased with is that it on the Build Operate and Transfer (BOT) model. However, the issue of the life span of the contract, and scope of activities of the concessionaire remain issues of great controversies which have led to many litigations and counter litigations between FAAN and BASL.

The claim by experts that concession, BOT model has its strength over other type of PPP in that it is an effective way to attract finance required to fund new constructions or rehabilitate existing facilities came to bear following the reconstruction of the burnt domestic terminal of Murtala Muhammed Airport, Lagos.

With paucity of fund at the disposal of the federal government at that time and even now, attempt to embark on such project would have been forlorn. The decision of the Federal government to embrace the option of encouraging private sector through PPP into the reconstruction of the burnt terminal made it available for use within few years after the inferno was a wise on.

According to former President of Aviation Round Table (ART) Capt Dele Ore the project is a welcome one which has become a benchmark for anyone who might want to work in that direction.

“When that terminal a few years ago got burnt the Federal Government refused to reconstruct that place and of course there were attempts at reconstructing it without success until Bi-Courtney came and rescued the nation by putting up the magnificent edifice. We saw brilliance and capacity in the magnificent edifice. But suddenly trouble came over the length of the life of the contract. This disturbed me a lot. We have seen what we can call a benchmark and whoever wants to do anything in that direction must do something better. The issue all over the world today is that government has no business in doing business. Concession is the best way to go if we want to stop or bridge existing infrastructure gap,” Ore Said.

Another key advantage of the concession arrangement according to Chief Executive Officer of Centurion Security, Group Capt John Ojikutu (Retired) is that it provides incentives to the operator to improve efficiency and effectiveness since gains in efficiency translate into increased profits and return to the concessionaire and government. He said through a well implemented concession agreement, revenue would be boosted and while development be spurred.

This, Ojikutu regretted has not been the case in Nigeria because of government policy and the bureaucracy as well as greed of those within and outside the system who do not believe in transparency.

“Everyone be it those in government or outside, the concessionaires, have seen the money, I mean real money, in the aviation sector. That is why no one wants to let go. It is unfortunate that because of inconsistency in government policies and the insincerity of those behind the implementation of those policies, Government and the concessionaires are not making enough money from system. The money is finding its way into the pockets of some individual. This is not the best for the survival of the sector,” Ojikutu lamented.

He went further, “But if concession agreements are well drafted and implemented without ambiguities, the government and the concessionaires would make their returns within the specified period of time. But because the whole thing is planted on deceit, there is confusion everywhere. Hence both FAAN and BASL are engaged in avoidable revenue losses on the concession.”

Equally the transfer of the full package of operating and financing responsibilities enables the concessionaire to prioritise and innovate as it deems most effective. Going with Capt Dele Ore position, the public enterprises is less concerned about returns on investment which is a priority to private sector operators. He noted that since BASL wants quick, commensurate and appreciable returns on its investment in the concession, it cannot afford to do anything below what would spur effectiveness in the system.

Despite all the strength noted in the concession agreement between FAAN and BASL on the operation of MMA2, the concession is seen more as a curse rather than a blessing to the two actors when viewed from the numbers of litigations the two have been embroiled in the last ten years the concession subsists.

While concession has been seen by experts as a great impetus to economic and social development in an emerging economy, embarking on it has been described as walking a minefield of unfamiliar forest. It has a lot of risk factors.

While it remains a big risk to the concessionaire, it could equally be of great risk to the government in that the complexity of the contract required to define the operator’s activities has brought a lot of drawbacks to many agreements in the industry. The define operation activities of BASL in the concession agreement is a major controversy that about to rear its head as Lagos state proposes to build an airport in Epe axis of the state. Whereas BASL claimed it has entered into an agreement that forbids construction, establishment and operation of any domestic airport terminal in Lagos State. This has for long remained an issue of litigation between the two parties and it is likely Lagos state would soon be a party to it. How this riddle would be resolved left many wondering on what would become of aviation development in the state and Nigeria as a whole.

Revenue loss through poor or improper implementation of concession agreement has been a major setback to the option.

Recently the Chairman of Bi-Courtney Resort group Dr. Wale Babalakin at a press briefing to mark the 10th year operations of the terminal, claimed FAAN owes BASL a sum of N200billion being the damages awarded against FAAN by a Federal High Court and subsequent revenue accruable to it from the operations of the domestic flights from GAT. This some stakeholders argued would never arisen if the concession agreement has been implanted without rancour.

The experts who don’t want their names in print observed that the ‘addendum’ introduced to the agreement have caused a lot of mistrust between the parties. They argued that the claimed change in the clauses of the concession agreement which FAAN denies knowledge of, “is a product of lack of transparency on the parts of both parties.” They are of the opinions that “ if other concessions have to work without glitz in the sector, transparency must be the watch word.”

Speaking on why patriotism should be placed about personal or pecuniary benefits while entering into concession agreements at a time the government wants to concession some of its airports across the country, Ojikutu noted that the volume of money seeing by both government officials and investor s in the system remains the major attractions and not to provide services.

The ART General Secretary noted that if those pushing and obstructing don’t see money in the system they would spare themselves of the troubles.

“If Babalakin is not making money from the concession, he would have let go of it long ago. Similarly, if those in FAAN and Ministry have realised that there is no money in the sector they would not want to die in the struggle. Unfortunate they are all making money at the expense of the Federal government while the Federal government keeps borrowing to finance projects in the sector,” he lamented.

He therefore advised government to take caution in the subsequent concessions agreements, even as he advised that federal government should in its new decision on concession drive concession only non aeronautical side of the airport and leave the aeronautical side where it many run against International Civil Aviation Organisation (ICAO) regulations.

By Abiodun Akomolafe, African Business Travel News

 

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