ESTABLISHING BANKABLE PPP TRANSACTIONS FOR INFRASTRUCTURE
PROJECTS
By
Aminu Diko
D G / C E O In f ra s t ru ctu re C on ces s i on R eg u l a t o ry C om m i s s i on
Presented at the Business Law Conference
Lagos, Nigeria
25-27th May 2014
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Contents
1.0 PREAMBLE ................................................................................................ Error! Bookmark not defined.
2.0 INTRODUCTION ....................................................................................................................................... 3
2.1 The Public Private Partnership Imperative in Nigeria………………………….………………………………….3
3.0 UNDERTSANDING THE NIGERIAN PPP FRAMEWORK ............................................................................. 5
3.1 Legal…………………………….……………………………………………………………………………………………………….5
4.0 THE PPP TRANSACTION ........................................................................................................................... 6
4.1 Models of PPPs………………………….………………………………………………………………………………………….6
4.2 The PPP Process…………………………….………………………………………………………………………………………7
4.3 Components of Bankability…………………….…………………………………………………………………………….7
5.0 CHARACTERISTICS OF BANKABLE PPP PROJECTS .............................................................................. 99
5.1 What Lenders look for……………………………………………………………………………………………………………………….9
6.0 CONCLUSION ......................................................................................................................................... 90
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1.0 PROTOCOLS
Distinguished Ladies and Gentlemen
Permit me to use this opportunity to commend the Nigerian Bar Association for continuing its
track record of using forums such as this, where like minds can interact and offer solutions
towards the progress of our country. It is truly an honour for me to be invited as a Keynote
Speaker and to speak at this session on a pertinent issue confronting our country today. With
the discussions at the just concluded World Economic Forum on Africa, it is with great
admiration that the conference organizers decided to focus on bankable PPP infrastructure
projects, a very topical issue that seeks to position Nigeria and Africa as the next frontier for
investments, growth and development.
2.0 INTRODUCTION
2.1 The Public Private Partnership imperative in Nigeria
Infrastructure forms the foundation of all development in a country. The lack or inadequacy
of infrastructure restricts productivity and limits competitiveness. In Nigeria, rapid population
growth and increasing urbanization with poor maintenance and limited investment over the
past five decades have placed enormous pressure on existing infrastructure. Regrettably,
infrastructure development in the country is funded largely from the fiscal budget, which is
volatile, rarely meets crucial infrastructure expenditure requirements in a timely manner,
receives a larger brunt of fiscal retrenchment in times of financial crises and has greater
potential for mismanagement and corrupt practices. Indeed, recent studies by the Federal
Government indicate that funding of infrastructure development through her fiscal budget is,
in part, responsible for the lower quantity and quality of infrastructure.
Recognizing the importance of adequate infrastructure services for economic growth and
development of industry, the quality of life, and given the constraints on public budgets to
finance the ever growing infrastructure needs, governments have resorted to shifting part of
the burden for new infrastructure investment to the private sector. Partnerships between the
public and private sector for the financing, design, construction, operation and maintenance of
infrastructure and delivery of associated services have been growing globally. From 1999, with
the advent of democracy, government began a series of reforms towards encouraging private
sector investments and liberalizing the economy. One of such reforms includes privatization of
the power sector, the creation of a Sovereign Wealth Fund (SWF) part of which would be used
towards the funding of critical infrastructure and the establishment of the Infrastructure
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Concession Regulatory Commission (ICRC) an agency to support the Federal Government’s
drive towards the Public Private Partnership (PPP) model due to the realization that the Federal
Government can no longer fund critical capital projects. PPPs thus form the balance between
State ownership and privatization.
Distinguished Ladies and Gentlemen,
What is a Public-Private Partnership? PPP is a contractual agreement between a public agency
(federal, State or local) and a private sector entity. Through this agreement, the skills and assets
of each sector (public and private) are shared in delivering a service or facility for the use of
the general public. In addition to sharing of resources, each party shares in the risks and
rewards potential in the delivery of the service of the service and/or facility. The public sector
maintains ownership, oversight and quality assessment role, while the private sector is more
closely involved in the actual delivery of the service or project. This has become the method of
choice by governments throughout the world for up-scaling infrastructure and providing
goods and services for their economies.
The successes from private participation recorded by a number of countries greatly influenced
the reforms of the Federal Government of Nigeria in creating enabling environment for the
private sector participation in development which has eventually steered the country in the
right direction. From 1998, private sector parties started engaging with governments in a more
systematic manner and in 2005, the Commission for Africa Report strongly called for more
private sector partnership. Incidentally, this was the year Nigeria enacted the Infrastructure
Concession Regulatory (Establishment Etc) Act 2005 under which the Commission I head was
established in 2008.
The Commission was established to catalyze and facilitate engagement of the private sector by
Ministries, Departments and Agencies (MDAs) of the Federal Government in initiating,
developing, financing and implementing PPP projects over Federal Government Infrastructure
in a transparent, competitive and sustainable manner. The Commission also has the added
responsibility to take custody of all agreements legally entered into by the private sector with
any agency of the Federal Government of Nigeria in the financing, operation and management
of infrastructure and allied services and ensuring compliance with the terms and conditions of
such agreement.
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3.0 UNDERTSANDING THE NIGERIAN PPP FRAMEWORK
3.1 Legal
The Federal Government enacted the Infrastructure Concession Regulatory Commission
(Establishment, etc) Act 2005. Under the law the Infrastructure Concession Regulatory
Commission (ICRC) was established in November 2008 as a way of addressing the huge
infrastructure deficit in Nigeria and the decrepit state of our existing infrastructure. The Act
empowers Ministries, Departments and Agencies (MDAs) to utilize Public Private Partnerships
(PPP) as a procurement vehicle of choice, where suitable, to rapidly turn around the country’s
infrastructural insufficiency. The Act envisages the ICRC to serve as the primary driver agency
to facilitate the engagement of the private sector by MDAs of the Federal Government in
initiating, developing and delivering PPP projects in a transparent, competitive and sustainable
manner. The Commission also has the additional task of creating an enabling environment for
the private sector to enter into partnerships with Government in the financing, operation and
management of infrastructure and allied services.
In 2009, the Federal Executive Council (FEC) approved the National Public Private Partnership
Policy (N4P) which became the second governance document that regulates how PPP are
governed giving further effect to the Act. When the Commission commenced operations by
virtue of the provisions of the Act, the PPPs (Concessions) granted by the Federal Government
before the establishment of the ICRC were all transferred to the Commission for effective
implementation.
The N4P has three stages to it – the Financial, Legal and Institutional Framework. The financial
framework tasks the responsibility of taking measures to deepen the financial markets and
develop capacity on the government thereby creating an enabling environment for PPPs,
likewise, the legal framework under the N4P harmonizes existing laws and provides a legal
platform form implementing PPPs. In addition, the institutional framework creates a platform
for MDAs and States to implement PPPs. The N4P also ensures that the key principles of PPPs
are met in any project and these are:
 Value for Money – ensures that project appraisals take into account not only cost but
also risks and service quality.
 Public Interest – Adequate and prior consultation with end users and other stakeholders
of an infrastructure project is standard.
 Risk allocation – risks are allocated to the party best able to manage them
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 Transparency – world class standards of public and corporate governance to enhance
credibility
 Competition – ensures that projects are subjected to appropriate commercial pressures
 Capacity to deliver – ensures that the public side has the capacity to manage the
commercial processes and to partner on equal basis with private sector players.
These key principles will be tested at each stage of a PPP project cycle from the identification to
the development, procurement and implementation phases.
4.0 THE PPP TRANSACTION
4.1 Models of PPP
The specific schemes for PPP vary according to the services to be delivered, the expected roles
of the parties to the scheme, the level of investment to be made by the private sector partner,
the mode of payment for the services, revenue streams, the way the risks involved in delivering
the services are allocated among the parties, and the expected life of the partnership etc. In
each case, however, a private investor / operator would enter into a contract arrangement
with a public sector agency to deliver some specified services which would be consumed by the
citizenry – the beneficiary of the service whose satisfaction with the service delivery must
therefore be a key determinant of the success of the Partnership. Some common frames of PPP
schemes include:
(a)
(b)
(C)
(d)
(e)
Service Contract
Here, the public agency buys services delivered to the consumers by the private
supplier; usually short term (2-3 years) e.g. education, health care etc.
Management Contracts
In this arrangement, a private contractor manages a public sector facility to deliver
service to consuming public e.g. hospitals.
Joint Ventures
In Joint Ventures risks are shared. The public sector retains strategic control of longterm services, private party designs and operations.
Build Own Operate and Transfer and its many variants. In this arrangement, the
Private Sector designs, constructs and delivers services for a fee or tariff.
Concessions
Private Party invests in expanding and operating a public facility, while the Public
sector maintains control of service.
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4.2 The PPP process
4.3 Components of Bankability 1
The primary consideration of any lender to a PPP project is a simple one – to ensure it will be
repaid what is has lent together with an appropriate level of interest. A PPP project is
“considered bankable if lenders are willing to finance it”. As with most PPP projects, a lender’s
main objectives will therefore include:
 Protecting the revenue stream (for example, by ensuring deduction risk is clear and
properly assessed),
 Creating an adequate security package (for example, by ensuring there is a realizable
recourse to sponsors, through the Viability Gap Fund (VGF) whereby public capital is
provided to fill funding gaps required to make infrastructure projects commercially
viable and bankable, thus increasing the appetite for private sector investment. A VGF
can provide up-front funding to cover a certain amount of a project’s capital costs.
 Setting appropriate caps on liability for sponsor recourse,
 Parent company guarantees,
 On-demand construction bonds if required and/or performance bonds and the like and
pricing finance commensurate with its ultimate view of the risks involved,
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www.hoganlovells.com/.../PPP_projects_in_the_education_sector_-_key...
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 Bankability of public sector obligations,




Soundness and stability of the legal framework for PPP,
Effectiveness and enforceability of the PPP contract and related agreements,
Confidence in the regulatory regime when applicable,
Availability and effectiveness of insurance cover, where needed.
Clearly, the cost/revenue analysis is of key importance. Also, in certain scenarios like force
majeure termination or certain default termination, lenders will want to know they still have a
reasonable prospect of return through recourse to certain levels to the public sector, sponsors
or additional security providers. A structure that adequately satisfies the risks of a project is
therefore fundamental to the “bankability” of the project.
Other risks ascertained in evaluating the bankability of a project are:
Financial
risks
– infrastructure projects are impacted by exchange rate
Appreciation/depreciation and changes in interest rates which can have a substantial impact
on costs and revenues. The table below explains in detail some financial risks and ways to
mitigate them.
Table 2: financial risk types and ways to mitigate
Regulatory risks – this arises from lack of suitably developed regulatory systems which ensure
regulatory independence from the government, regulations for the participation of the private
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sector in infrastructure or appropriate periodic review of tariffs can cause considerable
uncertainties.
Political risks – these are risks that arise from wars, civil disturbances terrorism etc.
Market risks – these are risks that arise due to uncertainties about the market demand for the
infrastructure service. For example, number of users and their frequency and intensity of use
of the infrastructure service.
5.0 CHARACTERISTICS OF BANKABLE PPP PROJECTS
1. Debt/Equity Ratio: The debt-to-equity ratio is used to compare the amount of debt in
the project against the amount of equity invested. Financing PPP projects through debt
is relatively cheaper than equity as the risk portfolio is less. The norm is a 70/30 ratio
but could vary depending on the project.
2. Funding: A higher percentage of funding needs comes from third party finances in
terms of long term debt which consist of about 80% of the total project cost.
3. Public Interest Test: The results of the public interest test represent the constraints faced
by the private sector if they are involved in the construction, operation and delivery of
the service. These in turn affect the market appetite and the likely level of competition
in the market2.
4. Market Interest Test: Market interest refers to the practice of soliciting opinions from
private sector as to the potential viability and attractiveness of particular projects. Issues
to be explored during the market sounding exercise may include: (i) The strength of the
private sector market for the project (ii) The private sector’s scope for achieving
economies of scale. (iii) The private sectors’ expertise (iv) The likely level of market
interest in the project and (v) The capability of the market to undertake the project.
5. 1 What Lenders Generally Look for
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
A good business plan/feasibility study done on the project;

FEC Approval: In Nigeria, Financiers are likely to seek evidence of government approval
for the project to be procured on PPP;

Project risks allocation process: Here risk allocation should be seen from the perspective
of the lenders and project proponents because without PPP project attaining financial
close its not implementable
http://www.psdas.gov.hk/content/doc/2005-1-11/PDP%20-%202005-1-11.pdf
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
Project Cash Flow: Financiers usually consider the expected cash flow of the project
both inflow and outflow. This serve as a guide on verifying if the project cash flow can
support repayment of loans (bonds, sukuks);

Equity Returns: Lenders will further be interest in the PPP project sponsor’s plans to
maximize their net returns from the project – Return on Equity.
6.0 CONCLUSION
The private sector has large pools of resources from which they can seek funding, which
government may not have access to, or the capacity to access, including both local and
international financial markets. As a result, private sector involvement in infrastructure
provision has been widely considered and implemented as a preferred method of financing
infrastructure provision globally. Governments all over the world have come to recognize that
the collaboration between public and private sectors is crucial to securing dependable and
sustainable funding for infrastructure and reducing the pressure on fiscal budgets
There are a number of reasons why investors use project financing for PPP projects, some of
which are – risk spreading and limitation, combining skills, long term finance and borrowing
capacity. On the other hand, for public authority, it increases competition, lower cost, role of
lenders and transparency. Overall, PPPs is a long term process that requires commitment from
both parties to ensure its success.
In readiness for PPP projects, the government should have the Business Climate, Financial
environment and Legal and Regulatory environment ready to:
 Have a proper mechanism for dispute resolution;
 Boast of a deep financial market;
 Establish laws on property rights effectively enforced and a fair compensation for
expropriation;
 Strengthen government’s support and commitment towards business concerns;
 Ensure Fair and transparent procurement practices and;
 Facilitate Community and stakeholder participation in government policy making
Thank you all for listening
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