Tuesday, August 17, 2010

Between Theory and Practice: An Examination of Public Private Partnerships Implementations in Sub-Saharan Africa

Competition, Risk Sharing and Transparency:

Public-private partnership advocates regard market-driven competition, shared risk, and transparency as essential prerequisite for successful PPP that achieve their intended purposes and protect the public from excessive risk (Schaeffer & Loveridge, 2002). An examination of the very nature of PPP as currently practiced in African will prove that these public protections often proved elusive in project implementations.

Market-Driven Competition: In theory, a substantial fraction of the benefits from private provision comes from marshalling the pro-efficiency forces of competition. The paramount importance of such competition to successful PPP in developed countries has long been understood and documented by Donahue (1989), Kettl (1993) and others. In Africa however, two major impediments to robust competition stands out: deregulation and project related barriers.

Most PPPs in sub-Saharan Africa often requires special waivers of competitive procurement laws. Advocates of PPP insist that government procurement and financing rules that allegedly impede government capacity to operate as efficiently as private sector should be waived for PPP (Williams, 2003). The consequence can be ironic indeed: Contracts hailed as models of market discipline are then awarded to well-connected companies on a sole source basis, unencumbered by market forces (Bloomfield, p. 401, 2006). This exact scenario is what happened in Nigeria in 2003, when the Obasanjo regime signed a Build, Operate and Transfer (BOT) Public-Private Partnership (PPP) contract with Bi-Courtney Aviation Services Limited (BASL), for the construction of the second terminal at Murtala Mohammed Airport (MM2). The new airport terminal was opened in 2007, with a directive to all airlines to move their operational basis from the publicly operated First terminal to the second terminal in accordance with the PPP contract signed with Bi-Courtney (Usim, 2009). The exemption from competitive procurement rules paved the way for the private developer team to invent their own billing rates and rules with little or no regard to the user of services at the airport. It is interesting to note that when confronted with the monopolistic tendencies of concession contracts in Africa, advocates of PPP often echoes the sentiments expressed below by executives of Bi-Courtney:

“Bi-Courtney has always wondered why in construing ‘concession’ in Nigeria
public private partnership scheme, the word ‘exclusivity’ has always been
interpreted to mean private monopoly,” he said. “Monopoly must be distinguished
from exclusivity.”He argued that a concession contract is for a business
operated under a contract or license associated with a degree of exclusivity in
business within a certain geographical area. “This is to say that exclusivity is
a feature of any concession contract and not private monopoly. Exclusivity is
one of the safeguard to ensure returns for the concessionaire. This is more so
because concession contract do not endure in perpetuity,” he said (Nnodim,
online ¶ 13, 2009)

Of course, this is at best a distinction without forms or the difference between six and half a dozen; given the fact that “airlines who currently patronize Bi-Courtney’s MM2 are allegedly complaining of prohibitive charges which stem from the monopoly the BOT agreement confers on Bi-Courtney Aviation. The exclusivity clause in the BOT Agreement forbids even the Federal Government of Nigeria from improving or expanding the old terminal (MM1) at the Murtala Muhammed Airport. It also states that all scheduled domestic flights in and out of airports in Lagos State “shall during the Concession Period operate from MM2 and that no new domestic terminal shall be built in Lagos State” (Osa-Okunbor, 2010).

Additionally it is also instructive to point out that theoretically the envisaged competition inherent in PPPs often took place ex-ante, i.e. during the bidding stage, since the ultimate provider of any services will almost certainly become a monopolist. Consequently, if there are not enough competent bidders or bidding consortia to make the process competitive, there is less of a guarantee that Africans will get value for money (Bettignies & Ross). Others argued that there is still a social gain to the communities where the services are provided efficiently and competently. In his analysis of two water supply PPPs in Point Noire and Congo-Brazzaville, Tati, submits that even though the foreign company was widely touted as superior in skills and manpower with an imposing head office in Italy, the local private provider actually outperformed the foreign company and outlasted them in delivery of portable water (Tati, 2005).

With regards to project-related barriers to competition, one needs to note that some public-private partnerships are undertaken under conditions that render meaningful competition difficult or impossible to achieve. For instance, when the conditions of the project is such that requires provision of substantial up-front financing as well as construction services, the pool of eligible contractors can be significantly reduced; as such only the largest companies with access to massive private capital usually apply. The high cost of developing proposals for long-term complex contracts can also be a deterrent. Under these circumstances, a competitive proposal process may not generate meaningful competition. For instance, the Nigerian Natural Gas Escravos contracts required bidders to invest substantial funds in investments in the local communities and investigating the existing problems. The only bidder at the time is Chevron, an incumbent multinational corporation who has long standing contractual relationship with Nigeria National Petroleum Corporation; they also happened to be the corporation that created the problem they were asked to clean up before making a new bid!

Risk Sharing and Risk Shifting: PPP are often described as innovative and collaborative undertakings in which the public and private sectors share the risks, responsibilities, and rewards (Savas 2000). Performance contracts that commit the private partner to specific results are held to be the key to successful risk allocation in public-private partnership contracts.

However, implementing and enforcing effective performance guarantees can be problematic for unstable African governments and as such those benefits are not always capture (Forrer, Kee, & Zhang, 2002, 47). Typically, an ideal PPP in Africa, often involve very fat profits, no risk, government subsidies and monopoly control (Farlam). The well known “currency and political risk” often occasioned by change of policies due to unstable government are often insured by World Bank, IFC, IMF and other multilateral institutions or by the Western countries Export/Import banks. Demand risks are also covered by subsidies by African governments, even when they know going in that the majority of the people that will be serviced might not be able to afford the cost that will be charged by the private managers. In short, virtually all the attendant risk were often passed on to African tax payers and users, whether in user fees or in country’s debt repayment.

Even though countries like South Africa has PPP manual, setting out the steps for risk-adjusted model, with detailed risk identification, impact, mitigation, matrix and test affordability, most PPP contracts risk are still heavily weighted against African government, due largely to the unequal financial positions of the parties. The contract warranty terms have often been found to be weaker than those typically found in conventional construction contract in western countries (Bloomfield, 2006). This is a problem that has more to do with each party’s financial capability, and expertise.

Transparency: As stakeholders, African citizens deserve accurate information regarding the contractual obligation incurred on their behalf. In theory, long term public-private partnerships concession contracts promote accountability through transparent procurement procedures and written contracts to which the public has full access (Domberger, et.al).
However, some have argued that the information citizens receive regarding the budgetary implications of major PPP projects is often inadequate, inaccurate, or misleading (Altshuler & Luberoff, 2003, 32-35). Most of the concession agreements are often signed sealed and delivered in foreign financial capital like New York, London and Tokyo, far away from African capitals with little or no scrutiny by African press. For instance, there is an ongoing controversy in Nigeria on the true status of agreement signed between Bi-Courtney and the Nigerian government to manage the airport terminal. Bi-Courtney insists that it has 36 years to run the airport terminal while the Nigerian government claims, it has 12 years to manage the terminal (Osa-Okunbor, 2010).This will not have happened if the agreement is subjected to public scrutiny as it is done in most western nations before the commencement of the contract. There are no public disclosure legislations in most African countries, and even where there are, routine contracts are tagged “top secrets” and thus rendered unreachable to journalist and activist who seeks to unravel their contents.
What is more, most of the terms of the long term contracts and concession arrangements are not even made enforceable in African courts; they are mostly subjected to arbitration and mediation abroad. It took members of the Ogoni communities in Nigeria, more than 23 years before they could obtain redress in US Federal Court against Royal Dutch Shell Oil Company for the environmental degradation and pollution of Ogoni fishing villages while executing a PPP contract in Nigeria’s oil rich Niger Delta (Ogunbayo, ¶ 2, 2009).

Most African government rule over their people with little or no regards to legitimacy, and accountability. Elections and the polls therefore count for nothing. Very often, African government enter into PPP arrangement without having to obtain voter approval, comply with statutory debt limitations or report PPP lease obligation as debt (Wallison, 1996).
Thus even though the ability to bypass the public appropriation process through innovative financing methods is often regarded as major advantage of PPP, it should be noted that avoiding restrictions on debt is not the same as avoiding debt (Bloomfield) . As Donahue argued public ignorance resulting from deliberate deception on the part of public officials and others is “engineered ignorance” (1989, p. 32). In this case, there is no doubt that there are powerful incentives and considerable opportunities for politicians, private developers, and public servants to mislead Africans.

A particularly egregious case of abuse of PPP is typified in the Kenya road corruption case earlier referenced. There the government in power secretly used PPP as a vehicle for obtaining cash loans in form of concession fees paid directly to the politician account at the onset of the contract. The private contractor then adds these as user fees spread over the life of the contract (Farlam).
Historically, corruption has been an enormous problem affecting public procurement in Africa. PPP deals are often susceptible to corruption because the deals are far more complex and thus choice of companies cannot be reduced to the single variable of price, and as such it offers greater latitude for manipulations by foreign or local firms or government officials that are hard for the public and anti-corruption systems to spot. For instance twelve multinational companies (MNCs) were found to have bribed the former head of Lesotho Highlands Water Project and, according to the Lesotho prosecuting authorities, these MNCs were the prime movers in initiating the bribes. One of these companies, Acres international, was debarred by the World Bank from its contracts for three years in July 2004 (Farlam).

Harris (2003), argues that the private sector generally has more incentive to minimize costs and reduce leakages from corruption than the public sector ( p.33). But the possibility of lucrative companies taken over by cronies or relatives of those in government is highlighted by the incident in Tanzania where a power purchasing agreement (PPA) signed between the government and an independent power producer in 1995 was described as “public-private partnership at its worst”(Farlam, p.39).

Long Term Savings Estimate: Among the alleged benefits of PPP, at least in the West, is the promise of significant cost savings to the public. In an era of limited public resources and expanding public needs, citizens are rightly supportive of governmental initiatives aimed at delivering public services more cost effectively (Collin, 1998). The credibility of cost saving estimates depends, of course, on the data, methodology and assumptions used to calculate savings (Bloomfield, 2006, p.405). Lacking access to these details, African citizens must rely on their government willingness and ability to develop accurate and reliable financial forecasts before committing public resources to long-term contracts. In the absence of hard evidence, Africans are asked to stay cheerful and trust the good intentions of others (Blowfield, 2004).

When the cost saving estimates disseminated to the public are based on flawed calculations, unrealistic assumptions or outright falsehood as in the following examples transparency is diminished. In South Africa for example, the requirement for empowerment of black entrepreneurs have been affected by a system called “fronting,” where companies appoint nominal black directors or shareholders to win contracts but are in fact managed, and owned by foreign firms (Farlam, p.48). Similar reports abound in Tanzania where a 10 year lease agreement at the container terminal at Daresalaam port requiring 50% reduction of expatriate was circumvented by creative accounting “gymnastics” (Farlam, p.39). The extent of the disillusionment with PPPs implementation in water, sanitation and electricity in sub-Saharan Africa are such that an associate at an international legal firm described PPPs as a failure in Africa (Ogunbiyi, 2004).

It may be that these cases are the exceptions to the rule. It is to be hoped that the cost saving claims for PPP are based on reasonable, realistic calculations and assumptions. But these troubling examples underscore the public’s vulnerability to erroneous, biased cost-savings claims that appear to be aimed at selling PPP to African governments rather than informing the public of the full financial implications of long term contracts and obligations. The complex and sophisticated financial and contractual arrangement offered by PPP has been turned essentially into a veritable avenue for corrupt government official to siphon money from the national coffer using this public service project as an unlimited credit card to line their pocket.