Economic Confidential, December, 2008

NEWS UPDATE

The Economics of Infrastructure Concession in Nigeria

By: Salisu Suleiman

The economy of every country is broadly divided into the public and the private sectors. A major challenge facing policy makers the world over is how to manage role of government in the economy. Some are of the view that government should disengage completely from the economy, while others argue for more government intervention.  For developing countries like Nigeria, the role of government in stimulating economic development remains central. It is accepted for example that a degree of government involvement is necessary to sustain a vibrant economy, which will in turn have a multiple effect on the entire economy.

Apart from the need to stimulate economic growth and development, the possibility of market failure, especially in developing countries where both structural and institutional factors have combined to limit the opacity of the price system to efficiently and equitably allocate resources in the economy. Added to this, certain "public goods" like defense, education, health and social welfare, consumed by all in the society, and some of which form the means to economic growth and poverty alleviation in an economy like ours, cannot be wholly left to be determined by the price system.

Similarly, government's intervention in the economy too is predicated on the need to ensure steady or stable economic growth. Government intervention is therefore predicated on the desire to harness available resources in a comprehensive and coordinated manner to hasten the pace of development and lessen the misallocation of present and future stock of resources. The existence of public goods and externalities also provide an economic rationale for the range of activities undertaken by the government to determine a nation's economic direction.

Government does this via the 'Allocative' function. This is the situation where government uses resources at its disposal to provide a number of goods and services, particularly those that may not be efficiently provided and equitably distributed through the market system. They include public goods, and services like education, health, water and power supplies, postal service, police protection, defense etc. The power to tax and the power to spend are the major tools of governments allocation function. As fiscal instruments, they constitute the goods and service component of the budget and a major process through which the federal, state and local governments exert some degree of influence and participate directly in the mainstream of the economy.

Another method of government function is through the 'Distribution' function. This is the means through which government attempts to balance or equalize "existing socio-economic clearages or imbalances between the rich and the poor, between the developed sectors and the underdeveloped, between the advanced and rich states or region and their poor backward counterparts. Experts assert that what ever distributive policy is used to address inequality, it can only be effective and meaningful against the backdrop of a well articulated and sincere attempt to remove structural and institutional barriers to social and economic mobility.

Finally, government intervention in the economy may be through the 'Stabilization' function. This function relates to the maintenance of high levels of resource utilization and stable price level, all means of reducing poverty. Two basic instruments available to government in carrying out this stabilization function are: the ability to increase or decrease the stock of money which can increase or decrease aggregate demand and influence the rate of interest and the ability to influence investment and output decisions in the economy through alterations in the composition of the expenditure budget or tax system, which enter into the decision process of producers and consumers throughout the economy.

But what happens when government does not have the resources to undertake the various tasks above, or where the competition for scarce resources is so high that the demands in a single sub sector alone can decimate a country's available resources? This is exactly the situation in Nigeria today. Indeed, the government has estimated that Nigeria needs to invest about $510 billion in critical areas such as rail and road network, water and electricity to be considered a leading global player. But with competing demands from education, agriculture, national security, public services and other sectors of the economy, where will these funds come from? This is against the backdrop that the country's external reserves have dipped below $60 billion.

Alternative sources of funding are pivotal to mitigating these challenges.  Thus, various concepts of public-private partnership have developed. One of the best models of PPPs is that of infrastructure concession. In Nigeria, this culminated in the Infrastructure Concession Regulatory Commission Act of 2005 which is intended at formalizing and regulating private sector participation in federal infrastructure. The ICRC Act stipulates that: "As from the commencement of this Act, any Federal Government Ministry, Agency, Corporation or Body involved in the financing, construction, operation or maintenance of infrastructure, by whatever name called, may enter into a contract with or grant concession to any duly pre-qualified project proponent in the private sector for the financing, construction, operation or maintenance of any infrastructure that is financially viable or any development facility of the Federal Government".

In context of the foregoing, "concession" refers to a contractual arrangement whereby the project proponent or contractor undertakes the construction, including financing of any infrastructure, facility and the operation and maintenance thereof and includes the supply of any equipment and machinery for any infrastructure and the provision of any services. Infrastructure concession in practice relies principally on the private sector. To ensure that public private partnerships are not abused, the Government's key policy objectives for PPP have been clearly spelt out in the following terms:     " to accelerate investment in new infrastructure and ensure that existing infrastructure is brought up to a satisfactory standard and capable of providing services that meet the needs and aspirations of the public; to improve the availability, quality, and efficiency of power, water, transport and other public services to increase economic growth, productivity, competitiveness, and access to markets; to increase the capacity and diversity of the private sector by providing opportunities for international and local investors and contractors in public infrastructure, encouraging efficiency, innovation, and flexibility at minimum cost.

The Infrastructure Concession Regulatory Commission hopes to accelerate investment in new infrastructure and ensure that existing infrastructure is brought up to a satisfactory standard and capable of providing services that meet the needs and aspirations of the public. The Commission also hopes to improve the availability, quality, and efficiency of power, water, transport and other public services to increase economic growth, productivity, competitiveness, and access to markets; to increase the capacity and diversity of the private sector by providing opportunities for international and local investors and contractors in public infrastructure, encouraging efficiency, innovation, and flexibility at minimum cost.

Other objectives of the ICRC include: to ensure that infrastructure projects are planned, prioritized, and managed to maximize economic returns and are delivered in a timely, efficient, and cost effective manner; to utilize state assets efficiently for the benefit of all users of public services; to ensure balanced regional development; to increase access to quality public services for all members of society; and to enhance the health, safety, and wellbeing of the public.

While formally inaugurating The Infrastructure Concession Regulatory Commission (ICRC) in Abuja recently, President Yar'Adua charged the body to bridge the huge infrastructure deficit in Nigeria by acting as an interface with the private sector to promote communication on national Public Private Partnership policies and programs.  The Commission has also been tasked to collaborate with State Governments to develop an orderly and harmonized framework for development of infrastructure in the country. 

The president explained that global demand for basic infrastructure services had grown over the years, quickly outstripping the supply capacity of existing assets. He added that Nigeria's experience is that huge infrastructure deficit has greatly constrained economic growth and development, thus inhibiting the country's ability to improve the quality of life of citizens as envisaged in the Seven- Point Agenda.

In the president's words: 'given the Federal Government's budgetary constraints vis-à-vis the quantum of resources required to rebuild, maintain, upgrade, and expand our critical infrastructure, the concession program as envisaged would leverage effectively on private capital'. He added that 'this would necessarily involve the requisite upgrade of government's regulatory and monitoring roles, with the Federal Government focusing on planning and structuring, while the private sector engages in management, investment, construction and finance of infrastructure development' .

 Suleiman is Head, Press and Public Relations

Infrastructure Concession Regulatory Commission,

Abuja.