As always the best place to start is at the beginning
In case you were wondering, the above is how the Lekki Expressway was funded i.e. where the money to build it came from.
Unpacking that, we can quickly see that the road was built with 68% debt and 32% equity. Debt of course isnt really a problem by itself, the issue here might be where exactly the debt is coming from. As an aside, it’s also interesting that the local lenders are getting out first in terms of tenure (12yrs). This is a lesson for those who are quick to complain about foreign loans but that’s besides the point.
Let me state my position clearly now; I dont like this deal. I think it was badly structured from the get go and is bound to run into problems.
First off, you might notice that LASG is actually an investor in this project via a mezzanine debt tranche i.e the state government is into this deal to make money over the 20years it is invested. It has no equity whatsoever in the deal. This is not only bad, it is actually very dangerous.
On to the next, no one needs to be told that banks and finance institutions enter into such a deal to make money. Nothing wrong with making money of course given that quite often, in the process of making money, a social good or service is delivered.
But what does this kind of funding arrangement mean for the motorists who will use the road over the next 30 years? Quite simply, it means that each time you drive through that toll and pay, you are paying for literarily every bag of cement, every drop of ashphalt or bitumen, every steel iron and the labour used to build it. It doesnt stop there, you are also paying for a reasonable profit element to cover the risk of those who put their money in over 12 to 20yrs. You will also be paying for the salaries of those who run LCC among a myriad of other costs they might incur. Lastly, you will be paying for the maintenance of the road over the life of the project as this must be part of the deal.
This is where I have a serious problem with the deal; most of the people who will be using that road are already taxpayers who presumably have an ongoing relationship with the Lagos State Government. But strangely, you now have a deal where a service within a service has been carved out and a payment demanded for it. This is where I think a lot of people who support the tolling as ‘neccesary’ miss the point; the question of what exactly is being paid for and to who?
The funding structure also puts a lie to the ‘PPP’ tag given to this deal. It’s actually not a PPP deal at all. The correct term for it ought to be PFI – Private Finance Initiative given that there is no government equity involved. When something sounds too good to be true, well clearly it must be. A road needed to be built, govt either had no money or didnt want to put its money into but somehow as if by magic, the road has appeared there. But who is paying for this seemingly free lunch? Or to ask a better question, is this a better way to do things?
Thankfully, Nigeria did not invent PFI so we can always check out how they have fared in other countries. The UK has experimented very well with PFIs in the past and there is a ton of research showing they are a worse option than the alternatives. As an example, the ACCA carried out a survey of accounts in 2002 asking the question ‘Do PFI schemes provide value for money?’. It may or may not shock you to hear that only 4% of respondents said yes. But dont take my word for it, the report is here. 2 quotes from the executive summary include the following ‘an extremely expensive option generated through political dogma‘ and ‘I believe that PFI is a short term quick fix but in the longer term it is costly to the public purse’.
Take your pick from any of PFI failures. Start here for the £6bn M25 widening deal which according to the National Audit Office ended up costing 25% more than it would have under alternative options. The previous Labour govt loved these deals and signed a whole bunch of them. 103 NHS PFI deals that cost £11.3bn when they were signed will end up costing the NHS £65bn over 30 years. Interestingly, I understand that LASG has so far paid N7bn to LCC for various contract breaches since the deal was signed ranging from the suspension of the toll before the elections to delays in construction. To that I say, get out while you can.
So what is a PPP and what is the difference? It is exactly what it says it should be – a partnership between the govt and the private sector to deliver critical infrastructure. This is not a ‘mouth’ partnership, it has to be a ‘put your money where your mouth is’ kind of partnership. The best example I have come across is this road in Malaysia. It is the longest road in Malaysia covering 772km from the north to the south of the country. So how was it funded? The table below shows the top 10 shareholders in the deal
In case you were wondering, UEM Group Berhad is 100% owned by Khazanah Nasional Berhad which is itself the Investment Company of the Malaysian govt. in other words the Malaysian govt owns just over half of the road. Governments have a continuos/never ending relationship with their taxpayers which means that a govt can take a very long term if not perpetual view of an ‘investment’ in a way that the sector cant. This is why govts build roads and provide various other infrastructure. Govt does not neccesarily have to ‘make its money back’ from providing infrastructure because it will always make its money back ultimately from collecting your taxes. But the private sector has to make its money back. And it doesnt have the luxury of this continous relationship with the taxpayers that govt has.
Using a simplistic example; say the govt were to build that road itself, how would it make the money back to use elsewhere without tolling? The new road ought to create plenty of movement. So the question is do you tax the movement by tolling or tax the reason for the movement? People driving on that road will be coming from home in the morning or going home in the evening, so you should tax their homes – and given that they already pay some taxes on their homes, you can increase this ever so gently. Where are all they heading to in the morning? They are going to work presumably. A better road means they are less tired when they get there and can be more productive meaning you can tax those businesses, again ever so gently. If people can leave work at say 5pm and get home by 6pm, this means they can get some rest and come back out for a meal or drinks in the neighbourhood. So you tax the restaurants and bars that will inevitably get more business in the neighbourhood . You can add your ideas to the list.
The problem with tolling in this case is that you are taxing the movement mainly because the money has to be repaid to the banks [Indeed this explains why the tolls were built even before the roads were completed – from the chart above, ‘pre-completion revenues’ aka tolling is even higher than the equity put in by ARM & co]. And when you tax the movement, you are creating other problems because taxpayers resources are not finite. Using an example, imagine if when Heathrow Terminal 5 was opened, ticket prices suddenly increased by 50% for airlines landing there because they had to ‘pay for the airport’, most people would quickly start flying to Gatwick or other airports. So the payment is spread around all sorts of less noticeable places e.g the coffee you drink at the airport and what you pay to park. It is never a very smart idea to tax the movement which is why even when govts around the world are obviously trying to raise revenues, the case is always made that the taxes are to reduce an unwanted activity i.e congestion. This is why despite living in London for the past 8 years, I have never once paid the congestion charge to drive into Central London i.e the charge has been effective because the small city of London now has one less car to worry about.
One of the best congestion charge schemes in the world operates in Singapore. The only word I can use to describe it is is fantastic because it does exactly what it wants to do. Basically the charge is variable so that as traffic increases the daily charge is increased sometimes to very painful levels until the traffic levels fall back to normal and the charge reduces again. It works like magic. A new report also shows that Sweden has managed to reduce congestion over the years with a similar charge in Stockholm. So the question is, is LASG tolling to reduce congestion or to make money? Well the answer is clear because reducing congestion would be counter productive to the whole point of letting the investors exit with a smile on their faces.
The time will come when LASG will need to charge to reduce congestion on the roads and yours truly will wholeheartedly support such a move. The key is that there must be a viable alternative in place and such a charge is used to discourage unwanted behaviour (too much driving, pollution etc) and encourage other activites (public transport). In this case, a business (a road) has been established in Lekki and the company is collecting revenues (tolls) from the hapless motorists. When they are done there, they will then go and pay their other taxes as normal to LASG as if nothing happened.
There is plenty to write about this topic, I havent even talked about the unforeseen problem of traffc caused by people queuing to pay. People have asked why the toll is N120 and not say say N100 to reduce the trouble of looking for change. The short answer to that is that that’s what the spreadsheet said they should charge. If LASG had equity in the deal, it could have foregone/deferred its share of the revenues and gone to the back of queue i.e. asking the tolls to be reduced to make it easier for people to pass through. But it cant in this situation. And it is already losing money and will end up paying the shortfall if the traffic falls below a certain amount.
I think that this deal will collapse before the next election in 2015. And by collapse I mean LASG will be forced to assume the liabilities of the project and pay off all the lenders. When thathappens, I am very sure that it will end up paying well in excess of the original N50bn cost of the deal.
Perhaps it’s not Governor Fashola’s fault as this deal was started before he became governor, but it’s very important that Nigerian governments learn painful lessons. I think this is going to be one of such and will hopefully force a rethink of other such projects in the pipeline.
No hard feelings, a bad deal is just a bad deal.