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Demand Risk

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Public Private Partnerships in Nigeria

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Abstract

This chapter discusses demand risk. The chapter commences with an analysis of how demand risk affects projects generally, and PPPs in particular. The chapter opens with an evaluation of how demand risk is allocated in PPPs. This is followed by a discussion of incomplete contract theory, which is the theoretical framework used in analysing demand risk in this book. In the subsequent sections of this chapter, a case study of the MMA2 Airport project is carried out to evaluate the management of demand risk in Nigeria. The chapter concludes with recommendations for dealing with the risk.

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Notes

  1. 1.

    Norton Rose (2006) Infrastructure PPP in Asia, (online), available at: http://ebookbrowse.com/nortonrose-infrastructure-ppp-in-asia-2006-pdf-d5316336 (last accessed 26 November 2012).

  2. 2.

    Damilola Akerele and Kassim Gidado (2003) “The Risks and Constraints in the Implementation of PFI/PPP in Nigeria”in D.J. Greenwood (ed.), 19th Annual ARCOM Conference, 3–5 September 2003, University of Brighton, UK, Association of Researchers in Construction Management, 1: 379–91, also available at: http://www.arcom.ac.uk/publications/procs/ar2003-379-391_Akerele_and_Gidado.pdf (last accessed on 1 January 2012).

  3. 3.

    Bi-Courtney Limited v. Attorney General of the Federation (unreported), Suit No. FHC/ABJ/CS/50/2009.

  4. 4.

    Elisabetta Iossa and Daniel Martimot identify three payment mechanisms in PPPs; these are user charges, usage payments and availability payments. The usage payments are technically variants of the user charge and availability payments. See Elisabetta Iossa and Daniel Martimot(2008), “The Simple Micro-Economics of Public-Private Partnerships”, Working Paper, available at http://papers.ssrn.com/paper.taf?abstract_id=1318267 (last accessed on 5 May 2012).

  5. 5.

    This is common in PFI contracts in the UK and Contrats de partenariat in France. Several other countries have started to use this contract type exclusively, irrespective of the sector.

  6. 6.

    Julie De-Brux and Claudine Desrieux (2012) “Public Private Partnerships and the Allocation of Demand Risk: An Incomplete Contract Theory Approach”, available at http://extrant.isnie.org/uploads/isnie2012/de-brux_desrieux.pdf (last accessed 13 August 2012).

  7. 7.

    Laure Athias (2007) “Political Accountability, Incentives, and Contractual Design of Public Private Partnerships”, MPRA Paper No. 17,089, available at http://mpra.ub.uni-muenchen.de/17089/ (last accessed 13 October 2015).

  8. 8.

    For example, so many factors may affect the continued use of a tolled road; for example, a shift in the use of mass transit, an increase in the cost of petrol and the relocation of people from a particular area. While the use of air transport in Nigeria, even locally, depends on economic conditions as, in lean times, passengers are likely to turn to cheaper forms of transport such as buses. This is also true in periods after air mishaps, where people abandon air transportation in preference to other competing means of transport.

  9. 9.

    HM Treasury (2003) “Green Book, Appraisal and Evaluation in Central Government”, London: HM Treasury, p. 85; Mott MacDonald (2002) “Review of Large Public Procurement in the UK”, London: HM Treasury; Robert Bain and Jan. W. Plantagie (2003) “Traffic Forecasting Risk: Study Update 2003”, London: Standard & Poor’s; Robert Bain and Jan. W. Plantagie (2004) “Traffic Forecasting Risk: Study Update”, London: Standard & Poor’s; Robert Bain and Lidia Polakovic (2005) “Traffic Forecasting Risk Study 2005: Through Ramp-Up and Beyond”, London: Standard & Poor’s.

  10. 10.

    Jose M. Viegas (2010) “Questioning the Need for Full Amortization in PPP Contracts for Transport Infrastructure”, Research in Transportation Economics, 30(1): 139–144.

  11. 11.

    Jae-ho Choi, Jinwook Chung and Doo-Jin Lee (2010)_ “Risk Perception Analysis: Participation in China’s Water PPP Market”, International Journal of Project Management, 28(6): 580–592.

  12. 12.

    For instance, in Chile, in nine out of ten highways franchised, the government provided a guarantee that the revenue will equal 70 % of the construction and maintenance costs. See E.M.R.A. Engel, R.D. Fischer and A. Galetovic (2001) “Least Present Value of Revenue Auctions and Highway Franchising”, Journal of Political Economy, 109(5): 993–1020.

  13. 13.

    For instance, in Spain, where three firms went bankrupt as a result of traffic projections being less than one-third of original projections, government permitted toll increases and term extensions. Also, in Mexico most of the concessions were renegotiated after cost overruns and low revenues at the cost of US$6 million to the government. See E.M.R.A. Engel, R.D. Fischer and A. Galetovic (2001).

  14. 14.

    This might not necessarily lead to a loss to the private sector as the private sector may be paid reasonable compensation for transferring the asset back to the public sector. See, for instance, Elisabetta Iossa, Giancarlo Spagnolo and Mercedez Vellez (2007) “Best Practices on Contract Design in Public-Private Partnerships”, Report Prepared for the World Bank available at http://www.gianca.org/papersHomepage/Best%20Practices%20on%20Contract%20Design.pff (last accessed 19 November 2012).

  15. 15.

    Laure Athias (2007) “Political Accountability, Incentives and Contractual Design of Public Private Partnerships: Demand Risk on Private Providers or Public Authorities”, available at http//mpra.ub.uni-muenchen.de/10,538/1/ATHIAS_Political_accountability_dec.pdf (last accessed 13 October 2015).

  16. 16.

    Patrick Bajari, Stephanie Houghton and Steve Tadelis (2006) “Bidding for Incomplete Contracts: An Empirical Analysis”, National Bureau of Economic Research Working Paper available at http://www.nber.org/papers/w12051.pdf?new_window=1 (last accessed 13 October 2015).

  17. 17.

    Laure Athias and Raphael Soubeyran (2012) “Demand Risk Allocation in Incomplete Contracts: The Case of Public Private Partnerships”, Conference on Economics PPPs, IESE, Barcelona, 20–21 April, available at http://www.iese.edu/en/files/20_Athias_tcm4-80532.pdf (last accessed 13 October 2015).

  18. 18.

    Philippe Aghion and Richard Holden (2011) “Incomplete Contracts and The Theory of the Firm, What Have We Learned Over the Past 25 Years”, Journal of Economic Perspectives, 25(2), Spring: 181–197.

  19. 19.

    Ronald Coase (1937) “The Nature of the Firm”, Economica, 4(16): 386–405.

  20. 20.

    Oliver Williamson (1985) The Economic Institutions of Capitalism, New York: Free Press; Oliver Williamson (1991) “Comparative Economic Organization: The Analysis of Discrete Structural Alternatives”, Administrative Science Quarterly, 36(2): 269–296.

  21. 21.

    Philippe Aghion and Richard Holden (2011).

  22. 22.

    Eric Brousseau and M’hand Fares (2000) “Incomplete Contracts and Governance Structures: Are Incomplete Contract Theory and New Institutional Economics Substitutes or Complements?” in Claude Menard (ed.), Institutions, Contracts, Organisations, Perspectives from New Institutional Economics, Aldershot: Edward Elgar Publishing.

  23. 23.

    Bruce R. Lyons (1996) “Incomplete Contract Theory and Contracts between Firms: A Preliminary Empirical Study”, Centre for Competition and Regulation Working Paper, CCR 01-1.

  24. 24.

    Philippe Aghion and Richard Holden (2011).

  25. 25.

    Sanford J. Grossman and Oliver D. Hart (1986) “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration”,Journal of Political Economy, 94(4): 691–719.

  26. 26.

    Philippe Aghion and Richard Holden (2011).

  27. 27.

    Ibid.

  28. 28.

    See Patrick Schmitz (2001) “The Hold Up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory” Bulletin of Economic Research, 53(1): 1–17.

  29. 29.

    Antonio Nicita and Ugo Pagano (2002) “Incomplete Contracts and Institutions” in Fabrizio Cafaggi, Antonio Nicita, Ugo Pagano (eds.), Legal Ordering and Economic Institutions, London: Routledge, p. 145.

  30. 30.

    Ibid.

  31. 31.

    R.E. Scott and G.G. Triantis (2005) “Incomplete Contracts and the Theory of Contract Design”, Case Western Law Review, 56(1): 1–15. Electronic copy (online) available at http://law.bepress.com/uvalwps/olin/art23 (last accessed 6 October 2012).

  32. 32.

    Antonio Nicita and Ugo Pagano (2002).

  33. 33.

    Ibid.

  34. 34.

    The degree of asset specificity is defined as the degree to which an asset cannot be redeployed to alternative uses and by alternative users without sacrifice to productive value; see Antonio Nicita and Ugo Pagano (2002).

  35. 35.

    Ownership of the asset matters when contracts are incomplete because the owner has residual control rights. Since the government owns the PPP asset, it makes all decisions concerning the asset not included in the contract; for instance, it can build another road to compete with an existing toll road managed by the private sector. See O. Hart (2003) “Incomplete Contracts and Public Ownership: Remarks, and an Application to Public Private Partnerships”, Economic Journal, 113(486): C69-C76.

  36. 36.

    Hold-up occurs, for example, when parties renegotiate the incomplete contract. During renegotiation, the party in the better position is the one who can potentially hold-up the other party and therefore obtain better pay-offs or better conditions. See, for example, S. Ping Ho and Chun-Wei-Tsui (2009) “The Transaction Cost of Public-Private Partnerships: Implications on PPP Governance Design”, available at http://www.academiceventplanner.com/LEAD2009/papers/Ho_Tsui.pdf (last accessed 13 October 2015).

  37. 37.

    Antonio Nicita and Ugo Pagano (2002).

  38. 38.

    Oliver Williamson (1985).

  39. 39.

    Laure Athias (2007).

  40. 40.

    Julie De-Brux and Claudine Desrieux (2012).

  41. 41.

    Ellen Dannin (2011) “Crumbling Infrastructure, Crumbling Democracy: Infrastructure Privatization Contracts and Their Effects on State and Local Governance”, North Western Journal of Law and Social Policy, 6(1), Winter:. 47.

  42. 42.

    Tell Magazine, Tuesday 26 June 2012. Some of the major cases which are all reported in This Day newspaper, Wednesday, 31 October 2012 are Bi-Courtney Limited v. Attorney General of the Federation (unreported), Suit No. FHC/ABJ/CS/50/2009; Ojemaie Investments Limited (Claiming as Landlords to Arik Air) v. Bi-Courtney Limited (unreported), Suit No. CA/A/141/M/2009; Safiyanu Dauda Mohammed and National Union of Air Transport Services, Air Transport Services Senior Staff Association of Nigeria (ATSSAN) v. Bi-Courtney Limited (unreported), Suit No. CA/A/141/M/09 (This was an action filed by the workers union); Arik Air v Bi-Courtney Limited; The Federal Airport Authority of Nigeria v. Bi-Courtney Limited & Anor. (2011) LPELR 19742 (CA) pg.1–57; Suit No: CA/A/239/M/2010 and Attorney General of the Federation v. Bi-Courtney Limited, reported in This Day newspaper, Wednesday, 31 October 2012.

  43. 43.

    The trial court and the Court of Appeal have already decided in favour of the concessionaire. It is possible that FAAN might appeal further to the Supreme Court.

  44. 44.

    This already manifesting, as there are suspicions that the cancellation of the Lagos– Ibadan road concession granted previously to Bi-Courtney Limited (the concessionaire of MM2) by the government and the subsequent prosecution of the majority shareholder of the company for money laundering is as a result of the dispute.

  45. 45.

    See the recital to the Supplementary Agreement.

  46. 46.

    It is claimed in some quarters that KPMG recommended the extension of the term of the concession for 36 years, in order to allow the concessionaire to recover its investment. See Tell magazine (2012).

  47. 47.

    Editorial, “Power Tussle Over MMA2” Vanguard newspaper, Monday 11 August 2013: p. 11.

  48. 48.

    Note that it may also be argued that there is an inverse relationship between the service charge and the duration of the concession contract; that is, the lower the service charge, the longer the concession.

  49. 49.

    Article 11.4 of MMA 2 Concession Agreement, 2003.

  50. 50.

    Julie De-Brux and Claudine Desrieux (2012); Laure Athias and Raphael Soubyeran (2012).

  51. 51.

    Ibid.

  52. 52.

    Transport Research Centre (TRANSYT) (2007) “Evaluation of Demand Risk Mitigation in PPP Projects”, p. 8.

  53. 53.

    Ibid; see also Jose A. Gomez-Ibanez and John R. Meyer (1993) Going Private: The International Experience with Transport Privatization, Brookings Institution, Washington, DC.

  54. 54.

    Jose M. Vasello and Juan Gallego (2005) “Risk Sharing in New Public Works Concession Law in Spain”, Transport Research Record 1932, p. 1–8; Jose M. Vassallo (2006) “Traffic Risk Mitigation in Highway Concession Projects: The Experience of Chile”, Journal of Transport Economy and Policy, 40(3): 359–381.

  55. 55.

    Jose M. Vasello (2006).

  56. 56.

    See Elisabetta Iossa, Giancarlo Spagnolo and Mercedez Vellez (2007), for a discussion of these subsidies.

  57. 57.

    Transport Research Centre (TRANSYT) (2007).

  58. 58.

    Timothy Irwin (2003) Public Money for Private Infrastructure: Deciding When to Offer Guarantees Output Based Subsidies and other Fiscal Support, World Bank Working Paper 10, Washington, DC; Transport Research Centre (TRANSYT) (2007); Jose M. Vasello (2006).

  59. 59.

    Jose M. Vasello and Antonio Solino (2006) “Minimum Income Guarantee in Transportation Infrastructure Concessions in Chile”, Transport Research Record, Journal of the Transportation Research Board, 1960(1): 15–22.

  60. 60.

    Transport Research Centre (TRANSYT) (2007).

  61. 61.

    D. Foice (1998) “Second Severn Crossing”, Proceedings of the Seminar PPP Risk Management for Big Transport Projects, Ministerio de Fomento, Spain.

  62. 62.

    Transport Research Centre (TRANSYT).

  63. 63.

    T. de Lemos, D, Eaton, M. Betts and L. Tadeu de Almeida (2004) “Risk Management in Lusoponte Concession: A Case Study of the Two Bridges in Lisbon, Portugal”, International Journal of Project Management, 22: 63–73.

  64. 64.

    Eduardo M.R.A. Engel, Ronald Fischer and Alexander Galetoric (1997) “Highways Franchising Pitfalls and Opportunities”, American Economic Review, 87: 68–72; Eduardo M.R.A. Engel, Ronald Fischer and Alexander Galetoric (2001) “Least Present Value of Revenue Auctions and Highway Franchising”, Journal of Political Economy, 109(5): 993–1020.

  65. 65.

    It was used in the Santiago–Valparaiso Vina del Mar Concession in Chile.

  66. 66.

    Jose M. Vasello (2006).

  67. 67.

    Eduardo M.R.A. Engel, Ronald Fischer and Alexander Galetoric (2001).

  68. 68.

    Jose M. Vasello (2006).

  69. 69.

    Eduardo M.R.A. Engel, Ronald Fischer, Alexander Galetoric (2001).

  70. 70.

    Jean Tirole (1997) “Comentario a la propuesta de Engel, Fischer y Galetovic sobre licitación de carreteras”, Estudios Públicos, 65, Winter 1997: 201–14, cited in E.M.R.A. Engel et al. (2001).

  71. 71.

    See John Quiggins (2005) “Public Private Partnerships: Options for Improved Risk Allocation”, Australian Economic Review, 38: 445; John Quiggins (2006) “Public Private-Partnerships: Options for Improved Risk Allocation” University of New South Wales Law Journal, 29(3): 289.

  72. 72.

    Jose M. Viegas (2010)“Questioning the Need for Full Amortisation in PPP Contracts for Transport Infrastructure”, Research in Transport Economics, 30: 139–144.

  73. 73.

    Ibid.

  74. 74.

    Elisabetta Iossa and David Martimot (2008).

  75. 75.

    Ibid.

  76. 76.

    European Commission (2004) Resource Book on PPP Case Studies, Brussels: EU.

  77. 77.

    Ibid.

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  1. Ministry of Finance, Abuja, Nigeria

    George Nwangwu

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Nwangwu, G. (2016). Demand Risk. In: Public Private Partnerships in Nigeria. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-54242-7_8

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  • DOI: https://doi.org/10.1057/978-1-137-54242-7_8

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