CRITICAL SUCCESS FACTORS FOR PUBLIC PRIVATE PARTNERSHIP PROJECTS IN NIGERIA: A PERCEPTUAL SURVEY

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1 CRITICAL SUCCESS FACTORS FOR PUBLIC PRIVATE PARTNERSHIP PROJECTS IN NIGERIA: A PERCEPTUAL SURVEY Martin. O. Dada, Department of Building, University of Lagos, Akoka, Yaba, Lagos, Nigeria. tobdad@yahoo.com Michael G. Oladokun, Department of Building, University of Lagos, Akoka, Yaba, Lagos, Nigeria michael.oladokun@gmail.com There has been a movement towards involvement of the private sector in the provision of public infrastructure and services through the use of Public Private Partnerships (PPPs). This paper sought to identify a number of factors judged critical to the success or failure of PPP projects in order to determine the criticality of those factors. A questionnaire survey was conducted based on the experience of the respondents on PPP related projects. Five main success factors (SFs) and some success sub factors (SSFs) were identified. Of the main SFs, economic viability was ranked most critical to the success of PPP projects followed by appropriate risk allocation via reliable contractual arrangements, sound financial package, favourable investment environment, and reliable concessionaire with strong technical strength respectively. The study findings further suggest that there is agreement in the perceptions of both the public and private sectors on the criticality of SFs and significance of SSFs. It is recommended that relevant stakeholders can be appropriately guided in policy formulation for PPP projects in Nigeria. KEYWORDS: Success factors, public-private partnerships. INTRODUCTION Innovative procurement approaches have emerged in infrastructure development through PPPs while limited time privatization based on the concept of concession or build operate transfer (BOT) or other variants is popular in many countries (Zhang, 2004) because PPP approach can have a strong positive effect on the economic life of any country (Montanheiro, 2008). Government is no longer considered the sole provider of public works and services. PPPs through the private finance initiative (PFI) have been recognised as important approaches to solving problems for governments in providing infrastructure systems (Ho, 2006). Consequently, there has been a strong movement toward involvement of the private sector in the provision of public infrastructure and services across a wide range of industries and sectors, including power, transportation, water supply and disposal, telecommunications, oil and gas, mining, schools, hospitals, and military training facilities in order to alleviate the spending on governments budgets (Algarni, Arditi & Polat, 2007; Zhang, 2005a). Some of the forces driving this

2 CIB W065/055 Commissions: Transformation through Construction 2 movement have been a scarcity of public resources, a political trend toward the deregulation of infrastructure, and an expansion of global markets (Ababutain, 2002). With this movement, the private sector is playing an increasingly crucial role in the finance and provision of services that were traditionally the domain of the public sector (Chege and Rwelamila, 2001). Nigeria is not left out in this movement as the Federal Government of Nigeria is moving increasingly into a private sector driven economy with the use of PPP procurement system in different sectors of the economy. Governments at various levels (i.e. federal, state and local) are increasingly utilising this methodology. For instance, in Lagos state, the PPP methodology has been adopted in the generation of power; management of waste disposal; highway maintenance, and street cleaning; provision of infrastructures, among others. This research thus intends to identify and assess the critical success factors for the successful implementation of PPP construction projects in Nigeria. The study has the capability of contributing to the PPP body of knowledge. This knowledge would help in the establishment of relevant laws, regulations, and guidelines and in the development of efficient procurement framework for best PPP practices in Nigeria. CRITICAL SUCCESS FACTORS FOR PPP PROJECTS Rockmart and the Sloan School of Management developed the concept of Critical Success Factors (CSFs) accoding to Jefferies, Gameson and Rowlinson (2002). Morledge and Owen (1999) developed the concept of CSFs further to identify certain weaknesses associated with the practical application of Rockart s method. These include: subjectivity; bias, human inability to process complex information, change in relation to surrounding environments; imprecise definitions and generalisations, and qualitative performance measures. This method of CSFs has been applied as a management measure in a number of sectors. Thus, there have been attempts to apply this same concept to construction management. A number of authors have identified CSFs for PPP projects. Tiong (1996) identified six CSFs for private contractors in competitive tendering and negotiation in BOT contracts as: entrepreneurship and leadership; right project identification; strength of the consortium; technical solution advantage; financial package differentiation; and differentiation in guarantees. Qiao, Wang, Tiong, and Chan (2001) established eight CSFs in BOT projects in China as: appropriate project identification; stable political and economic situation; attractive financial package; acceptable toll/tariff levels; reasonable risk allocation; selection of suitable subcontractors; management control; and technology transfer. Jefferies et al. (2002) explored CSFs for BOOT procurement system specific to Stadium Australia. Hardcastle, Edwards, Kintyre and Li (2005) used factor analysis approach to identify CSFs in 2

3 CIB W065/055 Commissions: Transformation through Construction 3 PPP/PFI projects in the United Kingdom construction industry: effective procurement; project implement ability; government guarantee; favourable economic conditions; and available financial market. In the work of Zhang (2005a), he is of the opinion that the PPPs involve various kinds of risks that may emerge at different stages in the life cycle of a project. He argued that PPPs should be seen as merely a vehicle for governments to develop infrastructure projects by transferring all the risks to the private sector and thus shedding of all their responsibilities. The risks require appropriate allocation and management. He further reiterated that private finance initiatives do not automatically lead to successful infrastructure projects. He then advocated that a PPP project procurement should be based on a public private win win principle. It is under this premise that he was able to identify five CSFs and a number of SSFs. These are: favourable investment environment; economic viability; reliable concessionaire with strong technical strength; sound financial package; and appropriate risk allocation via reliable contractual arrangements. STUDY OBJECTIVES The objectives of the study are to: 1. identify and assess the criticality of SFs, 2. identify and assess the significance of SSFs, and 3. evaluate the degree of agreements between the public and the private sectors regarding the criticality of SFs and significance of SSFs. RESEARCH METHODS A literature review was conducted for the research. A number of CSFs and success sub factors were identified. The authors made use of the factors identified by Zhang (2005a) based on the comprehensiveness of the factors due to the PPP experts opinions. A questionnaire survey was then developed and used as a research tool to assess and rank these main factors and sub factors. The population for the research was senior/middle-level managers, and project managers/officers in public ministries, banking institutions, law firms, construction companies, consulting firms, academia, and investment companies that are directly responsible for managing and administering construction related PPP projects. The respondents were based in Lagos, the commercial nerve-centre of Nigeria where there were ongoing PPP projects or where the offices of stakeholders in PPP projects were located. The respondents sample were obtained with the use of non probability sampling technique. Respondents were asked to rate the criticality of CSFs on a scale of 0 5 (with 0 being not applicable, 1 being not critical, 2 being fairly critical, 3 being critical, 4 being very critical, and 5 being extremely critical. 3

4 CIB W065/055 Commissions: Transformation through Construction 4 Also, they were asked to rate the relative significance of the success sub factors on a scale of 0 5 (with 0 being not applicable, 1 being not significant, 2 being fairly significant, 3 being significant, 4 being very significant, and 5 being extremely significant. 120 questionnaires were administered. Of this number, fifty nine (59) respondents returned complete questionnaires. The effective return rate is, however, 49%. This is higher than 23% and 12% reported by Zhang (2005a) and Hardcastle et al. (2005) respectively. RESULTS The criticality index of each SFs was calculated as follows: Criticality index = (5n 5 + 4n 4 + 3n 3 + 2n 2 + 1n 1 ) / 5(n 5 + n 4 + n 3 + n 2 + n 1 ) Where n 5 = number of respondents who answered extremely critical ; n 4 = number of respondents who answered very critical ; n 3 = number of respondents who answered critical ; n 2 = number of respondents who answered fairly critical ; n 1 = number of respondents who answered not critical. The significance index of each of SSFs was calculated based on the formula provided by Zhang (2005a). Significance index = (0R i0 + 20R i1 + 40R i2 + 60R i3 + 80R i R i5 )/(R i0 + R i1 + R i3 + R i4 + R i5 ) Where R i0 = number of responses as 0 for the ith factor or sub factor; R i1 = number of responses as 1 for the ith factor or sub factor; R i2 = number of responses as 2 for the ith factor or sub factor; R i3 = number of responses as 3 for the ith factor or sub factor; R i4 = number of responses as 4 for the ith factor or sub factor; R i5 = number of responses as 5 for the ith factor or sub factor. The criticality indices and rank of the five main SFs are shown in Table 1 based on the responses from public sector, private sector, and all the sectors respectively. It was observed that public sector ranked economic viability (0.896) as being the highest and favourable investment environment (0.768) as being the least. In the case of the private sector economic viability was also ranked highest while reliable concessionaire consortium with strong technical strength (0.612) was ranked least. The ranking of the overall responses is not different from the results of the private sector: economic viability (0.888); appropriate risk allocation via reliable contractual arrangements (0.838); sound financial package (0.804); favourable investment environment (0.766); and reliable concessionaire consortium with strong technical strength (0.684). 4

5 CIB W065/055 Commissions: Transformation through Construction 5 Table 1: Criticality Indices and Rank of Success Factors Public Private Overall Success factors C.I. R. C.I. R. C.I R. Economic viability Appropriate risk allocation via reliable contractual arrangements Sound financial package Reliable concessionaire consortium with strong technical strength Favourable investment environment Note: C.I. = Criticality Index R.= Ranking Appropriate risk allocation via reliable contractual arrangements is another factor critical to the success of any kind of PPP project. Ability to appropriately and reliably allocate risk in: 1. concession agreement; 2. shareholder agreement; 3. design and construct contract; 4. loan agreement; 5. insurance agreement; 6. supply agreement; 7. operation agreement; 8. off-take agreement; 9. guarantees/support/comfort letters; goes a long way in making PPP projects a success and the lack of which may result in projects failure to reach closures due to the inability to resolve legal issues. This factor is adjudged critical because of the fact that PPP procurement system is still at the infant stage here in Nigeria and this is further complicated by the presence of no specific framework guiding PPP contract arrangements. Reliable concessionaire consortium with strong technical strength was ranked least as being critical to the success of PPP projects. Government support is needed with a stable political system devoid of currency exchange risk under a promising economy. For PPP procurement route to triumph in Nigeria the investment environment must be favourable and attractive to investors. Table 2 shows a summary of the significance indices from the public sector, private sector, and all the sectors. For all the responses under favourable investment environment, the first five most ranked SSFs are stable political system (95.0%), favourable economic system (90.8%), government support (84.4%), the project is well suited for privatisation (82.4%), and predictable risk scenarios (81.6%). Under the economic viability, long-term demand for the products/services offered by the project (89.2%) ranked highest. Others are: sufficient profitability of the project to attract investors (86.8%), long-term cash flow that is attractive to lender (86.8%), long-term availability of suppliers needed for the normal operation of the project (72.8%), and limited competition from other projects (65.8%). In reliable concessionaire consortium with strong technical strength, the first five most ranked SSFs are: good relationship with host government authorities 5

6 CIB W065/055 Commissions: Transformation through Construction 6 (86.2%), leading role by a key enterprise or entrepreneur (84.8%), strong and capable project team (86.2%), effective project organisation structure (80.0%), and sound technical solution (77.2%) Table 2 Significance Indices and Ranks of Success Sub factors Public Private Overall Success sub factors S.I. R. S.I. R. S.I. R. Favourable investment environment Stable political system Favourable economic system Government support The project is in public interest Predictable risk scenarios The project is well suited for privatisation Adequate local financial market Predictable and reasonable legal framework Supportive and understanding community Predictable currency exchange risk Promising economy Economic viability Long-term demand for the products/services offered by the project Long-term cash flow that is attractive to lender Sufficient profitability of the project to attract investors Long-term availability of suppliers needed for the normal operation of the project Limited competition from other projects Reliable concessionaire consortium with strong technical strength Good relationship with host government authorities Strong and capable project team Leading role by a key enterprise or entrepreneur Effective project organisation structure Sound technical solution Cost - effective technical solution Low environmental impact Public safety and health considerations Multidisciplinary participants Partnering skills Innovative technical solution Rich experience in international PPP project management Sound financial package Appropriate toll/tariff level(s) and suitable adjustment formula Abilities to deal with fluctuations in interest/exchange rates Sound financial analysis Investment, payment, and drawdown schedules Sources and structure of main loans and standby facilities Long - term debt financing that minimises refinancing risk Stable currencies of securitisation (debts and equity finance) Fixed and low interest rate financing Low financial charges

7 CIB W065/055 Commissions: Transformation through Construction 7 High equity/debt ratio Appropriate risk allocation via reliable contractual arrangements Appropriate and reliable risk allocation in: Concession agreement Off take agreement Guarantees/support/comfort letters Loan agreement Shareholder agreement Operation agreement Insurance agreement Design and construct contract Supply agreement Note: S.I. = Significance Index R = Ranking For sound financial package, the five most ranked SSFs are: appropriate toll/tariff level and suitable adjustment formula (89.4%), abilities to deal with fluctuations in interest/exchange rates (86.2%), sound financial analysis (83.4%), sources and structure of main loans and standby facilities (81.6%), and investment, payment and drawdown schedules (80.0%). Under the appropriate risk allocation via reliable contractual arrangements, the following are the five most ranked SSFs: concession agreement (83.8%), loan agreement (79.4%), guarantees/support/comfort letters (80.0%), operation agreement (76.6%), and off take agreement (75.6%). It will be noted that the lowest percentage significance in all is 60.4%. This shows that all the SSFs are significant and therefore very important to the success of PPP projects. A rank agreement analysis was carried out between the Public and Private sectors by the use of Spearman s rank correlation coefficient, r s. Table 3. Agreement Analysis of Ranking of Success Factors T Public Private Agreement h Success factors S.I. R. S.I. R. Analysis eeconomic viability Appropriate risk allocation via reliable contractual harrangements isound financial package r s = 0.90 greliable concessionaire consortium with strong technical strength h Favourable investment environment e r Note: S.I. = Significance Index R.= Ranking r s = Spearman s coefficient of rank correlation the value of rs, the higher the agreement between the two groups. An r s of zero means perfect disagreement, and an r s of 1 means perfect agreement. r s for SFs and SSFs are shown in Tables 3 and 4 respectively. It can be seen that the minimum r s is 0.75 which shows that there is a good agreement between the public and private sectors 7

8 CIB W065/055 Commissions: Transformation through Construction 8 Table 4. Agreement Analysis of Ranking of Success Sub factors Public Private Agreemen t Success sub factors S.I. R S.I. R. Analysis Favourable investment environment Stable political system Favourable economic system Government support The project is in public interest r s = 0.92 Predictable risk scenarios The project is well suited for privatisation Adequate local financial market Predictable and reasonable legal framework Supportive and understanding community Predictable currency exchange risk Promising economy Economic viability Long-term demand for the products/services offered by the project Long-term cash flow that is attractive to lender Sufficient profitability of the project to attract investors r s = 0.90 Long-term availability of suppliers needed for the normal operation of the project Limited competition from other projects Reliable concessionaire consortium with strong technical strength Good relationship with host government authorities Leading role by a key enterprise or entrepreneur Strong and capable project team Effective project organisation structure Sound technical solution r s = 0.92 Cost - effective technical solution Low environmental impact Multidisciplinary participants Public safety and health considerations Innovative technical solution Partnering skills Rich experience in international PPP project management Sound financial package Appropriate toll/tariff level(s) and suitable adjustment formula Abilities to deal with fluctuations in interest/exchange rates Sound financial analysis Investment, payment, and drawdown schedules Sources and structure of main loans and standby facilities r s = 0.95 Long - term debt financing that minimises refinancing risk Stable currencies of securitisation (debts and equity finance) Fixed and low interest rate financing Low financial charges High equity/debt ratio Appropriate risk allocation via reliable contractual arrangements Appropriate and reliable risk allocation in: Concession agreement Guarantees/support/comfort letters Off take agreement Loan agreement r s =

9 CIB W065/055 Commissions: Transformation through Construction 9 Shareholder agreement Insurance agreement Operation agreement Design and construct contract Supply agreement Note: S.I. = Significance Index R = Ranking r s = Spearman s coefficient of rank correlation A null hypothesis (H 0 ) was set up thus: There is no significant difference in the perception of public and private sectors regarding the criticality of success factors The alternative Hypothesis (H 1 ) was: There is significant difference in the perception of public and private sectors regarding the criticality of success factors.the level of significance for this test was set at 5%. Table 5 shows the result of the computation of Spearman s rank correlation coefficient, the t- values, and the decision rule of null hypothesis for the criticality of success factors as perceived by the public and private sectors. Table 5. Test of Agreement of Ranking Sectors rs t-cal t-tab Decision Between public and private Reject null hypothesis Note: r s =Spearman's rank correlation coefficient; t-cal=t-calculated; t-tab= t-tabulated; From Table 5 it can be observed that t-cal of 3.58 is greater than t-tab of 1.18 with 3 degrees of freedom, hence the rejection of the null hypothesis and the acceptance of the alternative hypothesis. It can then be concluded that there is no agreement between the public and private sectors on there perception regarding the criticality of success factors.. This result is illuminating and can be explained by the fact that the private and public sectors from commercial perspectives are two different entities. Both sectors have their own definition of what is success on PPP projects. The implications of the findings are profound. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS This study has identified in order of importance five critical success factors. Economic viability was ranked as being the most critical factor to the success of any kind of PPP projects in Nigeria. Other success factors in descending order of criticality include appropriate risk allocation via reliable contractual arrangements, sound financial package, favourable investment environment, and reliable concessionaire consortium with strong technical strength. Furthermore, the findings of this study revealed that there is no agreement in the perceptions of both the public and private sectors on the criticality of success factors and significance of SSFs based on hypothesis tested. The lack of homogeneity in perceptions between the public and private sectors on PPP projects suggests a gap in perceptions between the two sectors. 9

10 CIB W065/055 Commissions: Transformation through Construction 10 This perception gap has to be appropriately managed for consensus building and to carry along relevant stakeholders in Nigeria. A study of this nature can be replicated in other developing countries REFERENCES Ababutain, A.Y. (2002). A multi-criteria decision-making model for selection of BOT toll road proposals within the public sector. PhD Thesis, Civil and Environmental Engineering Department, University of Pittsburgh. Algarni, A.M., Arditi, D. and Polat, G. (2007). Build-Operate-Transfer in infrastructure projects in the United States. Journal of Construction Engineering and Management, 133(10), Asika, N. (2002). Research methodology in behavioural sciences. Ikeja, Longman Nigeria PLC. Chege, L.W. and Rwelamila, P.D. (2001). Private financing of construction projects and procurement systems: An integrated approach. Proceedings of the CIB World Building Congress Paper No: 259, Wellington, New Zealand. George, D. and Mallery, P. (2000). SPSS for windows step by step- A simple guide and reference 9.0 update. Buston, Allyn and Bacon, 2 nd Ed. Hardcastle, C., Edwards, P.J., Akintoye, A. and Li, B. (2005). Critical success factors for PPP/PFI projects in the UK construction industry: A factor analysis approach. Construction Management and Economics, 23(5). Ho, S.P. (2006). Model for financing renegotiation in public-private partnership projects and its policy implications: Game theoretic view. Journal of Construction Engineering and Management, 132(7), Jefferies, M., Gameson, R. and Rowlinson, S. (2002). Critical success factors of the BOOT procurement system: reflections from the Stadium Australia case study. Engineering, Construction and Architectural Management, 9(4), Montanheiro, L. (2008). Public-Private Partnerships and their Economic Contribution. International Journal of Applied Public-Private Partnerships, 1(2), Morledge, R. and Owen, K. (1999). Developing a methodological approach to the identification of factors critical to success in privatised infrastructure projects in the UK. In S.O Ogunlana(ed.) Profitable Partnering in Construction Procurement) pp , CIB N92 Proceedings, Publication 224 Tiong, R.L.K. (1996). CSFs in competitive tendering and negotiation model for BOT projects. Journal of Construction Engineering and Management, 122(3) Zhang, X. (2004). Improving concessionaire selection protocols in public/private partnered infrastructure projects. Journal of Construction Engineering and Management, 130(5), Zhang, X. (2005a). Critical success factors for public-private partnerships in infrastructure development. Journal of Construction Engineering and Management, 131(1), Zhang, X. (2005b). Criteria for selecting the private sector partner in public-private partnerships. Journal of Construction Engineering and Management. 131(6),