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PROPERTY ARTICLES
Why PPP is key to real estate development, by Adeola
Guardian, 30th March, 2009
PPP has been implemented successfully globally. It started in the UK, with the Deven Silver Mines developed by the English Crown and the Florentine Merchant Bank in 1299, but became popular in the U.S. in the mid 60s to early 70s with Independent Power Stations. Since then, most major capital projects in the world have been executed through PPPs for the provision of infrastructure, writes Yemi Adeola, MD/CEO of Sterling Bank, at the Ogun Gateway Land Forum.
REAL Estate generically refers to buildings and land. This covers housing, commercial and public buildings, hotels, parks. It includes the physical building as well as the totality of the environment, neighbourhood and amenities within which the building is situated.
Housing as a subset of Real Estate is one of man's most basic needs. Maslow's hierarchy of need depicts human needs as consisting of five levels - physiological, safety, social, esteem and self-actualisation. Shelter or housing comes under safety needs, where the individual seeks personal security and comfort.
This form of security is thus a basic necessity of life which every Nigerian should readily have access to without deprivation. One of the most worrisome features of Nigerian urban centres is the growing level of over-crowding and in some cases, outright homelessness. It is common place o see families of eight persons cramped in a single room in a tenement building usually referred to "per room per room or face me, I face you". One index used to measure the quality of life is housing and improving the quality of life is the whole essence of government and governance.
In most developed countries of the world, governments spend large proportion of their budge on provision of housing for the people, either directly or through pubic-private financing models It is a different story in most African societies, where provision of basic housing is perceived and has been an individual's responsibility. Governments have always politicised this social need talking so much about it albeit acting very slowly.
As a basic necessity of life, housing must be a safe place of abode and must fulfil some specific functions, among which are protection against environmental hazards and provision of certain socio-economic services including transportation, communication, recreation, commerce, education, healthcare, employment opportunity and the required infrastructural facilities such as waste disposal, water, electricity and even street network i.e. amenities that improve the quality of life.
The current democratic dispensation has given a commitment to review the various housing reforms including the Land Use Act that has been perceived as a major hindrance in real estate development and transactions. This is a part of the seven-point agenda of President Yar'Adua's administration. Over the years, the government has attempted to implement its housing policy through the various MDAs like Ministry of Works and Housing, Federal Housing authority (FHA), Federal Mortgage Bank of Nigeria (FMBN) and the PMIs even with international development agencies and donors.
The FMBN has estimated that Nigeria has a housing deficit of about 14 million units, requiring about N35 trillion ($270 billion) naira to fund. According to World bank estimates, Nigeria requires the production of about 720,000 housing units annually for the next 20 years in order to solve the housing needs of the country. Considering the massive figure above and the 140 million population of Nigeria at an annual growth rate of 2.025 per cent (2008); there is a wide gap between demand and supply which further validates the huge market for real estate business in Nigeria for which Ogun State is not an exception.
Virtually all levels of government in Nigeria since independence have highlighted housing as a major priority, but the country has yet to develop a robust and workable social housing policy; vibrant housing and mortgage market and affordable homes for her citizens.
Available states also indicate that the Federal Housing Authority (FHA) built only 30,000 housing units nation wide between 1973 and 2006 while housing has remained an elusive target. This figure however does not reveal what proportion has remained habitable or were abandoned to date. The private sector has more than delivered multiples of this volume within the same period. Only recently, the Federal Government approved the development of about 1,032 housing units nation wide - a far cry from the huge demand for affordable housing in Nigeria.
Failure of the Real Estate sector of Nigeria (public sector)
Real estate delivery in Nigeria has had a history of fits and starts or is something some features and challenges of the real estate development in Nigeria cut across government, individuals and prospective developers.
Housing is a social service. Though successive governments seem to regularly recast this mantra there has not been adequate political support neither is there a strong systemic or institutional framework to do this in a professional manner consistent with the aspirations of majority of Nigerians.
Nigeria does not yet have a workable social housing system because policy makers and executors have not backed their promises with the required action. In times past, the federal and state governments have forayed into providing low cost housing for citizens with limited success except for the revolution that we are witnessing in a couple of states like Lagos and Ogun axis spurred by the active involvement of the private sector.
The cost of construction of a modest and decent accommodation is high when you consider the average earning capacity (per capita income) of the populace. This could only be moderated by low cost construction finance and affordable mortgage financing as the current commercial rates for mortgages is an issue of concern for both users and providers. The absence of liquidity products like mortgage-backed securities complicate the financing structure for proposed development.
The Land Use Act of 1978 in Nigeria has hindered mortgage financing and creates enormous obstacles to private sector involvement in the housing industry. Obtaining C-of-O and transfer of titles is marred by all manners of administrative red-tapism and untoward delays. Also, there is also no strong provision for foreclosure in the Nigerian constitution. This provision does not create a strong incentive to lend on long-term basis. The Economic Freedom of the World report ranked Nigeria 134 out of 141 countries in legal structure and security of property rights.
The other constraint to the development of the sector could be ascribed to haphazard housing policy on the part of government and lack of continuity, which has being a bane of a well-orchestrated real estate development in Nigeria. Urban population today stands at 50-60 per cent with increasing migration. At such an alarming growth rate, major cities like Lagos, Abeokuta, Kano, Port Harcourt, Kaduna, Onitsha, Aba, Ibadan, etc., are groaning under the weight of unfettered agglomeration. The consequences of this are apparent, and without affordable housing, the provision of other amenities is greatly at risk.
Traditional sources of financing for real estate include:
- Savings & Loans, Commercial Banks, PMIs
- Government, Insurance Companies
- Private investors
- World Bank agencies ( IFC, Exim, U.S. OPIC)
When the housing deficit of the nation that has been estimated to be 14 to 16 million units is considered. The Federal Mortgage Bank of Nigeria (FMBN) estimates that it is worth N42 trillion ($287 billion). Therefore financing an average of 720,000 housing unit per year as part f the target of the MDG becomes an audacious tasks that is difficult to meet.
A public-private partnership (PPPs) is an arrangement typified by joint working arrangement between the public and private sector. In he broadest sense, PPPs can cover all types of collaboration between the public and private sectors to deliver much needed social goods and services.
There is usually a focus on planning, funding and operation through a partnership between the government and one or more private entities. In real estate development government contribution may include but are not limited to the following:
Provision of land or concessions & permit; enforceable agreement; enabling legal framework; infrastructure; taxes and fees; and others; while the private sector undertakes finance construction, operation and maintenance.
Typically, a private sector consortium forms a special company called a "special purpose vehicle (SPV) to develop, build, maintain and operate the asset for the contracted period. Special purpose entity (SPE) (Sometimes, especially in Europe, "Special purpose vehicle" or simply SPV) is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfil narrow, specific or temporary objectives, SPE's are typically used by companies to isolate the firm from financial risk. Typically, the stream of cash flows from the project or facility is the source of repayment for any obligations against the SPV.
A simply PPP example would be a hospital building financed and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing facility management and other non-medical services while the hospital itself provides medical services.
PPPs have been implemented successfully globally. It started in the UK with (Devon Silver Mines developed by the English Crown and the Florentine Merchant Bank in 1999, but became popular in the U.S. in the mid-60s to early 70s with independent power stations. Since then most major capital projects in the world have been executed through PPPs for the provision of infrastructure) toll roads, mass transit transportation systems, rails bridges, water, hospitals, prison, schools, power plants, refineries etc.
Example of PPP in Nigeria is the Lekki Epe Expressway and the MMA2 terminal in also in Lagos. Sterling Bank has also financed a real estate project that was previously abandoned by the FHA in Lagos under a successful PPP arrangement in 2007/2008.
With the obvious paucity of investment capital sources to satisfy developmental needs in Nigeria, government has come to realise that the private sector can immensely contribute to the implementation of its policies. Recent experience has revealed in a number of ways, a shift from government traditional activities to a modern and more meaningful result-oriented public-private partnership (PPP). The Federal Government of Nigeria has supported this collaboration by passing requisite legislation to give a boost to PPPs.
Many Nigerian states have identified public private partnership (PPP) as the most effective way improving infrastructure and stimulating economic growth as years of neglect and high population growth has left the country's infrastructure in an abysmal state.
Currently, Governments at all level are committed to improving transport system, water supply, waste management power and commercial infrastructure, implementing projects of this magnitude will require substantial financial input that government is immediately unable to fully fund out of its annual statutory budgets. The PPP model will no doubt help Ogun State government address the delivery of real estate projects in the state.
The thinking behind the PPP initiative is to involve private companies to assist the government in fulfilling its mandate to the people. PPP projects can be structured in a variety of ways, but in most cases the financial and management burden is transferred from the state to the private sector. Projects are however structured in a manner, which allows the private sector to achieve a reasonable return on investment.
Reason why opt for PPP include:
One: PPPs promote mutually beneficial relationships between the public and private sectors, serving as an effective way to bridge gaps between demand and resources, quality and accessibility, and risk and benefit. It is a win-win situation for both parties.
Two: PPPs assign risk based on resources and ability. The public sector manages the political risk and provides the enable legal frame work while the other bears commercial risks related to financing developing, and managing the project.
Three: PPP have proven over the years to better manage the triple constraints in project financing and management: Cost, time and quality. Aside the above, PPPs have a higher statistical probability of success in the ratio of 10:1 in real estate financing in Nigeria.
Besides, private sector governing principles minimise mispricing, cost overruns, and supposed lack of transparency. Also, PPPs deliver in less time. Private firms have many incentives to deliver on time, and greater efficiency by introducing more effective practices to reduce waste and improve revenue collection.
Four: More robust investment sources enable partners to meet increased demand and channel resources to previously undeserved prospective home owners.
On the part of Government PPPs ameliorate budgetary constraints, as the state is currently under pressure to develop necessary infrastructure with limited resources.
They also free up government resources and fuel growth if the right factors are in place: the number, value, and type of PPPs, combined with supportive policies.
Besides, the more PPP projects launched, the higher the rate of GDP growth. They bring capital into the state while creating long-term employment, in turn driving consumption, generating more wealth and fuelling a stronger economy with better infrastructure, better quality of life.
Among factors that influence PPP performances are;
Creating effective legal, regulatory and institutional environment. Competent policy and institutional frame work including effective legislation and regulatory oversight of infrastructure development .
Addressing co-ordination failures across different stakeholder agenda ministry of finance, line ministries, regulatory bodies, communities, financiers , developers, contractors, environmentalists.
Contract enforcement
Ensuring value for money, access and service quality
Effective project finance assessment value for money of investments
Value the public and merit good benefits and establishing performance benchmarks.
It has been observed that inefficiency has been a more important factor than low level of investment for failure of public housing projects.
Risk mitigation and financing issues include
Effective operational, political and commercial risk mitigations as well as financial cost and liquidity instruments infrastructure funds, and guarantee facilities. Will the state be willing to share in some of the risk by providing guarantees what about interest rates and long term yield curve; or refinancing/liquidity risk: Availability of corporate bond products for bank loan refinancing liquidity for take out financing;
Limited capacity of all stakeholders in project and long term credit risk management/supervision (commercial banks, institutional investors, SEC, PenCom, CBN, FMBN.
Finally and most importantly, our general environment for doing business must live up to international standards, to encourage a large flow of foreign direct investment.
A possible significant change for real estate finance is the creation of pension funds. The investment rules set by the Pension Fund Commission favour mortgage related securities provided they receive an investment grade rating from rating agencies. In the investment guidelines of the 2004 Pension Act, the Pension Funds can invest in Real Estate or its derivative Projects. This is one source of financing that has yet to be explored. For this to happen there must be complement of other factors that must be in place.
There are also plans to introduce real estate investment trust to fast track the growth of the real estate sector because of the obvious limitation to direct investment of pension funds in real estate, REITs receive special tax considerations and typical offer investors high yields, as well as a highly liquid method of investment in real estate.
In addition, a related area of support by the government is a comprehensive regulatory framework for Asset-Backed Securities (ABS).
Notable private initiatives aimed at boosting Ogun State's real estate sector areas follows:
River View Estate, Isheri (in the works)
Masters Golden Estate 500 housing units
Police Housing Scheme 300 housing units
Hill Crest Estate (in the works)
Pearl Estate (in the works)
Evergreen Estate (in the works)
Paramount Estate (in the works)
Action step for the Government
In conclusion, it is important to note that real estate finance under the PPP does function in isolation but becomes an attractive proposition under an environment where other infrastructures are being developed in tandem.
One of the key success factor for Real Estate Development PPP will be driven largely by the level of investment that will create the required off-take of affordable housing.
I wish to encourage the government to:
Continue the investment friendly reforms and transparency; focus development of infrastructure e.g. development of industrial parks to open up new areas; continue collaboration with international development agencies and professional agencies to create capacity for PPP implementation in the state; implement budget allocation for housing delivery and implementation of infrastructure development master plan for the state; provide infrastructure for the proposed private initiatives in an organised manner to attract required financing; and complement, extend or collaborate with neighbouring states e.g. the mono rail system and complementary roads and highways.
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