A review of the Lekki-Epe Expressway Toll Road Concession Project

Introduction
The Lekki-Epe Toll Road Concession Project commenced in 2000 with the placing of advertisements by the Lagos State Government for proposals as to how key road infrastructure within the swelling metropolis of Lagos could be developed on a PPP basis. Asset & Resource Management Company Limited submitted a proposal in relation to the rehabilitation, construction, operation, maintenance and tolling of numerous stretches of highway infrastructure within Lagos and was duly mandated in 2003 to develop a toll road corridor along the Lekki peninsula. The Concession Agreement was eventually signed by the concession company, Lekki Concession Company Limited (“LCC”) on 24 April 2006.

Overview
The concession agreement gives LCC the right to design, rehabilitate, construct, operate, maintain and toll the existing Epe Expressway (which will be widened and rehabilitated as Phase 1 of the project), the Coastal Road which will be an expressway running parallel to the existing road (as Phase 2 of the Project) and the Southern Bypass which is an additional option for LCC in the Concession Agreement. The term of the Concession Agreement is 30 years from its effective date and the scheme is structured as a BOT project, with the road infrastructure being handed back to the State at the end of the concession term.

Construction of the Phase 1 works will be undertaken under a turnkey, lump-sum, fixed price contract which also includes a five year maintenance obligation on the contractor. To further assist in aligning the interests of the investors and the contractor, the contractor will take an equity interest of up to 5% in LCC in exchange for an agreed reduction to the EPC price. Operation of the tolling is due to commence in 12 months and will be undertaken by LCC directly with management support and expertise from an industry expert.

The project is a State sponsored project and, from the outset, the perception was that the State would struggle to honour its obligations under the Concession Agreement. To address these perceptions, the concept of a Federal Support Agreement was introduced into the transaction structure.

As of today, Lagos State very proudly states that 70% of its revenues are internally generated and therefore layering in Federal government support was neither necessary nor desirable. In addition, historic political differences between the Lagos State Government and the Federal Government tended to indicate that obtaining any sort of federal support for the project would be hard fought. Nevertheless, it was recognized that to obtain the sorts of tenors that the project required, the perception (mistaken or otherwise) of the ability of Lagos State to satisfy its obligations under the Concession Agreement would need to be addressed through the Federal Support Agreement. After many months of negotiation and endeavour, a Federal Support Agreement for the project was eventually signed with the Federal Government. The agreement, which is the first of its kind in Nigeria, provides a mechanism which allows for funds allocated to Lagos State out of federally controlled sources to be utilised to support the State’s obligations on a termination of the Concession Agreement. It was on the basis of this document that the possibility of a commercial bank entering the finance structure alongside the ADB became a real possibility.

Financing
The transaction was initially pitched to Nigerian lenders, however, with an illiquid bond market and a yield curve out to only 5 years, the 5 plus 5 plus 5 year structure even with a standby facility covering the refinancing risk was far from appealing either for LCC or the local lenders. A more long-term and cost effective financing plan was therefore required. The ADB was identified as being a potential source of long-term financing and it, together with Standard Bank were able to offer a financial package which matched the long-term nature of the project revenues. Furthermore, as the ADB is a dollar lending organisation, Standard Bank was able to structure a swap facility whereby LCC’s exposure to dollar denominated obligations to the ADB was significantly mitigated.

Challenges
The time period from the commencement of the concession process to financial close (two and a half years) is a clear indication that the project has faced many challenges.

• There were no privately financed toll road precedents to follow in West Africa. The project was truly a first for the region.
• There is no doubt that Lagos is viewed as a challenging environment in which to undertake an urban toll road project. In addition, the city end of the corridor is very narrow and massively congested. The results of this perception were many. In the first place, international organizations and contractors were not convinced that the environment in Lagos would support such a scheme. While certain international organizations enquired about the transaction, none were prepared to bid for the EPC and O&M roles in the transaction. Equally, equity investors were challenged by the raw politics of the environment and the unpredictability of everyday life.
• Local lenders had no real experience of long-term limited recourse financing of infrastructure concession projects. In addition, the financial terms that they were able to offer were constrained by limited tenors which were not consistent with the long-term nature of the financing that was required.
• At the outset of the project, there was a lack of any real procurement and regulatory regime for concession projects at the State level.
• During its development phase, the project was faced with the uncertainty of the first transition of power between civilian administrations in Nigeria. At the same time, there was a change in the government of Lagos State with a new Executive Governor being elected.

Success Factors
Achieving the financial close milestone was the product of a number of different factors.

• ARM took the decision to gather together a team of experienced infrastructure development advisors for the project at a very early stage in the process. At any time during the long gestation period for the project, it would have been very easy and understandable for ARM to seek to cut its losses and abandon the project.
• LCC was very quickly established as a substantive entity in Lagos. It was able to hire a dynamic chief executive with wide ranging experience of developing and financing concession based infrastructure projects. The LCC team was absolutely vital in driving the process along, not only in relation to the financing of the project but also dealing with the myriad of commercial, political and legal issues facing the project. There is no doubt that without the energy, enthusiasm and dedication of the LCC team in Lagos, the project would not have achieved financial close.
• The State proved itself to be an effective partner in the scheme. Not only did the State show considerable patience in the development phase (a quality not often shown by political entities), it proved its commitment to the scheme in a difficult political arena by agreeing firstly to guarantee the investment required to enable the pre-financial works to proceed and then to provide a mezzanine loan to LCC of N5 billion to assist in the overall financing of the project.
• The patience, dedication and pragmatism of the senior lenders was a key aspect. Local lenders had stuck with the project from the outset and with ADB and Standard Bank providing 15 year money, the local lenders (buoyed by consolidation and an extended bond yield curve) were able to push the market by offering 12 year tenors not previously seen in the Nigerian market.
• The project underwent significant amounts of due diligence. The involvement of the African Infrastructure Investment Fund, co-managed by Macquarie, in the equity led to an extremely detailed, thorough and robust due diligence process. In addition, the senior lenders conducted their own traffic, technical, financial and legal reviews and there is no doubt that the rigorous nature of the process served to flush out many issues which were then addressed appropriately.
• Political reality required the construction works on the scheme to commence prior to first drawdown of the senior debt. In fact, the progress of the pre-financial close works was an enabling factor in itself. With the assistance of the State, ARM and local lending institutions, LCC was able to proceed with and complete the first section of the construction works before financial close was achieved. The completion of these works, in the most congested part of the road corridor, was a clear demonstration of the management capabilities of LCC and of the contractor, Hitech.
• The transaction is predominantly a Nigerian deal. The LCC team is Nigerian, the local lenders are all strong Nigerian financial institutions, the contractor is Nigerian and the majority of the shareholders are also Nigerian. With such a high level of local participation came much needed know how and understanding as to how the maze of local conditions should best be negotiated. This “on the ground” experience and presence was absolutely vital to address the public relations, technical, political, financial, commercial and legal issues that arose throughout the process.

Conclusion
The Lekki-Epe Toll Road Concession Project was very much a first for West Africa. At the outset, many believed that the project was not feasible given the environment in which it was proposed to be undertaken. Nevertheless, one after the other, issues were addressed, albeit over an extended period. Achievement of the important financial close milestone is a testament to the faith and dedication of the sponsors, investors and advisors who have worked on the transaction over many years. It is also anticipated that the scheme will open the way for the development of other PPP infrastructure projects within Lagos and Nigeria as well as being the starting point for a new private sector highways services industry within the region.