How is the Orange Island project progressing?
We are on track to complete Phase 1 (75 hectares) at the end of 2019. The reclamation was completed ahead of schedule in 2016, We are currently constructing the phase 1 infrastructure, which includes the roads, storm drainage, water, sewage, and part of the power provision. The reason why power is not 100% is it will be rolled out in a modular fashion according to occupancy over the course of the next few years. Critical mass will be reached once 80% of the villa plots are built up. The infrastructure for the remaining 75 hectares (Phase 2) is scheduled to be completed in 2022.
What will the project consist of?
Orange Island is a new district of Lagos comprising 150 ha of land reclaimed from the Lagos lagoon and is part of the new Lagos Lagoon Districts on the Lekki Peninsula. This was conceived in the 2006 Lagos State Masterplan as part of its plan to manage Lagos as a “megacity." We started the reclamation in 2014, the land was then left to consolidate for over fourteen months. While some parts have been consolidating for four years. Work on the infrastructure commenced on the consolidated part of the land in 2018. Another two years is being spent rolling out the infrastructure. We are currently in the second year and the entire project has taken five years so far. By the expected completion date of December 31, 2019, the project would have taken sixty-three months.
What percentage of plots have been sold?
There were two phases. In Phase I, approximated 88% has been sold to date, and in Phase II, which we started marketing this year, about 70% has been sold. We are fortunate to have created a strong brand driven by good corporate governance, execution capacity, quality of the project team, track record, competitive pricing and sheer grit and determination. The market seems to have approved of our work, and as a result demand for our land has remained high. We were also fortunate to have attracted corporate sales. One of the critical success factors has to be the management of our purchasers (customers). Understanding the buying characteristics of our target market was key. The average Lagos white collar land buyer is sophisticated, knowledgeable and intolerant of poor quality or excuses for lack of delivery. They account for most of the land sales in Lagos and the Lekki Corridor in particular. As such, the pricing plan we gave our subscriber took account of this. Because Orange Island is a reclamation project, we were able to offer purchasers a 36-month payment plan, which was unprecedented at that time. The payment plans were also tailored to each purchaser. This strategy worked well for us mainly because we delivered on our execution milestones, focus on quality and treated our subscribers as partners informing them about all aspects of the project.
What was the financial engineering strategy behind the project, and how was it funded?
The project was funded mainly by pre-sales. We did have some equity and secured local debt. Initially, we applied and obtained Export Credit Agency (ECA) finance from the Netherlands, though we were not able to draw down on it as this was a few months before the crash in the Naira exchange rate. In summary, the reclamation of the entire 150ha island cost approximately NGN12 billion (USD33.33 million), and the infrastructure for Phase I cost about another NGN13 billion. We borrowed a total of NGN2.8 billion (USD7.8 million) for Phase I which we were able to pay off within eight months of drawdown. At this stage, we have spent about NGN25 billion before the infrastructure cost for Phase II. Our purchasers' payments were made on individual payment plans based on their individual circumstances. Once agreed upon, we were quite strict on adherence to the payment milestone. We found that this method meant that our purchasers rarely defaulted on their payment plans. One of the reasons we were able to do that was because key our contractors, Van Oord Nigeria and Metropolitan Construction, dredging and main infrastructure contractor respectively, agreed to be paid in accordance with our cash flows and not by the standard method of certification and valuation used in the industry. Our bankers, Keystone Bank Limited were also very supportive. All contracts, sub-contractors, suppliers and consultants were paid based on our cash flows and not on the existing norms in the industry. We have Swampsea Construction to thank for keeping the project on critical path. They did an excellent job of providing overarching technical support and supervision of the project. We were honest about our funding constraints and kept our word on meeting scheduled payments. A closely monitored master spreadsheet was drawn up showing subscriber inflow versus expected outflows. This was used to schedule payments a month in advance. Many would consider this this unconventional strategy risky. Relying on pre-sales to fund projects is not ideal, but in the existing financial environment we had to be extremely innovative in the creating a workable funding plan for our project. This is what worked at Orange Island. I am not recommending that al projects of this type should be funded in this manner, but I would urge developers to find novel ways of addressing the unique challenges of executing projects in a dynamic, difficult emerging economy like ours. Innovation in marketing, design and finance strategy are essential. They are many 'saner' financial models that work in other parts of the world, but Nigeria is unique.
How do you expect the project to help and improve Lagos? Do you plan to capitalize on the marina?
I hope that Orange Island provides a model for creating private sector driven, sustainable districts in our crowded, chaotic city. We do not take proper advantage of our waterways, which is a shame, especially with the current traffic congestion on our roads. Ferries and car ferries are just starting to arrive. For all the islands that have been reclaimed, the Ministry of Physical Planning has established a rule that there must be space allocated for water taxis and a place for the government to build a ferry terminal. Orange Island is part of a larger plan. The Island is located on the Lagoon Highway which is accessed from Freedom Way directly off the Lekki Epe Expressway. This will subsequently lead into a regional road and bridge system. There is also the coastal road on the Ocean side of the Lekki Peninsula, so this entire area is meant to be served by a new system of roads. If the government does it, I believe it will go some way in alleviating the traffic jams on the Expressway, though this is currently uncertain.
What is your assessment of PPPs for infrastructure projects in Nigeria, and do you see potential for more?
Developers of master planned communities in Nigeria essentially become their own little governments, providing roads and other infrastructure. Orange Island is more of a housing infrastructure project than a true real estate project. I believe partnership with the private sector is the right approach. A great deal of progress has been made on public private partnerships in infrastructure projects particularly in Lagos State. History has shown private enterprise can achieve much if provided with the right incentives. The government needs to do more on that front. Better incentives and an improved operating environment will encourage housing development further. The other thing is that the state government treats PPPs as commercial ventures. To make such partnerships more successful, the government should step back from the commercial aspects and focus on its role to increase employment, improve the quality of life, and should earn revenues through taxes, tariffs, and levies. It must focus on making sure the operating environment is right and incentivizing developers to build and develop. That said, we are proud to be a showcase of how PPPs can work well in Lagos.