Plugging the Nigerian infrastructure gap – The legal milieu (2) … continued from last week
… continued from last week
BONDS AND INSURANCE
Generally, the issuance of general infrastructure bonds or project bonds to finance projects is relatively rare. The corporate bond market is arguably still in its early stages of development and bonds tend to be for general corporate purposes. Federal and state governments have however issued some infrastructure bonds in recent times. These tend to be for some green field projects or for refinancing brown field projects originally financed in more traditional ways.
Bonds are more familiar within the payment security context and, as in many other jurisdictions, contractors and subcontractors are frequently required to provide advance payment guarantees and performance bonds in project finance and construction transactions. Documentation for bonds and payment guarantees tend to vary with the financial institutions involved but will generally not require that a judgment or an arbitral award be in place before a demand can be made or complied with.
Typically, in addition to payment securities, project finance documents frequently prescribe requisite insurance, which the sponsor of the project is mandatorily required to take out to de-risk the project. The particular risks in respect of which such mandatory insurance is required will normally vary with the nature of the project with, focus on both construction related risks and operational risks.
ENFORCEMENT OF SECURITY AND BANKRUPTCY PROCEEDINGS
Security documentation for a project finance transaction will normally include detailed provisions regarding rights of financiers and project procurers in the event of a default by the project sponsor. Enforcement rights tend to be consistent with international project finance practices and include appointment of receivers, powers of sale and, depending on the nature of the security, foreclosure rights. Also, as noted previously, the inclusion of step-in provisions are also increasing popular in project finance transactions and lenders will normally have entered into a direct agreement with the project procurers to provide for instances of default by the project sponsors.
Outside of bankruptcy, the simplest means of enforcement tends to be taking over control of the special purpose vehicle and executing the project through the enforcement of share charge security.
Share charges are generally less expensive to create than other forms of security and are thus likely to be in place for the total secured amount. Share charges are also relatively easier to enforce than other forms of security interests, as these charges require in the main, the registration of documents with the Companies Registry. More often than not, as part of the security package, requisite documents will have to been signed in advance to be held in escrow. As in other jurisdictions, many other forms of security interests including step-in rights are also enforceable outside of bankruptcy scenarios.
In the event of bankruptcy, typical priority payments such as taxes, employee salaries and pensions will normally rank ahead of unsecured debts and floating debenture debts. In addition, similarly with many other common law jurisdictions, fraudulent preference rules are applicable in Nigeria such that any transactions within the three months immediately preceding bankruptcy, which have the effect of giving a creditor preference over other creditors, will be deemed fraudulent and void against the trustee in bankruptcy.
SOCIO-ENVIRONMENTAL ISSUES
Licensing and permits
Environmental Impact Assessment
Under Nigerian federal law, the public and private sectors are precluded from undertaking or authorizing projects without prior consideration, at an early stage, of their environmental effects.
Typically, prior to commencement of construction, the project promoter will need to undertake an Environmental Impact Assessment (“EIA”) of the project in conjunction with officials of the Federal Ministry of Environment (“FME”) and state government environmental board officials. Upon the conclusion of the EIA, the FME will normally issue a certificate confirming that the EIA has been concluded and the construction of the project may commence. Separate EIAs will normally be required for expansions of the project. The EIA report produced as part of the EIA process will normally identify likely adverse effects from the project and propose measures for mitigating such adverse effects.
Aside from the EIA, there are no specific rules or regulations regarding socio-environmental issues and any additional obligations will typically be driven by rules applicable to financiers and investors in the project.
Equator Principles
There are no specific legal requirements for projects to be subject to the equator principles in Nigeria.
However in practice, projects will typically still comply with these and similar requirements based on obligations and requirements of investors and financiers in projects. Virtually all foreign lenders, private equity firms and other investors, which finance projects in Nigeria are either directly or indirectly required to comply with the equator principles and thus will usually flow this obligation down to project sponsors. Also, the International Finance Corporation (“IFC”), one of the main champions of the Equator Principles has invested in several Nigerian banks and requires, as part of the conditions of its investments, that these banks uphold equator principle standards in their operations. These institutions therefor also flow down equator principle compliance obligations to project promoters.
It is also noteworthy that aside from the Equator Principles, Nigerian banks are also obliged to comply with the nine (9) Nigerian Sustainable Banking Principles, which include the following:
avoidance, minimizing and offsetting negative impacts of business operations on environmental and local communities;
respect for human rights in business activities;
promotion of women empowerment through a gender inclusive workplace; and
implementation of robust and transparent environmental and social governance practices and assessment of clients in this regard.
Where projects are being financed by Nigerian banks, these principles will also need to be complied with by the project promoters and non-compliance will normally be an event of default in applicable documentation.
PPP AND OTHER PUBLIC PROCUREMENT METHODS
Public procurement
At the federal level in Nigeria, public procurements are regulated by the Public Procurements Act (“PPA”), which applies to all procurements by government, government ministries and agencies and entities which derive at least thirty five percent (35%) of their funding from the consolidated revenue fund. The PPA generally requires for all procurements to be by open competitive bidding save for certain exceptional circumstances recognized and provided for under the PPA. For procurements in excess of US$5 Million, the approval of the Bureau of Public Procurement (“BPP”) and the Federal Executive Council will be required.
The requirement for open competitive bidding can sometimes be the cause of some tension in relation to project finance transactions where the project is initially developed on an unsolicited basis based on a cold approach of the procuring entity by the project sponsor. Even in such circumstances there are no general exceptions from the requirements for open competitive bidding and the procuring entity is still required to invite counterproposals from third parties.
Public procurement matters in Nigeria are regulated by the BPP. The BPP has a nine-step process for seeking redress in relation to public procurement matters. The process entails an initial complaint to the accounting officer within the relevant procuring entity who will review the complaint and give a verdict within fifteen (15) working days. Where the complainant remains dissatisfied, further recourse may be had to the BPP. Once a report is made to the BPP, the procurement process will be suspended and the BPP will notify all bidders accordingly. Where a complainant remains dissatisfied with the decision of the BPP, further recourse may be had to the Nigerian courts.
FOREIGN INVESTMENT AND CROSS-BORDER ISSUES
While not offering any specific incentives to foreigners looking to invest in projects in Nigeria, Nigerian law does guarantee free reparability of capital imported into Nigeria for such projects.
To ensure that invested capital can be freely repatriated, foreign investors will need to have imported such capital into Nigeria through commercial banks licensed by the Central Bank of Nigeria to deal in foreign exchange (“authorized dealers”). Within two days of importation of such capital into Nigeria and conversion into local currency, the authorized dealer will normally issue a Certificate of Capital Importation (“CCI”). So long as such CCI is issued to the investor at the time capital is imported to Nigeria, there will not normally be any issues with repatriation of such capital together with any interest thereon whether in the form of interest on loans or dividend in respect of equity. It is however pertinent to note that CCIs are generally not transferrable thus, where a foreign investor seeks to divest of its interest in a project to another foreign investor, it may not always be possible for the deal to be consummated completely offshore. To avoid these issues, foreign investors may sometimes invest in projects through offshore special purpose vehicles incorporated specifically for the relevant project, which can be sold as part of the divestment process and ensure that there is no need for a transfer of CCIs.
Apart from free reparability of investments, Nigerian law also expressly guarantees foreign investors freedom from expropriation. This is consistent with the right to property guaranteed in the Nigerian constitution and with provisions of bilateral investment treaties, which Nigeria has signed with a number of countries.
The foregoing aside, certain sectors and industries in Nigeria are subject to local content regulation, which either restricts the extent of foreign investor involvement or guarantees preferential treatment to Nigerian individuals and businesses in the relevant sector. For instance, the Nigerian Oil and Gas Industry Content Development Act, which regulates local content in the oil and gas industry provides that local companies are to be given preferential treatment in the award of certain contracts and licences in the industry.
DISPUTE RESOLUTION
There are no special courts or dispute resolution mechanisms for project finance or construction contracts. Typically, these contracts will provide for arbitration as the principal means of dispute resolution, with only limited recourse to court for interim injunctive reliefs pending conclusion of the arbitral process. Pursuant to the Arbitration and Conciliation Act Cap A18 Laws of the Federation of Nigeria 2004 (“ACA”), arbitral awards are to be recognized as binding and enforceable by Nigerian courts baring any vitiating circumstances such as fraud, which make such awards liable to be set aside. As regards applicable arbitration rules commonly adopted, the ACA contains default rules, which may be specifically adopted by parties or will be incorporated in the absence of any express adoption. Parties however frequently adopt International Chamber of Commerce Rules of the London Court of International Arbitration.
Nigeria is party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) and thus Nigerian courts will generally recognize and enforce foreign arbitral awards.
OUTLOOK AND CONCLUSIONS
As noted in the introduction, the sheer size of the infrastructure gap in Nigeria makes it clear that, even in the best of times, the government alone cannot be relied upon to finance infrastructure development and significant amounts of private investment are required to support any attempts to bridge the infrastructure gap. This situation implies that for years to come there is likely to be growing interest and activity in the project finance space in Nigeria.
Although not quite at the appropriate stage of sophistication and with scope for further development, the legal, regulatory and business framework for project finance in Nigeria does display some level of maturity and progress. Undoubtedly as deals continue to be consummated, the framework will mature further and the different aspects of the system will be tested.
Given the current difficulties occasioned by the slump in oil price, it is likely that even less government funding will be available for infrastructure development. Balance this lack of government funding against the backdrop of Nigeria’s recent entry into the club of middle-income countries (by GDP) and confirmation of its status as one of the top thirty economies in the world, and it becomes clear that there is likely to be even more interest and activity in the project finance space in Nigeria.
Nigerian Chapter authored by one of B&I’s partners and published in the 5th Edition of “The Projects and Construction Review” by Julio Cesar Bueno (Editor).
The Grey Matter Concept is an initiative of the law firm, Banwo & Ighodalo