The Fundamentals of International Project Finance and Investment In Infrastructure From The Nigerian Perspective

The provision of infrastructure is an underpinning necessity in the modern society. The need for infrastructure goes beyond their physical presence, but also the fact that the enjoyment of several rights and and benefits and incentive accruing to citizens are hugely based on the existence of the relevant infrastructure to further these rights, privileges and benefits. In practical analogy, Schools are needed for the right to education, hospital are needed for quality health delivery and insurance, good roads for easy transportation and ease of business, power plants are necessary for power supply to businesses and homes, sewage recycling plants are required for clean environment and proper waste management, parks for leisure and even prisons are needed to keep the society safe.

When used in a broad sense, infrastructure is a term that includes a large number of projects ranging from capital intensives projects such as power generation and transmission, water and sewage, transportation and telecommunications to social infrastructures such as schools, markets, prisons, parks, social housing, etc.

The need and demand for infrastructure is on the increase especially in developing economies like Nigeria. The increasing demand for infrastructure also connotes an increase in capital budgeting and spending by governments seeking to provide these needs. According to Oxford Economics Capital project and infrastructure spending: Outlook to 2025 research findings, Worldwide infrastructure spending will grow from $4 trillion per year in 2012 to more than $9 trillion per year by 2025. Overall, close to $78 trillion is expected to be spent globally between 2014 and 2025. Several factors are responsible for the increasing demand for infrastructure, most of which are reasonably very obvious finding its roots in demographics and

First, growing urbanization in emerging markets and developing economies such as Indonesia, Egypt, Brazil and Nigeria would increase spending for such vital infrastructure sectors as housing, water, power, and transportation.

As years goes by, Demographic changes will vary by region and country, affecting both the amount and type of infrastructure spending. For instance, aging populations in Western Europe and Japan will require additional health care facilities, while countries in the Middle East, Sub-Saharan Africa such as Nigeria with a large young population and many parts of Asia-Pacific will need more schools in addition to health care facilities and other social infrastructure for their youth.

Traditionally and as a matter of practice over the years around the world, the provision of infrastructure in diverse sectors is designated as the duty of the government or public administration and have been financed with public funds a capital intensive sector a huge sum is usually set aside every year in this regard as capital budgeting. According to the OECD, total global infrastructure investment requirements by 2030 for transport, electricity generation, transmission and distribution, water and telecommunications will come to USD 71tn. This figure represents about 3.5% of the annual World GDP from 2007 to 2030.

From the projection above, it is questionable whether the government would meet up with these obligations in the face of fall in government revenues, increased debt profile to the Gross domestic Products ratio. Sometimes, the inability of the public sector to deliver efficient investment spending and mis-allocation of resources due to political interference have led to a strong reduction of public capital committed to such investments. The government cannot afford to undertake these responsibilities alone therefore the need for alternative financing and for greater private involvement in infrastructural investment.

This paper examines alternative financing technique for infrastructure projects by examining the fundamentals of an international project finance transaction from the Nigerian perspective. It covers the regulatory framework and laws, the transaction structure of a typical project finance arrangement, the parties and major players, contracts and documents needed in a project financing and the advantages of project finance over other forms of financing such as corporate financing (Debt and Equity) on the side of private investors and capital budgeting on the side of the government.

Financing Options in Infrastructure Projects: Traditional Corporate Financing

One of the major considerations whenever a new project is developed is financing. Given that provision of infrastructure is capital intensive, a large pool of funds is needed to design, build and operate these projects. Notwithstanding that most infrastructure projects are public projects, e.g Highways, Schools, Social Housing Schemes, Electricity generation, Oil and gas, Mining, however given the constraints on the government, Private investors also play a key role in building these projects. These investors as we would see in the latter part of this article includes Commercial Banks, Multinational agencies, consulting firms, private individuals, and pure industrial sponsors. Private investment in capital projects helps to free up public sector budgets and also provide more revenue to the government as a result.

There are various possible ways that investors approach financing when investing in infrastructure. The first of these approaches is the use of traditional debt or equity financing (corporate financing). In corporate financing, the private investor or company carry out the project on its own balance sheet by utilizing its own capital assets or resorting to the money or capital markets (i.e Banks, or issuing debentures or bonds) for loans. Lets assume that Company A, a private engineering consulting company is desirous of building a housing estate which would be leased to the public after construction. if Company A wants to finance this project using the corporate financing, it does so on using the business assets and credit of the company with which it carries out its other businesses. Thus, the cost of the Estate Project will reflect on the company accounts. A lot of factors makes this approach unattractive and unfavorable for investment in infrastructure. Most pronounced among them is risks involved in the constructing, operation and management of the infrastructure projects especially in developing economies and emerging markets with a high economic volatility. Thus an investor using traditional financing risks contaminating other projects which it is running and may even plunge itself into bankruptcy.

Financing Options in Infrastructure Projects: Project Finance

Mindful of the risks involved in the foregoing, Instead of using the traditional equity and debt financing, investors resort to a technique or arrangement known as project finance.

Project Financing is a non-recursive or limited recursive technique used by investors in financing capital intensive and long term projects. By project financing, a group of investors otherwise called project sponsors who are interested in the building and developing one particular infrastructure project in any sector come together and pull resources (equity) under a new entity known as the Special Purpose Vehicle (SPV) to design, build and most times operate the project. The SPV or project company usually an incorporated company possess a separate legal entity from the project sponsors, so is its assets and liabilities. The sole aim of the SPV is to design, build and manage the project. This it does by sub-contracting the majors works to be done to counter parties under a network of contracts.

Practically the Investors or shareholders in a project finance may be private investors entirely without the participation of the government. However the most common project finance contract is the Public-Private Partnership (PPP) which is the collaboration between the public sector (government or a government agency) to build and provide infrastructure projects for public use or economic reasons by utilizing a non-recursive and off balance sheet finance.

The Organization for Economic Co-operation and Development (OECD) a Public-Private Partnership (PPP) as an agreement between the government and one or more private partners (which may include the operators and the financers). Within the agreement, the private partners deliver the service so that the service delivery objectives of the government are aligned with the profit objectives of the private partners. Furthermore, the effectiveness of the alignment depends on a sufficient transfer of risk to the private partners.

According to the International Monetary Fund, PPPs refer to arrangements in which the private sector supplies infrastructure assets and services that traditionally have been provided by the government.

The newly formed project company (SPV) gets funds in two ways: first the SPV just like any other company has shares which would be allotted to the project sponsors relative to their respective equity stakes in the company. The project sponsors most times enter into a shareholders agreement or Joint-Venture Agreement to spell out their rights, interests, and duties as shareholders in the SPV. As noted earlier, because the infrastructural projects which the SPV is established are capital intensive, most often, the equity stakes provided by the project sponsors are not just enough, thus the Project company in order to make up for the cost of the project will issue a mandate to a bank called the Mandated Lead Arranger to organize other banks to lend money to the SPV. This is called syndication process.

Elements of Project Finance

a. Non-Recursive or Limited Recursive Financing.

One of the fundamental element of project finance is that it is non recursive. By this, when lenders give money to the project company in form of debt to finance the project, the lenders cannot resort to the project company or its shareholders (project sponsors) for the payment of the debt. The lenders can only recover their money from the revenue which the project would be able to generate during its operational stage. The project company is incorporated solely to build the project, thus, it has no credit or assets which could evaluated and attached unlike a normal company carrying on business. Thus, the liability of the project company and its sponsors is limited to the project itself. If in the long run the project fails or the company defaults, the debt becomes a bad debt.

However, in extreme cases, lenders may require that the debt be made limited recursive. The extent to which the debt is recursive is a matter of agreement between the SPV and the lenders. The lenders may contract that if the SPV defaults under a particular circumstance or if it acts negligently and carelessly against the standard of a reasonable man, the SPV and its shareholders may be liable.

b. Off-Balance Sheet Financing

Investing in infrastructure is a very risky venture: the project may not be viable or it may fail totally, thus by incorporating a new entity, the project sponsor shields themselves from liabilities arising from default. Unlike the traditional equity and debt financing, when the project sponsors come together to form the project company (SPV) for the purpose of constructing the project, their liability in the project is restricted to the equity contributed in the SPV. Thus, the balance sheet of the project sponsors is different from the balance sheet of the SPV because the SPV is a different entity from the project sponsors, for all intents and purposes, the project sponsors are investors in the project company. This enables the project sponsors to concentrate on their usual individual businesses without having to bother about the impact of the project on their business. It also helps to prevent contamination of other projects they have at hand either on their own balance sheet or through other SPVs .

c. Capital Intensive Projects

Another element of International project Finance is that is used to finance capital intensive projects. The case is not different in project finance arrangements in Nigeria. The provision or maintenance of infrastructure demands a large fund of money which demands the participation of numerous counter-parties.  

d. Numerous Project Participants

A typical Project Finance arrangement consists of multiple project participants carrying out different roles at every stage of the infrastructure development. The network of contracts can be very complex as a result of these. The contracts begins with the formation of the Project company through a Joint-venture Agreement or Shareholders agreement or Partnership deed in case of a partnership. It then continues as the project company contract with other counter parties who are to perform a particular role at each stage of the life cycle of the contract. An project finance agreement consists of 40 counter-parties.

Transaction Structure and Parties to a Project Finance Transaction

Special Purpose Vehicle (The Project Company)

The Project Company technically called the special purpose vehicle is the corporate conglomerate of the project sponsors. As indicative by its name, it is the entity the project sponsors form for the special purpose of building the project. The SPV is a company whereas the project sponsors are shareholders in the company. Under a shareholders agreement, or Joint- Venture agreement, the project sponsors contribute equity and are allotted shares in the SPV relative to the equities contributed. It is the the Project company (SPV) that goes into contract with other counter-parties in the transaction such as the lenders, the consortium of contractors, the project managers, offtakers, e.t.c. put in a more practical parlance, the SPV is the spine of the project finance network. At the end construction of the project, depending on the nature of the project, the SPV may assume ownership and operation of the infrastructure.

In Nigeria, the Special Purpose Vehicle otherwise called the project company is usually an incorporated company under the Companies and Allied matters Act, 2020. Theoretically but rarely in practice, it would seem that with the coming into force of the new Companies and Allied Matters Act which introduced novel business vehicles, an SPV can also be a Limited Liability Partnership (LLP), in which case the project sponsors would be called partners and would be bound under a partnership deed or agreement. Depending on the nature and description of the project and the the portfolio of its shareholders (project sponsors), the SPV may be expected to comply with other legislation and also obtain operation licenses.

Project sponsors

They are the developers of the project. Project Sponsors are the shareholders in the Project Company (SPV) who may entirely be private investors or private investors and government agencies in which case the contract is called a Public-Private Partnership (PPP). Project sponsors provide equity capital to the SPV with the Shareholders Agreement or Joint-Venture Agreement. If the SPV is a Partnership (the companies and Allied Matters Act 2020 provides for limited liability partnerships LLPs), the project sponsors would be called partners and would be bounded by a partnership deed or agreement.

There are three types of sponsors: Industrial Sponsors who see project financing as an initiative linked to their core business. The link can be upstream or downstream of their original core business. They provide, not only money, but also know-how. It is also common that they build, operate, and/or act as suppliers or clients of the infrastructure (DUAL ROLE).

Public Sponsors who see project financing as the opportunity to realize public works which are economically self-sustaining with limited public investment (Public Private Partnership - PPP). The ultimate objectives include growth, job creation, and welfare. Their role is typically based on a Concession Agreement.

There may be a third category of sponsors called Pure Financial Sponsors with no industrial rationale who have a high tendency to make risks and see project financing as an opportunity to get substantial returns on their investments

Lenders

Lenders provide debt capital to the SPV to complement the equity provided by the project sponsors. Practically speaking, lenders provide bulk of the capital used in financing infrastructure.lenders provide debt capital in two forms: Syndicated Loans in which a group of banks forms a syndicate to jointly provide a certain amount of funds to construct and manage the infrastructure on a mid-to-long term basis and to fully guarantee all the assets of the SPV. The project company in need of debt capital approaches a bank called the Mandated Lead Arranger (MLA) and gives it the mandate to organize other banks into a syndicate to provide loan to the project company for the purpose of financing its project. The syndicate contracts with the SPV through a Loan agreement, a Tripartite deed and also contract within the syndicate through an inter-creditors agreement.

Debt capital also come in Project Bonds in which investors underwrite debt securities issued by the SPV, which are backed up by the cash flow generated by the SPV throughout its life. o It is attractive for institutional investors that seek long-term assets providing a stable stream of cash flow.

It must be noted that the loan provided by the lenders in project finance is non-recursive or in some circumstances limited recursive. This means repayment of the loan is tied to the performance of the project itself. The money is to be re payed from the revenue derived from the infrastructure in the operational stage, thus the project company or the project sponsors cannot be recursed to or their asset attached in case of default or failure of the project. This underscores the necessity of the lender to conduct a preliminary credit risk analysis based on the project model and also underwrite its credit undertaking with an Insurance Company. 

Contractors

The construction contractor for the project, who is also frequently referred to as an EPC Contractor enters into a contract with the project company to build the project. It is the company (or consortium of companies) with the technical know-how that is chosen to design, engineer, build and deliver the project for a fixed-price, by a specified date, according to the construction documents, plans, specifications, shop drawings and other support documents.  The construction contract usually takes the form of an EPC Contract, which is short for Engineering, Procurement and Construction Contract. The contract0r may or may not also be the operator of the project. In most cases there are several contractors performing different construction roles at various stages and there may also be a main contractor who primarily oversees the other contractors. In such a setting, the main contractor is held accountable for any lapses of the subsidiary contractors.

Purchasers (Off takers)

The purchasers are the buyers of the end product of the infrastructure or the services provided by it. The purchasers may be the general public in cases of public utility or Buyers of goods or services produced by the plant might be generic,which means not defined ex ante (i.e. a retail market), or a single buyer who commits to buying all of the project company’s output. In the latter case, these buyers are called offtakers and output is sold wholesale.purchasers are discussed in details under sales contract.  

Contracts and Documents in a Project Finance Transactions

a. Project Modelling 

For a risk laden enterprise such as a project finance and investment in infrastructure, it would not be out of place for lenders or equity investors to be reluctant to provide loans or equity to the project company without a proof of worthiness of the project. Project sponsors who are seeking equity investors, project lenders and other stakeholders have to appeal to these potential project participants by providing a proposal that is sufficiently compelling to get them to risk vast sum of money investing in their project. In other words, project sponsors must demonstrate that investing in thier project will provide a return on invested capital. Project model in practice go by different names, it may be called feasibility analysis, proposal or even business plan. A typical project model provides sufficient information relating to the nature of the project, the capital needed to float, the demand for the project or markets available for it, the risk involved and ways these risks can be mitigated.

Project models are made by using statistics, variables, derivatives and basic assumptions. From a legal angle, the project model can be seen as an inducement or a representation which drives a potential lender or equity investor to join the project.as a result, it must be based based on reasonable, believable and transparent assumptions and variables that reflect the anticipated real-life situations and not whitewashed realities. Otherwise may attach liability against the project company according to the provisions of relevant contract documents to that effect or even under the general law of contract. 

b. Shareholders Agreement, Joint Venture Agreement or Partnership Deed

The Shareholders agreement or Joint venture agreement is a pee-incorporation contract between all the project sponsors. It is also known as equity contribution agreement. it spells out the equity stakes contributed by each project sponsor or developer and also the rights and obligation of each project sponsor in the SPV. Just as a regular shareholders agreement, it also makes provision for the corporate governance of the newly formed entity by providing for nomination into the Board of Directors, appointment of secretaries, auditors and other officers of the project company. As a pee-incorporation contract, the shareholders agreement or Joint-Venture Agreement is not binding on the project company until it is ratified after the incorporation of the company.

The equity contribution agreement may also be in form of a Partnership Deed if the Special Purpose Vehicle is a Partnership.

c. Loan Agreement

One of the ways the SPV receives capital for financing project is debt capital. Lenders/Investors provide debt capital to the SPV in two forms: Syndicated Loans in which a group of banks forms a syndicate to jointly provide a certain amount of funds to construct and manage the infrastructure on a mid-to-long term basis and to fully guarantee all the assets of the SPV. The syndicate is a group of banks mobilized by a bank called the Mandated lead Arranger (MLA).

Project Bonds can also be issued by the SPV to investors to generate capital for the project. Through project bond,investors underwrite debt securities issued by the SPV, which are backed up by the cash flow generated by the SPV throughout its life or over a specified period of time usually in the long term. It is attractive for institutional investors that seek long-term assets providing a stable stream of cash flow.

The loan agreements or contract are therefore documents of agreement between the project company (SPV) and the lenders. The Loan Agreement in project finance contains specialty clauses that contractually address the specific requirements of the project and project finance documents. In addition, because project financings are limited-recourse or non-recourse as to the borrower, relying on the project alone as the sole source of loan repayment, the Loan Agreement sets forth dividend restrictions, required project metrics, ratios, and covenants, in addition to general conditions precedent as well as basic terms.

d. Engineering and Procurement and Construction Contract

The Engineering, procurement and Construction contract is an Industrial contract in project finance that is relevant in the construction phase of the project. The EPC is between the SPV which is the project company and The contractor. The contractor is the company (or consortium of companies) with the technical know-how that is chosen to design, engineer, build and deliver the project for a fixed-price, by a specified date, according to the construction documents, plans, specifications, shop drawings and other support documents.

Where the EPC is between the SPV and Consortium of Contractors, Contract obligations are taken on by the main contractor (who directly commits to the SPV) and are later passed on to the consortium members. The main contractor is normally responsible for damages resulting from delays in completing the project. The contractor is also required to pay penalty fees if the plant does not pass performance tests. By the same token, the contractor may also receive bonuses if the plant performs at higher than expected levels or if the project is finished ahead of schedule.

Most times, the EPC is often between the SPV and an industrial sponsor who is also a share holder in the SPV.In such instances, the project sponsor acts in dual capacity as a shareholder in the SPV and a contractor.

e. Operations and Maintenance Agreement

Operation & Maintenance Agreements (O&M Agreements) are project finance documents that govern the operations, maintenance and management of completed projects. When construction of a project is complete and the project is turned over from the contractor to the project company, the focus of the project necessarily transitions from development to operation.

O & M Agreements establish a contractual framework between the project company, as the owner of the project, and a professional operator who is engaged to manage, operate and maintain the project. All aspects of project operations, maintenance and performance are typically delegated to professional operators who are required to have expertise in both the industry and in the subject locale.

The operator can be the project sponsor, project stakeholders, the project company itself, or a third-party, professional operator. If the operator is the sponsor, stakeholder or project company, then the project company or one of it’s key players must retain the responsibility and liability for operations and maintenance of the project.

f. Supply Agreements

Supply Agreements in project financing are contracts between the project company and significant suppliers of raw materials needed for the operation of the project. Supply agreement can also be called raw material agreements. However it is important to note that supply/raw material contracts are not required in all forms of project finance arrangement. Whether a Project Finance will require a supply contract is dependent on the nature of the infrastructure project itself. For instance, a Highway constructed by way of Public-Private Partnership and concessioned to the project company to manage will rarely need raw materials for its operation because the road is already built, although the road may require repairs as the need arises, however repairs are not contemplated as a long term contractual necessity. On the other hand, if the infrastructure is a power plant, offshore mining, or other energy-driven projects, it will be imperative to contract with a supplier for basic raw materials such as fuel, natural gas, and other like commodities or utilities. Supply Agreements essentially counterbalance sales contracts sometimes called Offtake Agreements, ensuring that a balance maintained and that the SPV makes profit from the project to service its debts and pay dividends to its shareholders. Supply Agreements can be fixed supply agreements or variable supply agreements, frequently with a minimum and maximum range.

g. Sales Contracts

The object of a project fiance is to develop an infrastructure that provides either services or commodities. If the commodities or services produced by the Project must be sold, they must be a buyer, if there is a buyer, there should be a contract between the buyer and the seller (Project company). The buyers are the counter parties to whom the SPV sells its output.

Buyers of goods or services produced by the plant might be generic, which means not defined ex ante (i.e. a retail market). A typical example of a this is a highway built through project finance. In this instance, the service of using the highway is for the general public and not for a specific buyer or user. In instances like this, it is difficult to have a sales contract with every user of the generic service I.e the highway, rather tickets may be issued upon payment of toll to use the facility. Although tickets are not formal contracts, they have the force of law evidencing an agreement. An practical example of this is the Lekki-Epe Highway in Lagos managed by the Lekki Concessionary company which collect tolls from road users at the Lekki tollgate.

The sales contract on the other hand may be between the Project company and a single buyer who commits to buy all or most of the project company’s output. In the latter case, these buyers are called offtakers and output is sold by wholesale. This can be illustrated using the electricity generation, transmission and distribution sector where the Generation companies (GENCOS) generate power and sale to the Nigerian Bulk Electricity Trading Company. The N(TRANSCOS) who in turn sell to the Distribution Companies (DISCOS) who sell to the final consumers. The NBET was created to provide the status of a credit-worthy offtaker with which the GENCOS can confidently contract given that many investors within the power market were not willing to take on the credit risk of the Discos (which are presently not viewed as credit worthy). It was thus set up to purchase power from the GENCOS under Power Purchase Agreements (PPAs) and, in turn, to sell to the Discos under Vesting Contracts (VCs). It cannot be said that the general public is an offtaker of the DISCOS. This is because the consumers do not buy all the commodities or even a large number of the commodities of the Discos. Also due to the large number of consumers, it may be difficult if not impossible to have a formal contract with them. However, other forms of agreement suffices as evidence of purchase of the generic commodity, for example, receipts, electricity bills, etc.

They are several types of offtakers agreement including Take or Pay Contracts, Take-and-Pay contracts, Throughput contracts, Hedging contracts, Purchase Power and others.

h. Concession Agreements

Where the government partners with private investors through PPP, there is always a Concession agreement. Concession agreement is the contract between the public sector and the project company wherein the public sector gives the private company the authorization to build the infrastructure, assume ownership and operation of the project for a period of years and ultimately transfer the ownership of the infrastructure back to the public sector at the end of the concession period. Concession is illustrated in Build-Operate-Transfer (BOT). In a BOT project, the public sector grants to a private company the right to develop and operate a facility or system for a certain period (the "Project Period"), in what would otherwise be a public sector project.

i. Tripartite Deed

Tripartite Deeds are project finance documents that are typically required by project lenders to establish a direct relationship with themselves and counterparties to the contract. Tripartite Deeds are sometimes referred to as consent deeds, direct agreements or side agreements. The Tripartite Deed specifies the circumstances under which the project lender may step in to remedy a default under the project documents.

j. Intercreditor Agreement

An Intercreditor Agreement whenever project financing involve a consortium or syndicate of lenders. An Intercreditor Agreement is an agreement by and between the project lenders who are providing the financing to the project company. It governs the common terms and relationships by and among the lenders in respect of the borrower’s obligations.

Regulatory Framework of Project Finance in Nigeria

I. General law of Contract

There is no legislation that regulates the entirety of project finance in Nigeria. Each aspect of the transaction is governed by an applicable law. As noted earlier, project finance is a network of contract between the Project Company (SPV) and the counter parties. To this end, the general law of contract is a regulatory law. The application of law of contract is presupposed on the understanding that all parties to the contract are to abide by the spirit and letter of the terms of the contract and carry out their duties and obligation therein. Thus, Pacta Sumpta servenda, Parties are bound by their contract.

The general principle of contract such as offer, acceptance, consideration, consensus ad idem are all applicable to project finance.

II. Companies and Allied Matters Act, 2020

The Companies and Allied Matters Act is the primary legislation that regulates corporate affairs in Nigeria. It makes supervening provisions for the incorporation of Companies and other Business Vehicles, corporate governance, shares, equities and debentures as well as corporate insolvency, receivership, liquidation among others.

The Project Company(SPV) in a project finance arrangement is incorporated as a limited liability company under the Companies and Allied Matters Act, and it is upon incorporation that it assumes its qualities as a separate legal entity from the project sponsors, with incidental powers to borrow from the project financiers and possibly owned the project upon its completion.

It seems under Section 54 of the Companies and Allied Matters Act 1990 that a Foreign project company, I.e an SPV incorporated under a foreign corporate regime cannot carry out a project in Nigeria unless it first registered as a Nigerian Company.

An Exception to the above is where the foreign project company is exempted by the President of the Federal Republic of Nigeria pursuant to Section 56 of the Companies and allied Matters Act.

III. Nigerian Investment Promotion Commission Act

Following the abrogation of the Indigenization Policy, the Nigerian Investment promotion Commission Act was enacted to encourage foreign participation in business and investment in Nigeria. Section 20(4) of The NIPCA provides that a Non Nigerian, Whether Company or Individual may invest and participate in any enterprise in Nigeria except those in the Negative List. To this end, foreigners including foreign companies are encouraged to participate in infrastructure or service investments in Nigeria by way of Project Finance as either as Project Sponsors by contributing to the equity of the SPV, Contractors or Engineering Companies who carry out the actual construction of the project, however this is subject to any other enactment regulating the right of aliens to participate in trade and business in Nigeria.

If there is foreigner or foreign company is a shareholder in an SPV in Nigeria, the project company before commencement of its business must register with the Nigerian Investment Promotion Commission.

IV. The Investment and Securities Act, 2007

The Investment and Securities Act is the primary law regulating the Nigerian Capital Market. The Act establishes the Securities and exchange Commission (SEC) as the principal agency to give effect to its provisions. By the provision of ISA, all shares owned by foreigners in Nigerian Companies either through Foreign Portfolio Investment (FPI) or Foreign Direct Investment (FDI) must be registered with the Securities an Exchanges Commission as Foreign Portfolios. Thus a foreigner or Foreign company who is a shareholder in a Nigerian SPV must register his shares with SEC as Foreign Portfolios.

V. The Infrastructure Concession Regulatory Commission Act, 2005

The Infrastructure Concession Regulatory Commission Act, 2005 (ICRC Act) and the ICRC – The ICRC Act provides for the participation of the private sector in financing the construction, development operation or maintenance of infrastructure or development of new projects of the federal government through concession or contractual arrangements and establishes the Infrastructure Concession Regulatory Commission (ICRC) to drive PPP projects in Nigeria. The Act applies only to PPP projects in which the federal government or its agencies are parties to. It is inapplicable to PPP projects undertaken by state governments. The ICRC Act also does not apply to project finance arrangements financed by private investor because they are not Public-Private Partnerships (PPP). The The Infrastructure Concession Regulatory Commission is the principal organ established by the Act, Its responsibility among other things is to manage the portfolio of the government in the Project Companies (SPVs), keep records, monitor concession performances and general operation of the PPP project. 

VI. Public-Private Partnership Laws Of States

A key aspect of Nigerian legal system is that there are dual regimes at federal and state government levels. The ICRC Act does not apply to infrastructure projects undertaken by state governments where no federal asset or ministry is involved. As such, several states have developed their own frameworks for PPPs, and a number have made great progress in this regard. The following states have enacted PPP laws and corresponding PPP offices/bureaus: Abia, Akwa Ibom, Cross River, Delta, Ekiti, Kogi, Kwara, Lagos, Oyo, Plateau, Rivers. The use of PPPs has been successfully deployed in various sectors in Nigeria (including energy, rail, roads, housing, aviation) and it is further expected that PPP structures would still be deployed in the aviation and Oil & Gas sector as reports and recent government policies are indicative of the government's intention to concession four government owned airports and the four petroleum refineries currently operated by the Nigerian National Petroleum Corporation (NNPC).

VII. Insurance Act

Investment in Infrastructure is a venture full of risks because it involves a huge amount of capital and it is a non-recursive financing contract. As a result, parties to the network always seek to secure their stake and investments through an underwriting contract. The Insurance Act is the primarily legislation that regulates the business of insurance in Nigeria.

Under Nigerian insurance law, any insurance policy taken in relation to an insurable interest in Nigeria must first be taken out using a Nigerian insurance company unless the Nigerian insurance industry lacks the capacity to retain the risk of such portfolio.

VIII. Relevant Sector and Licensing Acts

The requirement of licensing depends on the nature of the project and the sector which the project relates to. For instance, NESERA demands that Environmental Impact Assessment be carried on all projects that posses a potential threat to the environment. 

Licensing is undoubtedly a regulatory prerequisite to undertaking project in the Nigeria's power sector. For instance, Section 62 EPSRA forbids the construction and operation without license of any power project for generating electricity exceeding 1 MW in aggregate at a site or an undertaking for distribution for electricity with a capacity exceeding 100 kilowatts (KW) in aggregate at a site, or such other capacity as the Nigerian Electricity Regulatory Commission (NERC) may determine from time to time. 

In Petadis v. HFP Properties, NERC declared, among other things, that the electricity distribution arrangement at the Ikota Shopping Complex, Lagos, was illegal as the Respondent was essentially engaging in regulated activity by generating above 1MW without license and distributing same on the basis of a delegation of power from the Eko Electricity Distribution Company (EEDC). Therefore, it is the duty of the project company to ascertain the neccesary licences that pertains to a project and obtain those licensces. To this end, the relevant laws and regulations that demands for these licenses is a regulatory framework.

IX. Foreign Exchange (Monitoring & Miscellenous Provisions Act)

The Act is enforced by the central Bank of Nigeria. It regulates the importation and expatriation of capital and earning and profits in and out of Nigeria. According to the Act, Importation of capital into Nigeria can only be effected through an authorized dealer which is the Central Bank of Nigeria (CBN). The CBN may appoint a bank or non-banking institution to operate as an authorized dealer and must take steps to issue certificate of importation after 24 Hours of importation. Importation of capital through an authorized dealer is important to avoid criminal liability of Money Laundering. Also an investor is entitled to open a foreign domiciliary account with the authorized dealer, in any case the capital imported is loan the investor is entitled to free transfer from CBN to service the loan in it’s country of origin. The investor is also guaranteed free repatriation of capital should he transfer or sale the stake as well as unrestricted repatriation of dividends and profits net taxation.

The Act is important particularly in Project Finance and investment in infrastructure where an investor or a shareholder of the project company is a foreigner or a foreign company. It is also applicable in cases where a foreign bank is member of the syndicate of lenders or a foreigner or foreign company is a bond holder of the project company. The Act provides a medium and mechanism through which the parties aforementioned can legally import their capital to invest in the project.

X. National Office for Technological Acquisition and Promotion Act.

The Act established the National Office for Technological Acquisition and Promotion (NOTAP). It requires every contract entered into by any person in Nigeria and a foreign investor or foreign company into be registered within Sixty (60) days of its execution. . If a transfer of technology is involved, the company has to obtain the approval of the National Office for Technology Acquisition and Promotion for remittances of fees payable under the contract. Section 4 of NOTAP Act provides for contracts which are registrable viz: use of trademarks, right to use patented inventions, the supply of technical expertise, a basic or detached engineering drawing, supply of machinery and plant, e.t.c. any project finance contract where a foreign investor is a counter-party to a contract of any of the above mentioned subject matter is required to be registered with NOTAP.

However, it must be noted that non-registration does not render the contract invalid, but repatriation of fees, royalties or profits through the authorized dealer is disallowed unless certificate of registration is produced.

Major current initiatives and Ease of Doing Business in Nigeria relating to project Finance and Investment in Infrastructure

Ease of doing business in Nigeria relates to policies of government put into place to facilitate foreign investment and promote seamless and easy investment processes. Ease of doing business may relate to concessions and mild compromise to extant laws and regulations within allowable and convenient limits so as to ensure Investors in the Nigerian economy do not encounter difficulties or bureaucracy. Some of the ease of doing business that relates to project finance and investment in infrastructure are:

1. One Stop Investment Centre (OSIC)

The one stop investment OSIC was established by the Nigerian Investment Promotion Commission Act to promote foreign direct investment by bringing together different agencies which grant approval to foreign investors under one building. As noted under regulatory frameworks, investment in project finance and in all sectors in general is governed by laws, most of these laws requires obtaining licence, registration and other conditions to be fulfilled at their respective offices. Ordinarily this connotes that an investor will have to walk in into all the regulatory agencies to obtain the required permits, licence or registration. However, with OSIC in place, different regulatory agencies establish their physical presence by delegating officers through outlets and service desks at the OSIC office, thus an investor need only walk into OSIC office to transact with all of them obliterating the need to visit the agencies’ offices. OSIC eliminates dealing with multiple agents and agencies at different distant locations, eliminates high cost of doing business, eliminates over bureaucratization, eradicate poor service delivery and also reduces corruption.

2. The Infrastructure Credit Enhancement Company

(InfraCredit) was established in 2017 to provide guarantees to enhance the credit quality of eligible local currency debt instruments issued to finance eligible infrastructure related assets in Nigeria. It is expected that these guarantees will increase the number of project specific bonds issued by project sponsors and address the dearth of long term financing options for infrastructure projects.

3.  Power Sector Recovery Program (PSRP)

The FGN, in collaboration with the World Bank Group, has also developed a draft Power Sector Recovery Program (PSRP), recognizing the deterioration of the power sector and the urgent need to address the challenges in the sector to improve its financial viability. The PSRP is a series of strategic policy actions, operational governance and financial intervention initiatives to be implemented by the FGN over five years (2017 – 2021) aimed at providing support to the sector and improving its financial viability, transparency and service delivery.

4. Electronic Certificate of Importation

The Central Bank of Nigeria (CBN) on September 7 2017 issued a circular to Nigerian banks directing that physical certificate of capital importation (CCI) will no longer be issued for foreign exchange inflows and that the processing of Certificate of Capital Importation (CCIs) will only be done electronically. All investors with physical CCIs that had not been fully utilized were required to have such certificates dematerialized and converted into e-CCIs by May 19 2017. (Where there is an importation of capital investment (debt or equity) such foreigners are required to process a certificate of capital importation (CCI) which essentially guarantees access to the official foreign exchange market for repatriation of capital and returns on investment.

5. Incentives

Investments in infrastructure in Nigeria enjoy a number of incentives. The incentives accruing to a particular venture depends on the sector the project relates to. A company engaged in gas utilisation is entitled to certain incentives including a tax-free period of three to five years, investment and capital allowance. Where a company incurs capital expenditure on the provision of facilities such as road or electricity for a trade or business which is located at least 20 kilometres away from where such facilities are provided by the government, the company shall be entitled to an allowance of a percentage of that expenditure. Investments in infrastructure may also be entitled to pioneer status tax holiday granted to qualified (or eligible) industries/products anywhere in Nigeria for a period of three to five years. Locating a project in a free zone called Export processing free zones within Nigeria will provide certain benefits, including exemption from all Federal, State and local government

taxes, levies and rates (Section 8, Nigeria Export Processing Zones Authority Act)

Advantages of Project Finance over Traditional Financing

1. By utilizing an off balance sheet financing, the project sponsors or developers avoid risk contamination and shields a project sponsor’s assets from the inconveniences of the project and probability of insolvency unlike in project finance where an investor company carriers out a project on its own balance sheet, increasing the risk of its business.

2. Project Finance is a non-recursive or limited recursive financing. The lenders primarily recourse in cases of default is the project itself. A project sponsor has no or limited liability to the lenders for breach or default.

3. Project Finance provides a platform for increase Partnership between the government and private investors through PPP, thereby improving infrastructural development in the country and saving expenditures for the government by reducing capital budgeting. 

4. In project finance transaction, risk is shared among all of the project participants. This risk sharing encourages project participants to perform well and improves the chances of success of the project.

5. it encourages foreign participation in business in Nigeria through foreign direct investment

Conclusion

Nigeria is in dearth of infrastructure. This calls for all sectors including private investors and Government to pull resources together to balance the infrastructure deficit in the country. The government must galvanize efforts to put all hands on deck in nation building, promote foreign investment, reduce the national debt profile, and development infrastructure. Project finance provides a viable solution.

Author

CHIDERA EMMANUEL CHIKERE (LLB, B.L, AICMC)

Chidera is a Bar Aspirant, and a graduate of the Nigerian Law School, Yola. He holds a Bachelor of Law Degree top 5% from Ebonyi State University in 2019.

He possess an unbridled passion for Corporate and Commercial Law with particular interest in Finance, Investment in Infrastructure and Projects, Energy, Intellectual Property, Digital Privacy, Public International Law and Diplomacy.

Chidera is a Personal Development enthusiast and runs a HR brand "The Right Fit Consulting". He occupies the position of Company Secretary/Compliance Analyst at Catch Up Media and Publicity Ltd, a media start-up where he advises on all ranges of regulatory compliance and corporate governance. He is open to opportunities and positions across different practice groups, firms and organizations.

Contact details:

Phone: 08165192403, 09059684582

Email: [email protected]

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