The Projects and Construction Review: Nigeria

Introduction

Nigeria's infrastructure gap is reportedly estimated to be US$3 trillion, or six times the size of the country's annual GDP.2 Going by the country's budgetary pattern in the past four decades, this gap is expected to be largely funded from its oil and gas resources. These earnings are usually affected by fluctuations in the global pricing of crude oil. At the time of writing, Nigeria's two major crude blends, brent crude and bonny light crude, are at US$68 per barrel.3 This is a fairly high figure. In the recent past, this was hardly reliably the case.

The global oil and gas market suffered a historic loss on 20 April 2020, when oil prices fell below zero US dollars. This unprecedented steep drop in crude oil price was generally attributed to the socioeconomic shockwave caused by the covid-19 pandemic, which slowed down economic activities in most crude importing countries, particularly China. The current crude oil pricing outlook is promising. However, given the historic and sudden price swings that were evident in oil's overall poor performance in 2020, Nigeria contends always with the clear and present danger' of a scarcity of public funds to invest in projects that focus on underserved areas of its economy. Redressing the estimated US$3 trillion infrastructure gap, therefore, requires that Nigerian policymakers must look beyond public funds and work out an effective and enduring framework to integrate private sector participation with budgetary allocation for the country's infrastructural development.

In response, arguably, to the vagaries of public budget for infrastructures, public-private partnerships (PPPs) have become popular over the years in Nigeria, with several PPP projects currently in the works. Multilateral lending agencies and development banks are also showing more interest in financing Nigeria's infrastructure development under the PPP model. They often serve as a project's third-party financiers.

The federal government recently announced plans to sell or concession 36 of its public infrastructural assets. This is expected to boost PPP transactions and increase project financing for infrastructure development in the coming years.

The year in review

The Nigerian LNG Train 7 project was one of the most significant project finance transactions in infrastructure development in 2020. The contract for engineering, procurement and construction (EPC) was awarded in May 2020 to the SCD JV Consortium, which included affiliates of Saipem, Chiyoda, and Daewoo. According to reports, the project will cost around US$4 billion and will be fully funded by Nigerian LNG. Aside from the Train 7 project, several other project finance transactions are currently underway in Nigeria, with the majority of them taking the form of PPPs.

Signed by the President in 2019, the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme Order 2019 No. 0007 of 2019 (Order) will be a major reference point for project finance transactions in infrastructure development and PPPs for the next decade. The Order establishes the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme for a 10-year period (Scheme). The goal is to encourage PPP for road projects in Nigeria by providing tax credits to private companies that build or renovate roads eligible for the Scheme. According to the Order, private companies that develop road infrastructure under the Scheme are issued road infrastructure tax credits, which entitle the company to use the project cost as a credit against the company's income tax liability. Dangote Industries Limited, along with five other companies, is currently taking advantage of the Order to build 19 federal roads. At the time of writing, the 43km Obajana–Kabba road was completed, making it Nigeria's longest concrete road. In addition, the federal government has announced that it will use US$405 million in sukuk bonds to fund 44 ongoing highway projects.

Project finance in infrastructure development, particularly through PPPs, has become a driving force in Nigerian infrastructure development. On the Infrastructure Concession Regulatory Commission (ICRC) website, 69 projects are currently listed as ongoing PPP projects.4

At the time of writing, a bill to amend the ICRC Establishment Act, 2005 is pending in the federal legislature. When it is enacted, the bill will give the Commission supervisory and disciplinary authority over concession agreements. The bill also proposes to change the Commission's name from the ICRC to the Public-Private Partnership Commission to better reflect the Commission's mandate and scope of work.

Documents and transactional structures

Documents and transaction structures

i Transactional structures

In a typical Nigeria project finance transaction, there is no required structure to be used. Most transactions adopt a structure that is appropriate for the project at hand. Generally speaking, the structure used in a project finance transaction is usually determined by factors such as the procuring entity, the financing entity, and the type of project. Build-own-operate-transfer (BOOT), build-own-operate, build-own-transfer (BOT), development lease, engineering procurement and construction (EPC) contracts, and operation and maintenance (O&M) contracts, are the most common transactional structures used in project finance transactions.

ii Documentation

Project documentation just like project structures are usually transaction-specific. In other words, the procuring entity and the contractor are free to choose the financing structure that will be used for the project. The chosen structure will, in turn, determine the documentation required for the project. Typically, the procuring entity and the contractor establish a special purpose vehicle (SPV) for the project. In other cases, where there is more than one contractor, the consortium of contractors will establish an SPV to be used for the project, as seen in the NLNG Train 7 project. The documentation typically includes the registration documents for the SPV, the shareholders' agreement and the document evidencing the structure adopted for the PPP. This could be the BOOT, BOT, EPC contracts, O&M contracts, or development leases, depending on the model. The facility agreement between the financier and the contractor is also documented when the financier is a third party (which is usually the case).

Where the project requires an offtaker, such as a gas plant, a gas sale or offtake agreement is also prepared.

iii Delivery methods and standard forms

In Nigeria, there are no mandatory standard forms for PPPs. Parties are free to choose the model that is best suited to each project. There are, however, standard form contracts such as the International Federation of Consulting Engineers Contract (FIDIC), Standard Form of Building Contract in Nigeria, 1990 (SFBCN), and the Joint Contract Tribunal (JCT). The use of these standard form contracts is convenient, but they are usually subject to significant amendments to reflect the parties' agreement.

Risk allocation and management

i Management of risks

Environmental risks, price risks, political risks, legal risks, completion risks, operational risks and interest rate risks are among the most important risks in project finance transactions and construction contracts. In practice, risks are usually assigned to the parties best suited to bear them. Contracts typically include provisions for risk management and allocation. As an example, all-risk insurance against damage should be considered.

A well-drafted contract considers all potential risks and allocates them accordingly.

ii Limitation of liability

Liability limits are usually contractually imposed. Parties to a contract may often agree to limit or exempt a party from such liabilities. This is consistent with general contract rules about exclusion and limiting clauses. The Nigerian courts generally respect the parties' freedom to enter into a lawful contract and would enforce the terms of such contract. Even though there are still contradictory decisions on this issue, there are some exceptions to this rule. The first is where the liability arose from a negligent act; the second is where the liability sought to be excluded arose from an act that constitutes a fundamental breach of contract. The exclusion or limiting clauses would not be enforced in these cases.5

It is common for parties to cap their liability in a contract. As previously stated, this is subject to contract, and the parties' agreement would be honoured. It is also critical to be aware of limitation periods, which can allow a party in default to be released from liability. The ICRC Establishment Act of 2005 states that any suit brought against any member of the ICRC shall be subject to the provisions of the Public Officers Protection Act (POPA).6 POPA requires that any action brought against a public officer be filed within three months, or the action will be statute-barred. Similarly, under the Limitation Act, an action to enforce a contract must be filed within six years of the accrual of the cause of action, or the action will become statute-barred.

Another factor to consider is force majeure. Parties are free to agree on circumstances that would constitute force majeure and the consequences of those circumstances. Typically, the consequences of the circumstances range from the suspension of the contractual obligation to the exclusion from liability or the complete discharge of the contract. Regardless of the parties' agreement, certain circumstances can discharge the obligations of the contract under the general principles of discharge by frustration.

iii Political risks

Given the government's central role in PPP transactions, political risks are important factors to consider in PPPs. Typically, parties, by contract, obtain several guarantees from the government, including clauses prohibiting the government from taking any action or making any decision that would fundamentally affect the contract's performance. The clause also includes remedies in the event that the government takes actions or makes decisions that fundamentally affect the contract's performance, although the applicable PPP law prevents the giving of any guarantee without the approval of the Federal Executive Council.7 Regardless of the contract provisions, certain guarantees are provided to the investor by the Constitution and statutory provisions. Foreign investors are protected from expropriation and nationalisation under the National Investment Promotion Commission Act (NIPCA). The NIPCA also ensures that compensation is paid in a timely and effective manner in the event of expropriation or nationalisation. The NIPCA also includes provisions for dispute resolution.

In terms of currency exchange and transfer restrictions, the NIPCA and the Foreign Exchange (Monetary and Miscellaneous Provisions) Act ensure that funds can be repatriated at the official rate. However, to take advantage of this benefit, capital must have been imported through an authorised dealer and the dealer must issue a certificate of capital importation (CCI) to the foreign investor.

Contractual force majeure clauses typically include provisions for war and civil unrest. If they were not anticipated, they usually result in situations that would frustrate the contract under the general principles of contract.

Security and collateral

The security and collateral to be used in the project are largely determined by the nature of the project and the parties' agreement. The most common type of security required is one on the project's assets. Typically, this takes the form of a legal charge, debenture or mortgage. Security can also be created over the project's sponsor's shares. Where the agreements involve off-taking, the project accounts may be mandated to be domiciled with a specific bank, and the account would be charged as security in favour of the project's financiers.

The perfection of the securities is determined by the type of security purchased. When the security is over project shares or assets held by the SPV, the charge must be registered with the Corporate Affairs Commission within 90 days of its creation. Where landed property is used as security, the mortgage must be approved by the governor of the state, and the charge must be registered at the Land Registry. Stamp duties must be paid prior to registration. Due to the potential high costs involved in the payment of stamp duties, this is a crucial consideration when structuring securities. When a mortgage of landed assets is used as security, the stamp duties payable are usually higher. To cut costs, it is common for parties to use up-stamping strategies. Step-in rights are also common clauses included in contracts to allow lenders to step into the concessions.

Bonds and insurance

The nature of the terms to be included in the agreement is largely determined by the parties' negotiations. In most cases, project bonds are not used in project finance transactions. However, it is not unusual for bonds to be used to refinance brownfield projects. The federal government announced in 2020 that it will use US$405 million in sukuk bonds to fund 44 ongoing highway projects. Earlier, in 2017 and 2018, the federal government spent US$541 million in sukuk bonds to fund 58 critical highway projects across the country. Depending on the financial institution involved, contractors and subcontractors may be required to provide performance bonds or payment guarantees.

Insurance policies on the project assets is a common clause in contracts. In addition, Section 64 of the Insurance Act requires any owner or contractor of a building under construction with more than two floors to obtain insurance to cover liability for construction risks caused by the contractor's, owner's, servant's, agents' or consultants' negligence.

Enforcement of security and bankruptcy proceedings

In project finance, security or collateral can be enforced either within or outside of bankruptcy or insolvency proceedings. The parties' agreement would have detailed the steps to be taken in the event of default or insolvency. The appointment of a receiver, power of sale and step-in rights are common modes of enforcement. The appointment of a receiver is a common method of enforcement because the receiver can be appointed with or without recourse to the court. Once appointed, the receiver may act by taking over the project or in any other way he or she sees fit. Typically, the court is eventually approached to sanction the receiver's appointment and to provide him or her with police protection to carry out his or her duties. However, actions taken by the receiver prior to filing an application with the court are legal.

The activation of the share charge is another very effective enforcement procedure that can be used outside of bankruptcy proceedings (if any). Documents transferring the shares from the SPV to the financiers would have been executed and held in escrow in practice. When the documents are released and filed with the Corporate Affairs Commission (CAC), ownership of the shares is transferred to the financiers, who now control the SPV.

When insolvency proceedings are to be pursued, a winding-up petition is filed. The petitioner would file an application to wind up the SPV and a receiver would be appointed to liquidate the SPV's assets. However, the new Companies and Allied Matters Act, 2020 (the law that governs bankruptcy and insolvency proceedings) has introduced an administration procedure that seeks to save the company. This is done before the general bankruptcy proceedings. There are certain exceptions to the bankruptcy proceedings. Insurers are barred from participating in common insolvency proceedings; the Insurance Act governs them and specifies how a winding-up petition can be filed against an insurance company. Section 33 of the Insurance Act also prohibits life insurance companies from voluntarily winding up save for under certain circumstances.

Socio-environmental issues

i Licensing and permits

Several laws govern environmental concerns in construction. The National Environmental Standards and Regulatory Enforcement Agency (Establishment) Act (NESREAA), the Environmental Impact Assessment (EIA) Act and several sector-specific regulations are among these laws. The NESREAA establishes the National Environmental Standards and Regulatory Enforcement Agency, which, among other things, has the authority to prohibit processes and the use of equipment or technology that are detrimental to environmental quality.8 Furthermore, the EIA Act requires that prior to the start of any construction or project that is likely to have an impact on the environment, the project sponsor must conduct an environmental impact assessment to determine the impact of the project on the environment and devise ways to minimise the impact on the environment. This evaluation is carried out in collaboration with the relevant federal and state environmental ministries.

When certain projects are undertaken in specific regulated industries, such as the oil and gas industry, the Department of Petroleum Resources establishes health, safety and environmental guidelines that must be followed.

ii Equator Principles

The Equator Principles apply to project finance transactions in which the World Bank or other international organisations are the project financiers. The Equator Principles have not been widely accepted in Nigeria: only Access Bank and Fidelity Bank have adopted the Equator Principles thus far.9

iii Responsibility of financial institutions

The civil liability of financial institutions is limited to the parties' agreement. Financial institutions must also follow the Central Bank of Nigeria's sustainable banking principles, which were issued in 2012. If fraud and other financial irregularities are involved in the process by which funds were disbursed, the financial institution or its officials may face criminal charges.

Ppp and other public procurement methods

i PPP

PPPs are increasingly being used in infrastructure development projects. As previously stated, Nigeria's infrastructure gap is estimated to be US$3 trillion. The use of PPPs is seen as a significant step toward closing this infrastructure gap. The ICRC Act of 2005 governs PPPs in Nigeria. The ICRC calls for 'private sector participation in financing the construction, development, operation, or maintenance of Federal Government infrastructure or development projects through concession or contractual arrangements'.10 It also created the ICRC to oversee, regulate and monitor contracts for infrastructure or development projects in Nigeria.

There is also the Public Procurement Act (PPA), which applies to all federal government procurements and procuring entities, as well as government ministries and agencies that receive at least 35 per cent of their funding from the consolidated revenue fund.11 The Public Procurement (Goods and Works) Regulations 2007 are issued by the Bureau of Public Enterprises, which is established by the PPA. The Fiscal Responsibility Act of 2007 (FRA) applies to PPP projects as well. The FRA ensures that the Federal Ministry of Finance evaluates and manages all fiscal risks that may arise as a result of the government's concession agreements.

At the federal level, the ICRC Act and the PPA apply to PPPs. The states are free to enact their own PPP legislation. Some states, such as Lagos, already have PPP laws in place, such as the Lagos State Public Private Partnership Law.

The open competitive bidding process is used in the procurement procedures.12 The open competitive bidding process can be national or international in nature. Where the bidding process is international, the Bureau of Public Procurement (BPP) may give national bidders a margin of preference.13 The BPP may also choose to use special and restricted procurement methods, such as two-state tendering and restricted tendering. Certain conditions will allow the BPP to use these modes of procurement, such as when it is impractical for the procuring entity to develop detailed specifications for the goods or works or, in the case of services, to identify their characteristics, and when it seeks tenders, proposals or offers on various means of meeting its needs in order to obtain the most satisfactory solution to its procurement need.14 Requests for quotations and direct procurement may also be used by the procuring entity.15 Currently, there are 69 PPP projects listed on the ICRC website.16

ii Public procurement

The PPA governs general public bidding. To select the final contractor, the PPA uses an open competitive bidding process with transparency. However, as previously stated, where the bidding is international, the BPP can give national bidders a preference margin. The BPP is also the appropriate body to consider review applications. The PPA includes extensive review provisions.17 An application is made first to the accounting officer, who must decide within 15 days. If the complainant is still dissatisfied, he or she must file a complaint with the BPP and, if that fails, he or she must file a complaint with the Federal High Court. When the accounting officer deems it necessary, he or she may take corrective action, such as suspending the proceedings. In addition, if the complaint reaches the BPP, the BPP must promptly notify the procuring entity and halt any further action by the procuring or disposing entity until the BPP has resolved the matter. It is also not uncommon for parties to seek injunctive relief in court.

Foreign investment and cross-border issues

Before a foreigner can conduct business in Nigeria, he or she must first register with the CAC or obtain an exemption from registration from the President. A foreigner may also choose to invest in an existing Nigerian company. When a foreigner registers a company, he or she must also register with the NIPC and comply with all immigration laws in order to conduct business in Nigeria, such as obtaining visas, business and work permits. If the foreigner also intends to hire foreign experts, the Ministry of Interiors must grant expatriate quota approval. Furthermore, the foreigner must import capital through an authorised dealer and obtain a CCI. Foreigners may also face subtle restrictions on land ownership. Foreigners cannot own landed properties in Nigeria without the approval of the Federal Executive Council. However, if a foreigner establishes a company in Nigeria, the company may own landed property. Other possible restrictions include sector-specific restrictions on company ownership. The Oil and Gas Industry Content Development Act prioritises Nigerian companies in all oil and gas-related matters. A Nigerian company is one that is registered and has at least 51 per cent of its equity owned by Nigerians.18

Foreign investors in Nigeria have access to a number of guarantees and incentives. Foreign investors are protected from nationalisation and expropriation under the NIPCA.19 It also states that in the event of expropriation or nationalisation for the national interest or a public purpose, the foreigner is entitled to fair, adequate and prompt compensation in foreign currency, and the foreigner has the right to go to court to determine the quantum of compensation.20 The NIPCA also ensures unconditional repatriation of funds via an authorised dealer.21

Removal of profits and investment

A foreigner is guaranteed unconditional repatriation of funds through an authorised dealer. Funds do not need to be converted to local currency. When funds are imported through an authorised dealer and a CCI is obtained, the foreigner is able to open a foreign currency domiciliary account in which funds can be domiciled in foreign currencies. One of the benefits of having a CCI is that funds can be transferred unconditionally through an authorised dealer at the official exchange rate.

Dispute resolution

i Special jurisdiction

There are no special courts or tribunals with jurisdiction over project financing or construction contracts. Regular courts of record have jurisdiction to hear cases involving project finance and construction contracts. When it comes to a simple contract dispute, the high courts of the states have jurisdiction. However, when the dispute involves an action or inaction by the federal government or its agencies, or when the action involves insolvency, the Federal High Court has jurisdiction.

Given that arbitration is used in the majority of contracts, foreign investors must consider which mode of arbitration is most convenient for them: ad hoc or institutional. In general, institutional arbitration is preferable because it reduces the role of courts.

ii Arbitration and ADR

Arbitration and other forms of alternative dispute resolution (ADR) are widely used in Nigerian project finance and construction contracts. Arbitration is the most commonly used form of ADR. Although most arbitrations are ad hoc, the Lagos Court of International Arbitration22 and the Lagos Chamber of Commerce International Arbitration Centre23 are the most prominent arbitration institutions in Nigeria.

Nigeria is a signatory to both the International Centre for Settlement of Investment Disputes Convention of 1965 (ICSID Convention) and the New York Convention on the Enforcement of International Arbitral Awards of 1958 (New York Convention). Furthermore, under the Arbitration and Conciliation Act, arbitral awards, whether domestic or international, must be recognised and enforced by Nigerian courts unless they fall into one of the categories of awards that will not be enforced.24 In the case of disputes involving foreign investors, the NIPCA provides a comprehensive model of redress that includes mutual discussions, bilateral or multilateral treaties, and, finally, recourse to the ICSID.

Outlook and conclusions

Over the past few years, both the public and private sectors in Nigeria have shown promise in the project finance space. Despite Nigeria's massive infrastructure gap and insufficient public funds, the problem is said to be gradually shifting from a lack of financiers to a lack of bankable projects. This is premised on the increased participation and interest of international financiers in Nigerian infrastructural development. This has been described as 'too much money chasing too few projects'.25

Given the drop in oil prices, fewer public funds are expected to be available for infrastructure development. With an increase in international financiers for projects, it is likely that the lack of funds, which was previously the major issue, will be replaced by a lack of bankable projects and an unfavourable business environment, owing primarily to political risks.

According to a United Nations Conference on Trade and Development Investment Report, FDI inflows into Nigeria have been declining. They fell from US$6.4 billion in 2018 to US$3.3 billion in 2019 and US$2.6 billion in 2020. However, it is believed that the 2020 figures were high, given that the pandemic caused a 42 per cent drop in global FDI. On the upside, FDI is expected to increase in Nigeria, which will lead to an increase in project finance for infrastructure development.

Footnotes

1 Olumide Famuyiwa is a partner and Abdulrasheed Bolaji Ijaodola is an associate at Babalakin & Co.

3 This was the prevailing figure at 13 May 2021 as published on https://oilprice.com/

4 https://ppp.icrc.gov.ng (last accessed 9 May 2021).

5 MTN Communications Limited v. Amadi (2012) LPELR-21276 (CA), International Messengers Nigeria v. Pegofor Industries Ltd (2005) ALL NLR 234, UBA Plc v. Vertex Agro Limited (2019). LPELR-4842 (CA), Broadline Ent Ltd v. Moneterey Maritime Corp (1995) 9 NWLR Pt. 417 p. 1 at 29.

6 Section 29 ICRC Establishment Act, 2005.

7 Section 3 of the ICRC Establishment Act.

8 Section 8(d) of the NESREAA.

10 The Explanatory Memorandum of the ICRC Act 2005.

11 Section 15 of the PPA.

12 Section 24 of the PPA.

13 Section 34 of the PPA.

14 Section 39(2) (a) of the PPA.

15 Section 41 of the PPA.

16 https://ppp.icrc.gov.ng (last accessed 9 May 2021).

17 Section 54 of the PPA.

18 Section 106 of the Oil and Gas Industry Content Development Act.

19 Section 25 of the NIPCA.

20 ibid.

21 Section 24 of the NIPCA.

24 Sections 28 and 30 of the Arbitration and Conciliation Act.

25 Mayowa Mubashir Abiru, 'Towards Implementing the African Continental Free Trade Area (AfCFTA) Agreement: A Framework to Address Bankability Concerns for African Infrastructure Projects'. James Leigland and Andrew Roberts, 'The African Project Preparation Gap: Africans Address a Critical Limiting Factor in Infrastructure Investment', Public –Private Infrastructure Advisory Facility, World Bank (2007), <>https://openknowledge.worldbank.org/bitstream/handle/10986/10716/397920Grid1lines.pdf?sequence=1&isAllowed=y> (last accessed 10 May 2021).

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