MARCH 2015 POWER NEWSLETTER

LOCAL CONTENT REGULATION FOR NIGERIA’S POWER SECTOR

INTRODUCTION

The Regulations on National Content Development for the Power Sector 2014 (the “Regulations”) was issued by the Nigerian Electricity Regulatory Commission (“NERC”) on 24th December, 2014 pursuant to the powers conferred on NERC to issue regulationsi and in furtherance of NERC’s object to ensure the optimal utilisation of resources for the provision of electricity services in Nigeriaii.

The central theme of the Regulations is to promote the deliberate utilisation of local human and material resources in the Nigerian Electricity Supply Industry (“NESI”) by all entities that hold licences to carry out any regulated activity, including electricity generation and distribution (“Licensees”).

This newsletter presents highlights of the Regulations and our view on some of its provisions.

WHAT IS THE LOCAL CONTENT REQUIREMENT?

Licensees are required to give first consideration to qualified Nigerian Companies for the supply of

goods, works and servicesiii and in the award of contracts, Licensees are to give first consideration

for goods made in Nigeria and services provided by Nigerian firms. The use of the expression “first

consideration”, in the absence of a definition, suggests that Licensees may only consider foreign

companies where there is a dearth of local capacity in relation to the supply of goods and services. It

therefore follows that suppliers and service providers seeking to be optimally positioned for the

supply of goods and services in NESI must be Nigerian Companies.

It is noteworthy that the Regulations provide no definition for a “Nigerian Company” albeit that the term is used in the Regulations and “Company” is a defined term in the sameiv. It is therefore not clear if: (i) any indigenous shareholding percentage is required, or perhaps it will suffice if the company is merely formed and registered in Nigeria regardless of the nationality of its shareholders and the quantum of their respective shareholding interests; or (ii) the definition of “Company” in the Regulations and the need to capitalise Nigeria inadvertently created the term Nigerian Company.

In evaluating bids, operators and project promoters are required to consider Nigerian content at the

commercial stage and to select the bid containing the highest level of Nigerian content. Although the

Regulations provide a definition for “Nigerian operator”, we note that neither the definition of

“operator” nor “project promoter” is provided in the Regulations and since these terms were used

distinctly from “Licensees” – the latter forming the stated scope of application of the Regulationsv - it

may be assumed that the Regulations apply to other market participants in addition to Licensees.

WAIVER

Significantly, the Regulations provide for the grant of a waiver by NERC where there is inadequate

local contracting capacity. A waiver will be granted by NERC based on certain criteria, which include

situations where the items or capacity are unavailable locally and where the losses to be incurred by

a Licensee will not be prudent if the items are sourced locally. A waiver will not continue for longer

than three (3) years from the date it is granted.

HOW WILL THE LOCAL CONTENT REQUIREMENT WORK

JOINT QUALIFICATION SYSTEM (“JQS”)

A JQS which will constitute an industry databank of available capabilities in the industry is to be established by NERC in consultation with NESI Nigerian Content Consultative Forum (“Forum”)vi. The JQS will be the sole system for Nigerian content registration and pre-qualification of contractors in the industry, amongst others.

NIGERIAN CONTENT PLAN (“NCP”) FOR MAJOR PROJECTS

Licensees are required to prepare and submit a NCP for major projects. “Major Projects” are projects with a total budget exceeding the threshold set by NERC on the advice of the Forum. The threshold will be set following the inauguration of the Forum.

Although the Regulations provide no explanation on what a NCP will contain, it can be assumed that it will include details of how Licensees will give first consideration to qualified Nigerian Companies in the supply of goods and services for such Major Projects.

NERC is required to communicate its approval of the NCP by way of a certificate of authorisation,

within ten (10) days of submission of the NCP. Where NERC does not approve the NCP, the reason

for the disapproval will be communicated to the Licensee. It is uncertain if a Licensee will be able to

request for a review of NERC’s decision disapproving a NCP. The effect of a failure by NERC to

communicate its decision within the time specified is also uncertain.

EMPLOYMENT AND PROFESSIONAL SERVICES

Major Projects or contracts must contain a “Labour Clause” requiring the use of a minimum percentage of Nigerian labour in specific cadres. Licensees must give first consideration to suitably qualified Nigerians for employment and training. All entities operating in NESI are required to employ only Nigerians in their junior and intermediate cadre, and all unskilled labour are to be locally sourced.

Licensees can apply to NERC to retain a maximum of five percent (5%) of management positions, or such percentage as may be approved by NERC as expatriate positions. The application for the employment of an expatriate must be in a form prescribed by NERC, with appropriate justification showing that no suitably qualified Nigerian was found after diligent search.

Licensees are also required to maintain an employment and training plan for each financial year, with such plan providing for succession planning to enable Nigerians assume positions occupied by expatriates. The Regulations require that professional services in the area of engineering, insurance, reinsurance,

legal and financial and capital market services are to be provided by appropriately qualified/licenced

Nigerian entities. Foreign firms may however, only be engaged when the required services are

rendered in collaboration with a Nigerian firm except in the case of insurance and re-insurance

services where the Regulations makes no provision for such collaboration but provide that where

there is a reasonable need to engage an off-shore insurance firm, the prior consent of the NERC

must be sought.

TECHNOLOGY ACQUISITION

Licensees are to maintain a “Technology Transfer Plan” containing details of various technologies deployed by the operator and the proposed modalities for transfer to Nigerians where applicable. Furthermore, Licensees are required to give full and effective support to technology acquisition by encouraging and facilitating the formation of joint ventures and the development of licensing agreements between Nigerian and foreign contractors.

NERC has a wide latitude to impose fines and other sanctions as it deems fit where there is a failure to submit an acceptable technology acquisition report when requested by NERC.

FUTURE INCENTIVES

NERC may consult with and make recommendations to relevant arms of Government on appropriate fiscal framework and tax incentives for both foreign and indigenous companies who establish facilities, factories, production units or other operations in Nigeria for the purpose of carrying out production, manufacturing or for providing services and goods otherwise imported into Nigeria. This will be in addition to the already existing fiscal incentives applicable to NESI.

PENALTIES

To ensure compliance with the Regulations, NERC is empowered to establish penalties in line with the provisions of the Electric Power Sector Reform Act 2005 and its regulations.

OUR TAKE

The Regulations is a welcome development for NESI and should foster the rapid development of local capacity in the NESI. While some of the Regulations’ provisions still require greater clarity, it is expected that a lot of industry practices will evolve as NERC implements the Regulations and as NESI develops.

It is notable that the Regulations have steered clear of certain provisions in the Nigerian Oil and Gas Content Development Act, a law applicable in Nigeria’s oil and gas industry. For example, there are no provisions in the Regulations on the ownership of a percentage of the shareholding of Licensees by Nigerians, no requirements to maintain a bank account in Nigeria or retain a percentage of the total revenue accruing from the Nigerian operations in such account, and no requirement to pay any fraction of a contract sum awarded in NESI to any fund. Clearly, the focus of the Regulations is the utilisation of local human and material resources in NESI.

The requirement to give first consideration to qualified Nigerian Companies for the supply of goods and services will boost indigenous capacity in NESI. However this may have the effect of insulating Nigerian firms involved in the manufacturing of goods from foreign competition and generate lags in new technology, particularly as smart energy solutions have continued to emerge globally. In any case, the encouragement of the formation of joint ventures and the development of licensing agreements between Nigerian and foreign contractors should serve as a catalyst for acquiring technology locally.

In relation to the NCP requirement, it is not clear whether the same will apply retrospectively to companies prior to the threshold being set by NERC. It will be useful for NERC to clarify this.

The inclusion of the time within which NERC must respond following the submission of a NCP by Licensees should ensure administrative efficiency.

Licensees can with the prior consent of NERC, engage offshore insurance firms where there is a “reasonable need”. However no parameter has been set to define what justifies a reasonable need to engage an offshore insurance firm. There may therefore be uncertainty in the interpretation and implementation of this provision.

A question may arise as to whether certain provisions in the Regulations (e.g. the requirement that first consideration be given to goods manufactured in Nigeria) are compatible with certain rules of the World Trade Organization (“WTO”)vii, the international body that Nigeria joined twenty (20) years ago and if not, whether the Regulations may provoke a WTO challenge by any WTO member country. In this regard, where all or any of the provisions in the Regulations are successfully challenged by any WTO member country, Nigeria may be required to amend the Regulations with a view to making the same consistent with her obligations under the WTO rules.

Qualification

The contents of this newsletter are meant for the general information of our clients and friends and do not amount to legal advice. All enquiries on the subject may be made to: John Asokhia at jasokhia@acas-law.com or Ibiwunmi Adeyeri at iadeyeri@acas-law.com. Adepetun Caxton-Martins Agbor & Segun 9th Floor, St. Nicholas House, Catholic Mission Street, Lagos Island, Lagos State, Nigeria. Telephone: +234 (1) 462 2094; 462 2480; 740 6743 Fax: +234 (1) 461 3140 Website: www.acas-law.com

i Section 96(1), Electric Power Sector Reform Act 2005 ii Section 32(1) (a), Electric Power Sector Reform Act, 2005 iii Paragraph 5 of the Regulations iv Pursuant to Paragraph 2 of the Regulations, “Company” or “companies” wherever refers to legal entities

supplying essential goods and / or providing services to “Licensee” or “Licensees” in the NESI. v Paragraph 3 (ii) of the Regulations vi The Regulations provide for the establishment of a Forum whose functions include carrying out periodic

surveys to determine the local content participation in NESI, and advising NERC on the benchmark to set as the

threshold for local content in NESI. vii This is in relation to certain provisions of the General Agreement on Tariff and Trade 1994 (GATT) and

National Treatment Obligations’ under the Agreement on Trade Related Investment Measures (TRIMs). For

example, pursuant to the National Treatment Principle in Article III of GATT, “The products of the territory of

any contracting party imported into the territory of any other contracting party shall be accorded treatment no

less favourable than that accorded to like products of national origin in respect of all laws, regulations and

requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use…”