THE ROLE OF THE NIGERIAN

CAPITAL MARKET IN THE

DEVELOPMENT OF THE UTILITIES

SECTOR

“POWER SECTOR FINANCING: LEGAL CONSIDERATIONS”

KOFO DOSEKUN PARTNER, ALUKO & OYEBODE

PRE-2005 FRAMEWORK:

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Before now, the power sector was run by the National Electric

Power Authority (“NEPA”) – a monopoly and statutory corporation

wholly owned by the Federal Government of Nigeria.

NEPA was responsible for the generation, distribution and

transmission of electricity.

MONOPOLY CHALLENGES:

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Dilapidated infrastructure

Red tape and bureaucracy

Outdated billing system

Corruption

Ineffective and unmotivated personnel

Lack of investments and investment incentives

CURRENT LEGISLATIVE FRAMEWORK:

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Enabling Legislative Framework: Electric Power Sector Reform

Act (“EPSR”)

Framework After Unbundling of NEPA

6 Generation companies (Gencos)

1 Transmission company (Transco)

11 Distribution companies (Discos)

Federal Government Visions 2020 Target of 40,000MW will

require investments in power generation capacity alone of at least

US$3.5 Billion Per annum for next 10 years.

TRANSITIONAL STRUCTURE (1):

Bulk Purchaser

Gencos

Transmission Company of

Nigeria

DISCOs

Consumers

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Power Purchase Agreement

Vesting Contracts

Eligible

Consumers The government, intending to

retain ownership of Transco, has

sub-contracted the management

of Transco to Manitoba Hydro

International. Transco is

responsible for evacuating

generated electric power from

Genco and wheeling it to Discos.

Power produced by the Gencos

will be purchased by the Nigerian

Bulk Electricity Trading Company

(“NBETC”) on behalf of all the

Discos. The role of the NBETC is

to provide certainty to investors

who might otherwise be reluctant

to invest, considering that the

Discos do not have the proven

track record in efficient metering,

billing or payment.

FINANCING:

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Sources of Financing

Debt Financing

Capital Market

Pension Funds

Market Constraints

High Costs of Funds

Tenor not Available in the Market

Size of Local Bank Balance Sheet

Technical Understanding of Requirements (Query)

Gas Supply Issues (Domestic Supply Obligations)

Need for cross border Financing

Project Finance

BANKABILITY ISSUES:

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Financial

Legal

Economic

Technical

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Sponsors

Project Vehicle Lenders

Facility

Agreements

Offtakers

Loan

Repayments

EPC

Contractor

Subordinated

Shareholder Loans

Sale

Proceeds

Power Purchase

Agreements

Gas Suppliers

Direct

Agreements

Direct

Agreements

Direct

Agreements

Gas Supply

Agreements

Fixed/Floating

Charge

FINANCING STRUCTURES : TYPICAL

FINANCE DOCUMENTS

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Account Bank Agreement

Multilateral Agencies

Facilities Agreements

Common Terms Agreement

Security Trust Deed

Security Documents

International Commercial

Facility Agreement

Direct Agreements

Intercreditors

Agreement

Nigerian Commercial

Facility Agreement

PROJECT DOCUMENTS

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Project Vehicle

(Borrower)

EPC Contracts

Gas Supply

Agreements

Operation and Maintenance

Agreements

EPC Contractor

Gas Suppliers

Operator

Power Purchase

Agreement Offtakers

KEY FINANCING RISKS

Cross Border Risks

Sovereign Risk

Collateral Risk

Law and Legal System Risk

Political Risk

Foreign Exchange Risk

Transferability Risk

Transparency and Reputational Risk

Expropriation Risk

Concession/ Licence

Change of Law Risk

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KEY FINANCING RISKS

Sponsor Risk

Construction Risk

Operating Risk Technical Cost Management

Market (Take or Pay) Risk

Fiscal Risk

Tax Interest Rate

Supply/Gas Reserves Risk

Repayment Risk – (Bulk Purchaser) FGN to provide credit enhancement to Bulk Purchaser. Partial Risk Guarantee from World Bank

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KEY ISSUES Adequate access to gas supply?

Adequate government incentives to facilitate financing (e.g. tax

holidays, guarantees)?

Strict tariff regulation (impedes generation of revenue to meet financing requirements) – adoption of MYTO 2 helpful.

Definitive tariff structure for power / gas / feedstock for power

Management of Transmission Company of Nigeria - Manitoba

Adequate infrastructure (e.g. gas pipelines, transportation of equipment from sea port to plant site)?

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FEDERAL GOVERNMENT STRATEGY FOR

FINANCING / INCENTIVES

FGN/World Bank plans to provide Partial Risk Guarantee

(PRG) for investors

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Letter of Credit (LC) will be issued by bank (LC Bank) to backstop the Bulk Trader’s payment obligations to the

IPPs. LC Bank will pay IPPs where Bulk Trade fails.

Obligation to reimburse the LC Bank will

be backstopped by the PRG.

MIGA – Political Risk Guarantee.

FG will indemnify the World

Bank.

FINANCING CHALLENGES

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• Key challenges in Financing - Security

• High Cost of Perfection • Length of time required to perfect security

– Permits & Licenses • Overlapping responsibilities of regulatory agencies (Environmental Permits)

– Offshore Insurance (NIC Consent)

• Likely given project costs

– Regulatory Regime

• Untested Regulatory regime • Effect of PIB to cost of gas

production

- Foreign Exchange Issues

• Receipts in Naira vs • Dollar Facility

• Mitigating Factors

- Security

• No Hard Security

• Early agreement on security to be provided

– Permits & Licenses

• Early agreements and submission of required permit by parties.

– Early Application & Engagement of National Insurance Commission

– Regulatory Regime

• Evolution of Regulatory Regime by NERC

• Passage of PIB?

– Foreign Exchange

• Foreign Exchange regime in place

CONCLUSION

Conclusion of power sector reforms will require significant financing for Gencos

and Discos;

Potential investors/ lenders following process and it is key to ensure that process is concluded smoothly;

Regulatory framework has been evolving since passage of Electric Power Sector Reform Act 2005 and will now be tested in practice;

Key Support is to be required from Government;

Regulatory and commercial framework of power sector must create environment for profitable and bankable projects.

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