THE ROLE OF THE NIGERIAN CAPITAL MARKET IN THE DEVELOPMENT ... sector financing - legal... ·...
Transcript of THE ROLE OF THE NIGERIAN CAPITAL MARKET IN THE DEVELOPMENT ... sector financing - legal... ·...
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Outdated billing system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
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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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