20 20 KEY DEVELOPMENTS IN 19 20 NIGERIAN POWER & WRAP- UP O U T L O O K INFRASTRUCTURE A PUBLICATION OF THE POWER & INFRASTRUCTURE PRACTICE OF OLANIWUN AJAYI LP TABLE OF CONTENTS 08 O V E R V I E W 24 P O W E R
LEGAL & REGULATORY DEVELOPMENTS . Consultation Paper on the Development of a Regulatory Framework for Electricity Distribution Franchising in Nigeria . Regulation of Local Content in the Nigerian Power Sector Receives Boost . The MYTO Minor Review Order 2019 – the Awaited Relief or a Nostrum? . Regulatory Watch
MARKET DEVELOPMENTS . Deal Highlights . Gas Supply . Generation . Spotlight Feature Piece: On-Grid Power Generation (Interview of Mr. Oti Ikomi, CEO of Proton Energy Limited) . Transmission . Distribution . Financing, Investment & Market Development Initiatives TABLE OF CONTENTS
90 INFRASTRUCTURE
LEGAL & MARKET DEVELOPMENTS • Road & Rail • Spotlight Feature Piece: Project 4MB (Interview of Mr. Ope George, DG of the Lagos State PPP Office) • Air & Sea Ports • Telecoms • Insight Article: August 2019 Minor Review Order & License Cancellation Notice
118 PROJECTS IN THE P I P E L I N E 122 CLOUDY CRYSTAL BALL GLOSSARY 4
4MB Lagos State 4th Mainland Bridge CPGNL C ummins Power Generation Nigeria Limited
AEDC A buja Electricity Distribution Company Plc CRCC C hina Railway Construction Corporation
A gence Française de Development or French AFD DFBOT Design, Finance, Build, O perate and Transfer Development Agency
Af DB A fric an Development Bank DFI Development Financial Institution
Af IF European Union’s African Investment Facility DisCo Electricity Distribution Company licensed by NERC
AMR A utomated Meter Reading ECA Export Credit Agency
ANED A ssociation of Nigerian Electricity Distributors ECOWAS Economic Community of West African States
APGC A ssociation of Power Generation Companies EEC Enyimba Economic City
ATC&C A ggregate Technical Commercial & Collections EIA Environmental Impact Assessment
BPE Bureau of P ublic Enterprise EKEDC Eko Distribution Company Limited
CAPEX C apital Expenditure EMS Electricity Management System
CBEA C ros s-Boundary Energy Access EPC Engineering, Procurement, Construction
CBN C entral Bank of Nigeria EPSRA Electric Power Sector Reform Act, 2005
C hinese Civil Engineering Construction Company CCECC ESIA Environmental and Social Impact Assessment Nigeria Ltd
CDB C hina Development Bank ETR Extra- ordinary tariff review
United Kingdom government’s foreign investment CDC Group EU European Union arm
CHEC C hina Harbour Engineering Company FAAN Federal Airport Authority of Nigeria GLOSSARY 5
FCT Federal Capital Territory Inf raCo Infrastructure Company
FEC N igeria’s Federal Executive Council IPP Independent Power Project
FEED Front - End Engineering and Design ISO Independent System O peration
FGN The Federal Government of Nigeria JHCF James Hope College Foundation
FID Final Investment Decision JICA Japan International Co-operation Agency
FIDC First Investment Development Company kV Kilo-volt
FIRS Federal Inland Revenue Services kW Kilo-watt
FOREX Foreign Exchange LASG Lagos State Government
GE General Electric Company LC Letter of Credit
GenCo E lec tricity Generation Company licensed by NE RC LFZ Lekki Free Zone
GoTG Government of the Republic of Gambia LPLTZ Lekki Port LFTZ E nterprise Limited
GW Giga-watt MAP Meter Assets Provider
HSC Nigerian Electricity Health & Safety Code MD Managing Director
ICRC Infrastructure Concession Regulatory Commission MDAs M inistries, Departments and Agencies of the FGN
IE Ikeja Electric Plc MO Market Operator
IEDN Independent Electricity Distribution Networks MoU Memorandum of Understanding
INEC Independent National Electoral Commission MRO Minor Review Order GLOSSARY 6
MRT Minimum Remittance Threshold NICL N E RC’s Notice of Intention to Cancel Licences
MVA Mega Volt Amp NIPOST Nigerian Postal Service
MW M ega-watts NIPP National Integrated Power Project
MYTO Multi-Year Tariff O rder, 2015 NLNG Nigeria LNG Limited
NASS N igeria’s N ational A ssembly NNPC Nigerian National Petroleum Corporation
NBET Nigerian Bulk Electricity Trading Plc NPA Nigerian Ports Authority
NCC Nigerian Communications Commission NSG Nasarawa State Government
NSIA NCCF Nigerian Content Consultative Forum Nigerian Sovereign Investment Authority
NEMSF Nigerian Electricity Market Stabilisation Facility O&M O peration and Maintenance
NEMSF Nigeria Electricity Market Stabilization Facility ONHYM Morocco National Office for Hydrocarbons & Mines
NEP National Electrification Project OPEX O perating Expenditure
NEP Nigerian Electrification Roadmap PA P erformance Agreement
NERC Nigerian Electricity Regulatory Commission PAF P ayment Assurance Facility
NESI Nigerian Electricity Supply Industry PAIF P ower and Airline Intervention Fund
NESIS Nigerian Electricity Supply and Installation Standards PDP P eoples Democratic Party
NGN N aira PEPCA P rivatisation & Commercialisation Act
NICAPACO Nigerian Carton and Packaging Manufacturing Company Limited PHCN P ower Holding Company of Nigeria GLOSSARY 7
PHEDC P ort Harcourt Electricity Distribution Company SCADA Supervisory Control and Data Administration
C omprising Saipem of Italy, Chiyoda of Japan, and Daewoo of South PIPP P IPP LVI DisCo Limited SCD Consorium Korea
PIU P rojec t I mplementation Unit SO System Operator
PPA P ower Purchase Agreement TBEA Tebian Electric Apparatus
PPP P ublic Private Partnership TCN Transmission Company of Nigeria
PSRP P ower Sector Recovery Plan TEM T rans itional Stage Electricity M arket
Q1 First Q uarter of the year TIT Technical Team
TREDIC Star Q2 Second Q uarter of the year Nigerian Canadian firm Core
Q3 T hird Q uarter of the year TREP First Q uarter of the year
Q4 Fourth Q uarter of the year TSP Transmission Service Provider
REA Rural Electrification Agency UK United Kingdom
Rf P Request for Proposal US United States of America
Rf Q Request for Q ualification USAID United States Aid
ROW Right of way USTDA United States Trade and Development Agency
RP Global P rivately owned Spanish IPP developer and investor WB World Bank 8
OVERVIEW F O R E W O R D
The year 2019 began on a note of cautious optimism, with to settle in - with the passage of the 2019 budget in May industry players looking to see what impact the general and the announcement of ministerial appointments in July. elections would have on the Nigerian economy as a whole From there on out, the year was marked by a number of and the infrastructure sector in particular. In the power major market developments in the infrastructure space, sector, stakeholders were concerned about a potential with some of the more consequential of these taking place reversal of the NESI privatisation process, which the in the power sector. President Buhari administration had reportedly considered in the preceding year and has continued to contemplate. For The FGN continued to demonstrate a keenness to leverage non-power infrastructure, there was no telling whe ther a private sector funding and capacity in the development of “…a number of change in administration would mark the end of the road for public utilities. This was evinced by, among others, a major market projects commenced or continued under President Buhari’s proposed PPP collaboration between the Nigerian and developments first term, or whether a second term by President Buhari German governments, in relation to the contemplated in the would hasten or decelerate the pace of such projects. The upgrade of NESI’s systems by Siemens, as well as the FGN infrastructure suspense was heightened by INEC’s delayed administration continuing to make significant progress with the proposed space, with of the elections, which eventually held between the third acquisition of the Afam power generation assets by the some of the week in February and the first week in March. Transcorp group. Other notable strides in 2019 include the th more landmark 4 Mainland Bridge Project, spearheaded by the As predicted, even after the general elections, which saw no Lagos State Government, the operationalization of the consequential sea changes, deal traffic in the NESI and the infrastructure Lagos-Abeokuta railway line and the proposed development of these taking spaces remained slow for most of 2019, and there were no of ultra-modern healthcare centers by the Kano State place in the regulatory developments of note up until the end of the Government. power sector…” second quarter of 2019, when the new administration began 9
OVERVIEW F O R E W O R D
On a less positive note, due to a mix of reasons, the of international players such as Konexa, and which is projects previously earmarked by the FGN for priority expected to revitalize the distribution sub-sector and have treatment under the auspices of the Presidential positive ripple effects on the value chain. The long-awaited
Infrastructure Development Fund – including the 3000MW minor review of MYTO 2015 was also a major market Mambila hydro power project, the Lagos-Ibadan expressway shaker; which sector participants and the public are still project, the 2nd Niger Bridge, and the Abuja-Kano Road – adjusting to. again made little progress in 2019, despite keen attention from infrastructure players and stakeholders within the Thus, notwithstanding its slow start, the year 2019 (and broader polity. That said, the tides appear to have changed indeed, the first few weeks of 2020) was full of interesting for these projects, among other key infrastructure projects activity, which will set the tone for 2020 and beyond. Whilst “…a number of in different sectors in the country, with the recent senate some of the developments were positive, legacy economic, major market approval of NGN 22.7 Billion worth of foreign loans for legal and regulatory framework challenges continue to developments infrastructure projects. inhibit investment and frustrate development; and the in the PSRP, which was designed to address them has for the most infrastructure From a regulatory perspective, worthy of note for the NESI part been poorly implemented. Thus, it remains to be seen space, with in particular was NERC’s issuance of a consultation paper on what further strides will be taken to address these some of the the proposed franchising of electricity distribution activities; challenges in the medium to long term. more a move which was in part inspired by the innovative efforts consequential of these taking place in the power sector…” 10
OVERVIEW P O W E R
INTRODUCTION For the NESI, 2019 brought about a number of pivotal regulatory power sector by investors who were hitherto disincentivized by the initiatives, which set the stage for what is intended to be a more liquid illiquidity which plagued it since the privatisation. Whilst the tariff review and investor-friendly market. Although the NERC’s long-awaited retail has forced the DisCos to revisit their business models, the MRO (and tariff review did not arrive until August 2019 (and was closely followed by more critically, the major reviews on the horizon) are expected to bring the December 2019 MRO), as far as 2019 power sector highlights are about an improvement in DisCo revenues. In the same token, it is concerned, the MRO takes the cake. Whilst it was received with mixed envisaged that the minimum market remittance thresholds imposed by reactions from sector stakeholders (with resistance stemming from the MRO will lead to better discipline in the DisCos’ settlement of NBET certain quarters, including the National Assembly) and its sustainability is invoices, and in turn, NBET’s settlement of the GenCo invoices under its as yet uncertain, what is noteworthy from the broader market perspective PPAs. Further, with the recently issued Transitional Accounting Order, is the positive ripple effect that it has had on the rest of the value chain, which essentially provides for an FGN subsidy that covers the portion of and the general perception of the NESI by local and international NBET invoices falling out of the DisCos’ remittance thresholds, and which investors. We discuss the MRO in greater detail at pages 110 – 117 of this constitute tariff-related liabilities, the DisCos’ books will receive a report. refreshing makeover. We dissect the Transitional Accounting Order in further detail at page 89 of this report. Although it is still early days, there has already been a keener eye on the 11
OVERVIEW P O W E R
GENERATION
Although the year kicked off on a positive note, with a recorded peak As predicted, NBET’s reluctance to negotiate new PPAs continued; generation capacity of c. 9 MW as at 31 January, by and large, the and on the flip side, prospective power producers remained for the C . power generation sub-sector performed rather poorly in 2019. most part disincentivized by NBET’s illiquidity, and in general, the Revenue assurance remained a critical issue for the GenCos, with historical bankability issues surrounding investment in the NESI. N 1 . 2 B N NBET’s average remittance to them hovering at c. 28% throughout the year. In this regard, efforts to probe the dealings of NBET and Against this backdrop, the 14 on-grid solar PPAs negotiated in 2016 L O S S REA, through the suspension and interrogation of their MDs signaled remained stagnant, as did the proposed privatisation of FGN’s NIPP I N C U R R E D a conscientious effort by the executive arm of government, to ensure assets. That said, Infracredit and the Nigeria Infrastructure Debt B Y transparent and efficient financial dealings in the generation sub- Fund (NIDF) stood out as rare green shoots in the generation sub- G E N C O S sector. sector - with Infracredit guaranteeing North South Power’s issuance F O R of Nigeria’s first 15-year corporate guarantee infrastructure bond, in E N E R G Y Grid instability was also a challenge, which inhibited the evacuation connection with the 600MW Shiroro Hydroelectric Power Plant L O S S & of generation capacity from plant to the grid and further along to the project; and NIDF financing the Daystar solar power project. MAINTENANCE last mile. Further, owing to changes in macroeconomic factors, such Notwithstanding these strides, as expected, it appears the generally as the increase in gas prices (from USD 62/barrel as at December sterile investment environment in the on-grid space shone the 2018 to USD 66.74/barrel by June 2019), GenCo operating costs spotlight on Nigeria’s off-grid power supply potential; which was also increased without corresponding spikes in revenue. keenly explored in 2019.
Relatedly, owing to constraints in gas supply, the Azura, Sapele, Solar power providers, such as Lumos and Rensource continued their Olorunsogo and Ihovbor power plants recorded zero generation growth with residential and commercial customers. The global capacity in July 2019. That said, improvements in the security of gas renewable energy supplier, RP Global, in collaboration with Oolu supply for power generation is still expected from the Solar, also made its debut into the Nigerian power supply market in commercialization of flare gas in Nigeria; which significantly 2019; with a diverse investment strategy that targets both off-grid broadens the pool of gas sources available for utilization. and on-grid renewable energy solutions.
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OVERVIEW P O W E R
2019 AT A G L A N C E
NUMBER OF NATIONAL 12 GRID COLLAPSES (as at THERMAL December 2019) 10,142 GENERATION HYDRO MW CAPACITY 2,380 (as of October MW 2019) c. 3775MW Average daily output level
c.3,044MW out of 7,653MW Average stranded capacity 12,522 MW Total Installed Capacity 13
OVERVIEW P O W E R
2019 AT A G L A N C E
D ISC O NBET REMMITTANCE THRESHOLDS & PAYMENTS AS AT N O V E M B E R 2019
NERC Approved Minimum Remittance % Payment Performance %
Yola; 13
Port 45,00 45,00 Harcourt; 21 42,00 Kano; 33
Kaduna; 18
Jos; 6 27,00 26,00
Ikeja; 49
Ibadan; 26 12,00 10,00 Enugu; 42 6,00
Eko; 45 2,00 0,00 0,00
Benin; 30
Abuja; 45 14
OVERVIEW P O W E R
2019 AT A G L A N C E
D E C E M B E R 2019 NBET REMITTANCE THRESHOLDS
NERC Approved MRTs % 15
OVERVIEW P O W E R
TRANSMISSION
In 2019, there was much controversy about the actual performance of pages 81-89 of this report) appeared to be the big break initiative within TCN. According to TCN, its transmission capacity was increased by 2,353 the transmission sub-sector in 2019. Upon implementation, the project MW between 2017 and 2019 and stood at 8,000 MW in 2019; with an will increase the system’s end-to-end operational capacity to 25GW in average of 4,000MW made available to end-users. However, industry the long run, through the conduct of, among others, major transmission stakeholders estimated TCN’s capacity to have been 4,500-5,500MW . asset upgrades. Another positive for transmission in 2019 was the grant Whatever the case, the national grid remained the major weak link in of approval for a USD 3 Billion financing from the World Bank; a large the power value chain in 2019; owing largely to the poor state and proportion of which is designated for the development of transmission quality of transmission infrastructure, as well as other factors, such as infrastructure. transmission network vandalism, right of way challenges and the discord between transmission and distribution infrastructure development plans. From a revenue perspective, NERC has sought through the MRO to reduce the TCN’s financial exposure to the DisCos, by mandating a 100% Notwithstanding these challenges, the TCN’s Transmission Rehabilitation monthly remittance by the DisCos to the MO, and a requirement for 3 and Expansion Program (TREP) continued to progress; with a number of months’ payment security in favor of the MO. While it remains to be seen key network development projects being undertaken and completed what real impact this will have – especially in terms of DisCo compliance, across the federation. Worthy of note were the network rehabilitation it is expected that this will boost TCN’s operational cash flow. Prior to the works in Kebbi, Jos, Akwa Ibom and Bayelsa states, which featured MRO, TCN had itself taken an aggressive approach towards revenue numerous sub-station and power reactor installations. collection from the DisCos, by cutting off the feeders of DisCos that failed to settle its invoices in full. On the bright side, the Siemens project (discussed in further detail at
“THE SIEMENS PROJECT APPEARED TO BE THE BIG BREAK INITIATIVE WITHIN THE TRANSMISSION SUB- SECTOR IN 2019” 16
OVERVIEW P O W E R
2019 AT A G L A N C E
MAY 2019 TRANSMISSION 8 ,1 0 0 M W CAPACITY FEB 2019 5 ,3 7 5 M W
ENERGY RECEIVED V. ENERGY BILLED
As at June 2019, the total energy received by the DisCos from the grid was JAN - JUN about 14,118GWh but only approximately 11,306 GWh was billed for, Total Billing: N 362.2 Billion resulting in an average billing efficiency of about 80%
Out of the c. NGN 362.2 Billion billed by the DisCos in the first two quarters of 2019, only about NGN 240.81 Billion was recovered; representing about
66% collection efficiency.
17
OVERVIEW P O W E R
DISTRIBUTION
As the Buhari administration transited into its last mile, the DisCos August 2018 and even well into 2019. remained the whipping boys of the power sector In 2019. Although there The delayed implementation of the MAP regime was occasioned in part was some progressive regulatory activity in the course of the year, by a number of bankability concerns. Notably, owing to the import duty distribution services were still beset by a number of critical challenges. hike on meters in Nigeria, from 10% to 45%, coupled with the capping of These stemmed to a large extent from the absence of a cost-reflective meter costs at NGN 36,000 for single-phase meters and NGN 67,000 for retail tariff (even after the MRO was issued). However, in addition to the three-phase meters, MAPS are unable to pass through and recover the tariff shortfall, distribution services were frustrated by teething problems higher costs they incur in procuring the metering assets. encountered in the implementation of regulatory measures taken in 2017 and 2018. The Eligible Customer regime, which was launched in 2017 to introduce competition in the wholesale power sale market also continued to Notably, end-user metering remained a severe challenge in 2019, with encounter hiccups in 2019. In the main, the implementation challenges only 100,000 of the 5 million meters required for the implementation of of this regime stem from the fact that the extant retail tariff structure is the MAP regime being installed since the issuance of the MAP Regulations sustained by the cross-subsidization of residential customers by
in March 2018. Further, the DisCos did not attain the extended deadline maximum demand (industrial) customers – and unsurprisingly, DisCos for full implementation of the MAP scheme (through the execution and have strongly resisted the effective cannibalization of their businesses operationalization of metering service agreements with the MAPs) by that the Eligible Customer framework appears to portend.
NGN 354 BILLION REQUIRED TO BRIDGE THE METERING GAP 18
OVERVIEW P O W E R
DISTRIBUTION
Perhaps the most critical challenge faced by the distribution sub-sector in the DisCos’ tariff-related challenges, NERC recently published a 2019 continued to be the artificial tariff regime, which has affected the Transitional Accounting Order (discussed in detail on page 89 of this DisCos’ loss reduction trajectory, as ATC&C losses have for most DisCos report), which among others, seeks to implement the PSRPs strategy for increased (rather than decreased) since 2013; as well as the illiquidity addressing illiquidity in the sector through the use of FGN intervention across the entire sector. funding; and in particular, at the distribution sub-sector level.
When it was eventually issued, the MRO was far from being a breath of In terms of interesting market developments, Ikeja DisCo’s “Willing fresh air to the DisCos; with its introduction of the minimum remittance Buyer/Willing Seller” PPA with the Magodo Residents Association was one payment thresholds to the NBET and the MO (i.e the MRTs). Although a to note; a since the implementation of the agreement on August 15, welcome development for NBET, the GenCos and the MO, the 2019, residents of the estate have reportedly been on 24 hour supply sustainability of the MRTs remains doubtful – and compliance rates remain rather poor. Another positive for the distribution sub-sector was that FGN finally began to repay the Yola DisCo core investor the sums owed to it That said, a major positive for distribution (in the early days of 2020) following the exercise of its put option under its Performance Agreement was the greater strides made by the FG N in implementing the PSRP. In with the BPE. This development is sure to restore the integrity of the particular, in what appears designed to serve as an interim solution to FGN as a credible contractual counterparty.
FOR 2019-2020 DISCOS INDEBTEDNESS TO THE MARKET TARIFF SHORTFALL OF COVERING 2017. 2019 IS ESTIMATED AT N 1.1 TRILLION N200.8BN 19
OVERVIEW P O W E R
2019 AT A G L A N C E
ATC&C LOSSES
On average, as much as ₦4.65 in every ₦10.00 worth of energy received by a DisCo was unrecovered, due to a combination of energy theft, inefficient distribution networks, inadequate revenue collection, low metering and unwillingness to pay by customers.
DisCos achieved an average ATC&C Loss reduction of 7.3 points; reaching 47.7% which is still quite far from the c. 25.6% performance agreement target. 20
OVERVIEW INFRASTRUCTURE
INTRODUCTION
For broader infrastructural development, 2019 was a relatively active alternative infrastructure financing; and the Director-General of ICRC
year; with a promising blend of project embarkments (especially PPPs) acknowledged the need for a “huge infusion of private capital into our and progressive policy changes. Illustratively, after the general elections, infrastructure space.” the Federal Minister for Trade and Investment, Okechukwu Enelamah Despite these positive signals from key government officials, funding announced the FG N’s plans to increase investment in infrastructural remains the greatest challenge for the big-ticket infrastructure development to about USD 20 Billion over the next 5 to 10 years. development projects in Nigeria. Whilst there has been a surge in PPP projects across different infrastructure project categories, the funding In April, the FEC also established a special purpose committee appetite of local and international financiers to private sector proponents
(comprising cabinet ministers and selected private sector investors) for will still depend on the FG N’s willingness to negotiate bankable project documents which give investors adequate assurances and protections.
“…FUNDING REMAINS THE GREATEST CHALLENGE FOR THE BIG - TICKET INFRASTRUCTURE DEVELOPMENT PROJECTS IN N IGERIA…” 21
OVERVIEW INFRASTRUCTURE
ROAD & RAIL
Road infrastructure appeared to be a front-burner issue for FGN in 2019, reconstruction of 19 federal roads covering 794.4km in aggregate under
as it made several major strides to develop the nation’s road network in the scheme. the course of the year. The first of such initiatives was taken in January, when the Executive Order No. 007 on the Road Infrastructure For rail, as predicted, there was little traction on the Eastern & Western Development and Refurbishment Tax Credit Scheme was signed. The Railway lines, among other rail projects. This notwithstanding, in June, Executive Order seeks to introduce a PPP intervention scheme that FGN approved the procurement of a USD 2.3 Billion loan for the rewards private sector investment in the development of road construction of the Lagos-Calabar coastal railway from Chinese banks; a infrastructure with tax credits; and is already gaining traction, as 6 line which will traverse most states in the South-East and South-South companies undertook to finance the construction rehabilitation, and regions.
“…FGN approved the procurement of a USD 2.3 Billion loan for the construction of the Lagos- Calabar coastal railway…” 22
OVERVIEW INFRASTRUCTURE
AIR & SEAPORTS
The aviation sector saw some Deep Seaport Project in Lagos State activity in 2019; chiefly through the on one hand; and the progression of key local and decommissioning of the Rivers Port international airport projects. As Terminal B on the other. expected, the federal and state Development on the Akwa Ibom Sea governments are starting to lean Port Project also continued to move more towards private management at snail pace but with greater “USD and operation; and this trend was traction expected in the coming evident in the nature of projects months. $629 which sprung up in the course of the year. A prime example is the Asaba On the brighter side, USD 629 Million International Airport, which the Million (NGN 226.44 Billion) worth worth of Delta State Government opened for of debt financing was secured for debt concession in the second quarter of the Lekki Deep Seaport Project, 2019, following which the FIDC whilst the China Harbour financing Consortium emerged as the Engineering Company, the world’s was secured preferred bidder. largest marine engineering company was engaged as EPC contractor. The for the Lekki For sea ports, 2019 was bitter- Federal Ministry of Transport Deep sweet, with the major highlights (through the Nigerian Shippers’ being the execution of finance Council) also made some progress Seaport agreements with the China with the concessions of inland dry Project” Development Bank for the Lekki ports across the country. 23
OVERVIEW INFRASTRUCTURE
HEALTHCARE & EDUCATION
“..the patient-doctor ratio stood at 1500:1, whilst more than 90% of the population live without medical insurance.”
The dearth in Nigeria’s public social infrastructure persisted in 2019; with endoscopies. Equally, Evercare is set to complete the construction of its little to no growth in these areas. In keeping with the historical trend, 150-bed secondary healthcare facility in Lagos State in 2020. development was inhibited by the lack of adequate funding allocation for healthcare and educational projects; and the tendency to deprioritize Much like the healthcare sector, education in Nigeria remained more them in favor of quick-win infrastructure initiatives, such as roads and promising in the private sector than the public sector in 2019. Again, a bridges. good education remains a luxury accessible to the wealthy few; as about 10.5 million children aged 5-14 years are out of school and only 61 % of With a recorded population of 200 million, the patient-doctor ratio stood 6-11 year-olds regularly attend primary school. As such, heavy reliance at 1500:1, whilst more than 90% of the population live without medical has been placed on the good will of philanthropists such as Mr. Jim Ovia insurance. As such, for the few who could afford it, private and foreign to bridge the gap in education. In 2019, Mr. Ovia embarked on the medical care continued to thrive; with USD 1 Billion spent on outbound development of the Lagos branch of James Hope College; having medical tourism. In this environment, private healthcare providers such purchased a 14.57-hectare expanse of land from the American as the Reddington Group continue to dominate progressive reform in International School Lagos. The parcel of land will be developed into a
Nigeria’s healthcare sector. Reddington embarked on the opening of its co-educational secondary boarding school facility, where at least 40% of third hospital in Lagos State in 2019, the Duchess Hospital, which will students from all backgrounds and geo-political zones will be trained on serve as a regional hub in west Africa for specialist healthcare services full scholarship. that are not readily available in Nigeria, such as colonoscopies and POWER LEGAL & REGULATORY DEVELOPMENTS LEGAL & REGULATORY 26 DEVELOPMENTS
CONSULTATION PAPER ON THE DEVELOPMENT OF A REGULATORY FRAMEWORK FOR ELECTRICITY DISTRIBUTION FRANCHISING IN NIGERIA
On 17 April 2019, NERC published a consultation paper soliciting Franchising structures that may be adopted include: (i) metering, billing
stakeholders’ views on the terms that would regulate the sub-franchising and collection, which involve the franchisee undertaking the management of the operations and coverage areas of DisCos (the Proposed and operation of these DisCo functions; (ii) total management of the
Franchising Regulation). The overarching objective of the Proposed DisCo’s functions, including rehabilitating and upgrading the distribution Franchising Regulation is to develop investment models that would system; and (iii) distributed generation, which allows the franchisee attract third party investments in the DisCos’ networks, with the ultimate procure on-grid or off-grid energy to meet the electricity deficit (or peak aim of bridging the power supply deficit and ensuring consumer demand deficit) of consumers within the franchise area. satisfaction. The principal terms regulating the relationship between the DisCo and In summary, the Proposed Franchising Regulation will allow the DisCos the franchisee would be set out in a franchising agreement to be grant franchises, under which third parties would undertake specific roles executed by both parties (Franchise Agreement). The Franchise
within the DisCos’ respective licence coverage areas. Franchisees would Agreement is to regulate: (i) delivery/performance parameters; (ii) the be selected through a competitive procurement process, organized by the franchisee’s investment plan; (iii) frequency and mode of payment for DisCo. Qualifications of franchisees include that they must: (i) possess the power supplied to the franchisee; (iii) payment guarantees from the expertise in the management and distribution of electricity; and (ii) have franchisee; (iv) default events and conditions for termination; and (v) the capacity to invest resources into the upgrade and expansion of the other parameters, including but not limited to contract periods, baseline distribution system. data and treatment of existing contracts.
LEGAL & REGULATORY 27 DEVELOPMENTS
Whilst the MYTO would continue to apply to areas covered under the Franchise Arrangement, the Proposed Franchising Regulation provides that where the franchisee makes capital investments, surcharges will be payable to the franchisee, to enable it obtain a return on its investment.
Importantly, the Proposed Franchising Regulation states that the ownership of all distribution networks shall remain with the DisCos. We note however that the Proposed Franchising Regulation does not expressly address the ownership status of upgraded assets and investments of the franchisee in the distribution network. It may be argued that such upgraded assets and investments form part of the distribution network and would as such be considered as DisCo assets. This is however one area, among others, which will benefit from added clarity when the definitive regulations are issued, as it is likely to be of critical importance to DisCos and investors (and their financiers) alike.
“…where the franchisee makes capital investments, surcharges will be payable to the franchisee to enable it obtain a return on its investment.” LEGAL & REGULATORY 28 DEVELOPMENTS
REGULATION OF LOCAL CONTENT IN THE NIGERIAN POWER SECTOR
RECEIVES A BOOST In addition, licencees must consider the level of Nigerian content in the evaluation of bids and select the bid with the highest level of Nigerian content. Licencees must also ensure that not more than 5% (or such Earlier in 2019, NERC published the long-awaited schedules to the further percentage as may be approved by NERC) of its management National Content Development for the Power Sector (the Local Content position are occupied by expatriates and employ only Nigerians in their Regulation) of 24 December 2014 (the Schedules). The Schedules junior and intermediate cadres. prescribe the precise thresholds for local content within the power sector; thereby enabling the full operationality of the Regulations in The foregoing requirements are however without prejudice to the right their entirety. of a licencee to obtain a waiver for the procurement of the goods and services from a non-Nigerian company, where there is an inadequate In the main, the Local Content Regulation mandates that all licencees of local capacity for such goods and/or services in Nigeria. Such waiver can the Commission must ensure that in the award of contracts, first only be granted by the NERC for a period not exceeding 3 years from consideration is given to qualified Nigerian companies for the supply of the date of NERC’s approval, upon satisfaction of certain criteria goods and works, and for the provision of services. Licencees must prescribed in the Local Content Regulations. engage Nigerian companies for the provision of engineering, legal, insurance/reinsurance, financial and capital market services; save that Strikingly, the Local Content Regulation establishes the Nigerian Content foreign contractors may be engaged in collaboration with local Consultative Forum (NCCF). Functions of the NCCF include: (x) carrying contractors where NERC’s approval is obtained. Licencees are also out periodic surveys to ascertain local content participation in the sector; obliged to develop and communicate their Nigerian content policies and (y) advising NERC on benchmarks and thresholds for local content in the procedures to contractors and subcontractors, and to monitor and NESI; and (z) development of the Schedules, which would include the enforce their compliance. minimum specifications on Nigerian content and labour requirements. LEGAL & REGULATORY 29 DEVELOPMENTS
Principally, the Schedules prescribe the local content percentage thresholds applicable to generation, distribution and transmission licencees in the NESI, and in respect of a variety of projects and materials. In imposing these thresholds, NERC has sought to graduate the level of local content requirements imposed on licencees over time (from 2019 to 2024 and beyond). A few of such thresholds include:
GenCos are required to fully engage local manpower in the construction of certain civil A 20% local content threshold for power transmission 10% works of power plants; notably, power generation 20% automation (installation, service works and integration) turbines, transformer plinths, control room cable (such as SCADA system optical fibres, sub-station trenches etc. The Schedules also prescribe automation, communication infrastructure etc.) was specific percentage thresholds for different imposed for the year 2019. This threshold is to increase to classes of electrical/mechanical equipment 50% between 2020 and 2023 and 75% by 2024. utilised in power generation. For example, in respect of turbines, 10% of local materials were
to be used at the start of 2019, 15% between In terms of labour requirements, the Schedules provide the 2020 and 2023 and 30% from 2024 onwards. 25% percentage thresholds for 19 categories of services in respect of which licencees would require manpower; and the threshold increment over the years. For example, 25%
25 % of electricity distribution transformers must of manpower deployed for O&M works in the NESI were to have been locally sourced from 2019, 50% be reserved for Nigerians from 2019, 50% between 2020 25% and 2023 and 75% by 2024. between 2020 and 2023 and 75% by 2024. LEGAL & REGULATORY 30 DEVELOPMENTS
The implementation of the Local Content Regulation is a significant development in the power sector. With proper enforcement of compliance by licencees, it is anticipated that the Local Content Regulation will: (x) foster considerable job creation opportunities; thus reducing the rate of unemployment in the country; (y) lessen the dependence of licencees on the FOREX market to settle payments due under their FOREX denominated contracts to foreign counterparties; and (z) boost capacity for an overall improvement in technical know-how and quality of materials across the entire value chain in the NESI. It however remains to be seen how the implementation of the regulation will impact ECA-led financings and what innovative structures market participants might deploy in this regard. LEGAL & REGULATORY 31 DEVELOPMENTS
THE MYTO MINOR REVIEW ORDER 2019 – THE AWAITED RELIEF OR A NOSTRUM
One of the principal objectives of NERC, as stipulated in the EPSRA, is to applicable tariffs, following which NERC is expected to vary the tariffs, ensure that the prices charged by licencees are fair to consumers, are where there has been a material change in certain specified economic sufficient to allow the licencees to finance their activities and allow for indices. reasonable earnings for efficient operation (See section 32(1)(d), ESPRA). In furtherance of its statutory powers under the EPSRA, and with a view to determining cost reflective tariffs, NERC issued the long-overdue EPSRA further subjects the applicable tariffs for distribution activities to (first) minor review of the MYTO 2015 and the Minimum Remittance regulation and provides that the regulation shall be according to one or Order for the Year 2019, on 19 August 2019. The aforementioned order more methodologies adopted by NERC. Pursuant to these powers, NERC was subsequently superseded by the December 2019 Minor Review of in 2015, issued the Multi-Year Tariff Order 2015 (MYTO 2015), applicable the MYTO 2015 and Minimum Remittance Order for the year 2020, which for the period commencing January 2015 to December 2024, with the was issued on 31 December 2019 (the MRO). objective of ensuring that the applicable tariffs for distribution activities are cost-reflective, in accordance with the aforementioned provisions of Both the first and second MRO were received with mixed reactions by EPSRA. different stakeholders across the power sector. We delve into the provisions of the MRO, its advantages, flaws and impact on the DisCos MYTO 2015 mandates NERC to carry out a biannual minor review of the on pages 110 - 117 of this report. LEGAL & REGULATORY 32 DEVELOPMENTS
REGULATORY WATCH NERC Order on Mandatory Dispatch of Hydro Power Plants in the Nigerian Electricity Supply Industry Reports on Electricity Generation
On 18 September 2019, NERC issued an Order titled
“Order on the Mandatory Dispatch of Hydro Power Plants in the Nigerian Electricity Supply Industry”. The Order was made on the basis of projections that there would be significant events of flooding in 2019, “…the Order designates the Jebba, which would adversely affect the operations of 3 Kainji and Shiroro power plants as “must hydropower stations – Jebba, Kainji and Shiroro. The run” powerplants which must be Order was also premised on reports that the flooding accorded high priority in the dispatch of could pose an environmental risk to the lives and property downstream of the designated stations. In a grid connected power plants…” bid to forestall this, NERC, by the Order, designates
the Jebba, Kainji and Shiroro power plants as “must run” powerplants which must be accorded high priority in the dispatch of grid connected power plants in Nigeria by the TCN. The Order also mandates the TCN to submit detailed written justification to NERC for any event of deviation/non- compliance with the terms of the Order. LEGAL & REGULATORY 33 DEVELOPMENTS
REGULATORY WATCH NERC Douses Allegations of NGN 2 Billion Fraudulently Paid to GenCos Reports on Electricity Generation
In February 2019, NERC investigated and responded to allegations which pervaded the media that fraudulent payments were made to the Olorunsogo and Omotosho Power Plants by NBET.
The allegations stemmed from a September 2018 whistle blowers’ report submitted by 2 senior officers of NBET (Mallam Waziri Bintube, General Manager/Chief Financial Officer and Mallam Abdulahhi Sambo, Deputy General/Head Internal Audit. The report featured 15 allegations of fraudulent practices against the NBET Managing Director (Dr. Marilyn Amobi) and was issued to the Honourable Minister of Finance, on copy to the Secretary to the Government of the Federation, Honourable Minister of Power, Works & Housing, the EFCC, the ICPC and NERC; requesting their urgent intervention to curb fraud and corrupt practices within NBET.
Upon investigation, NERC found in the main that the allegations were spurious, lacking in merit and substance; as all payments made by NBET to the 2 power plants in question were in accordance with the terms of the relevant PPAs and the provisions of the Supplementary TEM Order by the NERC. LEGAL & REGULATORY 34 DEVELOPMENTS
REGULATORY WATCH NERC’s Ruling on TCN’s Application for Rev iew of Supplementary TEM Order
Reports on Electricity Transmission
By a petition dated 30 August 2018 and a subsequent position paper dated 4 January 2019, the TCN requested that: (i) the Supplementary TEM Order After a consideration of the points raised by TCN and other participants at issued by NERC be declared null and void because of its inconsistency with the public hearing, NERC ruled that the Supplementary TEM Order is the provisions of the EPSRA and other industry ruling documents pursuant consistent with the EPSRA and industry ruling documents, because the to section 24 of the NERC (Business rules of the Commission) Regulation; DisCos (pursuant to their respective composite licence for network business (ii) all 330kV customers should be declared as eligible customers because it and trading) are allowed to contract for supply of electricity at all voltage is the only category such customers fall into under the EPSRA, the Market levels. NERC further ruled that as the Eligible Customer Regulation provides Rules and the Grid Code; and (iii) all 330KV customers should pay their for an elective regime, any customer (connected at the 330 KV voltage energy and capacity directly to generators with whom they contracted; level) who elects to be an eligible customer may freely contract directly while the wheeling, ancillary, market operation and system operation with a GenCo or a trading licencee for supply of energy and capacity under charges should be paid to the MO. a Transmission Use of System Agreement with the Transmission Service Provider. NERC added that without such an election, there is no basis for An administrative proceeding in the form of a public hearing was held by NBET or the TCN to invoice customers connected at 132 voltage levels. NERC to provide an opportunity for all stakeholders to contribute to the request made in the TCN’s position paper. LEGAL & REGULATORY 35 DEVELOPMENTS
REGULATORY WATCH NERC launches probe of alleged power rejection by Discos
Reports on Electricity Distribution
The DisCos further accused the TCN of spending $1.6 billion on transmission projects without visible results
In September 2019, NERC launched an investigation into the persistent NERC confirmed that a six-man panel had been set up, including
claims by TCN that the DisCos frequently reject volumes of electricity independent external industry operators, to investigate the TCN’s claims sent to them for onward distribution to consumers. of power rejection. NERC stated that from the preliminary observations of the investigative team, and additional 3,800 megawatts of electricity The DisCos asserted that the allegations are false, as the rejection of could be retrieved from the grid for distribution to end-users. power supply is detrimental to their’ businesses – which is in essence the sale of power. The DisCos also contended that the weakness of the TCN’s The DisCos further accused the TCN of spending USD 1.6 Billion on facilities limits the amount of power made available to them for transmission projects without visible results. In denying this claim, the distribution. TCN stated that the DisCos are ignorant of the procurement processes for its transmission infrastructure. LEGAL & REGULATORY 36 DEVELOPMENTS
REGULATORY WATCH CBN, FIRS to verify financial records of 8 DisCos
Reports on Electricity Distribution
In November 2019, NERC disclosed that the CBN and the collection agents; and (iv) details of bilateral contracts FIRS would be engaged to verify all financial documents and willing buyer/willing seller arrangements, with details submitted to it by 8 DisCos (Abuja, Benin, Enugu, Ikeja, of the monthly revenue made from these arrangements. Kaduna, Kano, Port Harcourt and Yola) (the Affected DisCos) who faced regulatory actions for reportedly NERC stated that the affected DisCos have been unable to failing to abide by the terms of the EPSRA. meet their minimum remittance thresholds specified in the MRO (of August 2019), thus exacerbating the liquidity Following a statement that it would not hesitate to challenges in the sector. prosecute directors of any DisCos who submit false or misleading documents on their finances, NERC issued a Against this backdrop, NERC requested that the Affected follow-up notice and required the concerned DisCos to DisCos provide their financial information, along with their
state reasons why their licences should not be cancelled written response to NERC’s previously issued license in accordance with Section 74 of EPSRA. cancellation notice; to be subjected to the scrutiny and verification processes of the CBN and FIRS. NERC stated in the follow-up notice that the Affected DisCos are to provide (i) monthly statements of their NERC further required that the information be submitted revenue accounts from the date of takeover; (ii) contracts individually under oath in depositions by each of the with all revenue collection agents; (iii) monthly DisCos’ Managing Directors; Chief Operating Officer; remittances by all collection agents from the date of their Finance Director/Chief Financial Officer; General appointment, along with fees paid by the DisCos to the Counsel/Head of Legal; and Head of Compliance. LEGAL & REGULATORY 37 DEVELOPMENTS
REGULATORY WATCH Investigation into the Utilisation of Intervention Funds
Reports on Electricity Distribution
In November 2019, NERC established a four-man Airline Intervention Fund (PAIF); and (iii) the NGN 701 committee headed by its Vice Chairman, Mr. Sanusi Billion Payment Assurance Facility (PAF) - extended to Garba (the Committee), to review the utilisation of the NBET to settle invoices of GenCos to a minimum level of various intervention funds from FGN by DisCos, as well 80 %. The CBN is also expected to provide an additional as measures the DisCos have taken to address NGN 600 Billion, as proposed by the NBET in its report customer complaints and improve their customers’ of the implementation of the NGN 701 Billion PAF to the overall willingness to pay for power supply services. power sector.
According to the CBN’s annual report for 2018, the apex The Committee was saddled with the responsibility of bank had as at the end of 2018, granted total credit of reviewing how the DisCos spent these funds and NGN 1.095 Trillion to the power sector under 3 different adjudicating on the petitions filed by 8 DisCos against schemes which it set up. the MRO (of August 2019). These DisCos are expected to explain in detail, the appropriation of their revenues The schemes were: (i) the Nigerian Electricity Market since they took over control of the assets. Stabilisation Facility (NEMSF) worth NGN 213.417 Billion – established for the settlement of outstanding The affected DisCos were also required to explain their payment obligations due to market participants during customer enumeration, general procurement practices, the interim phase of the marke,t as well as legacy debts related party transactions, directors’ fees and expenses, owed by the Power Holding Company of Nigeria (PHCN) technical partners and material and contingent to gas suppliers; (ii) the NGN 300 Billion Power and liabilities. LEGAL & REGULATORY 38 DEVELOPMENTS
REGULATORY WATCH NERC Order on the Mandatory Migration of R3 Class of Residential Customers, Industrial and Commercial Customers to Reports on Electricity Distribution Cashless Settlement Platforms
In line with its object to pursue the development for Electricity Supplies Regulations 2007 (the Cash of a financially sustainable NESI that serves the Collection Regulation), DisCos are to transit needs of end-use customers with adequate, industrial and commercial customers and R3 class reliable and affordable electricity, and further to residential customers to cashless settlement the Federal Government’s policy directive that platforms by 31 January 2020 and 31 March 2020 requires the mandatory transition of certain respectively. classes of end-use customers of DisCos from direct cash settlement of bill to cashless settlement The Order further stipulates that all collection platforms in order to reduce collection losses, agents and super-agents, sub-agents, payment NERC issued an Order titled “Order on the solutions service providers and payment terminal Mandatory Migration of R3 Class of Residential service providers to be engaged by DisCos in Customers, Industrial and Commercial Customers compliance with the Order shall be registered with to Cashless Settlement Platforms and Other both the CBN and NERC. The Order also empowers Matters relating to Revenue Protection in the NERC and the CBN or its delegate to monitor all Nigerian Electricity Supply Industry”. third party dedicated account for the billing/collection of funds from the designated The Order directs that without prejudice to the customers. The Order is slated to take effect from provisions of section 10 of the Meter Reading, 2 January 2020. Billing, Cash Collections and Credit Management LEGAL & REGULATORY 39 DEVELOPMENTS
REGULATORY WATCH NERC Fines AEDC 250 Million Naira for Non-compliance with ESPRA and other Regulatory instruments Reports on Electricity Distribution
It was alleged that AEDC’s negligence in complying with Section 1.3.26 Further, NERC found that AEDC had breached the provisions of the Part IV of the NERC Distribution Code – which provides that “distribution Nigerian Electricity Supply and Installation Standards (NESIS) transformers, switchgears, distribution boxes etc. installed in streets and Regulations 2015 as AEDC failed to adequately fence and secure their accessible to public shall be protected by locking the doors and/or distribution substation to prevent unauthorized access even after this providing a suitable fence with gate wherever possible”; and the terms breach was identified by the AEDC technical crew that worked on the site and Conditions of its Licence resulted in the death of a 4-year old boy, 2 weeks before the incident. Master Mohammed Arafat Jibril, on 11 April 2019 at the Senior Quarters of the Federal low-Cost Housing Estate, Maikunkele, Bosso local Consequently, by an Order dated 14 May 2019, NERC fined AEDC in the Government Area of Niger. NERC also found that AEDC had breached its sum of NGN 250 Million to NERC for infractions identified in the Order, obligation under Section 5.3.1 of the Nigerian Electricity Health & Safety and also directed AEDC to pay the sum of NGN 50 Million to the family of Code (HSC), which is to send a preliminary report to NERC within 72 late Master Mohammed Arafat Jibril as compensation. AEDC was further hours of an accident resulting in damage of equipment, loss of life and required to conduct a detailed safety audit of its network and send its injury to human beings. findings to NERC with a detailed remediation plan to address issues in the safety audit in the short, medium and long term.
xxx LEGAL & REGULATORY 40 DEVELOPMENTS
REGULATORY WATCH NERC issue permits to Meter Asset Providers Appointed by 8 DisCos
Reports on Electricity Distribution
In 2019, NERC issued permits to the Meter Assets Providers that were successful in the procurements conducted by 8 DisCos, to wit: the Abuja Electricity Distribution Company Plc (AEDC), the Jos Electricity Distribution Company Plc, the Port Harcourt Electricity Distribution Plc, the Yola Electricity Distribution Company Plc, the Enugu Electricity Distribution Company Plc, the Ibadan Electricity Distribution Company Plc, the Ikeja Electricity Distribution Company and the Benin Electricity Distribution Company.
NERC further directed that the rollout of meters shall commence no later than 1 May 2019 and that the customers of the DisCos should expect the commencement of the rollout date for meters to be installed in their premises within 10 working days of making payment to MAPs in accordance with section 18 (3) of the MAP Regulations 2018. LEGAL & REGULATORY DEVELOPMENTS DEAL 42 HIGHLIGHTS
TRANSCORP CONSORTIUM WINS BPE BID NASARAWA STATE GOVT. TO PARTNER TO ACQUIRE AFAM GENCO WITH GE AND BEACON ENERGY ON COAL IPP PROJECT
The Nasarawa State Govt (NSG) is currently in talks with Beacon In October 2019, the Bureau of Public Enterprises (BPE) announced Energy Development Services Limited (Beacon or the Sponsor) and the Transcorp Consortium as preferred bidder for the purchase of General Electric (GE), among other partners, in relation to the Afam GenCo (one of the six PHCN successor power generation proposed development of a c. USD 55 Million 100 mega-watts companies and the last of such companies to be privatised). Afam (MW) coal fired power plant in Lafia, Nasarawa State. The project is GenCo, comprises two plants – Afam Power and Afam Three Fast intended to power the whole of Nasarawa State and leverages the Power, which have an expected capacity of 966MW in aggregate. rich endowment in coal deposits; which will serve as The Transcorp Consortium, who bidded for the asset at NGN 105.3 state’s feedstock for the power plant under the framework of a strategic Billion will become the holder of the entire equity stake in Afam PPP with a local mining company. GenCo.
Having conducted a review of the Development and project’s Financing Plan on behalf of NSG and advised NSG on same, we are expectant of another landmark IPP in Nigeria which will undoubtedly boost economic activity within Nasarawa State.
HIGHLIGHTS DEAL 43 HIGHLIGHTS
RP GLOBAL LAUNCHES INTO THE GAMBIAN GOVERNMENT DEVELOPS THE NIGERIAN POWER MARKET SENEGAMBIA HIGHWAY CORRIDOR
The Government of the Republic of Gambia (GoTG) commenced The Nasarawa State Govt (NSG) is currently in talks with Beacon construction of the 1km Senegambia Road Bridge, which serves as Energy Development Services Limited (Beacon or the Sponsor) and a strategic link between the northern and southern parts of Gambia General Electric (GE), among other partners, in relation to the and Senegal and traverses the River Gambia. The project, which is proposed development of a c. USD 55 Million 100 mega-watts (MW) being midwifed by the Gambian Ministry of Transport, Works and coal fired power plant in Lafia, Nasarawa State. The project is Infrastructure, and the national Roads Authority has now attained intended to power the whole of Nasarawa State and leverages the its tolling plaza construction phase, the feasibility studies for which state’s rich endowment in coal deposits; which will serve as feedstock have been conducted. for the power plant under the framework of a strategic PPP with a
local mining company. We are pleased to have advised GoTG on the legal framework
applicable to this laudable project, which will no doubt serve as a Having conducted a review of the project’s Development and king pin trade corridor in Africa, that facilitates continental trade. Financing Plan on behalf of NSG and advised NSG on same, we are
expectant of another landmark IPP in Nigeria which will undoubtedly boost economic activity within Nasarawa State.
HIGHLIGHTS DEAL 44 HIGHLIGHTS
QUANTUM CAPITAL SPONSORS USD 30 REDDINGTON HOSPITAL EMBARKS ON MILLION DOLLAR SECONDARY SCHOOL MULTI-SPECIALIST HOSPITAL PROJECT IN PROJECT IN LAGOS L A G O S
Renowned health-care service provider in Nigeria, the Reddington The James Hope College Foundation (JHCF), in partnership with Group has embarked on the development of a 100-bed multi-specialist Quantum Capital Partners recently purchased the USD 27 Million hospital in Lagos State (the Duchess Hospital). The Duchess Hospital 14.57-hectare expanse of land, previously owned by the American will provide healthcare for common illnesses such as malaria, but its International School Lagos at Twin Lakes Estate, Lagos. core medical offerings will be specialist procedures (such as
colonoscopies and endoscopies). The acquisition marks the first step in JHCF’s vision to establish a The Duchess Hospital is a pivotal project, not just on a national level, world-class co-educational secondary school in Lagos State, which will but also at the regional level, as it will blaze the trail in sub-Saharan fully fund the schooling of 40% of its students on 100% scholarships. Africa for specialist healthcare institutions rendering services of its The Executive Governor of Lagos State, Mr. Babajide Sanwo-Olu caliber (which are only available abroad) and at affordable rates. The pledged his full support in seeing to the development of the school by Reddington Group will be partnering with foreign healthcare moguls for September 2020, at the project signing ceremony in October 2019. the provision of operation and maintenance services at Duchess
Hospital. To that end, Reddington is considering proposals from Apollo In an economy where critical social infrastructure such as education India and is also in talks with Cromwell Hospital, London. too often takes the back burner, we are pleased to be a part of this We are proud to be advising the Reddington Group on this project, truly meaningful project as advisers to JHCF. which will go a significant way in bridging healthcare gap. Nigeria’s HIGHLIGHTS DEAL 45 HIGHLIGHTS
MODERNIZATION OF THE NIGERIAN POSTAL SERVICE
We are honoured to have advised the BPE in connection with the proposed restructuring, modernization and commercialization of the Nigerian Postal Service (NIPOST).
In a bid to improving and modernizing the Nigerian Postal System, Olaniwun Ajayi undertook a detailed review of the legal and regulatory framework currently applicable or proposed to be applicable to the Nigerian Postal System and distilled the gaps and challenges in the framework, which may hamper the project. We are expectant that with the current political will to restructure and commercialize NIPOST as advised, Nigerian postal services will be raised to world standards.
HIGHLIGHTS MARKET 46 DEVELOPMENTS
G A S Gas Debts and the S U P P L Y Resulting Disruptions to the Operations of GenCos
Consequent upon the industry-wide liquidity challenges that have Whilst the aforementioned proposition is supported by the fact that exposed the successor GenCos to a revenue shortfall of over NGN 1 the total credit from Nigerian banks to corporations in the oil and gas Trillion, and their resulting inability to pay debts owed to gas producing sector dropped by approximately NGN 222.8 Billion in the second companies, four generating companies were required to shut down quarter of 2019, it is however also important to note that pipeline production as early as January 2019. vandalism also persisted and continued to affect gas supply in the period under review. More particularly, worth noting is the fact that Commenting on this disruption to electricity generation so early in the pipeline vandalism hit an all-time high of 115% in July 2019, an year, the Executive Secretary of the Association of Power Generation exponential increase, given the pipeline vandalism rate of 77% in June Companies (APGC) asserted that the disruption to the operations of 2019. the GenCos was due to the lack of access to loans to make payments to some of the gas producing companies, including Shell Petroleum Development Company and Total Nigeria Plc. It was further noted by the Executive Secretary of the APGC that gas supply was not the major 115 issue encountered by the GenCos, as is commonly thought, but rather, pipeline % the fact that the GenCos were yet to exhaust their present allocation of vandalism gas, as a result of the liquidity crisis in the sector. rate 77% MARKET 47 DEVELOPMENTS
Completion of the Agbara-Ota
In June 2019, Shell Nigeria Gas Limited increased its gas Capacity Increase Project by Shell distribution capacity by over 150%, as a result of its completion of the Agbara-Ota Capacity Increase Project, its second gas train in the country.
Speaking to journalists at a media launch event in June 2018, it was noted by the company’s Managing Director (MD) that the completed expansion project will enable the direct supply of over 1,000MW of electricity to various industrial parks and manufacturing companies across the country. The MD also stated that the project is only one of the numerous expansion projects which Shell Nigeria Gas Limited intends to embark upon in the coming years.
In relation to its distribution capacity expansion project in other states, Shell also completed the first phase of its pipeline expansion in Abia State, connecting manufacturing industries in the Osisioma area of the state directly to pipeline gas. The MD also noted that further to this expansion, gas will also be delivered to the IPP in charge of the provision of electricity to the Ariaria market in the State, with the objective of ensuring efficient energy supply to the traders in this market. MARKET 48 DEVELOPMENTS
Update on the Nigeria-Morocco Gas Pipeline Project
Following the completion of the feasibility study in July 2018, in January an Environmental and Social Impact Assessment was to be undertaken. 2019, the FGN, through the Nigerian National Petroleum Corporation Whilst from all indications, setbacks have been experienced in the (NNPC), and the Kingdom of Morocco through the Morocco National achievement of the aforemetioned milestones, the NNPC, as well as its Office for Hydrocarbons & Mines (ONHYM), announced the award of a Moroccan counterpart are still optimistic that the Nigeria-Morocco Gas contract to Pensen, a British company with a reputation for providing Pipeline will be delivered in record time, and in accordance with agreed engineering and project management services in the oil and gas sector, timelines. for the Front-End Engineering and Design (FEED) Phase I study, in relation to the construction of the 5,660km Nigeria-Morocco Gas Pipeline. The Nigeria-Morocco Gas Pipeline is expected to supply gas to at least 15
countries, including Benin, Togo, Ghana, Cote d’Ivoire, Senegal and The FEED Phase I study which was expected to be completed by the end Mauritania upon its completion and will have intake and offtake points in of the first quarter of 2019, comprises the review of the feasibility study the various countries through which it traverses, before it links with the results, and the evaluation of the gas demand and supply study, Maghreb-Europe gas pipeline in Northern Morocco. following which the design of the pipeline system, and the execution of MARKET 49 DEVELOPMENTS
The NLNG Train 7 Project
Following the execution of the contract for the design of its USD 7 Billion Train 7 LNG expansion plant with the SCD Consorium (comprising Saipem of Italy, Chiyoda of Japan, and Daewoo of South Korea), Nigeria LNG (NLNG), at a Letter of Intent signing ceremony held on the 10 September 2019, announced its execution of a Letter of Intent for the engineering, procurement and construction of Train 7 with the SCD Consortium.
With the execution of this Letter of Intent, NLNG achieved a significant milestone, which ultimately resulted in the company achieving its target of reaching a Final Investment Decision (FID) in December 2019. Having now made the FID, it is expected that the construction period for the Train 7 LNG expansion plant will last approximately five (5) years, with the first LNG rundown expected in 2024.
NLNG’s Train 7 project is of significant importance to the county, as the project will include the debottlenecking of the existing six trains, and increase the overall processing capacity and output of the NLNG facility at Bonny Island, Nigeria by about 35% from the current output of 22 million mt to about 30 million mt per annum. MARKET 50 DEVELOPMENTS
MARKET DEVELOPMENTS IN THE GENERATION OF ELECTRICITY IN NIGERIA
Privatisation of Afam Power
As previously reported, the Transcorp Consortium won the bid to acquire Afam Power Plc. and Afam Three Fast Power Limited. The project is a landmark achievement in the generation sub-sector; as the last of successor generation assets to be privatized and an expected boost to the overall installed capacity by at least 966 MW at inception. The Transcorp Consortium brings with it the good will of its track record in the power sector and its strong brand within the local and international markets; which is expected to bode well for the project.
Ondo State Signs PPA with Alagbaka Power Limited
As part of its continuous efforts to boost power supply within Ondo State, the Ondo State Government signed a power purchase agreement with Alagbaka Power Limited in February 2019. The private partner is expected to construct a 15MW gas-fired power generation plant within 18 months at Alagbaka GRA, Akure, Ondo State, which would feed all government facilities within the Alagbaka GRA, as well as some government owned residential estates in the state capital. MARKET 51 DEVELOPMENTS
NERC Issues 40MW Embedded Power Generation Licence to Green Energy International Limited
NERC has issued a licence to Green Energy International Limited (GEIL) for the generation of 40MW. GEIL is the operator of Otakikpo marginal field in Rivers State, Nigeria. The licence would enable GEIL utilise the associated gas resources from the Otakikpo marginal field for power generation as part of the efforts of the FGN to curtail gas flaring in Nigeria.
CBN grants additional NGN 600 Billion Payment Assurance Facility to NBET
The CBN has extended the payment assurance facility (PAF) with the grant of additional NG N 600 Billion to NBET. The PAF is a bridge facility granted to NBET to assist it in meeting its payment obligations under generation invoices and ease the liquidity challenges faced by NBET.
C r o s s - Boundary Energy Access’ Investment in Mini-Grids
In February 2019, Cross-Boundary Energy Access announced the funding of its proposed mini-grid development in Nigeria by the Rockefeller Foundation and Ceniarth, up to the tune of USD 16 Million. The investment is targeted at providing access to electricity to about 170,000 people, by providing first- time power to homes and businesses. MARKET 52 DEVELOPMENTS
Egbin upgrades to 1320MW full c a p a c i t y
The MD of Mainstrem Energy, operator of the Egbin power plant, (which is the largest power generating station in Nigeria with an installed capacity of 1,320MW, consisting of six units of 220MW each) has upgraded the power plant to optimal capacity of 1,320MW. The MD explained that the new technology deployed for the increment is a combined cycle power plant which uses less gas and produces more energy than the current plant will help achieve optimal capacity of the plant.
EU to invest GBP 200 Million in renewable energy generation in Nigeria
In May 2019, the EU announced two planned investments in renewable energy generation in Nigeria. The investment is bifurcated into: (x) a GBP 30 Million from the Electrification Financing Initiative (ElectriFI) and (y) a GBP 165 Million direct loan from the EU. The investment is directed at increasing access to electricity in Nigeria as well as Nigeria’s clean energy supply. SPOTLIGHT FEATURE PIECE SPOTLIGHT FEATURE PIECE: 54 * ON-GRID POWER GENERATION
BACKGROUND
Although 2019 was a slower year for on-grid power generation, IPPs such as Proton Energy remain optimistic about what the future holds for this segment of the value INTERVIEW OF chain. In this wise, we had the privilege of interviewing Mr. Oti Ikomi, CEO of Proton Energy Limited, on his perspectives on the challenges encountered by IPPs in the NESI, MR. OTI IKOMI his views on how they should be tackled and his assessment of NERC’s recent regulatory initiatives.
Can you tell us a bit about what Proton Energy is c u r r e n t l y Q : engaged in in the power space in Nigeria (and the r e s t o f sub-Saharan Africa)?
Proton Energy Limited is an independent power producer with a pipeline of assets under A : development in the South-South region of Nigeria capable of adding up to 1500 MW to the national grid. Proton Energy is currently developing its flagship project, a 150 MW Combined Cycle Power Plant in Sapele, Nigeria. As we build a footprint in Nigeria, we also explore opportunities across the sub-Saharan region across the electricity value chain. 55
What do you consider the main challenges and constr aints to investment in Q : Nigeria’s power sector value chain?
The major challenge which has beleaguered the power sector value chain is the issue of liquidity. The sector has struggled to A : achieve financial sustainability, and this has slowed investment interest into the sector across the value chain. Investors will remain weary on how to recoup their investment given the non-cost-reflective tariffs and collection challenges in the demand-side of the market.
Closely linked to the liquidity challenge are policy opaqueness or inconsistency, sanctity and respect of contracts, and other technical constraints largely fueled by illiquidity in the sector.
A major sentiment that surfaces within the investment community is the question of “Who is In Charge?” in the sector. There is sometimes a perception of disharmony among key government agencies/bodies, releasing statements, orders and Q : comments at cross-purposes to one another.
A : 56
What do you consider the main challenges and constr aints to investment in What are your views on the adequacy of the Governme nt’s efforts to ‘de - r i s k ’ Q : Nigeria’sinvestment powerin on-grid sector power value generation chain? in Nigeria s ince the Azura Project, including Q : the FGN’s stance on affording the same credit suppo rt and protections to new IPPs?
The Federal Government either directly or through its agencies has made considerable and commendable efforts to de-risk A : the sector. From the development of a Meter Asset Provider(MAP) scheme aimed at improving collection efficiency, the Presidential Power Initiative with Siemens to unlock bottlenecks and improve transmission and distribution assets, to
provision of a payment support fund to backstop NBET’s payment obligation to generating companies and gas suppliers.
Notwithstanding these efforts, to make any long-term and sustainable impact in de-risking the sector, the political will needs to be consistent and effectively match these initiatives. For example, tariff review cannot be delayed due to pressure from the political class.
Until local and international investors begin to see improvements in financial and technical performance metrics in the sector, guarantees, especially sovereign ones will be required to ensure adequate risk allocation for project bankability.
How can government eliminate the need to provide credit support? They need to move the market efficiently and concertedly towards a market-driven environment (howbeit with fair regulation).
They also need to identify efficient generation projects which present a win-win for government/national interests, as well as entrenching private sector participation in the sector. Across the country, there are on-grid generation projects which are already significantly de-risked – can be evacuated based on current transmission network, require little to no expansion works on transmission infrastructure, are optimally sized, thereby placing low demand on payment securities or risk of default on the sovereign via the Put Call Option Agreement, are sited in close proximity to gas and transmission facilities and are scheduled to become operational on or around the time when transmission, distribution and payment challenges will have been significantly resolved in circa 4 years. 57
What opportunities do regulatory measures like the Eligible Customer Q : Regulations present for Nigerian on-grid generation companies and IPPs?
Regulations such as the Eligible Customer Regulation expand the market and provide an opportunity for generating companies to approach consumers directly using on-grid infrastructure. However, under current conditions, some industry A : players may argue as to its timing. It presents a situation which allows for cherry-picking of cheapest generation by major consumers and relies on other infrastructure to be in place which may not necessarily be available. It is however a good mid and long term initiative.
In spite of a slew of World Bank facilities granted for the rehabilitation and upgrading of electricity transmission substatio ns and lines in Nigeria, Q : many private sector market participants still consi der transmission one of the most significant challenges with the NESI and a n inhibitor of private investment in the sector, what do you consider a su stainable means of dealing with Nigeria’s transmission issues?
Some industry players have made suggestions like regionalizing the grid, which allows for easier management to outright A : privatisation of the national grid. Whichever approach you consider, either a regionalized privatised grid, one-block privatised grid, or a federally run grid, there are case studies of efficient systems one can draw from across the world. What is important is to ensure project management and optimum financing of the laid-out projects. If you take the Transmission Expansion Plan and follow through on an implementation plan, we will see massive results. This is where the role of Siemens as technical partner under the Presidential Power Initiative should present significant results, given their global project management and technical know-how to complement the Transmission Company team. 58
What in your view, do recent regulatory development s and actions in the NESI such as the Minimum Remittance Orders and Orde r on Transitional Q : Accounting Treatment of Tariff Related liabilities signal for the NESI; particularly as regards regulation of the sector an d the end-user tariff?
The Minimum Remittance Order by NERC is a drive towards improving performance of distribution companies with respect to A : their invoice settlement obligations, with the overriding objective of strengthening liquidity conditions in the NESI, improving sustainability and viability of the sector. Placing a minimum remittance of say 60% across DisCos ensures the burden on FGN payment support is lower and GenCo and gas supplier invoices can be readily settled.
The Order on Transitional Accounting Treatment is NERC’s way of balancing the impact of the Minimum Remittance Order on DisCos, basically allowing tariff shortfalls to be defrayed directly on their books. The effect of this is that it places DisCo accounts on a stronger footing and presents an opportunity for them to access credit from financial institutions to meet their investment targets.
Overall, both Orders signal a move towards improved liquidity in the sector and performance in the distribution segment of the market. It is my clear opinion that NERC must be supported and encouraged in these new laudable orders.
59
As the founder, Chief Executive Office and Vice- Ch airman of a leading Q : Nigerian IPP developer with a number of IPPs in dev elopment, what do you consider the prospects of the on-grid segment of th e Nigerian Electricity Supply Industry (NESI) in the next year, and beyond ?
Many critical factors are lining up to indicate a positive horizon for the NESI, especially at the on-grid segment. With the A : impending tariff review, as well as transmission and distribution improvements, the sector is on the cusp of a much-awaited growth. This expectation is however hinged on key industry actors following through on policies, orders and efficient plan implementation.
After a period of inaction which stalled the market development, all stakeholders, especially within government must deploy all the tools at their disposal in ensuring the power sector recovers. On our part, our flagship 150 MW Proton Delta Sunrise Project is scheduled for financial close in the short term, within a year and this will be a significant boost to the NESI. MARKET 60 DEVELOPMENTS
MARKET DEVELOPMENTS IN THE
TRANSMISSION OF ELECTRICITY TCN Capacity Deficit Still an Issue IN NIGERIA Despite Heavy Investments
Reports obtained from the TCN by Thisday Newspaper revealed that TCN In the Bida area of Niger State, TCN reported the addition of 60MVA to has within the last two years raised its transmission capacity by about raise supply to Abuja DisCo by 48MW; while in Suleja and Abeokuta, it 2,352.5 megawatts. According to TCN, in 2017, the company added 80 added 120MVA and 60MVA respectively. TCN also revealed that it Mega Volt Amp (MVA) to its existing 180MVA high-end transmission upgraded the capacity of the Molai to 210MVA and supply to Yola DisCo substation located in Benin South; another 100MVA was added to its by 120MW. Separately, TCN reported the construction of a greenfield sub-station in Alimosho, Lagos; and 60MVA was added to an existing transmission substation at New Kano, with a capacity of 420MVA and 160MVA substation in Ajah to upgrade its capacity to 220MVA and additional 336MW for Kano DisCo. increase supply to Eko DisCo by 48MW.
To realise its target of a reliable grid, TCN’s General Manager stated that Also, in the Afam area of Rivers State, TCN reportedly installed a TCN also initiated the process for the acquisition of functional 150MVA transformer to add 120MW of electricity to its Port Harcourt Supervisory Control and Data Administration (SCADA) system for the DisCo load; 60MVA to upgrade the Hadejia sub-station to 82.5MVA and grid, which will enable the System Operator (SO) in the national control supply to Kaduna DisCo; among other of such works in Bornu, Aba, centers to exchange operational information regarding the grid on real Gombe Uyo States and the Federal Capital Territory. time bases with other operators in substations across the country.
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The EU observed that despite claims through various financial instruments, by the TCN that the national grid has ranging from traditional grants to been expanded to 7,152 MW blended finance. The EU has also capacity, the reality is that Nigeria’s provided technical assistance and electricity network is operating at infrastructural projects across several 4,500 -5,500MW. The EU maintained areas, both on and off the grid here that the (NESI) has defied growth, in Nigeria. However, despite these despite the sum of EUR 156.3 Million efforts, the industry is said to have invested in the sector by the EU an average loss of NGN 1.3 Billion per day.
“Nigeria’s transmission network is operating at 4,500 -5,500MW” MARKET 62 DEVELOPMENTS
Implementation Of Regulation On As discussed at pages 28-30 of this report, NERC commenced the National Content Development implementation of its 2014 Regulations on National Content Development For The Power Sector for the Power Sector (the Local Content Regulations), which seek to prevent foreign dominance in the power sector. The direct impact of this on the transmission sub-sector, is among others, an increase in the threshold of locally sourced materials permitted for use by TCN (or any future transmission licencees). Notably, the Schedule to the Local Content Regulations imposes a 20% local content threshold for power transmission automation (installation, service works and integration) (such as SCADA system optical fibres, sub-station automation, communication infrastructure etc.) in 2019.
“the Schedule to the Local Content Regulations imposes a
20% local content threshold for power transmission automation in 2019” MARKET 63 DEVELOPMENTS
TCN Planned Restructuring and On 21 August 2019, the MD of TCN announced the planned “split” of the TCN and stated Proposed Investment in USD 5 that the FGN will spend USD 5 Million to digitise its substations’ control rooms Million Digital Power Transmission nationwide. The MD explained that following the split, the TCN as it is currently known Control Rooms and structured will cease to exist; whilst a separate Transmission Service Provider (TSP) and Independent System Operation (ISO) (who would serve as the Market Operator) will emerge. However, the MD noted that the split can only be successful when the SCADA and the Electricity Management System (EMS) is in place.
The TCN MD also stated that putting the SCADA in place will take about two years. As such, the process had been segmented, such that it starts with the Automated Meter Reading (AMR), where fully functional meters will be made available to all market participants.
“FGN will spend USD 5 Million to digitise its substations’ control rooms nationwide.” MARKET 64 DEVELOPMENTS
Buhari inaugurates new Power Transmission Sub-station in Yobe
“…a new President Muhammadu the nation’s power sector Buhari, represented by to the next level of the Minister of State for efficacy and relevance, as 330/132/33KV Power, Works and well as an indication of Housing, Suleiman Zarma the TCN’s efforts to Transmission Substation in commissioned a new expand its capacity, in 330/132/33KV order to make electricity Transmission Substation more readily available in Damaturu, Yobe” in Damaturu, Yobe on 13 Nigeria. The target towns February 2019. The which will benefit from President stated that the the additional power project was another step supply include Ganjarma, towards the Buhari Gaidam, Dapchi, Yadi and
regime’s resolve to take Damaturu Township. MARKET 65 DEVELOPMENTS
General/Overall TCN PROJECTS IN 2019 C a p a c i t y Improvement
Tcn Completion Of 2 New Transmission Sub-Stations In Kebbi State
In February 2019, TCN announced the successful completion of a new 2x40MVA 132/33kV Transmission sub-station project in Yauri, Kebbi State. In its announcement, TCN stated that one of the transformers had been energized while the second one “TCN announced the would soon be energized as soon as the final pre- commissioning issues are dealt with. The Kebbi successful completion of a Transmission Sub-station project is just one of the many contracts that were inherited by TCN and new 2x40MVA 132/33kV completed by its in-house engineers. The Kebbi Transmission sub-station Transmission Sub-station project was first awarded by PHCN in December 2007, but was dormant for over a project in Yauri” decade; until TCN took over the project in the May 2018 and completed it. TCN stated that the sub-station project will increase the quantum of bulk electricity supply to Kano DisCo load feeders for onward delivery to electricity customers in certain areas in Kebbi State. MARKET 66 DEVELOPMENTS
General/Overall TCN PROJECTS IN 2019 C a p a c i t y Improvement
The TCN completed and energised the TCN Completes First Phase of first phase of the ongoing new The Ekim Transmission Substation transmission substation in Ekim, Akwa project is being executed in collaboration New Ekim Substation in Akwa
Ibom State. In its report, the TCN stated with the Akwa Ibom State Government. I b o m that the completed phase comprises a While TCN provides and installs the 60MVA 132/33kV power transformer and transformers, switchgears and gantries three outgoing 33kV feeder bays. using its in-house engineers, the Akwa According to TCN, the project is one of Ibom State Government is providing all “TCN stated that the the new substations it has successfully the civil works associated with the executed within the last year. The execution of the project. completed phase company mentioned that these projects comprises a are a manifestation of the Transmission The consequent effect of the completion Rehabilitation and Expansion Programme of the first phase according to TCN is the 60MVA aimed at improving the transmission availability of an additional 48MW of bulk grid. However, despite completion of the power supply for Port Harcourt Electricity first phase of the project, the 2x60MVA Distribution Company (PHEDC) to off 132/33kV capacity substation will be completed take, through the three feeders to its with the execution of the second phase customers such as the Akwa Ibom State power transformer and of the project which also comprises one University, Coconut Oil Refinery, Meter three outgoing 33kV 60MVA power transformer and three Manufacturing Factory, Syringe Factory, feeder bays. Ikot Abasi and Onna LGAs, Easter Obolo feeder bays” as well as Mkpat Enin. MARKET 67 DEVELOPMENTS
General/Overall TCN PROJECTS IN 2019 C a p a c i t y Improvement
Federal Government Installs 90MVA Facility to Boost Power Supply in Bayelsa State
The FGN has upgraded the existing 2×40MVA in Bayelsa Transmission Substation with the installation of a 90MVA capacity transformer to boost electricity supply in the state. The project is situated in the Gbarantoru area and was sanctioned in 2014 for a revised contract sum of over USD 3.8 Million. TCN acknowledged the intervention as timely, as the substation was only using one of the 40MVA transformer due to damage to the second. The project has now been completed and is ready for evacuation of power into the Bayelsa distribution network.
“TCN acknowledged the intervention as timely” MARKET 68 DEVELOPMENTS
General/Overall TCN PROJECTS IN 2019 C a p a c i t y Improvement “7,000MW of reliable power supply by 2021” Nigeria signs deal to improve power transmission
The FGN signed an implementation agreement for the Nigeria Electrification Roadmap, a partnership between governments of Nigeria, Germany and
Siemens AG, to upgrade Nigeria’s power transmission and distribution infrastructure.
The agreement provides that Siemens, TCN and the NERC will work together to achieve 7,000MW of reliable power supply by 2021, which would be scaled up to 11,000MW by 2023 and 25,000MW by 2025, when the deal is expected to conclude. MARKET 69 DEVELOPMENTS
MARKET DEVELOPMENTS IN THE NERC CAP on Estimated Billing DISTRIBUTION OF ELECTRICITY IN NIGERIA
In August 2019, the NERC expressed its intention to cap electricity tariffs applied to unmetered consumers. The NERC Chairman, Prof. James NERC had previously directed that all new connections be done strictly Mommoh, stated that discussions and consultations with stakeholders based on metering, so that no customer can be connected by a DisCo were on-going with respect to the proposed initiative. According to Prof. without a meter first being installed at its premises. Also, NERC stressed Mommoh “henceforth, meters will be rolled out to customers under the the requirement for all unmetered customers to be issued with electricity Meter Asset Providers (MAPs) scheme, and if anyone does not have it, bills strictly based on NERC’s estimated billing methodology, and in the there is going to be capping on how much they should pay which is under event that a customer is over billed, the DisCo ought to promptly refund consultation now and will be concluded in a few days time.” He further the excess sum. NERC reckons that any unmetered customer who is emphasised that this decision is driven by the need to be fair to both disputing his or her estimated bill has the right not to pay the disputed consumers and electricity providers. bill as same is to go through the dispute resolution process of NERC. NERC also encouraged customers who feel short-changed by electricity
The incidence of “crazy billing” arising from the estimated billing method providers to play their part by reporting such cases of infraction at the adopted by the DisCos since 2012 has been a sore spot between the NERC’s Forum Offices or the DisCo’s Customer Complaint Office nearest DisCos and their customers; which prompted the move by NERC to curb to them. the practice. MARKET 70 DEVELOPMENTS
MARKET DEVELOPMENTS IN THE NERC CAP on Estimated Billing DISTRIBUTION OF ELECTRICITY IN NIGERIA
Relatedly, the Federal House of Representatives on 03 October 2019 The bill is currently before the upper chambers of the National Assembly passed a bill seeking to prohibit and criminalise estimated billing by and may be passed in 2020. However, several stakeholders in the NESI electricity distribution companies and provide for compulsory installation have objected to the passing of the bill on the grounds that it amounts to of pre-paid meters to all power consumers in Nigeria and other related criminalizing a mere technical and managerial issue within the matters. By the terms of the bill, the issuance of an estimated bill by a distribution system. DisCo would attract either a one-year jail term or a fine of N1 million naira or both. MARKET 71 DEVELOPMENTS
Proposed Extraordinary Tariff Review
In October 2019, NERC issued a (ETRs), ETR’s differ from other notice of its intention to commence tariff reviews in that they are an extraordinary tariff review for neither initiated by NERC nor the TCN and the DisCos, pursuant conducted by NERC as a matter of to its powers under It said Section course, but are initiated by 76 of the EPSRA. In the notice, licencees in certain circumstances, NERC asked for comments from which are specified by the Tariff members of the public, which Regulations. One of such would be considered during the circumstances is where it becomes review process. apparent that the proposed The Regulations on the Procedure additional investments of a for Electricity Tariff Reviews in the licencee has not been factored in NESI (the Tariff Regulations) their existing tariff plan, including makes provisions for three emergency expansions and categories of reviews, namely, prudent replacement costs. (See major tariff review, minor tariff Regulations 10(b) of the Tarriff review and extra-ordinary tariff Regulations). review. Although similar to the Notwithstanding the proposed ETR, major and minor reviews, in terms NERC is in the process of a major of the methodology underpinning tariff review, which could be extra-ordinary tariff reviews implemented by January 2020. MARKET 72 DEVELOPMENTS
The Siemens Project
In July 2019, the FGN - through the BPE entered into Given the limit on the DisCos’ Capex incurrence, it is a six-year Implementation Agreement (the envisaged that the proposed capital expenditure Agreement) with Siemens for the execution of a under NEP may substantially impact the DisCos’ National Electrification Roadmap (the NEP) for the books, currently burdened with significant debt Power Sector. overhang. It is therefore useful to determine the treatment of the proposed capital expenditure on the
NEP raises material legal issues which directly impact DisCo’s books as this will materially influence the the existing DisCos’ contractual and statutory DisCos’ proposed approach/attitude with NEP and obligations particularly in relation to their obligation to come to a decision of whether the requisite prior improve and upgrade its existing distribution system consent of and cooperation with the lender may be and infrastructure as part of its overall performance required. In addition, NEP will also likely impact the
obligations. In essence, the implementation of the DisCos’ compliance with the CAPEX limit in the MYTO Project may likely affect its existing contractual released by NERC. arrangement with third parties as the DisCos may be constrained to vary, alter or terminate existing Whilst the objectives of the Project are laudable, it bilateral contracts with third parties for the acquisition however remains to be seen whether the DisCos will of relevant assets and equipment and the voluntarily accede to or buy into this arrangement or, improvement and rehabilitation of the distribution better still, negotiate favourable terms with Siemens infrastructure. and/or the FGN on the proposed implementation of the Project.
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FINANCING, INVESTMENT FEC approves US$247.3m loan & MARKET DEVELOPMENT from French Govt, AfDB for
INITIATIVES IN POWER Electrification
Nigeria’s Federal Executive Council (FEC) in April 2019, approved a US$247.3 million loan facility from the African Development Bank (AfDB) and the French Government to finance a part of the Nigerian Electrification Project (NEP).
The loan will finance four key projects under NEP being spearheaded by the Rural Electrification Agency (REA), comprising solar hybrid mini-grids for rural economic development, appliances and equipment for off-grid communities, energizing education and institutional “About 500,000 more capacity building. Nigerians in approximately Once fully implemented, about 500,000 more Nigerians in 105,000 households…will approximately 105,000 households, 8 universities and have access to an 20,000 small and medium enterprises in different parts of the country will have access to an installed generating installed generating capacity of 76.5MW. capacity of 76.5MW” MARKET 74 DEVELOPMENTS
Africa50 invests in 461MW Azura Edo power plant Africa50, a pan-African investment platform, announced, in December 2019, its investment in the 461-megawatt Azura-Edo IPP. Africa50 takes to Azura, significant power generation experience, having invested in several key infrastructure projects across the continent representing over 1,000MW of capacity.
FG secures USD 3 Billion World Bank loan for Nigeria’s Power Sector
Federal Government has secured a $3bn loan from the World Bank to be utilized for reforming the nation’s power sector. The Minister of Finance at a World Bank annual meeting in October 2019 announced that the loan would be disbursed in four tranches of $750m each beginning from April 2020.
UK’s CDC Group to invest USD 300 Million in Nigeria’s power sector Amongst Others
CDC Group, the UK government’s foreign investment arm, announced in June 2019 that it will invest USD 300 Million in power grid development in Nigeria and other Africa countries over the next five years. This contribution will be made through a special purpose vehicle called Gridworks. Gridworks will make investments in African transmission networks, but also in the electricity distribution infrastructure. MARKET 75 DEVELOPMENTS
USAID injects USD 162 Million into 4 Discos In July 2019, United States Aid (USAID) through its Power Africa Transactions and Reform Project provided technical assistance and capacity building to four DisCos and delivered $162 million worth of increased revenue through improved revenue protection and collection mechanisms.
The loan from USAID also facilitated over 500,000 new connections; reduced aggregate technical, commercial and collections losses between 6% and 13% per Disco; introduced new DisCo operational efficiencies that improved customer service and timely revenue management; and trained in various disciplines over 4,000 Disco employees over a two year period.
Azuri to expand Off-Grid Solutions with USD 26 Million Equity Investment
To accelerate its expansion plan in the East and West African regions, Azuri Technologies, a provider of pay-as-you-go solar home solutions to off-grid households across Africa, announced in June 2019, a strategic investment of USD 26 Million.
According to the firm, the capital infusion from Japanese corporation, Marubeni, will enable Azuri accelerate expansion in existing sub-Saharan Africa markets and roll-out its solar lighting, TV and additional services into new markets, with a focus on enhancing the lives of millions living without access to the grid. MARKET 76 DEVELOPMENTS
Cross-Boundary to Invest USD 16 Million in Mini-Grids in Nigeria Cross-Boundary launched, in July 2019, its Cross-Boundary Energy Access (CBEA) fund, a project financing facility for mini-grids with funding commitments from The Rockefeller Foundation and Ceniarth. Cross-Boundary Energy Access will initially invest USD 16 Million into mini-grids serving 170,000 people, providing first-time power to homes and businesses.
FGN Secures USD 13 Million financing from JICA
The Federal Government in December 2019 obtained a grant of USD 13 million from Japan International Co-operation Agency (JICA) for the purpose of ensuring uninterrupted supply of electricity in the Apo and Keffi axis of Nasarawa State.
United States Trade and Development Agency grants t he Nigeria National Development Corporation US$1.16 Billion as part fun ding for the NNPC- Abuja Independent Power Project
The Nigerian government has secured US $1.16 Billion grant from the United States of America as part funding for the NNPC-Abuja Independent Power Project (IPP). The agreement was concluded through the Nigerian National Petroleum Corporation (NNPC) and the United States Trade and Development Agency (USTDA).
The IPP was modeled to generate 1,350 megawatts of electricity to alleviate the power challenge in the country. MARKET 77 DEVELOPMENTS
FINANCING, INVESTMENT AND FGN Concessions Medical MARKET DEVELOPMENT Warehouse Facilities in
INITIATIVES IN INFRASTRUCTURE Abuja and Lagos
The Federal Government in March 2019 officially concessioned its medical warehouse facilities in Abuja and Lagos worth more than NGN 1.56 Billion to MDS Logistics. According to the ICRC, the concession, through a PPP arrangement with MDS Logistics, meant that the government would no longer have to appropriate large sums of money to “…the government effectively store medicines. would no longer have
The medical warehouse facilities in Abuja to appropriate large and Lagos, were constructed by the United State Agency for International Development sums of money to (USAID) and the Global Fund to fight AIDS, effectively store Tuberculosis and Malaria in collaboration with the Federal Ministry of Health. medicines.” MARKET 78 DEVELOPMENTS
Rendeavour in a joint venture arrangement with Lago s S t a t e Government invests over USD 250 Million in Alaro Ci t y , L F Z
Rendeavour announced in July 2019 that it will be investing over USD 250 Million worth of infrastructure in Alaro City, the new mixed-income city being built at the Lekki Free Zone (LFZ), Lagos state. Over USD 250 Million worth of infrastructure will be invested in Alaro City, a 2,000-hectare integrated mixed-use, city-scale development with industrial and logistics locations, complemented by offices, homes, schools, healthcare facilities, hotels, entertainment and 150 hectares of parks and open spaces. The project, more than twice the size of Victoria Island, is a joint venture between the Lagos State Government and Rendeavour.
FGN signs USD 430 Million Enyimba Economic City Project
The Federal Government in December 2019 executed a USD 430 Million line of credit granted by African Development Bank (AfDB) and a consortium of private investors and multilateral financial institutions for the development of Enyimba Economic City project (EEC), is a proposed free-trade zone with independent business registry, labor law, banking regulations and more, will sit on over 9,500 hectares of land in the oil producing communities of Abia State, between Aba and Port Harcourt. Upon completion, the EEC is expected to drive economic expansion in the Southeast region and by extension Nigeria. MARKET 79 DEVELOPMENTS
FGN executes USD 629 Million financing agreement wi t h China Development Bank
The Federal Government in October 2019 executed a USD 629 Million financing agreement with China Development Bank for the development of the
Lekki Deep Seaport Project, Nigeria’s first deep seaport. The deal involves a 45-year concessionary agreement between China Harbour Engineering Company (CHEC), which owns majority shares in the project and Lekki Port LFTZ Enterprise Limited (LPLTZ).
The port construction is being carried out by two major companies, China Harbour Engineering Company Limited (CHEC) and Louis Berger Group, USA. Upon completion, Lekki Deep Seaport will be one of the most modern ports, supporting the burgeoning trade across Nigeria and the entire West African region; providing the connection to the global shipping network.
Construction of Nigeria’s first ever University of Transport
China Civil Engineering Construction Corporation (CCECC) in December 2019 announced the commencement of the first free-of-charge transport university in Nigeria in the town of Daura in Nigeria, near the Niger border. When completed in 18 months’ time, the university will produce managers and technicians for Nigeria’s rapidly growing rail and road networks.
CCECC is investing USD 50 Million in the development of the university as part of its corporate social responsibility. MARKET 80 DEVELOPMENTS
World Bank approves USD 350 Million for Water Supply and Rural Sanitation Project in Nigeria
The World Bank in October 2019 announced its approval of a USD 350 Million investment for the construction of the second phase of the sustainable water supply and rural sanitation project in Nigeria. Phase II of the Project will include construction of new drinking water and sanitation facilities in rural and semi-urban areas which will work with solar off grids. The implementation of this phase has already begun and is expected to be completed in 2025.
“…new drinking water and sanitation facilities in rural and semi-urban areas …will work with solar off grids” MARKET 81 DEVELOPMENTS
The National Electrification Roadmap Project
INTRODUCTION
On 22 July 2019, the FGN - through the BPE entered into a six-year reliability and affordability of power supply required to drive economic implementation agreement (the Agreement) with German energy giant, growth, industrialization and poverty alleviation in Nigeria. Siemens AG, for the execution of the FGN’s National Electrification Roadmap the Roadmap (the NER or the Roadmap) for the Nigerian In quantitative terms, the FGN expects the NER to result in an increase Electricity Supply Industry (NESI). According to the Agreement, the in local electricity generation capacity from current levels of about 4MW overarching objective of the Roadmap is to prescribe a framework for the to about 25,000 MW of electricity by year 2025, along with phased upgrade of operational capacity within the NESI, with a view to corresponding improvements in transmission and distribution capacity. improving access to and supply of electricity in Nigeria and achieving
THE FRAMEWORK FOR IMPLEMENTATION
According to the Agreement, the Roadmap is to be implemented in three phases as follows:
Phase 1 – the reduction in Aggregate Technical Commercial & Collections (ATC&C) losses and achieving improved grid stability and reliability through such measures as the following:
i. supply of electricity distribution equipment; and ii. upgrade, expansion and replacement of distribution infrastructure and equipment, including but not limited to auto-reclosure, distribution transformers, switchgears, ring main unit and sub-stations.
MARKET 82 DEVELOPMENTS
In terms of its quantitative targets, Phase 1 is aimed at increasing the system’s end-to-end operational capacity to 7 GW.
Phase 2 – the reduction in network bottlenecks to enable full use of existing generation and “last mile” distribution capacities; with a view to bringing the system’s operational capacity to 11 GW.
Phase 3 – an implementation of appropriate network upgrade and expansion in the generation, transmission and distribution segments of the value chain, with a view to attaining a total system capacity of 25 GW in the long term.
Laudable as its objectives are, the NER, as currently formulated, poses a number of legal and practical challenges unraveled in the ensuing paragraphs.
SCOPE AND STRUCTURE OF THE NER
There is an air of uncertainty around the exact legal structure of the distribution assets within the NESI. First, the extent to which FGN may NER, as it appears to be an amalgamation of both a PPP arrangement grant such rights in relation to entities which it has privatised and ceded where Siemens acts as the private partner to FGN for the construction control of (save for (TCN)) is uncertain. Secondly, in the absence of and execution of the NER; and a simple services procurement exercise by direct contracts between Siemens and the GenCos/DisCos granting the the FGN wherein Siemens merely undertakes the NER as a contractor to rights to improve their assets to Siemens, the contractual framework FGN. The proper situation of the NER into one of the foregoing project upon which the NER is based is inadequate. Further, assuming that FGN categories is critical, as this will determine a number of legal and can legally grant a concession in respect of the GenCo/DisCo assets, and bankability considerations that will affect the viability of the NER. enter into a PPP arrangement with Siemens or procure the services of Siemens in respect thereof, the NER does not appear to have considered In terms of its overall legal structure, the NER purports to grant the right the requisite PPP legal framework. to Siemens to improve the power generation, transmission and MARKET 83 DEVELOPMENTS
If however the NER envisages a procurement-type arrangement, there is Given the uncertainty around the exact structure of the NER, the extent the mandatory requirement to obtain the prior approval of the to which it will be a mutually beneficial arrangement, to both Siemens Infrastructure Concession Regulatory Commission (ICRC) and comply and FGN is equally uncertain. with the competitive and transparent bidding process in accordance with the Public Procurement Act (the PPA).
NATURE OF THE PARTIES’ OBLIGATIONS
The Agreement imposes a number of obligations on BPE, including the omnibus power to perform such functions as may be necessary to enable preparation of site-specific studies, environmental impact assessment it achieve its objectives. That said, it may be argued that the steps taken (EIA) studies, soil investigations, collation of project requirements and by BPE in relation to the NER are motivated by its obligation to ensure necessary information, arrangement of relevant workshops, regulatory the success of the DisCos’ privatisation. interface/engagement with other agencies and procuring necessary approvals (though on “best efforts”). As it is typical of ”best efforts” obligations, these obligations only require that all steps known to be usual, necessary, and proper for ensuring the Given that BPE is a corporation created pursuant to statute, i.e., the achievement of an endeavour must be taken, in good faith and to the Public Enterprises (Privatisation & Commercialisation) Act (the PEPCA), it standard of a reasonable man. In this regard, the parties are not cannot act beyond the powers conferred on it by statute. A review of the contractually bound to ensure the strict performance of their obligations PEPCA reveals that its powers mainly relate to privatising and under the Agreement; which lowers the bar for certainty of performance. commercializing public enterprises. Notably, it is specifically charged with the responsibility of ensuring the success of the privatisation, and an MARKET 84 DEVELOPMENTS
NATURE OF PARTIES’ OBLIGATIONS
The Agreement stipulates the terms and conditions governing the NER, imposes binding legal obligations on the parties thereto. That said, the as well as the duties and obligations of the parties arising thereunder. As Agreement expressly states that it does not envisage the creation of any presently structured, the parties are not legally obligated to conclude any enforceable obligations or rights; particularly with respect to the contracts, and in the event no contract is concluded, neither of the conclusion of the relevant definitive contracts. parties shall have ground for any claim against the other party. It should be noted that the legal theory underpinning every agreement is that it
FUNDING AND FINANCING STRUCTURE
The Agreement contemplates that parties will raise financing from Export sources at concessionary interest rates, it would also be necessary to
Credit Agencies (ECAs) and other financial institutions to implement the consider the impact of these guarantees on Nigeria’s debt sustainability NER, and that the FGN will provide necessary guarantees for such debt. and by extension, credit ratings; and whether the NER represents a In this regard, a number of associated issues arise. viable avenue for raising the funding to address some of the infrastructural challenges with the NESI. Importantly, as FG N is required to provide the guarantee for such debt financing, this would typically require compliance with the provisions of An important issue that also arises is the interplay between the funding the Fiscal Responsibility Act and the Debt Management Office from ECAs and extant local content requirements in the NESI; given the
(Establishment) Act – which require, as a condition precedent, the typical conditions for ECA funding – which would require a certain approval of the National Assembly (NASS) via a resolution. minimum percentage of exports of goods or services from the ECA’s country. Further, aside the obvious fact that the FGN can also borrow from other MARKET 85 DEVELOPMENTS
In addition, the contemplated financial support by Siemens comprises funds backstopped by the German Export Credit Agency (Euler Hermes AG), other ECAs, insurance companies or other alternatives and available means of financing by third parties. It is thus doubtful that equity financing was envisaged under the NEP, though it may be argued that it is reasonably contemplated under the general expression ”other means of financing by third parties”.
IMPACT ON EXISTING CONTRACTUAL ARRANGEMENTS
The seeming utility of the objectives of the NER notwithstanding, one The commercial philosophy underpinning the privatisation of the further point that may need to be considered is the potential impact of distribution and generation assets in Nigeria is the continued the NER on obligations under existing contracts entered into with third improvement in the efficiency and reliability of supply of power to the parties by key stakeholders, particularly the DisCos, and the TCN. Given electricity consumers in Nigeria. In achieving this, the DisCos executed that the scope of the partnership with Siemens involves the Performance Agreements (PAs) with the FGN pursuant to which they are improvement in the operational capacity and upgrade of the existing obligated to meet certain minimum performance targets within a ten- distribution and transmission systems, it appears that the NER may year period. Typically, the minimum performance targets include the directly impact on the contractual and statutory obligations of the DisCos implementation of wide consumer metering plan, sustainable under key privatisation documents and EPSRA. investments in ATC&C loss
MARKET 86 DEVELOPMENTS
reduction plan, network expansion, rehabilitation and upgrade and performance targets which fall within the purview of Siemens investment in non-electric and innovative technology. In fulfilment of responsibilities; or whether they will nonetheless be strictly bound by the these contractual obligations, the DisCos expectedly would have entered terms of their performance agreements. Further, the status of the DisCos into bilateral contracts with third parties for the acquisition of relevant existing goods and services contracts which overlap with the scope of assets and equipment and the rehabilitation of the distribution and matters covered under the NER is unknown; as it would appear that they generation infrastructure. would have to be terminated for the NER contracts to take effect.
In so far as Siemens is required to perform similar obligations to that of The NER involves significant capex incurrence mainly focused on the DisCos, it remains to be seen what the interplay between Siemens transmission and distribution. On the distribution side, it remains to be obligations and that of the DisCos under the privatisation contracts will seen (x) the extent of the DisCos’ buy-in into the NER given that BPE is a be. Notably, whether the DisCos’ have effectively “outsourced” the minority shareholder (only has 40% shareholding interest in the DisCos); attainment of their minimum performance targets (under their (y) whether BPE will bring these investments into the Discos as equity; performance agreements with BPE) to Siemens, or whether they are and (z) whether the FGN will strong arm the DisCos into taking on fresh expected to continue to seek to attain them independent of the NER is as infrastructure on their books (and the terms). This is vital given that a yet unclear. Where the former is the case, it is not certain whether BPE previous similarly structured “loan” that the FGN had offered the DisCos will excuse the DisCos’ failure to attain aspects of their minimum was widely rejected by the DisCos. MARKET 87 DEVELOPMENTS
From a contractual perspective, the proposed capital expenditure (Capex) may substantially impact the DisCo’s books, bearing in mind their existing significant debt overhang. The terms of the DisCos’ existing financing already imposed limitations on their capex incurrence with the attendant requirement of seeking the prior consent of the Lender before any fresh capex incurrence. It is expedient to determine whether lender’s sign off will be required and the form of co-operation to be obtained from the Banks (to the extent that the NER appears not to be an intervention fund, circular or revision of the prudential treatment of DisCo’s debt by CBN.
From a regulatory perspective, NERC imposed on the DisCos a capital expenditure (CAPEX) limit and, more recently, announced a new MYTO review. It is also left to be seen whether: (x) the capital requirement of the NER ties in with current restrictions on DisCo’s capex spend; (y) NERC can be convinced to relax the CAPEX restriction a little; and (z) the proposed tariffs factor in the proposed CAPEX that will be incurred on behalf of the DisCos. MARKET 88 DEVELOPMENTS
On the transmission side, it should be noted that the FGN already developed the Transmission Rehabilitation and Expansion Programme (TREP) spearheaded by TCN and financed by the African Development Bank (AfDB), World Bank (WB), Agence Francaise de Development (AFD) and Japan International Cooperation Agency (JICA) with the ultimate objective of improving the quality and reliability of electricity supply and ensuring the sustainability of the power sector. In achieving these objectives, TREP aims to increase the wheeling capacity of the transmission network through the expansion of existing substations, construction of additional lines and upgradation of existing transmission via replacement of conductors with higher amperage. Given that the objectives of TREP are almost similar with the NER, it is vital to ascertain whether the NER is complimentary to TREP or a subtle attempt to replace the NER.
IMPACT ON OTHER EXISTING POWER PROJECTS
Based on publicly available information and in recent years, the FGN has cheapest option, it is interesting to see how the NER interacts with the channeled its efforts towards the promotion and development of off-grid varied off-grid solutions and its direct impact on mini-grids, Independent projects - primarily focused on markets, rural communities and Electricity Distribution Networks (IEDN) and potential sub-franchisees universities. Whilst it is accepted that grid power still remains the (under the proposed distribution franchising arrangement). MARKET 89 DEVELOPMENTS
CONCLUSION
In essence, whilst the objectives of the NER and its overarching philosophy are indeed laudable and a step in the right direction for the NESI, its successful implementation will require engagement between FGN/Siemens and the key stakeholders in the NESI to ensure a harmonious co-existence and, by extension, avoid any potential frictions or conflicts.
NERC ORDER ON THE TRANSITIONAL ACCOUNTING TREATMENT OF TARIFF RELATED LIABILITIES
On 28 January 2020, the NERC issued the "Order on the Transitional of which is the payment of the unpaid tariff-related portion of the NBET Accounting Treatment of Tariff Related Liabilities in the Financial Records invoices from the PAF and other funding sources in the PSRP. Thus, in effect, the Order establishes a transitional “subsidy” regime under which of Participants in the NESI (the Order). the tariff-related portion of the NBET invoices which does not form part
of the DisCos’ required remittance amount to NBET under the MRO is Ostensibly, the Order was made for the purpose of: (i) providing a paid by the FGN from PSRP funding sources. guideline for the transitional accounting treatment of “tariff-related In terms of its key features, the transitional accounting regime requires liabilities” in the financial records of the market participants; (ii) ensuring among others that the amount designated in each NBET invoices to be that no new tariff-related liabilities accrue in the financial records of the immediately payable by the DisCos must be promptly settled by the DisCos; and (iii) maintaining the creditworthiness of the balance sheet of DisCos, while the portion of the NBET invoices designated to be payable DisCos for the purpose of raising capital towards the improvement of by FGN is to tentatively remain in the financial records of the DisCos, as electricity networks and service delivery. a liability, until the sum is paid to the GenCos from the PAF or other financing sources in the PSRP financing. Pending its settlement by FGN, In the main, the Order prescribes a “transition regime” for the invoicing the unpaid sum designated in the NBET invoice as payable by FGN shall and payment of amounts due from the DisCos to NBET; a critical feature not accrue any interest. INFRASTRUCTURE LEGAL &MARKET DEVELOPMENTS MARKET 92 DEVELOPMENTS
ROAD & RAIL Introduction of the Road Infrastructure Development and Refurbishment Tax Scheme
One of the notable developments in transportation infrastructure in 2019 companies income tax payable by the private corporations that invest in was the execution of the Executive Order No. 007 on Road Infrastructure road infrastructure development under the Scheme. Development and Refurbishment Tax Credit Scheme by the president of the Federal Republic of Nigeria (the Executive Order). In sum, the At the signing of the Execution Order in January 2019, the Minister of Executive Order seeks to introduce a public-private partnership Finance, Zainab Ahmed noted that six companies, including Dangote intervention scheme that enables the Federal Government leverage Industries Limited, Lafarge Africa Plc., Unilever Nigeria Plc., Flour Mills of private sector funding in the construction, refurbishment and Nigeria Plc., Nigeria LNG Limited, and China Road and Bridge Corporation maintenance of road infrastructure in Nigeria (the Scheme). Nigeria Limited had undertaken to finance the construction, rehabilitation, and reconstruction of 19 federal roads covering 794.4km Fundamentally, the objective of the Scheme is to precipitate private in aggregate under the Scheme. These 19 road projects have been sector investment in the development of road infrastructure in exchange prioritized in 11 states across each of Nigeria’s 6 geo-political zones, and for tax credits. Such tax credits could then be applied against the include:
“…the objective of the Scheme is to precipitate private sector investment in the development of road infrastructure in exchange for tax credits.” KEY 93 PROJECTS
• Reconstruction of Birnin Gwari – Dansadau Road Kano • Rehabilitation of • Reconstruction of Birnin Sharada Road Gwari Expressway State Kaduna • Rehabilitation of State Nnamdi Azikiwe Expressway/Bypass Gombe • Construction of Edo Ashaka-Bajoga State Highway State
• Rehabilitation of Benin City – Asaba • Reconstruction of Road Dikwa- Borno GambaruNgala Road State • Reconstruction of Bama-Banki Road
• Reconstruction of Sokoto Road Ogun • Reconstruction of Benue Makurdi-Yandev-Gboko • Rehabilitation of Obele- Road Ilaro-Papalanto- State State • Reconstruction of Zone Shagamu Road Roundabout-House of Assembly Road
• Reconstruction of Obajana-Kabba Road Reconstruction of Apapa- Lagos Oshodi-Oworonshoki-Ojota • Reconstruction of Ekuku-Idoma- Road in Lagos State State Kogi Obehira Road State • Construction of AdaviEba-Ikuehi- Obeiba-Obokore Road
Abia • Rehabilitation of Lokoja-Ganaja • Construction of Bodo-Bonny Road Rivers • Ofeme Community & Bridges across Opobo Channel in State Road Network and Road Rivers State State Bridges MARKET 94 DEVELOPMENTS
Commencement of the Ado-Iyin Road Project
The Ekiti State Government has recommenced the construction of the The project is expected to be executed in three phases, with phase 1 of 7.25km Ado Iyin Road project, after a protracted period during which the Project being the construction of the 7.25km road from Ado to Iyin, construction activities came to a halt, after it was originally awarded in phase 2 from Iyin to Aramoko, and phase 3 from Aramoko to Itawure, 1978. The construction of the Project, which is estimated to cost The Project is expected to be completed by 2021, and is expected to approximately USD 88 Million has been awarded to the Chinese Civil enhance the marketability of the farm produce cultivated within Ekiti Engineering Construction Company Nigeria Ltd. (CCECC), which has in State. turn commenced the recruitment of workers from the state in line with the applicable local content requirements. MARKET 95 DEVELOPMENTS
Approval of the Commencement of Works on the Nigeria-Seme-Benin “The Abidjan-Lagos Corridor is approximately Road by the Federal Government 1,090km long, and connects some of the largest and economically dynamic cities in Africa”
Another major development in relation to transportation infrastructure in approximately USD 10.66 Million has been mobilized through the African
2019 was the approval of the commencement of construction work on Development Bank (AfDB), in addition to the AfDB’s contribution of USD the Nigeria-Seme-Benin Road by the FGN, earlier in the year. 11.06 MILLION, making a total of USD 22.72 Million deployed towards the Project. News of the FG N’s approval was disclosed by the Minister of Power, In addition to the foregoing, the Economic Community of West African Works and Housing at the 12th Ministerial Steering Committee and States (ECOWAS) had earlier in the year launched the Project Experts Meeting for the Abidjan-Lagos Corridor Highway Development Implementation Unit (PIU) for the Project, with the mandate of providing Programme. The Minister further disclosed that the relevant treaties, day-to-day management of the Project, under the supervision of the loan agreements, as well as feasibility, technical and financial related Commissioner for Infrastructure of the ECOWAS. contracts had now been executed by the relevant stakeholders, and that work on the project would be done in a manner that would make it The Abidjan-Lagos Corridor is approximately 1,090km long, and connects adaptable to the results of the feasibility and technical studies. some of the largest and economically dynamic cities in Africa. It also links very vibrant seaports which serve the landlocked countries of the One major agreement which has been executed in relation to the Project region such as Burkina Faso, Mali and Niger. Given the important nature is the Grant Retrocession Agreement, which is required for the of the project and its potential to stimulate significant growth in the disbursement of grant funds from the European Union’s African economy of numerous African countries, these developments in relation Investment Facility (AfIF). Accordingly, the EU contribution of to the Project have been very encouraging. MARKET 96 DEVELOPMENTS
FGN’s Approval of US$2.3 Billion for the Development of In response to a request from the Ministry of Transportation, the FGN approved the sum of Coastal Rail Lines USD 2.3 Billion for the construction of coastal rail lines in Nigeria, which runs from Lagos to Calabar, and cuts across most states in the South East and Southern parts of the country.
According to the Minister of Transportation, the FGN had entered into an agreement with CRCC for the construction of the rail line. The Minister further noted that over 78% of the project fund was to be sought from Chinese financial institutions, and backed by a sovereign guarantee provided by the FGN, while the Nigerian government was to provide counterpart funding in the sum of approximately USD 500 Million. Alternatively, the project was to be funded by a 25:75 equity to debt ratio, with the FGN and the contractor contributing 15% and 10% of the equity respectively.
The Minister of Transportation also stated that a number of other rail infrastructure projects had been approved for construction by the FGN, including the central line which runs from Abuja through Baruo, Itakpe and Lokoja.
The foregoing notwithstanding, in a statement made by the Senior Special Assistant to the President on Media and Publicity, Mr. Garba Shehu in October 2019, it was announced that the President had commenced conversations and entered agreements with the government of Russia, pursuant to which the government of Russia had agreed to support the construction of the rail line from Lagos to Calabar. Accordingly, it is uncertain what the status of the project is, as well as the initial agreement with CRCC. SPOTLIGHT FEATURE PIECE SPOTLIGHT FEATURE PIECE: 98 * PROJECT 4MB
BACKGROUND
In November 2019, the Lagos State Government, With its first official bid process being abandoned acting through its Ministry of Works & Infrastructure before the RfP stage in 2018, Governor Sanwo-Olu’s and the Lagos State Public-Private Partnerships Office, administration has taken the baton and is re-launching re-launched the bid process for the construction of the the Project 4MB dream with full guns blazing. As legal
th INTERVIEW OF MR. 4 Mainland Bridge (Project 4MB). First conceived in advisers to the Lagos State Government on the year 2000, Project 4MB has been in the pipelines for project, we had the privilege of interviewing Mr . Ope OPE GEORGE, DG OF two decades; during which levels of commitment to George, the Director-General of the Lagos State THE LAGOS STATE the project have wavered from one government Public-Private Partnerships Office and gaining an PPP OFFICE administration to the other. insider’s perspective on the re-modelled Project 4MB.
What is the Project 4MB vision Q : and rationale?
Project 4MB’s main objective is to drastically ease congestion on the 3rd Mainland Bridge. As a result, the project will give A : Lagosians more route options and commute timing flexibility. On a broader policy level, the project is a critical part of the Lagos State Strategic Transport Master Plan and the National Integrated Infrastructure Master Plan; and is therefore a key feature of the infrastructure vision for Lagos State and Nigeria at large. In keeping with this vision, we expect that the bridge will place Lagos State on the map as a landmark center of excellence for infrastructure on the continent. 99
What are the bridge’s key Q : f e a t u r e s ?
The bridge comprises a 38km expressway, which takes off at Abraham Adesanya in Ajah on the Eti-Osa Lekki-Epe Corridor A : and terminates at Kara Bridge on Lagos-Ibadan Express Way. 7 of the 38km traverse the Lagos Lagoon (the “River Bridge”), whilst the remaining 31km traverse the creek (the “Deck on Pile Bridge”) and several communities, including Ikorodu.
In terms of its capacity, the bridge will have 4-6 lanes, including pedestrian, cyclist and BRT lanes; and a design speed is 120 km/h. I should add that one unique feature of the bridge is its “Lagos-Abuja Direct Route”, which meanders off the bridge and is intended to provide an alternative auto route from Lagos State to Abuja.
Project 4MB was conceived 20 years ago. What has de layed the project Q : till date and what are its chances of success this time around?
Projects of this magnitude require political will, capital and commitment; all of which the current administration has. A : Previously, the amount of groundwork required, in terms of technical feasibility studies and reports was grossly underestimated, as was the project budget.
Since the previous attempt to execute the project, LASG has gone back to the drawing board and technical studies have been ongoing since 2015/2016; so the project’s feasibility is now settled from that perspective.
Also, we have ensured that key learnings from the 2018 bid process are being taken on board in the 2019-2020 bid process, which has attracted a large volume of high caliber bidders. 100
What is the project budget and Q : how will it be funded?
The estimated project budget is USD 2.25 Billion (NG N 840 Billion). LASG has opted to leverage the strength of private sector A : capacity and funding to implement the project. As such, a PPP has been adopted, under which the designated concessionaire will finance, design, construct, operate, maintain and ultimately transfer the bridge and appurtenant infrastructure to LASG.
“…Lagosians…are best-suited to take ownership of something that affects our daily lives in Lagos State and has the potential to improve it drastically.”
What is the rationale behind LASG’s decision to emb ark on Project 4MB, Q : as opposed to FGN?
We believe that as Lagosians, we are best-suited to take ownership of something that affects our daily lives in Lagos State and A : has the potential to improve it drastically. Gov. Sanwo-Olu’s administration is passionate about the project and eager to bring it to life. That said, the FGN has been immensely supportive of Lagos State and remains a critical stakeholder in the project. 101
What degree of social and environmental impact eval uation has been undertaken, and what measures have been put in plac e to mitigate any Q : negative social and environmental impacts of the pr o j e c t ?
LASG deliberately chose a route with minimal social disturbance - c. 86% of the bridge traverses water, creeks and virgin A : land.
That said, LASG is fully aware of its legal obligations to ensure that the owners of any land required for the construction of the bridge are duly compensated. Also, ESIA studies have been ongoing since 2016 and updated reports are underway.
What measures have been put in place to reduce cong estion at the Q : t o l l s ?
Taking from Lagos State’s successful tolled roads, (such as the Lekki-Ikoyi Link Bridge) the 4th Mainland Bridge would be A : developed with state of the art and modern tolling infrastructure and technology. In particular, we would ease congestion on the bridge by:
• implementing a cashless payment system, which utilizes one-touch/swipe e-tags and vouchers that are purchasable at all filing stations, franchise eateries and supermarkets across Lagos; and
• leveraging the 4-6 lane bandwidth for an adequate number of tolling booths. 102
What provision will be made for security Q : on the bridge?
The bridge will be policed 24/7 between each toll plaza. In addition, a vehicle A : break-down service will be available from each of the toll plaza locations.
What is the status of the current bid process for Q : the project?
LASG is conducting a 6-stage bid process, which has attained its second stage – A : the RfQ stage. It is pleasing to note that the bid process has attracted applicants of international repute and the highest caliber.
To ensure the process is conducted in accordance with international best practices, LASG is being supported by tier 1 technical, financial and legal consultants,. MARKET 103 DEVELOPMENTS
AIR & SEA PORT Lekki Deep Sea Port
In 2019, Tolaram Group, the parent company of the Lekki Port LFTZ Nigeria’s first deep seaport project, estimated to gulp over USD 1.6 Enterprise Limited, successfully concluded negotiations and signed a USD Billion. 629 Million (N 226.44 Billion) loan facility agreement with China Development Bank (CDB) for the construction of the Lekki Deep Seaport. Tolaram, which has the concession to build and operate the Lekki Deep Seaport for 45 years, appointed the China Harbour Engineering Company The development of Lekki Deep Sea Port was conceptualised on the basis (CHEC), the world’s biggest marine engineering company, as the EPC of a significant gap in projected demand and capacity within the ports contractor to oversee the design, construction and commissioning of the sector. Market studies indicate that the demand for containers in Nigeria port project under the supervision of an American project management is expected to grow at 12.9 per cent up to 2025. However, given the consultant known as Louis Berger Group. expansion constraints on the existing ports infrastructure, the capacity in Slated to be completed in 2020, the Lekki Deep Sea Port project has Lagos is incapable to meet the growing demand. This is a major step definitive milestones and targets set to be achieved over the next years. towards the financial close on the funding for the construction of MARKET 104 DEVELOPMENTS
Port Harcourt Port to be Shutdown
Reports in 2019 indicated that the FGN has decommissioned the Rivers Ports Terminal B, located in Port Harcourt, Rivers State, following the report of a consultant commissioned by the NPA, which stated that having reached the end of its lifespan, the facility is no longer safe for operation.
This closure has resulted in port congestion as the Apapa ports remains the only viable alternative from importers from the South-South and South-East and surroundings as the other ports in the area, such as Onne, is privately owned. Reports indicate that the Rivers Port, which was last rehabilitated in 1960, was constructed in two stages starting from 1912 with the development of berths 1 to 3 and subsequently berths 4 to 8 in 1923. It was constructed with a total quay length of 1,288 kilometres for evacuation of agricultural products and mineral resources. Following continued concerns raised by terminal operators on the state of the quays, the NPA had commissioned a consultant, Messrs Cares Limited, to carry out a comprehensive condition survey of the infrastructure and proffer solution.
The consultant’s report confirmed deteriorated structures and need for prompt reconstruction. The consultant, having reviewed the existing state of the quay structures, said there was a reduced functionality in the capacity of the port structure. It stated that the present condition of the quay structures has exceeded its useful lifespan and carrying out further maintenance on it would be uneconomical.
NPA alleges that the decision to decommission the Port is as a result of non compliance of the concession agreement by the concessionaire, BUA Ports and Terminal Limited, 10 years after full access of the port was granted by the FGN.
According to the consultant, the structural integrity of the quay substructure is doubtful thereby impacting negatively on the ability to dredge alongside the berths. MARKET 105 DEVELOPMENTS
Delta State concessions Asaba Airport
In May 2019, the Delta State airport. The concession is for a period Government opened bids for the of 30 years, with an annual concession concession of the Asaba International fee of N 100 Million payable to the Airport. Following the evaluation of state government, escalating by 10 bids submitted, the FIDC Consortium percent every five years. emerged as the preferred bidder and is in the process of negotiating a There is also an annual royalty of concession agreement with the Asaba 2.5% of gross annual revenue payable State Government. The project is said to the state, with over NGN 28 Billion to be the first full brown-field airport expected to be spent into the airport concession in Africa and a hybrid development by the concessionaire arrangement covering further over the next (3) three years. development and management of the MARKET 106 DEVELOPMENTS
Enugu Airport Closure
In August 2019, the Federal Airport Authority of Nigeria (FAAN) International flights had been diverted to the Port Harcourt International announced the closure of the Akanu Ibiam International Airport, Enugu Airport in Rivers by Ethiopian Airlines due to the closure of the airport. In State for the reconstruction of the runway, which had been declared the same vein, domestic flights were diverted to the Sam Mbwkwe unsafe for use. Airport, Owerri, the Port Harcourt Airport and the Asaba Airport in Delta.
The airport had been closed to address and resolve certain safety and The Honourable Minister of Aviation, Sen. Hadi Sirika, confirmed that the security concerns; including an unsafe runway and landing aids. runway repairs and other renovation work would be completed by December 2019 or at the latest by April 2020.
“The airport had been closed to address and resolve certain safety and security concerns.” MARKET 107 DEVELOPMENTS
T E L E C O M S
The Nigerian Communications Commission Million Glo-1 cable. This lull is largely as a (NCC) reports that as at December 2019, result of limited fibre networks hindered by the Nigeria has approximately 184,699,409 cost of obtaining right-of-way (ROW). In
subscribers with a teledensity of 96.76%. addition to ROW issues, the InfraCo’s complain However, irrespective of the teledensity levels, that other major causes include the high cost Nigerians have yet to benefit from broadband of electricity, elevated security costs, chronic expansion, with penetration stalling at 37.80%. vandalism, and multiple levels of taxation at The lack of a national fibre-optic backbone is the state and local government level. This has one of the most serious growth constraints to left fibre-optic networks concentrated in Lagos, domestic connectivity. Indeed, this is the Abuja and Port Harcourt, with limited coverage primary task for Infrastructure Companies in Kano, Kaduna, Katsina and the country’s (InfraCo)’s across Nigeria. north-eastern regions.
Nigeria’s cable system remains underutilised To address the dearth in infrastructure and this is despite significant levels of however, the NCC has since 2016, issued six investment in infrastructure, including Ntel’s (6) licences to InfraCos for each of the geo- USD 600 Million South Atlantic 3 fibre-optic political zones in the country with Main One cable, MTN’s USD 650 Million West Africa Cable Limited specifically dedicated to Lagos because System, Dolphin Telecoms’ USD 700 Million of its dense population. Asides from Main One, Africa Coast to Europe cable, MainOne’s USD other licencees include: 300 Million cable and Globacom’s USD 800 MARKET 108 DEVELOPMENTS
Zinox Technologies Limited, Brinks requisite approvals in their respective
Integrated Solutions, O’dua Infraco regions. Accordingly, late last year, it Resources Limited, Fleek Networks was reported that the NCC was seeking
Limited and Raeana Nigeria Limited. the Federal Executive Council (FEC)’s Interestingly, late last year the NCC approval to disburse the sum of NGN began the process to examine bids for 65,000,000,000 (Sixty-Five Billion Naira
the grant of the seventh licence for the Only) as subsidies for the InfraCo’s over North-Central region of Nigeria. the next four-years.
In addition to the above, at the Nigeria Further, the Government has updated Innovate Summit last year, the Director its broadband ambitions, aiming to General of the NCC, maintained that increase penetration from 30% by 2020 licencees would benefit from a to 70% by 2021. Accordingly, we await disbursement of subsidies upon what further developments which may attainment of deployment milestones in arise this year in addition to FECs their respective regions. Some of the approval of the NCCs request for milestones the operators are expected additional funding and for the InfraCos to meet include: digging metro fibre, to roll out their respective development pilling, cable installation, importation of plans. equipment and obtaining all the INSIGHT 110 INSIGHT
Regulatory Insight Article: August MRO & NICL 2019 Minor Review Order & Licence Cancellation Notice
Background
For the DisCos, 2019 was foreshadowed by a heated tussle with the BPE and the Minister in 2018, over a myriad of issues; chief among “the forthcoming which was the Performance Agreement “Target Date”. After a long-drawn saga with the BPE over its assertion that 1 November 2018 tariff review was the Target Date on which the DisCo core investors’ attainment (or otherwise) of their performance targets under their respective appeared to be Performance Agreements would be evaluated, the BPE conceded 31 December 2019 as the Target Date in a press release issued on 14 the only silver October 2019. lining for the DisCos at the end With the Target Date fire doused, or at least abated for an additional year, the DisCos still grappled with the proposed appointment of of 2018” additional BPE directors on their boards; an initiative which had originated from the office of the Minister in 2017, but which the BPE took full ownership of in 2018 and 2019, in a subtle communication of FGN’s diminishing confidence in the core investors and in a bid for increased visibility and control of the DisCos to address FGN’s concerns.
Asides their BPE woes, the DisCos also faced harsh criticism from the Minister throughout his 4-year tenor in office, and particularly, in the run-up to the February 2019 general elections. The Minister repeatedly attributed the overall underperformance of the NESI to the DisCos’ alleged shortcomings and this fueled a generally negative public opinion about the DisCos and the core investors operating them.
With the long overdue inaugural review of MYTO 2015 anticipated in January 2019, the forthcoming tariff review appeared to be the only silver lining for the DisCos at the end of 2018. However, the first MYTO 2015 Minor Review Order was not issued by NERC until 19 August 2019 and brought with it the benefit of a tariff increment, the burden of increased financial obligations for the DisCos, chiefly in the form of “Minimum Remittance Thresholds” (MRTs) to NBET and the MO. The MRTs proved to be the source of the DisCos gravest challenges in 2019 and continue till date to pose a serious threat to their continued existence as going concerns and NESI licencees.
111 INSIGHT
The Minor Review Order: A Primer
The 2016-2018 Minor Review of MYTO and Minimum Remittance Order for the Year 2019 (the MRO) is the first minor review of MYTO 2015 since its issuance in December 2015 and effectiveness from February 2016. Thus, if reviewed biannually, as required by MYTO 2015 itself, the MRO would have been the 8th minor review of MYTO 2015. As such, the expectation was that the MRO would remedy the huge tariff shortfall occasioned by its protracted delay and bring about much financial relief to the DisCos as a result.
In line with the MYTO methodology, the MRO is based on a consideration of certain key macroeconomic indices, namely: inflation, USD - NGN exchange rates, gas prices and the available generation capacity in the period between January 1 2016 and December 31 2018. The MRO also makes statistical projections on these indices for the years 2019 and beyond.
In terms of its key distinguishing features, the MRO: • Prescribes a revenue waterfall – this waterfall comprises a list of certain remittances (including the MRTs and repayment of the DisCos’ CBN-NEMSF facilities), as preconditions to the DisCos’ “earning of their revenue”. Whilst the MRTs for monthly NBET invoices vary from DisCo to DisCo (ranging from about 30% to 45% on average), the prescribed MRT to the MO is 100% of monthly invoices for all the DisCos. • Imposes a penalty for non-compliance with the MRTs - the MRO states that the DisCos shall be liable for relevant penalties/sanctions where they fail to meet the MRTs in any payment cycle. • Requires the maintenance of letters of credit (LCs) - the MRO requires the DisCos to maintain adequate and unencumbered letter of credit covering three (3) months, based on the MRTs. • Takes effect retroactively – although the MRO is dated 19 August 2019, it states that its effective date is from 1 July 2019. Consequently, the DisCos are expected to have attained the MRTs for the month of July 2019, notwithstanding the fact that they did not have notice of.
Finally, in a brief discussion about the huge and ever-increasing amount of FGN Ministries, Departments and Agencies (MDA) debts (MDA Debts) to the DisCos, the MRO simply reiterates the obligation of the DisCos to ensure that MDAs are metered “with the appropriate meters of their choice” within sixty (60) days of the date on which the MRO was issued. NERC also reiterated the DisCos’ right to disconnect non-paying MDAs, in accordance with the Regulation on Connection and Disconnection Procedures for Electricity Services. 112 INSIGHT
Critical Flaws of the MRO
Riddled by a number of fatally inaccurate assumptions, which formed the basis of its tariff review, the MRO proved to be a far cry from the long-awaited relief sought by the DisCos. It appeared that the tariff increment NERC gave on one hand (which still did not attain cost-reflectivity) was taken away by the erroneous tariff computing assumptions and the MRTs (discussed below) on the other hand.
The Generation Cost Assumption
• Whilst the MRO assumes a generation cost of NGN 20.80, the invoices from NBET to the DisCos, both before and after the issuance of the MRO indicate a generation cost which is significantly higher than NERC’s assumed figure. Whilst NBET’s case appears to rest on the premise that it is merely applying the monthly escalation mechanism provided under its Power Purchase Agreements (PPAs) with the GenCos (which permits wholesale tariff increments where macroeconomic realities necessitate it), the DisCos on the other hand would only be able to pass through this increased cost to electricity consumers upon the next minor tariff review by NERC; which, going by NERC’s antecedent habits, may be considerably delayed. • The excess above NERC’s allowed generation cost is too huge a deficit to be accommodated by the DisCos’ monthly collections and therefore makes attainment of the MRTs a near impossibility.
Exchange Rate Assumption
• The MRO utilizes official exchange rates of the CBN, plus the premium of 1% permitted for transaction costs under the MYTO methodology, which in effect pegs the average exchange rates for determining the applicable end user tariff for the years 2016, 2017, 2018 and 2019 at NGN 255.90, NGN 308.80, NGN 309.14 and NGN 309.90 to USD 1.00 respectively. • Whilst the foregoing accurately reflects the CBN exchange rate, foreign exchange is generally not accessible to the DisCos at this rate, as the DisCos are only able to obtain foreign exchange at the interbank rate to run their operations; which is usually in excess of NGN 360 to USD 1.00 and therefore significantly higher than the CBN official rate, which NERC has adopted in computing the tariff.
113 INSIGHT
Critical Flaws of the MRO
MDA Debts
Based on ANED statistics, the aggregate amount of MDA Debts owed to the DisCos as at May 2019 stood at c. NGN 65,281,886,115.52 (excluding post- privatization MDA Debts), a fact which the MRO neither reflects nor truly addresses. In stating no more than the obligation of the DisCos to meter MDAs and reiterating their disconnection rights, in relation to MDA Debts, NERC’s implicit message to the DisCos on the topic is that the DisCos are expected to continue bearing the MDA Debt burden on their books, whilst also complying with the MRTs; leaving them in a most precarious economic condition.
Revenue Waterfall
The MRO waterfall does not feature operational expenses such as salary payments and standard business overhead expenses; presumably because NERC expects that as financial priorities, they rank beneath the items listed in the waterfall. As a result, the DisCos have struggled to meet the MRTs and in the case of some DisCos, staff remuneration has either been slashed or delayed to aid MRT compliance. For other DisCos, monies allocated to service standard trade contracts were diverted for use as MO and NBET remittance payments. Thus, compliance with the MRO waterfall and in particular, the MRTs poses a real threat to the continued existence of the DisCos as going concerns.
114 INSIGHT
Compliance Thus Far & Threatened Licence Cancellati o n
Unsurprisingly, the MRO came as a rude shock to the DisCos, who were still wrapping their heads around it when eight (8) of them were issued with a Notice of Intention to Cancel Licences (the NICL) from NERC on 8 October 2019, for among other reasons, their non-attainment of MRTs for July 2019 (the month prior to the issuance of the MRO).
The NICL in a Nutshell
The NICL, which was purportedly based on Section 74 of EPSRA begins with a statement of NERC’s belief that the DisCos to which it was addressed (the NICL DisCos) have breached (i) EPSRA), (ii) the terms and conditions of their distribution licences; and (iii) the MRO. The particulars of breach stated in the NICL were in principal the non-attainment by the NICL DisCos of the MRTs for July 2019 and their failure to provide the NBET and MO LCs required by the MRO. The NICL DisCos were required within 60 days of the date of the NICL to show cause why their licences should not be cancelled.
Held against the scrutiny of a sound legal analysis, the NICL’s basis is questionable, as NERC failed to situate any of its allegations within the closed list of circumstances under which a distribution licence may be cancelled under Section 74(2) of EPSRA; notably:
• Where the licence was issued through fraud or misrepresentation or non-disclosure of material facts (Cancellation Ground 1); • Where the licencee has willfully or unreasonably contravened the provisions of EPSRA (Cancellation Ground 2); • Where the licencee has failed to comply with any term or condition of its licence and the term or condition in question expressly provides that its breach shall render the licencee liable to cancellation (Cancellation Ground 3); and • Where the financial position of the licencee is such that it is unable to fulfill the obligations imposed under the licence (Cancellation Ground 4).
115 INSIGHT
Compliance Thus Far & Threatened License Cancellati o n
Cancellation Grounds 1, 3 and 4 were easily dismissed on account of the fact that NERC did not rely on them in the NICL or, in the case of Cancellation Ground 3, NERC failed to establish the existence of a distribution licence term or condition that was breached and which provided that the penalty for its breach is a licence cancellation. Cancellation Ground 2 was therefore the only potential legal basis on which the NICL could stand. However, whilst NERC could rightfully allege that the NICL DisCos had indeed breached the provisions of EPSRA by breaching the terms of the MRO (through their non-attainment of the MRTs and non-placement of NBET and MO LCs) the question remained as to whether this breach was “willful” or “unreasonable”, as required by section 74(2) of EPSRA; which NERC failed to discuss or interrogate in the MRO. This notwithstanding, an assertion of willfulness fails on account of the fact that the circumstances predicating the alleged breach of the MRO are regulatory and macroeconomic circumstances (including the retroactive effect of the MRO, which rendered compliance for the month of July 2019 impossible) that are beyond the NICL DisCos’ control. Equally, an unreasonable breach of EPSRA, which would constitute an act of intentional irrationality or capriciousness by the NICL DisCos in their breach of the MRO, has neither been alleged nor proven by NERC.
Response to the NICL: A Multi-Pronged Approach
Whilst the most intuitive and indeed the required response to the NICL was a letter from each NICL DisCo showing cause why its licence should not be cancelled, the NICL DisCos sought to shield themselves from the threat of an imminent and seemingly unjustified licence cancellation on all fronts. Accordingly, both the NICL DisCos and all the DisCos at large filed petitions to NERC seeking a review of the MRO; which in the main corrects its inaccurate assumptions or remedies the effects thereof. Notably, the petition prayed NERC for the setting off of MDA Debts from NBET invoices and the suspension of the MRTs until a cost-reflective tariff is attained.
In addition to the petitions, a number of the NICL DisCos also issued Force Majeure Notices to the BPE under their respective Performance Agreements, alleging that the NICL constitutes a Change in Law under the Performance Agreement, as it imposes additional obligations and costs on the DisCos; and that this triggered the Political Force Majeure Event that is characterized by the NICL DisCos’ inability to perform certain material obligations under their licences. The case made by the Force Majeure Notices was that the MRTs impose an undue financial constraint on the NICL DisCos (through the imposition of the MRT obligation), such that they would be financially incapable of carrying out obligations under their licences to, for example, invest in the improvement of their distribution infrastructure. 116 INSIGHT
Compliance Thus Far & Threatened License Cancellati o n
In responding to the Petitions, NERC issued hearing notices to the DisCos, in which it stated that:
• the hearings would be conducted publicly; and • in addition to (and quite separate from) the issues for determination framed by the DisCos in their petitions, the DisCos would be required to provide particulars of sensitive and confidential information pertaining to their business (such as the monthly balances in their revenue accounts, their directors’ earnings and details of related party transactions); in a demonstration of their “optimal utilization of resources” and “efficient operation.”
Spooked by the prospect of revealing intimate details about their operations and financial affairs to the public, most of the DisCos withdrew their petitions and instead, engaged NERC for an amicable settlement of the issues surrounding the MRO and the NICL. Despite such engagements and the intervention of the House of Representatives, as a mediator, NERC insisted on: (x) the public hearings, this time of the NICL DisCos’ responses to the NICL (since their petitions had been withdrawn); and (y) the broadened scope of issues to be discussed at the hearings. NERC eventually conceded private hearings, where the DisCos attain the MRTs for the month of August 2019 and thereafter, and this spurred a forced compliance with the MRTs on the part of most NICL DisCos.
The NICL proceedings are still ongoing and NERC is yet to issue its final decision thereon. Thus, a licence cancellation remains an imminent threat for not only the NICL DisCos, but the compliant DisCos alike, as their struggle to attain the MRTs each month has proven a herculean task which continues to threaten the financial viability of their businesses. 117 INSIGHT
Conclusion
Needless to say, the NICL saga brought about a sour conclusion to 2019 for the DisCos. On the bright side however, BPE remained silent on the Target Date in December; perhaps because of its privity to and understanding of the upheaval created by the NICL and the need to postpone the performance target evaluation until the dust on NICL is settled. Whatever the case, our crystal ball predicts that 2020 should at the least subdue the bitter tides of the NICL; as NERC issued a new MRO on 31 December 2019, which, although similar to the previous MRO in substance, demonstrates a willingness to meet the DisCos halfway in its provision that NERC shall consider MDA receivables and MDA collection efficiency in determining the DisCos’ compliance with the MRTs. Although, the aforementioned provision is vague, in that it lacks specificity as to the parameters to be used by NERC in its determination of the DisCos’ MDA collection efficiency; and how exactly this would excuse any shortcomings in their attainment of the MRTs, NERC appears to be taking one small step towards a consensus with the DisCos. PROJECTS IN THE PIPELINE PROJECTS IN THE 119 PIPELINE
KEY PIPELINE PROJECTS 4 TH MAINLAND BRIDGE
The Lagos State of 120 km/h including the Government (LASG), acting development of adjacent through its Ministry of real estates. Spanning Works & Infrastructure, about 38 kilometres, and the Lagos State Public starting from Abraham Private Partnerships Office Adesanya in Ajah, on the intends to construct the Eti-Osa-Lekki-Epe corridor “…a greenfield tolled road Fourth Mainland Bridge and traverse the North under a Design, Build, West towards the Lagoon and bridge with a design Finance, Operate, Maintain shoreline of the Lagos- and Transfer arrangement Ibadan Expressway via speed of 120 km/h” (the Project). The Project is Owutu/Isawo in Ikorodu, a proposed public private once completed, the partnership transport Project aims to relieve infrastructure severe congestion on the development, which existing Third Mainland includes the construction Bridge, while opening new and operation of, a areas of the City for future greenfield tolled road and development. bridge with a design speed PROJECTS IN THE 120 PIPELINE
CONSTRUCTION OF THE US $653M SECOND NIGER BRIDGE
The second Niger Bridge is being constructed
across Nigeria’s Niger River and is intended to ease traffic congestion and will span from Asaba to Ozubulu and Ogbaru areas (the Project). The Project is being undertaken on behalf of the Federal Government by the Federal Ministry of Power, Works and Housing jointly with the Nigerian Sovereign Investment Authority (NSIA) through a Public Private Partnership involving Julius Berger as a Design, Finance, Build, Operate and Transfer (DFBOT) model to cost with the Federal Government contributing USD 150 Million while the consortium will raise the rest of the funds. The Second Niger Bridge is slated to be 1.6 km-long and furnished with other ancillary infrastructure including a 10.3 km highway and a toll station. PROJECTS IN THE 121 PIPELINE
TREDIC STAR CORE, MAY SIGN USD 2.3Billion POWER DEAL
Nigeria and a Canadian firm, TREDIC Star Core, may sign USD 2.3 Billion power deal to boost power generation by 1,652 megawatts(Mw) of electricity. TREDIC Star Core explained that the deal will improve generation as well as ensure that 23 micro-power stations are built across the country based on strategic areas of economic activities, which include heavy manufacturing, mining operation, large-scale agricultural undertaking, industrial clusters, among others.
TREDIC Star Core, may sign USD 2.3 Billion power deal to boost power generation by 1,652 megawatts(Mw) of electricity CLOUDY CRYSTAL BALL CLOUDY 123 CRYSTAL BALL
O V E R V I E W
After a relatively sluggish 2019, which was largely due to the post-election hangover, it seems reasonable to expect that 2020 will be a more eventful year for stakeholders in Nigerian infrastructure. The failure of Vision 2020 should also occasion a quicker pace of development; although the FGN appears to have attempted to kick the can down the road with its “Vison 2030”, coined in 2019 with similar objectives to Vision 2020. Whilst it is typically a tricky endeavor to predict what specific sub-sectors will receive the most attention from a policy, regulatory and financing perspective, we expect that power, transport (road, rail, sea and airports) and healthcare, which represent the country’s areas of greatest need, will continue to be the main points of focus for the FGN, state governments and investors looking to create sustainable value in the Nigerian infrastructure space.
Against this backdrop, and in view of some of the undercurrents that we have begun to watch develop, we have identified and set forth below, a number of key themes that we expect to drive activity in the Nigerian infrastructure space over the course of the year.
INCREASED INFRASTRUCTURE SPENDING BY F G N
A review of the FGN’s 2020 budget suggests that significant resources (circa NGN 2.47 Trillion) will be directed towards capital expenditure, including infrastructure, which remains one of the policy priorities of the current administration. The recent senate approval of President Buhari’s plans to spend USD 22.7 Billion on select infrastructure projects across different industries attests to the increased priority given to infrastructural development by the President Buhari administration in its second term. With the leadership transitions in the ministries responsible for power, works and housing now completed, major project activities should be expected – and have indeed commenced, with a number of road projects having already kicked off across the country.
Also, with the news that the FGN has confirmed plans to raise about NGN 2 Trillion (about USD 5.5 Billion) from domestic pension funds, for purposes of funding infrastructure spend, players can expect to see a slew of public sector funded projects take off in the course of 2020. From a legal perspective, stakeholders will be interested to see how the borrowing and implementation will be structured – in particular, whether the funds will be managed as part of the Presidential Infrastructure Development Fund (under which the projects are generally structured as quasi-PPPs) or a similar vehicle, or whether the funds will be applied by the FGN through budgetary allocations (and consequently subject to traditional procurement structures). CLOUDY 124 CRYSTAL BALL
PROPOSED REVIEW OF POWER SECTOR PRIVATISATION
The recently publicized recommendations of the Nasir El-Rufai led committee mandated by the FGN to review the 2013 privatisation of the unbundled power assets are expected to also trigger a wave of activity in the power sector – particularly, with respect to the proposal that the FGN should unwind the entire 2013 exercise and conduct a fresh privatisation. Whilst it is certain that this proposal will be met with stiff resistance by the investors in the privatised assets (particularly, the DisCos) it remains to be seen what the reaction of the wider market will be, should the FGN decide to implement the recommendations.
On one hand, issues such as the continued artificial depression of end-user tariffs, which has adverse effects on sector liquidity, as well as the likelihood of complex disputes arising from such a process, would likely hamper the FGN’s efforts in this regard. On the other hand, less risk-averse investors may interpret regulatory actions such as the MROs and the Transitional Accounting Order (and a proposed major tariff review later in the year) as signals of a transition to a more market-led sector (or at least a more liquid market), and take a positive view of the refreshed privatisation.
INTEGRATION ACTIVITIES AMONGST POWER SECTOR PARTICI P A N T S
In the course of 2020, we expect to see increased integration across the key segments of the power sector value chain. In particular, with sector players looking to maximize value from their operations, despite sector-wide challenges, stakeholders can expect to see business combinations of varying kinds between DisCos and GenCos and embedded generators, and potentially, between GenCos and independent electricity distribution network (IEDN) operators.
Besides the big question as to what synergies these players hope to achieve with these deals and whether/how these will impact the sector at large, an interesting sub-plot to some of the expected activity is the review that these deals will be subjected to by antitrust authorities. The interplay between NERC and the FCCPC in relation to their respective reviews will also be particularly interesting to see, as these will set the precedents for antitrust review in the power sector for years to come. CLOUDY 125 CRYSTAL BALL
MORE STATE LEVEL ACTIVITY
Another key theme for 2020 is a projected spike in infrastructure development activity at the sub-national level, particularly by state governments. With big and ambitious projects such as the Fourth Mainland Bridge project announced by the Lagos State Government in 2019, industry experts predict that there will be more similar announcements by states across the federation – especially with the ever-increasing political spotlight on the performance of state governments.
Whilst it is envisaged that a huge chunk of the funding for some of these state-level projects will come from federal allocations and debt (such as the recently issued N100 billion Lagos State bond), it is expected that a significant portion of these projects will be executed by way of PPPs – a number of states, including Ogun, Delta, Oyo, Kano, Imo and Bauchi have recently enacted PPP- focused laws, with a view to implementing private-sector funded infrastructure projects in their states.
RAMP- UP IN DISTRIBUTION NETWORK SUB-FRANCHISING
For the power sector in particular, another key area that is expected to see a lot of activity in 2020 is the sub-franchising of electricity distribution networks. Since the release of the Consultation Paper on Electricity Distribution Franchising by NERC in April 2019, which received widespread input from key industry stakeholders, there appears to have been little progress in issuing the definitive regulations to guide prospective investors in implementing proposed franchising arrangements.
Notwithstanding the seeming delays, we expect that the definitive regulations will be released in the course of the 2020. In the meantime, players in the sub-franchising space are likely continue to ramp-up project structuring and other preparatory activities, subject to any changes that may be required to align with the definitive regulations when passed. It is expected that, once operational, these sub-franchise arrangements will provide sustainable solutions to many of the current challenges in the electricity distribution segment of the power sector. CLOUDY 126 CRYSTAL BALL
INCREASED PRIVATE EQUITY FUNDING
Over the past few years, private equity funds have morphed into some of the largest players in the global infrastructure space, with about US$110 billion reportedly available for deployment to infrastructure assets on annual basis. Whilst more traditional sources of financing still rule the roost in the Nigerian market, there have been signs over the past few years that the private equity funds are increasingly turning their attention towards the Nigerian market, which – with an infrastructure deficit requiring an estimated US$15 billion per annum to fix – desperately needs the funding.
Experientially, in view of the challenges in the power sector, private equity involvement has been felt more strongly in other sectors such as healthcare, telecoms and real estate – and in the power sector, has been limited to off-grid participants. However, with the global private equity industry’s cash assets at an all-time high, and some positive signals (such as the proposed major tariff review set for 2020) being sent out by the FGN, industry watchers will be keen to see whether 2020 will see an unprecedented influx of private equity investment to Nigerian infrastructure. TEAM
Prof . Olukonyinsola Wolemi Esan Ibi Ogunbiyi Jonathan Aluju Joba Akinola Ajayi, SAN P artner P artner P artner Senior Associate Managing Partner
Ejemen Of oman Tomilayo Fadoju Feyisayo Ogundipe Georgette Monnou Senior Associate A s sociate A s sociate A s sociate
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