As of 2018, (based on data from the Nigerian Content Development Monitoring Board), the implementation of local content legislation, in Nigeria’s oil and gas industry is said to have created over 30,000 jobs and delivered project-based trainings for up to 5,800 young Nigerians. Also, the total value of contracts awarded to Nigerian companies in its oil and gas industry has risen to 83 percent while average Nigerian content retention in-country has moved upward up to 28 percent. When viewed from this perspective, stakeholders in the power sector would easily understand how the Nigerian Electricity Regulatory Commission ( the Commission) is thinking about driving a deliberate utilization of local human and material resources in the power sector.
The primary objective of the newly updated Regulation on National Content Development for the Power Sector (Regulations) and the Minimum Specification of Nigerian Content (Minimum Specification) is to promote the deliberate utilization of Nigerian goods and services and Nigerians within the power sector. The Commission is hoping to replicate the success of similar local content legislation in Nigeria’s oil and gas industry.
In this update, we consider some of most direct implications that the Regulations & Minimum Specifications have for key stakeholders across the power sector value chain. We expect that the regulations will become fully effective on the date it is gazetted.
For Core Investors
The Regulations stipulate a maximum of 5% of management positions within licensees for expatriates. This provisioning will have implications for core investors, (and investors generally) although the extent of those implications will depend on a number of variables, which include (i) whether the core investors are investors in the primary licensees of NERC (i.e. GenCos, TransCo DisCos) (ii) whether the core investors are investors in Meter Service Providers (iii) whether a power sector contractor firm is a resident Nigerian company or not (iv) whether the core investors invested in independent distribution or generation projects (Independents). It is useful to note that ‘management’ will typically be interpreted in terms of, not only the board and senior management but all the persons in the leadership of a licensee who cannot belong to any labour union or association by reason of their seniority.
It appears that the 5% cap may be contrary to the spirit of the shareholders’ agreement between Discos and the Federal Government of Nigeria (through the Bureau of Public Enterprises and the Ministry of Finance Incorporated), and the respective core investors. For instance, based on the shareholder’s agreement for the DisCos, the core investor in the DisCos, have a contractual right to nominate 6 out of the contractual maximum of 7 directors on the board of a DisCo, whilst the FGN nominates 1 member of the board. The respective core investors also typically have shareholder rights to nominate the chairman and chief executive officer of the relevant DisCo. It appears that the basis of this arrangement was to recognise the typical diversity of interests in a core investor and to give a certain level of comfort to core investors by providing them with a majority of board positions and also with the flexibility and optionality to deploy the highest possible quality of management necessary to deliver returns and efficient service delivery. Although, there is currently, in our view, a fair distribution of Nigerians across the board and management of DisCos locally, the 5% cap does appear to be contrary to the spirit of the shareholders’ agreement that Discos signed with the FGN and should be concerning for core investors, especially in the light of the persisting operational and liquidity issues in the distribution sub-sector. We think the primary focus of the Commission should be “stabilizing” the industry at this time. The 5% cap may actually be more stifling for MSPs (and some Independents) who typically have more compact boards and foreign presence.
A substantial amount of the acquisition and operational financing deployed by core investors to acquire target shares in the primary licensees were sourced from a combination of local and international debt providers. Whilst lenders are not the immediate focus of the Regulation, there are a number of points that lenders need to pay close attention to. Firstly, lenders need to take note of increasing regulation in the sector and consider the extent to which appropriate language can be introduced in loan documentation to mitigate and/or compensate for the effect of a regulatory breach by power sector obligors, to the extent that such breach materially affects the ability of the obligors to repay. It does appear that template language will not suffice for all situations. Although there would typically be a standard “compliance with laws” undertaking within loan documentation, this provisioning, considered alone, may be of limited utility in certain circumstances, especially given the standard requirement under such undertakings, for such breach to be of a material nature as to impair the relevant obligor’s ability to perform its contracted obligations or where the breach has a material adverse effect in itself. We think that it will be useful, going forward, for lenders to also specify key regulations of concern within loan documentation, in view of the evolving fine and sanctions framework in the power sector and the effect that regulatory action can have on the ability of the obligors to repay. At the very minimum, specific mention of such regulations, which should be flagged during a lender due diligence, should serve the purpose of emphasizing the importance of compliance by obligors with such regulations of concern. In many respects, we consider the Regulation to be within this category of key legislations in the power sector.
Secondly, the Regulations have now provided that finance and capital market services are now to be rendered by Nigerian firms which show evidence of good standing with the relevant regulators. The Regulations only allow engagement of foreign firms to provide services in the power sector, when such foreign firms show evidence that the services will be provided in collaboration with a local firm. This requirement should generally be a matter for due diligence for local and international lenders to the power sector.
The other point, which also comes up for consideration for lenders, is a provision in the Minimum Specifications for a business activity referred to as ‘funding’. It is not exactly clear what the regulatory intention is here; however, it would appear, subject to further clarification from the Commission, that the Commission is seeking to specify a minimum level of financing that must be provided by presumably, local debt providers to licensees. The local content spend permissible under this category by licensees is a minimum of 10% in 2019, 15% between the 2020-2023 corridor and 20% between 2024 and above.
The concern here for stakeholders, really, should be whether the NERC, as presently constituted, is properly and efficiently staffed and organised, in view of increased level of regulatory interaction from the power sector, that the Regulations will require. It is our view that, that the reason for the success of local content legislation in the oil and gas industry, is in part, the enactment of specific local government legislation by the National Assembly and the implementation of that legislation by a separate local content management and development corporation created by legislation for that purpose. Prior to this time, the approach to local content regulation had been for the Nigerian National Petroleum Corporation (NNPC) to set up a Nigerian Content Division and issued Nigerian Content directives to the industry. This appears to be similar to the current approach in the power sector as of date. It is our view that the Commission should consider a structure that allows its local content desk/team to operate with more independence, less bureaucracy and commercial efficiency necessary for the smooth operation of the sector
For Financial & Strategic Promoters & Investors
There is in our view, a sense in which the Regulations will attract foreign direct investment in Nigeria’s power sector. There are at least 28 distinct business areas within the electricity generation stream, 30 distinct business areas within the transmission stream, and 34 distinct business areas within the distribution stream, that have been opened up to local participation by regulatory fiat. We expect that discerning Nigerian promoters/business and where considered strategic, Licensees, will take advantage of these opportunities to foster technical collaborations with willing foreign technical partners, by implementing a variety of legal structures that are available for the execution of such technical collaborations. We expect that a number of the existing licensees/power sector contractors will also leverage these opportunities for expansion capital
For Existing & Prospective Licensees
The Regulations make wide-ranging provisions that impacts key aspects of the operations of licensees covering employment, procurement, management, technology transfer, project staffing, engagement of professional services (lawyers, insurance, engineers etc.). At the minimum, we expect that licensees will now begin to put compliance structures in place, possibly starting with the set up a local content desk or working with external counsel to design a local content compliance strategy. While it is highly recommended that stakeholders obtain advice that is specific to their operations, we share below some of the key legal issues that licensee should should pay attention to:
1. Who Does The Regulation Apply to? – The Regulation applies generally to NERC’s licensees. Although, the NERC typically uses “licensees” when referring to persons engaged in the generation, transmission, system operation, distribution, and trading of electricity; the NERC appears to have taken a wider approach to the the definition of “licensees” in the Regulations. The Regulations, define a licensee as “any person who holds a license issued under the Act to carry on any regulated activity”. The conclusion to be made therefrom is that the primary scope of the Regulation covers not only GenCos, DisCos and the Transmission Company of Nigeria but also includes Meter Service Providers, including Nigerian Bulk Electricity Trader (NBET), Meter Asset Providers and all other persons carrying out a regulated activity pursuant to a license from the NERC.
It is useful to note that both local and foreign non-licensee contractors in the power sector also have obligations under the Regulations, to the extent that they execute projects on behalf of a licensee. The Regulations make it compulsory for licensees to ensure that non-licensees comply with the Regulations and the Minimum Specifications. It would be standard for a licensee to publish standard notification and qualification requirements to non-licensees in this regard prior to award of contracts.
2. What is a Nigerian Company? – Licensees are now to give first consideration to “Nigerian Companies”/ “Nigerian firms” or “Nigerian Professional Companies, for the supply of goods, works and for the provision of services; in particular; for goods made in Nigeria and services provided by Nigerian firms, in the award of contracts. We note that none of these phrases, although used, are defined in the Regulations. The Regulations however recognises a “Nigerian Operator” as “a company incorporated in Nigeria with the object of providing goods and services for the NESI. On this basis, we think it is reasonable to conclude that the Commission does not intend to set shareholding thresholds for local participation on a shareholder level, for Nigerian companies which are subject of the Regulations, such that the mere fact of registration in Nigeria at the Corporate Affairs Commission will satisfy the requirements of the Regulation. This is a welcome departure from the local content legislation applicable in the oil and gas industry which defines a Nigerian company as one with not less than 51% equity by Nigerians. We consider this concession to be in the interest of investors across board, in the power sector. Whilst we recognise the need to use regulation to drive the deliberate utilization of local human and material resources, we expect that the Commission will continue to be sensitive to the interest of both foreign direct investors and partners in the power sector.
3. Joint Qualification System – We are not aware that the Joint Qualification System (JQS) has been set up at this time. We expect that the set-up of the JQS should be a critical pre-condition to the enforcement of the Regulations. By design, the JQS is an online platform for Nigerian content registration, pre-qualification, and verification of capacities and capabilities.
4. Employees– The Regulations now require the approval of the NERC for the employment of expatriate by a Licensee, alongside a requirement for Licensees to employ only Nigerians in all junior and intermediate cadres or corresponding grades. We think that the important point to note here is the need for licensees to review existing human resource and employment strategy in view of the increased spending that will now be required on capacity training and building for Nigerian employees. For instance, on the basis that Nigerian employment law recognises that training bonds are a legitimate strategy for protecting employer interests, a licensee may consider a structured training bond programme within the context of compliance with the Regulations.
5. Major Project Threshold –The Regulations require Licensees to submit a Nigerian Content Plan for Major Projects, which by definition are projects that exceed a financial threshold set by the Commission. We expect that the specification of the threshold for major projects will be specified and operate as a pre-condition to the full operation of the Regulation.
6. Existing Local Content Legislation – It may be important for the Commission to clarify certain provisions of the Regulation and Minimum Specification within the context of existing legislation on local content. For instance, pursuant to the 2018 MAP Regulations, Meter Asset Providers (MAP) are required to source for a minimum of 30% of their contacted metering volumes from local meter manufacturing companies. Based on the provisions of the Minimum Specification, it would appear that this amount has been increased to 40%. We expect that the Commission will clarify its position on this point prior to full scale enforcement of the Regulations
7. Waiver Regime: The Regulations allow Licensees to obtain a waiver for no longer than a 3-year period where there is inadequate local capacity. Licensees may also obtain a waiver where, the losses incurred by the Licensee as a result of using local capacity, will be imprudent or where the use of such local capacity will lead to an increased cost of doing business for a Licensee. We reckon that these grounds have been introduced to further protect the interest of investors, however, we think that the Commission should also consider providing the details on the acceptable documentation upon which the Commission will grant a waiver on these two latter grounds.
This publication is not intended to be and does not constitute legal advice. Please reach out to your Balogun Harold contact, if you require specific advice on the contents of this publication or speak to a utilities sector expert via firstname.lastname@example.org. Finalised copies of the Minimum Specification & the Regulations are available upon request.