Exclusive interview with Dolapo Kukoyi, a partner at Detail Commercial Solicitors in Lagos and head of the firm’s power practice. She will be chairing a session on “Challenges to funding the power sector” at the Finance and Investment Forum at the upcoming WAPIC.
Let’s start with some background on your organisation and your role?
Detail Commercial Solicitors (DETAIL) is a firm of commercial solicitors who specialise exclusively in non- court room practice to focus our entire resources on providing our clients with proactive legal and commercial advice. This is especially because clients value risk mitigation and dispute avoidance.
In terms of our antecedents in Nigeria’s power sector DETAIL is reputed for its in-depth knowledge and experience of the workings of Power projects in Nigeria. We have acted both on the government/regulatory side and on the private side with power developers in developing Power projects.
We have also been very actively involved in the acquisition and concession of successor companies in the Nigerian power privatisations to date.
In terms of my role, I am a Partner at DETAIL, leading the firm’s Power practice. My role cuts across power project development, acquisitions, structuring and financing.
Any exciting projects in the power sector that you are currently involved in that you can share?
DETAIL is currently acting as Transaction Legal Advisers to the Central Bank of Nigeria and the Nigerian Electricity Regulatory Commission on a 213 billion naira Nigeria Electricity Market Stabilization Facility. The overall aim of the facility is to reset the economics of the Nigerian Power Sector to enhance the potential for more investments. In terms of specific objectives, the facility was structured to:
- settle shortfalls/debts due to market participants, service providers and legacy gas debts owed to gas suppliers;
- facilitate a contracts-based market in which all the participants operate by contracts, rather than on a reasonable endeavours basis, as has been carried on over the years whilst the privatised generation and distribution companies were being run by government; and
- facilitate short term improvement of power supply. It was also envisaged that the payments made to the generation companies and gas suppliers would incentivise an increase in power supply.
Another exciting project in the Nigerian Power sector that DETAIL has recently been involved in is the privatization of the Nigerian Integrated Power Projects (NIPP) where we are advising a couple of preferred bidders and also advising the investor Group, which is an umbrella body of all the preferred bidders.
Our antecedents in this respect date back to the PHCN privatisation where we played an active role as a member of a core negotiating team nominated by the Disco Roundtable (a pressure group created by investors in the privatised Distribution Companies) to negotiate with the Nigerian Government and Regulators on issues common to the Distribution Companies.
Our role in NIPP privatisation included negotiation of the transaction and industry agreements as well as making representations to the government on critical issues affecting the transaction.
Another project which we are currently involved and which is quite interesting for us is the drafting of mini-grid regulations for the Nigerian Electricity Regulatory Commission, being sponsored by the Nigerian Energy Support Programme (NESP). We hope the Mini-Grid Regulations will help:
- increase access to power in unserved and underserved areas all over Nigeria, particularly rural areas;
- increase the potential for small renewable energy projects; and
- potentially expand and strengthen the network of the distribution companies in places where they have high losses.
What in your view are the main challenges in the power sector in Nigeria right now?
There are a number of challenges, which include:
- Lack of cost reflective electricity tariffs which we hope will be resolved soon
- Related to (i) above is the resulting liquidity constraints in the power sector value chain
- A need to establish regulatory certainty that will provide comfort for investors
- Limited availability of gas supply and gas infrastructure within a viable pricing regime that will encourage investments; and
- Limited funding for transmission infrastructure development and maintenance and lack of clarity on the government’s policy in relation to transmission
And with regards to funding in particular?
One of the limitations in the power sector is the lack of guarantees of payment risks given the current liquidity issues in the sector, which inhibits revenue certainty.
Currently, the Nigeria Bulk Electricity Trader and other government entities are not willing to provide the guarantees which investors would still require in the early days whilst liquidity issues of the Distribution Companies are being resolved.
The NIPPs are a case in question whereby investors will need to be assured of a cost reflective tariff and revenue certainty. This remains a gap which will need to be deliberated between the Nigerian government, commercial banks, development finance institutions and private investors to come up with creative solutions.
Another limitation that hinders the bankability of power projects is the untested operationalisation of the sector Industry Agreements.
The sector industry agreements had been executed pre-privatisation with the incumbent management of the privatized PHCN generation and distribution companies.
The contracts (Power Purchase Agreements, Vesting Contracts, Gas Supply Agreements and Gas Transportation Agreements) are however, neither effective nor operational. There is therefore no track record to show how the contracts actually work.
This is crucial in order to achieve revenue certainty in the market for lenders and investors in the Distribution Companies and new on-grid generation projects. With the Transitional Electricity Market now declared open, it is expected that the Industry Agreements will build operational momentum making it easier for investors to see how the agreements operate, identify the related risks and better plan to manage such risks.
What is your vision for the industry?
Essentially, my vision is for a viable sector in which we have:
- A tested market in terms of revenue certainty with effective and operational contracts;
- track records of payments by the Distribution Companies up the value chain to generation, transmission and gas supply;
- Regulatory certainty; and
- A combination of a,b and c that would incentivise international investment in the sector which will keep our lights on and strengthen the Nigerian economy.
What is your advice to a prospective investor in the power sector in West Africa?
Speaking specifically to Nigeria; patience, credible partners and good advisers are critical for investing in the power sector in Nigeria. It is a marathon not a sprint. So far, the Government has shown its commitment though there is a lot that still needs to be done in sorting out the liquidity issues, which the distribution companies are likely to face in the next couple of years.
You are chairing a session on “Challenges to funding the power sector” at the Finance and Investment Forum at WAPIC – what are you hoping for in this session?
I am hoping that at the session we will be able to review the CBN- Nigerian Electricity Market Stabilization Facility (CBN-NEMSF) from the perspective of Market participants and the participating banks and we will be assessing how effective the CBN-NEMSF has been; what the shortcomings are; and what still needs to be done in terms of improving the liquidity of the Distribution Companies.
What will be your message at WAPIC?
The Nigerian power sector is a work in progress. Considerable developments have taken place in the past year in the Power Sector, though there is more that still needs to be done. The potential for investment is enormous.