Mitigating Legal Risks in Nigeria's Project Finance Market
| DOI | 10.3366/ajicl.2017.0204 |
| Published date | 01 August 2017 |
| Date | 01 August 2017 |
| Pages | 442-455 |
Infrastructure acts as catalyst and critical to human and economic development and also the general functioning of every modern society. It impacts functionality on a given society and defines a country's business competitiveness and also creates jobs. However in Nigeria, the decades of sub-optimal investments in infrastructure assets and the general lack of maintenance culture have all taken toll on the nation's critical infrastructure. So, one big challenge starring the three tiers of government in the face is how to fix the yawning infrastructure gaps. But unfortunately, the magnitude of financing required to bridge the country's infrastructure deficit currently outstrips the supply of capital available from the public sector. Thus, one sure way to address these infrastructure gaps in the country is to leverage public private partnership framework to fund critical public infrastructure. So, one financing technique that has proved helpful in raising the required funds to drive infrastructure projects through the public private partnership framework is project financing technique or mechanism. It is however important to note at the outset that infrastructure finance is a subset of project finance.
For the purposes of this article, the terms ‘project finance’, ‘project financing’ and ‘infrastructure finance’ are used interchangeably and as a precursor, this article will first take a look at project finance as a financing technique.
Project finance is an off-shoot of a large cluster of financial techniques referred to as structured finance. Structured finance is a very broad term and can be defined in so many ways depending on the context. It is simply a mechanism for risk transfers. But generally, structured finance is a financing technique where legal structures are deployed to isolate asset or entity risk, resulting in decreased risk for the originator; or monetization of any rights of payments by a party having the legal right to transfer those payments to others.
Project finance,
Typically, in a structured financing, ‘revenue generating asset (or group of assets) is segregated in order to serve as the source of debt repayment and shift the repayment obligation away from the entity that created the asset to the revenue stream generated by the asset’.
The pertinent question then is: what is project risk?
Generally, a risk is defined as ‘uncertainty in regard to cost, loss, or damage’
The term ‘projects risks’ means ‘those circumstances which, in the assessment of the parties, may have a negative effect on the benefit they expect to achieve with the project’.
The use of the phrase ‘risk allocation’ signifies the ‘determination of which party or parties should’ take on ‘the consequences of the occurrence of events identified as project risks.’
In principle, the associated risks in project financing are similar to those of other project financing transactions, ‘and can be evaluated using much the same basic techniques’.
There are different types of risks that project financing faces. These may include: technical risk, construction risk, operating risk, revenue risk, financial risk, force majeure, environmental risk and project default.
It is important to note that there are some of these inherent risks that are legal in nature and hence they are referred to as legal risks. So, relying of the definition of the term ‘project risk’ above, a legal risk is simply a risk that is legal in nature which leaves the parties to a particular project financing with unforeseen financial exposures and possible losses. These legal risks include: regulatory risk, governing law and contract formality risk, investment protection law risk, insolvency law and creditor's rights risk, change of law risk, legal and judicial systems risk, among host of others.
Some of these legal risks will now be examined.
Regulatory risk is one of the inherent risks which are legal in nature and are due to regulatory action or inaction. They are usually faced by private investors involved in project financing when implementing tariff increases agreed upon in the project contracts. Regulations for infrastructure projects are usually addressed in the concession or other key contracts between a procuring public entity and a private company. This is called ‘regulation by contract’.
There is also the risk of over-regulation in which the government believes that there is a legitimate public interest to be protected at the expense of the infrastructure project in question. Generally, this policy relates to a perceived need to protect consumers or customers as the case may be; discourage and sanction unwholesome practices and promote a...
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