How is Nigeria Progressing Post-Recession?
Oludare Senbore advises on matters such as local and foreign currency syndicated lending, sale and lease back financing, structured finance, project finance, mergers and acquisitions, structured trade finance, foreign investment advisory services, privatisation, private equity and the regulatory framework relating to utilities. As one of our many thought leaders this month, he speaks on how his jurisdiction, Nigeria, is progressing post-recession.
With the unstable nature of the financial world, what would you say is the best advice to give a client who is enquiring about foreign currency or syndicated lending?
Though Nigeria has technically come out of a recession, the macroeconomic environment in Nigeria still continues to remain challenging with no certainty as to how long oil prices will remain above $50.00 per barrel, continued reliance of the country on the oil export sector for foreign currency earnings and the early hints of political (election) discourse within the polity.
As noted by the Monetary Policy Committee (the “Committee”) at its meeting in March 2017, the banking sector is becoming less resilient as a result of the macroeconomic environment. This led the Committee to direct the management of the Central Bank of Nigeria (the “CBN”) to work with Nigerian Banks to promptly address rising non-performing loans, declining asset quality, credit concentration and high foreign exchange exposures.
Foreign currency liquidity issues have exacerbated the refinancing risk within the banking sector, leading to a deterioration in loan assets, especially oil-related loan assets. In addition, a number of Nigerian financial institutions have refused to renew their Eurobond issues as they do not intend to expand their US Dollar loan assets. It is no wonder that Nigerian banks are shying away from dollar syndicated loans, particularly in light of the CBN’s requirement for additional capital requirements where a bank has significant exposure to the oil and gas sector.
Therefore, my advice to any client that is wishing to raise debt financing in US Dollars from the syndicated markets at this time, is only to enter the fray if you have a dollar earning asset and are able to afford a natural or financial hedge. In addition, it appears that the Export Credit Agencies and Multilateral Agencies currently still have an appetite for good quality Nigerian loan assets. The actions of the CBN over the last 9 – 12 months to wit, improving the foreign currency liquidity in the market, establishment of various windows within the Nigerian foreign exchange market and ensure timely execution and settlement for eligible transactions etc., has eased the concerns of such institutions and encouraged them to continue lending to Nigerian companies. This has created assurance as to the stability and availability of foreign currency to individuals and businesses with a legitimate need within this period.
As Thought Leader, can you share ways in which Nigeria has developed over the past decade, in relation to their Energy and Natural Resources, Power & Infrastructure and Project Finance?
Energy plays a vital role in development, progress and economic growth of any country. Uninterrupted energy supply is pertinent and necessary for consistency in the growth and development of any nation. Sadly, Nigeria has yet to attain this goal and the effect of this is still being felt in lack of access to basic needs, poverty and deprivation that is still felt by a large portion of Nigeria’s population. The Federal Minister of Power, Works and Housing confirmed in a speech last year that since 1950 when the Electricity Corporation of Nigeria (ECN), the predecessor of National Electric Power Authority (NEPA) and Power Holding Company of Nigeria (PHCN), was created, the maximum energy Nigeria has generated stands at 5,074 MW, which was achieved in February 2016, nowhere near enough to power a country with a population of over 170 million. The Nigerian government has been particularly focused on seeking to use electricity to boost economic development and as such has taken steps towards achieving this goal.
Notably, the Roadmap released by the federal government focuses on the use of a mix of energy sources including solar, wind, hydro and coal to increase generation capacity. Amidst the constraints which include, human and administrative challenges, damaged, unmaintained or serviced turbines, non-availability of gas, damaged pipelines, vandalism and lack of maintenance there has been a focus on making incremental progress so as to steadily increase the generation, transmission and distribution capacity of the country. Focus has been around removing constraints and solving issues that have impaired the generation, transmission and distribution capacity of the utility companies in Nigeria.
The government has also increased its focus on solar energy and renewable energy resources in its commitment to the Paris Accord as well as addressing the significant lack of gas infrastructure in the Northern parts of the country.
In addition, the last decade has seen development in the area of legislation and regulation affecting the power and the Energy and Natural Resources sector, whilst these have not solved the issues, they have been a step in the right direction for transparency and efficiency in the sector.
However, with respect to project and infrastructure finance, other than the Lekki Toll Road Project, the Nigerian LNG Project (Trains 4 & 5), there has been a significant dearth of private sector led project finance transactions within the infrastructure space that have achieved financial close. This is a significant cause for concern.
Moreover, what changes are you anticipating to occur in the following decade?
The recent shock to the Nigerian economy highlighted the fact that the Federal Government does not have the necessary balance sheet to provide the much needed infrastructural development required for the country. Thus in order to address the significant infrastructural gaps within the country and create the necessary jobs required to boost the economy and the per capita income of individual Nigerians, co-operation and partnership between the public and private sectors is much required.
This also means the regulatory, monetary and fiscal landscape will have to be aligned to be able attract investors into the infrastructure sectors in Nigeria.
The private sector will require a number of assurances and certainty if there are going to make the huge investments that are required and these assurances pertain to the certainty of the regulatory framework, protection of their investments from political or governmental interference, efficiency and reform of the business environment, which should cover tax reforms, streamlining the process of obtaining governmental approvals and permits, etc.
A lot of the foregoing are areas where the current government is focusing its time, energy and effort as the general belief of the government is that if the appropriate business environment is created to attract foreign investments into Nigeria, the potentials of the Nigerian market and returns that could be made from Nigeria, will facilitate the necessary investments.
We also see a renewed emphasise on PPP/Project Finance for the execution of large scale infrastructure projects, potential for more off-grid solutions as a means to resolve the power challenges in Nigeria in the short to medium term and advent of infrastructure bonds or project-specific bonds for financing infrastructure projects.
With growing environmental concerns, how do you anticipate the Energy and Natural Resources sector to change? How will this affect your role and your clients?
There is an increased emphasis for all oil and gas companies operating in Nigeria to operate in an environmental sustainable manner; otherwise they run the risk of significant governmental fines, civil and criminal actions.
Energy demands by industries in Nigeria will continue to grow, particularly with increasing pressure on available resources due to our large population. The government is already driving a need for energy conservation, efficiency and diversification. As part of this, stakeholders in the sector will have to be pro-active in evaluating and introducing new techniques aimed at pollution prevention and focus on operational practices that do not impact the environment negatively. Businesses will have to give a genuine focus to their sustainability and corporate social responsibility.
These changes will likely be initially introduced through government regulation. As lawyers, this will be an opportunity to help our clients navigate unchartered waters whilst also contributing positively to the environment. A move towards efficiency will ultimately be positive for the industry and the country.
What is the most challenging aspect of your role, and how do you use your years of expertise to overcome this challenge?
Practicing law within the Nigerian energy sector requires not only traditional legal skills, but also an understanding of the ever-changing world in which we live and the development of new skills and knowledge to address the new trends within the sector as well as client’s ever-changing needs. This is particularly true in light of the recent and largely unforeseen, collapse in the price of crude oil, which has had a massive impact in a largely oil-dependent country like Nigeria, such that clients are now focusing a great deal on insolvency, restructuring, prepayment facilities, derivatives and hedging instruments and issues.
These new areas of legal practice highlight the dearth of good and knowledgeable young lawyers with the necessary skills to address the issues and questions that are relevant to help our clients navigate the changing and challenging times we are faced with. Thus it is important to not only attract the right people to join the firm, but also invest a significant amount of time and resources in improving their skills and knowledge.
We all need to stay mentally agile, current and receptive to our environment.
Oludare is a Partner in the Aluko & Oyebode’s Corporate and Commercial Practice Group and heads the Firm’s Power team. His care area of expertise are in Energy and Natural Resources, Power & Infrastructure Finance, Project Finance and Private Equity.
He has over 17 years’ experience in international financial transactions, such as non-recourse and recourse financing, acquisition financing, mezzanine financing, etc. with specific focus on the following sectors: power and infrastructure, energy and natural resources.
Aluko & Oyebode (the “Firm”) is one of the largest integrated law firms in Nigeria providing a comprehensive range of specialist legal services to a highly diversified clientele including top-tier Nigerian, international and multinational clients. Areas of the Firm’s specialisation include Corporate and Commercial Practice; Energy and Natural Resources; Power; Project/Infrastructure Finance; Banking and Corporate Finance; Admiralty and Shipping; Aviation; Capital Markets; Mergers and Acquisitions; Litigation and Arbitration; Telecommunications; Intellectual Property; Real Estate; Privatisation and Taxation.
