Nigeria has a bold ambition for its future. The ambition is to live
up to the expectation that by 2020 it will have the twentieth largest
economy in the world. Indeed, some forecasts say that Nigeria will
overtake South Africa as Africa's largest economy by 2025. This ambition
is the cornerstone of Vision 20:2020, which has formed the central
economic objective of the Nigerian government since 2010 and the basis
for the first National Implementation Plan.
To realise Vision 20:2020, the government, under the leadership of
President Goodluck Jonathan, is pursuing the Transformation Agenda: an
economic and political programme that aims to sustain and promote growth
in the economy. Key priorities include encouraging international trade,
improving Nigeria's communication and energy infrastructure and
reforming governance at political, economic and corporate levels. While
the Transformation Agenda has its critics, progress has been made and
recognised by institutions such as the International Monetary Fund
Against the backdrop of the continuing financial crisis, Africa has
been emerging as the place to do business. Its finance sector is active
and Chinese and Indian businesses and state owned corporations have
continued to invest. For example, the Nigerian government recently
approved a US$1.5 billion railroad modernisation project to be built by
the state owned China Civil Engineering Construction Corporation.
As one of Africa's largest economies, Nigeria has a lot going for it:
petroleum resources, a huge domestic demand for investment in
infrastructure, strong local banks and the political will to modernise
the banking system. Its laws are based on English law and there are
plenty of lawyers experienced in international work.
The Nigerian government is going ahead with a privatisation programme
as part of the Transformation Agenda and within this, in early 2012,
Manitoba Hydro of Canada (MHC) won a US$24 million power transmission
contract. MHC will manage the Transmission Company of Nigeria, and will
be responsible for transmitting electricity from power plants to
This process is not of course without its challenges. Among the most
cited ones are political instability, corruption, inadequate
infrastructure, and the economy's over-dependence on the oil sector (the
infamous 'resource curse').
This article will follow the recent developments in Nigeria and their
potential impact on foreign financiers. First, it will look at
financing transactions and typical issues to be aware of when lending
into Nigeria and how these can be dealt with. Further, it will summarise
the long-awaited reforms in the energy sector such as the proposed
Petroleum Industry Bill. Finally, the article will provide a brief guide
on the new UK anti-bribery legislation and its extraterritorial effect.
Financing transactions in Nigeria
Most international financing deals in Nigeria are structured. As with
all other emerging markets, conventional financing structures and
techniques must be adapted to fit the specific circumstances of the
transaction and frequently, new structures have to be created for
complex issues not experienced elsewhere.
Trade finance structures remain popular due to the short-term,
self-liquidating nature of trade deals. Huge investment is required in
Nigerian infrastructure, which calls for project financings. Nigeria
also remains a popular country for ECA-backed financings. In October
2011, the Export-Import Bank of the United States (Ex-Im Bank) and the
Nigerian Ministry of Power signed a Memorandum of Understanding aimed at
securing up to US$1.5 billion of US exports of goods and services to
support Nigerian power projects. According to Ex-Im Bank, Nigeria is one
of nine countries in the world that it has identified as offering US
companies the greatest opportunities for sales with its growing economy
and significant infrastructure needs.
With so much demand for the financing, the question is: who will provide it?
We should first acknowledge that a lot of the financing comes from
local lenders. There is a view that international banks could lend more
to local banks in Africa to enable them to 'on-lend' in Africa. However,
this lack of financing may be beneficial to some of Africa's largest
banks, which include Nigerian institutions, as they continue their
The financial sector in Nigeria has undergone significant changes
following the onset of the current global financial crisis. Drastic
measures have been taken by the Central Bank of Nigeria (CBN), such as
imposing stricter capital rules and establishing the Asset Management
Corporation of Nigeria (AMCON) – a state-owned 'bad bank' holding
non-performing loans to encourage banks to diversify their portfolios
and push through management changes. These actions have resulted in a
stronger and more stable domestic banking sector.
Nigerian law is based on English law so overall the English law
financing agreements and local law security documents work well together
in cross-border financing. More and more of syndicated financings in
Nigeria base their documentation on Loan Market Association (LMA)
documents, although these of course need to be adapted. The approach
taken by local lenders to the risks involved in lending in their home
jurisdiction, the importance they attach to documentary risk and the
credit risk of the borrower tend to differ from the international
lenders. Local lenders also are more likely to have, or try to
establish, long-standing relationships with the borrower, which need to
be taken into account. Accordingly, the approach of domestic and
international lenders to the documentation may vary significantly, and
so will the approach taken by different syndicates of lenders, depending
on their composition, for a particular financing transaction.
Below is a brief overview of issues that are important to consider
when structuring finance deals in Nigeria and that tend to come up
often. This is by no means an exhaustive list and specific transactions
may raise other issues, so lenders must always get local legal advice.
Effective security constitutes part of any structured finance
transaction. In common with a lot of Sub-Saharan African jurisdictions,
stamp duties and registration fees in respect of security created by
local companies are a big issue to deal with in Nigeria.
Under Nigerian law, stamp duty is chargeable on a wide range of
instruments; in particular stamp duty is payable on virtually all
security documentation. It is payable on the types of security most
often used in structured trade and project financing, such as
debentures, letters of pledge, assignments of contractual rights and
charges over bank accounts in Nigeria. Stamp duty is calculated on the ad valorem
basis and varies depending on the type of security and the nature of
the assets involved. Documents are required to be stamped within 30 days
of execution or, where executed outside Nigeria, within 30 days of
receipt of the documents in Nigeria.
Documents, which are required to be stamped, are precluded from being
admitted in evidence by a Nigerian court without unpaid stamp duty and
penalties (where applicable) first being paid.
A charge created by a Nigerian company with the intention that it
provides security must be registered within 90 days of its creation with
the Corporate Affairs Commission (CAC) or it will be void against the
liquidator and any creditor of the company. In practice, the majority of
the usual security documents granted by Nigerian companies are
registrable. The registration with the CAC is done after stamping the
Where land forms part of the security package, further charges are
payable and these are calculated based on the rates applicable in the
state where the land is situated.
These are some of the current rates of stamp duty and registration
fees (calculated as percentages of the principal amount of a loan):
stamp duty (charges and mortgages) is 0.375%; CAC registration fee is 1%
for private companies and 2% for public companies. Where land in Lagos
State forms part of the security package the consent fee is 2% and the
registration fee is 0.5%.
It is strongly recommended to all lenders that the exact amount of
stamp duty and registration fees should be ascertained at an early stage
of the transaction and notified to the borrower, so that there are no
unpleasant surprises later on.
The costs of stamp duty and the registration fees are invariably
borne by the borrowers and can constitute the biggest part of the
upfront transaction costs. The borrowers often try to negotiate various
means of reducing the overall amount of duties and fees or to make the
payments in stages. The techniques may include:
(a) signing documents offshore or keeping security documents undated
and unregistered. This should only be adopted where the security
document does not require CAC registration. However, in most financial
transactions the common form of security is a fixed and floating charge,
which requires CAC registration.
(b) so called 'up-stamping'. This involves paying stamp duty on part
of the secured liabilities only. Examples include stamping after each
drawdown to spread the cost. Another example is stamping only for an
agreed amount representing part of the secured liabilities with the
balance paid into a secured account which the lenders can apply to
up-stamp the documents later. Up-stamping carries certain legal risks
for the lenders: where the security document is stamped for an amount
lower than the principal amount of the loan, the lender will only be
permitted to prove for and realise the security for that lower amount.
The lender will also risk losing priority for their security interest in
respect of the part which is to be up-stamped at a later date in the
event of a competing lender taking a security interest over the same
asset prior to the up-stamping.
(c) taking a view that having unstamped documents is sufficient where
the assets, such as cash in a secured account, are held offshore and
where it is unlikely that the security interest created by such document
will be enforced in Nigeria.
International lenders tend to take a much stricter view of the ways
in which to reduce the duties and fees than local lenders and may insist
on a fully perfected security prior to the initial drawdown (which
involves paying the requisite stamp duty and registration fees upfront).
However, it seems that the up-stamping route is becoming more
acceptable to international lenders.
Another possible way to save on stamp duties and registration fees is
to structure the lending through an international organisation like the
Africa Export-Import Bank (Afrexim). The lenders of record then can
take advantage of its tax-exempt status.
Exchange control restrictions are in force in Nigeria and care must
be taken to structure transactions involving hard currencies with these
exchange controls in mind. Generally, there are no restrictions on the
repayment of foreign currency loans, which are made in accordance with
the provisions of the applicable regulations. However, certain
documentation requirements must be met before the principal and interest
are permitted to be paid offshore. For example, payment of fees to
offshore lenders requires the consent of the CBN. An example of this
would be the funding of an offshore debt service reserve account in US
dollars by a Nigerian borrower. Lenders should seek local legal advice
in respect of each type of offshore payment created by a transaction.
Finally, it is difficult to overestimate the importance of working
together with local lawyers when structuring and executing transactions
in Nigeria. The legal sector in Nigeria is significantly developed, with
established legal firms that have experience in cross border legal work
and excellent local knowledge. This is invaluable to foreign investors
in getting their transactions structured correctly, highlighting
potential problems early on and assisting parties in order to bring
transactions to successful conclusion.
Reforms in the petroleum sector
In early 2012, the Nigerian government instructed a special task
force to prepare the definitive version of the Petroleum Industry Bill
(PIB) to be presented for the approval of the Nigerian National
Assembly. The long-awaited and controversial piece of legislation has
been in the making for several years now. Multiple versions of the PIB
have been prepared, which has meant a slow passage of the PIB through
the legislature. The PIB was submitted to the National Assembly on July
17, 2012 and although there is no certainty that it will be passed in
the form submitted, its submission is an important step in the path
towards its enactment. The key aims of the PIB are to drastically
restructure the Nigerian petroleum sector to make the industry more
commercially orientated. It seeks to replace numerous laws and
regulations governing the petroleum sector with a single Act covering
the entire industry.
The delay and the resulting uncertainty in respect of the future
legal regime of the petroleum industry have blocked billions of dollars
of potential investment. It has been reported that licensing rounds,
contract renewals and investments have been put on hold for several
years pending the new legislation.
The stated objectives of the PIB include:
- enhancing exploration and exploitation of petroleum resources in Nigeria;
- establishing a progressive fiscal framework that encourages further
investment in the petroleum industry whilst optimising accruable
revenues to the Federal Government;
- establishing a commercially oriented and profit driven National Oil Company (NOC);
- deregulating and liberalising the downstream petroleum sector;
- promoting transparency, simplicity and openness in the petroleum industry;
- protecting health, safety and the environment;
- promoting the development of Nigerian content in the petroleum industry; and
- optimising domestic gas supplies, in particular for power generation.
The PIB envisages that the NOC and the Nigerian Petroleum Assets
Management Company (NPAMC) will hold certain assets and liabilities of
the state owned Nigerian National Petroleum Corporation (NNPC).
Initially, the government will hold the shares in the NOC and within a
certain time from the date of incorporation it will divest a maximum of
30% of its shares to the public. Similarly, the government will be
required to divest up to 49% of its shares in the NPAMC. Both companies
will be able to raise finance for their operations thereby reducing the
need for injection of state funds.
The PIB includes various new provisions on the taxation of the
petroleum industry. It is expected that the PIB would increase the
amount of revenue that the government would take in the form of
royalties and taxes from the industry. Some of the tax provisions
however envisage incentives and reductions in the fiscal burdens of
companies that have a substantial Nigerian interest.
The PIB tries to address the problems with the Niger Delta region
host communities by providing for the host communities a share in the
profits of upstream petroleum operators.
As is always the case with any large-scale changes affecting an entire industry, the PIB is not without its critics.
A number of the more radical provisions contained in the earlier
versions of the PIB were stripped out over time and others have been
watered down further in order to ease the adoption of the final version.
Earlier versions of the PIB were criticised because provisions dealing
with the establishment of the NOC were considered too brief and did not
address certain key issues, such as what assets would be allocated to
it. The draft submitted to the National Assembly seems to have addressed
this concern. In the PIB, the NOC will be a limited liability company
and, therefore, most of the provisions relevant to its operations will
be as set out in its articles of association. The PIB also states the
assets that will be transferred to the NOC. The NOC will be vested with
the assets of the NNPC which are not vested in the NPAMC or the National
Gas Company Plc.
Multinational oil companies had queried how the existing joint
venture agreements and licences were to be treated under the PIB, as it
was unclear whether the PIB would have covered all of the existing
licences. If it did not cover all existing licences, that would have
meant that a large part of the Nigerian petroleum industry would have
been excluded from its scope. The PIB now seems to have addressed this
concern, by providing that the interests of the Nigerian government in
the unincorporated joint ventures currently held by the NNPC, will be
transferred to the NPAMC. As a result of this, joint venture agreements
will continue to subsist but the NNPC will be replaced as a joint
venture party by the NPAMC. The existing licences and leases (oil
exploration licences, oil prospecting licences and oil mining leases)
will become petroleum exploration licences, petroleum prospecting
licences and petroleum mining leases, respectively. All such licences
and leases will continue to be valid for the duration of their original
terms as if they were issued or granted under the PIB. At the expiration
of any of them, the holder may then apply to the Minister of Petroleum
Resources for a renewal of the expired licence or lease.
Concerns were raised in relation to early versions of the PIB
regarding the roles and powers of the agencies not being clearly
defined. If this is the case when the PIB becomes law, it will not have
gone far enough to promote openness and transparency in the industry.
However the PIB appears to have addressed these concerns and establishes
a new framework for the regulation of the petroleum industry in which
it provides a comprehensive list of the roles and powers of each of the
regulators proposed to be established. More specifically, the PIB
provides for the establishment of two regulators for the petroleum
industry –the Upstream Petroleum Inspectorate (to regulate upstream
petroleum operations) and the Downstream Petroleum Regulatory Agency (to
regulate downstream petroleum operations).
Whatever the final version of the PIB, its enactment will be a
welcome resolution after a long period of uncertainty in the Nigerian
UK anti-bribery legislation
Two of Nigeria's often cited problems are lack of transparency and
corruption. In light of that, foreign financiers and investors ought to
note the recent developments in the UK anti-bribery legislation.
The UK Bribery Act 2010 (the Act) came into force in 2011.
Importantly and untypically for UK legislation, the Act has
extraterritorial effect and intends to cover acts performed outside of
the UK, as well as acts performed by non-UK organisations with
sufficient connection to the UK.
It creates new criminal offences of bribing, being bribed, and
bribing foreign public officials, that may be committed by a company,
any individual, and any senior officer who consents or connives in an
offence. There are no viable defences to these offences. The Act also
deems it an offence if a company fails to prevent bribery by allowing
any person associated with it to bribe in order to get or keep business
for that company. There is a defence if an organisation can show it had
in place 'adequate procedures' designed to prevent this. The UK Ministry
of Justice has produced guidance on what those adequate procedures are.
Any organisation (a partnership or incorporated body), formed or
carrying on business in the UK, commits an offence if it allows an
'associated person' to bribe another person intending to get or keep
business or a business advantage for the organisation. An 'associated
person' is essentially someone who performs services for or on behalf of
the organisation. This can include employees, contractors, suppliers
and even joint ventures. This is an important point to note for any
organisation dealing with overseas employees, contractors or suppliers,
as the acts committed by such overseas parties may cause the
organisation to be liable for breach of the Act.
The maximum penalty for the offences under the Act is 10 years'
imprisonment and/or an unlimited fine. For the 'failure to prevent'
offence the fine alone applies.
Organisations which also have US operations will potentially be
subject to the Foreign Corrupt Practices Act (the FCPA) as well as the
Act. The FCPA differs from the Act in a number of key aspects:
(a) the FCPA applies to bribery only in the public sector;
(b) currently, it provides certain exceptions for facilitation payments (although this may be changing soon);
(c) it has no equivalent of the corporate bribery offence; and
(d) the extra-territorial scope of the FCPA differs from that of the Act.
Consequently, an organisation, which is equipped for the FCPA, may
not necessarily be equipped for the Act and the organisation should not
be complacent about compliance with the Act.
The above highlights the exciting opportunities as well as examples
of some of the challenges facing foreign investors while doing business
in Nigeria. As is the case in other parts of the world, experience and
knowledge of the region and of the approaches which have been used
previously to resolve particular difficulties are invaluable and lawyers
with in-depth understanding of the local market can add significant
value particularly in order to structure, document and complete
© 2012 SNR Denton. SNR Denton is the collective trade name for an
international legal practice. SNR Denton UK LLP is a limited liability
partnership registered in England and Wales under no. OC322045.
Authorised and regulated by the Solicitors Regulation Authority. A list
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Veronika Koroleva is a partner in the award winning Trade and Export
Finance practice of SNR Denton based in London. She specialises in
structured trade finance and has advised lenders and borrowers on a
range of finance transactions, including structured trade finance,
project finance, receivables financing, supply chain financing,
warehouse financing, ownership-based structures as well as global loans
to corporates and financial institutions in emerging markets. Her
experience has covered numerous jurisdictions in Africa, Eastern Europe
and CIS, Middle East, Latin America and Asia. Veronika also advised
lenders on cross-border restructuring and portfolio transfers.
Veronika is also a Russian qualified lawyer and has previously practised law in Moscow.
One Fleet Place
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Geoffrey Wynne is head of SNR Denton's Trade and Export Finance group
and a co-head of the firm's Africa practice. Geoffrey is one of the
leading trade finance lawyers and has advised extensively most of the
major trade finance banks around the world on trade and commodity
transactions in virtually every emerging market including Africa, CIS,
Far East, Middle East, India and Latin America. He has worked on many
structured trade transactions covering such diverse commodities as oil,
nickel, steel, tobacco, cocoa and coffee.
Geoffrey is a leading banking lawyer who has been aptly described by
Chambers & Partners: A Guide to the Legal Profession, as "the well
regarded Geoffrey Wynne who is an expert in structured and trade finance
and has acted for banks and borrowers in all areas of practice".
Geoffrey is a regular speaker at international conferences on banking,
trade finance and financial subjects, the author of many articles on
trade finance topics and editor of A Practitioner's Guide to Trade and Commodity Finance, the first edition is which is to be published later this summer by Sweet & Maxwell.
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