Arbitration & Dispute Management: Navigating Contractual Risks In Power Sector Projects

By Abdussamad Abdurrahman

Are power sector projects still considered bankable?

This question has become prevalent among projects and construction practitioners, particularly following the COVID-19 pandemic in the Nigerian and West African markets. Though the entire world is in a recovery phase from the global economic impact of the COVID-19 pandemic, project risk continues to raise concerns in the context of contracts. This is particularly apparent in the power sector where there is a requirement for project developers to raise debt to fund the construction of projects.

“To put it simply, the main concern is – will the lenders be repaid? That is what it comes down to. If a project is going to be bankable, the lenders will need to know that, whatever happens, within reason, they are going to get repaid,” said Arun Velusami, Partner at Hogan Lovells. “However, with this sort of simplistic answer, the lenders will also need to see that the project in question is commercially viable and will benefit the country”.

Insights from the World Bank reveal that the bankability of an infrastructure project is determined at a much earlier phase of the project life, i.e. the project development stage. When determining the commercial viability of a project, certain elements come into play. One important element is to ensure the tariffs are cost-reflective, noting that they are enough to pay the debt and attract foreign investment. Another point is to be able to garner government support for the project, as this gives significant credibility. Lastly, consideration must be given to cases where early termination of a project may arise or other factors might impact the project, such as force majeure. In this case, the financial institution will require a guarantee that the debt will be repaid.

Recently, global law firm, Hogan Lovells, in partnership with Ghanaian law firm Bentsi-Enchill, Letsa and Ankomah, hosted Virtual Sessions on the power sector. These sessions, which were held over two days, were organized as part of the Lagos Chamber of Commerce International Arbitration Centre (LACIAC) and the Association for Consulting Engineering in Nigeria (ACEN) Second Regional Training Workshop on Dispute Management in Africa Infrastructure Projects (DIMAP) 2020. The training workshop featured a faculty of experts in the fields of construction, project management, dispute management and dispute resolution, who delivered insights on how to navigate contractual agreements within the sector.

Speaking on dispute resolution clauses in the context of power contracts, Dr Ademola Bamgbose, a dispute resolution expert in the London office at Hogan Lovells, noted that “dispute resolution clauses are often relegated to the end of contractual negotiations; or dismissed as “boilerplate” and given standard wording without any thought as to the context. But these clauses can have profound implications on how a dispute is resolved and on how the contractual rights and obligations in a power contract are enforced”. He emphasized the importance of robust and clearly drafted dispute resolution clauses as it can be somewhat difficult to get parties to agree on anything after the dispute has arisen.

The training workshop touched on power sector projects, exploring the best legal practices in the management of power projects. Looking further into the current situation brought about by the COVID-19 pandemic, it seems there have been changes in the way power project contracts are being addressed by the concerned parties. Arun Velusami noted during the session that, “During the negotiation phase of power projects where the power and concession agreement is being exchanged, one of the areas raised is if COVID-19 should be dealt with as a force majeure event”.

Participants in the virtual sessions pointed out that Africa as a continent was able to overcome the Ebola epidemic, where similar issues were raised; therefore it is necessary that all parties must ensure timelines and costs are aligned with the current event before entering the contract. Overall, it was pointed out that the duration of contracting is now being extended due to barriers to physical travel, which does not make the process as effective during the deliberation stage.

Training remains vital and programs like DIMAP create the avenue to inform participants on the nuances of navigating power sector contracts and building on best practices in the Nigerian power sector, particularly in preparation for the new normal.