The Need for Sanctity of Contracts for the Success of the Power Sector Reform: An Investor’s Experience

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The Need for Sanctity of Contracts for the Success of the Power Sector Reform: An Investor’s Experience

Olatunde Ayeni

The story of the power sector in Nigeria is a long but very uninspiring one to electricity consumers and investors in the sector. Whenever it is told, there is always this conclusion that successive governments have failed the people. However in present day Nigeria, the story has slightly changed with most Nigerians having the misconception that the electricity distribution companies are the entities that have failed the people without full cognisance of the fact that these distribution companies are merely the last in the power value chain and can only distribute the power they receive from the generating companies through the Transmission Company of Nigeria.

This paper seeks to examine the need for there to be Sanctity of Contracts and the experience of an Investor in the Power Sector.

The first section of this paper starts by giving a brief history of the Nigerian Electric Power Industry; (ii) it then goes into an overview of the Power Sector Reforms, (iii) the next section deals with the Need For Sanctity of Contracts, here the paper looks at the definitions of a Contract and Sanctity of Contract, (iv) it then goes on to deal with the essence of a contract and the interplay with the concept of freedom to contract. The aim is to highlight the effects of the paradigm shift from a Government controlled contracting mentality, where resources are provided 100% by the government thereby giving it a dictatorial effect where contractual obligations are constantly breached without consequence, to the present age where private participation requires both local and foreign funding which could only be accessible in a climate where contractual terms are honoured irrespective of the parties involved. The next section of this paper then goes on to look at the Problems and Challenges of a private investor in the power sector, citing personal experiences of the author, concluding with why it is absolutely necessary for there to be sanctity of contracts from all stakeholders whether public or private, in order for there to be a successful power sector reform.

The story dates back before 1950 when the Public Works Department ceased to have control over the operation of electricity generating plants and the distribution system in the country. In the same vein the Nigerian Government Electricity Undertaking (NGEU) was immediately established as an arm of the Public Works Department to take over the assets and liabilities of electricity supply in Lagos. By 1950, the then colonial government considered it expedient to integrate electricity power development and make it effective. The government then established the body known as the Electricity Corporation of Nigeria (ECN) pursuant to Ordinance No. 15 of 1950. With the ordinance in place, the electricity department and all the undertakings which were controlled came under one body.

The ECN officially took over electricity supply activities in Nigeria by April, 1951 by integrating all Government owned, as well as Native Authority owned generating plants and systems. These steps creditably improved electric power supply in the country through grid connection of generation, transmission and distribution of electricity.

In 1962, the Niger Dams Authority was established by an Act of Parliament which made it the responsibility of the Authority to construct dams after discovering the innumerable benefits that would accrue from the Dams. The vast nature of the country’s grid power transmission system started operation in 1966 with the collaborative efforts of both ECN and NDA which then linked Lagos with Kainji while the Kainji –Kaduna link was extended to Zaria and Kano. In the southern part, we had Oshogbo-Benin-Ughelli and Benin-Onitsha-Afam links which were constructed until the entire national grid linked the whole 36 states including the Federal Capital Territory.

Subsequently, the Niger Dam Authorities (NDA) and Electricity Corporation of Nigeria became one entity. But for some challenges including the civil war the merger could not take effect from April 1, 1972 as planned until January 6, 1973, when the first General Manager was appointed and both ECN and NDA under a unified body subsequently changed its name to National Electric Power Authority (NEPA). Not a few Nigerian have argued that was when the power crisis in Nigeria began. This is borne out of the fact that for several years, despite investments made by the Federal Government in the sector over time, power outages continued to torment electricity consumers.

Power Sector Reform

The country’s return to democratic governance in 1999 introduced yet another phase in the power sector. By the time former president, Olusegun Obasanjo took over the mantle of leadership in 1999, epileptic power supply had become one of the most worrisome issues in the country; and a major problem that any responsible Government anywhere in the world would have loved to tackle with all the resources available to it.

The Obasanjo administration through the Bureau of Public Enterprise (BPE) and the Federal Executive Council (FEC) in 2001 approved the National Electric Power Policy (NEPP) which was prepared by the Electric Power Sector Reforms Implementation Committee (EPIC), thereby achieving various milestones in the power sector reform’s agenda. These include:

• The signing into law of the Electricity Power Sector Reform Act on 11th March 2005 (EPSRA) and later enactment by the National Assembly on August 8th 2005, as the legal foundation for the implementation of the power policy of the Federal Republic of Nigeria;

• The establishment of the Power Holding Company of Nigeria (PHCN) on 5th May 2005 which led to the transfer of assets and liabilities of the old NEPA to the new PHCN;

• The establishment of the Nigeria Electricity Regulatory Commission (NERC) in October 2005 to act as the power sector’s regulator in addition to granting licenses for Power Generation, Transmission, Distribution and supply of electricity;

• New Successor Companies i.e. 6 Generation Companies (GenCos), 1 Transmission Company (TransCo) and 11 Distribution Companies (DisCos) were incorporated between November 2005 and November 2006;

• Assets, liabilities and staff of PHCN were transferred to the 18 successor companies on July 2006 and the relevant market codes were also issued;

• The Nigerian Bulk Electricity Trading Company PLC (NBET) was incorporated in July 29th 2010, to carry on the role of bulk trading in transmission under license from NERC i.e. purchase and resale of electric power and ancillary services from Independent Power Producers (IPPs) and selling to the DisCos;

• The Nigerian Electricity Liability Management Company GTE was incorporated in August 2006, to carry out the role of liability management for the defunct PHCN. It is interesting to note that in the company’s mission statement, its mission is to “Ensure Sanctity of Contract and Settlement of Pensions and Third Party liabilities”, this is very much in tune with the subject matter of this paper;

• The Market Rules to guide operations in the electricity industry were approved in 2008;

• A Rural Electrification policy was approved in 2006 and the Agency was established albeit suspended in 2009 but revived in 2011;

• A liquidation Committee was established on April 12th, 2011 to seamlessly wind up the operations of PHCN.

Pursuant to the unbundling exercise, the Federal Government owned electricity system now had the following:

1. Three hydro and seven thermal generating stations with a total installed capacity of about 6,852MW. Each entity was incorporated as a single-asset generating company.

2. A radial transmission grid (330kV and 132kV), owned and managed by the Transmission Company of Nigeria, with the responsibility of undertaking the system operation and market settlement functions, respectively; and

3. Eleven distribution companies (33kV and below) that undertake the wires, sales, billing, collection and customer care functions within their area of geographical monopoly.

A competitive tender was later carried out for bids by core investor groups including competent generation asset owners for a minimum of 51 per cent of equity in the following successor thermal generating companies. These are Afam Power Plc; Sapele Power Plc; Ughelli Power Plc; and Geregu Power Plc. There was a separate concession process for successor hydro generating companies namely, Shiroro Hydro Power Plc; Kainji Hydro Power,(Note that Jebba power station is part of Kainji Hydro Power Plc.) Similarly, competitive tender was carried out to receive bids from core investor groups with specific criteria for distribution companies. The successor distribution companies are listed below:

• Abuja Electricity Distribution Plc;

• Benin Electricity Distribution Plc;

• Eko Electricity Distribution Plc;

• Enugu Electricity Distribution Plc;

• Ibadan Electricity Distribution Plc;

• Ikeja Electricity Distribution Plc;

• Jos Electricity Distribution Plc;

• Kaduna Electricity Distribution Plc;

• Kano Electricity Distribution Plc;

• Port Harcourt Electricity Distribution Plc;

• Yola Electricity Distribution Plc.

Currently as we speak, the Federal Government owns 100% of the transmission company, while its equity in the generating companies is 20% leaving 80% to private investors. In the case of distribution companies, the Government only sold 60% while it retained 40% equity. On the 30th of November, 2013, the Federal Government of Nigeria handed over certificates of ownership to prospective private investors for proper management of power sector affairs except the Transmission Company of Nigeria (TCN). Of course in achieving these milestones, several contractual commitments were made by both the Federal Government and the private investors who acquired these companies. These commitments now place certain obligations on both the Federal Government, the investors in these power assets and the general public.

The Need for Sanctity of Contracts

According to Black’s Law Dictionary “contract” is defined as,

“an agreement between two or more parties creating obligations that are enforceable or otherwise recognisable at law.”

A contract can further be described as a promise or set of promises the breach of which the law gives a remedy or the performance of which the law in some way recognises as a duty legally binding. It is interesting to note that the same Black’s Law dictionary, defines the concept of “sanctity of contract” as,

“the principle that the parties to a contract having duly entered into it, must honour their obligations under it.”

Essence of a Contract

One of the notable functions of a contract is to facilitate forward planning of a transaction and to make provision for future contingencies. The more complex the transaction, the greater the need for such planning and more detailed the provisions that are likely to be made in the said contract. Secondly, a contract will establish what are the respective responsibilities of the parties and the standard of performance to be expected of them. Thirdly, a contract will allow the parties to examine the economic risks involved in the transaction and allow allocation of the risks in advance. Lastly, a contract may provide for what is to happen in the event that things go wrong or a default is committed by a party. From the foregoing, I will conveniently say that a contract is an instrument by which separate and conflicting interests of the participants can be reconciled and brought to a common goal.

The significant role played by contracts and the sanctity of the terms contained therein in any economic system or growth cannot be over emphasised. The issue is now to what extent does the law appreciate or assume that parties enjoy freedom of economic decision when they decide to enter into a contract?

The Concept of Freedom of Contract

The concept of freedom of contract encompasses two different meanings. First is the freedom of a party to choose to enter into a contract on whatever terms it may consider advantageous to its interests, or to choose not to. Therefore, contractual obligation is attributed to the will of the parties.

Prior to the reform period, the Nigerian Government and its people were used to the Government making provisions for public infrastructural services. Contracts or understandings for the provision of public amenities were always between Government bodies and on that basis the need for sanctity of contractual terms were never cherished or enforced. Even between two different arms of government, the principle of sanctity of contract was hardly respected by successive Nigerian Government. A typical example is the boundary issues between the River State Government and Akwa Ibom State. It took the intervention of the Supreme Court to emphasise the principle of sanctity of contract and the need for parties to adhere to it.

However today, sanctity of contract has become more compelling due to the emergence of private sector participation in the provision of some of these infrastructural services which now has more far reaching effect. The implication of failure of the Government to adhere to the principle of sanctity of contract, go a long way in destroying the confidence every would-be investor ordinarily would have in taking an investment decision

In a developing economy like ours, the frequently agitating questions for an investor borders amongst the following:

• If an investor and the Government enters into a contract or makes a commitment in writing would it be respected?

• Can an investor enforce the terms in case of default?

• Would an investor have a remedy? And even where there is a remedy, would the Government honor the remedial measures

• If there is a change in Government would the previous administration’s commitments be respected by the succeeding administration?

• Would the Government as a party even honour its own obligations under the contract?

All these could be resolved successfully if parties both the private sector and the government imbibe the tenets of sanctity of contracts. The concept behind the sanctity of contract goes beyond the parties to the contract alone, it imposes a duty even on third parties not to aid or induce any of the parties to the contract to commit any breach of the terms contained therein. The Courts must hold culpable a 3rd party who knowingly without justification facilitated or intentionally induced the breach of a contract between contracting parties. This is one principle that also imposes a duty on the Court to give effect to the contract or agreement freely entered into by parties as in Babatunde vs. Bank of the North Limited 2011 (Pt.1279) 738.

A typical example is the case of BFI GROUP CORPORATION v BUREAU OF PUBLIC ENTERPRISES where the Appellant (BFI GROUP) challenged the unilateral decision of BPE in extinguishing the contract of sale of the Aluminum Smelter Company of Nigeria (ALSCON) on the basis that the Appellant failed to pay 10% initial bid price within 15 days of the receipt of the letter confirming the Appellant as the preferred bidder. It was the case of the Appellant that the position taken by BPE was contrary to the terms of the Undertakings and Agreements signed and submitted to BPE which clearly provided that the 10% of the bid price shall be paid within 15 working days of signing the Share Purchase Agreement. The Supreme Court in its decision emphasised on the sanctity of contract when it held thus:

“The Court must treat as sacrosanct the terms of an agreement freely entered into by the parties. This is because the parties to a contract enjoy their freedom to contract on their own terms so long as same is lawful. The terms of a contract between parties are clothed with some degree of sanctity and if any question should arise with regards to the contract, the terms in any document which constitute the contract are invariably the guide to its interpretation. When parties enter into a contract, they are bound by the terms of the contract as set out by them. It is not the business of the Court to rewrite a contract for the parties.”

The Court however stated that ALSCON, has a duty to construe the surrounding circumstances including written or oral statements so as to discover the intention of the parties.

Generally, the law is reluctant to admit excuses for non-performance of a clearly entered contractual term. But the draconian requirements of commercial convenience have to be reconciled with the moral qualifications introduced by the need to discourage the grosser forms of unfair dealings. Therefore, in as much as there is the pressing need to respect the sanctity of contracts, the law as well as equity in recent times have dictated to the conscience of the Courts to admit defences based on limitation laws, fraud, misrepresentation, mistakes, duress and undue influence to curb economic exploitations.

It must also be noted that the law will not permit a party of full age and understanding, who failed to read the contract or appreciate the full import and effect of the terms contained therein to escape from the contract. It will not rewrite a contract for the parties or imply additional provisions merely because it would be reasonable to do so. However in certain circumstances, the law will pronounce that parties are discharged or relieved from performance of their obligations by reason of change of circumstances i.e. frustration of the contract. One of such instances is the situation with the Yola Disco in which the investors due to the insurgency in their franchise area had to invoke the force majeure provisions to discharge them from further obligation under the contract.

The necessity that Government respects the contracts with the private sectors as envisaged by the EPSRA, considering the process in the power sector and the endemic corruption in the environment is another problem that stares investors in the face. The failure of government to respect the terms of most of these contracts has more far reaching effects than anticipated. For example an investor who had performed its due diligence enters into a contract with the government and he thereafter takes the same contract to his bankers for finance on the basis of what was agreed to. A breach of such contractual terms in the obligations of the government would have a spiral effect on the private investor both on his finances as well as the performance of his own obligations under the contract.

The Experience of Private Investors in the Power Sector In Nigeria

As stated in the previous section of this paper, Nigeria has moved from the pre-reform era where the Government was solely responsible for the provision of social amenities to an era where private sector participation for the successful provision of social amenities has seen the emergence of investors such as myself, the need for sanctity of contract cannot be overemphasised. There are many challenges private investors like us have encountered in doing business in Nigeria and such constraints include: (a) Limited access to funds in money and capital markets due to the lack of confidence the financiers have in the government vis a vis their obligations. (b) Unpredictable and weak policy framework (c) Inadequate and deteriorating infrastructures support. (d) Low consumer purchasing power (e) High cost of equipment and working capital (f) Multiple Levies and taxes. Although the tax system has witnessed some improvements in recent years, it is still uneven, with an irregular pattern of exemptions to consumption taxes and import tariffs. (g) Inefficiencies in customs and port administration (h) Consistency and confidence in the government economic policies, (i) Maintaining balance between labour interests and private sector development, (j) Transparency in the regulatory mechanism of the government (k) Not seeing Government as a Continuum. Successive Governments tend not to realise that Government is a continuum and therefore a successive Government should respect contracts entered into by previous administrations; (m) Complexities in the legal framework. For example, there is a lack of adequate legal procedure for enforcement of contracts. This lacuna introduces additional (and unnecessary) uncertainties into normal business relationships in the system that discourages private investment.

However the fundamental challenge experienced by investors in the Nigerian power sector is that of lack of respect for sanctity of contracts. The world has become one global market whereby trade and finance are done across borders, the effect of which is that there are direct linkages between markets and once one market develops a bad reputation for not honouring obligations in contracts, the effects could be immeasurable to an economy. The aforementioned statement can be better demonstrated with the on-going Nigerian power reform scenario and I would explain. Over $2.5 billion USD was spent by investors in the acquisition of the unbundled power companies with most of the debt funding being raised by our local banks. While our local banks then have corresponding funding arrangements with foreign banks.

An overview estimation of the quantum of finance required by the DisCos for capex post privatisation is estimated at about $2 billion with average capex for Abuja being $179.5 million, Benin $341 million, Eko $230.5 million, Enugu $133.5 million, Ibadan $217 million, Ikeja $299.5 million, Jos $288 million, Kano $149 million, Port Harcourt $25 million, and Yola $88 million. While for the GenCos it is estimated that the funding requirement post privatisation is put at $1.5 billion, with estimated average capex for Ughelli being $370 million, Kainji $400 million, Sapele $300 million, Geregu $138 million, Shiroro $200 million, and Afam $100 million.

Already with the frequent breaches to the terms of the acquisition agreements e.g. lack of adequate power from the GenCos to the DisCos for distribution to the end customers, improper implementation of MYTO (electricity tariffs issued by the National Electricity Regulation Commission) so as to have a cost effective tariff, no access to acquired assets as a result of insecurity in some parts of the country, lack of will to end all previous staff and union agitation, etc. The foreign lenders are reluctant to extend further financing to this sector as a result of non-adherence to sanctity of the initial contracts of purchase and the inability of investors to honour existing obligations. This trend is already a source of major worry to investors such as myself as we are having sleepless nights trying to convince international lenders to extend further funding for post-acquisition activities.

We ask ourselves as investors in the Nigerian power sector, has government fulfilled its part of the numerous agreements it entered into with investors? From an investor’s point of view, my answer is “No”.

One of such instances is the Mambilla Hydraulic Power Project to be established in Taraba State, which was meant to generate a minimum of 2600MW for the benefits of Nigerians. The contract was awarded and entered into by the Obasanjo regime since 2005 but unfortunately, successive Governments have failed to honour minor commitments as promised in the contract despite the willingness of the Chinese company to finance the project with over $5 Billion USD up till completion.

These viral attitudes over the years have eaten deep into our system that successive governments in this country have become notorious for not honouring contract agreements they entered into with investors no matter the far reaching negative implications it will have. Take a look at the Power Sector Reform Act; and the Power Roadmap. You will observe how laudable the provisions of those legal instruments are. But to a large extent, they exist only on paper as government has continued to breach them, thereby frustrating the efforts of genuine businessmen.

A typical example as earlier mentioned is the Yola Disco. As we speak the investors are yet to receive any assurances on how or when they will receive their investments despite the fact that the entire situation being experienced in the region were anticipated and well captured in the contracts executed between the investors and the Federal Government. It may interest you to note that despite the observance of the procedural steps as outlined in the contracts and the formal handover of the Yola Disco by the private investors to the Federal Government over a year ago, the Federal Government is yet to refund or pay the investors the terminations proceeds as agreed by parties. This flagrant disregard for duly executed contracts by Federal Government not only creates a big hole in the finance and business of private investors but also leaves a bad legacy that any genuine private investor would never wish to experience.

Another is the Multi Year Tariff Order which the DISCOs are fighting hard for the government to implement, what you as an investor in the end receives are series of court orders aiding and inducing the government to further commit these breaches which dashes the hope of the private investors who have heavy debt portfolios to settle already planned on their expected incomes from the inflows of the contract.

Another example was when Lagos State Government in 1999 conceived the idea of Independent Power Projects to supply power to the territory of Lagos State and invited a private investor, Enron Corporation of United States to undertake the project. Thereafter, a Power Purchase Agreement was entered into between Enron Corporation, Lagos State Government, the defunct National Electricity Power Authority, which then had a near monopoly on electricity generation, transmission and distribution activities in Nigeria and the Federal Government. Upon a flagrant breach and disregard of the terms of the Agreement, the Lagos State Government had no better choice than to file a petition against the partners in the project— Power Holding Company of Nigeria (PHCN), Ikeja Electricity Distribution Company, Eko Electricity Distribution Company and the Transmission Company of Nigeria Plc. Holden in Lagos before the Nigerian Electricity Regulatory Commission (NERC) The Panel Hearing (Panel Hearing No. NERC/033/00004/2008) attributed, wrongful invoicing of the Government of Lagos State and breach of the Barge Power Purchase Agreement for Electricity Generating Facilities in Lagos, Nigeria, as the major elements that caused the transaction to fail.

Another fascinating experience is the series of suits especially industrial actions filed on a regular basis by different Labour Unions under the defunct PHCN. As an investor, we observe on a regular basis the complaints of the Unions about different agreements reached between them and the Government even before the unbundling of PHCN and the privatisation process. The apparent disregard for most of these agreements reached by the Government with these bodies gives so much concern to us as investors and most especially the far reaching effect of the terms of these agreements on the interests sold to us.

There are so many instances that these agreements reached are never tabled during the privatisation stage but they usually surface upon conclusion of acquisition of interests by private investors. In as much as I would not like to mention some of these cases which are still pending in the appellate courts, I would like to state here that most of the complaints or issues in those cases always have little or nothing to do with the interests as acquired by the private investors but more to do with breaches of terms agreed to by the Government before transfer of interests to private sectors. However, because we are vulnerable, we are always the target of the complainants.

Another dimension through which the private investor is being taught a hard lesson by the Federal Government over investment in the power sector is the outright neglect of some of the MDAs in paying for electricity power distributed to them. A typical example is the Ministry of Defence. As I speak, the DISCO’s are being owed over N80 billion of utilised electricity by the Military barracks and facilities all over the nation. The interesting aspect of this is that despite their debt portfolio, the DISCOs must ensure that electricity power, which is purchased by them is constantly supplied to these Military barracks. I am sure some would have read in the dailies few days ago about one of our employees who was beaten blue and black by some military personnel in Abeokuta over complaint that the five hours of electricity given to them was too small despite the fact that they do not pay. These and more are challenges we face every day as investors in the Nigerian power sector.

The sanctity of contracts must remain the bedrock of a new culture in doing business if we must succeed in our power reform agenda. For the power sector reform to achieve its purpose and for the economy to stabilise and grow and attract more investors; our government still has much to do in the area of respecting agreements and honouring commitments voluntarily entered into.

Being a paper presented by Dr. Olatunde Ayeni, CON, a lawyer, investor and Chairman of Ibadan Electricity Distribution Company at the 2nd National Workshop for Judicial Officers on the Nigerian Energy/Power Sector organised by the National Judicial Institute in collaboration with IIPELP on Tuesday, 5th April 2016.


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