• Monday, May 27, 2024
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ELECTRIC POWER SECTOR- POST PRIVATIZATION: Practical Negotiation Issues for Upgrade and Rehabilitation Contracts

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Proem:

It is no news that, in order to guarantee effective gas supply to power generation companies and provide a lasting resolution to electric power sector challenges in Nigeria, the federal government of Nigeria announced a N213 billon power intervention fund. The said fund is meant to cater to the legacy gas debts and address the revenue shortfall in the power sector. Whilst outlining the scope of the intervention that the N213 billion facility is designed to address, the current minister of petroleum resources together with her counterpart in the ministry of power, stated that the fund would be used to (a) settle the legacy gas debts which stands at N36 billion, (b) execute agreed metering programs (c) procure transformers by distribution companies and (d) execute maintenance programs and procurement of equipment by generation companies.

Of huge importance, however, is the need for the owners of the newly privatized power companies to effect far-reaching upgrades of the relevant plants and networks as many of these are decrepit and require substantial rehabilitation or in some cases outright- replacement.

Our Task:

This week, we look at (from my very recent experience) a few of the matters that the owners of the newly privatized companies should give due cognizance as they negotiate rehabilitation, turnkey or such other similar contracts (including operations and maintenance contracts) with engineering companies and Original Equipment Manufacturers (“OEMs”).

I know some would argue that a condition for being selected as preferred bidder for the relevant asset in the first place was to have had such contracts already signed. However, considering the urgency in completing the privatization process, it is not unlikely that many of these new owners only had Memoranda of Understanding (“MoUs”), Heads of Agreement (HoAs), Letters of Intent (“LoI”) or such similar arrangements with the same effect- that more definitive agreements would still need to be extensively negotiated and executed.

Preliminary Negotiation Issues

When negotiating such contracts and any contract for that matter, no party is likely to achieve all its objectives. Therefore, the understanding by the parties that each negotiation is unique and the considerations necessarily different will assist in assuring that negotiations are not long drawn or stalemated. Parties negotiating any contract must be very familiar with commercial considerations in order to better allocate the risks to the party best suited to accommodate same. Prior to commencing negotiations, it is also important to know the key objectives and goals of the client and to clearly categorize these into the “nice to have” and “the must have” buckets. 

It must be clear from the commencement of negotiations that compliance with mandatory provisions of applicable laws is not negotiable and same cannot be mitigated by any commercial, technical or business considerations. With specific reference to the electric power, except where specific request from derogation is sought and obtained in certain cases, the grid code and the rules set out in the Nigerian Electricity Supply and Installation Standards (when they become effective) must be complied with. We take a random look, very briefly, at 5 of these issues; especially from the power company’s (employer’s/owner’s) perspective.

Specific Matters

Scope of Work and Services-

It is germane that the pre-agreed minimum performance targets in the industry Performance Agreement are set as benchmarks for determining the extent of the scope of work and services and should impact the division of responsibilities and warranties (particularly those related to performance and timing).This is particularly important as (when the Transition Electricity Market kicks-in and the Performance Agreement becomes enforceable) the owners of the newly privatized companies may lose their investments where they don’t achieve set targets. It may also be important to create a linkage between the technical due diligence conducted, if any, and the scope of work. However, the scope of work or services should not be restricted to these. The works and services should as much as possible include matters that a prudent and experienced contractor in such a similar situation would take into cognizance.

Liability-

It is not unlikely that many of the OEMs (who are by the way non-Nigerian) would seek to work/ execute such contracts jointly with their Nigerian subsidiaries and typically split the contract to offshore and onshore elements for tax and other purposes. Such companies also try to make liability to the owner/ employer (in this case the power generation or distribution company) ‘several’ rather than being ‘joint and several’. I would typically advise clients where I am on the owner/ employer’s side (and very strongly too) to make same joint and several so that at any point in time, such a client can chase any member of the OEM Group ehich is a counterparty under the contract, without needing to necessarily establish the fault of the specific entity.

Definitions, Definitions, Definitions-

I would advise caution in relation to the use and acceptance of definitions in the relevant contract. Definitions should be properly situated within the context of the entire arrangement. A good example could be the definition of terms such as ‘defect’. Would any defect, for example, in the works or services be deemed a ‘defect’ or would same need to be material to be regarded as a ‘defect’ within the context of the relevant contract? Where materiality is key, a pertinent question for determination is how to determine what amounts to materiality. This really is very important. Some other terms which may impact quality, timely delivery and price escalations should also be properly reviewed in light of the entire arrangement.

Change Orders-

Change orders generally impact costs and or schedule for completion, such that completion may not take place as pre-agreed whilst cost may also escalate. So much can be said about change orders. One point to note, however, is that the OEM/ contractor must be required to show how the event, pursuant to which it seeks a change order, has or would impact its ability to complete as scheduled or within the purview of the pre-set costs profile.

Force Majeure-

A force majeure clause sets out the circumstances in which a party to a contract could be excused from performing its contractual obligations where such performance is precluded or made impossible by state of affairs outside that party’s control.

In the absence of a force majeure clause, the parties to an agreement may only be able to rely on the common law doctrine of “frustration” which may be inauspicious for one or more parties.  Although, the term “force majeure” is frequently used, it should be properly defined and not just copied and pasted. This is so because, apart from not being an English word, a clause in an agreement which provided that “the usual force majeure clauses shall apply” was held by an English court to be void for uncertainty. There is, therefore, the need for certainty. From my experience negotiating contracts, force majeure clauses are very important clauses although, several persons treat them as merely boiler plate.

I would, for example, negotiate that, for a Force Majeure to avail a party, the circumstances must be such that the material event (a) is or was not within the reasonable control, directly or indirectly, of such party, (b) was not the result of fault or negligence on the part of that affected party and (c) could not have been prevented by due diligence.

Further, I would also argue that the inability of a party to fulfill its financial obligations should not be a Force Majeure Event. For more on negotiating contracts in the electric power sector, read the text “The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business” by Ayodele Oni.

Ayodele Oni  {[email protected]}, a solicitor, specializes in international energy (oil, gas and electricity) investment law and policy. He holds a mini-MBA in power & electricity. Follow me @ayodelegoni.