A Review of Key Investment Protections for Investors and Meter Asset Providers in MAP 2018

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Tuesday, March 20, 2018  01.44PM / Olubunmi Abayomi-Olukunle 

The Nigerian Electricity Regulatory Commission (
NERC) recently issued the Meter Asset Provider Regulations 2018 (The MAP Regulation). The key regulatory objectives of the MAP Regulation are to encourage the development of independent and competitive metering services in the Nigerian Electricity Supply Industry (NESI) and to attract private investment in the provision of metering services in the NESI (NERC’s Regulatory Objective).

 

The MAP Regulation is significant because it effectively unbundles Nigeria’s electricity distribution sector, by re-allocating the responsibility for providing metering services, effectively creating a new class of market participants, - Meter Asset Providers -.

 

When considered within the context of the liquidity problems which Electricity Distribution Companies (DisCos) have traditionally alluded to as the reason for the slow pace of metering customers within their coverage area, it would appear that the MAP regulation has effectively shifted the financial cum liquidity challenge as relates to the provision of metering services from DisCos to, hopefully, less-leveraged entities.

 

Other things been equal, the implementation of the MAP regulations should free-up the balance sheet of DisCos and allow for add-on investments in critical infrastructure. By way of statutory mandate within the MAP Regulation, DisCos must now engage MAPs in order to achieve the metering targets set by law. For the electricity consumer in Nigeria (Consumers), the MAP regulation means that Consumers will now be able to get electricity meters within 10 days of payment. Consumers need not wait endlessly for free meters anymore and may choose to pay upfront in full or pay in instalments through programmed deductions from payments made for electricity consumption.  

We expect that the Metering Service Providers (
MSPs) i.e. the existing licensed meter manufacturers, importers, installers and vendors, will, take advantage of the opportunity that the MAP Regulation creates, to expand their service offering and refine corporate strategy. The existing MSPs are better-positioned to take advantage of the opportunities which the MAP Regulations provide because they can easily leverage their existing networks and knowledge of the metering business for value and scale, a factor, which could be a differentiation advantage in raising expansion financing. Accordingly, we expect to see an uptick, in strategic investments and in debt financing, especially, private debt financing, facing the metering sub-sector, in the short term and increasing private equity investment across the value chain of the metering business in the long term. 

Bearing NERC’s Regulatory Objective in mind, the below is a review of the MAP Regulation with a view to examining the extent to which the MAP Regulation protects prospective/intending investors and promoters of the MAP business.
  

Prohibition of Self-Dealing

The MAP Regulation contains catch-all provisioning which prohibits DisCos from self-dealing. Accordingly, DisCos and their core investors, including their subsidiaries, affiliates, directors and their relatives are prohibited from setting up, owning shares or holding directorships and senior management positions in the MAP.

 

This provisioning demonstrates a good understanding of some of the most significant systemic challenges within the NESI. Self-dealings of this nature are very prevalent and often lead to conflict-scenarios which typically trigger larger inefficiency and political issues. It is useful to note that the self-dealing prohibition is absolute and does not admit of any disclosure exceptions.  

Guided Procurement

Although, the standard practice has been for DisCos to conduct bidding processes for procuring meter assets, DisCos are now subject to even higher procurement standards, with respect to the procurement of metering services, pursuant to the MAP Regulation.

 

For instance, the MAP Regulation places an obligation on DisCos to conduct an open and competitive bidding process. Expressions of Interest must be published in two Nigerian newspapers and on a DisCo’s website. In addition, DisCos are now required to complete procurement processes for metering services within strict timelines.

 

Specifically, Discos are now required to complete a guided procurement process for the engagement of the first cohort of MAPs, within 4 months from April 3, 2018.

 

To ensure compliance with statutory requirements, procurement processes for metering services are now also subject to top-level review by tender auditors who will be engaged by the NERC to audit all meter service procurements. It is instructive to note the statutory/guided procurement process preserved in the MAP Regulation, effectively, provides bidders with the additional leverage to challenge or call into question the openness or transparency of procurement process for metering services to question in court.  

Payment Assurance For MAPs

The MAP Regulations place a mandatory obligation on DisCos to provide payment security within 30 days of executing an MSA with a MAP. The MAP Regulation suggests a number of payment security options which DisCos and MAPs may consider, including the provision by a DisCo of an irrevocable direct pay letter of credit. The payment assurance provisioning is thoughtful and critical, against the background of the liquidity issues experienced in the NESI and the multiple financial obligations that Discos are increasingly committed to. 

For sure, Discos will have to be creative in complying with this requirement in view of existing financing and security arrangements. Although, the MAP Regulation also places an obligation on DisCos to  ring fence payments for metering services by Customers to a dedicated account, even this option, will present its own peculiar, albeit surmountable finance--obligation’ challenges for Discos.

 

It is useful to note that the MAP Regulation places a separate regulatory obligation on DisCos to pay MAPs periodically in line with the MSA. This provisioning widens the scope of liability that DisCos are exposed to, in relation to metering services as they may now also be held liable, other than for contractual breach and in additional to the standard contractual remedies.

 

It is further useful to note that by statutory mandate, MAPs have a statutory right to be paid in full in respect of metering services provided and are deemed to be the owners of meter assets until they have been paid in full. MAPs are also entitled to fully recover the cost of meter assets, defined as the cost of the meter, meter accessories and all associated costs, including financing costs and a return on investment. 

 

Contract Regulation

The MAP Regulation adopts a framework that ensures that commercial expectations are managed and contractual obligations are enforceable between the MAPs and DisCos. The MAP Regulation lays the basic groundwork for the contractual arrangements between MAPs and DisCos. At the very minimum, MPAs and DisCos must execute a Metering Service Agreement (MSA) and a Service Level Agreement (SLA).

 

Although, no standard form agreements are provided in the MAP Regulation, the MAP Regulation specifies certain clauses that must be in an MSA. It is instructive to note that the current statutory requirements are minimal and basic. The applicable MSA for instance, is significantly more complex in terms of provisioning required to secure efficient scoping and allocation of risk and resources.  A number of country and industry-specific issues will further complicate an MSA. Accordingly, operational MSAs (and SLAs) will require careful thought and an original approach. 

 

Resolution of Conflicts Between NERC Regulation

It is useful to note that conflicts between the MAP Regulation and any other laws in force are to be resolved in favour of the MAP Regulation. This provisioning provides some good comfort for investors and MAPs in the context of an increasingly over-regulated industry. 

 

Local Content Threshold

The MAP Regulation provides for a mandatory local content threshold, which requires MAPs to source a minimum of 30% of contracted metering volumes from local manufacturers. We think that this is a reasonable threshold given the current local meter manufacturing capacity vis-a-vis the high demand for electricity meters in Nigeria. We expect that growth in local manufacturing capacity will drive adjustments to local content thresholds contained in the MAP Regulation, in the long term. 

 

Comments

Although, the Map Regulation is a worthy effort, there are still a number of open issues, which we think the NERC should give more thought to. Some these relates to and includes – the absence of a definition of phrases like ‘metering services’ and ‘meter assets’, ‘efficient cost of meter assets’ in relation to the amount payable by a Customer for a meter asset, within the context of the MAP Regulation; the propriety of an exemption regime in appropriate cases, the precise legal effect that the MAP Regulation bears in relation to existing metering contracts which DisCos have signed up prior to the MAP Regulation and a statutory determination of the burden of agency liability.

 

Overall, the success of the business arrangements which the MAP Regulation envisage is dependent on the availability of power supply. If there is no power supply, this will affect the ability of Consumers, who opt for instalment payments for meter assets, to fulfil their payment obligations.

 

This will have implications for MAPs depending on the nature of financing which a MAP secures. Without a doubt, MAPs have to structure for revenue risks of this nature when arranging financing. MAPs will also need to carefully negotiate the liability for utilities disputes relating to the supply of power, within the context of the commercial issues that such disputes, will throw up in an MSA. 

 

About the Author

Olubunmi Abayomi-Olukunle is a partner and Lead Counsel at the Private Equity, Venture Capital & Emerging Companies sector-focused, specialist investment & finance law firm of Balogun Harold - www.balogunharold.com. He can be reached by e-mail vide olu@balogunharold.com   

 

Download the MAP Regulation 2018 via  www.lawyard.ng

·       Meter Asset Provider Regulations 2018 Nigerian Lawyer Website ...

·       Download the NERC Meter Asset Provider Regulations 2018 - Lawyard  

 
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