Project Finance in Nigeria: Legal Structure, Risk Allocation, and Security Arrangements

Contributor: Olugbade Johnson Abiola

Introduction

Project finance is an important mechanism for funding large-scale infrastructure and investment projects in Nigeria, particularly in the energy, transportation, telecommunications, and oil and gas sectors. Unlike conventional corporate finance, project finance relies primarily on the project’s assets, contractual rights, and anticipated cash flows for repayment, rather than on the sponsors’ general creditworthiness. The structure typically involves a special purpose vehicle (SPV) established to develop, finance, and operate the project, while sponsors, lenders, contractors, operators, offtakers, and government authorities assume distinct contractual obligations. The effectiveness of this structure depends largely on the project’s commercial viability, regulatory compliance, predictable revenue streams, and the enforceability of its contractual arrangements.

Risk allocation is central to the viability of a project finance transaction. Parties generally allocate construction, operational, revenue, regulatory, foreign exchange, and other project risks through engineering, procurement and construction (EPC) contracts, offtake agreements, guarantees, insurance arrangements, and other contractual mechanisms. Lenders, in turn, protect their interests through security over project assets and contractual rights, including fixed and floating charges, mortgages, assignments, guarantees, and security over project bank accounts. Direct agreements and contractual step-in rights may also enable lenders to intervene after a default, preserve the project’s operations, and protect its revenue-generating capacity before enforcing their security.

Nigeria’s project finance legal framework derives from a combination of general commercial legislation and sector-specific regulatory regimes. Relevant legislation includes the Companies and Allied Matters Act 2020 (CAMA), the Secured Transactions in Movable Assets Act 2017 (STMA), the Land Use Act, the Infrastructure Concession Regulatory Commission (Establishment, etc.) Act 2005 (ICRC Act), the Electricity Act 2023, and the Petroleum Industry Act 2021 (PIA). These statutes regulate, among other matters, corporate structuring, the creation and perfection of security interests, land rights, public-private partnerships (PPPs), electricity projects, and petroleum-sector investments. This article examines Nigeria’s project finance legal structure, project risk allocation, and the security arrangements available to lenders. It argues that project bankability ultimately depends on integrating a sound legal and contractual structure, predictable cash flows, appropriate risk allocation, regulatory certainty, and enforceable security arrangements.

Legal Structure Of Project Finance In Nigeria

The Special Purpose Vehicle

The SPV ordinarily sits at the centre of a project finance structure. It is typically incorporated as a private company limited by shares and established to develop, own, finance, and operate the project. The SPV holds the material project contracts, licences, assets, revenues, and corresponding liabilities. This ring-fencing enables lenders to assess the transaction primarily by reference to the project’s projected cash flows and assets rather than the sponsors’ wider balance sheets.^[1]

Sponsors usually provide equity or subordinated financing and may assume additional obligations through completion guarantees, cost-overrun undertakings, or sponsor support agreements. Lenders generally provide senior debt and look to project revenues, secured assets, and contractual rights for repayment. The separation between sponsor obligations and those of the SPV is therefore fundamental to limited-recourse or non-recourse project financing.

Project Contracts And The Contractual Nexus

A project finance transaction is built around an interconnected network of agreements. Depending on the project, these may include the facility agreement, shareholders’ agreement, EPC contract, operation and maintenance agreement, concession agreement, power purchase agreement, supply agreement, offtake agreement, insurance arrangements, and direct agreements with lenders.^[2]

These agreements allocate responsibilities and risks across the project. A fixed-price, date-certain EPC contract, for example, may transfer substantial construction risk to the contractor through performance standards, warranties, performance security, and liquidated damages. An operation and maintenance agreement may allocate operational risk to an experienced operator, while an offtake or similar revenue agreement may mitigate market and payment risk. Because the contracts are interdependent, default or termination under one material agreement can undermine the wider financing structure. Lenders therefore commonly require security assignments of material contracts, notice of default, restrictions on termination, and direct agreements that allow them to cure defaults or exercise step-in rights before a key project contract is terminated.

Sponsors, Lenders And Government Agencies

Sponsors are the industrial, financial, or governmental parties that promote the project and hold equity in the SPV. Their relationship is usually governed by a shareholders’ agreement addressing capital contributions, governance, reserved matters, transfer restrictions, and exit rights. Where a project has multiple sponsors, the effectiveness of these arrangements can materially affect governance and bankability.^[3]

Project lenders may include commercial banks, development finance institutions, export credit agencies, and institutional investors. In syndicated financings, the lenders may act through arrangers, facility agents, and security trustees under coordinated finance documents. Government bodies may also participate as regulators, grantors, procuring authorities, or contractual counterparties. At the federal level, the ICRC Act provides the principal statutory framework for infrastructure concessions and establishes the Infrastructure Concession Regulatory Commission to issue policy guidance, take custody of concession agreements, monitor compliance with the Act, and promote efficient execution of concession arrangements.^[4] Federal concession procurement under the Act is generally subject to competitive public bidding, subject to the statutory exceptions.^[5]

Risk Allocation In Nigerian Project Finance

Risk allocation is a defining feature of project finance. The underlying principle is that a risk should, as far as practicable, be allocated to the party best able to control, manage, mitigate, or price it at the lowest reasonable cost. This requires an optimal allocation of risk rather than indiscriminately transferring every risk to one party.^[6] In practice, the project’s contractual framework implements the allocation and is supported by insurance, guarantees, reserves, and other risk-mitigation instruments.

Construction And Completion Risk

Construction and completion risk is particularly significant because the project must ordinarily reach completion before it can generate the stable revenues on which debt repayment depends. Delay, cost overruns, design defects, failure to meet performance standards, and contractor default may therefore threaten the financing structure. An EPC contract commonly addresses these risks through a fixed or otherwise controlled price, a defined completion schedule, technical specifications, performance tests, warranties, liquidated damages, and termination rights. Lenders may also require performance bonds, advance-payment guarantees, parent-company guarantees, and, where appropriate, sponsor completion support. These mechanisms reduce the risk that the SPV will lack the resources required to complete the project or satisfy its financing obligations.

Revenue And Market Risk

Project finance depends on predictable cash flows. Revenue risk therefore directly affects bankability. In a power project, a power purchase agreement may constitute the principal revenue contract; in a transportation project, revenues may derive from tolls, user charges, availability payments, or other agreed payment mechanisms. Where an offtaker or public counterparty has limited credit strength, lenders may require letters of credit, guarantees, escrow arrangements, reserve accounts, or other credit enhancement. The legal enforceability and durability of the revenue contract are therefore as important as the project’s underlying financial assumptions.

Political And Regulatory Risk

Political and regulatory risk is particularly important where a project depends on government licences, concessions, tariffs, permits, or other public-sector decisions. Changes in law, discriminatory regulatory action, expropriation, or unlawful government interference may materially affect project revenues and performance. The Nigerian Investment Promotion Commission Act protects qualifying foreign investment by guaranteeing the transferability of dividends or profits, foreign-loan servicing payments, and proceeds of sale or liquidation through an authorised dealer, and by providing statutory protection against expropriation subject to the conditions prescribed by the Act.^[7] These protections are especially relevant where foreign sponsors or lenders participate in Nigerian projects.

Foreign Exchange And Currency Risk

Foreign-currency financing presents a particular challenge where project revenues are denominated mainly in naira while debt obligations are payable in United States dollars or another foreign currency. Currency depreciation or limited access to foreign exchange can increase the effective debt-service burden. The Foreign Exchange (Monitoring and Miscellaneous Provisions) Act permits foreign capital to be imported through an authorised dealer and requires the authorised dealer to issue a Certificate of Capital Importation (CCI). The Act also links qualifying imported capital to statutory transferability protections for dividends, profits, foreign-loan servicing, and proceeds of sale or liquidation.^[8] Project structures may additionally use hedging arrangements, permitted foreign-currency accounts, reserve mechanisms, and contractual currency-adjustment provisions to manage currency exposure.

Environmental And Force Majeure Risk

Environmental compliance can materially affect project cost, timing, and bankability. The Environmental Impact Assessment Act requires prior consideration of projects’ environmental effects and, where applicable, an environmental assessment before implementation.^[9] Project documents should therefore allocate responsibility for obtaining environmental approvals, maintaining compliance, remediating environmental harm, and bearing associated costs. Force majeure provisions are equally important because natural disasters, epidemics, civil disturbances, government action, and other events beyond the parties’ reasonable control may delay or prevent performance. The drafting should define qualifying events, notice and mitigation obligations, relief from performance, prolonged-force-majeure consequences, and termination rights with sufficient precision to avoid uncertainty.

Security Arrangements In Nigerian Project Finance

Because project debt is serviced primarily from project cash flows, lenders ordinarily require a comprehensive security package over the SPV’s assets, contractual rights, receivables, and accounts. The package is usually reinforced by contractual protections designed to preserve the project as a going concern and maintain its revenue-generating capacity.

Fixed And Floating Charges

CAMA permits a company to secure debentures by fixed or floating charges. A floating charge extends over the whole or a specified part of the company’s undertaking and assets while allowing the company, until crystallisation, to deal with the charged assets in the ordinary course of business. A fixed charge, by contrast, attaches to identified property and restricts the chargor’s freedom to dispose of or deal with that property without the chargee’s consent.^[10] In project finance, a debenture may combine fixed and floating security so lenders can obtain security over both specific project assets and changing classes of assets.

Where security is held for a lending syndicate, a trustee structure may hold and administer the security for the lenders in accordance with the finance documents.^[11] CAMA gives a fixed charge priority over a floating charge affecting the same property, subject to the statutory exception concerning a registered restriction on the creation of a later-ranking charge.^[12] Registrable company charges must also be registered with the Corporate Affairs Commission under CAMA, and the Act caps the aggregate fees payable for filing, registration, or release of a charge at 0.35 per cent of the value of the charge.^[13] Timely registration is therefore essential to perfecting security.

Security Over Movable Assets

The STMA establishes a specialised framework for consensual security interests in movable assets and creates the National Collateral Registry. Under the Act, a security interest is perfected by registering a financing statement in the Registry, and the security interest automatically continues in identifiable or traceable proceeds of the collateral.^[14] This regime is relevant to project finance because project companies may hold valuable movable assets such as equipment, inventory, receivables, and bank-account rights. Where the grantor is a company, the transaction must also be assessed against CAMA’s registration requirements for registrable company charges, while asset-specific statutes may impose additional perfection requirements for particular classes of property.

Mortgages Over Land

Where the project includes an interest in land, lenders may require a legal mortgage or other land-based security. Under the Land Use Act, all land in each State is vested in the Governor to be held in trust, and the holder of a statutory right of occupancy may not alienate that right by assignment, mortgage, transfer of possession, sublease, or otherwise without the Governor’s consent.^[15] The consent process can materially affect the timing of land-security perfection and should therefore be addressed in the financing conditions precedent and completion timetable.

In Brossette Manufacturing (Nigeria) Ltd v M/S Ola Ilemobola Ltd & Ors, the Supreme Court affirmed the importance of section 22 of the Land Use Act. Still, it clarified that the provision does not prohibit parties from entering into an agreement intended to be presented to the Governor for the requisite consent. The decision distinguishes the underlying agreement from the completed alienation and underscores the need to structure and perfect land security carefully.^[16]

Assignments, Guarantees And Accounts

Lenders commonly take security assignments over the SPV’s material project contracts, insurance proceeds, receivables, and other contractual rights, together with security over project bank accounts. Project accounts are often governed by a cash-flow waterfall that applies available revenue in an agreed order, typically prioritising permitted operating costs and debt service before distributions to sponsors. Reserve accounts and cash-sweep mechanisms may provide additional protection where project performance deteriorates.^[17] Sponsor support, completion guarantees, contractor parent-company guarantees, and, where legally and commercially appropriate, government support may supplement the asset-based security package and address risks that project cash flow and collateral alone cannot adequately cover.

Step-In Rights

Direct agreements are an important lender-protection mechanism. They may require a material project counterparty to notify lenders before terminating the underlying project contract and give lenders, or a nominated substitute, a defined period to cure the default or step into the SPV’s position. In PPP structures, the ICRC’s PPP Manual expressly recognises direct contracts that permit senior lenders to step in when specified contractual conditions are not satisfied.^[18] Properly drafted step-in rights can preserve project continuity and value while lenders consider restructuring, substitution, or enforcement.

Sector-Specific And Regulatory Considerations Affecting Bankability

Bankability is shaped not only by the general financing and security framework but also by sector-specific regulation. Petroleum projects must comply with the PIA’s licensing, regulatory, environmental, and operational requirements. Relevant settlors must also comply with the host communities development trust regime established by the Act, including the obligation to incorporate a host communities development trust for the benefit of qualifying host communities.^[19] These obligations can affect project costs, implementation schedules, and ongoing regulatory compliance.

The Electricity Act 2023 has also altered the regulatory landscape for power projects by enabling States, subject to the statutory transition framework, to establish and regulate intrastate electricity markets while federal regulation continues to apply within the scope reserved to the national market.^[20] Sponsors and lenders must therefore identify the relevant licensing authority, applicable market rules, tariff arrangements, and regulatory interfaces for each project. Transportation and other federal infrastructure projects, including roads, ports, and rail projects, may also be structured as concessions under the ICRC Act, which places statutory responsibilities on the relevant federal authority and the ICRC for procurement, supervision, custody of concession agreements, and compliance.^[21]

Dispute Resolution And Enforcement

Project finance documentation should contain a coherent dispute-resolution framework because disputes may arise under several interdependent contracts at the same time. Arbitration is frequently used in complex domestic and cross-border transactions because parties can select a neutral forum, specialist decision-makers, and a procedure suited to the transaction. The Arbitration and Mediation Act 2023 provides Nigeria’s current statutory framework for arbitration and mediation. It also governs the recognition and enforcement of arbitral awards and applies the New York Convention, set out in the Second Schedule to the Act, to qualifying foreign arbitral awards.^[22]

The project documents should clearly address governing law, the seat of arbitration, tribunal constitution, interim measures, consolidation or coordination where appropriate, and enforcement. Dispute-resolution provisions across the contractual suite should also be aligned. Inconsistent clauses may generate jurisdictional disputes, delay enforcement, and disrupt project cash flows. Direct agreements should likewise preserve agreed lender rights to receive notice, cure defaults, or exercise step-in rights notwithstanding disputes between the SPV and a material counterparty.

Conclusion

Project finance provides Nigeria with an important mechanism for mobilising private and institutional capital for infrastructure and other capital-intensive projects. Its effectiveness depends on a legal structure that ring-fences the project, supports predictable cash flows, allocates risks to the parties best able to manage them, and gives lenders enforceable security and contractual protections.

Nigerian law provides a strong foundation for this structure through CAMA, the STMA, the Land Use Act, the ICRC Act, the Electricity Act 2023, the PIA, and related legislation. The framework nevertheless operates across several statutes, regulators, and perfection regimes, making transaction-specific legal due diligence essential. Bankability ultimately depends not on the existence of security alone but on the interaction between project contracts, revenue arrangements, regulatory approvals, risk allocation, and effective enforcement mechanisms. Fixed and floating charges, movable-asset security, mortgages, assignments, guarantees, account controls, direct agreements, and step-in rights perform complementary functions. Properly integrated, these mechanisms can support commercially viable projects while allocating risk in a legally enforceable and financially sustainable manner.

Reference

1. Infrastructure Concession Regulatory Commission, ‘PPP Manual for Nigeria’ 125-27 <https://www.icrc.gov.ng/assets/uploads/2017/12/PPP-Manual.pdf> accessed 28 September 2026. ↑
2. Infrastructure Concession Regulatory Commission, ‘PPP Manual for Nigeria’ (n 1) 146-50. ↑
3. Ibid 147-48. ↑
4. Infrastructure Concession Regulatory Commission (Establishment, etc.) Act 2005, ss 14, 19 and 20. ↑
5. Ibid s 4. ↑
6. Infrastructure Concession Regulatory Commission, ‘PPP Manual for Nigeria’ (n 1) 248-49. ↑
7. Nigerian Investment Promotion Commission Act, ss 24-25. ↑
8. Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, Cap F34, Laws of the Federation of Nigeria 2004, s 15(1)-(4). ↑
9. Environmental Impact Assessment Act, Cap E12, Laws of the Federation of Nigeria 2004, s 2. ↑
10. Companies and Allied Matters Act 2020, ss 198(2) and 203. ↑
11. Ibid ss 208-213. ↑
12. Ibid s 204. ↑
13. Ibid s 222(1) and (12). ↑
14. Secured Transactions in Movable Assets Act 2017, ss 7-10. ↑
15. Land Use Act, Cap L5, Laws of the Federation of Nigeria 2004, ss 1 and 22. ↑
16. Brossette Manufacturing (Nigeria) Ltd v M/S Ola Ilemobola Ltd & Ors (2007) 2 All NLR 179 (SC) 198-99; [2007] NGSC 5. ↑
17. Infrastructure Concession Regulatory Commission, ‘PPP Manual for Nigeria’ (n 1) 135-36, 149-50. ↑
18. Ibid 149. ↑
19. Petroleum Industry Act 2021, s 235. ↑
20. Electricity Act 2023, ss 63(7) and 230. ↑
21. Infrastructure Concession Regulatory Commission (Establishment, etc.) Act 2005, ss 1, 12 and 20. ↑
22. Arbitration and Mediation Act 2023, ss 57-60 and Second Schedule. ↑