Paper presented AT

2. UNDERWRITING THE LEGAL INTERFACE BETWEEN FUNDING AND SUCCESSFUL PROJECT DELIVERY TOWARDS THE GROWTH OF AN EMERGING ECONOMY AND NATIONAL DEVELOPMENT Paper presented AT CONFERENCE ON PRIVATE FINANCE INITIATIVE (PFI) AS A VERITABLE TOOL FOR INFRASTRUCTURAL DEVT IN AN EMERGING ECONOMY ORGANISED BY NIG. INST. OF QUANTITY SURVEYORS (NIQS) LAGOS CHAPTER LAGOS, NIGERIA 9th – 10th November 2011 By Tunde Morodolu

3. INTRODUCTION • In an emerging economy like ours successful funding and project delivery might be an uneasy task without the collaboration of financial institutions. • Project finance could be short, medium or long –term infrastructure. • Project finance initiatives PFI plays a critical role in emerging economy like ours. • Most banks are only willing to support projects that have comprehensive risk management systems in place

4. Private Finance Initiatives(PFI) When the Government commissions a project it can undertake the financing itself or enter into a Private Finance Initiative (PFI) where the design, finance and maintenance of the project are all provided (in some cases it may be a subset of the 3) by a private consortium. PFIs are typically run on a fifteen to thirty year contract, with the consortium being paid back in predefined installments, conditional on performance. On expiry of the contract, ownership of the project’s assets normally reverts back to the public sector. Projects procured under PFI have included: hospitals, offices, schools, housing and roads. Although most PFIs are for new construction work they can also be used for refurbishments and service provision e.g V/Is, Lekki – Epe Expressway, Lagos - Ibadan

5. Factors Associated to Successful Project Delivery Successful projects delivery start fromPlanning:- -Planning permission can be hard to obtain and designs may not be finalized before work starts. -The construction process itself may face difficulties e.g. defective materials, labour disputes, design changes and disruption of work by the elements. All these can lead to projects running over time and/or over budget. Even after completion there are risks that buildings become prematurely obsolete or face wear & tear, leading to refurbishments and extra cost. 

6. Con’t -The allocation of these risks should in principle depend on who is best able to bear and manage them. It will also depend on the extent to which it is possible to write suitable contracts. A project contract should stipulate how risks are allocated, though it is impossible to contract for every contingency and there is often legal ambiguity.

7. Successful Project Delivery in an Emerging Economy • In our environment which is characterized by uncertainties, employers awarding contracts require financial protection should the chosen contractor fail to perform his contractual obligation.

8. Con’t • The Insurance companies that have established themselves as specialist surety companies provide that financial protection to the employer under their bonds.

9. The Bonding Relationship • A bond is a contract where one party guarantees performance by another party of an obligation or undertaking to a third party. The one whose obligation or undertaking is guaranteed is the Client :the one who guarantees that the obligation or undertaking is performed is the Suretyand the one in whose favour the guarantee is given is the Beneficiary.

10. Con’t • In summary the bond provides a guarantee to the Beneficiary against loss up to a specified amount resulting from the failure of the client to perform the prescribed obligation or undertaking.

11. VARIOUS PARTIES TO A BOND • Before a bond is demanded, there are two primary players - the person who gives the contract (obligee/ principal) & the person who should fulfill the contract (obligor /contractor). As mentioned above, these two parties reach an agreement which the 3rd party, a surety comes in to guarantee the fulfillment.

12. Con’t • There are three key actors to note • The obligee (employer/principal/ creditor). This is the owner who has the benefit on the bond • The obligor (contractor/ debtor). This is the person that carries out the obligation. He is the executor of the project for which the bond is issued. • The surety: guarantees the principal that the obligor will fulfill the obligation. The surety prepares, signs, seals and delivers the bond to the guaranteed person or company

13. TYPES OF BONDS There are several types of Bonds, amongst them are: • Bid or Tender Bonds • Performance Bonds • Advance Payment Bonds • Retention Bonds • Customs / Excise Bond • Court Bond • Supply Contract Bond • Credit Bond • Counter Indemnity Bond

14. a] Bid or Tender Bonds • Bid bonds are often required to accompany contract tenders. It is a guarantee up to the value that the contractor will honour his tender and that if successful will enter into the contract and meet any bond requirements laid down in the contract. This will usually enable the employer, to call on the bond if the:

15. Surety Bond • Contractual/Legal • Obligation • Surety Agreement Surety Bond Beneficiary Client Surety

16. Con’t • Tenderer withdraws his tender • Declines to enter into a contract after being notified of the acceptance of his tender or • Fails to provide the performance Bond as required by the tender conditions within a specified time of his tender being accepted.

17. Con’t • The main purpose B/T is to guarantee that if the bidder succeeds and he is awarded the contract, the employer will not lose financially if he (the contractor) thereafter withdraws without furnishing the requested performance, the contract is awarded to the next lowest responsible bidder. The liability of the surety is the difference between the bid/ tender of the bidder who takes up the bid bond but eventually withdraws & that of the contractor who is finally awarded the contract.

18. b]Performance Bond • It is now fairly standard practice for corporate and government bodies and others to stipulate that a performance bond is provided as security against default under a contract awarded. The bond will typically have a face value [or bond penalty] of 10% - 15% of the contract price.

19. Con’t • If the client fails to perform, the bond will be called and the surety in question will be required to complete the contract or pay the bond penalty. In other words a performance bond is a guarantee, up to the value of the bond to protect the employer against loss or damage sustained by the failure of the contractor to perform his contractual obligations.

20. Con’t • In addition, it is the security, which the contractor is required to provide in order to obtain the release of his bid bond.

21. C] Advance Payment Bonds • Is a type of bond that prevent abuse of mobilization fee paid. It guarantee up to the value of the bond. It safeguards the employer, where the contractor has received monies in advance of commencement of work, for example to purchase materials to be used in the contract.

22. Con’t • Some contracts contain payment terms under which the contractor is paid a percentage of the purchase price on signature of the contract. • Other contracts may entitle the contractor to be paid stated percentages of the contract price at stages during the construction process and prior to completion. • In either event the contractor should be required to provide a bond to cover the advance payment so made.

23. d] Retention / Maintenance Bonds • Contracts will commonly have a provision for the retention of a percentage of money owed for work undertaken, in case the work subsequently fails to meet specification during the maintenance period, typically 12 months from the physical completion of work.

24. Con’t • The provision of a retention bond allows this money [usually 5%] to be released early. The bond also acts as a guarantee to the employer that if he does not deduct retention monies from stage payments during the contract and default was to occur, monies which would have been retained will be made good by the surety.

25. e] Customs/ Excise Bond • For all goods imported or exported into the country customs duty becomes payable immediately the goods enter the country. • This indemnifies the govt agencies of revenue loss arising from improper use of dutiable articles or goods and or non payment of duties thereof. It also allow the payment of duty to be deferred subject to there being a guarantee in place from an acceptable surety.

26. Con’t • Customs Bond is therefore a guarantee against any loss of revenue arising from the failure, default or non-compliance by a Company in the discharge of his obligations to the govt agencies (Customs). The regulator has put in place certain bonds to carter for this.

27. Con’t • The bonds include: • Custom House Agents • Warehouse Bond • Removal Bond • Transshipment Bond • Transit Bond

28. Court Bond • Court and Administration Bonds or more commonly referred to as Master Bonds provide guarantees to the Master of the Supreme Court for the protection of the beneficiaries and creditors against losses arising from the default or failure of persons appointed to control or administer trust or property assets.

29. Liquidation Bond • A liquidation Bond is a Court bond , which guarantees the faithful performance of the liquidator (appointed by the Master of the Supreme Court) while handling the execution of a company under provisioned liquidation. Liquidation bonds also provided are in respect of the amount of the assets of the company in liquidation

30. Counter Indemnity This is a primary liability contract whereby a person called an indemnifier makes himself primary liability to a creditor for the payment of debt owned by a debtor. This means an indemnifier promises the creditor to pay the debt granted to a customer/ contractor. Without first calling on the debtor to repay. The awareness and demand by banks/ mortgage institutions of this type of bond is gaining wider acceptance.

31. Con’t • This become apparent as the need to use it to support other securities provided and this measure has tremendously assisted contractors in emerging economy like ours.

32. Credit bond • This type of bond arrangement is usually between lenders and borrowers. This type of bond guarantee the moral/ financial integrity of the borrower. The surety undertakes to accept responsibility for failure of borrower to carry out the bond agreement according to the rules laid down for advancing the credit.

33. Bond Application • Requirements • Completion of full application form returned with: • Last three years audited accounts • CV’s of Directors • Company assets & liabilities statement • Copies of completion certificates on previous work done • Copy of the bond wording required [if available]

34. Con’t • Collateral Security in the form of Landed Property • Valuation Report on the Property • Take Contractors All Risk to cover project • Take Workmens Compensation to cover employees on the project

35. Con’t • On receipt of the full application form the case is assessed taking into account all information provided on the application form. • If we wish to progress, references are requested from the applicants bankers, accountants and solicitors. If we have not already provided a bond to the recipient we approach them either directly or via the client to seek acceptance of the surety.

36. Con’t • After completion of due diligence, if everything is in order , we provide a non-negotiable copy of the bond (draft) for checking. On acceptance of the non-negotiable copy of the bond the counter indemnity and Proforma are issued. On receipt of the signed counter indemnity and premium, the bond is issued from the surety.

37. Con’t • The bond is then sent to the client for signing and onward transmission to the recipient. • If no wording is supplied we present our own standard bond wording. • Note various wordings-Demand Bond & Conditional Bond (A conditional bond is issued in a pending criminal case when the judge who sets bond feels that conditions of pre-trial release are appropriate. In order for a conditional bond to be issued, a criminal warrant must be issued!) • Reinsurance Arrangement in place

38. PRECEDURE FOR CREDIT BONDS • CREDIT LINES • Completion of credit line application form returned with a copy of profit & loss & balance sheet. • On receipt of a credit line application form the accountants and solicitors references are taken, brief checking is done and the application is either rejected or the decision is taken to progress.

39. Con’t • A credit line facility letter(non-binding) is issued subject to a selection of the following, depending on the individual case: • Satisfactory Bankers, Solicitors and Accountants References. • Total facility available at any one time =N=………. • Premium of………% p.a of the bonded figure for contracts with bond release dates over 1 year.

40. Con’t • Premium of ………% flat of the bonded figure for contracts with bond release within 1year • Payment of premiums before issuing the bond • Signing of counter indemnity which is equivalent to a Company Guarantee. • Submission of your last three years Accounts.

41. Con’t • Director’s personal Guarantees may be required if the company exceeds the maximum credit line limit. • A letter may be required from the company confirming that it will not increase its commitment to its bank without prior notification to surety. This instruction to be endorsed by the bank. • An inspection fee of =N=…….. May be required

42. Con’t • The credit line facility quoted is a guide and could be subject to change if any of the information supplied is found to be unsubstantiated or if changes have taken place. • However it should be stressed that a facility letter should not be issued if we do not feel confident of being able to agree on the bond if and when required.

43. PROCEDURES/ FINANCIAL GUARANTEES • Feasibility Studies/ Business Plan- To include outline of the company and its main directors, plus details of the loan, purposes/ synopsis / outline of the project • Financial Statement Audited historical accounts of the company, preferably for the last three years, and to include profit and loss figures and cash flow statements for the next three-five years.

44. Con’t • Relevant References Detailsof bankers , accountants, solicitors and two trade in order that we may take up reference. • Business Certificate If limited by company- certificate of incorporation & certificate of commencement of business

45. Con’t If enterprise - certificate of business registration if any. • Life Assurance To be provided over the main directors of the company.

46. Cont. Property Insurance • To be providedover any property offered as security, i.e. residential/commercial landed property, existing equipment and/or equipment being purchased, company stock/assets and goods being purchased, etc.

47. Con’t Professional Indemnity Ins. It covers loss due to mistakes or negligence. Professional indemnity insurance also covers work which has failed to perform its intended function. Same can as well be extended to cover associated legal expenses to a prescribed limit of indemnity acceptable to the surety.

48. Requirements • Name, qualification and years of experience. • Type of work (a) Building Surveyor (b) Residential Estate Surveyor/ Letting Agency (c ) Commercial estate agency (d) Residential Property Mgt (e) Commercial Property/ Land Mgt • Planning & Devt Consultancy • Project co-ordination/ mgt • Auctioneering etc

49. What s insurance? • In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment.

50. Cont. i. Transactions with property security • Full valuation report of the landed property must include forced sale values and recent photographs. Copies of land certificates/title deeds are also to be submitted. • If residential property, the owner is required to sign personal counter indemnity. This is common in our environment.