Introduction

Despite the controversial history of Nigeria's national airline, top-level discussions on establishing a new national carrier are frequent in the aviation sector.

The first national airline, Nigerian Airways, was established in 1958. Despite having 30 aircraft in its fleet in the 1980s, its debt exceeded $60 million by the time that it was liquidated in 2003.(1)

A short-lived arrangement between a number of institutional investors in Nigeria and the Virgin Group resulted in a new national carrier, Virgin Nigeria, in 2004. This airline had an appreciable impact within two years of operation, but bureaucratic challenges led to its divestment. Air Nigeria emerged from the restructuring process, but soon faced safety concerns and administrative complications before ceasing operations in September 2012.

Nigeria's ruling party promised to revive the national airline during its 2015 presidential campaign and has since made efforts towards implementing its manifesto. In May 2017 the Federal Executive Council (FEC) approved the allocation of N1.52 billion ($4.99 million at the time) for the financing of preparatory steps towards:

  • reintroducing of a national airline;
  • establishing an aviation leasing company;
  • concessioning Nigeria's airports;
  • establishing a maintenance, repair and overhaul facility; and
  • developing aerotropolis and agro cargo terminals.

The FEC also announced the appointment of the Lufthansa Group as the transaction adviser and tasked it with designing a plan for the establishment of a new national airline. Prior to the unveiling of the Lufthansa Group as the transaction adviser, the government had indicated that it was in talks with Boeing and Airbus about leading a consortium of airline companies to facilitate the re-establishment of a national airline.

However, in February 2018 Aviation Minister Hadi Sirika released a statement that Lufthansa had presented a counter-offer which the government considered unacceptable. This led to the cancellation of the offer and Lufthansa's replacement with the Airline Management Group as the government adviser for the project.

Debate on need for national airline

Nigerian government officials have repeatedly stated that the delivery of a new national carrier will:

  • encourage sectoral reforms;
  • generate jobs;
  • yield foreign exchange;
  • drive the growth of tourism and other sectors; and
  • reignite national pride.

There has been much emphasis on how a national carrier can enable the country to achieve its tourism potential through exclusive travel discounts and promotional deals.

Sirika has argued that a new national carrier could help Nigeria to maximise the benefits of the single African air transport market initiative, which the African Union launched in January 2018 in order to liberalise civil aviation in Africa (for further details please see "Liberalising aviation in Africa: overview of single air transport market"). Closely related to this is the argument that Nigeria's inability to fully utilise its bilateral air service agreements (BASAs) stems from the limited capacity of its commercial airlines. It is therefore hoped that a new national airline will be adequately established to acquire the required aircrafts and build the capacity to utilise the BASAs.

Other proponents of re-establishing a national carrier maintain that the airline could stimulate the growth of related sectors and attract further investment into:

  • increasing manpower in the aviation sector;
  • maintaining aircraft;
  • catering;
  • developing airports; and
  • creating aviation hubs.

However, these positive projections are not without their challenges. The eventual collapse of Nigerian Airways and its succeeding entities has been attributed to inefficient management and government interference, which aviation stakeholders assert are notable challenges associated with national airlines worldwide. These stakeholders argue that only a few state-owned airlines around the globe continue to thrive, which is down to the relevant governments allowing them to operate as commercial enterprises with minimal interference. However, concerns surround government authorities' willingness to refrain from interference due to their current level of interference in the privatised national utilities.

Failure to ensure the efficient management of a national carrier may lead to significant commercial losses and a need to use funds or resources that could be designated for other national needs. The need for a national carrier therefore cannot serve as the conclusive basis for a decision that will have adverse effects on national and economic planning. The government must carefully consider and address the concerns regarding the re-establishment of a national airline.

Adoption of PPP model

The government has adopted a public-private partnership (PPP) approach in facilitating the re-establishment of a national carrier. One of the major benefits of this arrangement is the harmonisation of private sector experience with government support in order to mitigate project risks, while also relieving the public sector of certain expenditures.

The successful implementation of a PPP model will assist in attaining the qualitative and timely provision of services while ensuring that private sector participants receive long-term remuneration. However, it is hoped that the air carrier management body that emerges from the PPP arrangement will be granted the autonomy required to operate the business seamlessly in order to accomplish its commercial objectives without necessarily foregoing national objectives.

The ongoing PPP arrangement for the re-establishment of a national airline is being supervised by the Infrastructure Concession Regulatory Commission (ICRC), established by the Infrastructure Concession Regulatory Commission Act 2005. Under the guidelines drafted pursuant to Sections 2 to 13 of the act, the ICRC requires projects to be carried out in four phases commencing with the PPP project identification phase. During this phase, the Ministry of Aviation must develop a project concept note indicating its plans for a new national airline for the ICRC's assessment, following which a project steering committee and a project delivery team may be established. Based on its assessment, the ICRC will present the FEC with its opinion on the eligibility of a PPP project for approval. Considering that the FEC approved the project in May 2017, it is presumed that the necessary steps of the project identification phase have been taken.

Following the FEC's approval, the project development and preparation phase will commence. The Ministry of Aviation is expected to prepare or have its transaction adviser prepare an outline business case and submit it to the ICRC for review. Where the ICRC is satisfied with the outline business case, it will issue an outline business case certificate of compliance to the ministry. Where the outline business case falls short of the requirements, the ICRC will decline it and advise the ministry of its reasons for doing so. The ICRC will subsequently engage with the Federal Ministry of Finance to identify and manage any risks and contingent liabilities that may arise from the project.

In April 2018 Nigeria's aviation minister informed industry stakeholders that the new transaction adviser was in the process of developing an outline business case for the new national airline, which suggests that the project is now in its second phase. If it progresses beyond the second phase to the procurement phase, the Ministry of Aviation will have to commence a procurement process leading to the emergence of a preferred PPP project proponent. Negotiations with the project proponent will form the basis of a full business case. This must be submitted to the ICRC for review and approval, following which a full business case certificate of compliance may be issued to the ministry. The ministry must then submit the full business case along with the ICRC's certificate of compliance to the FEC for approval.

The Ministry of Aviation may proceed to sign a PPP contract with the PPP project proponent only after obtaining the FEC's approval for the full business case. Once the contract has been signed, the ICRC will take custody of the agreement and begin to monitor compliance with its terms and conditions, pursuant to Section 20(a) of the Infrastructure Concession Regulatory Commission Act.

The fourth and final phase of the project is the implementation phase, which is predicated on the project proponent achieving financial close. Under the Infrastructure Concession Regulatory Commission Act, the ministry and the ICRC must continue to monitor and jointly inspect the project's implementation.

Comment

While it is commendable that the government is determined to re-establish a national carrier, this proposition must be considered alongside the project's commercial realities. It is hoped that the transaction adviser will guide the government appropriately in this regard.

Lufthansa's demand, prior to its disengagement, for an escrow account and the fact that the transactions must be carried out in foreign currencies are notable and underline major concerns regarding:

  • the government's ability to honour agreements reached with private sector participants; and
  • the instability of Nigeria's foreign exchange.

These issues must be adequately considered and addressed as the project progresses, as Nigeria's aviation sector is largely influenced by exchange rates in view of the fact that equipment and services are predominantly sourced outside the country.

In addition to the above, the government should pay close attention to infrastructure upgrades in the aviation sector and implement policies that can ensure that Nigeria maximises the benefit of the liberalisation provisions under the single African air transport market and the BASAs regardless of whether a new national airline is established. The government must create an environment that enables businesses and investors in the aviation sector to thrive. If the transaction adviser can propose an effective business case for the re-establishment of a new national airline, the government must pay close attention in order to ensure efficiency in the new entity's operation.

For further information on this topic please contact Tobi Adebowale at George Etomi & Partners by telephone (+234 1 462 1660) or email (tobi.adebowale@geplaw.com). The George Etomi & Partners website can be accessed at www.geplaw.com.

Endnotes

(1) "Should Nigeria have a national airline?" (2018) BBC News.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.