Consortium Agreements: Structuring Considerations in Nigeria

Consortium Agreements remain one of the crucial ways to win and execute public-private partnerships and high-stakes public and private contracts. By enabling collaboration between organizations with complementary skills and resources, consortium agreements provide the foundation for winning and executing ambitious projects. However, the way these agreements are structured plays a pivotal role in ensuring their success. In this article, we explore key consortium structures commonly used in Nigeria, the unique considerations for each, and how businesses can position themselves for growth through effective agreements.

Consortium Agreement Structures in Nigeria
Consortium agreements are usually structured as either incorporated joint ventures or as unincorporated joint ventures. Incorporated joint ventures can offer the advantage of limited liability for consortium members. However, without tailored legal advice, unincorporated joint ventures may expose partners to personal liability. Fundamentally, the substance of any of these structures can take one of two forms, as discussed below.

1. Expertise-Based Consortium

Under an expertise-based consortium, parties to a consortium agreement agree to contribute their expertise, technical skills or intellectual property towards winning a bid and executing a project. Depending on the nature of a particular project, consortium partners can include a legal partner, an accounting partner, an investment bank, a construction company, and so on. With an expertise-based consortium, the goal of the lead partner is often to manage the weight of upfront capital contributions and to leverage the reputation of partners to win a bid and execute the relevant public-private partnership project. The success of this kind of structure often depends on a number of factors, which include the ability of the lead partner to break the project down into key roles and to identify consortium partners in a short time, and the ability to hire expert legal support to properly document a compelling governance and risk/revenue sharing structure. 

In our experience, there are a number of structuring considerations that partners, using expertise-based consortium arrangements, should bear in mind. Firstly, expertise may vary in perceived value, leading to disputes about whether contributions are equitable, and there is often a lack of clear metrics to measure and compare different types of expertise. Secondly, over-reliance on a specific member’s expertise could disrupt a project if such a partner underperforms, withdraws, or where such partner becomes insolvent. Additionally, without upfront capital contributions, valuation as well as determining fair revenue-sharing mechanisms can be contentious. Fourthly, the absence of capital contributions may restrict the ability to respond to unforeseen costs or scale the project. In many cases, a lead partner may not have accounted for the cost of professional services or the costs associated with submitting a bid, such as the cost of posting a bid bond, thereby jeopardizing the success of a bid.

2. Finance-Partner Consortium

 Rather than contributing domain expertise, the partners in a finance partner consortium are primarily financial investors who contribute capital towards winning a bid and executing the relevant public-private partnership project. Typically, such structures can include at least one core partner, contributing domain expertise. Financial partners who participate in such structures may include private equity funds, venture capital funds, infrastructure funds, or banks. The success of this type of structure can often hinge on the level of the financial partners' domain expertise. For example, private equity funds specializing in the target sector may offer a significant advantage compared to sector-agnostic firms that only provide capital. The success of this structure can also depend on the ability of the lead partner to manage the conflicting priorities of investors regarding risk tolerance or return expectations.

In our experience, there are a number of structuring considerations that partners using finance-partner consortium arrangements should bear in mind. Firstly, without operational or technical contributions, the project may face execution risks if not well-managed. Also, disputes may arise over decision-making, especially where financial interests conflict. Secondly, without members contributing technical or operational expertise, the project will likely depend heavily on external contractors or advisors, leading to reduced control, higher costs, or potential completion risks. Decision-making may become contentious where partners with larger financial stakes demand greater control. Without technical expertise within the consortium, the project might lack innovative approaches or solutions that could arise from members contributing intellectual input. Lastly, financially-focused partners may be less equipped to handle regulatory or licensing challenges, thereby increasing regulatory risks for the consortium as a whole.

Executing the Right Bidding Strategy
Executing the right bidding strategy for public-private partnership projects often requires careful, advanced planning, transparent communication, and strong agreements. More importantly, balancing the expertise, resources, and interests of all partners is crucial to delivering a project that meets the expectations of both the public authority and the consortium partners.