INTRODUCTION

Nigeria’s financial system is skewed towards short-term financing, making it difficult to obtain long-term funds for project and infrastructural development. Infrastructure includes development projects which may be financed by the government or by the private sector (or both) designed to support economic growth and improve essential services. Nigeria as an emerging market, faces significant challenge of capital requirements for infrastructure projects that often exceed the capacity of sponsors i.e. governments, private companies, to finance independently. This funding gap makes it difficult for Nigeria to meet its infrastructure needs without external support or innovative financing solutions. To bridge this gap, the concept of project finance comes in handy as an innovative finance mechanism usually involving long-term, limited or non-recourse loans for the financing of largescale projects such as infrastructure, mining, energy, and other industrial development projects for the purpose of economic growth.

Given the complexity and risk inherent in largescale projects, the drafting of project finance contract(s) including Lenders Direct Agreement, becomes critical. The limited or non-recourse nature of project finance imports that the lender is the person who bears the major risk of the project company’s failure to complete the project. When structuring a project finance transaction, the lender through the legal draftsman must establish a comprehensive framework to safeguard its interests effectively by embedding a ‘step-in right’ clause into the contractual architecture of the project as one of the protection strategies for the lender.

This article examines the concept of step-in right within the project finance context. The article views step-in right as a lenders’ security mechanism and discusses its application in project finance contracts. Furthermore, it explores the various forms of step-in clauses, and sets out the challenges associated with exercising these rights.