With President Muhammadu Buhari continuing his overhaul of government infrastructure without filling key posts and concerns about a looming naira devaluation, news that partial risk guarantees have been signed for the Azura-Edo independent power plant is a welcome show of confidence in Nigeria, writes Dan Marks
The World Bank signed partial risk guarantee (PRG) agreements on 24 August for the ground-breaking 450MW Azura-Edo scheme, whose successful close is expected to pave the way for further independent power projects (IPPs). Financial close is expected in the next few months (AE 303/21,298/1, 290/1).
“This is a very important project for us, not as a deal but as a demonstration of how the Nigerian power sector needs to go forward. If you look at it, World Bank Group exposure to Azura-Edo is pretty significant. The International Bank for Reconstruction and Development (IBRD), Multilateral Investment Guarantee Agency and the International Finance Corporation are all involved to push this first project forwards and towards financial close,” World Bank practice manager for financial solutions and guarantees Pankaj Gupta told African Energy.
“Progress on the Azura-Edo IPP transaction is being closely watched by all other IPPs in the country because the project is very much an industry guinea pig,” Azura Power West Africa managing director and director at Amaya Capital David Ladipo told African Energy. “Not only do its contractual documents (both project and finance documents) serve as industry templates for other IPPs, but the 15 banks involved in the Azura transaction also comprise a large swathe of the total universe of project finance institutions active in the sub-Saharan market”. Permanent secretary at Nigeria’s Ministry of Power Godknows Igali said that “this landmark development confirms the Buhari administration’s commitment to the continuation of the power sector reforms which is anchored on attracting private sector investments and establishing and supporting institutions that are critical to the reforms”.
The agreements consist of a debt mobilisation guarantee of up to $117m and a liquidity guarantee of up to $120m. Similar to previous WBG guarantees in the country (AE 254/16), the liquidity guarantee is designed to ensure timely payment by the Nigerian Bulk Electricity Trader (NBET) and room to resolve any payment issues that might arise. It covers up to around three months of payments for power to Azura Power West Africa via a letter of credit (LC) from investment bank JP Morgan from which NBET can draw. If the LC is not replenished by NBET, the IBRD will cover the shortfall.
“NBET is really a new entity, it has been created from scratch with some notional paper assets from the Power Holding Company of Nigeria but there is no real cash flow already there and, most critically, no history of NBET being able to pay for electricity from independent power producers,” Gupta said. “Clearly you need an entity which can stand behind NBET and ensure that if NBET fails to pay on time there is another entity which will make up the bill. Such structures are intended to ensure that NBET can establish a strong enough payment record.”
The guarantee is part of a wider government initiative to establish NBET as a functioning entity. “The significance of the PRG documents that were executed last month needs to be seen in the context of the Nigerian government’s overall commitment to strengthening the creditworthiness of NBET,” Ladipo said. “This commitment is manifest in three different ways. The government has allocated a substantial sum towards the capitalisation of NBET’s balance sheet. It has required each electricity distribution company to post an LC worth three months of payments. And, in the case of the ‘front-runner’ projects like Azura-Edo, the government has also worked with the World Bank to ensure that the standby letter of credit provided by NBET (to the power producer) is backed by a PRG provided by the IBRD.”
The debt mobilisation guarantee is intended as a response to the need for huge private sector investment in the power sector in Nigeria. The facility will cover the risk associated with the government backed put-call option agreement (PCOA) to commercial banks involved with the project over the life of the loans In simplified terms this agreement allows the project sponsors to sell the power plant to the government in the event of a prolonged payment default by NBET, or in the event of certain specified changes in the political environment, whilst also setting out the terms by which government can purchase the project from the sponsors in the event that the project company fails to meet its obligations.
By backstopping NBET and federal government obligations, the World Bank aims to ensure that commercial capital is provided to the project, establishing a track record of attracting capital to Nigeria’s power sector.
The execution of the PRG agreements had been stalled for more than seven months pending the resolution of an abstruse legal question surrounding the validity and enforceability of the PCOA signed in October 2014 by Azura, NBET and the federal government (AE 290/1). Problems arose when the previous attorney general Mohammed Bello Adoke refused to issue the legal opinion required by the project’s lenders on the grounds that the government had waived its sovereign immunity under the PCOA and that this waiver of immunity was at odds with policy advice contained in a government circular issued last year that sought to restrict the assets that might be used to settle an arbitration case. Both the circular itself and the position adopted by Adoke appear to have blindsided the project’s financiers as well as the World Bank. As the World Bank pointed out to the Jonathan administration, it is standard practice, worldwide, for governments to waive their sovereign immunity whenever they enter into commercial transactions. More to the point, without the waiver of sovereign immunity, the PCOA would have been rendered worthless and the bankability of the project would have collapsed.
Elections delayed the resolution of this impasse, which came only after President Buhari sanctioned the disapplication of the problematic circular in respect of a large basket of IPPs (including the Azura project). Buhari’s actions then made it possible for the Ministry of Justice to issue the long-awaited legal opinion on 30 July. “Buhari and [vice president Yemi] Osinbajo worked assiduously to clear the obstacles to the release of the legal opinion,” Ladipo said. “This, in turn, paved the way for the execution of the World Bank PRG documents the following month.”
One individual close to the project told African Energy that he believed the issue was par for the course for one of the first privately owned, financed and developed power projects in a developing country. “It’s about precedents rather than saying exclusively it’s about politics and so many other things which are happening behind the scenes. Elections happen, things change – this is not unusual. It’s just that this particular issue came up here, in other countries there are other issues that come up when elections happen. We just take it in our stride and say this is a part and parcel of being a trailblazer in this kind of emerging market; things are not going to be smooth, the path is rocky.”
There is hope now that the project is over the crest of the hill, although the process of reaching financial close is likely to take several months to complete as stakeholders finalise their conditions precedent to take into account the changed economic environment. “We expect to reach first debt draw-down before the end of the year and we do not foresee any residual material impediments thereto,” Ladipo said. The number of stakeholders makes the process more time consuming than might normally be the case.
The project is 97.5% owned by Azura Edo Ltd, whose equity holders are Azura Power Holdings Ltd (50%), which is majority owned by Mauritius-based Amaya Capital and US investment fund American Capital Energy & Infrastructure, Macquarie Group and Old Mutual’s African Infrastructure Investment Fund 2 (30%), the UK’s Aldwych International (9.2%), Nigerian asset manager Asset and Resource Management Ltd (6%) and the Netherlands’ FMO (4.8%). Edo State government will take the remaining 2.5% stake (AE 284/9). Lenders are being represented by JP Morgan, Rand Merchant Bank, Standard Chartered Bank, Standard Bank and Siemens Bank. The plant itself will be sited near Benin City using gas supplied by Seplat on the basis of a gas supply agreement for 116mcf/d at $3/thousand ft3 signed in 2014.
Some industry analysts have questioned how sustainable a structure of project development based on guarantees from multilaterals or the sovereign can be. “Azura is in some ways a pathfinder and will therefore set very strong precedents for future deals and we are expecting that over time these deals will evolve to become more and more reliant on NBET’s stronger cash flows rather than on sovereign guarantees etc,” Gupta said. “The World Bank guarantees have been structured to help the government move the power sector IPP programme forward.” While the federal government has been seeking guarantees for as many as 20 power sector projects, the WBG is likely to provide guarantees to between three and five more projects over the next three years in an attempt to put the sector on its feet.
But the World Bank sees support for IPPs as just a small part of a much more holistic approach to the sector. Buhari was last month quoted in the local media as saying that lack of capacity in the transmission sector was a bigger problem than limited electricity generation. “We’ve been working on sector reform for a long period of time so for us sector reform is not only IPPs,” Gupta said. “Sector reform is also about investing in transmission, distribution etc. So in parallel we’re starting to work with the new government again on new lending products, meaning there will be funding for transmission and other investments which are actually required in the sector to make it financially viable.”
The World Bank has been approached by some of the struggling distribution companies (discos), hit by a difficult operating environment and a tariff decrease prior to the election (AE 306/7). The discos have become a symbol of Nigeria’s flagging efforts to breathe life into the electricity supply industry. “Multilateral development bank financing will be instrumental to making sure that the distribution entities are viable because at the end of the day if they are not viable everything else falls apart. This is an important piece of engagement that is needed at this critical juncture,” Gupta sa