Azura’s giant stride to open investment in power sector gets commendation

The official entry of Azura Power Holding Limited into the race of Nigeria’s energy liberation following the groundbreaking ceremony led by President Goodluck Jonathan on October 10, 2014, in the ancient City of Benin, is set to dictate the tone for other interested investors in the sector to dance, experts have said.

Azura Power announced on May 5, 2014, that it has completed the signing of the key industry contracts of $750 million transaction being the first of a new wave of project-financed Greenfield IPPs currently being developed in Nigeria.

The Azura-Edo IPP comprises a 450MW open-circle gas turbine power station; a short transmission line connecting the power plant to a local substation, and an underground gas pipeline connecting the power plant to the country’s main gas supply. It represents the first phase of 1,500MW power plant facility situated on a hundred hectares of land provided by the Edo State government, and is expected to create over 1,000 jobs during its construction and operation.

According to the country’s latest bride in the power sector, the financing of the Azura-Edo IPP involves $220 million of equity and $530 million of debt from a consortium of local and international financiers. The project, which is billed to take off later in the year, is projected to last three years in building before its connection to the national grid.

David Ladipo, co-managing director of Azura Power Holding Company Limited, told BusinessDay that “Azura’s entry means a great deal to the power sector in particular, and to the nation’s economy in general, because the significance of the Azura-Edo IPP project lies in the way it serves as a template for other IPPs.

“This is the first IPP project finance limited recourse in Nigeria to get to the point of financial close. The process of that involves the negotiations of multiple contracts with multiple counterparties. The terms of those contracts has to be put together in a way that the banks that are funding the project can be satisfied with the allocation of risk within those contracts.

“So, there is a huge amount of contractual and legal works and financial structuring work that need to be done for a project like this till we get to the point where the banks will disburse the money.”

He said the counterparties to Azura’s contracts had never had to negotiate with party like Azura who was making investment in project’s phases, explaining that, Nigerian Gas Company (NGC), Transmission Company of Nigeria (TCN), Nigerian Bulk Electricity Trading Company (NBET), Ministry of Finance, which was providing a backstop for the obligation of the NBET, were negotiating with Azura for the first time as a project’s finance counterparties.

“Once we finalised the long documentation and work commences, all the other IPPs developers in the country would be able to copy what we have done. So, they will be able to say ‘we know that the Azura project was put together with those sets of contracts negotiated in a particular way, which the banks were able to finance,’ because the contracts are bankable and that should accelerate their own development,” he said.

Ladipo, who acknowledged now that the government had sold the PHCN generating plants, all new power plants would effectively be independent power plants because they would be privately financed, insisted that, it was only a question of time for investors’ confidence to build in the power sector following its privatisation.

He said: “Confidence in the sector is being built by the sales of generation and distribution companies. Before that, it was built by the publication of the roadmap. It makes sense with the coherent policy document, which encouraged investors and the government privatising the industry against all odds. And now, they are putting together bankable, quite sophisticated forms of financing; putting them together as counterparties to these transactions, $800 million capital coming largely from oversea.”

According to him, the institutions that enabled Azura to put together international finance are also being used. “We needed a bulk trader and couldn’t contract with the distribution companies at this stage; they just wouldn’t be credit worthy. We needed to have a regulative agency who understands how to set tariff and review tariff proposals on the back of a project finance proposals. We have only had that in the last couples of years. We needed a distribution company that is in the hands of private company and that only took place a year or so ago.

“The only thing we have done differently is that, we took the building blocks of these financing to be in place. We took a gamble. So, we made an investment starting more than four to five years ago; ‘we believe that government would inevitably do what it has to do to get the industry back up its kneels,’ and we started putting serious development capital, and now, in anticipation of those events happening, we could have got that gamble wrong. So far, I think it was a good gamble,” he said.

When asked how Azura plan to survive the transmission challenges in the sector, Azura won’t have transmission’s problems because its plant is close to one of the the nation’s biggest transmission plants in Benin City, he said.

“We won’t come up to the grid until the next three years, and that is a lot of time for issues to be addressed. By then, there would be more transmission capacity. We are right next to one of the biggest transmission substations in the country and that substation is very well connected.

“It will be a good move to concession the management of the transmission company to a private sector firm, both in terms of full privatisation, I have not given it enough thoughts,” he said.

Sundeep Bahanda, co-managing director of Azura Power Holding Limited, in an exclusive interview with BusinessDay

He said the investment opportunity in Nigeria’s power sector was unrivaled and unlimited, saying the country per capital consumption was the lowest in the world and never minding the fact that it was an emerging market.

According to him, IPP is critical in Nigeria’s power drive because it is the only way to bring private investment to the sector, as it cannot be done by government alone and that investors will always invest in any country once sure of the security of their investment.

“Investors want to be able say ‘we have the support and trust of the host government’ and better policies being put in place, and we have the support of local players like ARM who understands the environment. So, IPPs are very critical because without it you won’t be able to successfully resolve the problem in the power sector,” he said.

He said further that, what Azura did was to create a real platform for new IPPs to come into the country, having spent up to 60 percent to 80 percent of its time working with government to create standard sets of industry templates all IPPs could use, and that was the real benefits, emphasising that, privatisation had enabled private money to come into the sector because the billions of dollars required in building gas stations and transmission stations cannot be done by government’s money.

“We chose this location for several reasons and one of the most important was because the major gas pipeline in Nigeria is situated a kilometre from the Azura plant. So, the gas molecule we talked about will be coming from the Oben Gas Plant, and it will be transfered through this distribution pipelines. We are very fortunate to be having this immediate access to gas through these pipelines.

“There are a lot of works to be done between now and the next two years, but I am confident because this Azura-Edo IPP project is a ground-breaking project in more than one way, particularly because it will create the pathway for new projects and new financing to come into the country

“I think the unique thing about Azura is a whole bunch of stakeholders: whether it is government or investors; and that is creating fundamental platform, which is very important. I am not a Nigerian but why am I here? I am here because I believe in Nigeria and I also believe in the people of Nigeria. I have been incredibly moved by the dedication and passion that Nigerians have shown, even people in government. Some have said the government is slow and all that, but that has not been our experience. They are all very passionate about success. They are very capable and committed, and that is what investors want to see,” he said.

NATHANIEL AKHIGBE