Can Nigeria meet its obligations towards Azura-Edo IPP?

The Azura-Edo Independent Power Project, a 450MW Open Cycle Gas Turbine power station being constructed near Benin City in Edo State, billed to be completed next year looks set for delivery six months ahead of schedule raising concern about its impact on Nigeria’s economy.

Africa’s largest economy with installed capacity of 7,500MW relies on gas for 85 percent of its generation from 25 plants but manages to generate 4000MW, is building the Azura-Edo IPP to increase generation which has fallen behind transmission by over 2000MW.

A key concern stakeholders shared with BusinessDay is that the inability to improve collections from DisCos may impact on Nigeria’s ability to pay for the power purchased from Azura-Edo IPP. The project which is backed by the World Bank may increase Nigeria’s debt portfolio and create a reputational risk for the country in the event of a default.

“On the technical side, the national grid can easily accommodate another 450MW as current generation is a whole 2,500MW below the grid capacity, however, on the financial side, challenges of low tariff and losses during transmission and distribution still persist,” Jubril Kareem power sector research head at Ecobank told BusinessDay by mail.

Kareem further said, “Higher tariff will go a long way in mitigating some of this risk, otherwise the government will end up basically subsiding power as it is obligated to pay Azura for power generated if Nigerian Bulk Electricity Trader (NBET) fail to do so.”

Odion Omonfoman, an energy consultant and the CEO of New Hampshire Capital Ltd echoes the same sentiment, “Azura IPP is backed by a Partial Risk Guarantee (PRG) from the World Bank. This means that if the power generated is not paid for, Azura would be paid by the World Bank.

“This effectively becomes a World Bank loan to the Nigerian government. Thus Azura coming on stream potentially could increase our sovereign debt portfolio, in the event of a payment default by NBET to Azura,” Omonfoman said.

According to Chuks Nwani, energy lawyer and vice president of PowerHouse International, an energy advisory firm, a default on Nigeria’s payment obligations carries “a reputational risk for the country, as it may lead to downgrade of Nigeria’s sovereign debt ratings because you have allowed your sovereign guarantees to be called.”

Nwani further said that it may cause investors to lose confidence in further investment in the power sector and the country generally.

Examination of remittances from Nigeria’s eleven DisCos to NBET this year reveals that the possibility of a default is not too remote. Between January and March this year, the DisCos settled on average only 31 percent of the N111billion worth of electricity invoice from generation companies failing to collect over N75.5billion from January to March 2017.
But accumulating further dollar debt arising from a default does not bode well for the economy. Nigeria’s is currently playing Russian roulette with its borrowing. Last week, Kemi Adeosun, Minister of Finance, said that the country will raise new dollar denominated debts to replace $3 billion worth of maturing naira-denominated short-term treasury bills, to lower debt service costs and improve its debt position.
Stripped of all niceties, Nigeria is merely engaging in debt conversion. Bongo Adi, an economist and lecturer at the Lagos Business School in an earlier comment to BusinessDay, said given that inflation in the domestic economy which has pushed up rates, making Naira loans attract high interest rates, the move make sense as it takes advantage of the low interest rates applicable to foreign currency loans.
However, there is unspoken unease about Nigeria’s galloping public debt masked by the popular refrain that the country’s debt-to-GDP ratio of 18.6 per cent, is one of the lowest in the world. There is little interrogation about liabilities and the use of loans to finance consumption.
The over $800m Azura-Edo IPP has been financed from both equity and debt investors. There are 15 lending institutions providing the debt to the project and four equity investors.
NBET which has a Power Purchase Agreement (PPA) will purchase the power for the national grid. Private investors are protected by WPRG which covers possible government failure to perform its obligations in respect of the project. Political risks are covered by MIGA and Put and Call Option Agreement.
Legal analysts at Perchstone & Graeys said in a note, “the Put and Call Option Agreement is very interesting and is perhaps one of the more significant innovations of the deal. The PCOA basically allows the promoters of the project to ‘put’ the plant (or its shares) to the government in the event that the PPA is terminated early. In such an event, the government is obligated to pay a ‘purchase price’ which, at a minimum, covers the outstanding debt used to finance the construction of the plant.”

ISAAC ANYAOGU