Having now sold off most of its electricity assets, the Nigerian government is not expected to be the primary builder of power plants in the future, and may not even build any at all. The country instead views its role as creating a facilitative environment for independent power producers (IPPs). While Nigeria has existing IPPs, the 459-MW, nearly $900m Azura-Edo IPP is considered the first of its kind: an IPP that will produce for the grid and will be built using a project finance structure which the government hopes will be repeated. Wherever possible, the plan is to use the Azura-Edo deal as a guideline for future investors and to build a pipeline of IPPs in Nigeria.
Guarantees
Key to the Azura-Edo deal are a series of guarantees, insurance policies and other risk-mitigation tools. One of the main instruments is a partial-risk guarantee (PRG) via the World Bank. PRGs are structured as letters of credit through commercial banks that power producers can tap into should the state-owned power trader, Nigerian Bulk Electricity Trading (NBET), not pay for the power it utilises. If that should happen, Azura-Edo can collect through the letter of credit and the World Bank will settle that newly created debt with the bank, and Azura-Edo then has the option to call on the government to recover the money it is owed. The World Bank is also protecting Azura-Edo from non-commercial risks through political insurance coverage via its Multilateral Investment Guarantee Agency, which offers protection against political decisions that could harm investments. The World Bank is planning more PRGs for Nigerian IPPs, and the African Development Bank has also declared its intention to offer these tools.
PCOA
Another crucial structure that can be used to mitigate risks is known as a put-and-call option agreement (PCOA), which was jointly designed by Azura-Edo and the Nigerian federal government. This option protects Azura-Edo in the case of an NBET default, or if gas-supply problems prevent production by releasing the plant’s owners from their legal obligations set out in the investment agreement. Azura-Edo can also demand that the government buy the facility at a price set under an international arbitration process. In a February 2016 briefing note, Anthony Giustini, a partner at the Paris office of global law firm Clifford Chance, called the structure “a robust agreement which is rapidly becoming the template for all future IPPs in Nigeria”. He added that he expects the PCOA to be used as a model throughout Africa.
Template
Using Azura-Edo as a template for other IPPs means more than just copying these specific risk-mitigation tools, however. A March 2015 International Finance Corporation (IFC) report on the project stated, “The hope is to use Azura’s transaction documents as templates for follow-on IPPs.” A copy-paste approach where possible could save time and money. The IFC, which is the World Bank’s for-profit investment arm, provided Azura-Edo with both debt and mezzanine financing, as well as acting as the lead facilitator for the range of development finance institutions participating. These include the US government’s Overseas Private Investment Corporation and the Netherlands’ Development Finance Company. The lead arrangers for the IPP’s commercial debt were Standard Chartered Bank and Rand Merchant Bank. The project also included a naira-denominated debt tranche supplied by Nigeria’s Bank of Industry, through Lagos-based First City Monument Bank.
While a pipeline of specific projects has not yet materialised – although this is expected once the government gives the World Bank an updated list of PRG-eligible proposals – there is one other project that has already been approved for a PRG. The Qua Iboe Power Plant is a proposed 533-MW facility in Ibeno, in Akwa Ibom State. However, since being initially proposed by ExxonMobil and a ground-breaking ceremony that took place in 2010, work on the plant has not extended beyond the initial planning stages.
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