By Adaora Elemide
Azura Power came into the scene as a Greenfield power project (one that is built from scratch to finish) and a PPA was signed to that effect in 2013. A Power Purchase Agreement (PPA) is an agreement between the Generation Companies (GenCos) and the Bulk Purchaser. In Nigeria, this bulk purchaser is the Nigerian Bulk Electricity Trader (NBET). This agreement has components that cannot work independently. Thus, if a vital component of the agreement is not executed, the agreement itself is said to be ineffective. One such component is that of the finance structures (equity and debt) which provides for the source of funding, terms of funding securitisation, and repayment for any debt accrued. As a Greenfield power plant, the Azura project required a huge capital investment from start to finish to be successful.
Due to the complexities and the inefficiencies of the Nigerian power sector, it is not unusual for investors to seek further agreements that provide a sense of security for the investments made. One of such is the Put/Call Option Agreement (PCOA). The PCOA is an agreement that allows the investor to sell off the project for a predetermined price. In the case of the Azura project, the PCOA determined the Azura selling price to be $1.2bn. This agreement was signed in 2014. Despite this, the PPA had still not become effective because the lenders for the project required a guarantee for the securitization of their loan investment. The said guarantee was in the form of a World Bank-backed Partial Risk Guarantee (PRG).
A PRG is an agreement that protects the interests of the lenders to a private sector investor in the event of a government’s default on contractual obligations that may negatively impact on the ability of said private investor (in this case the Azura Power project) to meet its loan obligations to the lenders. In the event of such a default, the government is mandated to reimburse the private entity for costs accrued. The implications of a country defaulting on a PRG essentially means, the said country is not creditworthy therefore, every country does all it can to avoid a default. Azura Power in 2015 secured the World Bank PRG and then mobilised to site. The parties to the PRG were Azura Power, the World Bank, the Federal Ministry of Finance, and the NBET.
Just a quick recap, Azura Power, a World Bank-financed project entered into a PPA with the NBET in 2013, signed the PCOA in 2014, and signed the PRG in 2015. The signing of the PRG in 2015 consequently activated the PPA that had been signed in 2013.
While the political hullabaloo suggests that the Jonathan-led administration put the country in the current critical indebtedness, the timelines must be noted. It is also important to note that without the signing of the PRG, the contractors DID NOT mobilise technicians to site for the construction of the power plant. The securing of the PRG put into motion the execution and completion of the Azura project.
In the energy sector, agreements such as the PPA, PCOA and the PRG are well known, standard industry practices put in place to protect investors from the whimsies of political interference. The problem here is, the government’s default on the terms of the PPA which has impeded its own ability to fulfil the conditions of the PRG. The defaults include the failure to, approve a cost-reflective tariff and secure gas supply to the power plant.