Contrary to the reported Senate investigative hearing’s findings on the Azura power project in some section of the media, the Buhari administration did not initiate the agreement and contract had already been in force before its advent.
Besides Nigeria’s foreign reserves is not directly exposed as alluded to in the report, according to presidency sources.
Citing a number of inconsistencies in the reporting of a Senate hearing in the matter last week, the source who spoke on the condition of anonymity said the agreements including the Power Purchase Agreement (PPA) were signed and executed between November 2010 and November 2014, long before President Muhammadu Buhari assumed office.
According to him, “Some of the key highlights reported in relation to the Azura power contract are inconsistent with existing contractual terms and timelines, and information readily available in our records and those of the stakeholders in the power sector.
“The record shows clearly that the Azura contract that is the execution of the Power Purchase Agreement was signed in April 2013.
According to the official records openly available establish that there were some inaccuracies and half-truths in the media report.
“It was reported that some speakers at a National Assembly claimed that there is $30 million per month payment to Azura irrespective of dispatch of the Azura power plant.
“It was also claimed that there will be an immediate drawdown of $1.2 billion from Nigeria’s foreign reserve if Azura’s invoices are not fully settled within the allowed time frame.
“Again there was a separate claim that the contract has been breached by both parties.”
Clarifying some of the inconsistencies in some of the media report of the Senate debate, the source said “by the time the Buhari administration came in the only item that was outstanding was the Legal opinion on the transaction from the Solicitor General which was subsequently completed in July 2015.
“The actual PPA with the Nigeria Bulk Electricity Trading Company (NBET) was executed in April 2013 and the Put-Call Option Agreement (PCOA) was executed in October 2014 by the Ministry of Finance. These two agreements form the basis of the financial obligations that the Federal Government is currently grappling with.”
On the payment of $30 million per month to Azura irrespective of dispatch, the source at the presidency said the media report was also inconsistent with documents detailing the contractual obligation of all parties in the Azura project.
According to him, “the Investors in Azura took loans from a consortium of 15 international banks to finance the project as is common practice across the globe for large infrastructure developments. In order to service these loans, Azura required a guarantee of steady cashflows.
“This would only be possible if Azura had a dispatch guarantee to ensure that it will be able to sell all of its power. The fragility of the national grid and the resulting unpredictability of dispatch meant that the Government then had to find a mechanism to take the dispatch risk away from Azura.
“To this effect, the PPA included a capacity payment which would only be due to Azura if they made their plant available but are not dispatched due to factors outside their control.
“The capacity charge is only a penalty against the FGN when Azura is not dispatched. When Azura is dispatched, the capacity charge forms part of the total unit cost that is paid for energy supplied to Nigerians. In order to obtain maximum value for Nigerians, this administration has put a lot of effort to ensure that Azura’s dispatch is as high as possible. The dispatch rate of the Azura plant has increased from 61% in 2017/18 to 93% in June 2019.”
In addition the source said “the FGN’s burden with respect to settling Azura’s invoices have been exacerbated by the prevalent subsidy regime in the Power Sector (regardless of dispatch efficiency).
“Currently, the market is only expected to cover 36% of Azura’s invoices leaving the FGN with the remaining 64%, so even if Azura is optimally dispatched, the Government still bears the majority of the payment burden.
“When the tariff is reviewed, the market will cover an increased share of Azura’s invoices thereby reducing the strains on the FGN – this underscores the importance of the tariff reforms. Payments to Azura are covered by the subsidy regime which other Generation companies also enjoy. When Distribution companies are allowed to charge cost reflective tariffs, the market will stabilise and the FGN will not have to pay any share of the Azura invoices.”
On the company’s ability to draw down $1.2 billion from Nigeria’s Foreign Reserves, the source maintained that the country’s reserves are not directly exposed as being speculated.
“The contractual structure of the Azura-Edo IPP is supported by a sovereign government guarantee (in the form of “Put Call Option Agreement” – PCOA); two World Bank Partial Risk Guarantees (PRG); and World Bank MIGA insurance cover.
“Under all of these agreements, Nigeria’s foreign reserves have no direct exposure. In the event that Azura’s invoices are not settled, the World Bank PRG will be activated i.e. the World Bank will pay Azura on Nigeria’s behalf.
“If this occurs, Nigeria’s international credit rating will be impacted and Nigeria will have a liability to the World Bank – the World Bank cannot directly debit Nigeria’s accounts. The PCOA was a novel instrument that ensures that in the event of continued default of payments, the Federal Government of Nigeria had the option of acquiring the power plant. Without a PCOA, a default would normally require the government to pay the investors penalties without the option of taking ownership of the asset.
“The $1.2 billion value being highlighted for the PCOA changes through life of the contract and is not constant. The value is based on a calculation of foregone cash flows by the investor less the payments historically made on the PPA,” the source explained.
On the claim that the contract has been breached many times by both parties, both sources dismissed the report noting that “engagements with all the parties involved in the transaction do not show that the contract has been breached.”
Speaking further on the different template used for Azuri, the source explained that “when the government sold these plants, they told prospective investors what the tariffs would be and then they asked them to bid a price for the assets in light of these given tariffs. Had the government set the tariff for Successor GenCos at the same rate as the tariff for New Entrant IPPs (such as Azura) the sale price would have been commensurately higher.”
“By contrast, the Azura IPP was not built by the government and did not come into being via the auction of a pre-existing asset. One hundred per cent of its capital costs were financed by the private sector through an open-book, transparent process with competitive bidding by multiple construction contractors and debt providers; and under the full review of the National Electricity Regulatory Commission, NBET and the World Bank. In turn, all of the project’s capital costs must be recoverable through the project’s tariffs.
“So, contrary to the insinuations in some quarters, the correct price comparison is not between Azura and the legacy government-built power plants but between Azura and other recent independent power plants that have been built in Africa using project finance. When this proper apples-to-apples comparison is made, Azura’s price is extremely competitive,” the source added.
For emphasis, the timeline of the Azura project showed that the project actually started in February 2009 with a market and feasibility studies which ended in October 2010 with the incorporation of the project company. This was long before the Buhari administration came into being.
A cursory look at the timeline also shows that between November and December 2010 a Memorandum of Understanding (MoU) with the Edo State government was signed, and an Environmental and Social Impact Assessment (ESIA) Adviser for the project was appointed, and the first draft of the ESIA scoping study was sent to the Federal Ministry of Environment.
On issues relating to the Power Purchase Agreement (PPA), the first session of negotiation with the Nigerian Bulk Electricity Trading (NBET) Plc was done in November 2011 while the first draft of government guarantee from the Federal Ministry of Finance was completed in July 2012.
By April 2013, the PPA was executed while the execution of the government guarantee by the Federal Ministry of Finance was completed by October 2014.