The Central Bank of Nigeria, CBN, is set to curtail the excesses of banks as regards their funding of power projects. This is in the light of recent concerns over the viability of the Power Holding Company of Nigeria, PHCN’s assets acquired by new investors. The concern stems from experts who are of the view that the privatised assets are obsolete, outdated and will likely require a huge amount of money to revamp to a state where they will be able to make minimal contribution to the companies’ profitability and to Nigeria’s power needs, in general.
There are also fears about majority of the loans going bad, in view of the fact that months after paying for the assets, the new owners are yet to take ownership. Going by the structure of bank loans, especially in Nigeria, the interest on the loans have started accumulating and no one knows for sure when the new owners will fully take charge of the assets and reach a breakeven point.
Enforcing lending limits
To this end, the CBN is considering reviewing its policies on sectoral lending by banks and also enforce the single obligor limits, the maximum amount banks borrow to single individuals or corporate.Confirming the development, the Director, Corporate Communication, CBN, Mr. Ugochukwu Okoroafor, in an email response to Sweetcrude, disclosed that from January 2014, normal measures will be introduced to curb unbridled lending by banks.
He said, “The CBN did not impose any caps. However, our concentration risk mitigants such as Single Obligor Limit of 20% applie.There is also a macro-prudential risk mitigant to address Sectoral concentration, which takes effect in January 2014, but this does not involve imposition of caps.”
Similarly, the International Finance Corporation, IFC, told investors that its investment activity in the Nigerian power sector over the next couple of months will be in the area of Greenfield projects. This implies that the old assets may not have been wise buys.The Director, Infrastructure Department, IFC, a subsidiary of the World Bank Group, Mr. Bernard Sheahan, said, “We have a detailed rehabilitation plan. We believe this plan will be important in the short run, like to add capacity, while in the long run the critical pieces will be to build Greenfield capacity.“The huge value added is, you can structure a Greenfield Independent Power Project, IPP, which is bankable. The World Bank will also provide funding for some of the transmission projects.
”Sheahan, however, disclosed the projects must be bankable, adding that the ongoing reforms in the power sector have helped boost the credibility rating of the present administration.Also, the Director and Head, Project, and Structured Finance, FBN Capital Limited, Mr. Patrick Mgbenwelu, in an emailed statement to Sweetcrude, said Nigerian banks would need the support of institutional and foreign investors to fund the huge resources needed to drive various ongoing infrastructure projects, especially the over $8 billion required to meet the deficit in the power sector for the next 10 years.
He said the over $8 billion funding required by the power sector cannot be provided by Nigerian banks alone, saying that there is the need for institutional investors and foreign investment to bridge the funding gap.
He further stated that Greenfield IPPs will emerge to bridge the energy gap, while government’s Public Private Partnership commitment will fuel various infrastructure projects such as rails, roads, bridges, and airports and a host of others.
Mgbenwelu said multi-billion dollar government projects will require private sector involvement, therefore, creating the need for Special Purpose Vehicles (SPVs) as obligator financial vehicles.Highlighting the importance of infrastructure finance, he said investors can choose to approach finance institutions and seek funds either as a corporate entity or directly through the projects.
The Chairman Technical Committee, Nat6ional Council on Privatisation, NCP, Mr. Atedo Peterside, recently disclosed that Nigerian banks provided about 70 per cent of the funds used by the investors in the acquisition of the PHCN assets.He said, “A grand total of approximately $3.3 billion (N528 billion) should accrue to Federal Government coffers from these PHCN generating companies (Gencos) and distribution companies (Disco) transactions.
“If the participants and financiers respected the financial rules put in place for these transactions, then a maximum of 70 per cent of this total would have been financed through debt/loan instruments.“We know that the lion’s share of the financing came via Nigerian banks and so our banking industry is now a major stakeholder and a long term player in the Nigerian power sector.”
Information from Michael Eboh, Vanguard was used in this report.