Delayed invoice settlements threaten Azura IPP’s success

The Federal Government has settled the past 10 invoices of the Azura Independent Power Plant(IPP), but it has often come too close to missing the deadline and this is giving investors cause for concern.

Azura has been called the ‘guinea pig’ for the long-term development of the sector due to its innovative financing structure which could be a template for other power plants in Nigeria.According to the terms of the Power Purchase Agreement (PPA), the power supply invoice should be settled within 15 business days after the invoice date by the Nigerian Bulk Electricity Trader (NBET), Ministry of Finance (MoF), and Central Bank of Nigeria (CBN).
But the FG has settled past invoices within 30 days, and although this is not in breach of the PPA, it is playing it too close to the margin and threatens the project’s project completion date (PCD).

We learnt that at present, the PCD definition requires that NBET must have paid within five business days of due date for six consecutive months. Sources tell us that given the structural realities of the NBET/MoF/CBN payment processes, it is unlikely that this hurdle will ever be met

“This means a relaxation of the PCD definition is required,” a source said. Other criteria to achieve PCD have been met by Azura IPP, including the plant being in operation for nine consecutive months, operating in excess of PPA performance levels, all financial covenants being met or exceeded, lower than budgeted project costs, and early operational cash flows.

We understands that the late payments are stirring investor concern as it is now assumed that the PCD will never occur in the foreseeable future because the FG has only settled the invoice within 30 days, according to a project document seen by our correspondent. According to the document, if the PCD is not achieved for three years, Azura will accumulate $135 million of stranded cash, shareholder internal rate of returns (IRR) would be impacted by 95 basis points (bps) even assuming this amount was then subsequently distributed.

The company’s position will be severely impacted if the naira suffered depreciation similar to 2016 and shareholders could potentially lose more than $65 million, though the project will be insulated from ruin.

Azura is the first Nigerian power project to benefit from both the World Bank’s “Partial Risk Guarantee” structure ($237 million of debt used to build the plant), the political risk insurance supplied by the Multilateral Investment Guarantee Agency, Azura delivered on budget and ahead of schedule by seven months.

The challenge for Azura is how to adequately incentivise shareholders so they continue to perform their obligations because starving the shareholders of a reasonable return could potentially enhance operational risk instead of de-risking the project. Azura may have been the guinea pig for the long-term development of the sector but replicating the feat has been difficult.

“Unless the Federal Government grants the same sovereign risk guarantees Azura enjoys, it will be difficult to replicate,” Dolapo Kukoyi, partner at Detail Commercial Solicitors, said. Azura project has been challenged by naira depreciation which has made it difficult to raise tariff and improve cash flow, an industry-wide malaise that has seen shortfalls rise to over N1 trillion.

To keep the project alive, Nigeria will need to migrate to a price deregulated atmosphere and operationalise the eligible customer policy, interim additional support from the Federal Government, more support from the World Bank and other lenders, said the document. Azura is critical to Nigeria’s quest to deepen energy access.

It contributes 10 percent of grid capacity but concerns remain about the ability of the Federal Government to sustain payment for Azura Power considering the huge cost involved in executing the project.

“The issue is, how can the government pay for the power in an electricity market that is not liquid?” Chuks Nwani, energy lawyer, said. Azura secured a $900 million debt financing from a consortium of 15 banks from nine different countries, including most of the European development finance institutions, to build a 450MW Open Cycle Gas Turbine in Benin City, Edo State, Southern Nigeria.

 

Source: Business Day

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