FG’s guarantees, liabilities may hit N6.1 trillion by year-end

Presidency claims ‘Azura project deal pre-dates Buhari’s administration’

Leveraging off-balance-sheet products such as Guarantees, Letters of Comforts and similar instruments, the Federal Government’s contingent liabilities may hit N6.1 trillion, the 2021- 2023 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) has shown.

Already, NBET’s submissions on Put-Call option Agreements (PCOA) with Gencos show that liabilities under the programme may rise to N2.45 trillion later this year.The financing products, which constitute Contingent Liabilities (CLs), according to the document, are also deployed to encourage private sector participation in the development of critical infrastructure and projects and other sectors of the economy through Public-Private Partnerships (PPPs), concessions and other structures, which provide significant social and economic benefit to Nigeria.

Nigeria’s power sector has continued to attract attention and probe over its lackluster performance despite the resources invested in the sector.The collection and remittance of electricity tariff have remained a challenge as the nation’s 11 distribution companies (DisCos) fail to meet the new minimum payment threshold set by the Nigerian Electricity Regulation Commission (NERC) as a prerequisite for a tariff increase.

In the first quarter of this year, the DisCos couldn’t remit about N123.1 billion of the N156.9 billion worth of energy supplied to them by the Nigerian Bulk Electricity Trading Company (NBET).

MEANWHILE, with the Senate Committee on Power revisiting the country’s power sector privatization exercise, insider details may have emerged to show that the Power Purchase Agreement became operational in 2013, years before the Buhari Administration.

Indeed, the Chairman of the Senate Committee on Power, Senator Gabriel Suswam, while presenting a report on ‘Addressing Nigeria’s Power Sector Problems’, described the Share Purchase Agreement (SPA) between the Federal Government and Azura Power Plant as a drain on the nation’s resources.

The contractual structure of the Azura-Edo IPP is supported by a sovereign government guarantee (in the form of “Put Call Option Agreement”); two World Bank Partial Risk Guarantees; and World Bank MIGA insurance cover.

Suswam, had said that the agreement between the Federal Government and Azura power plant was signed between 2016 and 2017, explaining that government ordinarily shouldn’t have signed those agreements.

However, a source noted that contrary to speculation, the Vice President and the immediate past Power Minister did not feature in the agreement nor signed any contract, as they were not in office when the agreement was signed in 2013.

“The commitment to pay for power through NBET, was made by the Nigerian Government in 2013. It is NBET that buys power from generating companies like Azura and sells to distribution companies. In 2013 when the deal was struck, it clearly appeared to be a good deal for Nigeria, which was desperate for power and feverishly seeking the establishment of power plants”, the Presidency official said.

The put-and-call option agreement (PCOA) establishes a direct contractual obligation between the host government and the project company. It in effect replaces a traditional sovereign guarantee or letter of support with a contingent real estate transaction.

The PCOA provides both a “put” option in favour of the project company and a “call” option in favour of the Nigerian Finance Ministry, that are subject to certain conditions, which typically include the termination of the PPA after certain specified “trigger” events.

The “put” option, if exercised by the project company, requires the host government to purchase the plant or the assets of the project company by a date certain for a pre-agreed purchase price. Conversely, the “call” option is a discretionary right of the host government to require the project company and shareholders to sell the plant or the assets of the project company on a date certain for a defined purchase price, which may vary according to the circumstances (such as a seller default under the PPA) that triggered the government’s exercise of the call option.

The top Presidency official also confirmed over the weekend that top Federal Government officials would be communicating at some point with the Senate to clarify some of the misconceptions that featured when the Chairman of the Senate Committee on Power, Senator Gabriel Suswam, presented its report.

“Neither Vice President Osinbajo nor Mr. Fashola signed any such agreement. They were not even in office when the Azura agreements were signed. Records show that the Power Purchase Agreement or PPA for the transaction in question was signed on April 22, 2013, during the tenure of the then President Goodluck Jonathan”, the source added.

The Take or Pay Clause in the Power Purchase Agreement, which obliges the Federal Government to pay for power declared available by the company, whether or not it is taken by the Government-owned Transmission Company, “is fairly standard, especially where, as in this case, the plant is a huge one requiring enormous set up cost and the country is in dire need of the power anyway,” the senior government official explained.

“The agreement in question, which was already executed as far back as April 2013 is quite typical in Power Purchase transactions. Nobody would build a power plant, which is a very costly and capital-intensive venture, and no lender would put money in one, unless someone had committed to pay for the power.

“At any rate, much of the payment goes straight to Nigeria Gas Company, Nigerian National Petroleum Company and other gas suppliers who make the power generation possible.”