Funding to close Nigeria’s power generation gap – FCMB Capital Markets

The new owners of the power plants carved out from the PHCN will require huge capital injection to stay afloat. The role played by the investment arm of FCMB is a step in the right direction, reports Alvin Afadama

FCMB Capital Markets Limited, a highly respected financial institution, has again demonstrated its power sector credentials by being sole arranger for the Naira component of the financing package for Nigeria’s first large-scale, privately-funded and project financed Independent Power Plant (IPP).

FCMB Capital Markets was sole arranger for the Naira equivalent of US$150 million, as part of an international group of investors and banks working on the US$750 million Azura-Edo IPP. The Azura-Edo IPP project is a Greenfield, 450MW Open Cycle Gas Turbine, power station near Benin City in Edo State. It is the first phase of a 1,120MW power plant facility that is targeted to begin producing electricity in early 2017. The project, which will lead to further economic development, is also forecasted to create over 1,000 jobs.

The Presidential Task Force on Power Generation report, dated February 8, 2014, showed peak electricity demand in Nigeria at 12,800 MW – which is three times the peak power generation.

For a country with a population of approximately 170 million, actual energy generation equates to 0.02 KW per capita for Nigeria, compared to 0.80 KW per capita for South Africa’s (40,000 MW generation; 50 million population) and 0.52 KW per capita for Brazil (100,000 MW generation; 192 million population).Using those 2 countries as benchmarks,

Nigeria should be generating 88,000 MW to 136,000 MW of electricity. In summary, Nigeria needs to generate about 40 times more electricity than we do to bridge the significant gap.

In 2011, the National Planning Commission forecast that Nigeria needed 35,000 MW of power generation capacity to achieve Vision 20:2020; this capacity was to be achieved from the 10 National Integrated Power Projects (NIPPs), large hydro plants, IPPs, and renewable power plants as well as through granting incentives to encourage new entrants to invest in the power generation space.

The role of the private sector in this plan was considered critical; hence, the successful privatisation in 2013 of five previously government-owned power generation and 11 distribution companies.

The sale raised approximately $2.6 billion for the goverment thus demonstrating the appetite and availability of capital to be invested in the sector. We anticipate that the next stage of privatisation, covering the 10 government-owned NIPPs, will generate similar or higher levels of sale proceeds  since the assets to be sold are newer and in much better condition.

New sources of power generation such as the Azura-Edo IPP, therefore, have a significant role to play in closing the power generation gap. In the recent past, it was challenging,for private investors to raise capital to develop and finance Greenfieldpower projects in Nigeria owing to the inability to structure a bankable business case due to the absence of a robust tariff framework, gas supply, and suitable off-taker arrangements supported by appropriate financial guarantees and other credit enhancements.

Over the past three-4years, however, the government has invested considerable financial and other resources as part of it’s Power Transformation Agenda, to encourage private investors to make substantial investments in the Nigerian electricity industry.

This has created the enabling environment in which private investors now have confidence to work in partnership with government to ensure that power projects like the Azura-Edo IPP can be made bankable.

Financial close of the Azura-Edo IPP is anticipated for the end of June 2014, and will involve the investment of equity, mezzanine finance, and non-recourse loans, raised from local and international sources.

The Power Purchase Agreement (PPA) for the project was signed with NBET in April, last year, and the project financing structure will benefit from the World Bank Group support in the form of a Partial Risk Guarantee and MIGA Political Risk Insurance.The capital structure also includes a BoI Power and Aviation Intervention Fund tranche, which FCMB Capital Markets  arranged.

Equity investors in the Azura-Edo IPP comprise the lead sponsor, Azura Power Holdings, African Infrastructure Investment Managers, Aldwych International, and Asset & Resource Management (ARM).

In addition to FCMB Capital Markets arranger role on the BOI-PAIF loan tranche, other banks involved in the project include Standard Chartered Bank as Global Mandated Lead Arranger and Structuring Bank; IFC and FMO as Joint Lead Arrangers for the DFI loan tranche; First City Monument Bank Limited (FCMB) as Disbursement Bank for the BOI-PAIF loan tranche and First Rand Bank Limited (acting through its Rand Merchant Bank division) as Joint Mandated Lead Arranger for the offshore commercial tranche. Also involved in group of lenders were Siemens Bank, Swedfund and CDC.

An international power solutions’ company has been selected as the Engineering, Procurement and Construction Contractor and a tier one Nigerian contractor as the civil works contractor. Separately, a Nigerian independent oil and gas exploration and production company is the preferred Gas Supply Contractor.

Speaking on the transaction, FCMB Capital Market’s Executive Director, Mr. Tolu Osinibi, explained that the firm’s involvement in the project was a demonstration of its commitment to the development of Nigeria’s power sector. ‘’We are excited to be part of this landmark transaction which will go a long way to close the power generation gap thereby boosting electricity supply in the country,” he said.