AFRICAN DEVELOPMENT FUND PARTIAL RISK GARANTEE IN SUPPORT OF THE POWER SECTOR PRIVATIZATION NIGERIA BULK ELECTRICITY TRADING PLC

Transcription

1 AFRICAN DEVELOPMENT FUND PROGRAM: COUNTRY: APPLICANT: PARTIAL RISK GARANTEE IN SUPPORT OF THE POWER SECTOR PRIVATIZATION FEDERAL REPUBLIC OF NIGERIA NIGERIA BULK ELECTRICITY TRADING PLC PROJECT APPRAISAL REPORT ONEC DEPARTMENT December 2013

2 TABLE OF CONTENTS PROGRAM SUMMARY... v RESULTS-BASED LOGICAL FRAMEWORK... vi IMPLEMENTATION SCHEDULE... vii 1 STRATEGIC THRUST & RATIONALE Program Linkages with Country Strategy and Objectives Rationale for Bank Group Involvement Aid Coordination PROGRAM DESCRIPTION Overview Program Components Program Methodology Eligibility Criteria Pipeline IPPs Technical Solutions Adopted and Alternatives Considered Program Type Program Cost and Financing Arrangements Program s Target Area and Development Impact Participatory Approach Bank Group Experience and Lessons Reflected in Program Design Key Performance Indicators PROGRAM FEASIBILITY Financial and Economic Performance Environnemental and Social Impact PROGRAM IMPLEMENTATION Implementation Arrangements Program Monitoring and Evaluation Governance Sustainability Risk Management Knowledge Building LEGAL INSTRUMENTS AND AUTHORITY Legal Instrument Conditions for Bank Intervention RECOMMENDATION Appendix I: Nigeria s Comparative Socio-Economic Indicators Appendix II: ADB Portfolio in Nigeria APPENDIX III: Similar Projects in Nigeria Appendix IV: Map of Project Area Appendix V: Indicative Term Sheet

3 CURRENCY EQUIVALENTS October2013 UA 1 USD 1.53 UA 1 NGN FISCAL YEAR 1 January - 31 December WEIGHTS AND MEASURES m Meter KOE kilogram of oil equivalent cm centimeter = 0.01 meter kv kilovolt = volts mm millimeter = meter KVa kilovolt ampere (1 000 Va) km kilometer = meter KW kilowatt = Watts m² square meter GW gigawatt ( kw or 1000 MW) cm² square centimeter MW megawatt ( W or kw km² square kilometer = m² KWh kilowatt hour (1 000 Wh) ha hectare = m² MWh megawatt hour (1 000 KWh) t (t) metric tonne (1 000 kg) GWh gigawatt hour ( KWh) i

4 ACRONYMS AND ABBREVIATIONS ADB ADF CSP DFID DisCo ESIA ESMP FGN FMENV FMF FMP GenCo IDA IPP MIGA MYTO II MW NBET NDPHC NERC NGFO NGN NIAF NIPP ONEC PHCN PPA PPP PRG PRSP TCN TA UA USAID USD WB African Development Bank African Development Fund Country Strategy Paper Department for International Development Distribution Company Environmental and Social Impact Assessment Environmental and Social Management Plan Federal Government of Nigeria Federal Ministry of Environment Federal Ministry of Finance Federal Ministry of Power Generation Company International Development Association Independent Power Producer Multilateral Investment Guarantee Agency Multi-Year Tariff Order II Megawatt Nigeria Bulk Electricity Trading PLC Niger Delta Power Holding Company Limited Nigeria Electricity Regulatory Commission ADB s Nigeria Field Office Nigerian Naira Nigeria Infrastructure Advisory Facility (DFID funded) National Integrated Power Projects Operations Energy, Environment and Climate Change Department Power Holding Company of Nigeria Power Purchase Agreement Public-Private Partnership Partial Risk Guarantee Poverty Reduction Strategy Paper Transmission Company of Nigeria Transformation Agenda Unit of Account United States Agency for International Development United States Dollar World Bank ii

5 PROGRAM INFORMATION SHEET Borrower/ Counterindemnity Provider Executing Agency Implementing Agency / Applicant Client Information Federal Republic of Nigeria (FGN) Federal Ministry of Power (FMP) Nigeria Bulk Electricity Trading PLC (NBET) FINANCING PLAN Sources Amount (UA million) Instrument African Development Fund (ADF) 120 PRG ADF 2 Loan Total Cost 122 Commitment Currency KEY FINANCIAL INFORMATION ADF Loan ADF Partial Risk Guarantee Unit of Account (UA) Unit of Account (UA) Currency United States Dollar (USD) United States Dollar (USD) Interest Rate 1% N/A Interest Rate Margin Service Charge Guarantee Fee Commitment Fees Standby Fee N/A 0.75% yearly on the disbursed and outstanding. N/A 0.50% yearly on the undisbursed portion of the loan starting 120 days after the signing of the agreement. N/A N/A N/A Equivalent to ADF loan service charge of 0.75% per annum on the face value of the drawn portion of the Guaranteed Amount. N/A Equivalent to ADF loan commitment fee of 0.50% per annum that will be charged on the face value of undrawn portion of the Guaranteed Amount. Front-end Fees N/A Up to 1% of the Guaranteed Amount. Other Fees Tenor N/A 30 years Grace Period 8 years N/A Legal and other out of pocket expenses incurred by the ADF during the initiation, appraisal and underwriting process of a guarantee, other than the Banks traditional operational expenses, will be charged to the beneficiary. The Guarantee tenor may vary for each project under the Program depending on the requirements of the specific underlying transaction. The Guarantee will be in place until the market is mature and the guarantee applicant, NBET, hands over PPA obligations to the individual distribution companies and hence the guarantee is withdrawn. iii

6 KEY FINANCIAL & ECONOMIC OUTCOMES Analysis NPV (USD million) IRR (%) Financial Analysis Okija IPP % Ikot Abasi IPP % Ughelli % Economic Analysis Program 1, % TIMEFRAME MAIN MILESTONES Concept Note Approval 29 August 2013 Program Approval December 2013 Completion (Component 2) 1 March, 2017 Last Disbursement (Component 2) 1 September 2017 iv

7 PROGRAM SUMMARY Program Overview: The Partial Risk Guarantee Program in Support of the Power Sector Privatization aims to increase electricity generation in Nigeria by catalysing private sector investment and commercial financing in Nigeria s power sector through the provision of Partial Risk Guarantees (PRGs). The ADF PRGs will mitigate the risk of the Nigeria Bulk Electricity Trading Plc (NBET), a Federal Government of Nigeria (FGN) entity established to purchase electricity from independent power producers (IPPs), not fulfilling its contractual obligations under its power purchase agreements (PPAs) with selected IPPs. The ADF PRGs offered under the Program will mitigate the political risk and increase the comfort level of private sector investors/ commercial lenders investing in the Nigerian power privatization program. It will therefore support the FGN in its efforts to reform the power sector and position the country on a sustainable growth path. Program Impact: An effective and steady power supply is critical to the sustainability of Nigeria s development path. According to FGN statistics, power outages cost Nigeria about 3% of its GDP annually. It is anticipated that the IPPs eligible for coverage under the Program could generate an additional 1,380 MW of power by 2016, thereby contributing to increasing the population s access to more reliable and affordable electricity (from 41% currently to 50% by 2016). Needs Assessment: Nigeria, in its development objective to rank amongst the top 20 economies of the world by the year 2020, targets an ambitious 40,000MW of electricity generation. With a population surpassing 160 million, Nigeria s current maximum electricity generation capacity, estimated at approximately 5,500 MW, is inadequate to meet the unsuppressed demand estimated at approximately 10,000 MW. Only about 41% of the population currently has access to electricity; and for that segment of the population, only 30% of its needs are currently met. To meet the generation targets set for 2020, significant private sector investment is required in the supply chain, including generation, gas to power infrastructure and distribution networks. The reform of the power sector started in 2005 with the enactment of the Electric Power Sector Reform Act (EPSRA) and was accelerated in 2010 with the Power Sector Reform Roadmap. Nigeria faces a range of challenges implementing the Power Sector Reform Roadmap, and providing comfort for private sector investment into its privatised power market is one of the main challenges. Bank Group s Added Value: The Bank Group s objective in introducing the ADF PRG instrument was to crowd in private financing by covering government related risks that the market is neither able to absorb nor mitigate. This ADF PRG Program, in support of the Nigerian Power Sector, will therefore directly contribute to the Bank Group s objective. Moreover, it is essential that Bank Group leverages its resources in Nigeria given the magnitude of the financing requirements. This requires novel approaches, such as the use of PRGs, with their leveraging factor as part of the financing mix for maximum value addition. Knowledge Management: The ADF PRG will provide innovative risk mitigation for NBET, in support of private sector power projects. The innovative approach, for crowding-in private financing for infrastructure investments, will have a catalytic and replication effect both in Nigeria and more broadly in Africa. The lessons learned from this operation will provide useful insight into the promotion of private investment for infrastructure projects using guarantees in Nigeria and other African countries going forward. v

8 RESULTS-BASED LOGICAL FRAMEWORK Country and Program Name: : Nigeria Partial Risk Guarantee in Support of the Power Sector Privatization Purpose of the program: Increase electricity generation in Nigeria by catalyzing private sector finance in the power sector through provision of partial risk guarantees in favor of Independent Power Producers (IPPs) to mitigate certain political risks IMPACT OUTCOMES OUTPUTS KEY ACTIVITIES RESULTS CHAIN Increased productivity, economic activity and growth, and reduced poverty in Nigeria Outcome Increased maximum electricity supply Increased consumption per capita Output -Power plants rehabilitated and/or commissioned - Training provided to NBET and NERC staff - Training of female staff PERFORMANCE INDICATORS Indicator Baseline (including CSI) Target 2016 Electricity access rate (%) 41 % 50 % Volume of power (in MW) supplied to meet maximum electricity demand Average volume of electricity consumed by inhabitant -Power plants generation capacity: * Okija IPP/or eligible IPP * Ikot Abasi IPP/ or eligible IPP * Yellowstone IPP/ or eligible IPP * Ughelli IPP/ or eligible IPP - Total Number of staff trained - Number of Female staff trained 5,500 MW 8,000 MW 121 KWh 210 KWh - Plants: *0 MW *0 MW *0 MW *330 MW *10 staff trained *2 Female staff trained -Plants: *495MW *250MW *351MW *614MW *185 staff trained *30 Female staff trained 1.Procurement of a commercial bank for the issuance of the revolving standby letter of credit (L/C) 2. Issuance of L/C for the account of NBET to each IPP IPPs related activities 3. Construction of three greenfield gaspower Plants and rehabilitation of one brownfield gas Power Plant 4. Upgrading of the 330 kv transmission line that runs parallel to the Okija site and construction of a 20 kms long 18 gas pipeline 5. Erection of a 3 km 330KV transmission line in Akwa Ibom State. Assembling of an 18 natural gas pipeline in Akwa Ibom State 6. Construction of a 2 km double circuit 330 kv overhead line connecting Yellowstone IPP to the Ajaokuta substation 7. Technical Assistance trainings MEANS OF VERIFICATION - Publications from: * FMP * NBET * NERC * NBS - Project progress and completion reports - Publications from: * FMP * NBET - Project progress and completion reports - Publications from: * NBET * FMP * Supervision Missions, - Project progress and completion reports INPUTS RISKS / MITIGATION MEASURES Governance risks such as accountability challenges and vulnerability to vested interests could have debilitating effect on the power sector in Nigeria. Mitigation: Nigeria has steadily progressed in achieving measures to improve public resource management and there is a strong level of commitment to the success of the reform. Liquidity risk due to weak billing and collection of payments due by the end consumer and lack of appropriate metering systems. Mitigation: DisCos have recently been privatized and are expected to improve efficiency in billing and collection of payments. Nevertheless, in case of non-payment, NBET will have the right contractually to partly curtail or withhold energy deliveries to DisCos. This will be in turn an incentive for DisCos to pay their bills. Weak operational capacity and poor financial standing of NBET. Mitigation: NBET capitalisation by FGN of approximately USD 820 million and NBET s liquidity enhancement, which includes guarantees covering 3 months of power purchases revenues due from distribution companies..combined with the Bank s ongoing budget support to the sector these measures should help address any potential capacity and financial issues. Transmission and distribution service deficiencies and inability to evacuate and distribute the energy generated by the IPPs. Mitigation: Agreements being entered into between greenfield power producers and TCN to construct transmission lines to evacuate power. The Bank s ongoing sector budget support and the ongoing handover of TCN to a short-term private manager. IPPs construction and/or rehabilitation risks leading to delays. Mitigation: Assessment of the technical and financial standing of the EPC contractors before financial close. Provisions for construction delay liquidated damages and penalties in EPC contract. Gas supply risks due to security concerns in the Niger Delta region with pipeline vandalism. Mitigation: The Gas Supply Agreement (GSA) will include liquidated damages provisions. Security is one of the priorities of the FGN s Transformation Agenda with renewed efforts to end militancy in the Delta region. - ADF Partial Risk Guarantees having a total face value amount of UA 120 million (USD 180 million), UA 30 million deducted from the country s PBA - ADF loan amounting to UA 2 million for capacity building (to NBET and NERC) vi

9 IMPLEMENTATION SCHEDULE vii

10 REPORT AND RECOMMENDATION OF MANAGEMENT TO THE BOARD OF DIRECTORS ON A PROPOSED PARTIAL RISK GUARANTEE PROGRAM TO THE FEDERAL REPUBLIC OF NIGERIA IN SUPPORT OF THE POWER SECTOR Management submits the following report and recommendations on a proposed Partial Risk Guarantee (PRG) Program to the Federal Government of Nigeria (FGN) in support of the power sector privatization. The first tranche of the PRG Program will be for a total PRG face value amount of UA 120 million (approximately equivalent to USD 180 million), which would use UA 30 million of Nigeria s ADF 12 PBA. An ADF loan of UA 2 million will also be provided for the capacity building of the main sector players. Management also notes, for the Board s information, that the Program could be expanded with a second tranche composed of ADF 13 PBA resources, ADB resources and/or other funds as requested by the FGN and as available beginning in STRATEGIC THRUST & RATIONALE 1.1 Program Linkages with Country Strategy and Objectives Nigeria s weak power sector continues to hinder every aspect of the country s economy and growth prospects. The improvement of the sector is thus one of the Federal Government of Nigeria s (FGN) key operational objectives. The proposed program is in line with the FGN s long-term development agenda Vision 20:2020 and its strategic direction as detailed in the Transformation Agenda (TA ). The FGN aspires to be among the top 20 economies in the world by the year Vision 20:2020 has identified the improvement of the provision of electricity as a key priority and sets an ambitious national generation capacity target of 40,000 MW by the year The TA has also identified critical infrastructure development, i.e. power, roads transportation, railways, and agricultural transformation, as key to its operational success The Bank Group s current CSP for Nigeria ( ) aims primarily at promoting inclusive and green growth, in line with the Bank Group s Ten-Year Strategy ( ), and focuses on the following two pillars: (i) promoting the development of a sound policy environment, and (ii) investing in critical infrastructure to promote the development of the real sector of the economy. It recognizes the huge financing needs of the country and the relatively small size of Nigeria s ADF resource envelop with the expectation that Nigeria will soon graduate from a blend to an ADB-only country. The strategy thus focuses on fostering a good policy environment and investing in critical infrastructure. A sound policy environment would ensure effective transformation of Nigeria s commodities-oriented economy (agriculture and crude-oil production) into an industrial, manufacturing and tradable services-oriented economy. PRGs are specifically referred to in the CSP as necessary to help crowd in private financing, accelerate foreign direct investment, and encourage private sector participation in public-private partnerships, in particular Independent Power Producers (IPPs). The proposed Program, in its objective to attract private financing for the power sector infrastructure, which is critical for fostering inclusive growth, fits perfectly with each pillar of the CSP and furthers the Bank Group s mission in Nigeria Finally, the Program will contribute to the green and inclusive growth pillar of the Bank Group s Ten-Year Strategy ( ). It will result in climate resilience and will increase the energy access rate by replacing expensive and heavily polluting emergency and/or individual dieselfired generators by a cleaner source of energy (gas fired thermal plants essentially) and securing the power generation capacity required to adequately supply reliable and affordable electricity to end users. 1

11 1.2 Rationale for Bank Group Involvement Nigeria electricity consumption per capita is amongst the lowest in the world, with long power outages, poor quality of supply, and low access to electricity. The country s current generation capacity includes three hydroelectric and eight thermal power plants from the Power Holding Company of Nigeria (PHCN), the state-owned holding company, ten thermal power plants from the National Integrated Power Project (NIPP), a Government sponsored programme, and eight privatelyowned Independent Power Producers (IPPs) having a total installed capacity of about 10,000 MW (2012). Yet, due to the poor maintenance of the facilities and the erratic gas supply, only about 5,500 MW (representing about 55%) of the installed capacity is currently available to be evacuated to the transmission grid. The available capacity falls significantly short of the demand currently estimated at about 10,000 MW. The ongoing sector privatization reform seeks to address this gap To redress the deteriorating power supply situation in Nigeria, the FGN enacted the Electric Power Sector Reform Act (EPSRA) in 2005 to prepare the regulatory environment for private sector participation. The reform for the sector was revived in 2010 with the Power Sector Reform Roadmap which is successfully being implemented despite some challenges. The Power Sector Reform has led to the unbundling of the PHCN into 18 different companies - 11 distribution companies, 6 generation companies and 1 transmission company. Some major achievements include the establishment and/or strengthening of key institutions such as the Nigeria Bulk Electricity Trader (NBET) and the Nigerian Electricity Regulatory Agency (NERC) as well as the payment by the distribution and generation successor companies to PHCN for a total amount of around $2.5 billion, which represents the total value of the share sale price of the privatized assets. A cost-reflective tariff, the Multi-Year Tariff Order (MYTO) II, has been introduced on 1 st June 2012 to make the sector attractive to both local and foreign investors. A detailed overview of the Nigerian power sector, as well as the status of the reform, is provided in Annex A The FGN aims at significantly increasing power generation in Nigeria by allowing privatelyowned IPPs to produce and supply power to the national grid, with a target to generate an additional 6,000 MW of power by In order to achieve this target, significant investments are expected from IPPs and as such, the FGN has approached the Bank Group to provide PRGs to support the contractual obligations of the NBET, which has been mandated to negotiate and implement power purchase agreements (PPAs) with IPPs on behalf of the distribution companies (DisCos) for an interim period to provide market certainty and confidence. The interim period, with NBET as bulk purchaser and reseller of electrical power, will last until DisCos establish their creditworthiness and the market is able to function on a bilateral basis between generation companies (GenCos) and distribution companies (DisCos). The Bank Group aims to support the FGN in its efforts to reform the sector, catalyze private sector investment and commercial financing, and position the country on a sustainable growth path through issuance of the PRGs. The provision of PRGs to backstop the payment obligations of NBET will have the effect of assisting the country in achieving its power generation objectives while minimizing public sector financing. 1.3 Aid Coordination There is considerable donor activity in the Nigerian power sector through investments, technical assistance, advisory services and capacity building support. The World Bank Group (WBG), in particular, offers a guarantee product that is similar in nature and scope to that of the Bank Group PRGs. The WBG s Nigeria portfolio includes a program of IDA Partial Risk Guarantees (PRGs) in the amount of US$ 400 million in support of gas supply and aggregation agreements for oil companies under the Nigeria Electricity and Gas Improvement Project. The Bank Group held extensive discussions with IDA on a co-guarantee project that would provide a super Line of Credit (L/C) to the IPPs in power sector. The approach was abandoned for each individual institution to 2

12 cover a number of separate projects nominated by NBET. The WBG is thus currently preparing a PRG operation in support of a series of IPPs in parallel with the subject Program. Nevertheless, given the number of IPPs coming on-stream and the magnitude of their needs during this interim phase of the privatization process, both WBG products and the Bank s products will be offered complementarily The UK s Department for International Development is supporting the development of energy infrastructure through its Nigeria Infrastructure Advisory Facility (NIAF) under which a number of advisory services on energy sector issues are being provided to the FGN. The United States and its Agency for International Development (USAID) are engaged in various activities through USAID s Africa Infrastructure Program in providing credit guarantees in support of small renewable energy projects and the Power Africa initiative recently announced by President Obama which aims at doubling access to power in Sub-Saharan Africa and for which the Bank is a strong partner. Other institutions involved in the power sector include the Agence Française de Développement which is supporting transmission line projects, and the German KfW, which is engaged in the rehabilitation of power plants To improve aid effectiveness, donors have developed a Country Assistance Framework (CAF) which provides a common understanding of the development challenges that Nigeria is facing and upon which donors develop their own strategies. For the power sector, donors collaborate through the Donor Coordination Group on Power, which is a forum for coordination of donors interventions in the sector. 2 PROGRAM DESCRIPTION 2.1 Overview The introduction of the ADF PRG instrument (a description of the PRG instrument is provided in Annex C) by the Bank Group in 2011 has strengthened the Bank Group s position as one of the main development partners of the Federal Government of Nigeria (FGN) for the implementation of the Nigerian power sector privatization reform. In this regard, the Bank was officially requested in May 2013 to provide ADF PRGs to nominated IPPs, as well as capacity building assistance to key institutions involved in Nigeria s power sector reform. Along with the capacity building component, the issuance of PRGs will give comfort to private investors and/or commercial lenders and mitigate against the risk of NBET not fulfilling its contractual obligations under the Power Purchase Agreements (PPAs) that will be concluded with each IPP. It will cover the risk of non-payment by NBET for electricity delivered by the IPPs. For each IPP, the amount covered by the PRG would be capped at an amount equivalent to 3 months of payments for electricity delivered to NBET. It should be noted that the public sector window of the Bank is not investing in any infrastructure under this proposed Program, while the private sector window (OPSM) is considering providing senior debt to some of the IPPs being supported by the Program The PRGs will only cover the transitional period of the power sector reform (a detailed description of the power sector reform is provided in Annex A), whilst NBET plays the role of intermediary between the IPPs and the DisCos. During that period, all the stakeholders in the sector will require some level of comfort pending the outcome of the ongoing power sector reform. The NBET was created in order to provide that comfort and hence build the credibility of the DisCos. Once the DisCos have established a robust billing system, a follow-up mechanism, a strong credit standing, and have gained the confidence of IPPs to engage in direct negotiations with them, the role of the NBET will no longer be required. In the new system, which has resulted from the power sector reform, there is an emergence of several institutions and it is important that the various contracts and 3

13 agreements that will be signed between the different parties be adhered to. This will provide the ultimate comfort for any future investors in this new contracts based system. 2.2 Program Components The program has two components: Component 1: Provision of Partial Risk Guarantees (PRGs) to support selected IPPs nominated by NBET. Component 2: Capacity Building in favour of key institutions involved in Nigeria s power sector reform, notably NBET and the Nigerian Electricity Regulatory Commission (NERC) with respect to implementation and enforcement of procurement as well as environmental and social rules and regulations. Measures will be undertaken to ensure equal opportunity and adequate participation of female staff For Component 1, it is anticipated that the financing structure for each PRG will involve a revolving standby letter of credit (L/C), in an amount not exceeding the equivalent of three (3) months of payments for electricity delivered, issued by a commercial bank (L/C Issuing Bank) to a specific IPP as payment security for certain payment obligations of NBET under the relevant PPA. In the event of non-payment by NBET of an invoice for electricity delivered, and in accordance with the terms of the L/C, the IPP would be entitled to draw under the L/C. In which event, the L/C Issuing Bank would be entitled to recover from NBET amounts paid to the IPP with a specified reimbursement period to be discussed and agreed with each L/C Issuing Bank. Each PRG will backstop the debt obligation of NBET to the L/C Issuing Bank for any amount drawn by an IPP under the L/C and not reimbursed by NBET to the L/C Issuing Bank within the specified timeframe. In the event that NBET fails to honor its payment obligations to the L/C Issuing Bank, the Bank will pay an amount equal to the amount drawn under the L/C and not reimbursed by NBET plus accrued interest, if any, to the L/C Issuing Bank, up to the aggregate maximum amount of the specific PRG. The FGN will indemnify and reimburse the Bank for all amounts paid to the L/C Issuing Bank under the PRG. The tenor of each PRG could technically match the underlying life of the project or at most the tenor of the PPA; however, it should be noted that once there is sufficient comfort in the market and the NBET hands over PPA obligations to individual privatized DisCos, the PRG will be withdrawn, as the obligations will no longer be those of a sovereign entity. Figure 2.1 below depicts the framework for the PRG component. 4

14 Figure 2.1 PRG Framework For Component 2, NBET and NERC will receive technical assistance support, amounting to UA 2 million, to enhance the FGN s capacity to sustain and regulate the privatized power sector. To increase the Program and the sector s sustainability, IT equipment, training and consultancy services will be provided in various fields, from environmental and social assessment to procurement, in order to strengthen these institutions ability to successfully perform their roles during the transitional period and beyond. Technical advisers (individual consultants) will be provided to them as appropriate and groups of officials and staff will be chosen from each of the proposed Program beneficiaries to take part in international training programs. This component will provide hands-on skills to enable the staff in these key public institutions to monitor the Program and more generally the whole sector. It is anticipated that once the market matures and the role of NBET is taken over by the DisCos, the NBET staff will remain at the level of the Federal Ministry of Power and the skills they would have acquired with this technical assistance component would still be relevant for the sector. The participation of female staff in the trainings will be encouraged to ensure equal opportunity. Details of the various capacity building activities are presented in Annex B.5 (table B.5.1). 2.3 Program Methodology The proposed methodology for this program entails the development of a strong pipeline of IPPs that would each benefit from a PRG. The first tranche of the Program will use the ADF 12 resources allocated by the FGN, which amounts to UA 30 million and translates into a PRG with a cumulative face value amount of UA 120 million (approximately equivalent to USD 180 million). This first tranche could be complemented in 2014 and beyond by a second tranche from ADF 13 resources and/or ADB resources, depending on the request from the FGN Once the PRG Program is approved by the Board, each individual PRG proposal for a specific IPP will be processed for approval by the Board on a lapse of time basis (LOTB). Each individual PRG proposal for a specific IPP will be thoroughly assessed before its submission to the Board, in line with the Bank Group s standard technical and commercial viability, environmental and social compliance and other criteria defined below. 2.4 Eligibility Criteria 5

15 2.4.1 A set of criteria has been developed for assessing prospective IPPs, and the criteria have been differentiated for greenfield and brownfield IPPs The set of criteria for the greenfield IPPs will include the requirement to submit the following: (i) completed Environmental and Social Impact Assessment (ESIA) and Resettlement Action Plan (RAP) acceptable to the Bank; (ii) signed or substantially negotiated Gas Supply Agreement; (iii) signed or substantially negotiated Grid Connection Agreement and Ancillary Service Agreement; (iv) signed or substantially negotiated PPA; (v) signed or substantially negotiated Engineering, Procurement and Construction (EPC) contract; (vi) evidence of appropriate use of funds for economy, fairness, and efficiency of the procurement process; and (vii) assessment of the commercial viability of the IPP together with evidence of secured commercial financing (i.e. the IPP should have reached financial close or have an initialled loan agreement) The set of criteria for brownfield IPPs includes: (i) completed ESIA audit acceptable to the Bank; (ii) availability of additional gas to supply the rehabilitated / expanded power plant; (iii) availability of sufficient transmission capacity to evacuate the additional generation from the rehabilitated / expanded power plant; (iv) signed or substantially negotiated EPC contract for the rehabilitation / expansion of the power plant; (v) evidence of appropriate use of funds for economy, fairness, and efficiency of the procurement process; and (vi) an assessment of the commercial viability of the IPP together with evidence of secured commercial financing for the rehabilitation / expansion (i.e. the IPP should have reached financial close or have an initialled loan agreement) Finally, in order for the IPPs, within the pipeline, to benefit from the PRGs, the Bank will have to be satisfied that these IPPs are contributing to development outcomes. 2.5 Pipeline IPPs A pipeline of IPPs has been developed based on nominations from the FGN, discussions with some IPPs which approached the Bank for a PRG and a preliminary assessment of the readiness of the IPPs by the project team. The FGN initially nominated five (5) greenfield IPPs, out of which two (2) were included in the pipeline. Some IPPs approached the Bank directly and two (2) were included in the pipeline following confirmation of the FGN s interest in supporting those IPPs. The pipeline is not exhaustive and is subject to change depending on the pace of development of the IPPs included in the pipeline and the progress of potential new candidate IPPs Greenfield IPPs: Three Greenfield IPPs have been included in the pipeline: Okija IPP consists of the design, construction and operation of a 495 MW open cycle gas to power plant at Okija, Anambra State in the South East of Nigeria by end The Bank has been mandated as the Global Coordinating Bank and the private sector department (OPSM) is currently undertaking its due diligence on the project. Ikot Abasi IPP consists of the design, construction and operation of two floating barges mounted with two gas turbines having a total output of about 250 MW in Ikot Abasi LGA in Akwa Ibom State by end The Bank has been requested to play a leading role in the financing of the project, which it is currently assessing. Yellowstone IPP consists of the development of a gas-fired power plant with an installed capacity of 350 MW and located directly adjacent to Geregu Power Plants (combined capacity of 868 MW) in Ajaokuta, Kogi State by end The Bank was requested to play a leading role in the financing of the project and the private sector department (OPSM) is currently undertaking its preliminary review of the project. 6

16 2.5.3 Brownfield IPPs: One Browfield IPP has been included in the pipeline: Ughelli. The IPP is a gas fired thermal plant situated in Delta State with an installed capacity of 972 MW and available capacity of 333 MW as at September, The Transcorp Consortium has now acquired 100% equity stake in Ughelli Power Plc as per the Share Sale Agreement signed with the Bureau of Public Enterprise (acting on behalf of the FGN). The acquisition plan includes the purchase of spare parts and refurbishment of existing units in the short terms, and plans for expansion in the medium term. 2.6 Technical Solutions Adopted and Alternatives Considered The solution adopted for this program is defined by a strong pipeline of IPPs to be considered for PRGs by the Bank, on a fast-tracked basis. Alternative solutions were considered for this Program and rejected for the reasons summarized in Table 2.2. Table 2.2 Program Alternatives and Reasons for Rejection Alternative Description Reasons for Rejection Absence of PRGs Super L/C Alternative design 2.7 Program Type No PRGs are provided for the IPPs Provide a super L/C comprising of co-guarantees from various DFIs involved in Nigeria s power sector Provide a PRG for each IPP rather than a series of PRGs as part of a larger program Potential investors would not be willing to take political risk existing in Nigeria The FGN is not willing to provide sovereign guarantees to private investors, as it would be a contingent liability on the Government IPPs would hardly, if at all, reach financial close Obstacle in elaborating an appropriate joint legal framework for the instrument. Lack of responsiveness due to long processing delays vs. the urgent need to provide PRGs for IPPs to reach financial close Not optimal in terms of use of internal resources The proposed program will be implemented as a standalone operation and will use the ADF Partial Risk Guarantee and ADF Loan instruments. 2.8 Program Cost and Financing Arrangements The first tranche of the Program will consist of UA 30 million from the ADF 12 PBA, resulting in a PRG having a total face value amount of UA 120 million (approximately equivalent to USD 180 million), as a result of the leverage factor of the ADF PRG instrument. Indeed, the ADF PRG has a four time multiplier effect allowing only 25% of the face value of the guarantee to be deducted from the country s PBA. The Program also includes an ADF loan amounting to UA 2 million to provide technical assistance support to NBET and NERC. In line with the Bank Group's Policy on Eligible Expenditures and in view of the country s strong commitment to the power sector, it is recommended that the Board approves 100% financing of the total cost of Component 2 of the Program Fees associated with each PRG issued include: a guarantee fee of 75 basis points per annum on the full face value of the PRG payable to the Fund; a standby-fee of 50 basis points charged per annum on the face value of the undrawn guarantee amount; a one-time front-end fee in an amount equal to up to a maximum of 100 basis points of the full face value of the PRG will be charged by the Fund to recover development and appraisal costs; as well as, other fees involving legal or out of pocket expenses incurred by the Bank Group during initiation, appraisal and underwriting process of a guarantee. In addition, there will be fees payable to the L/C Issuing Bank for providing the L/C. It is anticipated that all PRGs and L/C-related fees will be payable by the L/C beneficiaries, i.e. the 7

17 specific IPPs to benefit from the PRGs. It should be noted that all the IPPs included in the pipeline have indicated that they are willing to pay the fees and this will be firmed up during the negotiations of the guarantee agreement. The ADF loan will have the standard ADF loan terms for blend member countries such as Nigeria as indicated in the Project Information Sheet. 2.9 Program s Target Area and Development Impact With all IPPs supplying the national grid, the Program is expected to contribute to an improved electricity access, from the current 41% to approximately 50% by 2016, for household, commercial and industrial customers throughout the country. Access to modern, reliable and affordable energy is fundamental to poverty reduction and sustainable development. Energy access impacts on many aspects of people s well-being and livelihoods, without which they are constrained to endure low standards of living and difficult prospects to overcome poverty Currently, only 41% of Nigeria s total population has access to public electricity supply, with rural areas suffering the most from electricity deprivation. Even connected households suffer from an erratic electricity supply. Only 25% of households use grid electricity as main source of lighting (compared to 64% using kerosene). While over 80% of Nigerians have access to a radio and 64% to mobile phones, 95% of the population does not have access to personal computers and internet. This is partly explained because of the limited and unreliable power supply. It is expected that the dominant use of electricity will be for lighting, followed by operating information and communication technology (ICT) devices. This will in turn improve the welfare of households as well as provide additional income-generation opportunities Participatory Approach During the preparation of the Program, the Bank held extensive consultations with the main power sector stakeholders, including the Federal Ministry of Finance, the Federal Ministry of Power, NBET, NERC, TCN, as well as donors active in the sector, including the World Bank, USAID, and finally the sponsors of the IPPs and their financial advisors For Greenfield IPPs, consultations have taken place with representatives from the local administration, the affected communities, and civil society as part of the elaboration and validation of the ESIA and RAP documents. Consultations with local communities reached a wide segment of the population in the Program areas and took the form of formal and informal meetings, focus group discussions, and in-depth interviews. Information related to the Program was discussed and various stakeholders were encouraged to voice their concerns and opinions. Feedback obtained from the stakeholders was documented, and all issues and suggestions raised were recorded. The extent of consultations and issues raised will be assessed during the due diligence process of each transaction. Greenfield IPP transactions will follow the disclosure process of the Bank in accordance with the Environmental and Social Procedures for Private Sector Operations prior to presentation to Board approval on LOTB Bank Group Experience and Lessons Reflected in Program Design The Bank s experience in Nigeria has led to some key lessons learnt, principally relating to the FGN s weaknesses in implementation capacity and lack of consistency with policy and plans. The need for coherent power sector planning is being addressed by the FGN, with a strong commitment to see the reform program go through. At the Program level, due attention needs to be given to capacity assessment of NBET and other main institutions in the sector, especially in the areas that would be critical to the Fund e.g. environmental assessment; procurement etc. In this regard, and in addition to the ongoing Bank financed Economic and Power Sector Reform Program and Capacity 8

18 Building for PPP Infrastructure Projects operations, the project team has identified the capacity building needs of the key institutions, NBET and NERC, for the success of the power sector reform and secured some funding to fill the identified gaps (Component 2). Another main lessons learnt from the Bank s past interventions in Nigeria is the need to align it with the country s needs. As such, the decision to take a programmatic approach for this operation is based on the feedback received from the NBET and FGN that a timesaving and flexible mechanism for the delivery of the PRGs would be required in order to bring on board the IPPs as swiftly as possible The Project Team also integrated lessons learnt from the Bank s first PRG operation in Kenya in favor of the Lake Turkana Wind Power Project (LTWP) and other sister institutions, notably the World Bank Group institutions. During the presentation of the LTWP, the Board suggested that for projects for which the Bank is also financing the IPP from the private sector window, the approval process of the PRG should be fast-tracked and one Project Appraisal Report (PAR) should be submitted to the Board to the extent possible. In this Program, for the IPPs that are being considered for private sector window financing, the same PAR will be submitted for Board consideration once the Program has been approved. The International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) offer PRGs that cover traditional political risks and breach of contract on the part of government. The Multilateral Investment Guarantee Association (MIGA) offers political risk insurance products covering mainly foreign investors equity, quasiequity, and non-equity direct investments for any combination of the following political risks: (i) transfer restriction, (ii) expropriation, (iii) war and civil disturbance, and (iv) breach of contract. In addition, MIGA now also has the authority to cover non-payment of direct financial obligations of sovereign and sub-sovereign entities. The PRG Strategic Framework and Operational Guidelines highlighted lessons from the IDA experience which, notwithstanding certain operational and institutional differences between the WB and ADB, have been considered in the design of the ADF PRG product. Those lessons are essentially that a PRG operation requires an enabling policy framework; an implementation approach that rests on mainstream business processes and mobilizes specialist skills; clear institutional assignments within the organization, beyond the pilot stage; sufficient levels of leverage to make the instrument attractive; and an aggressive marketing to private investors and governments Key Performance Indicators The impact indicator will be the electricity access rate, which is expected to grow from the current 41% to 50% by The key outcome indicators will be the maximum electricity demand supplied to the national grid in MW, which is expected to grow from 5,500 to 8,000 MW by From an outputs perspective, the Program will result in additional generation capacity in 1,380 MW provided by the 4 IPPs being supported under this program, as well as the trainings provided to NBET and NERC staff that encourages gender balance. 3 PROGRAM FEASIBILITY 3.1 Financial and Economic Performance In order to offer the best indication of the Program s viability and profitability, the Program s financial and economic analysis focused on the IPPs that had already developed a preliminary financial model. These IPPs, Okija, Ikot Abasi and Ughelli can be considered as frontrunners in terms of readiness and in regards to fulfilling the Program s aforementioned criteria for accessing the PRG. Yellowstone IPP has already appointed its advisors (technical, legal, environmental, etc.) to prepare the project documents, but it is yet to appoint a financial advisor who will essentially be in charge of building a project information memorandum and a financial model. 9

19 3.1.2 The Economic Analysis is built on the assumption of applicability of the Multi-Year Tariff Order (MYTO) II, which provides a 15 year tariff path for the Nigerian power sector. The PPAs to be executed between the IPPs and the NBET would be in fact based on terms and conditions, including tariffs, approved by the sector regulator, Nigerian Electricity Regulatory Commission (NERC), in its MYTO II methodology The table below provides a summary of the main financial indicators from the financial and economic analysis conducted for the selected pipeline projects. Table 3.1 Key Financial and Economic Performance Indicators Analysis NPV (USD million) IRR (%) Financial Analysis Okija IPP % Ikot Abasi IPP % Ughelli % Economic Analysis 1,929 34% N.B. Detailed calculations and assumptions are given in Annex B The detailed calculations of the financial and economic analysis as well as sensitivity tests are provided in Annex B Environnemental and Social Impact The Program is classified as Category 4 according to the Bank s Environmental and Social Assessment Procedures (ESAP) The Bank is supporting NBET in setting up an Environmental and Social Management System designed to systematize the identification and management of environmental and social risks associated with the IPPs and to liaise with the Federal Environmental Protection Agency The environmental and social due diligence status of the IPPs is the following: For Greenfield IPPs: The Environmental and Social Assessments (ESIA) of all Greenfield IPPs listed above have been validated by the Federal Environmental Protection Agency, although the Bank still has to receive the supportive documentation in that regard. The Bank is currently reviewing the ESIAs for Okija and Ikot Abasi IPPs. The relevant environmental and social (E&S) due diligence documentation pertaining to Yellowstone have yet to be submitted by the sponsors to the Bank. For Brownfield IPPs: Ughelli IPP is yet to conduct an environmental audit and elaborate an environmental management plan, which will be required by the Bank as part of the due diligence process pertaining to each transaction. Moreover, the sponsors will have to obtain the required license from the Federal Environmental Protection Agency Upon receipt of the documentation described above, the Bank will review it against the background of its E&S procedures for private sector operations. All IPPs will be required to have inhouse expertise for the environmental and social monitoring during the construction and operations phases Environment: The energy produced would save Nigerians millions of dollars annually by displacing the expensive standby generators currently being used by Nigerian households and businesses. In addition, the Program will contribute to the national effort of meeting the rapidly 10

20 growing energy needs of present and future population, mostly through investment in largely environment-friendly initiatives Climate Change: Natural gas has some advantages over other fossil fuel energy sources, such as oil and coal. It is cleaner burning and has a lower carbon footprint. In this regard, the Program will contribute minimally to Nigeria s GHG emissions, and thus with limited climate change implications. While most of the IPPs are starting with open cycle gas turbine technology, they have plans to move to combined cycle technology in the medium to long run Gender: By supporting IPPs supplying the national grid, the Program is expected to contribute to an improved electricity access for Nigeria s population as a whole, out of whom 80.2 million (49%) are women. These include female heads of households, who represent 15% of the 30 million households living in Nigeria and considered to be financially vulnerable. 1 As primary responsible for household chores and child-rearing activities, women in Nigeria bear the brunt of dependency on biomass and lack of access to clean and modern energy sources. Moreover, lighting facilitates the overall efficiency of cooking and childrearing activities Grid electricity access contributes in freeing women s time for other activities, such as income-generation and education opportunities. In recent years, informal household businesses have become the main source of income in Nigeria over subsistence farming and informal employment, where women represent the majority of the labor force. Women also have become more prominent in formal enterprises, where they run one in every five registered business. 2 Electricity access will improve the operational efficiency of these businesses and significantly lower operational costs. This in turn will lead to greater financial independence which is an essential dimension of women s empowerment By making ICT and media more accessible, the Program will indirectly have a positive influence on attitudes about gender roles. The literature shows a positive correlation between access to information and women s empowerment. Women who have access to modern technologies can more easily be informed about educational, economic and other opportunities and access to mass media is often correlated with lower fertility rates. Finally, the Program s second component s emphasis on female participation will support the career growth of women within key institution s in Nigeria s power sector Social: Connecting homes to the grid will considerably and immediately improve the welfare of beneficiary households. Grid access will extend the effective working day, which in turn allows for more productive and leisurely activities (e.g. study time for children, listening to the radio and watching TV). In addition, electricity access will improve the quality of public services, in particular through the use of databases and computerized services to the benefit of households. With regards to vulnerable households, they benefit from a lifeline tariff and the government is currently looking at additional measures to support these customers The Program will support income generation activities as well as private sector development, particularly for household businesses, which are very common in Nigeria. According to the 2011 General Household Survey, 77% of urban and 62% of rural households in Nigeria have someone operating a business. Grid electricity will lower the operational costs of these businesses as well as standard enterprises, most of which currently rely on stand-alone diesel generators or batteries. In addition, the Program will contribute to the direct creation of temporary and permanent jobs for construction and operation activities as well as boost indirect employment (suppliers, contractors, catering services). 1 National Bureau of Statistics 2011, Men and Women in Nigeria 2 National Bureau of Statistics 2011, Households Enterprises in Nigeria 11

21 Involuntary Resettlement: It is possible that Greenfield IPPs, as they involve the need for land acquisition and the construction of associated facilities (transmission lines and gas and/or water pipelines) generate involuntary economic or physical resettlement. This will be identified during the due diligence process for each transaction. Each IPP presented on LOTB will have to comply with the Bank s Policy on Involuntary Resettlement (2003) A detailed environmental and social analysis is provided in Annex B8. 4 PROGRAM IMPLEMENTATION 4.1 Implementation Arrangements The purpose of the Program is to provide comfort to the private sector investors and lenders that the FGN, through NBET, will respect its payment obligations under the Power Purchase Agreements (PPAs) between the IPPs (selected to benefit the Program) and NBET. The FGN is therefore the primary obligor for the PRGs under this Program. The Federal Ministry of Power (FMoP) is the executing agency, while NBET is the implementing agency. NBET will assume fiduciary responsibilities on behalf of NERC for the procurement and financial management of the capacity building component benefiting NERC NBET, a FGN public entity, was incorporated on July 29, 2010, in line with the "Roadmap to Power Sector Reform" and in fulfilment of the requirements of Electric Power Sector Reform Act (EPSRA 2005) for a "trading licensee holding a bulk purchase and resale license to engage in the purchase and resale of electrical power and ancillary services from independent power producers and from the successor generation companies". Despite the fact that NBET does not have past experience in managing donor funded projects, its Board of Directors is made of eight credible Nigerians with various experiences at national and international levels and is chaired by the Honorable Coordinating Minister of the Economy and Finance. NBET is mandated to negotiate and implement PPAs with IPPs on behalf of the DisCos that are backed by credit enhancement mechanisms, such as PRGs. The implementation arrangements are detailed in Annex B Procurement: The Bank Group s Rules and Procedures for Procurement of Goods and Works, and Rules and Procedures for the Use of Consultants (both dated May 2008 and revised July 2012) apply to the Program in accordance with Article 1.2 and its charter to "ensure that the proceeds of any loan made or guaranteed by it are used only for the purposes for which the loan was granted, with due attention to considerations of economy and efficiency. Following the Rules 3.16, if the Bank guarantees the repayment of a loan made by another lender, the goods and works financed by the said loan shall be procured with due attention to economy and with procedures that meet the four principles of procurement. For the PRG-guaranteed L/C, the Bank will establish and approve the criteria that will be used for the selection of the L/C Issuing Bank before the PRG proposal for a specific IPP is submitted to the Board. In accordance with the PRG Operational Guidelines, due attention will be focused on the economy, efficiency, appropriate use of funds and competition All procurement to be carried out under the second component (B) for capacity building shall be in accordance with the Bank s Rules. NBET will be responsible for the procurement activities under that component. NBET is a newly established company, but an established procurement unit, which conducts its activities, based on the national procurement procedures. The risk assessment of NBET s ability to implement procurement arrangements under this project is rated medium. To mitigate this risk, a procurement specialist knowledgeable in Bank procedures will be recruited to reinforce NBET s procurement unit. The procurement arrangements for the Program are detailed in Annex B5. 12

22 4.1.5 Financial Management: The FMoP, being the Executing Agency, will, through the NBET, take overall responsibility for the Financial Management (FM) of the PRG program and ensure that the IPPs are regularly paid for energy produced and supplied to the market. To ensure the proper functioning of the NBET Finance Department, qualified professional accountants are already on board. The NBET Finance Department is headed by its Chief Finance Officer, a seasoned professional accountant with over two decades experience and assisted by an Assistant General Manager, Corporate Finance and a Controller of Finance who are both professional accountants. There is an internal audit unit headed also by a Professional Accountant. The Financial Management Team is also assisted by six additional professional staff. In spite of the current challenges in the Nigeria Public Financial Management (PFM), a detailed review of NBET s financial management arrangements rated the existing FM system as adequate to satisfy the requirements of the Bank, with the residual FM risk rated Low to Moderate The NBET current Finance Policy and Finance Operating Procedures Manuals were reviewed and deemed adequate for purposes of managing project related disbursements and the accompanying reporting requirements.. The Accounting Software in use is considered robust and capable of generating all the financial reports within the framework of International Financial Reporting Standards (IFRS) as required by law in Nigeria, and in conformity with expectations of the Bank The FGN has contributed to the capitalization of the NBET through capital supplementation via budget appropriations of approximately USD 145 million from the 2013 budget; while an additional USD 350 million was allocated to the NBET from the proceeds of the Eurobond to finance infrastructure related programs; and finally NGN 50 billion being the proceeds of the sale of Egbin Power plant (approximately USD 325million) was added to strengthen the company s balance sheet. In total, this amounts to approximately USD 820 million. Furthermore the NBET requested additional financing buffers from the Discos, in the form of 3 month payment guarantees to mitigate against any possible market shortfalls. The assessment thus concluded that NBET s current arrangements for continuing solvency are sound There are no traditional financial management-related fiduciary issues with the PRG component as there will be no procurement-related disbursements. Should the PRG be called, the ADF would disburse to the relevant L/C bank and the Federal Government of Nigeria (FGN) would be obligated to repay ADF in accordance with the Indemnity Agreement between FGN and ADF. However, the NBET will have to produce bi-annually, interim unaudited financial reports covering the component 2 of the Program (related to capacity building) as well as annual financial statements to be audited in accordance with para and submitted to the Bank for review within six months of the end of the financial year audited Audit: In accordance with the Constitution of Nigeria (sections 85 and 125), the Office of the Auditor General of the Federation (OAGF) is responsible for the audit of the financial transactions of Federal Government projects. However, due to lack of adequate staffing as well as excessive work load, the OAGF often allows project audits of this type to be conducted by qualified private independent external auditors, selected in terms of TORs acceptable to the financiers (in this case the Bank), and in conjunction with the OAGF. Currently NBET s external auditors are Price Waterhouse Coopers (PWC). This is one of the top four audit firms in Nigeria and in the World, and is acceptable to the Bank. Consideration will be made to extending the PWC contract to cover the specific requirements of the project. To date, NBET being a new organization has only produced one audited financial statement conducted in accordance with International Standards on Auditing (ISA). No significant adverse issues were noted by the auditor. 13

23 The auditors report on the project, plus the NBET entity annual accounts, along with the supporting management letters, will be submitted to the Bank within six months after the end of each fiscal year audited. Disbursement: The Program will have access to two disbursement methods for implementation of the capacity building component: the Special Account and Direct Payment methods as prescribed in the Bank s Disbursement Handbook. NBET will open a USD and Naira denominated Special Account in commercial banks acceptable to the Bank. For the PRG component: in the case of a call, the procedures for processing a claim under the PRG are provided in the Strategic Framework and Operational Guidelines for the ADF PRG. 4.2 Program Monitoring and Evaluation NBET will be responsible for the overall monitoring of the Program outcomes. NBET will benefit from monitoring and evaluation training under the capacity building component. IPPs will be expected to produce data on the Program outcomes and results indicators in regular progress reports. The Bank will monitor and supervise through the submission of reports that will be required by the IPPs under the Project Agreement with each IPP and submission of relevant reports by NBET as required under the Bank s Indemnity Agreement with the FGN as well as through regular field visits until the expiry of each PRG Since Nigeria hosts a fully equipped country office, the sector experts in the office will maintain a permanent dialogue with NBET, the IPPs and the FGN. This will be supplemented by rigorous supervision missions from the office and from the headquarters. Most projects in Nigeria are supervised more than twice a year. 4.3 Governance The Government is vigorously pursuing the implementation of its structural reforms, with focus on priority sectors that include infrastructure (power, roads and rail), banking and finance, petroleum, and logistics (seaports and airports). The power sector reform has been concluded and the investors have been legally handed over the assets. The government is in the process of concluding all outstanding labour related payments Economic governance and institutional capacity were weak at the federal level which justified the ongoing reforms in the sector. Results of the 2012 Public Expenditure Financial Accountability (PEFA) assessment (still in draft) show continuing challenges with transparency and accountability. The current weaknesses in the country s PFM system have more to do with the underutilization of the accountability and control mechanisms that have been in place for many decades than deficiencies in the legal framework. The FGN has nonetheless successfully commenced a number of initiatives to address its existing weaknesses In the power sector, three governance-related challenges affect the efficiencies in the sector: First, due in part to distorted electricity tariff system, the financial performance of the power companies remains poor. Second, the weak institutional and administrative framework is not conducive to the emergence of a level playing ground attractive to investors. Third, NERC s capacity to adequately enforce proper electricity pricing and tariff policies remains uncertain although the passage of the EPSR Act 2005 and NEPP 2001, which enabled the unbundling, reform and privatization of the Power Holding Company of Nigeria (PHCN), strengthened the performance and accountability in the sector. (NERC regulates and implements the tariff framework for the sector, Feed In Tariffs (FITs) for renewable energy, consumer assistance fund and subsidy payments). 14

24 4.3.4 Despite these challenges, the outlook for the sector and the country remains positive and promising in the medium term. This would nonetheless depend on the extent to which policymakers are consistent in the implementation of the reforms that would help build on the success recorded so far. Thus, maintaining the momentum in implementing the power sector reform, continuing implementation of the diverse infrastructure development and maintenance programs, and promoting private sector activities through active support will greatly contribute to increased power supply and sustained growth. The participation of private sponsors in implementation of this proposed PRG Program as well as the supervision of commercial lenders provides additional comfort. 4.4 Sustainability The proposed Program is critical to support the ongoing privatization reform which aims to increase power generation in Nigeria through IPPs and is technically, economically, and financially viable. The importance of the Program to the sector is understood in the context of the privatization of the sector and meeting government targets to fill the huge power generation gap in the country. The prohibitive economic and financial cost to Nigeria from the lack of reliable power supply is an important mitigation measure for sustainability risk. In fact, the financial cost of electricity demand that is un-served is estimated to be between N60 to N80/kW, with un-served customers having to rely on expensive diesel, petrol and LPFO generation. The economic cost is even greater, considering the loss of output and productivity, the high greenhouse gas emissions, etc. The additional generating capacity that will be provided by the IPPs to be supported under this Program is therefore necessary to provide much needed generation to sustain economic growth The sector s well-designed regulatory structure and the so far successful reform, support its sustainability. The electricity sector reform program in Nigeria is designed to be financially selfsustainable through sound regulatory policies that are applied to the terms of power purchase agreements between IPPs and NBET; as well as through the implementation and programmed reviews, by NERC, of the MYTO II. MYTO II is based on the sector s revenue requirements and is aimed at being cost effective and providing financial incentives for needed private investments in the industry. Finally, it is expected that once there is sufficient comfort in the market, NBET will hand over PPA obligations to individual DisCos and there will be direct bilateral contract between the IPPs and the DisCos. 4.5 Risk Management The ADF PRG will cover risks of non-payment by NBET of amounts due to the IPPs under the PPA. In this regard, the PRG will backstop the contractual obligations of the FGN owned entity, NBET, for power delivered by the private investors. Failure by FGN to honor the counter- indemnity will trigger the Bank Group s sanctions policy, which mitigates the risk of the Government not honoring its obligations to the L/C Bank NBET may however find itself in a position where it is unable to honor its contractual obligations to an IPP as stipulated in the PPA, which would trigger a political event that could in turn have the IPP draw on the L/C and ultimately on the PRG being triggered (if NBET defaults on its obligation). The major risks involved in this program and proposed mitigation measures are discussed in Table 4.1 below. Table 4.1 Risks and Mitigation Measures Risk Description Mitigation Risks that would trigger a call on the PRG 1 Poor financial standing of NBET due to financial mismanagement and inadequate working capital 15 NBET is being initially capitalised by FGN with approximately USD 820 million via three channels (i) a capital supplement from 2013 FGN budget

25 which leads to the Partial Risk Guarantee (PRG) being called. 2 Risk that payments are made by ADF to L/C bank following trigger of PRG without the ability to recover funds from NBET 3 Risk that FGN fails to meet its obligation to the ADF Group under the PRG 4 Billing and collection risks due to inability of distribution companies to collect revenues from end-users and lack of appropriate metering systems. 5 Termination or breach of contract due to political force majeure Risks that would not trigger a call on the PRG 1 Gas supply risk for gas-fired power generating plants due to security concerns and pipeline vandalism in the Niger Delta region, or inability of established gas producers to supply gas. 2 Risk that the Transmission Company of Nigeria (TCN) is not able to evacuate the power generated by the IPPs to the DisCos. appropriations of USD 145 million (ii) USD 350 million from FGN s Eurobond issuance and (iii) USD 325 million from the Egbin Power Plant sale escrow account. In addition NBET will benefit from liquidity enhancement of approximately (i) USD 150 million on a monthly basis from distribution company receivables and (ii) USD 450 million from guarantees covering 3 months of power purchases from distribution companies. FGN will provide a counter indemnity to the ADF under which it agrees to reimburse the ADF on demand for any payments made under the PRG. Furthermore, under the reimbursement and credit agreement, there will be a defined reimbursement period, whereby the Fund will closely monitor NBET s ability to reimburse the L/C. A default of FGN under the terms of the PRG will have cross-default implications for all FGN s obligations with the AFDB Group. Debt sustainability analysis carried out in 2012 by the Nigerian authorities and the IMF/World Bank indicates that Nigeria remains at low risk of debt distress. The authorities are adopting measures to reduce the degree of rising domestic indebtedness through measures such as the use of a sinking fund and increased issuance of medium to long-term external debt. Distribution companies have been privatised which should give them a greater economic incentive to collect revenues due to them and install appropriate metering systems. NBET will have the contractual right to partially curtail or withhold energy deliveries to distribution companies in the event of nonpayment which should incentivize distribution companies to pay their bills. Furthermore, NBET will benefit from liquidity enhancement of approximately (i) USD 150 million on a monthly basis from distribution company receivables and (ii) USD 450 million from guarantees covering 3 months of power purchases from distribution companies. The Bank is working closely with MIGA, who is considering providing a guarantee for the IPPs in the pipeline to cover that risk. Such risk would not trigger a call on the PRG, however, security of gas supply from the Niger Delta remains one of the priorities of the FGN which has renewed efforts to end militancy in the Delta region through its support for more inclusive employment opportunities, increased dialogue with the Niger Delta activists, more equitable distribution of hydrocarbon resources and enhanced security operations. Independent power producers are exploring alternative gas supplies to those provided by established gas producers. Gas Supply Agreements will include liquidated damages provisions. Such risk would not trigger a call on the PRG, however, greenfield IPPs would enter into agreements with the TCN to construct transmission lines and substations on a Build Operate Transfer basis to evacuate power. TCN is also in discussions with FGN and NERC to improve its financial capability to 16

26 3 Risk of Market Operator being unable to fulfill its obligations due to its inability to collect transmission and other ancillary charges from distribution companies 4 Risk that IPPs generate involuntary economic or physical resettlement. undertake the capital expenditure required to evacuate power. Such risk would not trigger a call on the PRG, however, the Market Operator is empowered by the Market Rules to collect a security cover (e.g..3 billing periods worth of charges in the transition phase) from DisCos and disconnect supply if the payments due are not made. The Bank s due diligence process for each transaction will identify such issues. The capacity building trainings on environmental risks assessment will enable NBET to monitor any such eventuality. 4.6 Knowledge Building The Program will have a catalytic replication effect, which will come from: (i) significant leveraging of resources through ADF s PRG instrument; (ii) possibility of replicating the Program; and (iii) learning and demonstration, as described below: a) Catalytic Effect: ADF resources, through this PRG, will crowd in significant amounts of private sector and other financing. b) Replication Effect: the Program can be replicated in Nigeria and/or other countries in African, given the magnitude of the power sector needs in the region c) Learning and Demonstration: In addition to the catalytic effect of the Program, the experience gained from processing it has allowed for capacity building and knowledge creation which will be leveraged within the Bank Group and the broader development community concerning the use of guarantee instruments to mobilize private sector financing. 5 LEGAL INSTRUMENTS AND AUTHORITY 5.1 Legal Instrument The legal instruments for this Program will include: a) Individual Guarantee Agreements between ADF and each L/C Issuing Bank which sets out the terms and conditions under which ADF would reimburse the L/C Bank an indicative term sheet is provided in Appendix V; b) Individual or single Indemnity Agreement(s) between ADF and FGN under which FGN undertakes to indemnify ADF on demand for any payments made by ADF under each Guarantee Agreement; c) Individual Project Agreements between ADF and each beneficiary IPP pursuant to which the IPP agrees to provide relevant project information, comply with applicable laws, including environmental laws, refrain from making amendments to the underlying project documents without ADF s consent, and make certain warranties, representations and undertakings; d) Individual Standby Letters of Credit issued by the respective L/C Issuing Banks at the request of NBET in favor of the beneficiary IPPs; and e) Individual Reimbursement and Credit Agreements between NBET, FGN and the respective L/C Issuing Bank under which NBET / FGN undertakes to reimburse the L/C Bank for amounts drawn under the L/C. f) ADF loan agreement to the Federal Republic of Nigeria; 5.2 Conditions for Bank Intervention A. Condition Precedent to Effectiveness of each Guarantee Agreement 17

27 5.2.1 The Guarantee Agreement shall become effective upon fulfilment of the following conditions, as well as other conditions to be determined on a case-by-case basis for the specific IPP transaction: (i) Execution, delivery and effectiveness of the following agreements: a. the Indemnity Agreement between ADF and FGN under which FGN undertakes to indemnify ADF on demand for any payments made by ADF under the Guarantee Agreement; b. the Guarantee Agreement between ADF and the L/C Issuing Bank, which embodies the terms and conditions of the ADF PRG; c. the Project Agreement between the ADF and the IPP pursuant to which the IPP agrees to provide relevant project information, comply with applicable laws, including environmental laws, refrain from making amendments to the underlying project documents without ADF s consent, and make certain warranties, representations and undertakings; d. an undertaking between ADF and IPP relating to payment of the PRG and L/C-related fees; e. the Reimbursement and Credit Agreement between NBET, FGN and the L/C Issuing Bank under which NBET / FGN undertakes to reimburse the L/C Issuing Bank for amounts drawn under the L/C, together with accrued interest; f. the Standby Letter of Credit from the L/C Bank in favor of the IPP; and g. the PPA; (ii) Confirmation from an authorized officer of the L/C Issuing Bank of the satisfaction of all conditions precedent to the issuance of the guaranteed L/C, other than satisfaction of any condition precedent therein requiring the effectiveness of the Guarantee Agreement. (iii)issuance of original legal opinions to ADF from: (a) the Attorney General of Nigeria in agreed form relating to the agreements to which it is a party; (b) counsel to NBET relating to the agreements to which it is a party; and (c) counsel to the IPP relating to the agreements to which it is a party; and (d) counsel to the L/C Issuing Bank relating to the agreements to which it is a party. (iv) Delivery of all environmental assessments and documentation required by ADF, including evidence that all project affected persons have been compensated or resettled in accordance with applicable ADF policies, determination by ADF that all relevant parties are in compliance with applicable ADF requirements, and receipt of all relevant Nigerian environmental approvals. (v) Payment in full by the IPP (the L/C beneficiary) of all fees then payable. (vi) Other certificates and evidence taking into account the nature of the financing. B. Condition Precedent to Entry into Force of the Loan Agreement The loan agreement for the capacity building component shall enter into force subject to fulfilment by the Borrower of the provisions of Section of the General Conditions Applicable to the African Development Fund Loan Agreements and Guarantee Agreement (Sovereign Entities). 18

28 C. Conditions Precedent to First Disbursement of the Loan The obligation of the Fund to make the first disbursement of the Loan for the capacity building component shall be conditional upon the entry into force of the Loan Agreement and the fulfillment by the Borrower of the following conditions: (i) Entry into force of the loan agreement; (ii) Evidence of having opened a USD special account and a Naira special account with a bank(s) acceptable to the Fund for the deposit of the proceeds of the Loan. 5.3 Compliance with Bank Policies This Program complies with all applicable Bank policies, in particular with the Strategic Framework and Operational Guidelines for the African Development Fund Partial Risk Guarantee Instrument. 6 RECOMMENDATION Management recommends that the Board of Directors approve: (i) the proposed ADF Partial Risk Guarantee of UA 30 million to the Federal Government of Nigeria for the proposed PRG having a total face value amount of UA 120 million (approximately USD 180 million); (ii) an increase of the commitment capacity of the Fund by seventy-five per cent (75%) of the face value of each guarantee extended in accordance with the Strategic Framework and Operational Guidelines, and an increase in the commitment capacity of the Fund to take account of currency fluctuations between the amount of the Fund s commitment currency of the PRG (UA) and the amount of the currency of denomination of each PRG; and (iii) the proposed ADF Loan of UA 2 million to the Federal Government of Nigeria, subject to the conditions stipulated in this report. The Board is also invited to note that Management anticipates returning to the Board for the approval of further amounts for additional tranches of the Program from ADF 13 resources and/or other funds as requested by the FGN and available. 19

29 % Appendix I: Nigeria s Comparative Socio-Economic Indicators Indicators Unit (e) National Accounts GNI at Current Prices Million US $ 33, , , , , GNI per Capita US$ 270 1,170 1,160 1,170 1, GDP at Current Prices Million US $ 46, , , , , , ,056 GDP at 2000 Constant prices Million US $ 46,386 94, , , , , ,511 Real GDP Growth Rate % Real per Capita GDP Growth Rate % Gross Domestic Investment % GDP Public Investment % GDP Private Investment % GDP Gross National Savings % GDP Prices and Money Inflation (CPI) % Exchange Rate (Annual Average) local currency/us$ Monetary Growth (M2) % Money and Quasi Money as % of GDP % Government Finance Total Revenue and Grants % GDP Total Expenditure and Net Lending % GDP Overall Deficit (-) / Surplus (+) % GDP External Sector Exports Volume Growth (Goods) % Imports Volume Growth (Goods) % Terms of Trade Growth % Current Account Balance Million US $ 5,786 78,323 53,164 4,094 7,844 29,895 39,787 Current Account Balance % GDP External Reserves months of imports Debt and Financial Flows Debt Service % exports External Debt % GDP Net Total Financial Flows Million US $ -1,994 2,551 4,002 1,310 4, Net Official Development Assistance Million US $ 174 1,290 1,657 2,062 1, Net Foreign Direct Investment Million US $ 1,310 8,249 8,650 6,099 8, Real GDP Growth Rate, Inflation (CPI), Current Account Balance as % of GDP, ,0 00 2,0 01 2,0 02 2,0 03 2,0 04 2,0 05 2,0 06 2,0 07 2,0 08 2,0 09 2,0 10 2,0 11 2,0 12 2,0 13 Source : AfDB Statistics Department; IMF: World Economic Outlook, October 2012 and International Financial Statistics, October 2012; AfDB Statistics Department: Development Data Portal Database, March United Nations: OECD, Reporting System Division. Notes: Data Not Available ( e ) Estimations Last Update: May 2013

30 Appendix II: ADB Portfolio in Nigeria List of projects (loans and grants) by Sector, including those that are not yet disbursement effective, September 2013: Sub-Sector Number of Projects PP/ PPP IP DO PPR Net Amount approved (UA) Share of Portfolio Average Age (years) Amount disbursed (UA) Disbursement rate Average annual disbursement (UA) AGRICULTURE 4 96,900,000 16% ,788, % 7,372, % National Fadama Development Project (NFDP) ,000, ,768, % 1,762, % 12/10/ /30/2012 Community based - Agricultural & Rural Development Project ,000, ,403, % 1,218, % 9/11/ /31/2012 (CBARDP) Support to the National Program for Food Security (SNPFS) ,000, ,789, % 1,217, % 10/18/ /31/2013 CGIAR: SUPPORT TO AGRICULTURAL RESEARCH FOR 39,900, ,826, % 3,174, % 3/18/ /31/2013 DEVELOPMENT OF STRATEGIC CROPS IN AFRICA (SARD- SC) INFRASTRUCTURE 8 441,000,000 75% ,208, % 33,811, % Rural Water Supply & Sanitation Sub-Programmes (RWSS) PPP ,000, ,838, % 1,294, % 10/10/ /31/2013 URBAN WATER SUPPLY AND SANITATION PROJECT FOR OYO AND TARABA STATES (UWSSP) ZARIA WATER SUPPLY AND SANITATION PROJECT (ZWSSP) - Loan Signed in July 2013 ECONOMIC AND POWER SECTOR REFORM PROGRAM (EPSERP) Average annual disburse ment Date approved Closing Date * 50,000, , % 14, % 9/2/2009 4/30/2016 * 63,920, % - 0.0% 2/8/ /31/2017 * 100,000, ,000, % 20,724, % 10/28/ /31/2013 Rural Access and Mobility Project (RAMP) ,270, ,723, % 2,302, % 7/18/ /31/2013 Capacity Building for PPP in Infrastructure Project ,800, % - 0.0% 3/13/2011 Capacity Building Programme for the Supervision of Aviation PPP ,600, ,405, % 240, % 4/27/ /30/2012 Safety in West & Central Africa (COSCAP) TRANSPORT FACILITATION PROGRAMME FOR THE PPP ,250, ,944, % 9,747, % 11/25/ /31/2014 BAMENDA-MAMFE-ABAKALIKIENUGU CORRIDOR - Nigeria (NCH&TFP) TRANSPORT FACILITATION PROGRAMME FOR THE PPP ,160, , % 39, % 11/25/ /31/2014 BAMENDA-MAMFE-ABAKALIKIENUGU CORRIDOR - ECOWAS (NCH&TFP) MULTI SECTOR 1 10,000,000 2% 8.3 7,873, % 946, % ECOWAS Peace and Development Project (PADEP) PPP ,000, ,873, % 946, % 9/29/ /30/2012 SOCIAL SECTOR 2 37,000,000 6% ,180, % 2,235, % Skills Training and Vocational Education (STVEP) PPP ,000, ,403, % 1,451, % 7/27/ /30/2013 SUPPORT TO NETWORK OF REGIONAL AFRICAN ,000, ,776, % 784, % 3/18/ /31/2013 INSTITUTIONS OF SCIENCE AND TECHNOLOGY (AUST & 2iE) PROJECT ENVIRONMENT 1 5,240,000 1% , % 1,078, % Lake Chad Basin Sustainable Development Programme / ,240, , % 1,078, % 12/12/ /31/2015 Programme de développement durable du Bassin du Lac Tchad (PRODEBALT). TOTAL PUBLIC SECTOR ,140, % ,078, % 45,445, % Legend: IP = Implementation Progress DO = Development Objectives PPR = Project Performance Rating PP = Problematic Project ; PPP = Potentially Problematic Project

31 APPENDIX III: Similar Projects in Nigeria Project Title Program Overview Geographic Location(s) WORLD BANK GROUP s Nigeria Electricity and Gas Improvement Project P The development objectives of the Electricity and Gas Improvement Project for Nigeria is to: (i) improve the availability and reliability of gas supply to increase power generation in existing public sector power plants; and (ii) improve the power network's capacity and efficiency to transmit and distribute quality electricity to the consumers. There are three components to the project: 1) risk mitigation through a series of Partial Risk Guarantee (PRGs) in support of gas supplies to increase power generation from existing public sector power plants; 2) enhancement of transmission and distribution infrastructure. This component will reinforce of distribution networks to increase electricity supply in selected cities including Kano, Kaduna, Eko, Ikeja, Ibadan, Abuja, Benin, Port Harcourt, Yola, Jos; and Enugu. 3) Technical advisory services. Provision of logistical support and technical advisory services required to sustain ongoing reforms undertaken by the recipient to improve the performance of its power sector including: a) design of gas infrastructure and transmission and distribution systems needed to handle expected increases in power supply; and b) formulation and execution of community outreach activities. Start Date & End Date National June 16, 2009 to December 31, 2017 Total Allocation Financing Mechanism $200 million Specific Investment Loan Focus Transmission and Distribution of Electricity GON priorities in the Power Roadmap Improve the availability and reliability of gas supply to increase power generation in existing public sector power plants; and improve the power networks capacity and efficiency to transmit and distribute quality electricity to the consumers. Appendix IV: Map of Project Area

32 Note: This map was produced by the Map Design Unit of the World Bank.