The Azura-Edo ipp and the road to a better future

On Monday, 5th May 2014, occurred a rather muted but deeply significant event. It was the grandly-named Transaction Closure Summit for the Azura-Edo Independent Power Project (IPP). It is significant for many reasons but today let us see it as the first true IPP to be developed in Nigeria because of the Electric Power Sector Reform Act (EPSRA), 2005. To be sure, there are a number of IPPs in Nigeria – the AES Barge (Ikorodu, 2000), Shell Afam VI (Port Harcourt, 2005), Agip Okpai (Kwale, 2006), Ibom Power (Ikot Abasi, 2010) and the completed-but-yet-to-be-commissioned Geometric Power (Aba).

A true IPP is one with no or very little direct government equity participation that is project financed. In other words, an electricity generation project financed solely on the basis of the revenues to be earned during the commercial life of the project, with no (or limited) recourse to the balance sheet or assets of the project promoters. Which is not to say that governments no longer have a role to play in the power sector. They do; and that takes us back to the original point that the Azura-Edo IPP is the first to be developed within the framework of the EPSRA, 2005, a piece of legislation whose fundamental significance is only now being gradually realised. 

During the 54 years of ECN, Niger Dams Authority and NEPA, Nigeria had gone from a population of 50m to 120m. Unfortunately, despite being the only player in electricity, the Federal Government had somehow failed to develop the policy, legal and operational framework for an electricity industry that could enable that population to acquire a modern standard of living. We started out far ahead of Malaysia, South Korea, Singapore and the like and ended up far behind them today. Apart from questions of governance, most of them reason for this seminal failure is explained by comparing just two figures. Peak daily electricity supply by 2005 was barely 3000MW for a population estimated at 120m.

It had become clear that the definition of “commanding heights” to mean State control of policy, regulation and operations was not working. So, in 2001, the Federal Government published a National Electric Power Policy (NEPP) that stated, amongst other things, that: “The priority is to create efficient market structures, within clear regulatory frameworks, that encourage more competitive markets for electricity generation and sales, which, at the same time, are able to attract private investors and ensure economically sound development of the system.” 

EPSRA gave legislative teeth to this intent by establishing NERC as the industry’s technical and economic regulator, by stipulating that the President would bring into effect rules for the operation of a national grid and the establishment of markets for electricity and for ancillary services and by giving NERC the responsibility for deploying its regulatory powers to create an electricity market structure. A lot of work has been done by NERC since 2005 to develop various regulatory instruments designed to establish just such a market. Amongst other things, over 100 generation licenses were issued to various parties. 

With further reform measures put in place including the establishment of the Nigeria Bulk Electricity Trading Company and the privatisation of the 11 electricity distribution companies (Discos) (which are vital to the creation of a sustainable electricity industry), the prospects for new IPPs increased significantly. However, none of the over 100 IPP licensees seemed to be competent, capable or courageous enough to take the plunge into promoting and developing a classic, privately-owned, project financed IPP. It appeared reform was not real, until the Azura-Edo IPP came along and obtained a license from NERC in 2012. Since being licensed, the Azura-Edo IPP has gone far and wide to undertake what the NEPP and EPSRA spoke about so eloquently but nobody seemed to have the courage to do. 

During the past 4 years, the promoters of Azura, a bunch of young men and women,  from various countries but dominantly Nigerian, all much closer to 40 than 50, took major steps to develop their project. They found an ideal site in Edo State, brought in the Edo State Government so as to secure land, community and fiscal incentive support and then embarked on the long, very painful and arduous process of dexterously managing and negotiating with a multitude of Federal Government, Nigerian and International private sector and multilateral agency players ranging across, banking, insurance, DFI, manufacturing and operations/maintenance. The purpose was as simple as it was difficult – create a viable, commercial and financial structure for their IPP. A task made more difficult by the total absence of Nigeria-specific precedents that could be adopted.

This is not the place to explain how they got it done. Suffice to say that the Azura-Edo IPP became the central player in a series of interlinked commercial transactions that involve 32 parties executing 18 sets of contracts, adding up to well over 3500 pages. These documents were all negotiated from scratch. Some of them are pretty standard. The most important documents are not. These include the Power Purchase Agreement (PPA), the Gas Sale and Purchase Agreement (GSPA), the Gas Transport Agreement (GTA), the Engineering, Procurement and Construction (EPC) contract, the Operations and Maintenance (O & M). Probably the most important are the World Bank Partial Risk Guarantee (PRG), Multilateral Investment Guarantee Agency (MIGA) guarantees and the Federal Government of Nigeria Put/Call Option Agreement (PCOA). 

All these documents are unique, with peculiar provisions that took the Nigerian situation into account. The complexity of the work derived from two things. First, every contract had to be interconnected. They had to support, not contradict, each other. Second, for that very reason, the failure to completely and successfully negotiate one document meant the failure of the entire project. Thus it was that the most commonly repeated words at the event last Monday were “template”, “tenacity” and “courage” – and these are really what the Azura-Edo IPP truly mean. First, the entire body of documents that have been painstakingly developed during the past 4 years constitute a body of knowledge and experience set into template transaction documents. Very soon, every other IPP following after Azura will use and adapt these templates time and time again in much less time than the 4 years it took to develop them. The value of this is incalculable.

Only those who have been through the mill of having to manage the various demands, concerns and, often, oversized egos, in a transaction as important, complex and groundbreaking as this one can truly understand the meaning of the word “tenacity” or “tenacious”. Third is “courage”, because Nigeria, to put it quite simply and extremely mildly, is not an easy place to work in for public officers and private sector players who are focused on delivering results. The Azura-Edo IPP is a validation of the decision taken by former President Olusegun Obasanjo, reluctant though he was at that time, to set Nigeria firmly on the path of electricity reform by promulgating NEPP and assenting to EPSRA. In 2017, 500MW of new generating capacity from this IPP, with attendant transmission capacity, will be delivered to Nigerians; and because the way has been opened by this pioneering project, others will follow down the path using a commercial structure never before seen in Nigeria, but created with such rare tenacity and courage. 

This is why, finally, we can begin to cautiously believe in the growing certainty that in every year after 2017, and for many decades to come, more and more and more electricity will be delivered to the long-suffering and often-disappointed people of this country. Much remains to be done, for instance, in developing a domestic fuel-to-electricity market with its supporting infrastructure. However, Azura-Edo IPP is not so much about the 500MW it will deliver in 2017, as it is about the proof of the effectiveness of the basic elements of the National Electric Power Policy and the assurance that indeed those who have worked and those who still work against reform will be defeated by the hard work, the courage and the tenacity of those Nigerians and their partners who will walk again and again down the new road to a better future pioneered by those brave ones who have the honour to have been part of the story of the Azura-Edo IPP.

Eyo Ekpo