Power Purchase Agreements Not Cancelled – Adeosun
Nigeria’s Finance Minister, Mrs Kemi Adeosun has said that unverified media reports on the purported cancellation of the Power Purchase Agreements (PPAs) signed by the Federal Government with Project Developers in the power sector is untrue.
She stated this in a statement made available to Economic Confidential in Abuja
“The Minister wishes to state unambiguously that the Federal Government has not cancelled the PPAs as wrongly reported by the media.
“It must be emphasized that the role of negotiating with Project Developers and signing PPAs is domiciled with the Nigerian Bulk Electricity Trading (NBET) Plc and not the Federal Ministry of Finance. However, as the primary obligor of all forms of guarantees issued by all governments of the federation and their agencies, the Federal Ministry of Finance through the Debt Management Office, MUST estimate the size of obligation that it is willing and able to accommodate in relation to the Power Sector.
“Furthermore, the Ministry is required to evaluate the country’s repayment capacity for current and contingent debt obligations as part of its Debt Sustainability Analysis (“DSA”), which is a key requirement for sound Public Debt Management practice. These liabilities have wider implications for the country’s debt and overall fiscal position in the medium to long-term.
“Guarantees constitute a contingent liability and it is important to note that increasingly, for a number of Power Purchase Agreements being signed in the Power Sector, in recent times, the Federal Government is required to provide and sign a Partial Risk Guarantee (PRG) as well as a Put Call Option Agreement (PCOA). Guarantees by themselves do not constitute a risk. However, where guarantees are expected to be the primary means of ensuring ongoing contractual payments, they constitute a huge risk to the fiscal sustainability of the Federal Government. Guarantees are issued to provide extra comfort between contractual counterparties and should be issued based on the existence of steady/regular cashflows that underpin the contracts.
“Besides, a sovereign default has the consequent effect of increasing Nigeria’s credit risk and cost of borrowing in the International Capital Markets (ICM). It would be recalled that the Federal Government had recently and successfully raised Eurobonds of US$5.5 billion in the ICM at favorable yields. These proceeds are being invested in the much-needed infrastructure (Road, Rail, Power, etc). A default would therefore, have a detrimental effect on the development of the country.
“In view of the above, the Federal Ministry of Finance initiated an inter-ministerial meeting with all representatives from the Debt Management Office, the Federal Ministry of Power, Works & Housing, the Nigerian Bulk Electricity Trading Plc and Bureau of Public Enterprises where the following decisions were reached with regards to Independent Power Plants requiring PCOAs which was communicated to NBET on the 26th of July, 2017:
The statement further said the Federal Government will bear Foreign exchange rate risk and make termination payments in Dollars.
It also said that NBET is required to work within a contingent liability exposure limit of US$10 billion (US$5bn for PCOAs and US$5bn for NIPPs). It is expected that NBET would negotiate with project developers to ensure that Nigerians are getting the best quality of service within costs aligned to global standards. The Federal Ministry of Finance is focused on achieving market sustainability in the long-term and requires that NBET has a comprehensive plan to manage these exposures to avoid a drawdown on the PRGs.
“It is imperative that the Federal Ministry of Power, Nigerian Electricity Regulatory Commission (NERC), and NBET must ensure that meters are rolled out to improve billing accuracy and also improve DISCO collections in order to increase cashflows to the power sector value chain. If the market cannot pay for power distributed, the situation will remain unsustainable. It is unhealthy for the Federal Government of Nigeria to build an entire sector based on Sovereign Guarantees without simultaneously addressing key challenges inhibiting financial sustainability across the value chain.
It should also be noted that no Multilateral Agency would continue to issue guarantees where it is clear that the requirement for steady cashflows within the sector to meet regular payment obligations does not exist.
The Minister of Finance wishes to also place on record that the Federal Government is very willing to accept investments that are accretive in value to the Nigerian economy on a holistic basis.