Energy Worth with Agency Report
Nigeria’s Minister of Finance, Mrs Kemi Adeosun, said on Friday that the Federal Ministry of Power, Nigerian Electricity Regulatory Commission (NERC) and Nigeria Bulk Electricity Trading (NBET) must ensure that meters are rolled out to improve billing accuracy and improve Distribution Companies collections.
Mrs Adeosun said the collections would facilitate increase in cash flows to the power sector value chain and ensure stability of federal government reforms in the sector, adding further that,”If the market cannot pay for power distributed,the situation will remain unsustainable”
Clarifying the federal Ministry of Finance’s position in a statement, Adeosun said, “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.”
Speaking further on Government stance on Power Purchase agreement, Adesoun said, “My attention has been drawn to bogus and 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”
In the statement issued, Adeosun said,”I wish to state unambiguously that the Federal Government has not cancelled the PPAs as wrongly reported by the media.”
Adeosun pointed out in the statement that, “It must be emphasised 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”
While giving further clarifications, Adeosun said,”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.”
Adeosun also noted that 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”
According to her,”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”
She noted however that 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 counter parties and should be issued based on the existence of steady/regular cash flows 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 favourable 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.
On the heels 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.
Also, the Federal Government she said will bear Foreign exchange rate risk and make termination payments in Dollars; 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 draw down on the PRGs.
It should also be noted that no Multilateral Agency would continue to issue guarantees where it is clear that the requirement for steady cash flows within the sector to meet regular payment obligations does not exist.