01 January 2013, Lagos – The federal government is to formally stop the repayment of the 60 per cent worth of loans partly used in the construction of the 335 megawatts (MW) Olorunsogo and 335MW Omotosho power plants by Chinese consortiums.
The stoppage of interest payment on the loan is, however, made possible by the formal signing of Power Purchase Agreements, PPAs, between the power plants and the Nigerian Bulk Electricity Trading Plc, NBET, starting with the Olorunsogo plant.
The government, in line with its ongoing power sector diversification programme, had ceded both plants, which are located in Olorunsogo, Ogun State and Okitipupa, Ondo State respectively to the Chinese consortiums of Sepco Electric Power Construction Corporation of China for Olorunsogo and China National Machinery Equipment Import and Export Corporation, CMEC, for Omotosho.
Both consortiums are in collaboration with an indigenous company, Pacific Energy.
The consortiums were designated as preferred bidders for the plants following their agreement to convert the loan into equity for the purchase of the companies and also in consideration that the 60 per cent Chinese loan for the construction of the plants was provided through them as contractors for the projects.
The Managing Director of NBET, Mr. Rumundaka Wonodi, who made this disclosure at the signing of the PPA with Olorunsogo power plant in Abuja, stated that the formal consummation of the PPA freed the government from the responsibility of repaying interests on the loan.
Wonodi added that the final process now grants the Bureau of Public Enterprises, BPE, the freedom to conclude its sale of the plants and escrow about $10.1 million of proceeds from the sales to a designated bank for the operation of the PPAs.
He explained that the signing of Olorunsogo PPA would be immediately followed by that of Omotosho power plant in a couple of weeks.
He said: “The federal government made investment in two power plants built with equity of 40 per cent respectively in the Omotosho and Olorunsogo power plants while 60 per cent loan was from the Chinese. In the last couple of years, the federal government decided to divest from these assets by having the Chinese convert their loan to equity and at the same time pipe down the government’s contribution.
“The net effect is that the Chinese are paying for the balance of what government had invested less some certain costs; some of those costs are related to the transmission infrastructure because transmission cannot be held within the power plant, any investment in transmission is handed to the Transmission Company of Nigeria (TCN).
“As part of that transaction, there needs to be a power purchase agreement to be put in place, also a gas supply agreement which was executed when all the other industry agreements were executed, the outstanding one is the PPAs.
“With the PPA signed, it will allow the investors led by Pacific Energy with Sepco in Olorunsogo and Pacific Energy with CMEC for Omotosho to go ahead with the rest of the transaction.
“The tariff has been approved by the regulator as well as the PPA and this allows us to conclude it and allows BPE to conclude the transaction for the balance of payment to be made to the government. Also the loan stops to run because if we don’t conclude the PPA, we have to continue to make interests payments but once we conclude this, everything freezes and they make the supplementary payment.”
Speaking on the benefits of the PPAs to the power sector, Wonodi said: “It also allows us to get closer to the declaration of TEM (Transitional Electricity Market) because all electricity supplied must come under a contract. The board of the bulk trader has also approved the PPA and its signing.
“One of the things you can count on from this is the availability of capacity as it is required; with the PPA, the company can commit better to gas supply and usually what happened was that things were done on best endeavour basis but with this, the power plant has a back-to-back gas supply reliability which it can also trigger and there will be more reliability of power supplied from these power plants.”
He added: “One other component of this agreement is that part of the money that will be paid by the investors, about $10.1 million, will be escrowed in a bank to support the PPA just like it is done in the privatisation where part of proceeds from the sale was escrowed in favour of the generation companies, this was the model that was proposed by the BPE for liquidity of the market.
“It is a negotiated PPA as opposed to the one that was signed in the privatisation; in this case, there are payments that needed to be made, valuation of assets and ancillaries; there was also the need to cut out transmission and put the gas supply firmly in place. The financial structure is slightly different because what it is turning out to now is that you are converting debt into equity, it is an all equity arrangement.”
*Chineme Okafor, Thisay