To say that closing project financings in Nigeria’s infrastructure sector is difficult is an understatement. The process of putting projects out to tender, packaging deals and finding willing lenders has proved so challenging that the country lacks a real track record, despite years of trying. Yet a burst of progress in the power sector, where the government is partially selling off its generating and distribution businesses to private companies, could deliver some groundbreaking financings. While these financings are likely to be dependent on substantial external support, local banks are showing real appetite to lend.

Powering up

Since the end of 2012, when the government approved $2.3 billion worth of bids for 15 of the 17 state-owned generation and distribution entities, Nigeria’s power privatisation programme has met several important milestones. In the lead is Benin City’s $700 million, 450MW Azura open cycle gas turbine power station, which has signed the country’s first power purchase agreement with offtaker Nigerian Bulk Electricity Trading Company (NBET), in a template others independent power producers can now follow.

The lead sponsor of Benin City is Amaya Capital Partners, though the group also includes includes Africa Infrastructure Investment Managers, Asset and Resource Management Company (ARM), the group behind Lagos’s Lekki toll road concession, and Aldwych International. The group putting together the debt financing includes arranger and structuring bank Standard Chartered and joint lead arrangers for the DFI portion IFC and FMO. David Ladipo, managing director of Azura Power West Africa, says he hopes the project could close by the end of the year. “Although there is still much work left to get the project to financial close and then into full construction and eventual operation, we are excited about the future.”

Preferred bidders for power assets have had to confirm their commitments by making down payments equivalent to 25% of their bid prices, and lose them if they fail to pay the balance. “We have seen a client that bought an asset for $300 million just pay $75 million in cash as down payment. We are now in the process of helping them raise the rest,” said Wale Shonibare, managing director, investment banking, at UBA Capital.

Nigeria’s gas producers, which have long favoured exporting their output as liquefied natural gas over supplying local electricity generators, have said they will supply power plants if they can be sure of some counterparty risk mitigation.

The World Bank has helped with this process, and is providing a 10-year $145 million partial risk guarantee in connection with the gas supply and aggregation agreement between supplier Chevron and the country’s largest power plant, Egbin. Deutsche Bank supplied the letter of credit (LC) that benefited from the guarantee. “We’ve offered a financial backstop to the LC giving the upstream investor certainty the offtaker will pay on time,” says Pankaj Gupta, a manger in the World Bank’s financial solutions group.

In another positive, the government finally handed over the running and repair of Nigeria’s transmission network to Canada’s Manitoba Hydro, reversing an earlier decision to cancel the $24 million contract. Poor management of transmission networks, and associated losses, have put off investment in generation and transmission assets.

Domestic dependence

Foreign lenders remain on the sidelines, leaving Nigerian banks, which have the competitive edge, keen to lend to power projects. Some are raising dollar funding, like Diamond Bank, which plans to raise $750 million from a sale of shares or bonds, in the biggest fund raising by a Nigerian bank this year. Fidelity Bank and First Bank are both planning Eurobond issues of $350 million and $500 million respectively.

“It’s cheaper for IPPs to borrow in dollars at between 8-9%, compared to in Naira, which costs between 17-18%,” says UBA Capital’s Shonibare. “However there is always foreign exchange risk when a business with Naira revenues chooses to borrow in dollars. Local banks with significant cheap naira deposits from savers will be in a better position to mobilise competitively-priced naira facilities than foreign banks.”

Local banks still struggle with the long tenors that infrastructure financings often require. Some development finance institutions are developing facilities that will help extend the tenors that local lenders can offer. The Africa Finance Corporation is looking to assemble a product that would refinance banks seven years into a 15-year loan. The AFC, which was founded in 2007, would take over the debt, or try and sell some of its down, possibly with enhancement from the host government or another multilateral.

In another initiative, Nigeria’s Central Bank is working on changes to prudential guidelines that could alter the existing regulations that stop banks lending long-term. “This could lead to some interesting syndications,” says Ayuli Jemide, lead partner at Detail Solicitors. “Banks are better capitalised and their cash reserves and cash flows are much higher than they used to be,” he says, adding that local banks have played an important role lobbying the government on how best to allocate risk on power projects.

Backstops, bridging and the bulk trader

Even with the benefit of external credit enhancements, gas supply contracts still have enough gaps to make lenders nervous. Gas provision contracts still rarely include enough detail about the volumes of gas that would be supplied and when sources of that supply will come on-stream. The mismatch between the length of the PPAs and the gas supply contracts creates an overhang that sponsors and government will struggle to bridge.

Lenders will also need to get to grips with the creditworthiness of the NBET, or bulk trader, which will buy power from generators and then sell it on to distribution companies. The creation of the bulk trader is designed to mitigate the risk associated with Nigerian distribution companies’ poor record on revenue collection.

In theory the bulk trader could have to pay generating companies between $10 million and $12 million a month, said one Lagos-based banker. This is the kind of exposure that lenders to any of the new generation companies will insist benefits from solid government backstops.

“In principle lenders welcome the bulk trader. It will meet revenues and pay the price under the offtake agreements and limit risk to the generators,” says Kirsti Massie, a partner in White & Case’s energy infrastructure, project and asset finance group in London. “But to encourage investment, the Nigerian government would be wise to consider guaranteeing its obligations and ensuring that it is appropriately capitalised.”

It is still unclear if the government will step in to capitalise the bulk trader or if the sector will have to wait for World Bank guarantees to materialise, which could draw out the process even more. Some market observers say the government is showing “no indication” that it will offer guarantees; others report that it is planning a $400 million capitalisation of its own. The government also needs to put in place funding for transmission and gas supply infrastructure.

Lenders to generators also worry whether they can find an offtaker for excess production. “The process for feeding this power into the grid is not fully established,” says Detail Solicitors’ Jemide. Uncertainties also exist around the terms of generation and distribution companies’ licences, particularly how easy they will be to renew, and how easy it will be to pledge assets as security to project lenders.

“So far in Nigeria there is a restriction on the ability of preferred bidders to grant security on their assets,” says White & Case’s Masse. Sponsors may be able to offer a pledge of shares in the project companies that own the assets or sponsor support to lenders to make up for a weaker security package. “The whole idea of project finance is that it is limited recourse, with the focus on the value of the assets, not the sponsor. If lenders are forced to look to sponsors for significant support then this erodes the concept of limited recourse project finance,” she says.

Clinging to concessions

Outside the power sector, developers are also looking for stronger signs of support from government, even on financings with minimal government involvement in operations. Singapore-based Tolaram group’s $1.5 billion greenfield container port project in Lekki Free Trade Zone, 65 km east of Lagos, is slated to close by the end of the year. It has most of its approvals in place, gained control of the land it requires, and has completed its technical studies and designs.

The developer has awarded an engineering, procurement and construction contract to China Harbour Engineering Company (CHEC) and a container terminal sub-concession to International Container Terminal Services. It has approached a mixture of international and local banks for debt, as well as development finance institutions such as the African Development Bank, European Investment Bank and International Finance Corporation, as well as export credit agencies.

One banker questions the project’s economics, particularly the volumes that it will attract. “There is a strong argument that African ports shouldn’t be awarded as concessions to companies with big shipping associations. The big players with their own terminals try to deter competition.”

Lenders will want to make sure that the government will have the port’s supporting infrastructure in place, and well as some kind of reassurance that a new government will not cancel the concession. The Nigerian Ports Authority’s 45-year concession with Tolaram gives the developer the opportunity to extend its term by another 25 years. “Some major concession agreements in Nigeria provide for 100% of the senior debt to be repaid on termination to encourage lenders to invest in projects,” says Andrew Buisson, a partner in Norton Rose’s infrastructure group in London.

Lenders are watching the fallout around the recent cancellation of the Lagos Ibadan expressway build-operate-transfer (BOT) concession, which Bi-Courtney Nigerian won in 2009. The government says the concessionaire did not fulfil its obligations under the concession but potential lenders to Nigerian infrastructure want to see what compensation is on offer. “If there is none, it will ring alarm bells,” said one Lagos-based banker for whom this fiasco suggests that contractor financing would be an easier route in Nigerian infrastructure. “Project finance is difficult because it needs all kinds of things from the government that take years to negotiate.”

Road and bridge projects elsewhere in Nigeria are also progressing, though lenders should choose projects wisely, given their very different traffic risk profiles, particularly those concessions around Lagos. Julius Berger’s AIMS Consortium won the 25-year BOT concession for the second Niger bridge, which will link Delta and Anambra states.

The BOT widening and rehabilitation of the Murtala Muhammed Airport Road and the Lagos-Ibadan Expressway, both near Nigeria’s commercial centre, have “massive traffic potential”, in the words of one banker, but politics can affect toll revenues from even the most promising road projects. The Lekki-Epe Expressway was forced to delay the introduction of tolls shortly before an election was due to take place, in a decision widely regarded as politically motivated.

Developers frequently have unrealistic ideas of their ability to close financings when they win bids. Projects have stalled when successful bidders were unable to close financing. “Only if they are successful do they go out and source funding, with the letter of award acting as an inducement,” says Detail Solicitors’ Jemide.

Among a longer pipeline of infrastructure deals, Lagos leads the way, with plans for new metro developments, an airport transit railway, even a cable car across one of its lagoons. But it will be a successful project financing in Nigeria’s power sector that will set a precedent for Nigeria’s wider infrastructure market.