AFRICAN DEVELOPMENT FUND

PROGRAM: PARTIAL RISK GARANTEE IN SUPPORT OF THE POWER SECTOR PRIVATIZATION

COUNTRY: FEDERAL REPUBLIC OF NIGERIA APPLICANT: NIGERIA BULK ELECTRICITY TRADING PLC

PROJECT APPRAISAL REPORT

ONEC DEPARTMENT

December 2013

TABLE OF CONTENTS

PROGRAM SUMMARY ...................................................................................................... v

RESULTS-BASED LOGICAL FRAMEWORK .................................................................. vi

IMPLEMENTATION SCHEDULE .................................................................................... vii

1 STRATEGIC THRUST & RATIONALE ...................................................................... 1

1.1 Program Linkages with Country Strategy and Objectives ........................................ 1

1.2 Rationale for Bank Group Involvement ................................................................... 2

1.3 Aid Coordination .................................................................................................... 2

2 PROGRAM DESCRIPTION ......................................................................................... 3

2.1 Overview ................................................................................................................ 3

2.2 Program Components .............................................................................................. 4

2.3 Program Methodology ............................................................................................ 5

2.4 Eligibility Criteria ................................................................................................... 5

2.5 Pipeline IPPs ........................................................................................................... 6

2.6 Technical Solutions Adopted and Alternatives Considered ...................................... 7

2.7 Program Type ......................................................................................................... 7

2.8 Program Cost and Financing Arrangements............................................................. 7

2.9 Program’s Target Area and Development Impact .................................................... 8

2.10 Participatory Approach ........................................................................................ 8

2.11 Bank Group Experience and Lessons Reflected in Program Design ..................... 8

2.12 Key Performance Indicators ................................................................................ 9

3 PROGRAM FEASIBILITY ........................................................................................... 9

3.1 Financial and Economic Performance ..................................................................... 9

3.2 Environnemental and Social Impact ...................................................................... 10

4 PROGRAM IMPLEMENTATION .............................................................................. 12

4.1 Implementation Arrangements .............................................................................. 12

4.2 Program Monitoring and Evaluation...................................................................... 14

4.3 Governance ........................................................................................................... 14

4.4 Sustainability ........................................................................................................ 15

4.5 Risk Management ................................................................................................. 15

4.6 Knowledge Building ............................................................................................. 17

5 LEGAL INSTRUMENTS AND AUTHORITY ........................................................... 17

5.1 Legal Instrument ................................................................................................... 17

5.2 Conditions for Bank Intervention .......................................................................... 17

6 RECOMMENDATION ............................................................................................... 19

Appendix I: Nigeria’s Comparative Socio-Economic Indicators

Appendix II: ADB Portfolio in Nigeria

APPENDIX III: Similar Projects in Nigeria

Appendix IV: Map of Project Area

Appendix V: Indicative Term Sheet

i

CURRENCY EQUIVALENTS

October2013

UA 1 USD 1.53

UA 1 NGN 237.94

FISCAL YEAR 1 January - 31 December

WEIGHTS AND MEASURES

m Meter KOE kilogram of oil equivalent

cm centimeter = 0.01 meter kV kilovolt = 1 000 volts

mm millimeter = 0.001 meter KVa kilovolt ampere (1 000 Va)

km kilometer = 1 000 meter KW kilowatt = 1 000 Watts

m² square meter GW gigawatt (1000 000 kW or 1000 MW)

cm² square centimeter MW megawatt (1 000 000 W or 1 000 kW

km² square kilometer = 1 000 000 m² KWh kilowatt hour (1 000 Wh)

ha hectare = 10 000 m² MWh megawatt hour (1 000 KWh)

t (t) metric tonne (1 000 kg) GWh gigawatt hour (1 000 000 KWh)

ii

ACRONYMS AND ABBREVIATIONS

ADB African Development Bank

ADF African Development Fund

CSP Country Strategy Paper

DFID Department for International Development DisCo Distribution Company

ESIA Environmental and Social Impact Assessment

ESMP Environmental and Social Management Plan FGN Federal Government of Nigeria

FMENV Federal Ministry of Environment

FMF Federal Ministry of Finance FMP Federal Ministry of Power

GenCo Generation Company

IDA International Development Association

IPP Independent Power Producer MIGA Multilateral Investment Guarantee Agency

MYTO II Multi-Year Tariff Order II

MW Megawatt NBET Nigeria Bulk Electricity Trading PLC

NDPHC Niger Delta Power Holding Company Limited

NERC Nigeria Electricity Regulatory Commission NGFO ADB’s Nigeria Field Office

NGN Nigerian Naira

NIAF Nigeria Infrastructure Advisory Facility (DFID funded)

NIPP National Integrated Power Projects ONEC Operations Energy, Environment and Climate Change Department

PHCN Power Holding Company of Nigeria

PPA Power Purchase Agreement PPP Public-Private Partnership

PRG Partial Risk Guarantee

PRSP Poverty Reduction Strategy Paper

TCN Transmission Company of Nigeria TA Transformation Agenda

UA Unit of Account

USAID United States Agency for International Development USD United States Dollar

WB World Bank

iii

PROGRAM INFORMATION SHEET

Client Information Borrower/ Counterindemnity Provider Federal Republic of Nigeria (FGN)

Executing Agency Federal Ministry of Power (FMP)

Implementing Agency / Applicant Nigeria Bulk Electricity Trading PLC (NBET)

FINANCING PLAN

Sources Amount (UA

million) Instrument

African Development Fund (ADF) 120 PRG

ADF 2 Loan

Total Cost 122

KEY FINANCIAL INFORMATION

ADF Loan ADF Partial Risk Guarantee

Commitment

Currency Unit of Account (UA) Unit of Account (UA)

Currency United States Dollar (USD) United States Dollar (USD)

Interest Rate 1% N/A

Interest Rate Margin

N/A N/A

Service Charge

0.75% yearly on the disbursed and outstanding.

N/A

Guarantee Fee N/A Equivalent to ADF loan service charge of 0.75% per annum on the face value of the

drawn portion of the Guaranteed Amount.

Commitment Fees 0.50% yearly on the undisbursed portion of the loan starting 120 days

after the signing of the agreement.

N/A

Standby Fee N/A

Equivalent to ADF loan commitment fee of 0.50% per annum that will be charged on the

face value of undrawn portion of the

Guaranteed Amount.

Front-end Fees N/A Up to 1% of the Guaranteed Amount.

Other Fees N/A

Legal and other out of pocket expenses incurred

by the ADF during the initiation, appraisal and

underwriting process of a guarantee, other than the Banks traditional operational expenses, will

be charged to the beneficiary.

Tenor 30 years

The Guarantee tenor may vary for each project under the Program depending on the

requirements of the specific underlying

transaction. The Guarantee will be in place until

the market is mature and the guarantee

applicant, NBET, hands over PPA obligations

to the individual distribution companies and

hence the guarantee is withdrawn.

Grace Period 8 years N/A

iv

KEY FINANCIAL & ECONOMIC OUTCOMES

Analysis NPV (USD million) IRR (%)

Financial Analysis

Okija IPP 62.2 22%

Ikot Abasi IPP 83.0 21%

Ughelli 15.3 16%

Economic Analysis

Program 1,929.9 34%

TIMEFRAME – MAIN MILESTONES

Concept Note Approval 29 August 2013

Program Approval December 2013

Completion (Component 2) 1 March, 2017

Last Disbursement (Component 2) 1 September 2017

v

PROGRAM SUMMARY

Program Overview: The Partial Risk Guarantee Program in Support of the Power Sector

Privatization aims to increase electricity generation in Nigeria by catalysing private sector

investment and commercial financing in Nigeria’s power sector through the provision of Partial

Risk Guarantees (PRGs). The ADF PRGs will mitigate the risk of the Nigeria Bulk Electricity

Trading Plc (NBET), a Federal Government of Nigeria (FGN) entity established to purchase

electricity from independent power producers (IPPs), not fulfilling its contractual obligations

under its power purchase agreements (PPAs) with selected IPPs. The ADF PRGs offered under

the Program will mitigate the political risk and increase the comfort level of private sector

investors/ commercial lenders investing in the Nigerian power privatization program. It will

therefore support the FGN in its efforts to reform the power sector and position the country on

a sustainable growth path.

Program Impact: An effective and steady power supply is critical to the sustainability of

Nigeria’s development path. According to FGN statistics, power outages cost Nigeria about

3% of its GDP annually. It is anticipated that the IPPs eligible for coverage under the Program

could generate an additional 1,380 MW of power by 2016, thereby contributing to increasing

the population’s access to more reliable and affordable electricity (from 41% currently to 50%

by 2016).

Needs Assessment: Nigeria, in its development objective to rank amongst the top 20

economies of the world by the year 2020, targets an ambitious 40,000MW of electricity

generation. With a population surpassing 160 million, Nigeria’s current maximum electricity

generation capacity, estimated at approximately 5,500 MW, is inadequate to meet the

unsuppressed demand estimated at approximately 10,000 MW. Only about 41% of the

population currently has access to electricity; and for that segment of the population, only 30%

of its needs are currently met. To meet the generation targets set for 2020, significant private

sector investment is required in the supply chain, including generation, gas to power

infrastructure and distribution networks. The reform of the power sector started in 2005 with

the enactment of the Electric Power Sector Reform Act (EPSRA) and was accelerated in 2010

with the Power Sector Reform Roadmap. Nigeria faces a range of challenges implementing the

Power Sector Reform Roadmap, and providing comfort for private sector investment into its

privatised power market is one of the main challenges.

Bank Group’s Added Value: The Bank Group’s objective in introducing the ADF PRG

instrument was to crowd in private financing by covering government related risks that the

market is neither able to absorb nor mitigate. This ADF PRG Program, in support of the

Nigerian Power Sector, will therefore directly contribute to the Bank Group’s objective.

Moreover, it is essential that Bank Group leverages its resources in Nigeria given the magnitude

of the financing requirements. This requires novel approaches, such as the use of PRGs, with

their leveraging factor as part of the financing mix for maximum value addition.

Knowledge Management: The ADF PRG will provide innovative risk mitigation for

NBET, in support of private sector power projects. The innovative approach, for crowding-in

private financing for infrastructure investments, will have a catalytic and replication effect both

in Nigeria and more broadly in Africa. The lessons learned from this operation will provide

useful insight into the promotion of private investment for infrastructure projects using

guarantees in Nigeria and other African countries going forward.

vi

RESULTS-BASED LOGICAL FRAMEWORK

Country and Program Name: : Nigeria – Partial Risk Guarantee in Support of the Power Sector Privatization Purpose of the program: Increase electricity generation in Nigeria by catalyzing private sector finance in the power sector through provision of partial risk guarantees in favor of Independent Power Producers (IPPs) to mitigate certain political risks

PERFORMANCE INDICATORS MEANS OF VERIFICATION

RISKS / RESULTS CHAIN Indicator Baseline Target

2016 MITIGATION MEASURES

(including CSI)

IMP

AC

T

Increased productivity, economic activity and growth, and reduced poverty in Nigeria

Electricity access rate (%) 41 % 50 %

- Publications from: * FMP * NBET * NERC * NBS - Project progress and completion reports

OU

TCO

MES

Outcome

Increased maximum electricity supply

Volume of power (in MW) supplied to meet maximum electricity demand

5,500 MW

8,000 MW

- Publications from: * FMP * NBET - Project progress and completion reports

Governance risks such as accountability challenges and vulnerability to vested interests could have debilitating effect on the power sector in Nigeria. Mitigation: Nigeria has steadily progressed in achieving measures to improve public resource management and there is a strong level of commitment to the success of the reform. Liquidity risk due to weak billing and collection of payments due by the end consumer and lack of appropriate metering systems. Mitigation: DisCos have recently been privatized and are expected to improve efficiency in billing and collection of payments. Nevertheless, in case of non-payment, NBET will have the right contractually to partly curtail or withhold energy deliveries to DisCos. This will be in turn an incentive for DisCos to pay their bills. Weak operational capacity and poor financial standing of NBET. Mitigation: NBET capitalisation by FGN of approximately USD 820 million and NBET’s liquidity enhancement, which includes guarantees covering 3 months of power purchases revenues due from distribution companies. .Combined with the Bank’s ongoing budget support to the sector these measures should help address any potential capacity and financial issues.

Increased consumption per capita

Average volume of electricity consumed by inhabitant 121 KWh 210 KWh

OU

TPU

TS

Output

-Power plants rehabilitated and/or

commissioned

-Power plants generation capacity:

* Okija IPP/or eligible IPP * Ikot Abasi IPP/ or eligible IPP

* Yellowstone IPP/ or eligible IPP * Ughelli IPP/ or eligible IPP

- Plants: *0 MW *0 MW *0 MW *330 MW

-Plants: *495MW *250MW *351MW *614MW - Publications from:

* NBET * FMP * Supervision Missions, - Project progress and completion reports

Transmission and distribution service deficiencies and inability to evacuate and distribute the energy generated by the IPPs. Mitigation: Agreements being entered into between greenfield power producers and TCN to construct transmission lines to evacuate power. The Bank’s ongoing sector budget support and the ongoing handover of TCN to a short-term private manager. IPPs construction and/or rehabilitation risks leading to delays. Mitigation: Assessment of the technical and financial standing of the EPC contractors before financial close. Provisions for construction delay liquidated damages and penalties in EPC contract. Gas supply risks due to security concerns in the Niger Delta region with pipeline vandalism. Mitigation: The Gas Supply Agreement (GSA) will include liquidated damages provisions. Security is one of the priorities of the FGN’s Transformation Agenda with renewed efforts to end militancy in the Delta region.

- Training provided to NBET and NERC

staff

- Training of female staff

- Total Number of staff trained

- Number of Female staff trained

*10 staff trained *2 Female staff trained

*185 staff trained *30 Female staff trained

KEY

AC

TIV

ITIE

S

INPUTS 1.Procurement of a commercial bank for the issuance of the revolving standby letter of credit (L/C)

- ADF Partial Risk Guarantees having a total face value amount of UA 120 million (USD 180 million), UA 30 million deducted from the country’s PBA - ADF loan amounting to UA 2 million for capacity building (to NBET and NERC)

2. Issuance of L/C for the account of NBET to each IPP IPPs related activities 3. Construction of three greenfield gasPower Plants and rehabilitation of one brownfield gas Power Plant 4. Upgrading of the 330 kV transmission line that runs parallel to the Okija site and construction of a 20 kms long 18”gas pipeline 5. Erection of a 3 km 330KV transmission line in Akwa Ibom State. Assembling of an 18” natural gas pipeline in Akwa Ibom State 6. Construction of a 2 km double circuit 330 kV overhead line connecting Yellowstone IPP to the Ajaokuta substation 7. Technical Assistance trainings

vii

IMPLEMENTATION SCHEDULE

1

REPORT AND RECOMMENDATION OF MANAGEMENT TO THE BOARD OF DIRECTORS

ON A PROPOSED PARTIAL RISK GUARANTEE PROGRAM

TO THE FEDERAL REPUBLIC OF NIGERIA IN SUPPORT OF THE POWER SECTOR

Management submits the following report and recommendations on a proposed Partial Risk

Guarantee (PRG) Program to the Federal Government of Nigeria (FGN) in support of the power

sector privatization. The first tranche of the PRG Program will be for a total PRG face value amount

of UA 120 million (approximately equivalent to USD 180 million), which would use UA 30 million

of Nigeria’s ADF 12 PBA. An ADF loan of UA 2 million will also be provided for the capacity

building of the main sector players. Management also notes, for the Board’s information, that the

Program could be expanded with a second tranche composed of ADF 13 PBA resources, ADB

resources and/or other funds as requested by the FGN and as available beginning in 2014.

1 STRATEGIC THRUST & RATIONALE

1.1 Program Linkages with Country Strategy and Objectives

1.1.1 Nigeria’s weak power sector continues to hinder every aspect of the country’s economy and

growth prospects. The improvement of the sector is thus one of the Federal Government of Nigeria’s

(FGN) key operational objectives. The proposed program is in line with the FGN’s long-term

development agenda Vision 20:2020 and its strategic direction as detailed in the Transformation

Agenda (TA 2011-2015). The FGN aspires to be among the top 20 economies in the world by the

year 2020. Vision 20:2020 has identified the improvement of the provision of electricity as a key

priority and sets an ambitious national generation capacity target of 40,000 MW by the year 2020.

The TA 2011-2015 has also identified critical infrastructure development, i.e. power, roads

transportation, railways, and agricultural transformation, as key to its operational success.

1.1.2 The Bank Group’s current CSP for Nigeria (2012-2016) aims primarily at promoting inclusive

and green growth, in line with the Bank Group’s Ten-Year Strategy (2013-2022), and focuses on the

following two pillars: (i) promoting the development of a sound policy environment, and (ii) investing

in critical infrastructure to promote the development of the real sector of the economy. It recognizes

the huge financing needs of the country and the relatively small size of Nigeria’s ADF resource

envelop with the expectation that Nigeria will soon graduate from a blend to an ADB-only country.

The strategy thus focuses on fostering a good policy environment and investing in critical

infrastructure. A sound policy environment would ensure effective transformation of Nigeria’s

commodities-oriented economy (agriculture and crude-oil production) into an industrial,

manufacturing and tradable services-oriented economy. PRGs are specifically referred to in the CSP

as necessary “to help crowd in private financing, accelerate foreign direct investment, and encourage

private sector participation in public-private partnerships, in particular Independent Power

Producers (IPPs)”. The proposed Program, in its objective to attract private financing for the power

sector infrastructure, which is critical for fostering inclusive growth, fits perfectly with each pillar of

the CSP and furthers the Bank Group’s mission in Nigeria.

1.1.3 Finally, the Program will contribute to the green and inclusive growth pillar of the Bank

Group’s Ten-Year Strategy (2013-2022). It will result in climate resilience and will increase the

energy access rate by replacing expensive and heavily polluting emergency and/or individual diesel-

fired generators by a cleaner source of energy (gas fired thermal plants essentially) and securing the

power generation capacity required to adequately supply reliable and affordable electricity to end

users.

2

1.2 Rationale for Bank Group Involvement

1.2.1 Nigeria electricity consumption per capita is amongst the lowest in the world, with long power

outages, poor quality of supply, and low access to electricity. The country’s current generation

capacity includes three hydroelectric and eight thermal power plants from the Power Holding

Company of Nigeria (PHCN), the state-owned holding company, ten thermal power plants from the

National Integrated Power Project (NIPP), a Government sponsored programme, and eight privately-

owned Independent Power Producers (IPPs) having a total installed capacity of about 10,000 MW

(2012). Yet, due to the poor maintenance of the facilities and the erratic gas supply, only about 5,500

MW (representing about 55%) of the installed capacity is currently available to be evacuated to the

transmission grid. The available capacity falls significantly short of the demand currently estimated

at about 10,000 MW. The ongoing sector privatization reform seeks to address this gap.

1.2.2 To redress the deteriorating power supply situation in Nigeria, the FGN enacted the Electric

Power Sector Reform Act (EPSRA) in 2005 to prepare the regulatory environment for private sector

participation. The reform for the sector was revived in 2010 with the Power Sector Reform Roadmap

which is successfully being implemented despite some challenges. The Power Sector Reform has led

to the unbundling of the PHCN into 18 different companies - 11 distribution companies, 6 generation

companies and 1 transmission company. Some major achievements include the establishment and/or

strengthening of key institutions such as the Nigeria Bulk Electricity Trader (NBET) and the Nigerian

Electricity Regulatory Agency (NERC) as well as the payment by the distribution and generation

successor companies to PHCN for a total amount of around $2.5 billion, which represents the total

value of the share sale price of the privatized assets. A cost-reflective tariff, the Multi-Year Tariff

Order (MYTO) II, has been introduced on 1st June 2012 to make the sector attractive to both local

and foreign investors. A detailed overview of the Nigerian power sector, as well as the status of the

reform, is provided in Annex A.2.

1.2.3 The FGN aims at significantly increasing power generation in Nigeria by allowing privately-

owned IPPs to produce and supply power to the national grid, with a target to generate an additional

6,000 MW of power by 2016. In order to achieve this target, significant investments are expected

from IPPs and as such, the FGN has approached the Bank Group to provide PRGs to support the

contractual obligations of the NBET, which has been mandated to negotiate and implement power

purchase agreements (PPAs) with IPPs on behalf of the distribution companies (DisCos) for an

interim period to provide market certainty and confidence. The interim period, with NBET as bulk

purchaser and reseller of electrical power, will last until DisCos establish their creditworthiness and

the market is able to function on a bilateral basis between generation companies (GenCos) and

distribution companies (DisCos). The Bank Group aims to support the FGN in its efforts to reform

the sector, catalyze private sector investment and commercial financing, and position the country on

a sustainable growth path through issuance of the PRGs. The provision of PRGs to backstop the

payment obligations of NBET will have the effect of assisting the country in achieving its power

generation objectives while minimizing public sector financing.

1.3 Aid Coordination

1.3.1 There is considerable donor activity in the Nigerian power sector through investments,

technical assistance, advisory services and capacity building support. The World Bank Group

(WBG), in particular, offers a guarantee product that is similar in nature and scope to that of the Bank

Group PRGs. The WBG’s Nigeria portfolio includes a program of IDA Partial Risk Guarantees

(PRGs) in the amount of US$ 400 million in support of gas supply and aggregation agreements for

oil companies under the Nigeria Electricity and Gas Improvement Project. The Bank Group held

extensive discussions with IDA on a co-guarantee project that would provide a super Line of Credit

(L/C) to the IPPs in power sector. The approach was abandoned for each individual institution to

3

cover a number of separate projects nominated by NBET. The WBG is thus currently preparing a

PRG operation in support of a series of IPPs in parallel with the subject Program. Nevertheless, given

the number of IPPs coming on-stream and the magnitude of their needs during this interim phase of

the privatization process, both WBG products and the Bank’s products will be offered

complementarily.

1.3.2 The UK’s Department for International Development is supporting the development of energy

infrastructure through its Nigeria Infrastructure Advisory Facility (NIAF) under which a number of

advisory services on energy sector issues are being provided to the FGN. The United States and its

Agency for International Development (USAID) are engaged in various activities through USAID’s

Africa Infrastructure Program in providing credit guarantees in support of small renewable energy

projects and the Power Africa initiative recently announced by President Obama which aims at

doubling access to power in Sub-Saharan Africa and for which the Bank is a strong partner. Other

institutions involved in the power sector include the Agence Française de Développement which is

supporting transmission line projects, and the German KfW, which is engaged in the rehabilitation of

power plants.

1.3.3 To improve aid effectiveness, donors have developed a Country Assistance Framework (CAF)

which provides a common understanding of the development challenges that Nigeria is facing and

upon which donors develop their own strategies. For the power sector, donors collaborate through the

Donor Coordination Group on Power, which is a forum for coordination of donors’ interventions in

the sector.

2 PROGRAM DESCRIPTION

2.1 Overview

2.1.1 The introduction of the ADF PRG instrument (a description of the PRG instrument is provided

in Annex C) by the Bank Group in 2011 has strengthened the Bank Group’s position as one of the

main development partners of the Federal Government of Nigeria (FGN) for the implementation of

the Nigerian power sector privatization reform. In this regard, the Bank was officially requested in

May 2013 to provide ADF PRGs to nominated IPPs, as well as capacity building assistance to key

institutions involved in Nigeria’s power sector reform. Along with the capacity building component,

the issuance of PRGs will give comfort to private investors and/or commercial lenders and mitigate

against the risk of NBET not fulfilling its contractual obligations under the Power Purchase

Agreements (PPAs) that will be concluded with each IPP. It will cover the risk of non-payment by

NBET for electricity delivered by the IPPs. For each IPP, the amount covered by the PRG would be

capped at an amount equivalent to 3 months of payments for electricity delivered to NBET. It should

be noted that the public sector window of the Bank is not investing in any infrastructure under this

proposed Program, while the private sector window (OPSM) is considering providing senior debt to

some of the IPPs being supported by the Program.

2.1.2 The PRGs will only cover the transitional period of the power sector reform (a detailed

description of the power sector reform is provided in Annex A), whilst NBET plays the role of

intermediary between the IPPs and the DisCos. During that period, all the stakeholders in the sector

will require some level of comfort pending the outcome of the ongoing power sector reform. The

NBET was created in order to provide that comfort and hence build the credibility of the DisCos.

Once the DisCos have established a robust billing system, a follow-up mechanism, a strong credit

standing, and have gained the confidence of IPPs to engage in direct negotiations with them, the role

of the NBET will no longer be required. In the new system, which has resulted from the power sector

reform, there is an emergence of several institutions and it is important that the various contracts and

4

agreements that will be signed between the different parties be adhered to. This will provide the

ultimate comfort for any future investors in this new contracts based system.

2.2 Program Components

2.2.1 The program has two components:

Component 1: Provision of Partial Risk Guarantees (PRGs) to support selected IPPs

nominated by NBET.

Component 2: Capacity Building in favour of key institutions involved in Nigeria’s power

sector reform, notably NBET and the Nigerian Electricity Regulatory Commission (NERC)

with respect to implementation and enforcement of procurement as well as environmental and

social rules and regulations. Measures will be undertaken to ensure equal opportunity and

adequate participation of female staff.

2.2.2 For Component 1, it is anticipated that the financing structure for each PRG will involve a

revolving standby letter of credit (L/C), in an amount not exceeding the equivalent of three (3) months

of payments for electricity delivered, issued by a commercial bank (L/C Issuing Bank) to a specific

IPP as payment security for certain payment obligations of NBET under the relevant PPA. In the

event of non-payment by NBET of an invoice for electricity delivered, and in accordance with the

terms of the L/C, the IPP would be entitled to draw under the L/C. In which event, the L/C Issuing

Bank would be entitled to recover from NBET amounts paid to the IPP with a specified

reimbursement period to be discussed and agreed with each L/C Issuing Bank. Each PRG will

backstop the debt obligation of NBET to the L/C Issuing Bank for any amount drawn by an IPP under

the L/C and not reimbursed by NBET to the L/C Issuing Bank within the specified timeframe. In the

event that NBET fails to honor its payment obligations to the L/C Issuing Bank, the Bank will pay an

amount equal to the amount drawn under the L/C and not reimbursed by NBET plus accrued interest,

if any, to the L/C Issuing Bank, up to the aggregate maximum amount of the specific PRG. The FGN

will indemnify and reimburse the Bank for all amounts paid to the L/C Issuing Bank under the PRG.

The tenor of each PRG could technically match the underlying life of the project or at most the tenor

of the PPA; however, it should be noted that once there is sufficient comfort in the market and the

NBET hands over PPA obligations to individual privatized DisCos, the PRG will be withdrawn, as

the obligations will no longer be those of a sovereign entity. Figure 2.1 below depicts the framework

for the PRG component.

5

Figure 2.1 PRG Framework

2.2.3 For Component 2, NBET and NERC will receive technical assistance support, amounting to

UA 2 million, to enhance the FGN’s capacity to sustain and regulate the privatized power sector. To

increase the Program and the sector’s sustainability, IT equipment, training and consultancy services

will be provided in various fields, from environmental and social assessment to procurement, in order

to strengthen these institutions’ ability to successfully perform their roles during the transitional

period and beyond. Technical advisers (individual consultants) will be provided to them as

appropriate and groups of officials and staff will be chosen from each of the proposed Program

beneficiaries to take part in international training programs. This component will provide hands-on

skills to enable the staff in these key public institutions to monitor the Program and more generally

the whole sector. It is anticipated that once the market matures and the role of NBET is taken over by

the DisCos, the NBET staff will remain at the level of the Federal Ministry of Power and the skills

they would have acquired with this technical assistance component would still be relevant for the

sector. The participation of female staff in the trainings will be encouraged to ensure equal

opportunity. Details of the various capacity building activities are presented in Annex B.5 (table B.5.1).

2.3 Program Methodology

2.3.1 The proposed methodology for this program entails the development of a strong pipeline of

IPPs that would each benefit from a PRG. The first tranche of the Program will use the ADF 12

resources allocated by the FGN, which amounts to UA 30 million and translates into a PRG with a

cumulative face value amount of UA 120 million (approximately equivalent to USD 180 million).

This first tranche could be complemented in 2014 and beyond by a second tranche from ADF 13

resources and/or ADB resources, depending on the request from the FGN.

2.3.2 Once the PRG Program is approved by the Board, each individual PRG proposal for a specific

IPP will be processed for approval by the Board on a lapse of time basis (LOTB). Each individual

PRG proposal for a specific IPP will be thoroughly assessed before its submission to the Board, in

line with the Bank Group’s standard technical and commercial viability, environmental and social

compliance and other criteria defined below.

2.4 Eligibility Criteria

6

2.4.1 A set of criteria has been developed for assessing prospective IPPs, and the criteria have been

differentiated for greenfield and brownfield IPPs.

2.4.2 The set of criteria for the greenfield IPPs will include the requirement to submit the following:

(i) completed Environmental and Social Impact Assessment (ESIA) and Resettlement Action Plan

(RAP) acceptable to the Bank; (ii) signed or substantially negotiated Gas Supply Agreement; (iii)

signed or substantially negotiated Grid Connection Agreement and Ancillary Service Agreement; (iv)

signed or substantially negotiated PPA; (v) signed or substantially negotiated Engineering,

Procurement and Construction (EPC) contract; (vi) evidence of appropriate use of funds for economy,

fairness, and efficiency of the procurement process; and (vii) assessment of the commercial viability

of the IPP together with evidence of secured commercial financing (i.e. the IPP should have reached

financial close or have an initialled loan agreement).

2.4.3 The set of criteria for brownfield IPPs includes: (i) completed ESIA audit acceptable to the

Bank; (ii) availability of additional gas to supply the rehabilitated / expanded power plant; (iii)

availability of sufficient transmission capacity to evacuate the additional generation from the

rehabilitated / expanded power plant; (iv) signed or substantially negotiated EPC contract for the

rehabilitation / expansion of the power plant; (v) evidence of appropriate use of funds for economy,

fairness, and efficiency of the procurement process; and (vi) an assessment of the commercial

viability of the IPP together with evidence of secured commercial financing for the rehabilitation /

expansion (i.e. the IPP should have reached financial close or have an initialled loan agreement).

2.4.4 Finally, in order for the IPPs, within the pipeline, to benefit from the PRGs, the Bank will

have to be satisfied that these IPPs are contributing to development outcomes.

2.5 Pipeline IPPs

2.5.1 A pipeline of IPPs has been developed based on nominations from the FGN, discussions with

some IPPs which approached the Bank for a PRG and a preliminary assessment of the readiness of

the IPPs by the project team. The FGN initially nominated five (5) greenfield IPPs, out of which two

(2) were included in the pipeline. Some IPPs approached the Bank directly and two (2) were included

in the pipeline following confirmation of the FGN’s interest in supporting those IPPs. The pipeline is

not exhaustive and is subject to change depending on the pace of development of the IPPs included

in the pipeline and the progress of potential new candidate IPPs.

2.5.2 Greenfield IPPs: Three Greenfield IPPs have been included in the pipeline:

Okija IPP consists of the design, construction and operation of a 495 MW open cycle gas to

power plant at Okija, Anambra State in the South East of Nigeria by end 2016. The Bank has

been mandated as the Global Coordinating Bank and the private sector department (OPSM)

is currently undertaking its due diligence on the project.

Ikot Abasi IPP consists of the design, construction and operation of two floating barges

mounted with two gas turbines having a total output of about 250 MW in Ikot Abasi LGA in

Akwa Ibom State by end 2016. The Bank has been requested to play a leading role in the

financing of the project, which it is currently assessing.

Yellowstone IPP consists of the development of a gas-fired power plant with an installed

capacity of 350 MW and located directly adjacent to Geregu Power Plants (combined capacity

of 868 MW) in Ajaokuta, Kogi State by end 2016. The Bank was requested to play a leading

role in the financing of the project and the private sector department (OPSM) is currently

undertaking its preliminary review of the project.

7

2.5.3 Brownfield IPPs: One Browfield IPP has been included in the pipeline: Ughelli. The IPP is a

gas fired thermal plant situated in Delta State with an installed capacity of 972 MW and available

capacity of 333 MW as at September, 2012. The Transcorp Consortium has now acquired 100%

equity stake in Ughelli Power Plc as per the Share Sale Agreement signed with the Bureau of Public

Enterprise (acting on behalf of the FGN). The acquisition plan includes the purchase of spare parts

and refurbishment of existing units in the short terms, and plans for expansion in the medium term.

2.6 Technical Solutions Adopted and Alternatives Considered

2.6.1 The solution adopted for this program is defined by a strong pipeline of IPPs to be considered

for PRGs by the Bank, on a fast-tracked basis. Alternative solutions were considered for this Program

and rejected for the reasons summarized in Table 2.2.

Table 2.2

Program Alternatives and Reasons for Rejection

Alternative Description Reasons for Rejection

Absence of PRGs No PRGs are provided for the IPPs

Potential investors would not be willing to take political risk existing in Nigeria

The FGN is not willing to provide sovereign guarantees

to private investors, as it would be a contingent liability

on the Government

IPPs would hardly, if at all, reach financial close

Super L/C Provide a super L/C

comprising of co-guarantees

from various DFIs involved in

Nigeria’s power sector

Obstacle in elaborating an appropriate joint legal

framework for the instrument.

Alternative

design

Provide a PRG for each IPP

rather than a series of PRGs as

part of a larger program

Lack of responsiveness due to long processing delays vs.

the urgent need to provide PRGs for IPPs to reach

financial close

Not optimal in terms of use of internal resources

2.7 Program Type

2.7.1 The proposed program will be implemented as a standalone operation and will use the ADF

Partial Risk Guarantee and ADF Loan instruments.

2.8 Program Cost and Financing Arrangements

2.8.1 The first tranche of the Program will consist of UA 30 million from the ADF 12 PBA, resulting

in a PRG having a total face value amount of UA 120 million (approximately equivalent to USD 180

million), as a result of the leverage factor of the ADF PRG instrument. Indeed, the ADF PRG has a

four time multiplier effect allowing only 25% of the face value of the guarantee to be deducted from

the country’s PBA. The Program also includes an ADF loan amounting to UA 2 million to provide

technical assistance support to NBET and NERC. In line with the Bank Group's Policy on Eligible

Expenditures and in view of the country’s strong commitment to the power sector, it is recommended

that the Board approves 100% financing of the total cost of Component 2 of the Program.

2.8.2 Fees associated with each PRG issued include: a guarantee fee of 75 basis points per annum

on the full face value of the PRG payable to the Fund; a standby-fee of 50 basis points charged per

annum on the face value of the undrawn guarantee amount; a one-time front-end fee in an amount

equal to up to a maximum of 100 basis points of the full face value of the PRG will be charged by the

Fund to recover development and appraisal costs; as well as, other fees involving legal or out of

pocket expenses incurred by the Bank Group during initiation, appraisal and underwriting process of

a guarantee. In addition, there will be fees payable to the L/C Issuing Bank for providing the L/C. It

is anticipated that all PRGs and L/C-related fees will be payable by the L/C beneficiaries, i.e. the

8

specific IPPs to benefit from the PRGs. It should be noted that all the IPPs included in the pipeline

have indicated that they are willing to pay the fees and this will be firmed up during the negotiations

of the guarantee agreement. The ADF loan will have the standard ADF loan terms for blend member

countries such as Nigeria as indicated in the Project Information Sheet.

2.9 Program’s Target Area and Development Impact

2.9.1 With all IPPs supplying the national grid, the Program is expected to contribute to an improved

electricity access, from the current 41% to approximately 50% by 2016, for household, commercial

and industrial customers throughout the country. Access to modern, reliable and affordable energy is

fundamental to poverty reduction and sustainable development. Energy access impacts on many

aspects of people’s well-being and livelihoods, without which they are constrained to endure low

standards of living and difficult prospects to overcome poverty.

2.9.2 Currently, only 41% of Nigeria’s total population has access to public electricity supply, with

rural areas suffering the most from electricity deprivation. Even connected households suffer from an

erratic electricity supply. Only 25% of households use grid electricity as main source of lighting

(compared to 64% using kerosene). While over 80% of Nigerians have access to a radio and 64% to

mobile phones, 95% of the population does not have access to personal computers and internet. This

is partly explained because of the limited and unreliable power supply. It is expected that the dominant

use of electricity will be for lighting, followed by operating information and communication

technology (ICT) devices. This will in turn improve the welfare of households as well as provide

additional income-generation opportunities.

2.10 Participatory Approach

2.10.1 During the preparation of the Program, the Bank held extensive consultations with the main

power sector stakeholders, including the Federal Ministry of Finance, the Federal Ministry of Power,

NBET, NERC, TCN, as well as donors active in the sector, including the World Bank, USAID, and

finally the sponsors of the IPPs and their financial advisors.

2.10.2 For Greenfield IPPs, consultations have taken place with representatives from the local

administration, the affected communities, and civil society as part of the elaboration and validation

of the ESIA and RAP documents. Consultations with local communities reached a wide segment of

the population in the Program areas and took the form of formal and informal meetings, focus group

discussions, and in-depth interviews. Information related to the Program was discussed and various

stakeholders were encouraged to voice their concerns and opinions. Feedback obtained from the

stakeholders was documented, and all issues and suggestions raised were recorded. The extent of

consultations and issues raised will be assessed during the due diligence process of each transaction.

Greenfield IPP transactions will follow the disclosure process of the Bank in accordance with the

Environmental and Social Procedures for Private Sector Operations prior to presentation to Board

approval on LOTB.

2.11 Bank Group Experience and Lessons Reflected in Program Design

2.11.1 The Bank’s experience in Nigeria has led to some key lessons learnt, principally relating to

the FGN’s weaknesses in implementation capacity and lack of consistency with policy and plans. The

need for coherent power sector planning is being addressed by the FGN, with a strong commitment

to see the reform program go through. At the Program level, due attention needs to be given to

capacity assessment of NBET and other main institutions in the sector, especially in the areas that

would be critical to the Fund e.g. environmental assessment; procurement etc. In this regard, and in

addition to the ongoing Bank financed Economic and Power Sector Reform Program and Capacity

9

Building for PPP Infrastructure Projects operations, the project team has identified the capacity

building needs of the key institutions, NBET and NERC, for the success of the power sector reform

and secured some funding to fill the identified gaps (Component 2). Another main lessons learnt from

the Bank’s past interventions in Nigeria is the need to align it with the country’s needs. As such, the

decision to take a programmatic approach for this operation is based on the feedback received from

the NBET and FGN that a timesaving and flexible mechanism for the delivery of the PRGs would be

required in order to bring on board the IPPs as swiftly as possible.

2.11.2 The Project Team also integrated lessons learnt from the Bank’s first PRG operation in Kenya

in favor of the Lake Turkana Wind Power Project (LTWP) and other sister institutions, notably the

World Bank Group institutions. During the presentation of the LTWP, the Board suggested that for

projects for which the Bank is also financing the IPP from the private sector window, the approval

process of the PRG should be fast-tracked and one Project Appraisal Report (PAR) should be

submitted to the Board to the extent possible. In this Program, for the IPPs that are being considered

for private sector window financing, the same PAR will be submitted for Board consideration once

the Program has been approved. The International Bank for Reconstruction and Development (IBRD)

and International Development Association (IDA) offer PRGs that cover traditional political risks

and breach of contract on the part of government. The Multilateral Investment Guarantee Association

(MIGA) offers political risk insurance products covering mainly foreign investors’ equity, quasi-

equity, and non-equity direct investments for any combination of the following political risks: (i)

transfer restriction, (ii) expropriation, (iii) war and civil disturbance, and (iv) breach of contract. In

addition, MIGA now also has the authority to cover non-payment of direct financial obligations of

sovereign and sub-sovereign entities. The PRG Strategic Framework and Operational Guidelines

highlighted lessons from the IDA experience which, notwithstanding certain operational and

institutional differences between the WB and ADB, have been considered in the design of the ADF

PRG product. Those lessons are essentially that a PRG operation requires an enabling policy

framework; an implementation approach that rests on mainstream business processes and mobilizes

specialist skills; clear institutional assignments within the organization, beyond the pilot stage;

sufficient levels of leverage to make the instrument attractive; and an aggressive marketing to private

investors and governments.

2.12 Key Performance Indicators

2.12.1 The impact indicator will be the electricity access rate, which is expected to grow from the

current 41% to 50% by 2016. The key outcome indicators will be the maximum electricity demand

supplied to the national grid in MW, which is expected to grow from 5,500 to 8,000 MW by 2016.

2.12.2 From an outputs perspective, the Program will result in additional generation capacity in 1,380

MW provided by the 4 IPPs being supported under this program, as well as the trainings provided to

NBET and NERC staff that encourages gender balance.

3 PROGRAM FEASIBILITY

3.1 Financial and Economic Performance

3.1.1 In order to offer the best indication of the Program’s viability and profitability, the Program’s

financial and economic analysis focused on the IPPs that had already developed a preliminary

financial model. These IPPs, Okija, Ikot Abasi and Ughelli can be considered as frontrunners in terms

of readiness and in regards to fulfilling the Program’s aforementioned criteria for accessing the PRG.

Yellowstone IPP has already appointed its advisors (technical, legal, environmental, etc.) to prepare

the project documents, but it is yet to appoint a financial advisor who will essentially be in charge of

building a project information memorandum and a financial model.

10

3.1.2 The Economic Analysis is built on the assumption of applicability of the Multi-Year Tariff

Order (MYTO) II, which provides a 15 year tariff path for the Nigerian power sector. The PPAs to

be executed between the IPPs and the NBET would be in fact based on terms and conditions,

including tariffs, approved by the sector regulator, Nigerian Electricity Regulatory Commission

(NERC), in its MYTO II methodology.

3.1.3 The table below provides a summary of the main financial indicators from the financial and

economic analysis conducted for the selected pipeline projects.

Table 3.1

Key Financial and Economic Performance Indicators

Analysis NPV (USD million) IRR (%)

Financial Analysis

Okija IPP 62.2 22%

Ikot Abasi IPP 83.0 21%

Ughelli 15.3 16%

Economic Analysis

1,929 34% N .B. Detailed calculations and assumptions are given in Annex B7

3.1.4 The detailed calculations of the financial and economic analysis as well as sensitivity tests are

provided in Annex B7.

3.2 Environnemental and Social Impact

3.2.1 The Program is classified as Category 4 according to the Bank’s Environmental and Social

Assessment Procedures (ESAP).

3.2.2 The Bank is supporting NBET in setting up an Environmental and Social Management System

designed to systematize the identification and management of environmental and social risks

associated with the IPPs and to liaise with the Federal Environmental Protection Agency.

3.2.3 The environmental and social due diligence status of the IPPs is the following:

For Greenfield IPPs: The Environmental and Social Assessments (ESIA) of all Greenfield

IPPs listed above have been validated by the Federal Environmental Protection Agency,

although the Bank still has to receive the supportive documentation in that regard. The Bank

is currently reviewing the ESIAs for Okija and Ikot Abasi IPPs. The relevant environmental

and social (E&S) due diligence documentation pertaining to Yellowstone have yet to be

submitted by the sponsors to the Bank.

For Brownfield IPPs: Ughelli IPP is yet to conduct an environmental audit and elaborate an

environmental management plan, which will be required by the Bank as part of the due

diligence process pertaining to each transaction. Moreover, the sponsors will have to obtain

the required license from the Federal Environmental Protection Agency.

3.2.4 Upon receipt of the documentation described above, the Bank will review it against the

background of its E&S procedures for private sector operations. All IPPs will be required to have in-

house expertise for the environmental and social monitoring during the construction and operations

phases.

3.2.5 Environment: The energy produced would save Nigerians millions of dollars annually by

displacing the expensive standby generators currently being used by Nigerian households and

businesses. In addition, the Program will contribute to the national effort of meeting the rapidly

11

growing energy needs of present and future population, mostly through investment in largely

environment-friendly initiatives.

3.2.6 Climate Change: Natural gas has some advantages over other fossil fuel energy sources, such

as oil and coal. It is cleaner burning and has a lower carbon footprint. In this regard, the Program will

contribute minimally to Nigeria’s GHG emissions, and thus with limited climate change implications.

While most of the IPPs are starting with open cycle gas turbine technology, they have plans to move

to combined cycle technology in the medium to long run.

3.2.7 Gender: By supporting IPPs supplying the national grid, the Program is expected to contribute

to an improved electricity access for Nigeria’s population as a whole, out of whom 80.2 million (49%)

are women. These include female heads of households, who represent 15% of the 30 million

households living in Nigeria and considered to be financially vulnerable.1 As primary responsible for

household chores and child-rearing activities, women in Nigeria bear the brunt of dependency on

biomass and lack of access to clean and modern energy sources. Moreover, lighting facilitates the

overall efficiency of cooking and childrearing activities.

3.2.8 Grid electricity access contributes in freeing women’s time for other activities, such as

income-generation and education opportunities. In recent years, informal household businesses have

become the main source of income in Nigeria over subsistence farming and informal employment,

where women represent the majority of the labor force. Women also have become more prominent

in formal enterprises, where they run one in every five registered business.2 Electricity access will

improve the operational efficiency of these businesses and significantly lower operational costs. This

in turn will lead to greater financial independence which is an essential dimension of women’s

empowerment.

3.2.9 By making ICT and media more accessible, the Program will indirectly have a positive

influence on attitudes about gender roles. The literature shows a positive correlation between access

to information and women’s empowerment. Women who have access to modern technologies can

more easily be informed about educational, economic and other opportunities and access to mass

media is often correlated with lower fertility rates. Finally, the Program’s second component’s

emphasis on female participation will support the career growth of women within key institution’s in

Nigeria’s power sector.

3.2.10 Social: Connecting homes to the grid will considerably and immediately improve the welfare

of beneficiary households. Grid access will extend the effective working day, which in turn allows

for more productive and leisurely activities (e.g. study time for children, listening to the radio and

watching TV). In addition, electricity access will improve the quality of public services, in particular

through the use of databases and computerized services to the benefit of households. With regards to

vulnerable households, they benefit from a lifeline tariff and the government is currently looking at

additional measures to support these customers.

3.2.11 The Program will support income generation activities as well as private sector development,

particularly for household businesses, which are very common in Nigeria. According to the 2011

General Household Survey, 77% of urban and 62% of rural households in Nigeria have someone

operating a business. Grid electricity will lower the operational costs of these businesses as well as

standard enterprises, most of which currently rely on stand-alone diesel generators or batteries. In

addition, the Program will contribute to the direct creation of temporary and permanent jobs for

construction and operation activities as well as boost indirect employment (suppliers, contractors,

catering services).

1 National Bureau of Statistics 2011, Men and Women in Nigeria 2 National Bureau of Statistics 2011, Households Enterprises in Nigeria

12

3.2.12 Involuntary Resettlement: It is possible that Greenfield IPPs, as they involve the need for

land acquisition and the construction of associated facilities (transmission lines and gas and/or water

pipelines) generate involuntary economic or physical resettlement. This will be identified during the

due diligence process for each transaction. Each IPP presented on LOTB will have to comply with

the Bank’s Policy on Involuntary Resettlement (2003).

3.2.13 A detailed environmental and social analysis is provided in Annex B8.

4 PROGRAM IMPLEMENTATION

4.1 Implementation Arrangements

4.1.1 The purpose of the Program is to provide comfort to the private sector investors and lenders

that the FGN, through NBET, will respect its payment obligations under the Power Purchase

Agreements (PPAs) between the IPPs (selected to benefit the Program) and NBET. The FGN is

therefore the primary obligor for the PRGs under this Program. The Federal Ministry of Power

(FMoP) is the executing agency, while NBET is the implementing agency. NBET will assume

fiduciary responsibilities on behalf of NERC for the procurement and financial management of the

capacity building component benefiting NERC.

4.1.2 NBET, a FGN public entity, was incorporated on July 29, 2010, in line with the "Roadmap to

Power Sector Reform" and in fulfilment of the requirements of Electric Power Sector Reform Act

(EPSRA 2005) for a "trading licensee holding a bulk purchase and resale license to engage in the

purchase and resale of electrical power and ancillary services from independent power producers and

from the successor generation companies". Despite the fact that NBET does not have past experience

in managing donor funded projects, its Board of Directors is made of eight credible Nigerians with

various experiences at national and international levels and is chaired by the Honorable Coordinating

Minister of the Economy and Finance. NBET is mandated to negotiate and implement PPAs with

IPPs on behalf of the DisCos that are backed by credit enhancement mechanisms, such as PRGs. The

implementation arrangements are detailed in Annex B3.

4.1.3 Procurement: The Bank Group’s “Rules and Procedures for Procurement of Goods and

Works”, and “Rules and Procedures for the Use of Consultants” (both dated May 2008 and revised

July 2012) apply to the Program in accordance with Article 1.2 and its charter to "ensure that the

proceeds of any loan made or guaranteed by it are used only for the purposes for which the loan was

granted, with due attention to considerations of economy and efficiency”. Following the Rules 3.16,

if the Bank guarantees the repayment of a loan made by another lender, the goods and works financed

by the said loan shall be procured with due attention to economy and with procedures that meet the

four principles of procurement. For the PRG-guaranteed L/C, the Bank will establish and approve the

criteria that will be used for the selection of the L/C Issuing Bank before the PRG proposal for a

specific IPP is submitted to the Board. In accordance with the PRG Operational Guidelines, due

attention will be focused on the economy, efficiency, appropriate use of funds and competition.

4.1.4 All procurement to be carried out under the second component (B) for capacity building shall

be in accordance with the Bank’s Rules. NBET will be responsible for the procurement activities

under that component. NBET is a newly established company, but an established procurement unit,

which conducts its activities, based on the national procurement procedures. The risk assessment of

NBET’s ability to implement procurement arrangements under this project is rated medium. To

mitigate this risk, a procurement specialist knowledgeable in Bank procedures will be recruited to

reinforce NBET’s procurement unit. The procurement arrangements for the Program are detailed in

Annex B5.

13

4.1.5 Financial Management: The FMoP, being the Executing Agency, will, through the NBET,

take overall responsibility for the Financial Management (FM) of the PRG program and ensure that

the IPPs are regularly paid for energy produced and supplied to the market. To ensure the proper

functioning of the NBET Finance Department, qualified professional accountants are already on

board. The NBET Finance Department is headed by its Chief Finance Officer, a seasoned professional

accountant with over two decades experience and assisted by an Assistant General Manager,

Corporate Finance and a Controller of Finance who are both professional accountants. There is an

internal audit unit headed also by a Professional Accountant. The Financial Management Team is

also assisted by six additional professional staff. In spite of the current challenges in the Nigeria

Public Financial Management (PFM), a detailed review of NBET’s financial management

arrangements rated the existing FM system as adequate to satisfy the requirements of the Bank, with

the residual FM risk rated Low to Moderate.

4.1.6 The NBET current Finance Policy and Finance Operating Procedures Manuals were reviewed

and deemed adequate for purposes of managing project related disbursements and the accompanying

reporting requirements.. The Accounting Software in use is considered robust and capable of

generating all the financial reports within the framework of International Financial Reporting

Standards (IFRS) as required by law in Nigeria, and in conformity with expectations of the Bank.

4.1.7 The FGN has contributed to the capitalization of the NBET through capital supplementation

via budget appropriations of approximately USD 145 million from the 2013 budget; while an

additional USD 350 million was allocated to the NBET from the proceeds of the Eurobond to finance

infrastructure related programs; and finally NGN 50 billion being the proceeds of the sale of Egbin

Power plant (approximately USD 325million) was added to strengthen the company’s balance sheet.

In total, this amounts to approximately USD 820 million. Furthermore the NBET requested additional

financing buffers from the Discos, in the form of 3 month payment guarantees to mitigate against any

possible market shortfalls. The assessment thus concluded that NBET’s current arrangements for

continuing solvency are sound.

4.1.8 There are no traditional financial management-related fiduciary issues with the PRG

component as there will be no procurement-related disbursements. Should the PRG be called, the

ADF would disburse to the relevant L/C bank and the Federal Government of Nigeria (FGN) would

be obligated to repay ADF in accordance with the Indemnity Agreement between FGN and ADF.

However, the NBET will have to produce bi-annually, interim unaudited financial reports covering

the component 2 of the Program (related to capacity building) as well as annual financial statements

to be audited in accordance with para 4.1.9 and submitted to the Bank for review within six months

of the end of the financial year audited.

4.1.9 Audit: In accordance with the Constitution of Nigeria (sections 85 and 125), the Office of the

Auditor General of the Federation (OAGF) is responsible for the audit of the financial transactions of

Federal Government projects. However, due to lack of adequate staffing as well as excessive work

load, the OAGF often allows project audits of this type to be conducted by qualified private

independent external auditors, selected in terms of TORs acceptable to the financiers (in this case the

Bank), and in conjunction with the OAGF. Currently NBET‘s external auditors are Price Waterhouse

Coopers (PWC). This is one of the top four audit firms in Nigeria and in the World, and is acceptable

to the Bank. Consideration will be made to extending the PWC contract to cover the specific

requirements of the project. To date, NBET being a new organization has only produced one audited

financial statement conducted in accordance with International Standards on Auditing (ISA). No

significant adverse issues were noted by the auditor.

14

4.1.10 The auditors’ report on the project, plus the NBET entity annual accounts, along with the

supporting management letters, will be submitted to the Bank within six months after the end of each

fiscal year audited.

Disbursement: The Program will have access to two disbursement methods for implementation of

the capacity building component: the Special Account and Direct Payment methods as prescribed in

the Bank’s Disbursement Handbook. NBET will open a USD and Naira denominated Special

Account in commercial banks acceptable to the Bank. For the PRG component: in the case of a call,

the procedures for processing a claim under the PRG are provided in the Strategic Framework and

Operational Guidelines for the ADF PRG.

4.2 Program Monitoring and Evaluation

4.2.1 NBET will be responsible for the overall monitoring of the Program outcomes. NBET will

benefit from monitoring and evaluation training under the capacity building component. IPPs will be

expected to produce data on the Program outcomes and results indicators in regular progress reports.

The Bank will monitor and supervise through the submission of reports that will be required by the

IPPs under the Project Agreement with each IPP and submission of relevant reports by NBET as

required under the Bank‘s Indemnity Agreement with the FGN as well as through regular field visits

until the expiry of each PRG.

4.2.2 Since Nigeria hosts a fully equipped country office, the sector experts in the office will

maintain a permanent dialogue with NBET, the IPPs and the FGN. This will be supplemented by

rigorous supervision missions from the office and from the headquarters. Most projects in Nigeria

are supervised more than twice a year.

4.3 Governance

4.3.1 The Government is vigorously pursuing the implementation of its structural reforms, with

focus on priority sectors that include infrastructure (power, roads and rail), banking and finance,

petroleum, and logistics (seaports and airports). The power sector reform has been concluded and the

investors have been legally handed over the assets. The government is in the process of concluding

all outstanding labour related payments.

4.3.2 Economic governance and institutional capacity were weak at the federal level which justified

the ongoing reforms in the sector. Results of the 2012 Public Expenditure Financial Accountability

(PEFA) assessment (still in draft) show continuing challenges with transparency and accountability.

The current weaknesses in the country’s PFM system have more to do with the underutilization of

the accountability and control mechanisms that have been in place for many decades than deficiencies

in the legal framework. The FGN has nonetheless successfully commenced a number of initiatives

to address its existing weaknesses.

4.3.3 In the power sector, three governance-related challenges affect the efficiencies in the sector:

First, due in part to distorted electricity tariff system, the financial performance of the power

companies remains poor. Second, the weak institutional and administrative framework is not

conducive to the emergence of a level playing ground attractive to investors. Third, NERC’s capacity

to adequately enforce proper electricity pricing and tariff policies remains uncertain although the

passage of the EPSR Act 2005 and NEPP 2001, which enabled the unbundling, reform and

privatization of the Power Holding Company of Nigeria (PHCN), strengthened the performance and

accountability in the sector. (NERC regulates and implements the tariff framework for the sector,

Feed In Tariffs (FITs) for renewable energy, consumer assistance fund and subsidy payments).

15

4.3.4 Despite these challenges, the outlook for the sector and the country remains positive and

promising in the medium term. This would nonetheless depend on the extent to which policymakers

are consistent in the implementation of the reforms that would help build on the success recorded so

far. Thus, maintaining the momentum in implementing the power sector reform, continuing

implementation of the diverse infrastructure development and maintenance programs, and promoting

private sector activities through active support will greatly contribute to increased power supply and

sustained growth. The participation of private sponsors in implementation of this proposed PRG

Program as well as the supervision of commercial lenders provides additional comfort.

4.4 Sustainability

4.4.1 The proposed Program is critical to support the ongoing privatization reform which aims to

increase power generation in Nigeria through IPPs and is technically, economically, and financially

viable. The importance of the Program to the sector is understood in the context of the privatization

of the sector and meeting government targets to fill the huge power generation gap in the country.

The prohibitive economic and financial cost to Nigeria from the lack of reliable power supply is an

important mitigation measure for sustainability risk. In fact, the financial cost of electricity demand

that is un-served is estimated to be between N60 to N80/kW, with un-served customers having to rely

on expensive diesel, petrol and LPFO generation. The economic cost is even greater, considering the

loss of output and productivity, the high greenhouse gas emissions, etc. The additional generating

capacity that will be provided by the IPPs to be supported under this Program is therefore necessary

to provide much needed generation to sustain economic growth.

4.4.2 The sector’s well-designed regulatory structure and the so far successful reform, support its

sustainability. The electricity sector reform program in Nigeria is designed to be financially self-

sustainable through sound regulatory policies that are applied to the terms of power purchase

agreements between IPPs and NBET; as well as through the implementation and programmed

reviews, by NERC, of the MYTO II. MYTO II is based on the sector’s revenue requirements and is

aimed at being cost effective and providing financial incentives for needed private investments in the

industry. Finally, it is expected that once there is sufficient comfort in the market, NBET will hand

over PPA obligations to individual DisCos and there will be direct bilateral contract between the IPPs

and the DisCos.

4.5 Risk Management

4.5.1 The ADF PRG will cover risks of non-payment by NBET of amounts due to the IPPs under

the PPA. In this regard, the PRG will backstop the contractual obligations of the FGN owned entity,

NBET, for power delivered by the private investors. Failure by FGN to honor the counter- indemnity

will trigger the Bank Group’s sanctions policy, which mitigates the risk of the Government not

honoring its obligations to the L/C Bank.

4.5.2 NBET may however find itself in a position where it is unable to honor its contractual

obligations to an IPP as stipulated in the PPA, which would trigger a political event that could in turn

have the IPP draw on the L/C and ultimately on the PRG being triggered (if NBET defaults on its

obligation). The major risks involved in this program and proposed mitigation measures are discussed

in Table 4.1 below. Table 4.1 – Risks and Mitigation Measures

Risk Description Mitigation

Risks that would trigger a call on the PRG

1 Poor financial standing of NBET

due to financial mismanagement

and inadequate working capital

NBET is being initially capitalised by FGN with

approximately USD 820 million via three channels (i)

a capital supplement from 2013 FGN budget

16

which leads to the Partial Risk

Guarantee (PRG) being called.

appropriations of USD 145 million (ii) USD 350

million from FGN’s Eurobond issuance and (iii) USD

325 million from the Egbin Power Plant sale escrow

account. In addition NBET will benefit from liquidity

enhancement of approximately (i) USD 150 million on

a monthly basis from distribution company

receivables and (ii) USD 450 million from guarantees

covering 3 months of power purchases from

distribution companies.

2 Risk that payments are made by

ADF to L/C bank following trigger of PRG without the ability to

recover funds from NBET

FGN will provide a counter indemnity to the ADF

under which it agrees to reimburse the ADF on demand for any payments made under the PRG.

Furthermore, under the reimbursement and credit

agreement, there will be a defined reimbursement

period, whereby the Fund will closely monitor

NBET’s ability to reimburse the L/C.

3 Risk that FGN fails to meet its

obligation to the ADF Group under

the PRG

A default of FGN under the terms of the PRG will have

cross-default implications for all FGN’s obligations

with the AFDB Group. Debt sustainability analysis

carried out in 2012 by the Nigerian authorities and the

IMF/World Bank indicates that Nigeria remains at low

risk of debt distress. The authorities are adopting

measures to reduce the degree of rising domestic indebtedness through measures such as the use of a

sinking fund and increased issuance of medium to

long-term external debt.

4 Billing and collection risks due to

inability of distribution companies

to collect revenues from end-users

and lack of appropriate metering

systems.

Distribution companies have been privatised which

should give them a greater economic incentive to

collect revenues due to them and install appropriate

metering systems. NBET will have the contractual

right to partially curtail or withhold energy deliveries

to distribution companies in the event of nonpayment

which should incentivize distribution companies to

pay their bills.

Furthermore, NBET will benefit from liquidity

enhancement of approximately (i) USD 150 million on a monthly basis from distribution company

receivables and (ii) USD 450 million from guarantees

covering 3 months of power purchases from

distribution companies.

5 Termination or breach of contract

due to political force majeure

The Bank is working closely with MIGA, who is

considering providing a guarantee for the IPPs in the

pipeline to cover that risk.

Risks that would not trigger a call on the PRG

1 Gas supply risk for gas-fired power

generating plants due to security

concerns and pipeline vandalism in

the Niger Delta region, or inability

of established gas producers to

supply gas.

Such risk would not trigger a call on the PRG,

however, security of gas supply from the Niger Delta

remains one of the priorities of the FGN which has

renewed efforts to end militancy in the Delta region

through its support for more inclusive employment

opportunities, increased dialogue with the Niger Delta

activists, more equitable distribution of hydrocarbon

resources and enhanced security operations. Independent power producers are exploring

alternative gas supplies to those provided by

established gas producers. Gas Supply Agreements

will include liquidated damages provisions.

2 Risk that the Transmission

Company of Nigeria (TCN) is not

able to evacuate the power

generated by the IPPs to the DisCos.

Such risk would not trigger a call on the PRG,

however, greenfield IPPs would enter into agreements

with the TCN to construct transmission lines and

substations on a Build Operate Transfer basis to

evacuate power. TCN is also in discussions with FGN

and NERC to improve its financial capability to

17

undertake the capital expenditure required to evacuate

power.

3 Risk of Market Operator being

unable to fulfill its obligations due

to its inability to collect

transmission and other ancillary

charges from distribution

companies

Such risk would not trigger a call on the PRG,

however, the Market Operator is empowered by the

Market Rules to collect a security cover (e.g. .3 billing

periods worth of charges in the transition phase) from

DisCos and disconnect supply if the payments due are

not made.

4 Risk that IPPs generate involuntary

economic or physical resettlement.

The Bank’s due diligence process for each transaction

will identify such issues. The capacity building

trainings on environmental risks assessment will

enable NBET to monitor any such eventuality.

4.6 Knowledge Building

4.6.1 The Program will have a catalytic replication effect, which will come from: (i) significant

leveraging of resources through ADF’s PRG instrument; (ii) possibility of replicating the Program;

and (iii) learning and demonstration, as described below:

a) Catalytic Effect: ADF resources, through this PRG, will crowd in significant amounts

of private sector and other financing.

b) Replication Effect: the Program can be replicated in Nigeria and/or other countries in

African, given the magnitude of the power sector needs in the region

c) Learning and Demonstration: In addition to the catalytic effect of the Program, the

experience gained from processing it has allowed for capacity building and knowledge

creation which will be leveraged within the Bank Group and the broader development

community concerning the use of guarantee instruments to mobilize private sector

financing.

5 LEGAL INSTRUMENTS AND AUTHORITY

5.1 Legal Instrument

5.1.1 The legal instruments for this Program will include:

a) Individual Guarantee Agreements between ADF and each L/C Issuing Bank which sets

out the terms and conditions under which ADF would reimburse the L/C Bank – an

indicative term sheet is provided in Appendix V;

b) Individual or single Indemnity Agreement(s) between ADF and FGN under which FGN

undertakes to indemnify ADF on demand for any payments made by ADF under each

Guarantee Agreement;

c) Individual Project Agreements between ADF and each beneficiary IPP pursuant to which

the IPP agrees to provide relevant project information, comply with applicable laws,

including environmental laws, refrain from making amendments to the underlying project

documents without ADF’s consent, and make certain warranties, representations and

undertakings;

d) Individual Standby Letters of Credit issued by the respective L/C Issuing Banks at the

request of NBET in favor of the beneficiary IPPs; and

e) Individual Reimbursement and Credit Agreements between NBET, FGN and the

respective L/C Issuing Bank under which NBET / FGN undertakes to reimburse the L/C

Bank for amounts drawn under the L/C.

f) ADF loan agreement to the Federal Republic of Nigeria;

5.2 Conditions for Bank Intervention

A. Condition Precedent to Effectiveness of each Guarantee Agreement

18

5.2.1 The Guarantee Agreement shall become effective upon fulfilment of the following conditions,

as well as other conditions to be determined on a case-by-case basis for the specific IPP transaction:

(i) Execution, delivery and effectiveness of the following agreements:

a. the Indemnity Agreement between ADF and FGN under which FGN undertakes to indemnify

ADF on demand for any payments made by ADF under the Guarantee Agreement;

b. the Guarantee Agreement between ADF and the L/C Issuing Bank, which embodies the terms and conditions of the ADF PRG;

c. the Project Agreement between the ADF and the IPP pursuant to which the IPP agrees to

provide relevant project information, comply with applicable laws, including environmental

laws, refrain from making amendments to the underlying project documents without ADF’s

consent, and make certain warranties, representations and undertakings;

d. an undertaking between ADF and IPP relating to payment of the PRG and L/C-related fees;

e. the Reimbursement and Credit Agreement between NBET, FGN and the L/C Issuing Bank

under which NBET / FGN undertakes to reimburse the L/C Issuing Bank for amounts drawn

under the L/C, together with accrued interest;

f. the Standby Letter of Credit from the L/C Bank in favor of the IPP; and

g. the PPA;

(ii) Confirmation from an authorized officer of the L/C Issuing Bank of the satisfaction of all

conditions precedent to the issuance of the guaranteed L/C, other than satisfaction of any

condition precedent therein requiring the effectiveness of the Guarantee Agreement.

(iii)Issuance of original legal opinions to ADF from: (a) the Attorney General of Nigeria in agreed

form relating to the agreements to which it is a party; (b) counsel to NBET relating to the

agreements to which it is a party; and (c) counsel to the IPP relating to the agreements to which

it is a party; and (d) counsel to the L/C Issuing Bank relating to the agreements to which it is a

party.

(iv) Delivery of all environmental assessments and documentation required by ADF, including

evidence that all project affected persons have been compensated or resettled in accordance with

applicable ADF policies, determination by ADF that all relevant parties are in compliance with

applicable ADF requirements, and receipt of all relevant Nigerian environmental approvals.

(v) Payment in full by the IPP (the L/C beneficiary) of all fees then payable. (vi) Other certificates and evidence taking into account the nature of the financing.

B. Condition Precedent to Entry into Force of the Loan Agreement

5.2.2 The loan agreement for the capacity building component shall enter into force subject to

fulfilment by the Borrower of the provisions of Section 12.01 of the General Conditions Applicable

to the African Development Fund Loan Agreements and Guarantee Agreement (Sovereign Entities).

19

C. Conditions Precedent to First Disbursement of the Loan

5.2.3 The obligation of the Fund to make the first disbursement of the Loan for the capacity building

component shall be conditional upon the entry into force of the Loan Agreement and the fulfillment

by the Borrower of the following conditions:

(i) Entry into force of the loan agreement;

(ii) Evidence of having opened a USD special account and a Naira special account with a bank(s)

acceptable to the Fund for the deposit of the proceeds of the Loan.

5.3 Compliance with Bank Policies

5.3.1 This Program complies with all applicable Bank policies, in particular with the Strategic

Framework and Operational Guidelines for the African Development Fund Partial Risk Guarantee

Instrument.

6 RECOMMENDATION

Management recommends that the Board of Directors approve: (i) the proposed ADF Partial Risk

Guarantee of UA 30 million to the Federal Government of Nigeria for the proposed PRG having a

total face value amount of UA 120 million (approximately USD 180 million); (ii) an increase of the

commitment capacity of the Fund by seventy-five per cent (75%) of the face value of each guarantee

extended in accordance with the Strategic Framework and Operational Guidelines, and an increase in

the commitment capacity of the Fund to take account of currency fluctuations between the amount of

the Fund’s commitment currency of the PRG (UA) and the amount of the currency of denomination

of each PRG; and (iii) the proposed ADF Loan of UA 2 million to the Federal Government of Nigeria,

subject to the conditions stipulated in this report. The Board is also invited to note that Management

anticipates returning to the Board for the approval of further amounts for additional tranches of the

Program from ADF 13 resources and/or other funds as requested by the FGN and available.

Appendix I: Nigeria’s Comparative Socio-Economic Indicators

Indicators Unit 2000 2008 2009 2010 2011 2012 2013 (e)

National Accounts

GNI at Current Prices Million US $ 33,396 176,279 179,206 185,355 194,965 ... ...

GNI per Capita US$ 270 1,170 1,160 1,170 1,200 ... ...

GDP at Current Prices Million US $ 46,386 211,590 175,097 228,351 243,849 287,803 337,056

GDP at 2000 Constant prices Million US $ 46,386 94,561 101,141 109,210 117,324 125,085 133,511

Real GDP Growth Rate % 6.3 6.0 7.0 8.0 7.4 6.6 6.7

Real per Capita GDP Growth Rate % 3.8 3.4 4.3 5.3 4.8 4.0 4.1

Gross Domestic Investment % GDP 20.4 8.2 11.6 11.6 10.3 9.2 8.8

Public Investment % GDP 9.5 2.4 2.9 5.0 3.5 2.4 2.0

Private Investment % GDP 10.9 5.7 8.7 6.6 6.8 6.8 6.8

Gross National Savings % GDP 32.4 36.1 36.9 28.9 25.7 25.7 24.6

Prices and Money

Inflation (CPI) % 6.9 12.0 12.0 13.6 10.9 12.0 9.7

Exchange Rate (Annual Average) local currency/US$ 101.7 118.5 148.9 150.3 154.7 156.8 ...

Monetary Growth (M2) % 48.1 53.8 20.0 4.2 8.1 ... ...

Money and Quasi Money as % of GDP % 22.0 35.6 41.1 32.5 32.0 ... ...

Government Finance

Total Revenue and Grants % GDP 42.1 26.9 18.1 21.0 27.3 29.2 28.8

Total Expenditure and Net Lending % GDP 36.2 30.6 27.9 25.8 27.5 25.4 24.4

Overall Deficit (-) / Surplus (+) % GDP 5.9 -3.8 -9.8 -4.8 -0.1 3.7 4.4

External Sector

Exports Volume Growth (Goods) % 18.8 -4.7 2.8 6.6 -8.2 5.6 3.8

Imports Volume Growth (Goods) % -21.4 15.0 1.4 29.1 10.4 12.8 2.9

Terms of Trade Growth % 24.4 11.2 -16.4 9.9 9.0 28.4 6.8

Current Account Balance Million US $ 5,786 78,323 53,164 4,094 7,844 29,895 39,787

Current Account Balance % GDP 12.5 37.0 30.4 1.8 3.2 10.4 11.8

External Reserves months of imports 8.3 9.8 10.7 6.1 4.9 6.0 ...

Debt and Financial Flows

Debt Service % exports 6.9 0.7 0.9 0.6 0.3 0.5 0.5

External Debt % GDP 65.2 2.1 2.3 2.3 2.4 2.3 2.1

Net Total Financial Flows Million US $ -1,994 2,551 4,002 1,310 4,375 ... ...

Net Official Development Assistance Million US $ 174 1,290 1,657 2,062 1,813 ... ...

Net Foreign Direct Investment Million US $ 1,310 8,249 8,650 6,099 8,915 ... ...

Source : AfDB Statistics Department; IMF: World Economic Outlook, October 2012 and International Financial Statistics, October 2012;

AfDB Statistics Department: Development Data Portal Database, March 2013. United Nations: OECD, Reporting System Division.

Notes: … Data Not Available ( e ) Estimations Last Update: May 2013

0.0

5.0

10.0

15.0

20.0

25.0

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

%

Real GDP Growth Rate, 2000-2013

0

5

10

15

20

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Inflation (CPI),

2000-2013

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

2,000

2,001

2,002

2,003

2,004

2,005

2,006

2,007

2,008

2,009

2,010

2,011

2,012

2,013

Current Account Balance as % of GDP,

2000-2013

Appendix II: ADB Portfolio in Nigeria List of projects (loans and grants) by Sector, including those that are not yet disbursement effective, September 2013:

Sub-Sector Number

of

Projects

PP/ PPP IP DO PPR Net Amount

approved (UA)

Share of

Portfolio

Average

Age

(years)

Amount

disbursed (UA)

Disburse-

ment

rate

Average

annual

disbursement

(UA)

Average

annual

disburse

ment

Date

approved

Closing

Date

AGRICULTURE 4 96,900,000 16% 6.4 43,788,405 45.2% 7,372,474 7.6%

National Fadama Development Project (NFDP) 2.14 2.75 2.28 22,000,000 9.1 17,768,556 73.1% 1,762,535 8.0% 12/10/2003 12/30/2012

Community based - Agricultural & Rural Development Project

(CBARDP)

2.36 2.67 2.22 13,000,000 9.4 12,403,913 87.8% 1,218,295 9.4% 9/11/2003 12/31/2012

Support to the National Program for Food Security (SNPFS) 2.43 2.75 2.50 22,000,000 6.3 10,789,403 34.7% 1,217,231 5.5% 10/18/2006 12/31/2013

CGIAR: SUPPORT TO AGRICULTURAL RESEARCH FOR

DEVELOPMENT OF STRATEGIC CROPS IN AFRICA (SARD-

SC)

39,900,000.0 0.9 2,826,533 7.1% 3,174,413 8.0% 3/18/2009 12/31/2013

INFRASTRUCTURE 8 441,000,000 75% 4.5 137,208,440 31.1% 33,811,232 7.7%

Rural Water Supply & Sanitation Sub-Programmes (RWSS) PPP 2.08 1.75 2.00 51,000,000 5.3 6,838,720 13.4% 1,294,004 2.5% 10/10/2007 12/31/2013

URBAN WATER SUPPLY AND SANITATION PROJECT FOR

OYO AND TARABA STATES (UWSSP)

* 50,000,000 3.4 50,379 0.1% 14,877 0.0% 9/2/2009 4/30/2016

ZARIA WATER SUPPLY AND SANITATION PROJECT

(ZWSSP) - Loan Signed in July 2013

* 63,920,000 1.0 - 0.0% - 0.0% 2/8/2012 12/31/2017

ECONOMIC AND POWER SECTOR REFORM PROGRAM

(EPSERP)

* 100,000,000 3.2 67,000,000 67.0% 20,724,576 20.7% 10/28/2009 12/31/2013

Rural Access and Mobility Project (RAMP) 2.57 3.00 2.67 35,270,000 5.5 16,723,253 36.0% 2,302,654 6.5% 7/18/2007 12/31/2013

Capacity Building for PPP in Infrastructure Project 2.57 3.00 2.67 21,800,000 1.9 - 0.0% - 0.0% 3/13/2011

Capacity Building Programme for the Supervision of Aviation

Safety in West & Central Africa (COSCAP)

PPP 2.1 2.0 2.1 4,600,000.0 7.7 2,405,610.3 40.5% 240,689.9 5.2% 4/27/2005 12/30/2012

TRANSPORT FACILITATION PROGRAMME FOR THE

BAMENDA-MAMFE-ABAKALIKIENUGU

CORRIDOR - Nigeria (NCH&TFP)

PPP 2.1 3.0 2.3 98,250,000.0 4.2 44,944,520.7 41.2% 9,747,022.6 9.9% 11/25/2008 12/31/2014

TRANSPORT FACILITATION PROGRAMME FOR THE

BAMENDA-MAMFE-ABAKALIKIENUGU

CORRIDOR - ECOWAS (NCH&TFP)

PPP 2.1 3.0 2.3 16,160,000.0 4.2 392,246.0 1.0% 39,365.1 0.2% 11/25/2008 12/31/2014

MULTI SECTOR 1 10,000,000 2% 8.3 7,873,460 78.7% 946,891 9.5%

ECOWAS Peace and Development Project (PADEP) PPP 2.1 2.3 2.2 10,000,000.0 8.3 7,873,459.8 78.7% 946,890.6 9.5% 9/29/2004 12/30/2012

SOCIAL SECTOR 2 37,000,000 6% 5.7 16,180,788 43.7% 2,235,826 6.0%

Skills Training and Vocational Education (STVEP) PPP 2.08 3.00 2.25 30,000,000 7.5 12,403,913 36.2% 1,451,750 4.8% 7/27/2005 11/30/2013

SUPPORT TO NETWORK OF REGIONAL AFRICAN

INSTITUTIONS OF SCIENCE AND TECHNOLOGY (AUST &

2iE) PROJECT

2.2 3.0 2.4 7,000,000.0 3.8 3,776,874.6 43.1% 784,076.0 11.2% 3/18/2009 12/31/2013

ENVIRONMENT 1 5,240,000 1% 2.1 27,314 0.5% 1,078,659 20.6%

Lake Chad Basin Sustainable Development Programme /

Programme de développement durable du Bassin du Lac

Tchad (PRODEBALT).

2.3 3.0 2.4 5,240,000.0 4.1 27,313.6 0.5% 1,078,659.1 20.6% 12/12/2008 12/31/2015

TOTAL PUBLIC SECTOR 16 590,140,000 100% 5.1 205,078,407 34.8% 45,445,081 7.7%

Legend: IP = Implementation Progress

DO = Development Objectives

PPR = Project Performance Rating

PP = Problematic Project ; PPP = Potentially Problematic Project

APPENDIX III: Similar Projects in Nigeria

Project Title Program Overview Geographic

Location(s)

Start Date &

End Date Total

Allocation

Financing

Mechanism

Focus GON

priorities in

the Power

Roadmap

WORLD BANK

GROUP’s

Nigeria Electricity and Gas

Improvement Project

P106172

The development objectives of the Electricity and Gas

Improvement Project for Nigeria is to: (i) improve the

availability and reliability of gas supply to increase power

generation in existing public sector power plants; and (ii)

improve the power network's capacity and efficiency to

transmit and distribute quality electricity to the consumers.

There are three components to the project: 1) risk mitigation

through a series of Partial Risk Guarantee (PRGs) in

support of gas supplies to increase power generation from

existing public sector power plants; 2) enhancement of

transmission and distribution infrastructure. This

component will reinforce of distribution networks to

increase electricity supply in selected cities including Kano,

Kaduna, Eko, Ikeja, Ibadan, Abuja, Benin, Port Harcourt,

Yola, Jos; and Enugu. 3) Technical advisory services.

Provision of logistical support and technical advisory

services required to sustain ongoing reforms undertaken by

the recipient to improve the performance of its power sector

including: a) design of gas infrastructure and transmission

and distribution systems needed to handle expected

increases in power supply; and b) formulation and

execution of community outreach activities.

National

June 16, 2009

to December

31, 2017

$200 million

Specific

Investment

Loan

Transmission

and

Distribution

of Electricity

Improve the availability and reliability of gas supply to increase power generation in existing

public sector power plants; and improve the power networks capacity and efficiency to transmit and

distribute quality electricity to the consumers.

Appendix IV: Map of Project Area

Note: This map was produced by the Map Design Unit of the World Bank.

Appendix V: Indicative Term Sheet

AFRICAN DEVELOPMENT FUND

INDICATIVE TERMS AND CONDITIONS OF

AN ADF PARTIAL RISK GUARANTEE

This Summary Terms and Conditions does not constitute an offer or commitment to provide the

envisaged guarantee, and as such any commitment would be pursuant to internal approvals,

conclusion of due diligence and successful negotiation of definitive legal documentation. The

terms and conditions outlined below are not a comprehensive statement of all applicable terms

and conditions that would be contained in the definitive legal documentation for the guarantee

facility and the transaction contemplated herein, but are an indicative summary of the

proposed guarantee structure normally required by the African Development Fund (ADF) for

similar types of transactions.

ADF PARTIAL RISK GUARANTEE (ADF PRG)

PURPOSE: The ADF PRG will backstop the failure by the L/C Applicant to

reimburse the L/C Bank amounts drawn by the L/C Beneficiary

under the L/C following the occurrence of a Guaranteed Event

(as defined below).

L/C APPLICANT: Federal Republic of Nigeria (FGN)

GUARANTEED L/C: Revolving Standby Letter of Credit (L/C) issued in favor of the

L/C Beneficiary by the L/C Bank at the request of Nigeria Bulk

Electricity Trader (NBET) and FGN to backstop NBET and

FGN payment obligations under a signed power purchase

agreement (PPA) entered into between NBET and an approved

Independent Power Producer (IPP). NBET and FGN obligations

include to reimburse the L/C Bank amounts drawn under the

L/C, up to a maximum amount equivalent to [TBD, will vary per

IPP], will be guaranteed by the ADF. Any amounts drawn by

the L/C Beneficiary that are reimbursed by NBET/FGN to the

L/C Bank within the L/C Reimbursement Period will be

reinstated as described below.

L/C BENEFICIARY: An approved IPP

L/C BANK: A commercial bank with an international long-term foreign

currency investment grade rating by one of Standard & Poor’s or

Moody’s Investors Services, acceptable to ADF, FGN/NBET

and the L/C Beneficiary, that is selected through a competitive

bidding process.

GUARANTEED EVENT: FGN/NBET’s failure to comply with its payment obligations

under the Reimbursement Agreement.

MAXIMUM L/C

AMOUNT: [TBD]

CURRENCY: [TBD]

L/C TERM: The validity period of the L/C will be [TBD – will depend on

project life of each approved IPP], or as agreed with the L/C

Bank.

L/C FORM: In a form satisfactory to ADF, FGN/NBET and the L/C

Beneficiary.

L/C BANK INTEREST: An appropriate spread above [TBD -relevant base rate] to reflect

ADF risk, and acceptable to the L/C Beneficiary and

FGN/NBET, and agreed by ADF.

L/C REIMBURSEMENT

PERIOD: Following a drawing on the L/C by the L/C Beneficiary, FGN /

NBET will be obligated to reimburse the L/C Bank the amount

drawn, plus accrued interest thereon, within [TBD] of the

drawdown (L/C Reimbursement Period) in accordance with

the terms of the reimbursement and credit agreement to be

entered into between the L/C Bank and the L/C Applicant

(Reimbursement Agreement).

If the L/C Applicant reimburses the L/C Bank before the expiry

of the L/C Reimbursement Period, the L/C will be reinstated by

the amount so reimbursed.

CALL ON ADF PRG: If the amount remains unreimbursed following the expiry of the

L/C Reimbursement Period, the L/C Bank will have the right to

call on the ADF PRG for an amount equal to the amount drawn

under the L/C and not reimbursed by the L/C Applicant plus

accrued interest, if any, due. Any amount paid by ADF to the

L/C Bank under the PRG will be deducted from the ADF

Guaranteed Amount. Even if the FGN/NBET’s payment default

is remedied, following a payment under the ADF PRG, the

amounts paid by ADF will not be reinstated to the ADF

Guaranteed Amount.

PROVISIONAL

PAYMENTS: In the event of a dispute between the L/C Beneficiary and the

L/C Applicant in connection with a Guaranteed Event, the L/C

can be drawn for provisional payments pending the settlement of

the dispute, provided that the L/C Beneficiary provides security

to FGN/NBET in the full amount of the provisional payment in

the event the final dispute settlement determines that

FGN/NBET had no liability or its liability was for less than the

amount of the provisional payment.

ADF GUARANTEED

AMOUNT: [TBD – will depend on the amount allocated to the approved

IPP]

ADF PRG GUARANTEE

PERIOD: [TBD – will depend on the project life of each approved IPP]

ADF PRG FEES:

Guarantee Fee: 0.75% per annum on the ADF Guaranteed

Amount, payable six monthly in advance, by the L/C Beneficiary

to ADF.

Front-End Fee: 1% of the ADF Guaranteed Amount payable by

the L/C Beneficiary to ADF prior to the effectiveness of the ADF

Guarantee Agreement.

Stand-By Fee: 0.50% per annum and will be charged on the face

value of undrawn portion of the Guaranteed Amount

External Legal Counsel Fees: In the amount agreed between

the external legal counsel, the L/C Beneficiary and ADF, and

payable by the L/C Beneficiary directly to external legal counsel.

L/C BANK FEES: To be payable by the L/C Beneficiary to the L/C Bank and

determined through a competitive bidding process.