African Development Fund (ADF) gives $184.2 to cover political risk in Nigerian Power Sector Privatisation

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The Board of Directors of the African Development Bank Group (AfDB) (http://www.afdb.org) approved an African Development Fund (ADF) Partial Risk Guarantee (PRG) program of US $184.2 million¹ , and an ADF loan of US $3.1 million, for capacity building, to support the Nigerian power sector privatization program.

  

The PRG program in Nigeria aims to increase the country’s electricity generation by catalyzing private sector investment and commercial financing in the power sector through the provision of PRGs. The PRGs will mitigate the risk of the Nigeria Bulk Electricity Trading Plc (NBET), a Federal Government of Nigeria entity established to purchase electricity from independent power producers (IPPs), not fulfilling its contractual obligations under its power purchase agreements with eligible IPPs. This in turn will increase the comfort level of private sector financiers and commercial lenders investing in the Nigerian power sector privatization program.

Following the Board’s decision, the Director of the AfDB’s Energy, Environment and Climate Change Department, Alex Rugamba, explained the potential impact of the program: “An effective and steady power supply is critical to the sustainability of Nigeria’s development path. The Board’s decision today will allow the AfDB to support the Nigerian Government’s efforts to reform the power sector and position the country for sustainable and inclusive growth.”

Over the long term, the Nigerian PRG program is expected to lead to increased productivity, economic activity and growth, and reduced poverty. In the short to medium term, the project will yield an increase in the maximum electricity supply and consumption per capita.

According to government statistics, power outages cost Nigeria about three per cent 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 per cent currently to 50 per cent by 2016).

Nigeria, in its development objective to rank amongst the top 20 economies of the world by the year 2020, targets an ambitious 40,000 MW of electricity generation, which represents more than half of the current installed capacity on the African continent. With a population surpassing 160 million, its current maximum electricity generation capacity – approximately 5,500 MW – is inadequate to meet demand estimated at 10,000 MW. 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.

This is the second ADF PRG issued by the Bank in less than two months after the one in support of the Lake Turkana Wind Project in Kenya. The AfDB’s innovative approach for crowding-in private financing for infrastructure investments with the guarantees will have a catalytic and replication effect in Nigeria and more broadly in Africa.

The ADF PRG is a political risk mitigation instrument that covers private lenders and investors against the risk of the government or government-owned entity failing to meet its contractual obligations to a project. Since 2004, the AfDB has made African Development Fund PRGs available to catalyze private investment in middle-income countries. With the introduction of the ADF PRG in 2011, it has offered the financial instrument to low-income countries as well.