AZITO, Côte d’Ivoire The project, the essence of which was the creation of the 288 MW power plant, and 225 kV transmission system was financed in 1999 and was repaid in just 12 years. It is considered to be the first private infrastructure project in Sub-Saharan Africa of such scale (not taking South Africa into consideration) to get not only a private commercial bank term loan but also receive it on a non-resource basis. The guarantees were provided by the International Development Agency with participation of multilateral agencies. In 2022 the process of expansion through transformation of a single-cycle to a combined-cycle power plant took place though for over 20 years past its construction it has been considered the largest thermal power plant and a model for the similar projects in the area. Description of financing. Sources of finance sponsors' equity A loan from the International Finance Corporation (IFC) B loan from the IFC commercial banks with an IDA guarantee Commonwealth Development and bilateral agencies subordinated debt cash from operations Source: created by the author The project sponsor is Cinergy, a company owned by ABB Energy Ventures, a subsidiary of the ABB Group; Industrial Promotion Services, the local arm of the Aga Khan Fund for Economic Development; and Éléctricité de France Internationale. The ABB Group operates worldwide in power generation, transmission and distribution: automation; oil, gas and petrochemicals; industrial products and contracting, financial ser- vices; and rail transport. EDF joined the partnership at a late stage of concession negotiations. It was expected to benefit the project through its prior experience in Côte d'Ivoire, including ownership interest and participation in the management of CIE and CIPREL To protect part of the project debt against interest rate volatility, the IFC provided a US$32 million interest rate swap to convert its exposure from a floating rate to a fixed rate. History In the 1980s EECI ran into financial difficulty because of overexpansion, droughts, financial mismanagement, the deterioration in the country's economy and problems with collecting bills from other government agencies. The company accumulated significant debt despite levying some of the highest electricity tariffs in the world. At the same time, the poor performance of many other public enterprises, the increasingly competitive international economic environment, and successful experience with a water and sewerage concession granted to a private Ivorian/French consortium led the government to formulate a privatisation program in 1990 and the government signed a 15-year concession for generation, transmission, distribution, export and import of electricity with Compagnie Ivoirienne d'Électricité (CIE), which is owned by a consortium consisting of Bouygues, a major French construction and engineering company that had also been involved in the water and sewer concession; Éléctricité de France (EDF), the French national utility; the government of Côte d'Ivoire; and other Ivorian shareholders. While EECI was to have a continuing and important role as the owner of the assets, directing new investments, overseeing CIE and managing the financial flows of the electricity sector, CIE assumed responsibility for the operation, maintenance and necessary upgrades of the country's generation, transmission and distribution facilities, in return for an exclusive franchise with the ultimate consumers of electricity. The government retained ownership of the gas fields and guaranteed the power sector's take-or-pay contracts with gas producers. It continued to set all fuel and electricity tariffs. CIE was able to turn the system around quickly, improving billing, collections and over- all financial management, and starting to earn a profit within two years. Earnings from the electricity sector in turn helped the government to make overdue payments on its own inter- national debt. Meanwhile, EECI, many of whose staff were transferred to CIE, did not function effectively in its supervisory role. As a result most of its responsibilities were shifted to other government organisations. Success with the CIE concession led the government to increase private-sector participation. Government's objectives To build on the success of the CIE and CIPREL concessions To increase the number of electricity producers To encourage greater private participation To upgrade the country's infrastructure without adding a burden to the government budget Accordingly, the Azito project was designed as a competitively tendered concession from the government that would be financed in part from private commercial banks, alongside the multilateral agency banks. The government also had a number of broader objectives, such as increasing generation capacity, extending access to more rural areas and benefiting the environment through the use of a clean-burning fuel such as natural gas. Bidding and concession process The government launched an international competitive bidding process in November 1996. There were four bidders: AES, Cinergy, Enron and Tractebel. Cinergy won primarily by proposing the lowest electricity tariff. Because of conflicts among the Ivorian regulatory agencies concerned, the concession agreement not signed until September 1998 and the financing was not structured until early 1999. Among the issues that caused the delay were the lack of a formal legal structure for build-operate-transfer (BOT) contracts and the routing and financing of the transmission line. Throughout the world contractors negotiating to become the first independent power producer (IPP) in a given country have introduced legal issues neither covered by local law nor even seen before by local government authorities. In the course of the Azito project negotiations, the issues included the use of project assets for collateral and the availability of inter- national arbitration in the event of a project dispute. Legal issues related to the concession included structuring power sector revenues and preventing dilution of Azito project cash flows as a result of subsequent project approvals. The cash-flow system of ranking was reviewed to give IPPs and gas suppliers equal pro rata treatment, and gave private participants in the sector priority over government agencies, in order to allay investors' and lenders' payment risk concerns. To protect the interests of existing power projects the government pledged not to approve new projects unless they met the following coverage ratio: total power sector revenues less fees paid by the government to CIE were to be no less than 1.3 times payments to fuel suppliers and IPPs. If the power sector did not meet this ratio, payments to new entrants would be subordinated to amounts due to existing power plants and fuel suppliers. The government modified the tariff structure to improve the financial viability of the power sector. In doing so, it tightened the eligibility requirements for subsidised power, making sure that the subsidies were restricted to lowincome users. Under the original plan, the transmission line was to cross heavily populated areas. After objections from the IFC and others, it was rerouted. The government originally planned to finance the transmission line but could not find a source of funding. As a result, the trans-mission line was financed along with the power plant by the public/private international banking syndicate. After the concession contract was signed in 1998, the joint arrangers started to work on a financing for just the power project. Then the government expanded the scope of the financing to include the transmission line. At financial closing Cinergy would on-lend funds for the transmission line to the government, which would be responsible for the construction of the transmission line. This required the bankers to do more due diligence and other work to pre- pare the financing documents, and, as a result, delayed the financial closing. Also, from a lender's perspective, it increased the government's obligations and therefore the project's political risk. As a result, the lenders asked for additional multilateral agency protection and were able to negotiate a political risk guarantee from the IDA. The political risk guarantee covers only 15 per cent of the project cost, but 50 per cent of the commercial bank funding. Project risk factors Construction risk is mitigated by a fixed-price, date-certain EPC contract. Operating risk is mitigated by an all-in operations and maintenance (O&M) contract. Gas supply risk pertains to the adequacy of supplies in the offshore fields. All parties agreed that these would be sufficient to supply the Azito project but would have to be re-evaluated in the event of another power project after Azito. Commercial risk, in terms of the respective prices of fuel and electricity, known as the 'spark spread', is assumed by the government. The government has made a commitment to set electricity tariffs at a level that ensures the financial viability of the sector, but it may be politically constrained as to the level of tariffs that it can charge to the ultimate consumers. Country risk includes deterioration of political stability, including an attempted mutiny by a group of soldiers, which escalated into an unsuccessful coup attempt in 2002, and a reduction in the trade surplus due to falling international commodity prices, especially for coffee and cocoa. The current account deficit, which began back in the 1990s due to increased debt service obligations and the suspension of international aid, has worsened due to excessive tax incentives, weak cost controls and extra-budgetary expenditures. The AFD, the IMF and the World Bank suspended the provision of reform-related aid and loans in 1999 and 2000 due to concerns about corruption, poor governance and non-fulfillment of debt service obligations. In conclusion, it should be noted that the country-specific economic risk associated with the Azito energy project is a more alarming factor than when the financing of the project was organized in 1999, but it is, of course, mitigated by the participation of multilateral institutions. The lenders see the IDA's political risk guarantee as not just political risk cover, but a commitment by the World Bank Group to monitor the project and encourage the gov- ernment of Côte d'Ivoire to meet its commitments; and Azito will test the agency's leverage in fulfilling that role. Critical success factors: Côte d'Ivoire's economic policies and growth after its 1994 devaluation and its debt restructuring initiatives gave project sponsors and lenders confidence in the success of a private project in the power sector. Power needs sufficient to justify a project of Azito's size were clearly demonstrated. The government, Société Générale and the IFC were able to demonstrate to the financial markets that the Ivorian power sector had established economic viability through sound tariffs and financial management. Lenders could see a precedent in the CIE and CIPREL concessions, which were working well. The government was willing to acknowledge the need to develop concession contract laws to cover Azito and future projects. As a result of its recent work in power sector reform, the government had clear notions concerning the role of private participants and social goals such as rural electrification. The government put together a strong team with good technical, financial, managerial and negotiating skills. The IDA partial risk guarantee was critical in attracting commercial lenders to a country that was not yet an established international borrower, but the project financing would have taken less time if the guarantee had been introduced earlier in the negotiating process The joint arrangers, the IFC and Société Générale, had to bridge cultural gaps, but team- work and the complementary skills of the two organisations were essential in designing a loan structure that could be syndicated successfully in the commercial bank market. Among other strengths, the three sponsors brought technical skills, previous experience with similar projects, experience in Côte d'Ivoire, risk-bearing capacity and insurance relationships to the project. The new sectoral cash-flow waterfall was the major structural innovation, establishing a system for power concessions that provides clear risk allocation and sound financial management. Sources: “Azito Power Plant Expansion, Abidjan, Côte d’Ivoire”, https://www.power-technology.com/projects/azito-power-plantexpansion-abidjan/ http://www.azitoenergie.com/fr/aboutus/aboutazitoenergie https://projectsportal.afdb.org/dataportal/VProject/show/P-CI-F00-007 https://web.archive.org/web/20210602181633/https://www.industryabout. com/country-territories-3/1505-cote-d-ivoire/fossil-fuels-energy/22345azito-gas-power-plan https://web.archive.org/web/20221206201057/https://www.powertechnology.com/projects/azito-power-plant-expansion-abidjan/ https://africa-energy-portal.org/news/cote-divoires-azito-power-plantexpansion-attracts-miga-guarantees
