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Energy

Nigeria’s debt sentence: The burden of the Port Harcourt refinery

Deciding to spend $1.5 billion to rehabilitate a refinery that has sunk so much is definitely a miss for the government.

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Only a couple of days ago, Fitch Ratings released its credit ratings for Nigeria, placing Nigeria at a “B” rating. For many who may not understand, a Fitch “B” rating signifies a degrading financial situation and highly speculative financial market in the country in question.

Fitch carries out sovereign credit ratings to determine a country’s ability to meet its debt obligations. Its ratings equally help to provide investors with insight into the level of risk associated with investing in a particular country. What a “B” rating does for Nigeria is signal to investors that risk levels are high, which in turn makes them either take their funds to less speculative markets or require excessive risk protection when investing in Nigeria. Consequently, the cost of funding government projects increases.

READ: NNPC reveals condition given by lender to fund PH refinery rehabilitation

About a day before the rating was released, Nigeria’s Federal Executive Council approved $1.5 billion for the rehabilitation of the Port Harcourt refinery, a refinery that was part of the trio on which the NNPC spent $396.33 million between 2013 and 2017, with no apparent result achieved. In 2019, the refineries were also reported to have lost N167 billion in a consecutive 9-month period, with Port Harcourt refinery alone losing N33.31 billion as it idled away for at least 7 months.

The confusion surrounding the means by which this proposed rehabilitation would be funded, is worrying. In Q4 2020, the Group Managing Director of the NNPC, Mele Kyari affirmed that Nigeria will work through public-private partnerships to upgrade the refineries. 

Speaking during an interview on Arise TV, Kyari said, “The end result will look more like the NLNG model with clear involvement from the private sector. This is not just another promise.”

He further acknowledged during an interview on Arise TV, that the government had failed at making the refineries work over the past 25 years and with respect to the Port Harcourt refinery, admitted that the NNPC knows that “the problem is securing financing.”

READ: FG holds ground breaking ceremony of Narrow gauge, deep seaport

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In mid-February this year, the Federal Government proposed selling off at least 34 national assets including the refineries, to raise money to finance the budget, an unsurprising move since the country was to spend at least 24% of its 2021 N13.5trn ($35.7bn) budget on debt servicing.

It was also going to raise an additional N4.28trn in new borrowings to fund the budget, pushing its public debt to about N35trn over a four-year period, which the Minister of Finance, Budget and National Planning, Zainab Ahmed, recently revealed will hit N38trn by December 2021.

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Strangely, the same government has approved $1.5 billion that it undoubtedly cannot afford, to fund a project that it has consistently failed at. With an existing deficit in the budget, there is no doubt that the funding for this project will come from more borrowing, either domestic or foreign.

READ: Three Nigerian tier-1 banks get new Fitch Rating

The problem with either of these borrowings is that they sink Nigeria further down a rabbit hole. With excessive domestic borrowing, there is a danger that the Central Bank of Nigeria (CBN) may be unable to curtail inflation if the pattern continues.

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Fitch, in its most recent rating, expressed concern about this, noting that the government had borrowed up to N13.2 trillion from the CBN between 2015 and 2020, constituting 8.6% of the country’s GDP. Also, excessive foreign borrowing and unsustainable debt servicing from internally generated revenue will raise macro-economic risks significantly.

Deciding to spend $1.5billion to rehabilitate a refinery that has sunk so much money – whether in corruption and embezzlement or actual spending – without any meaningful achievement, is certainly a step in the wrong direction.

Former Vice President, Atiku Abubakar, has referred to the government’s decision as “an unwise use of scarce funds.” It is particularly distressing because when such funds are allocated to an infrastructure for which prior monies spent have not been accounted for, the possibility for mismanagement is high.

READ: FG discloses how it hopes to fund the $1.5 billion rehabilitation of Port Harcourt refinery

With the allocation for total debt servicing in the 2021 budget amounting to more than the sum of the allocations to education and healthcare, Nigeria is taking from its critical sectors to fund its irresponsibility.

No surprise Fitch ratings highlighted that the rating for Nigeria is constrained by “particularly weak fiscal revenue, comparatively low governance and development indicators, high dependence on hydrocarbons and continued weak growth and high inflation.”

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A public-private partnership is what the refinery needs – A Build-Operate-Transfer (BOT) model will suffice, as the country will take on no debt, but be able to benefit from private sector financing and experience.

Floating an Incorporated Joint Venture to manage the refinery with private sector participation and a sturdy corporate governance framework is also a viable alternative not just for the Port Harcourt refinery, but other energy infrastructure in the country.

While doing this, the country should work tenaciously to diversify its revenue base, obliterate irrational spending habits like the Port Harcourt refinery allocation and move away from hydrocarbon dependence, while seeking to unify the multiple exchange windows.

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Caleb Adebayo is an LLM Candidate, Energy and Environmental Law at New York University School of Law. His interest lies at the intersection of Energy, Environment and Finance and he is keen on the interplay between Law, Policy and Energy Markets. Prior to taking up his LLM, he worked on the Energy team of a tier 1 Nigerian law firm. A nominee for The Future Awards Prize for Lawyers, he has written widely on the subject of Energy and Environmental Law. He is also a member of the New York City Bar Energy Subcommittee

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    Business News

    Power Minister explains why power outages have risen

    The Minister cited a breakdown of some National Integrated Power Plants supplying electricity to the national grid as being behind the recent power outages.

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    The Minister of Power, Engr. Sale Mamman explained why power outages have increased in Nigeria citing a breakdown of some National Integrated Power Plants supplying electricity to the national grid.

    The Minister disclosed this in a statement on Thursday morning, assuring Nigerians that the FG is working assiduously to restore the National grid to its previous historical levels and exceed that.

    READ: Despite $1.6bn investments, Nigeria’s national grid still worrisome

    What the Minister is saying

    • I sincerely regret the recent power outages across the Nation and the difficulties it has brought with it.
    • The problem is caused by the breakdown of some National Integrated Power Plants supplying electricity to the national grid. The plants are namely, Sapele, Afam, Olonrunsogo, Omotosho, Ibom, Egbin, Alaoji and Ihovbor. The Jebba Power Plant was shut down for annual maintenance.

    The Minister added that seven power plants are currently experiencing gas constraints including Geregu, Sepele, Omotosho, Gbarain, Omuku, Paras and Alaoji while Shiroro hydroelectric power plant has water management issues.

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    Business News

    BUA Group, French company announce progress in 200,000 bpd refinery project

    This is coming about 6 months after both firms signed an agreement for the supply of process technologies and the design of the facility.

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    The BUA Group and Axens, a French-based petroleum technology company, have both signed a progress acknowledgement statement for the proposed BUA multi-billion-dollar integrated 200,000 barrels per day refinery in Akwa Ibom State.

    This is coming about 6 months after both firms signed an agreement for the supply of process technologies and the design of the facility.

    BUA, while making the disclosure in a statement on Wednesday, April 14, 2021, said that the French President, Emmanuel Macron, commended its Chairman, Abdul Samad Rabiu, for his commitment to developing lasting relationships between French and Nigerian businesses.

    READ: What the $1.5 billion Port Harcourt refinery deal means to us – Maire Tecnimont

    The statement said that this came as the French Minister for Foreign Trade and Economic Attractiveness, Franck Riester, paid a visit to the BUA Group Headquarters in Lagos where he handed over a personal invitation from Macron to Rabiu to attend the Choose France Summit in June in Paris representing business leaders from Nigeria and Africa.

    The French minister also witnessed the signing of a progress acknowledgement statement between BUA Group and Axens of France for the proposed refinery project, according to the statement.

    The statement also said that during the visit, it was announced that the BUA chairman had been appointed Chairman of the France Nigeria Investment Club.

    READ: FG reacts to reports of revoking 32 refinery licenses

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    While thanking the minister and Macron for their unwavering support in bringing BUA and French businesses together, Rabiu said BUA had so far initiated partnerships and had developed personal relationships with a few French businesses, including Axens.

    He expressed confidence in the quality of expertise and technical know-how of the French companies BUA had partnered with.

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    Rabiu pointed out that the BUA refinery would reduce the huge cost of transporting Nigerian crude offshore, refining it and bringing it back into the country when fully operational.

    READ: Abdulsamad Rabiu’s stake in BUA Cement has increased by N1.2 trillion in value since listing in 2020

    He said that the choice of Akwa Ibom for the refinery was due to the huge availability of raw materials and its proximity to export petroleum products to regional countries.

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    The President of Axens, Jean Sentenac, in his statement, said he was pleased that the project was advancing on schedule and expressed delight for the very good cooperation between all the involved parties, reiterating the commitment of Axens in delivering the BUA Refinery Project on time and with the highest standards.

    READ: FG to open LPG distribution channels in all local governments

    Bottom line

    The completion and take-off of the refinery owned by the BUA Group would come as a huge boost for the Federal Government’s effort to stop the importation of refined petroleum products, ensuring that the country becomes a net exporter of these products.

    This will also help to conserve the scarce foreign exchange as the completion and take-off of the Dangote refinery and other similar refinery projects will help ensure self-sufficiency in the country.

    The BUA Group, just a few days ago, was listed as one of the companies with an active refinery license from the Department of Petroleum Resources (DPR).

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