OREANDA-NEWS. January 28, 2010. A government source says that on the basis of the Ministry of Finance and project customer Azerenerji OJSC (country’s national energy operator) it was decided to continue negotiations with the Asian Development Bank (ADB) amd commercial banks.

“This scheme was recognized as the most flexible in connection with lack of political conditions and more efficiency of financing. As a result, WBG’s proposals were automatically postponed,” the source said.

The government has already empowered the MoF and Azerenerjy for negotiations with the ADB about guarantees during commercial financing of the project. In fact, double guarantees (of the Azerbaijani government and ADB) will be given in this case that will reduce seriously rates on commercial loans.

“The Ministry and Azerenerji also pointed out that they have been enjoying ADB consultations when choosing commercial banks,” the source said.

Commercial loans will cover the balance of demanded financing above the 134 million euro loan of the Islamic Development Bank (IDB), the loan agreement with which was signed and endorsed and expected loans from OPEC Fund (OFID) and Abu Dhabi Fund for Development for US 20 million and US40 million respectively.

Besides IDB, the World Bank Group (WBG), the ADB and Arab countries’ funds ADFD, OFID, and the Kuwaiti Fund for Arab Economic Development (KFAED) claimed for financing the project in 2010.

The Finance Ministry and project customer Azerenerji should only choose the financing party.

WB was ready to grant a loan of up to US 150 million in the form of loan in a form of guarantee if the government finds it more profitable.

Earlier, the IDB approved allocation of 134 million euro for the project, while ADB keeps on preparing guarantee support for the project.

ADB intends to provide them and gives consulting support to Azerenerji OJSC in the process of choice of commercial banks from which financing will be drawn under ADB guarantees. The current process of selection of the banks is being conducted Azerenerji and the Ministry of Finance.

The guarantee support, considered by the sides, is a pilot project of private sector support for both the ADB itself and other banks with rating of no less than AAA.

Guarantee support for Azerenerji OJSC (Azerbaijan State Electric Company) is going to be the first experience of such kind for the ADB in the region of the South Caucasus.

The guarantees given by the ADB without governmental guarantee will allow Azerenerji to raise finances for its station project under rates to be less than even if the Company received guarantees of the Azerbaijani government. Another advantage for Azerenerji is a fact that guarantees relate to out-balance commitments, i.e they will not tell on Azerenerji’s balance and its credit burden.

ADB’s guarantees along with a loan of the Islamic Development Bank (IDB) will allow full financing of Canub project.

ADB scheduled approval of Guarantee Support Project on Canub the third week of December 2009. Guarantee support is estimated at US 124 million as ordinary credit resources of the bank.

ADB points out that energy is a vitally important contribution to support of economic growth in Azerbaijani non-oil sector of manufacture and services. The power sector, along with the oil sector, plays a leading role in Azerbaijani social and economic growth forming one third of gross domestic product (data for 2007).

At the same time efficiency of power generation capacities reduced because of shortage of funds for rehabilitation and creation of additional capacities.

Low power efficiency of generation and high losses of transmission and distribution lead to wastage of fossil fuels that could be exported, and nearly double emissions of greenhouse gas and other pollutants that damage to regional and global environment.

Shirvan thermal power plant is the second biggest plant in Azerbaijan. Commercial operation of the plant started in 1962. The installed capacity is 1,050 megawatts (MW) but available capacity 800 MW and average operational efficiency is 27%.

The replacement of Shirvan thermal power plant is one of the highest priorities of the power generation program of the Azerbaijani government. The new plant will increase significantly efficiency and achieve in saving funds. Taking into account considerable benefits from saving fuel consumption, the government wishes to complete the project at a growing rate and started realizing the project in 2007.

The Canub Thermal Power Plant (Project) will be located close to the existing facility to take advantage of the existing infrastructure. The plant is expected to have installed capacity of 760 MW and average efficiency of 42%. The Project is financially and economically viable.

Azerenerji, the state-owned enterprise responsible for power sector development in Azerbaijan, carried out half of the Project cost through commercial bank loans with state guarantee in 2008 (Phase 1 financing).

The project has been launched, however, because of the global financial crisis, long-term financing needed to complete the Project (Phase 2 financing) is no longer available. Additional funds are needed by January 2010 to complete the project.

Thus, Azerbaijan has asked for an ADB partial credit guarantee (with a direct sovereign counter-guarantee to ADB) so that it can raise long-term financing needed to match the cash flow of the project and maintain its financial viability. ADB’s guarantee will also promote return of Azerenerji to the commercial market of project financing under the conditions of competition and transparency as well as attract new commercial banks to diversify funding sources.