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Let There Be Light

Nigeria’s power sector is the butt of many jokes but a bright overhaul is taking place as private money rides to the rescue.

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A new tide of expectation grips Africa’s most populous country. Lights could soon be going on all over Nigeria. At the risk of stretching the metaphor—light is at the end of the tunnel.

It is a tunnel that Amaechi Agwunobi—a 35-year-old entrepreneur—has traveled for years. Agwunobi runs a business center offering internet, lamination and photo copying to two universities in Lagos.

“I have spent more money on petrol for my generators than I have been making from the business. Yet, I also have to pay electricity bills. If we had constant electricity, my business will be more profitable,” says Agwunobi.

Seni Osikanlu lives at 1004 Estate, a high-rise residential estate in Lagos. She prefers to pay a heavy service charge that guarantees constant power.

“In Lagos, it’s easy to have constant power—you just have to be prepared to pay through your teeth for it,” she says.

This is everyday life for millions of Nigerians who grew up with the joke that the national power generator, NEPA, meant: Never Expect Power Always. Or, that its successor the Power Holding Company of Nigeria (PHCN) stood for: Please Hold Candles Near.

It is the conundrum of an oil and gas rich nation with the lowest electricity coverage in the world. Economists say poor power supply costs Nigeria billions of dollars in imported generator diesel and lost output. It also hampers Nigeria’s quest to be the economic engine of Africa.

After many false dawns, the Nigerian power sector is now steering towards private money with the sale of 16 assets, unbundled from PHCN, to private investors following a bid process in November. The power sector can now invest money to increase generation and expand transmission and distribution.

Sahara Energy, a Nigeria-based conglomerate with a local partner, a joint venture between NEDC and Korea Electric Power Company (KEPCO), is one of the approved bidders. It has a majority holding in two of the assets that were sold by the Nigerian government: Egbin Power Station, the largest power generator in Nigeria, and Ikeja Electricity Distribution Company, the largest distributor.

Kola Adesina, the chairman of Egbin Power Plc, a 1,320-megawatt (MW) capacity plant, says the power station is producing a mere 1,110MW.

“Unfortunately, in the past eight years, two of the turbines went down. We had to fix them because the boilers were down,” he says.

“Primarily, between 2001 and 2003, we provided diesel to the emergency power plants in Abuja (45MW). It was a serious logistical nightmare because we had to deliver about 10 trucks every day for 30 months to fuel the plant. We then got the boilers fixed with our technical partner. By doing so we had the privilege of reducing the original costs we could be facing.”

Adesina says, by April 2014, another 220MW will be restored.

“Rather than throwing it into the grid and subjecting the capacity to both technical and distribution losses, we have decided that the new turbines will now go to both Ikeja and Eko Disco. It will be shared 120MW and 100MW respectively between the two distribution companies which translates into more capacity being available in Lagos,” he says.

Crumbling infrastructure, vandalism and distribution losses are a problem, says Adesina.

Transnational Corporation of Nigeria Plc. (Transcorp), a Nigerian conglomerate with a diversified portfolio, acquired 100% of the Ughelli power plant for $300 million in the privatization.

“We took over the plant in November; at that time it was producing 160MW. Under our plan, we said we will be able to get the plant back up to 650MW within the first three years and in five years, recover the entire 1000-megawatts capacity of the plant. We have been a lot more bullish, however, and are running far ahead of our projections,” says Obinna Ufudo, the CEO of Transcorp.

“We expect that by the end of 2014 we should be at about 700MW, which is in excess of what we promised to do in three years. We decided to have a single-minded focus on this plant and by doing so we are able to supply more power to the national grid and begin to affect the lives of the Nigerians and the economy a lot quicker.”

Transcorp have also signed an agreement with General Electric to develop a new 1,000MW plant at Ughelli.

“We intend to be the largest producer of power in Nigeria and eventually begin to look across the continent where we are able to extend our expertise.”

Both Ufudo and Adesina are certain that Nigerians will benefit from more power by the end of the year.

“I believe all the generation companies, which are now in private hands, will double their outputs by the end of the year. Producing power is one issue. Getting it to the homes is a different issue and this is where the distribution companies come in,” says Ufudo.

Stanbic IBTC is one of the many home-grown financial institutions lending to the power privatization process.

“We supported a number of bidders both on the GENCO (generation companies) and the DISCO (distribution companies) side. There were only local banks that participated in the acquisition phase and they provided about $2.7 billion worth of debt to the bidders. Other than Standard Bank of South Africa (majority shareholder of Stanbic IBTC), there was no other international participation in the PHCN privatization process,” says Soji Omisore, the head of mining, energy and infrastructure at Stanbic IBTC Bank Lagos.

The litmus test lies in bidders’ performance in the long run and how they handle risk.

“No project is without risk. The opportunities are prevalent but so are the risks. We are a Nigerian bank, we understand Nigeria and we take Nigerian risks,” says Omisore.

“From our perspective, the power sector in Nigeria is a challenge, but therein lies the opportunity—it’s not an easy sector. We believe there will be roughly up to $5 billion of capital expenditure and beyond that, there will be further expansion of about $1 million per megawatt required. Currently, we have just over 9,000MW of installed capacity; we’re only producing about 3,500MW to 4,500MW, depending on the rainfall patterns for a population of over 165 million. So, in terms of our per capita consumption, it is extremely low.”

Omisore also believes in the need for a very strong regulator as the market develops.

“The third phase will be the further expansion where we will increase capacity from the current 9,000MW to 20,000MW by 2020 as projected by the government. While this is achievable, I still perceive it to be ambitious. There are still many parties that need to play in order to affect that. While the government has done well, there is still significant room for further improvement in terms of the regulatory aspect, bankability issues and the general perceived risk attached to Nigeria,” he says.

When it comes to financing though, there are no sacred cows as there are a few boxes to tick on the part of the financial institutions. Omisore highlights the quality of bidders, their level of experience, expertise, past records and potential equity contribution as important factors.

“It is better to have a bad project and good sponsors, than a good sponsor and a bad project as the good sponsor will make the project happen,” says Omisore.

Now Nigerians wait to see whether the light bulb moment for their government is really as bright as everyone hopes it will be.

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