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Ease The Power Pain Please

Nigeria’s power sector reforms have resurrected hope for investors and consumers as the country looks to get out of the dark.

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At last, Nigeria’s rough ride through the dark tunnel is coming to a slow but steady end. Slightly over 10 years since successfully privatizing its telecommunications sector, the country looks set to repeat the feat in its moribund power sector.

Ongoing power sector reforms have now given birth to lingering pains on the sector’s value chain, generating anxiety, high hopes and renewed expectations from a citizenry that has become accustomed to living in the dark ages.

A few years ago, Nigeria’s investment climate was considered not attractive enough for inclusion in the BRIC (Brazil, Russia, India and China) group of nations. Fair enough. Today, the latest buzz word is MINT, for the grouping of Mexico, Indonesia, Nigeria and Turkey. The target year for MINT is 2050. All of this is fancy talk for most people in Africa’s most populous nation. Why wait for 2050? What matters most to them is the short-term fix. They yearn for the simple bliss of a regular and affordable supply of electricity, as they continue to ask why a resource-rich country should continue to lack light. They reckon that regular power supply would unleash their enterprising spirits and catapult their nation’s fortunes well ahead of the BRIC or MINT states within a decade. And they could be right.

Jim O’Neill, the man who coined the BRIC acronym and the former chairman of the asset-management division of the Goldman Sachs Group, agrees. The size of the Nigerian economy would double in six to seven years if the country’s perennial power outage is sorted out, he says.

Aliko Dangote, Africa’s leading industrialist and president of the Dangote Group, can only imagine what Nigeria could achieve with a consistent power supply.

“Can you believe that this country has been growing at seven percent with no power, with zero power? It’s a joke,” he says.

Nigerians have lived with the ‘no power or poor power’ status, in part due to a lack of political will by previous governments and the Nigerian factor—a euphemism for graft, nepotism, neglect of state-owned assets and underinvestment.

Industrial, commercial and domestic consumers of electricity have therefore resorted to producing their own electricity using gas, generators, solar panels and inverters. The Federal Ministry of Power estimates that these off-grid methods account for up to 6,000 megawatts (MW), against the 4,500MW generated and supplied by the grid. Global Business Intelligence estimated that Nigerians spent around $455 million on generators in 2011. Added to this ignoble expense is the negative impact to health, wellbeing and the environment.

The successful sale and handover, last November, of 11 distribution companies (Discos) and four generation companies (Gencos), formerly owned by the defunct Power Holding Company of Nigeria (PHCN), to Nigerian and foreign investors completed the first phase of the power sector privatization process.

Following the positive market reaction to this, the Nigerian government decided to partially privatize a further 10 Gencos with a combined installed capacity of 5,000MW, located mostly in the Niger Delta region and known as the National Integrated Power Project (NIPP). The federal, state and local tiers of government own these Gencos and have invested more than $8 billion in them through a special purpose vehicle, The Niger Delta Power Holding Company (NDPHC). The sale of an 80% stake of these Gencos is expected to be completed by the end of 2014.

For the Nigerian authorities, the ongoing sale of its power sector assets is expected to rake in more than $10 billion and new regulatory responsibilities, as successor companies struggle to comply with Post Acquisition Plan and budget agreements.

For the new investors, industrial spats, costly infrastructure revamps, bank debts, consumer agitation and hopefully, consumer satisfaction and corporate profits lie ahead.

For consumers, the entire exercise has resurrected hope. Their angst and heightened expectations has now been redirected to the new players.

For starters, the $24.7 million, three-year contract given to a Canadian firm, Manitoba Hydro International (MHI) in 2013, to manage the country’s electricity transmission system is being reviewed by the authorities over allegations of non-performance and over extension of MHI’s management. MHI is expected to upgrade the human and technical assets of the Transmission Company of Nigeria (TCN), one of the successor companies of the unbundled PHCN.

Transmission is crucial to the success of the industry. The last time there was a grid enhancement was in 1987. The Transmission Company of Nigeria (TCN) is the only PHCN company still owned by the government and is considered the weakest link in the country’s electricity network. The network currently has the capability to distribute less than 6,000MW of electricity and covers less than 40% of the country’s land area. Experts have warned that unless the government revamps the transmission leg of the value chain, the entire privatization exercise might end up in a cul-de-sac.

Upon completion of MHI’s work schedule in 2016, Nigeria’s transmission network should be capable of moving about 20,000MW of electricity and cover more than 80% of Nigeria’s land area. The minister of power, Chinedu Nebo, says around $3.7 billion in funding is needed for the transmission system to reach this target.

Alex Oti, managing director of Diamond Bank, says Nigeria’s banks are willing to lend more cash to the industry, notwithstanding the bank’s collective contribution of over $4.5 billion to the sector since the commencement of the privatization exercise.

The government says it needs $2.8 trillion (N464 trillion) for infrastructural development in the power sector in the next 30 years, under its National Integrated Infrastructure Master Plan.

Government has also stated that the energy sector will require $880 billion (N144 trillion) during the period while the power sector will need $10 billion (N1.6 trillion) for generation and distribution in the next five years to add 5,000MW to the national grid. It added that the transmission network needs $1.5 billion (N240 billion) over the next five years.

To overcome investors’ fears about the technical capability and credit worthiness of the PHCN successor companies, government has created the Nigerian Bulk Electricity Trading Plc (NBET), a state-owned independent off-taker, underpinned by an $800-million partial risk guarantee from the World Bank. Capitalized with $550 million and chaired by finance minister Ngozi Okonjo-Iweala, the NBET will purchase power from Gencos before reselling to Discos, thereby avoiding potential defaults. This is, however, meant to be a short-term measure, as successor firms begin to enforce new electricity tariffs driven by their respective investments and market forces.

Adeola Adenikinju, the director at the Centre for Petroleum, Energy Economics and Law at the University of Ibadan says Nigeria is moving into uncharted territory.

“Very few countries have surrendered their power sector to the private sector the way we have done. We cannot afford any regulatory laxity or incompetence. We must learn from some of the regulatory lapses that we currently experience in the telecommunication and airline industries.”

The next three to five years will be the litmus test for the sector. Success will be determined by how well new investors navigate through the maze of gas supplies, gas prices, political risks, the domestic and international economic climate, access to capital, revenue projections, the quality of inherited assets and liabilities, and interest and exchange rates.

Nigeria is expected to benefit from United States president Barack Obama’s Power Africa initiative, a five-year, $7-billion partnership between the US and the governments of Ethiopia, Kenya, Liberia, Nigeria, Tanzania and Mozambique. An additional $9 billion is expected to be added by the private sector. Already, Nigerian businessman and chairman of Heirs Holdings, Tony Elumelu has backed the plan with a pledge of $2.5 billion.

The Africa Development Bank (AfDB) has also earmarked close to $3 billion for Africa’s power sector over the next five years.

In February 2014, the Nigerian government signed a $350 million power financing deal with General Electric to support the construction of small-scale power projects across the country.

The Nigerian power industry may be awash with funds but no one can predict if projections to generate over 10,000MW of electricity by 2015 and 40,000MW by 2020 will be met. The director-general of the BPE, Benjamin Dikki, has given the market a two to three year period before power supply stabilizes.

“Expectations will need to be managed for the public to understand that the power sector cannot be built overnight and that this country is recovering from decades of underinvestment and corresponding crumbling infrastructure,” he says.

“This will be a defining year for this sector and one in which Nigerians will either begin to applaud the emergence of the proverbial light at the end of their tunnel or curse their stars,” says Peju Adebajo, the managing director of Mouka, a Lagos-based manufacturer of foam products.

“Whichever way the pendulum swings, both realities will not be cheap. Billions of dollars will either have been money well spent or lost, and the opportunity to improve the political economy and human development index of a fourth of Africa’s population may also have been either fast tracked or stunted.”

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