Privatisation of power generation assets in Nigeria

The effort to privatise Nigeria’s electricity sector is far from new – it was discussed as early as the late 1990s and the basics were outlined in the 2001 National Electric Power Policy. The spate of policies rolled out over the past two decades came from different administrations, but share a belief that a healthy national power system – one able to meet domestic needs – is unlikely as long as the government is the owner and operator of the system. That is, in part, because the federal budgeting process spreads money across many areas of need, leaving capital-intensive infrastructure like electricity short of the resources needed for sustainable growth.

Long Time Coming

The push for privatisation began in earnest under former President Olusegun Obasanjo, reducing the government’s role to law and regulation. Finally, after a privatisation process that saw majority shares of almost all of the government’s hard assets in electricity sold off over the course of 2012 and 2013, the long-gestating policies have finally been put into action.

In its sale, Abuja packaged four power plants and three dams into six electricity-generation firms and sold off 11 distribution companies, the responsibilities of which were divided geographically. The government maintained transmission responsibilities in federal hands, stating that retaining control of the grid is a national security imperative. For each of the 17 entities a stake of about 60% was purchased by a purpose-formed consortium containing a Nigerian investor, a foreign partner and a variety of smaller stakeholders – both local and foreign.

The Result

After these groups took control of their new assets in late 2013, it immediately became clear that privatisation would be no quick fix. Generation totals declined in the first months after the handover, a result of its complexity. While hopes were that the private sector would prove to be the panacea to the problem of power, the process faced a number of tricky financial and logistical hurdles (see overview) and as the scope of the need for capital upgrades became clearer, it resulted in a delay to the subsequent round of privatisation initially scheduled for 2014. To improve overall supply levels, privatisation allows for a first step in improving capital inflow and management, but there are underlying factors that also need addressing, including a lack of transparency in the system, a transmission grid in need of fixing and expansion, a revision of tariffs for electricity and natural gas feedstock, and the challenge of adequate metering so that customers pay only for the power they use.

Capital Costs

To be sure, all of these remaining obstacles were familiar to all parties before the privatisation, which may have contributed in part to the low levels of equity contributions from bidders. Although there were exceptions – such as the Africa Finance Corporation, or the State Grid Corporation of China, the largest publicly owned utility worldwide – only around 30% of the funding of the total $2.5bn spent during the privatisation process on the 17 assets came from owner’s equity. The remaining 70% of the financing came from banks. Most loans were domestically sourced, with Standard Bank of South Africa, which provided $80m, the one exception.

In early 2014 this raised concerns about Nigerian banks perhaps being too exposed to the power sector and potential defaults, however, the financing is small in proportion to banks’ total assets, which stood at $152.6bn as of April 2014, according to the Central Bank of Nigeria. United Bank for Africa provided $700m in credit to the power sector in 2013, against $16.1bn in assets as of the end of the first quarter of 2014. This included $122m for the purchase of the Ughelli Power Plant in Delta State. The Ughelli consortium includes Transnational Corporation of Nigeria, of which the UBA chairman, Tony Elumelu, is a major shareholder.

Though concentration risk appears to be limited for the banking system as a whole, a problem for the power sector itself is that bank loans in Nigeria are generally for short terms of less than a decade.

As a result, the government is pushing foreign investors to take larger equity stakes and exploring the potential for participation from private-equity investors or others willing to wait longer for a return on their investments. While the challenges of the transmission grid and the low gas and electricity tariffs will need to be addressed in order to prompt foreign investors to expand equity participation, the government has been periodically raising tariffs in small increments (see overview). However, investors want to see the tariffs doubled so that the power sector can attract additional capital.

Risk Guarantees

Another way the government hopes to unlock investment is by use of risk guarantees, primarily through the World Bank’s partial risk guarantee (PRG) programme, as well as the Multilateral Investment Guarantee Agency (MIGA). The development agency is willing to cover some of gas suppliers’ risk of generation companies defaulting on their gas-supply payments, and some of generation companies’ risk that distributors might fail to pay for the electricity they take. These guarantees would cover monthly defaults up to a negotiated amount and are considered an important enough element of the risk-mitigation strategy that a new government agency was created to make it possible. “As a generation company, you try to see the entire value chain in the power industry, from gas supplier to distributor,” Chukwueloka Umeh, managing director and CEO of Century Power Generation, told OBG. “The potential for each section is huge in Nigeria, but the whole chain must subsequently be de-risked.”

A PRG can only apply to transactions involving a public entity, necessitating the forming of Nigerian Bulk Electricity Trading (NBET). Routing all electricity purchases through the bulk trader makes PRGs possible, and the organisation is expected to wind down once the market is deemed able to function on a willing buyer-willing seller basis, without risk guarantees required to facilitate supply agreements. The existing Gas Allocation Company of Nigeria will fill a similar role, acting as an intermediary between gas suppliers and electricity generators. As of mid-2014 only a few PRGs had been signed, but more were expected to do so in the coming year.

Vendors

The area in which foreign investors have been most willing to participate has been through vending. Sellers of turbines and builders of plants, such as Siemens, General Electric (GE) and others stand ready to participate on that basis. GE announced plans for a $1bn equipment fabrication facility in Calabar, in the south-eastern corner of the country. To fix the grid the government hired Manitoba Hydro, the Canadian utility from the province of the same name, to improve the Transmission Company of Nigeria’s operations and create a plan for rehabilitation and investment. It would like to use the vendor financing model, in which private contractors identify elements of the plan they want to carry out, and accept payment over time.

Incremental Change

While Nigeria’s reform of its massive electricity sector will take time to yield concrete and visible results, the push to expand smaller-scale solutions is helping ease the immediacy of low grid supply. Smaller-scale solutions would include power plants that could be owned and operated by distribution companies and send electricity out over their own regional networks, instead of feeding the national grid. Using renewable energy for some of these smaller systems would knock the gas-supply problem out of the equation and is seen as particularly suited to the northern half of the country, where insolation rates are high and where gas networks are limited. Piecemeal regional solutions may also allow for fixing and expansion of the national grid to follow demand patterns. The vendor-financing model would allow generators and distributors to scale up a measure of control over the elements of the grid upon which they might rely.