Nigeria’s ongoing power sector reform offers local and international investors a number of opportunities. Paige McClanahan reports.


The Nigerian economy is booming: GDP grew by an impressive 6.5% in 2012 and growth in 2013 is expected be even higher. But the country’s economy faces an enormous challenge in the form of its limited electricity supply, which falls far short of demand.

Rising to that challenge, the Nigerian government is working to privatise the country’s power sector and drastically increase the amount of electricity supplied throughout the country. The government has made solid progress since the passage of the Electric Power Sector Reform Act in 2005, but the privatisation process has fallen behind schedule and much remains to be done. As the reforms progress, however, a number of new financing opportunities will arise for both national and international banks.

Nigeria’s power sector reforms began in 2000 with the enactment of the national electric power policy (NEPP). The new policy called for the unbundling of the sector, which at the time was wholly controlled by the government; the establishment of an independent regulator to monitor energy provision; and the development of a competitive electricity market. Subsequently, the electric power sector reform act established the legal and regulatory structure for the privatisation process and created the Nigeria Electricity Regulatory Commission (NERC) as an independent regulator.

As envisioned by the government, the privatisation process will see the old state monopoly – the Power Holding Company of Nigeria (PHCN) – disaggregated into a number of generation companies (“gencos”) and distribution companies (“discos”), as well as a single transmission company. The latter, the Transmission Company of Nigeria (TCN), will initially be managed by Canada’s Manitoba Hydro International under a three-year contract that was awarded in 2012.

The unbundling of the gencos and discos has proven somewhat challenging, although the process has made significant progress over the last 18 months.
In November 2012, the Bureau of Public Enterprises (BPE) received US$330mn worth of bank guarantees from the 16 preferred bidders for the successor companies to the PHCN, marking a major step forward in the privatisation process. By early the following year, the preferred bidders had met the deadline for submitting 25% of the offer value of their bids. The remaining 75% was due by August 21, 2013; however, only 13 of the 16 companies that had won bids were able to meet that deadline. The government is currently moving ahead with the companies that have paid on time; a temporary extension has been granted to the remaining three bid-winners. If they fail to provide the rest of the cash, however, then the bidding process could be re-opened.

A few late payments aside, reaching this stage marks a major achievement for the privatisation process, which has faced a number of obstacles over the last few years. Eluma Obibuaku, the vice-president for power at the Africa Finance Corporation (AFC), explains: “The process fell behind schedule during the initial PHCN bidding process for a host of reasons, including overly ambitious timelines, the resistance of labour and other stakeholders to the privatisation process, and the need for the government and the regulator to take additional time to determine the underlying value of the assets that were put up for sale.”

He adds that the single-biggest challenge to privatisation thus far has been meeting the demands of the PHCN labour unions, which he described as “the most powerful stakeholders within the sector”.

Those difficulties have largely been resolved, however. At the moment, even bigger challenges may lie ahead.


Pooling finance

“The first issue will be that the new owners have to raise financing to refurbish the assets,” says a banker based in Lagos. “That’s not going to happen overnight because they will require more funds for the refurbishment than they needed to actually acquire the assets.”

There will be plenty of opportunities for banks, both local and international, to get involved in the financing process from here on out, GTR’s source adds.
“With regard to banks in Nigeria, most of them are already involved in the process because a number of banks were significantly involved in providing the funding for the acquisition of the assets,” he continues. “And therefore they are already committed to the process.”

“I’m also sure that [the new power companies] will be negotiating with foreign banks as well. One, because of the quantity of funds required; two, because of issues around pricing; and three, because of the various countries from which the equipment will have to be provided,” he says.

Even as the current privatisation process unfolds, the government – which is keen to increase the country’s generating capacity as quickly as possible – is building an entirely new set of power generation plants, which are due to be privatised in 2014. Bidders for those plants will likely require the financing
services of banks as well.

Obibuaku of the AFC agrees that banks at all levels will be heavily involved as the privatisation process unfolds.

“There will be a large number of financing opportunities including debt, equity, equipment leasing, for all types of banks, and with time international banks, as they gain comfort with the operators of the newly-privatised assets,” says Obibuaku. “Each of the newly-privatised distribution companies will invest heavily in refurbishing their operating equipment and expanding their networks and will need financing from a variety of sources.”

The new gencos and discos will face significant challenges, even apart from financing. After having secured their assets, the companies will need to assess the state of their new power plants or distribution lines, determine what repairs are needed, and bring in both the equipment and expertise to carry out the necessary refurbishments. All of this will take time, and the possibilities for delay are numerous.

“The challenge is not really in terms of the difficulty of raising the funding,” says GTR’s Nigerian source, adding that the International Finance Corporation (IFC), has already made some commitments to finance the process. “The challenge is more about the execution of all of these steps, whether they can happen seamlessly, and how long it will take. It will be a competition between the various owners to see who actually has the best track record in terms of executing this.”


Plugging gaps

As the privatisation process slowly unfolds, the Nigerian economy will continue to be held back by an inadequate supply of electricity. Indeed, the country’s current power needs are vast.

“Nigeria is estimated to have an electricity deficit of 23,000MW, costing its economy close to US$2bn annually,” says Rolake Akinkugbe, the head of energy, oil, and gas research at Ecobank. “Almost US$13bn is spent annually on diesel-generated power, and the current level of around 4,000MW [of supplied electricity] is hardly enough for Nigeria’s 164.8 million population. This is hardly a sustainable position.”

But building more power plants won’t necessarily resolve all of the country’s power woes, Akinkugbe adds. The existing structure must also be supplied and maintained.

“Nigeria currently has installed capacity of 8,000MW, but up to 60% of this capacity has been offline due to maintenance shortfalls,” she says. “Even occasional short-term improvements in Nigeria’s electricity supply have been undermined by low water levels at the hydropower stations and inadequate gas supply to fire the power plants.”

The Nigerian government has set an ambitious target of increasing its power generation capacity to 40GW by 2020, up from the current level of 4 to 4.5GW. In addition to privatising the existing generation plants and distribution networks, the government is also building entirely new power plants, some of which will rely on renewable energy.

“There is significant potential for hydropower, solar energy, and wind resources,” says Obibuaku of the AFC. “The Benue River and a number of smaller rivers in northern Nigeria offer significant potential of several thousand megawatts of power. The most prominent new hydro project is the 700MW Zungeru hydropower project, which had its ground-breaking recently and is a government project with a Chinese contractor,” he adds.

Despite such new investments, it is looking unlikely that the government will reach its goal of increasing the country’s generating capacity to 40GW by 2020. There simply are not enough projects in the pipeline to enable the country to reach that target, analysts, say; the deadline is likely to be pushed back accordingly.
But the privatisation process, no matter how long it takes, is going to pay off in the long run, observers say.

“Successful power sector reforms are likely to push Nigeria’s GDP growth into double-digits,” says Akinkugbe of EcoBank. “This will in turn give a new lease on life to the manufacturing and production sectors, which currently have to rely on [diesel] generators for power. The benefits of an improved power supply are likely to far outweigh the initial pains.”

Our nameless source agrees.

“Nigeria has a huge market and the economy is growing, but to a certain extent the economy is hampered by insufficient electricity – for the manufacturing sector, for the services sector, and so on,” he says. Privatisation “is going to be a huge money-spinner when the process is eventually successfully concluded, and everyone can see that”.