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Private investment key to reviving Nigeria’s power sector

by Oscarline ONWUEMENYI

The parlous state of the Nigerian power sector received a shot in the arm with the recent issuance of a $100 million grant by the World Bank to guarantee private investment within the sector, under the Commercial Reorientation of the Electricity Sector Toolkit (CREST) initiative of the bank. According to the World Bank Country representative, Mr. Onno Ruhl, who commented on financing challenges in the power sector, the electricity supply industry is a capital intensive industry and so adequate cash flows are critical to recovering costs and returns on investment.

Experience from other countries has also shown that transferring assets to private hands cannot by itself bring about investments in collections needed to make investments commercially viable. For private participation to succeed therefore, all stakeholders need to reach a consensus about the tariff regime that should be introduced and about the enforcement of collections, including disconnection for non-payment.

Unlike the telecommunications industry, non-payment by customers is a problem that investors cannot fix without government’s commitment to payment enforcement, and so this should be given priority by the regulatory commission in the new dispensation. Given Nigeria ‘s volatile investment climate and the capital intensity of investments in the power sector, we can expect investors to want some level of guarantee from the government or multilateral agency to protect their investments and cover their risks. This guarantee may be in form of generation concessions or some security to cover the risks of non-payment.

Many experts on the sector have noted that while it is the Federal Government’s desire to reduce its funding of power sector projects, private investors should be given a level of comfort via the provision of guarantees and other forms of protection from investment losses. This funding does not have to come from the coffers of the government as international organisations like the World Bank, IMF and the UNDP can provide guarantee funding. It is therefore imperative that such agencies are carried along as the country proceeds with the reform programmes.

In an interview, Ruhl emphasised the need for proper financing of the sector to be streamlined to give investors enough confidence in the sector. In addition to such guarantees, he said, other measures should be taken to send the right message to investors on the viability of investing in Nigeria ‘s electricity industry. Beyond persuading investors about the huge returns that can be reaped, adequate information on available policies to protect investors’ interests is critical. A key priority for most foreign investors will be the nature of regulations that clearly define and allow exit for investors and infrastructure.

In addition to focusing on power generation Mr. Onno Ruhl, said the country should lay emphasis on transmission and distribution. “It is not enough to focus on building generation plants, transmission is important too. It is a long-term issue that Nigeria has to look at, there is not enough investment over time, and the sector has reached a stage where it can not improve unless there is a conscientious effort to attract private investment,” he said.

Beyond the issue of low investment in the sector over time, he said the government must ensure that appropriate tariff was collected from electricity consumers. He said the tariff been collected did not cover the cost of producing electricity, thus making it difficult, if not impossible, to carry out regular maintenance in the sector.

The World Bank’s Senior Private Sector Specialist, Mr. Steven Dimitriyev, had in a recent press conference attributed the high cost of investment in Nigeria to electricity crisis, noting that private sector involvement holds the key to the rehabilitation of the sector. According to him, Nigeria ‘s economic growth was stunted as a result of the the epileptic state of the nation’s power sector. “Electricity crisis is the most important infrastructure bottleneck in Nigeria today. It is the main driver of Nigeria ‘s high indirect cost,” he said. Dimitriyev further stressed that unreliability of electricity costs an average 10 percent of sales per year to a typical Nigerian firm. “All types of firms experience power outages and 85 percent of them own generators, this is higher than any of Nigeria ‘s comparator countries,” he said.

He pointed out that World Bank has been helping the Nigerian Government’s program of power sector reform and privatization through a project approved in July, 2001, called the Transmission Development Project. “The bank has supported two main goals of its Country Strategy for Nigeria privatization and improved infrastructure. For the power sector, an efficient transmission network, along with a fully function control system were seen as necessary to encourage the private sector to take part in power generation, distribution and supply to customers,” noted. Dimitriyev explained that the project also targets investment in an area of power infrastructure, seen as unlikely to attract private sector investment in the near term, but is a critical part of the power supply system.

The issuance of 29 private licences to independent power producers by the Nigerian Electricity Regulatory Commission (NERC) in 2008 had provoked mixed reactions. But with its potential to boost electricity production from the present 3400 megawatts to a targeted 10,000 megawatts by the end of 2011, many observers have lauded it as a pragmatic approach. However, there are hints that the potential may remain unfulfilled.

The Ministry of Power, however, has been unrelenting in depicting the nation’s electricity sector as a goldmine waiting for prospectors. During a recent visit by a delegation from the American power house, General Electric (GE) to Abuja, the former Minister of Power, Dr. Rilwan Babalola, noted that the deregulation of the sector from a monopoly to a more competitive market environment, will make it appealing to players with the financial and technical capabilities. But producers already involved in the project have pointed at shortcomings that require urgent fixing in order to ensure that private participation in electricity generation and distribution becomes more viable than it presently is.

The Chairman, Independent Power Producers Association of Nigeria (IPPAN), Prof. Barth Nnaji, had in a recent interview listed some shortcomings faced by power producers in the country to include access to bank credit, signing of the Power Purchase Agreement and the perennially inadequate gas supply as some of the shortcomings. The impediments have so far contributed in one way or another to frustrate investors in Independent Power Plants (IPPs). Even as the NERC has invited private participation, touting the attractive power market in Nigeria with an un-met demand in excess of 20,000 megawatts, the generation and distribution ends of the business remains difficult to access.

In order to promote competition and private sector participation, the ministry which established NERC vowed that the commission had put in place a simplified application process and market entry that allows for prudent cost recovery and reasonable margins, using a model of Power Purchase Agreement. But contrary to this promise, a major problem being experienced by producers is the difficulty in signing their Power Purchase Agreements. Nnaji had claimed that in order to build a power plant, getting the required financial backing by banks remains almost impossible, except the banks are assured of being able to recoup their funds when the electricity is sold. “Selling electricity will have to be a credible up taker and the credible up taker will be the one to sign the Power Purchase Agreement,” said Nnaji. But the question of who will sign the agreement remains pertinent. There is yet another question: is the agreement bankable such that the bank concerned can use it to give credit?

Apart from battling with the constraints of signing the Power Purchase Agreement (PPA), perhaps the most daunting challenge remains the issue of gas. Although the country has gas in abundance, it does not get to the areas where a lot of the IPPs are setting up. In reality, all of the associated gases in the country have not actually been harnessed and are still being flared, while the non-associated gas field remains undeveloped. Most of the private sector operators given the go-ahead to generate electricity will have to contend with these realities with perhaps the exception of the Notore Power Limited, recently allowed to generate 50 megawatts. The company will enjoy the use of the facilities of the defunct National Fertiliser Company of Nigeria (NAFCON), Onne, Rivers State . It has the mandate to supply power to Notore Chemical Industries Limited (formerly NAFCON) and also the National Grid. What stands the Notore Power Plant apart is that it is about the only one with the plant and gas readily available and is therefore ready to hit the ground running.

Also yet to be properly spelt out is the issue of legal infrastructure in the form of government interference in the human management process, maintaining consistency in policy and the political will to honour joint venture agreements. The issue of straightening out the legal infrastructure must be sorted out, according to Independent Producers, to avoid consequent untidy developments such as the one concerning the state of the Enron, (now AES) Power Project in Lagos State, which has prompted the state government to file a petition against the partners in the projectPower Holding Company of Nigeria, PHCN, Ikeja Electricity Distribution Company, Eko Electricity Distribution Company and the Transmission Company of Nigeria plc.

Despite series of challenges, the Federal government remains optimistic that with the 29 licences issued, the country would have mustered an additional 10,271MW in the grid when all the IPPs become fully operational. This target is to raise generation up to 6000MW in two years (counting from 2008), take it to 10,000MW by 2011 and 18,000MW in the unspecified, near future.
The new Minister of State for Power, Arch. Nuhu Somo Wya, stated last week that the ministry is aware of the plight of the licensees, but promised that the commission and other relevant agencies will fight in their corner. “In addition, we have embarked on consultations with stakeholders on the trading arrangements and as soon as this is concluded, licenses will be certain on who they will be negotiating power agreements with,” he said. While the declaration may appear to have cleared the ground, the concerned Independent Power Producers are awaiting the impact of these words with bated breath, particularly as regards sourcing for credit.
Currently, Nigeria has 14 generating plants, three hydro and 11 thermal with an installed capacity of 7876 megawatts. But available capacity is about 4361MW, with an output of just over 3000MW. The biggest plant is Egbin, with an installed capacity of 1320MW. Most of the plants have very low availability partly because of limitation in gas supply, but mostly due to their dilapidated condition.
In order to engage the private sector effectively in power business, the Minister said Power Purchase Agreement (PPA) and Gas Supply Purchase Agreement (GSPA) as well as Gas Transportation Agreement (GTA) have been drafted in line with international standard to facilitate private sector involvement in the industry. According to Wya, these documents are vital as bankable instruments that help would-be investors to obtain loan or to access other financial sources that would aid investment in the power sector.

He pointed out that while all these enabling conditions are being addressed the issue of qualified manpower that will deliver the targets as well as gas not only to power some of the idle power plants but the ones in plan are equally receiving greater attention from the Ministry.

Since Nigeria is generally perceived as an unpredictable investment location, we can expect that in the first few years, investors would be more comfortable if they can quickly exit. The government must therefore send the right signals to investors. For instance, delays in government approvals and licensing have an opportunity cost for international investors responding to concession auctions and solicitation for bids.

The government needs to be aware that international investors are less likely than local investors to continue to put up with the costs of administrative inefficiency.

This may be a key challenge for the reform programme if steps are not taken to create administrative structures that would facilitate the speedy processing of approvals and requests. The new regulatory institution must also be independent of government interference, as government is expected to also respond speedily to the needs and timeframes of investors.
The regulatory process must allow for satisfactory and non-arbitrary adjudication of disputes and tariff adjustments.
The financial environment must be transparently situated such that the local and international private sector will be willing to undertake broad-base roles in transactions and projects that will avert outstanding supply bottlenecks and prevent the regional markets from coming to market-based financial closure.

In the aftermath of the controversy triggered by the previous regimes, well-meaning, but clumsy attempts to accelerate power investments, one very important thing pertaining to ‘quick wins’ and ‘flagship projects’ needs to be reiterated: by successfully accelerating the closure of beacon projects, analysts anticipate that other governments, project developers, bankers, and investors would be encouraged to seek to replicate these successful projects, further levering additional private investment elsewhere in the international markets.

The shortage of skilled manpower to operate sophisticated generation infrastructure will also pose a challenge for investors. Most power generation plants in Nigeria were constructed in the 80s and very little upgrading has been carried out over the years. As such, most personnel in the sector lack the skills and knowledge of the new generation techniques.
Finally, the government must formulate a clear environment policy guiding the utilisation of energy resources. Such a policy should have the input of the government, investors and the customers to ensure that roles and commitments of all stakeholders to the prevention of environmental degradation are clearly defined.

Investors will be concerned about the activities of environmental protection activists and discontented communities would be compensated for the negative effects of energy exploitation, and the recurring incidences of youth restiveness and violence, occasioned by the government on the importance of having such a policy.


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