Economic Update

The privatisation of Nigeria’s power sector continues to ease forward, with the Ministry of Power now expecting the process to be completed by the second or third quarter of 2012. Meanwhile, in December the government licensed 20 independent power producers (IPPs), in a move that could significantly boost the country’s power-generating capacity over the next few years.

Privatising the generation and distribution of electricity in Nigeria has been in the works for several years. The Electric Power Sector Reform Act (EPSRA), which was enacted in 2005, established the Power Holding Company of Nigeria (PHCN), which replaced the National Electric Power Authority, a state-owned entity.

At the same time, the EPSRA also created 18 stand-alone entities under the PHCN: six for power generation (two hydro-electric, four thermal), one for transmission and 11 for distribution. Under the EPSRA, the “successor companies”, as these 18 companies are typically called, were to be privatised, with the exception of the transmission company.

The process was largely stalled until August 2010, when President Goodluck Jonathan released the Roadmap for Power Sector Reform, a comprehensive blueprint for restructuring the electricity sector. Starting in late 2010, the Bureau of Public Enterprise (BPE), which is largely responsible for the privatisation of various state-owned entities, began to invite prospective investors to bid for the six power stations and 11 distribution companies. In January and February 2011, the bureau held investor forums in several major cities, including London and New York. The deadline for bid submissions was set for March 4, 2011.

The BPE received 929 bids, including 529 for distribution companies and 400 for generation companies. After reviewing the applications, the bureau then approved 525 of these bids for the next stage of the privatisation process. These companies were required to pay a $20,000 fee and sign a confidentiality agreement to access additional information and data, which has been available since September 2011, and in November the BPE organised site visits for the prospective bidders.

Public reaction to the sale of PHCN’s assets has been mixed, with the most vocally negative response coming from labour unions, particularly from the workers in the electricity sector. In December the president of the National Union of Electricity Employees, Mansur Musa, said that the power sector roadmap was designed to serve the interests of a few and that the privatisation process had been manipulated by government officials.

For its part, the government has emphasised the fact that the country simply does not have sufficient public resources to invest in the development of the power sector. According to the minister of power, Bart Nnaji, “Investors in the PHCN successor companies will commit considerably more capital to them than the government can afford.”

While privatisation of the PHCN successor companies would be a major step forward for the power sector in Nigeria, it is only one part of a larger story. In December the government announced that it had issued 20 licences to IPPs, which are expected to add more than 6000 MW of capacity to the national grid within the next three years.

At present, power producers in the country are capable of generating only about 4400 MW of electricity, according to the latest statistics from the Ministry of Power, a figure that is low, given Nigeria’s population of approximately 160m. By comparison, South Africa, a country of about 50m people, has power generation capacity of around 40,000 MW. The government has also taken steps to ensure that investors in power generation companies will be able to find buyers for the power that they produce, with officials announcing in December that it was issuing a licence to a new bulk electricity trader – Nigerian Bulk Electricity Trading Company (NBET) – to begin operations.

The bulk trader, which is a government-owned entity, will purchase power from independent producers and then sell it on to distributors. Its purpose is to alleviate the risk faced by electricity-generating companies that its customers – the distributors – will not pay their bills. While NBET is expected to be an important player during the early days of the post-privatisation period, it could become less necessary over time, a point that the minister of power made in August. “Distribution companies are free to sign direct power-purchase agreements with independent generation companies. NBET shall exist only as long as it takes the distribution companies to become creditworthy and be able to directly negotiate their own power-purchase agreements,” Nnaji said.

While this will reduce the uncertainty of contractual payments, the IPPs nonetheless will face challenges in their attempts to formulate concrete investment plans due in part to the restrictions of Nigeria’s tariff regime. Currently, tariffs are low, meaning IPPs can be reluctant to commit to long-term, high-value investments particularly as the resources needed for electricity generation are expensive to obtain. A government plan to hike the tariff this month was cancelled, subsumed in the protests over subsidy removals.

These latest developments signal that the Nigerian government is serious about the privatisation of the power sector, a process that some believe has moved too slowly in recent years. And, increased private-sector participation in the provision and distribution of electricity could go some way to ensuring a reliable source of power, an important component in Nigeria’s bid to become one of the globe’s top 20 economies by 2020.