Oxford Business Group | Landmark power privatisation to drive Nigeria’s economy

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Businesses and consumers in Nigeria will be hoping that a more reliable electricity supply could be in sight after the government transferred most of the country’s power generation and distribution to the private sector at the beginning of November.

The landmark move, which represents one of the biggest privatisation initiatives worldwide to date, is expected to help address one of Nigeria’s biggest infrastructural bottlenecks and produce a much-needed increase in capacity as the country looks to power its expanding economy.

However, with demand continuing to outstrip the limited power production by a large margin, operators will be required to invest heavily in input supply, generation and transmission as they move the sector forward.

A decade in the making

The assets were handed over on November 1, although formal plans for the privatisation process started nearly a decade ago, with the 2005 passage of the Electric Power Sector Reform Act, while preliminary discussions began as far back as 2000 following the adoption of the National Electric Power Policy.

In 2010 the government announced that it would break up the state-owned Power Holding Company of Nigeria (PHCN), putting up for sale six power generation companies (Afam Power, Shiroro Hydro Power, Sapele Power Plant, Kainji Hydro Electric, Ughelli Power and Egbin Power) and 11 distribution companies (Abuja, Kaduna, Kano, Jos, Yola, Enugu, Benin, Eko, Ikeja, Ibadan and Port Harcourt Electricity Distribution Companies).

Private sector interest was strong, and more than 100 bids were eventually submitted. Winners were announced in 2012 and included various consortia consisting of both foreign and local companies. The sales process encountered a few hiccups – three preferred bidders were late with their payments in 2013 and two assets (Kaduna Distribution Company and Afam Power) had to be re-bid and have yet to be divested – but it has largely been a success.

Expected benefits of privatisation

Nigeria has been unable to provide sufficient electricity for years, despite channelling some $40bn into the sector over the past two decades, according to international media reports.

Electricity generation capacity for the 170m person country dropped to 3782 MW in October 2013, after peaking at around 4518 MW in December 2012, according to a report by the Presidential Task Force on Power. The findings highlighted the large gap between generation capacity and peak demand, which stands at around 12,800 MW, although given that the lengthy history of intermittent power supply, that figure may well indicate a depressed level of grid demand, meaning actual peak demand is expected to be much higher.

Many consumers and businesses rely on expensive diesel generators to fill the gap. Using the generators can add up to 30% in operating costs for local manufacturers and constitutes a significant challenge to expanding output.

There is widespread hope that private ownership will bring a three-pronged improvement in production, efficiency and customer service. However, improvements will undoubtedly take time, given the huge investment required and the deterioration of infrastructure across all segments of the sector. According to some media reports, an adequate power supply might boost GDP by 3%, in addition to improving overall productivity and reducing overhead expenses.

Gas it up

November’s wave of privatisation has also paved the way for investors to participate further in the development of the power sector, with 10 additional state-owned gas-fired power plants with a combined capacity of 4775 MW set to be sold off by the end of 2014. The country is looking to boost the share of gas in its generation mix, to benefit from its substantial reserves.

To ensure local power companies are able to sustainably tap local deposits, however, reforms to the tariff structure may be needed. At present, the government offers a rate of $1 per million cu feet (mcf), which is expected to rise to $1.50 per mcf. Ensuring that the domestic market remains attractive could require the government to more than double its current offer to a figure nearer $3.

Improving Nigeria’s electricity supply will also necessitate investment in transmission infrastructure, which remains in state hands but is being managed by a Canadian firm, Manitoba Hydro International. The government has already raised $750m through a bond issue to help overhaul the network.

Other opportunities for foreign investors are emerging in plant construction, management, consultancy and equipment supply. The government is offering several incentives, including tax holidays and breaks, with a particular focus on the gas-fired sector, as it looks to tap investors. By offering operators attractive terms, it will be hoping to steer the privatisation process towards success. Given that the poor electricity supply has long been Nigeria’s Achilles heel, a successful privatisation process and subsequent boost in capacity may yield dramatic results for the economy as a whole.

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