Electricity is regularly cited as Nigeria’s chief obstacle to economic growth, but 2013 may mark a turning point for what is often referred to as the country’s Achilles heel. Nigeria has a population of some 168.8m but produces less grid-connected electricity than a major British city. For more than a decade, the lack of reliable power has cut into profit margins and increased operating overheads. The leadership hopes a privatisation process – now under way for power generation and distribution processes – will remove these obstacles and help address the problem. The country is also lacking capacity for water and waste management, and although there is less of a focus on these issues, services across all public utilities are recognised as needing improvement in the coming years.

Under-investment and mismanagement are generally accepted as being among several primary causes of the power problem. The country has struggled over the years to adequately fund its electricity agency’s capital and operational budgets, resulting in declining output from power plants and higher leakage rates across the national transmission grid.

PRIVATISING: The state monopoly, Power Holding Company of Nigeria (PHCN), has been unbundled into 18 successor companies set to be privatised: six power generation companies, Afam Power, Shiroro Hydro Power, Sapele Power Plant, Kainji Hydro Electric, Ughelli Power and Egbin Power; 11 for distribution, including Abuja, Kaduna, Kano, Jos, Yola, Enugu, Benin, Eko, Ikeja, Ibadan and Port Harcourt Electricity Distribution Companies; and the Transmission Power Company of Nigeria, which will remain in state hands but be managed by a private player. As of October 2013, 15 of the transmission and distribution companies had been handed over to their new private owners, many of which consist of a mix of foreign and local investors, with the two remaining firms, Afam Power and Kaduna Distribution Company, expected to be sold in the next six months.

SUPPLY SOURCES: In addition to privatising power generation and distribution activities, the country is also hoping to improve sourcing of inputs and achieve more diversification of supply. For example, Nigeria already has several hydroelectric facilities and is looking to develop its capacity for renewables. In terms of an immediate solution to large-scale electricity production, however, the country’s wealth in natural gas is seen as the only feasible short-term option.

Gas is generally considered the preferred input for power plants due to low costs and relatively low emissions compared to oil or coal, but ensuring a reliable gas supply to power producers has been challenging, due in part to limited infrastructure. Nigeria has a small network of domestic gas lines that are prone to sabotage and malfunction. Additionally, few customers are hooked up to a gas-supply grid, and distributors have struggled to collect payment from customers who are.

In the past, the government has also failed enforce agreements with producers for domestic supply obligations. As a result, the state is offering to pay $1 per million cu foot (mcf) to producers such as Shell and Chevron for gas sold locally. There is a plan to increase that to $1.50 per mcf, and later to $2 per mcf. However, many in Nigeria insist that it would take a higher price – $3 at minimum, for example – for producers to prioritise domestic sales over exporting.

Graft, theft and other forms of misconduct have also slowed performance in the power sector. In the early 2000s, for example, N16bn ($100.8m) earmarked for new power plants disappeared, and fraud at the Rural Electrification Agency (REA) valued at N5.2bn ($32.8m) led to the organisation’s suspension just three years after it was formed. More recently, due to allegations of a conflict of interest stemming from his relationship with a private power producer, the minister of power – who was seen as one of the key figures in making privatisation a reality – stepped down from office.

OPPORTUNITIES: If the power sector can overcome its challenges, opportunities for foreign participation can be expected to balloon. The market for turbines is already a competitive one with the likes of General Electric, Siemens, Alstom and other key players participating. For distributors, pre-paid electricity meters are seen as an important investment to get past the problem of low collections. The government has also put in place extensive incentives for investment, such as a three- to five-year tax holiday and other tax breaks. Power-generation companies using natural gas will be offered additional tax breaks on investment, such as making interest on relevant loans tax deductible for government-approved projects, and making dividends paid out during the initial tax-holiday period un-taxable.

Companies will also compete on services, offering a comprehensive solution to asset management that may appeal in a country where this has been a struggle in the past. “The independent power projects (IPP) market is increasingly moving in this direction,” Michael Lakota, Siemens Nigeria’s managing director, told OBG. Siemens is marketing itself as a builder and operator of power stations as well as a provider of turbines. “We can deliver a turbine to the harbour and you can pick it up from there, or we can do much more. The means of differentiation is services,” Lakota said.

Management contracts and consulting services are also being tendered, expanding the scope of opportunity. Canadian utility Manitoba Hydro has been awarded a management contract for the national grid, for example, the one piece of existing physical infrastructure that will remain owned by government.

NEW FACILITIES: As the market for power opens up for investment, it may also support the introduction of new facilities, such as island power systems, to serve remote populations or industrial clusters. In the power generation market specifically, investment opportunities can be grouped into three types by usage and size. Facilities of 20 MW and higher represent the utilities market, operating as independent power providers and feeding into the national grid. On a second level is the captive market – plants that operate below 20 MW, designed to serve small groups of users located close to the source. A third level is the unregulated market, as licences are not necessary to build a plant of less than 10 MW. Users for these power stations may include distribution companies looking to establish islands of service in remote areas too expensive to connect to the national grid, or large users of electricity wishing to avoid the risk inherent in relying on the national supply and which could also save money by building their own dedicated facility. “Small-scale solar electricity generation units have the added benefit of autonomy, which is crucial in a country like Nigeria,” Patrick Owelle, CEO of PSC Industries, a solar and renewable electricity firm, told OBG. “Small-scale technology can limit and isolate the impact of grid-related outages.”

SIZE & SCOPE: Available capacity for distribution through the national grid is roughly 4000 MW. Electricity from power plants is estimated at a capacity of between 4000 MW and 8000 MW, although Nigeria’s electricity generation has declined from a peak of about 4517.6 MW recorded in December 2012 to some 3781.80 MW in October 2013, according to the power generation fact sheet of the Presidential Task Force on Power. The electricity generation report showed that though the country’s peak demand level was forecast at 12,800 MW of electricity, energy generation capacity stood at about 3559.46 MWh per hour (MWh/h), while actual amount of electricity sent out into the national grid was 3487.85 MWh/h. The chairman of the technical committee of the National Council on Privatisation, Atedo Peterside, said that nine of the former PHCN generation companies only had available capacity of 2692 MW as of September 2013, compared with a total installed capacity of 6976.40 MW.

Almost all industrial users of electricity, and residential customers who can afford it, have a backup diesel generator system. Though it is difficult to estimate an exact figure for demand, the African Development Bank has pegged the figure at between 10 GW and 12 GW, while many pundits set it at less than 20 GW. Even on a per capita basis that estimate would leave Nigeria with considerably less power than some other major African countries. South Africa has a capacity of about 40 GW and an average per capita consumption of 7808 KWh, according to a May 2013 study by Banwo & Ighodalo, a Lagos-based law firm. Egypt’s 17 GW of capacity yields a per capita figure of 1866 KWh. Per capita details can be difficult to assess because of the lack of solid census data, but the study estimated the figure for Nigeria at 236 KWh, based on an assumption of a population of 150m, a conservative population estimate.

REGULATORS: The power sector is regulated by the Nigeria Electricity Regulatory Commission (NERC), which up until 2013 was largely responsible for overseeing the handful of IPPs in the sector. Meanwhile the PHCN managed an extensive array of generation, transmission and distribution activities, providing roughly three quarters of the country’s power. PHCN’s role ended on November 1, 2013, when generation and distribution services were handed over to the private sector.

One of NERC’s most important roles is setting tariffs, a process done through the Multi-Year Tariff Order (MYTO) implemented in 2008, and MYTO II implemented in 2012. The MYTO is set according to relevant laws so that consumers pay a price that reflects costs and a reasonable return. NERC sets the rate after consulting with stakeholders, and adjusts it annually to reflect inflation and other costs. According to NERC, the average consumer paid N6 ($0.04)/KWh as of July 2008, after the first tariff under MYTO was announced. The tariff rose to N7 ($0.043), N8.5 ($0.05) and N10 ($0.06) in subsequent 12-month increments. From July 2008 the amount of government subsidy in the system fell from N5.26 ($0.03)/KWh to N1.19 ($0.01).

“The tariffs are very low for now, but in order to close power-purchase agreements the government is likely willing to support higher ones,” said Tomasso Casara, commercial manager at Saipem Contracting Nigeria, which works in the oil and gas sector. In the future, tariff levels are expected to be key to stimulating private sector investment, although others disagree and believe MYTO could add financial burden for the government.

REFORM PLANS: Plans and goals for the power sector are outlined in the August 2013 Road Map for Power Sector Reform. The original strategy, published in 2010, had an objective of reaching a total capacity of 14,218 MW by December 2013, a figure that combines both government and private power plants, although as of mid-2013, there was an installed generation capacity of 8664 MW, available generation capacity of 6579 MW and an actual generation capacity of 4671 MW. The problem of gas supply also means that installed capacity is underutilised, undermining the effectiveness of measuring success by added capacity.

The road map’s reform programme was the result of the work of two government bodies in the executive branch. The first is the Presidential Task Force on Power, comprising private sector executives and government representatives, which was created by President Goodluck Jonathan to work with all relevant government agencies and the private sector to improve coordination between the wide universe of actors, which, in this case, includes the Bureau of Privatisation, the Nigerian Bulk Electricity Trading and the REA.

To help clarify the individual responsibilities of each agency, another group was created within the organisational structure of the president’s office called the Presidential Action Committee on Power (PACP), made up of representatives from the Cabinet, the central bank and senior government officials. “We established the PACP with a view to eliminating red tape and the often over-bureaucratic and inefficient nature of decision-making in government,” Jonathan wrote in the introduction of the Road Map for Power Sector Reform. After the handover of power generation and distribution companies to the private sector in November 2013, the Transitional Electricity Market is expected to commence in February 2014, while interim rules are regulating the market during the transition. The Electricity Management Services (EMS) Company has taken over some of the non-core professional services of PHCN. The EMS is incorporated under the Federal Ministry of Power (FMP) as a government-owned company.

STEP BY STEP: The privatisation process has been in the works for about a decade, but it is far from the first attempt to fix the power problem. Precursors of today’s PHCN and NERC include the Electric Company of Nigeria and the Niger Dams Authority, which were bundled together and rebranded the National Electric Power Authority (NEPA) in 1972. NEPA was a vertically integrated monopoly with operations from generation to transmission to distribution. Reforms began in 1998, a year after Nigeria became a democracy, and NEPA’s monopoly was lifted that year, to make room for IPPs.

In 2000 the Electric Power Sector Reform Implementation Committee was created to review the sector and propose a course for reform. The committee proposed separating policy from regulation, and NERC has emerged as that dedicated regulator. The committee also recommended unbundling what was left of NEPA and transferring the company’s liabilities to a separate entity to make the existing assets viable privatisation candidates. These basic moves became the core of the Electric Power Sector Reform Act of 2005. With NEPA’s exit came PHCN’s entry, and the plan to unbundle it. The Nigerian Electricity Liability Management Company was created to absorb liabilities.

In 2004/05 the government introduced the National Integrated Power Project (NIPP), an initiative to fast track building 10 gas-fired power plants with a combined capacity of 4775 MW, to be owned by PHCN. That plan is on its way, but is running more slowly than expected, as six of the 10 planned plants have yet to be completed, and none with available capacity are getting a full allocation of gas; three receive less than required to run at full capacity and one gets none. Geregu II plant, with a capacity of 434 MW, was inaugurated by President Jonathan in October 2013. All 10 are now being privatised, including Calabar (630 MW), set to go on-stream by January 2014, Egbema (378 MW), Ihovbor (504 MW), Gbarain (252 MW), Sapele (504 MW), Omoku (252 MW), Alaoji (107 MW), Olorunsogo (750 MW) and Omotosho (500 MW). The Bureau of Public Enterprises and the Niger Delta Power Holding Company are conducting the sales. Privatisation will likely extend past the June 2014 completion target.

A primary reason for the delays has been a lack of financing. Initial funding for the NIPP came from the state’s Excess Crude Account, which was established in lieu of a formal sovereign wealth fund and financed by petroleum receipts. But the laws governing that account made their use illegal for NIPP projects, and President Umaru Musa Yar’Adua put an end to capital allocations to the NIPP from the account in 2007. The government has spent an estimated $15m-$20m on the project, but the assets are expected to sell for less. Bids to purchase the completed plants were submitted in mid-July 2013 and by October 1, 2013 some 82 consortia were pre-qualified, with new requirements established to help narrow down the number of bidders. In early November 2013 the application process closed having received 66 bidders.

RECENT PROGRESS: Measurable progress has been made since 2011 after President Jonathan pledged to make electricity a top priority for his administration. When the 2010 Road Map for Power Sector Reform was released, it won praise for setting realistic goals and timelines and offering more detail on how this would be accomplished than is typically expected from government in Nigeria. Production rose just several months after the road map was introduced.

After the 2011 presidential election, the pace of progress slowed. Despite what many termed a shaky performance by the government in Abuja to get more short-term production from the existing system, private sector interest was strong. Some 200 bidders were shortlisted for the generation and distribution companies unbundled from PHCN. Bid documents were purchased by 129 of those, including many world leaders in electricity technology, according to a study on Nigeria’s power sector by the Infrastructure Consortium for Africa (ICA), a multilateral group operating from the African Development Bank’s headquarters in Tunisia.

The next milestone came in February 2013, when all successful bidders met the deadline for the initial payment of 25% of the value of their bid. By summer 2013, the privatisation of most of the assets appeared to be on track with the remaining 75% paid for by August, although two assets – the distribution company covering the northern city of Kaduna and Afam Power generation company – were facing delays due to problems with qualified bidders. Nevertheless, certificates were given to 15 core owners of the successor distribution and transmission companies by October 2013.

Given the sector’s history of missed milestones, a push to roll out risk guarantees helped facilitate progress for investors. The World Bank’s partial risk guarantee (PRG) programme will be used to guarantee the process, with several options, including and the bank’s Multilateral Investment Guarantee Agency insurance policies being discussed as a means to this end. Other ideas included letters of credit and government guarantees. What seemed clear as of late August 2013 was that PRGs would be involved in the process (one had already been awarded earlier in the year) and that most options remained on the table. Opinions on when a regime for guarantees would be finalised ranged at that time from late 2013 to summer 2014 (see analysis).

GENERATION: The government-owned power plants and IPPs that make up Nigeria’s generation capacity fall into two categories: 21 closed systems that feed a small number of customers in close proximity, and three that were built to contribute to national supply. PHCN’s assets now in the process of being privatised include seven thermal plants ranging in size from 304 MW to 1320 MW of installed capacity. Overall installed capacity is 4988 MW, but actual capacity was pegged at 1978 MW in 2011 by the Bureau of Public Enterprises.

As of summer 2013, most plants were running at between 30% and 60% capacity, according to the Presidential Task Force on Power, except for Afam, where installed capacity is 726 MW and actual output is 60 MW. According to the Infrastructure Consortium for Africa study, in 2012 PHCN accounted for 75% of the electricity fed into the grid (about 3000 MW), with three large IPPs providing an additional 1000 MW.

IPPS: The three IPPs are AES Nigeria Barge, Okpai and Afam VI. AES Nigeria Barge was the first such plant, born of negotiations between the now-defunct US energy trading company Enron and the governments of Nigeria and Lagos state. Before its 2001 bankruptcy, Enron sold its stake to the AES Corporation of the US. The plant is located in Lagos and has been operational since 2001, but ongoing disagreements over gas supply and the power-purchase agreement have led to disputes, lawsuits and arbitration proceedings.

The latter two IPPs were developed as a result of Nigeria’s request to its five joint-venture partners in the oil sector – ExxonMobil, Shell, Total, Agip and Chevron – to build IPPs to contribute to the national electricity pool. In October 2013, plans were also solidified for a Chinese-built 140-MW IPP in Bauchi state.

RENEWABLES: Hydroelectric power is a key part of PHCN’s mix, with three dam-powered plant complexes in operation (760 MW nameplate capacity at Kainji, 578 MW at Jebba, and 130 MW at Shiroro, although malfunctions here brought production to a halt earlier in 2013). More capacity is currently under construction, including 700 MW at Zungeru. Dam concessions were privatised with the rest of the government’s generation assets, comprising two of the six generation companies sold. The damns are in need of rehabilitation, for which the concessionaires are responsible.

Solar power also looks set to become a contributor to the nation’s energy mix, with a Nigerian-German partnership set to build a 500-MW solar plant in the north. With Nigeria perhaps approaching a period in which private sector entrepreneurs will be making investment decisions, debate has increased about what options could be best suited for particular areas of the country. For example, in remote northern villages, where the sun is stronger, the grid is less reliable and there is no access to gas, solar power could be an ideal fit.

TRANSMISSION: Capacity for transmission was between 4500 MW and 5000 MW as of mid-2013. Ideally, transmission capacity will outpace generation capacity, with initial goals to increase the former to 6000 MW by the end of 2013 and to 10 GW by the middle of 2014. Loss rates are at about 11%, according to NERC, and the target is to reduce that figure to between 5% and 7%. Though it is known that the grid is in bad shape, details on its condition are unclear. “The only known maintenance carried out by the power sector workers is fault clearing,” according to the research conducted by the Yaba College of Technology. “Scheduled maintenance for healthy function and life extension of such infrastructure is non-existent.”

The PHCN successor company in charge of the grid is now called the Transmission Corporation of Nigeria (TCN), and will not be privatised. The new company is not expected to be funded from the federal budget, according to NERC, but from various other sources, including proceeds from bond sales. Eventually transmission fees are envisioned rising to the point where the company will become self-financing.

Canada’s Manitoba, which won a three-year management contract worth $23.72m to run TCN, was to have begun in September 2012. But as of mid-2013 it had not been able to take over, because it had not yet gained control over TCN’s finances.

DISTRIBUTION: Now that distribution is set for decentralisation, the practice may evolve to fit local realities. The challenges are fundamentally different in some areas. At one end of the spectrum are the two distribution companies for Lagos and one for Ibadan, a city in the neighbouring state of Oyo. These three distribution areas accounted for 75% of PHCN’s revenue before privatisation. They are also situated close enough to existing gas infrastructure to have a reasonable expectation of receiving a supply of gas for generation. The situation is different in the north, which will rely entirely on renewable energy at least in the medium term.

For now, however, the difference between serving dense urban communities and remote inland ones is reflected in some of the prices paid for private stakes in the distribution companies. Those covering major cities sold for between $32.75m and $41m. By comparison, the Yola Electricity Distribution Company, in the north-east of the country, fetched $14.75m. Eight of the 11 distribution companies are in the country’s southern or central regions. Just three – the Kaduna Electricity Distribution Company, the Kano Electricity Distribution Company and the Yola Electricity Distribution Company, are in the northern region.

To improve distribution efficiency, NERC has taken steps to introduce more pre-paid meters, through a programme called Credit Advance Payment for Metering Implementation. It has licensed 134 companies to participate in various roles: 15 have been authorised to import pre-paid meters, and nine to begin manufacturing them locally. Others will distribute or install meters for all types of electricity customers. The programme pledges to have a pre-paid meter installed within 45 days of any customer paying for the service.

WATER & WASTE: Although it represents the largest overhaul for public services, electricity is not the only area within utilities currently being targeted for reform. Roughly 60% of the population has access to clean water, a figure that is not rising fast enough to meet the official target of 75% by 2015. Like in the power sector there is an official reform document referred to as a road map, which involves rehabilitating existing infrastructure, such as hand-pump boreholes, and adding additional ones. Short-term performance targets were not met a year on from its introduction in January 2011.

Water provision has generally been considered similar to electricity in the West African nation: people expect it for free or at exceptionally low prices. Water infrastructure and delivery, however, is considered to be under-funded and tariffs are too low to allow for functional service providers given Nigeria’s inconsistent budgeting and allocation processes.

A privatisation move has been recently put forward by Akinwunmi Adesina, the minister of agriculture and rural development. For the purposes of water management, Nigeria’s territory has been split into 12 river basins, each with a separate government authority to manage them. Adesina, whose concern is expanding irrigation capacity, has suggested that privatising these river-basin authorities along with their assets and mandates could help, but as of summer 2013 it was unclear whether the idea had enough supporters in Abuja to merit close monitoring for policy changes.

Nigerians have yet to perceive access to water and sanitation through the prism of lost economic opportunity, as they do electricity. However a 2012 World Bank study concluded that N455bn ($2.87bn) in economic activity is lost annually, or 1.3% of GDP, as a result of poor sanitation. Major problems include drops in productivity due to sickness, premature death and money diverted to health care. Plumbing and human waste disposal is a problem, with the lack of toilets a common issue. Those without access to toilets spend a sum total of 2.5 days each year finding a hidden spot to use outside. Nigeria’s investment in sanitation amounts to 0.1% of GDP – a figure the World Bank has recommended be increased, prioritising the elimination of open defecation to prevent the spread of disease.

Some states have made progress on the issue of waste management, such as Lagos and Abuja, where private contractors now bid to handle the job. “Lagosians are gradually beginning to accept waste management as a private service,” Olumuyiwa Adeniyi, managing director of Wastepoint, a waste management company operating in the state, told OBG. “Payment collection has risen from 10% in 2008, to 22% in 2009, and 35% in 2010. Today we receive 50% of payment due to us for waste collection services rendered.” Several other states are considering copying that model.

OUTLOOK: Despite some last-minute hiccups in the privatisation schedule and challenges still to come, Nigeria’s business community is convinced that a tipping point has been reached in the sector’s reform process, and that the privatisation effort will pay off. For that to happen, a regime for guarantees to help stimulate investment would need to be solidified, and supply contracts at various points in the process, higher tariffs, and additional infrastructure to transport gas to plants would also be necessary. However, the biggest challenge remains the nation’s gas supply, the expansion of which hinges on expected projects materialising. Should the commercial and political will to sell it domestically follow, the sector looks set to shape up.