Power Sector Privatization: Process and Prospects – BPE
Power Sector Privatization has been a front burner issue since the era of President Olusegun Obasanjo in 1999. Has it been done right? Is there anything more we need to do to get adequate, regular and reliable energy on demand for our economic development? Energy Business Digest serves you a rare and detailed expose on the Nigerian Power Sector Privatization, the process, methodology adopted and the prospects as told by the Director General of the Bureau of Public Enterprises, BPE, Benjamin Dikki.
Watch out for the following Take Away Notes;
- Real Dimensions Before the Reform
- Objectives of the Reform
- Investment Opportunities
The piece is a collector’s copy. Enjoy it.
POWER SECTOR REFORMS AS A CATALYST FOR SOCIO-ECONOMIC DEVELOPMENT OF NIGERIA
By Benjamin E Dikki
Lessons learnt from the industrial revolution of the mid-18th century to the mid-19th century show that the revolution was partially fuelled by the use of energy to drive industrial processes. This engendered the introduction of more effective and efficient devices in production. The result was dramatic increase in productivity leading to a faster pace of economic growth and development including the well-being of the people. As observed by Stern (2003) energy used per unit of economic output has declined since the beginning of the 19th century, but that this is to a large extent due to a shift in energy use from direct use of fossil fuels such as coal to the use of higher quality fuels, and especially electricity. When this shift in the composition of energy use is taken into account, energy use and the level of economic activity are found to be positively correlated. It should be noted that since the advent of electricity in the production matrix, socio-economic development has been supported by the use of neater and more efficient energy of which electric power is the best so far.
The power sector in Nigeria before the reform was largely operated by a huge government monopoly. It became the common feature for most governments whether civilian or military to promise more investments in the sector that would improve performance and service delivery. But these were more effective in rhetoric than in the actual provision of the service. Long term neglect saw that this critical developmental requirement was starved of investments for over 20 years. Population growth, estimated at almost 3% meant that the existing capacity of power production and transmission could not cope with the increasing demand as the society became more complex and growth efforts were requiring more electricity. The unsustainability of the process of power provision model at that time saw the need for a radical reform programme that will change the shape and scope of power provision in Nigeria.
It is noteworthy that with a population of over 150 million with less than 5000MW available capacity, power supply is considered a major problem in the developmental efforts which need urgent attention. The situation where several African countries with less population and economic capacities have better per capita access to electricity is unacceptable if the vision of becoming one of the top twenty countries of the world by the year 2020 was to be achieved.
The Nigerian Power Sector reform is therefore not, and was not meant to be an end in itself; but part of the mechanism for liberalizing the economy to facilitate private sector participation as the drivers of the economic growth. This, in the long run would be a catalyst for better service provision as it creates the enabling environment for employment and wealth creation opportunities and enhanced security. The reform process is envisaged as an elixir to expose the country’s vast industrial and economic potential while moving it away from government control that limited growth through inadequate investments and vast inefficiency anchored on corruption. In doing so, role delineation was introduced such that different entities were charged with the responsibility of fashioning out policies for the sector (Line Ministry); a regulatory framework and agency was created to provide impartial environment for all service providers in the sector; and the sector opened for private sector operators to participate in the actual generation and distribution of power. In this regard, a new legal and regulatory regime was to be developed which saw the establishment of new legal and regulatory institutions created to regulate, protect or enhance the activities of players in the sector for sustainability.
It is expected that the reform will lead to the development of small and medium scale industries and generate employment for the army of unemployed as the innate growth and developmental capabilities of the country in the power sector is unleashed on the country with access to adequate quality, affordable and sustainable electricity supply services.
The Real Dimensions before the reforms
At the onset of the democratically elected civilian administration in 1999, the Nigerian Electricity Supply Industry (NESI) had reached, perhaps, the lowest point in its 100 year history. We highlight some of these relevant developments sequentially below;
- Of the 79 generation units owned largely by the vertically integrated publicly owned electric utility in the country, only 19 units were operational with an average daily available generation capacity of only 1,750 MW;
- With the last set of generation plants completed and commissioned in 1990 and the last transmission line built in 1987, no new electricity infrastructure was built between 1989-1999, while storage and maintenance culture were extremely poor;
- It was estimated that over 90 million people were without access to the national electricity transmission system; and over 50 million had to engage in costly and environmentally unfriendly private electricity generation.
- Accurate and reliable estimates of systems, commercial and payment losses were unavailable, but were estimated to exceed 50%. Nigeria had one of the lowest cost recovery electric power sectors with the tariff recovery put at only 30% of historical cost, making the sector insolvent and perennially unsustainable.
Role Of The Bureau Of Public Enterprises And The Electric Power Sector Reforms
The Bureau of Public Enterprises is the secretariat and implementation arm of the National Council on Privatization, a body set up by the Federal Government of Nigeria saddled with sector reform and privatization of state owned (or public) enterprises.
The reform and privatization of the Nigerian electric power sector was in response to the failure of the sector to deliver the required service to meet socio-economic demands, ostensibly because it was a monopoly. This was coupled with inadequate investment funding and appropriate manpower to grow and develop the sector to meet the equally growing population. This in turn was, perhaps, a direct consequence of the structure of the industry which was a vertically integrated government owned and operated entity lacking required investment and independent regulation.
Objectives Of The Power Sector Reform
The following outlines the objectives of the reform of the Nigerian power sector;
- To reduce the cost of doing business in Nigeria so as to attract new investments through provision of quality and dependable power supply to the economy for industrial, commercial and socio-domestic activities;
- To improve the efficiency of the distribution, generation and transmission network;
- To provide Nigerian people basic and affordable infrastructure, to enable them create employment for themselves.
- To promote small and medium enterprises and enhance well-being of the citizenry.
These can be achieved by creating an electricity market that is private sector driven, with potential for massive investment across the value chain.
The Steps Undertaken To Reform the Power Sector
To reform the process started with the inauguration of the Electric Power Reform Implementation Committee (EPIC) by the National Council on Privatization (NCP) to enunciate a new sector policy as well as a draft legal framework that will ensure the actualization of the new vision. The new National Electric Power Policy was submitted to the NCP and subsequently approval by the Federal Executive Council in September 2001. Thereafter the efforts culminated in the enactment of the Electric Power Sector Reform Act in March 2005 which repealed the archaic 1988- terminating the monopoly status of the National Electric Power Authority (NEPA) and allowing the private sector participation.
In particular, the National Electric Power Policy recommended the following:
- Establishment of a sector regulator;
- Privatization of the electric power sector; and
- A market trading design and new rules, codes and processes.
In March 2005 the Electric Power Sector Reform Act was passed which defined the reform agenda as follows:
- NEPA was transformed into PHCN Plc as a holding company for the assets, liabilities, employees, rights and obligations of NEPA on 5th May 2005;
- The independent regulator NERC was established on October 2005;
- In November 2005, 18 New successor Companies comprising of six generation companies (Gencos), 1 transmission company and 11 distribution companies (Discos) were incorporated;
- On 1st July 2006, the assets, liabilities and staff of PHCN were transferred to the successor companies, thereby granting them greater operational autonomy;
- Between 2006 and 2007, the first wave of privatization commenced with the harvesting of about 400 Expressions of Interest (EOIs) but the process was truncated due to policy changes at that period.
Creating the Nigerian Electricity Market
In order to ensure the smooth development of the sector, a market model that enabled an electricity market to be created was approved. This required that enabling environment for the operators be created by taking care of the huge liabilities of the previous government power owned company (NEPA). In this regard, the Nigerian Electricity Liability Management Company (NELMCO) was incorporated on August 25, 2006 to inherit and manage the legacy liabilities of PHCN arising from litigations, pensions; debts owed Independent Power Producers (IPPs) and other contractual debts of the successor companies. The liabilities that NELMCO is to inherit were estimated to have amounted to over N507 billion. The aim was to ensure that the new power market operates without the debilitating problems of the past. The companies created out of NEPA were to be privatized without liabilities that could have encumbered their operations.
In addition, the Nigerian Bulk Electricity Trading Plc (NBET) was incorporated on July 29, 2010 and was licensed by the regulator to undertake the business of trading in the wholesale electricity market as bulk purchaser and bulk seller of electricity and provider of ancillary services pursuant to the EPRSA Act 2005. It is to take over the contract management and obligations of the Federal Government under existing Power Purchase Agreements (PPAs) like those entered into with AES and AGIP. NBET was to negotiate, buy and sign vesting contract/PPAs with the existing IPPs and potential new entrants and act as a middleman for the existing Discos until they are creditworthy to enter into bilateral contracts with the independent Power Producers. It was also to provide comfort to investors as payment support mechanisms were to be anchored on it. Thus, the Bulk Trader is a single buyer/multi buyer hybrid market created as a transition institution to ensure an orderly development of a wholesale power market for Nigeria. Consequently, it has been capitalized by government to the tune of about $850 million.
The Privatization Strategy
The privatization strategies approved for the Successor Companies (SCs) including the Transmission Company of Nigeria were:
– Core investor sale of Discos and some Gencos;
– Asset sale of Gencos;
– Management contract for the Transmission Company; and
– Concession of some Gencos.
The Privatization Of The Successor Generation And Distribution Companies
Beginning in December 2010, BPE restarted the process for the transparent privatization of the PHCN Successor Companies. The process commenced with a series of Road Shows to promote the transactions. The road shows were held in Lagos, Dubai, London, New York and Johannesburg. BPE then advertised the opportunities and requested investors to send in their Expressions of Interest. Subsequently, 331 Expressions of Interest were received on March 4, 2011, which were afterward evaluated and a shortlist prepared.
Engagement of Management Contractor for TCN
Manitoba Hydro International (MHI) emerged as the Management Contractor for the Transmission Company of Nigeria (TCN) after a competitive transaction process. The Contract was executed with MHI on July 23, 2012 for a period of three years renewable for another two years. The objective of appointing a management contractor was to transform TCN to be technically and financially efficient and capable of evacuating the maximum capacity of energy generated. A key feature of the management contract was for the attainment of clearly defined milestones and engineering parameters that will transform the company.
In addition the contractor was to provide the day to day management of the company by occupying the key management positions from Managing Director to head Human Resources -8 key positions in all. Other outputs were:
- Training of Nigerian staff on and off shore as contained in the contract;
- The MHI management staff were to work together with Nigerian counterparts for the purpose of knowledge transfer;
- Extensive reporting requirements in the contract (monthly, quarterly and annually);
The contract, which was Lump sum with payments tied to deliverables, is supervised by the TCN board. Thus, TCN management reports to the board, which defines the schedule of delegated authority which clearly outlines the span of authority of the management.
The management contract will enable the complete unbundling and independent operation of the System and Market Operator functions into an Independent System Operator, allowing the functional entities of TCN to concentrate on their core purposes and thus further enrich the function and development of the industry. The management contractor has so far delivered the 18 reports on different facets of how TCN is to be transformed.
Privatization has opened up the power sector for further large scale investments by private financiers. The new Genco owners are contractually obligated to rump up generation capacity of the acquired plants by about 5,000 MW over the next five years, while the Disco owners are obligated to make significant reduction in Aggregate Technical and Commercial losses from the current high levels of over 50% in the next five years, as well as to extend access to new customers. With the successful privatization of PHCN, a conductive environment has been set for new Independent Power Producers. Also about US$ 1 billion per year for the next eight years is needed in transmission investment and private financing in terms of infrastructure bond is being explored.
Total Investment to be made in Discos
The table below outlines the expected investment in the Discos.
The five year total capital expenditure for the discos is almost $1.8 billion.
Discos Investment Obligation under MYTO
The multi-year tariff order developed by the sector regulator requires that the investments to be made by the Discos must cover the commitments they have all made in the following areas.
- Metering (6.4 million meters over five years)
- Health, safety and environmental practices.
- Reduction in number of customer interruptions i.e. due to network faults.
- New customer connections and network expansion.
- Improving customer services and complaints handling procedures.
- A cost reflective tariff has been introduced since June 1, 2012 and is subject to six monthly minor revisions.
Critical Success Factors
The following were the critical success factors identified for the accomplishment of the reform objectives:
- Political Support
Political support came at the highest level with the President personally directing the reform through a Presidential Action Committee on Power and a Presidential Task force; and continuous monitoring of the progress of the privatization process directed by the Vice-President as the Chairman of the National Council on Privatization.
- Transaction Advisory Services
Engagement of a Privatization Advisor through a competitive procurement process which resulted in CPCS of Ottawa, Canada, being engaged. CPCS proved to be a versatile responsive dynamic proactive and highly committed to the transaction and worked for closely with BPE on day to day issues including addressing internal processes.
3. A Committed in-House Team
A passionate in-house team with clearly defined responsibilities and clear objectives proved to be a key success factor. Members of the power team knew exactly what was expected of them, had cohesion and unity of purpose and ensured unfettered flow of information among themselves. A mechanism for monitoring the deliveries of each member was further established.
4. Transparency in the Process of Transaction.
Transparency was a crucial attribute for a large scale transaction of this nature to succeed. And so for every aspect of implementation, a clear transaction process was put in place such as:
– Strict adherence to the rules of the game(as in the requests for proposal)
– All bidders were treated equally
– Clear and public transaction documents for all bidder’s enquiries (documents do not differ between bidders)
– A quick response to bidders inquires; and
– Public bid openings
This provided confidence to potential bidders and sustained their interest
5. Resolution of Legacy Liabilities
The electricity supply industry had built up extensive legacy obligations over the past years of public ownership and operation with labour costs forming the main legacy liability fundamental to the success of the privatization was the effective handling of the labour legacy liability of the Power Holding Company of Nigeria (PHCN) which took over responsibility from NEPA. Government decided to pay off the entire 47,913 PHCN employees (severance and pension) so that the new owners could be provided with a clean operational slate. The process required 14 months of negotiations with the unions before an agreement was reached.
Guarantees and Securitization
FGN decided not to offer the typical sovereign guarantees and implementation agreements typical of privatization in developing countries which often present major challenges especially to foreign investors and financiers (local and international). Guarantees are normally required to mitigate country risk. Government resorted to the World Bank Partial Risks Guarantees(PRG). The PRG provides risk cover to private lenders or investors against the risk of government default on its obligation. PRG in the sum US$ 1billion was provided for gas and generation.
FGN also established the Nigeria Bulk Electricity Trading Company (NBET) as a transitional principal buyer. The power purchase agreements (PPAs) have been established between NBET and Gencos and the Vesting Contract between the Discos and NBET to give comfort to the embryonic electricity market. NBET has been secured with funding (including capital) amounting to US$ 800,000 so that it is in a position to honour the take and pay commitments in the PPA.
Catalyst for Socio-Economic Development of Nigeria
It is evident from the submissions above that the Pre-reform Nigeria Electric Power Sector, characterized by incessant power outages, had failed to deliver the required service to meet socio-economic development. Economic growth became stunted for decades. Many industries in the manufacturing sector simply closed shops while others relocated to greener pastures provided by neighbouring African countries that had more stable power supply. With this relocation by industrialists came loss of jobs, taxes to governments, etc.
However, with the current initiatives of reforming the sector, it is envisaged that Nigeria will soon witness a return to better days for manufacturing and real sectors of the economy. It is hoped that something similar or close to the industrial revolution of the mid19th century in the first nations will be replicated in our country, Nigeria. The impact of the reforms of the telecommunications sector will be more than replicated in the power sector. The initial signs will be through the reopening of the closed small and medium sized factories and eventually the larger factories. All these will provide the much needed job opportunities, increased revenue for the governments and also an anticipated rekindling of the entrepreneurial spirit that is abundant in Nigerians.
- Market Revenue Shortfalls in the Power Sector. The power market is bedeviled by revenue shortages occasioned by technical and commercial losses in the range of 40-62%. These shortages were caused by years of neglect, under investment and corruption. The shortfalls were to be made up for by subsidy provisions made by the Federal Government, which have so far not been forthcoming. This has threatened the market and is of serious concern to all stakeholders. It is clear that an urgent workable solution needs to be put in place to preserve the monumental achievement made by Nigeria in transiting its electricity industry from government dominated to a privatized market. It is heartwarming however that the Central Bank of Nigeria (CBN) proposed to provide N213billion intervention fund. The funds are to be on-lent across the value chain via a Special Purpose Vehicle (SPV) to be paid back by the market from gradual tariff increases.
- Monitoring Investors’ Implementation of their Business Plans. A robust monitoring template of the sector is being developed by NERC in collaboration with BPE.
- Transmission. The transmission system needs to be up-to-date with the current developments in the sector in order to be able to evacuate all the expected increase in generation. This requires careful planning and huge investments.
- Gas Supply. There should be adequate arrangements in place for the development of gas infrastructure to feed current and emerging thermal power stations.
- Patience. Change will not be immediate and that needs to be communicated to Nigerians to control rising expectations which can be attributed to decades of underinvestment and corresponding crumbling infrastructure.
- Funding the Power Sector. About $3.5 billion are needed in yearly investments for five years to improve generation, distribution and transmission in the country. The nation’s banking sector alone cannot shoulder that responsibility and bilateral and multilateral sources of funding are needed to support the sector.
- Rapidly Changing Market/Unpredictability. The nation has just moved from state ownership to a private sector managed electricity industry and there is likely to be unpredictability for the regulator, the other government agencies involved in the process, the private sector and the public.
- External vigilance by all stakeholders is required to sustain the reform and changes that will be experienced.
The intention of the reform of the Nigerian power sector is the provision of cheap, neat, safe, and environmentally friendly electricity for use in socio-economic activities such as Agriculture and Forestry including irrigation and protection against deforestation and desert encroachment; Communications; Domestic activities; Education; Entertainment; Healthcare services; Security; Small, Medium and Large Scale Businesses and Water Supply, all of which contribute to the economy. This will result to minimized waste, improved productive capacity, enhanced health and better revenue to individuals and the economy coming from exports and taxation. Access to quality electricity service is therefore a significant factor in poverty alleviation.
Culled: National Defence College News Magazine