PHCN privatization: not yet game over

We note that Nigeria’s sale of its state-owned electricity assets is just the beginning of a journey. The first steps, from the pre-transitional stage, have been taken. We are now at the transitional stage. Issues at this point include technical and financial issues as well as issues around risks: regulation, financial payment etc.

Electricity is a complex system. To move Nigeria’s electricity industry forward the entire mechanism – gas supply, generation, transmission and distribution – have to be in synch. All have to work at the same time. The electricity industry is as efficient as its weakest link.

Like the parts of a wristwatch which can range from 130 parts (for a simple mechanical watch) to 1728 parts (for what is called a grand complication in the watch making industry). The electricity industry in some sense is a grand complication. This does not suggest difficulty rather it means none of the main parts, however small or minor it may seem, can be allowed to fail. A dysfunctional transmission grid or deficient gas supply will jeopardise the entire system.

When new entrants takeover their assets from November 1st they will have to restore lost capacity, increase capacity. The current capacity of the nine Gencos is underwhelming – 39 percent of installed capacity. Financing additional capacity, that is, to get the Gencos producing at full capacity to meet the 4,284.4 MW shortfall is estimated to cost $1 million per MW ($4.28bn).

Assuming Gencos can upgrade their facilities; Discos have to be able to distribute the electricity evacuated and collect their fees. Atedo Peterside, chairman of the Technical Committee, of the National Council for Privatisation in a recent speech says Discos have to, over the next five years, deploy 6.5m meters and invest N60bn a year to modernise and expand their distribution network.

Those familiar with the privatisation process say that the new owners who have purchased the assets with debt and equity need control and time. They say it will take at least six months to conduct further due diligence, a census of metered consumers, redesign the grid, install transformers and work the assets to generate cash flow.

The ability Discos to generate cash flow is tied to efficiency. In technical terms it means reducing Aggregate, Technical, Commercial and Collection Losses. For a good job, a solid foundation for building the future, the process will take about 36 months.

It takes years to craft complicated watches, so too we expect that it will take some time before the electricity industry begins to function as it should. As things stand, it will take just two weak links to either advance or draw back the process. Issues about transmission, the weakest link in the electricity value chain, and reliable gas supply have to be tackled immediately.

The federal government spends only $6 billion per year on infrastructure, or 5 percent of its GDP, one of the lowest in sub-Saharan countries; the average is about 12 percent. In addition, governance has ground to halt. Substituted with politicking, eyes are off the ball distracted by the next elections. This will give mischief makers – government appointees angling for fiefdoms – ample time to frustrate the process.

Take, for instance, the squabbling at TCN. Such bickering risks distracting from what is most important: building confidence. Lack of confidence, in spite of competence, will delay execution and supervision of projects.

If TCN’s internal strife – over appointments, timelines, reporting hierarchy – remains unresolved, it will affect its sources of finance. For now, there are several sources of “third party financing”, by way of loan from Africa Development Bank (AfDB), process from the government’s Eurobond and NDPHC divestments, Agence Francaise de Developpement and contractor financing from China like the debt for equity swap for the Olorunsogo and Omotosho power plants sold at $177.3m and $217.5m respectively. It is in the federal government’s best interest to sort these issues as soon as possible; is it neither has the money nor time.

By: BusinessDay