Power financing: Banks eager, await documentation outcome

Monday Onuwabuagbe a small business owner who runs a photo studio in FESTAC town, a Lagos suburb, has heard of plans to reform the government-owned Power Holding Company of Nigeria (PHCN) by selling it off to core private sector investors.

Onuwabuagbe, who is in his late fifties, is optimistic that the reforms will put an end to the daily blackouts which cast a shadow on his otherwise, flashy snapshots.

He however says he is in the dark, about the current state of the reform process.

“The last we heard, Government was going to sack the PHCN workers,” Onuwabuagbe said.

“Right now I have no idea what is going on with the privatisation process.”

Nigerian and global banks which have better insight on the reform process, are eagerly awaiting the outcome of the documentation and subsequent handover of power assets to prospective buyers, the success of which will improve the prospects of attracting financing to the sector.

“Clearly, as that industry goes through its documentation phase, which is what it is currently going through, and power purchase agreements (PPA’s) are signed, which are backed up by the partial risk guaranty from the World Bank, and the contracts become water tight, I would then expect that this area with 17 new units, plus the transmission, will attract a lot of financing,” Omar Hafeez, Citibank’s Managing Director and Chief Executive Officer for Nigeria, tells BusinessDay.

Nigeria is unbundling the main PHCN asset into several components of distribution, transmission and generation companies, and selling them off.

Hafeez says right now, banks are only financing the acquisition aspect of the power assets, which is being financed with recourse to the balance sheets of the buyers, as opposed to the assets that are being purchased.

Beyond that, the commercial success of the eleven privatised electricity distribution companies (Discos) is then critical to attracting funds to the sector, the financing needs of which are estimated at $75 billion by 2020.

“I think really the viability of the whole model depends on the guy that pays the bill at the disco level… who really needs to finance the whole chain,” Hafeez said.

That would be consumers like Onuwabuagbe, who says he spends N10,000 a week on average, to fuel his backup generator.

“It is really when you get into a project finance basis, on a ring fenced basis where you only lend to a DISCO against its own assets, against its own recoveries and cash flows, that you know if the projects are bankable. We have not gotten there yet,” Hafeez said.

Bankability refers to a project or proposal that has sufficient collateral, future cash flow, and high probability of success, to be acceptable to institutional lenders or banks.

Once the documentation is done, the banks are expected to then know what the commercial reality is, how much is needed to invest in order to fix or upgrade the assets, and how quickly they can recover money from the end user with prepaid meters.

“I think that is really the end game. You want to make the whole chain, all the way from Disco up to gas exploration, all commercially viable,” Hafeez said.

The Discos are at the end of a complex chain of players in the power sector which includes the gas suppliers, IPPs/ Gencos, the bulk trader, and TCN.

Banks are already increasing their capacity to lend this year, as they hope to profit from the bid to end Nigeria’s notorious power shortage that sucks productivity out of businesses and puts a brake on growth.

UBA, Nigeria’s fifth-largest lender by market value, said last week it plans to increase loans by as much as 40 percent this year, to fund power projects.

Nigeria with a population of 160 million people is estimated to need about 40,000 Mega Watts (MW) of electricity over the next decade, but currently has less than 6,000 mega watts (MW) of available capacity.

PATRICK ATUANYA