Power privatization – one year after
History was made on November 1, 2013 when government handed over the privatised power generating and distributing companies to their private investors. It has been mostly successful given the completion of the Gencos and Discos privatisation, the award of TCN management contract to Manitoba Hydro International and the commencement of the privatisation of the NIPP power plants.
The Milestones thus far
The privatization process brought in over 331 Expression of Interest (EoIs) from local and international investors and raised about US$2.9 billion for the Federal Government of Nigeria.
Additionally, several key milestones were achieved within the last one year period, including the settlement of staff liabilities, the secured World Bank Partial Risk Guarantee (PRG) of US$700 million and African Development Bank (AfDB) PRG of US$182 million. The CBN has also taken a proactive approach to managing the burgeoning sector with the creation of the N300 billion power and aviation fund and the establishment of the N200 billion Power Sector Intervention Fund.
Also, NERC, the power sector’s regulatory body announced plans together with the Ministry of Petroleum, of a new benchmark price of US$2.50 per scf for gas supply and US$0.80 per scf for transportation. This has resulted in the announcement of a number of pipeline and gas projects by IOCs and Nigerian investors.
Challenges remain
Despite the many successes of the process, it has remained an uphill task for the new private operators of the power assets to reap gains from the exercise.
Generation currently stands at 4000MW, far below domestic and industrial demand. “Nigerians spend about N796.4 billion annually on petrol and diesel to fuel their electric generators in order generate their own electricity due to inadequate power supply”, says Godfrey Ogbemudia, Programme Director of Community Research and Development Centre (CREDC).
Adding that, in spite of the various government policies to revive the energy sector, nothing had really been achieved, as many Nigerians still less than four hours electricity supply per day.
Gas supply, infrastructure, tariffs, debt overhang as Achilles heel
There are several reasons for the problems facing the private operators. Firstly, the persistent gas shortage problem, coupled with decrepit infrastructure has meant inadequate power generation and limited revenues. Customers’ apathy to bill payment has also compounded the revenue generation problem.
Additionally, tariffs are driven by the MYTO model which is based on under-estimated ATC&C losses. This led to cash shortages amid growing receivables and payables, and the perception that bidders had perhaps overpaid for the assets. The current trade payables and receivables shortfall in the industry, is estimated at over N200 billion (US$1.25 billion) according to data from FBN Capital.
Adding to the revenue generation problem is the debt overhang problem. This problem is from two sources; debt to acquire the assets and legacy debt plus the need for the required fixed capital investments to effect the necessary turnaround in power generation and distribution. These investments are expected to be funded with even more debt capital. Equity capital would need to be raised to mitigate the effects of the high leverage.
Estimated CAPEX for the sector required is US$6 billion; US$1.8 billion for Discos and US$4.2 billion for Gencos according to data from FBN Capital. These estimates are based on a cost effective tariff model.
Vandalism still a lingering sore
The vandalism of electricity equipment has not receded, even with the assets being in private hands. This has constituted a big drain in the finances of the Power Companies, caused prolonged outages, worsened instability of the grid and distribution network and elicited considerable apathy to payment of electricity bills says Oladele Amoda, MD/CEO, EKO Electricity Distribution Company.
Despite these serious concerns, the private operators have been working to secure the continuing success of the privatization exercise.
Bridging the revenue gap
Discos have been aggressively pursuing loss cutting measures to close the revenue gap. Discos have been engaged in actively deploying meters and technology to improve billing.
Presently, losses in the power sector are about 40 – 50 percent of revenues; however, approximately half of losses are expected to be eliminated within the next year according to Taiwo Okeowo, Deputy Managing Director and Head Investment Banking FBN Capital.
“We envisage industry revenues of N1 trillion, in the next 3 years as aggregate technical losses on distributed power falls and generation output is set to rise with all the power plants coming on stream”, he continues.
Additionally, funding and leverage issues would spur new equity deals in the energy sector by H1 2015 of about $15 billion, according to Albert Okumagba, CEO of BGL Plc.
The need to raise capital is being driven by these transactions, “The eleven distribution companies should be quoted in five years”, says Okumagba.
TEM set to go
NERC has indicated that the electricity market is now ready to go into the next stage, the Transitional Electricity Market (TEM) phase.
All the condition precedents to the declaration of TEM have been completed, and the Minister of Power, Chinedu Nebo, is to declare the market open for trading under the terms of TEM.
The formal CPs include the approval of grid codes and market rules, establishment of an independent regulator, establishment of market operation and system operation with functional capabilities and the establishment of a market dispute resolution mechanism.
While the informal CPs not listed in the market rules but necessary for the optimal working of the market, include a fully cost reflective tariff, confirmation of reliable gas supply to power plants and validation of gas supply and power purchase agreements according to Sam Amadi, Chairman, NERC.
It is imperative to note, that for the private operators to remain creditworthy, insurance companies and pension funds who are traditional long term investors and did not participate in the privatisation should invest in the power sector. Presently, the long term funding of the private companies is limited as short to medium term dollar- denominated loans were raised against Naira assets.
It is imperative to correct this liability mismatch as it could get costly quickly. The LIBOR, the reference rate at which these loans were made, has trended up as a result of tapering from United States Federal Reserve.
Yinka Abraham