Nigeria: At long, long last, power is privatised

The successful privatisation of the Power Holding Company of Nigeria (PHCN) in September after several setbacks not only represents a paradigm shift, but may also drive an economic revolution in the country, Frederick Mordi reports.

On 30th September 2013, the Nigerian government formally presented certificates and legal papers to new owners of 15 state-owned power generation and distribution companies under the privatisation scheme. This opened a new chapter in the power sector, which had experienced one of the most complex privatisation exercises in the nation’s history.

Though the new owners will have to wait until 1st January 2014 before they assume full ownership of the privatised companies due to labour-related issues that are expected to be resolved before the end of this year, analysts say it was a significant milestone.

Explaining the delay in the full physical handover of the companies to investors, the chairman of the Presidential Task Force on power, Beks Dagogo-Jack, said the federal government would finalise payment of all outstanding entitlements of the Power Holding Company of Nigeria (PHCN) workers before the new owners take over.

He said: “We have an agreement with the PHCN workers’ unions and we have almost completed the payment. But they will all be settled before the 1st January 2014 deadline.”

Members of the National Union of Electricity Employees (NUEE) had threatened to embark on a nationwide strike to protest against the sale of the successor generation and distribution companies of PHCN. But the government has allayed their fears. About 47,000 PHCN workers are affected by the exercise.

So long a journey
Indeed, the transfer of ownership of the electricity companies from the government to the private sector marked the end of a tortuous journey that started in 1999 when the National Council on Privatisation (NCP), which manages the sale of state-owned assets, embarked on the exercise due to the perceived mismanagement of public enterprises over the years. At one point, PHCN’s generation capacity dropped to less than 2,500 megawatts. This led to frequent system collapses.

In fact, PHCN has not been able to generate up to 5,000 megawatts of electricity, even though experts say Nigeria needs more than 10 times that figure to catch up with advanced nations. Low levels of investment in repairs, maintenance and manpower development, as well as high energy losses, also characterised the PHCN, which was notoriously inefficient in terms of revenue collection. It is estimated that more than 50% of revenue collected is lost due to massive corruption in the system.

All these informed the government’s decision to sell the company. It is expected that the private sector owners would be able to block the leakages and improve on revenue collection when they take charge. The defunct PHCN had 10 distribution companies (Discos), five generation companies (Gencos) and the Transmission Company of Nigeria (TCN).

The unbundling process of the PHCN gained traction in August this year when winners of the bids for both Discos and Gencos finally emerged. The Bureau of Public Enterprises (BPE) put the total sale figure of the Gencos and Discos at $1.27bn and $1.26bn, respectively, bringing the total to $2.53bn.
The winning bidders paid their bids in two instalments comprising an initial 25% and final payment of 75% in August. This set the stage for the formal handing over of the companies to the new owners.

At the handover ceremony, Vice-President Namadi Sambo, who is also chairman of the NCP, said the government expects the new Gencos owners to generate an additional 5,000 megawatts within a period of five years.

He said: “This promise has been clearly captured in the performance agreement that the new owners have with the BPE. This promise will be monitored by the regulator.”

Sambo pledged that the new owners will take off with clean balance sheets as the Nigeria Electricity Liability Management Company (NELMCO) has been set up to assume all legacy liabilities. He also assured electricity consumers of adequate protection against unfair pricing and poor-quality service.
Sambo says the government has put in place some incentives for investors. They include duty exemptions for equipment, a five-year tax holiday, and resolution of labour liabilities to enable them to take off smoothly.

Expressing satisfaction with the conduct of the entire exercise, the Vice-President said it demonstrates the level of confidence that investors have in the power sector and the economy in general. He added that the government is collaborating with the private sector to implement the $8bn Nigeria gas master plan that will ensure sufficiency in gas supply to the power plants, while reaffirming that 10 additional power plants under the management of the Niger Delta Power Holding Company (NDPHC), are under way. This will boost power supply in the country. Passage of the Petroleum Industry Bill (PIB), will also enhance gas supply.

The International Finance Corporation (IFC), the private sector arm of the World Bank Group, has pledged to support the government through its Energy Business Plan that is expected to add up to 1,500 MW to the national grid.

Also justifying the exercise, the Minister of Power, Professor Chinedu Nebo, said the power sector is highly capital intensive, adding that it would require $3.5bn investment annually for the next 10 years for generation and transmission alone.

He said: “Government alone cannot afford these huge costs. This is at the core of the government decision to privatise the industry and in so doing, get the critical mass of private investment and expertise to resuscitate the comatose power sector.”

Nebo advised the new owners to consider listing their companies on the Nigerian Stock Exchange (NSE), where they could access long-term funds for growth and expansion. He added that the high rate of returns which the NSE offers investors (about 35% in 2012) is a good incentive. 

The new owners
Retired top military brass, including a former head of state, influential businessmen, politicians and some state governments, own the newly privatised companies. Almost all the new owners have foreign partners that are expected to provide the needed technical expertise in running the plants.

Some of the prominent names behind the power deal include former banker, Tony Elumelu, who leads the Transcorp/Woodrock consortium; businessman, Femi Otedola, chairman of Amperion; and Tonye Cole’s Sahara Energy Resource Nigeria. Former head of state General Abdulsalam Abubakar is chairman of Integrated Energy Distribution and Marketing Company (IEDMC). Niger, Rivers, Bayela, Cross River and Akwa Ibom states are also among the investors. A number of local banks are backing the project. Analysts believe the entry of the private sector into the industry will lead to a replication of the success recorded in the telecommunications sector following its deregulation in 2001. The expected increase in revenue arising from the metering of more Nigerian homes and businesses will further drive growth and turn the investment into a ‘veritable cash cow’ for investors.

However, analysts have called on the government to step up security in the country to enable the new owners to operate without hitches. For instance, they point out that telecommunications firms are currently experiencing security challenges in some parts of the country where their masts have been damaged.

They also cited vandalism of power equipment and the perennial issue of inadequate gas supply to power the generators as other potential challenges that should be addressed. The current ineffective metering system was another identified challenge. It is estimated that more than 60m out of the country’s 160m people do not have access to the national grid.

But chairman of the Nigerian Electricity Regulatory Commission (NERC) Dr Sam Amadi has assured them of the government’s readiness to tackle these issue. He said the commission would soon introduce a new electricity code in this regard.

The change of ownership effectively means that the Nigerian power sector is now deregulated like the telecommunications sector. Like the telecoms sector, which is reaping the gains of deregulation, analysts believe this paradigm shift in the power sector could revolutionise the economy as it would translate into better quality of service and constant power supply, leading to an increase in commercial activities in the country. If this becomes reality, Nigerians may have cause to start smiling.