B2507212-PHCN-Headquarters

B2507212-PHCN-HeadquartersIn view of the physical transfer of the privatised Power Holding Company of Nigeria’s (PHCN) successor companies by the Federal Government in November, there has been cautious optimism amongst many Nigerians, analysts and stakeholders alike. Indeed, as the Chairman, Technical Committee of the National Council on Privatisation, Atedo Peterside aptly put it in his paper presented at a forum organised by The Bankers Committee; “it is pertinent to remember that this is really the “beginning of a journey” and not the “end of a journey” as some have mistaken it to be”. As such, there are numerous challenges still facing the buyers of the power assets, who are now set to begin the copious task of undertaking an in depth evaluation of the acquired assets to determine the required level of investment that would be necessary to upgrade the assets, going forward.

A major challenge for the new owners is that of a low-margin electricity sector with an insatiable need for capital expenditure. Mr. Atedo Peterside recently pointed out that nine generation companies (including Omotosho and Olorunsogo) only had the available capacity of 2,692MW as of September 10, as against a total installed capacity of 6,976.40MW. It is therefore evident that most of the power plants have been in bad condition for decades due to poor maintenance and therefore a major overhaul of the assets will be necessary. Benjamin Dikki of the Bureau of Public Enterprises (BPE) also recently noted; “They (investors) will, after the takeover, re-tool and bring in new machinery like turbines, which are not easily bought off the shelf to put power on proper footing. They will need time to re-tool after the takeover and between two and three years to bring in the required machinery after which the country would witness increased and steady power supply”. He specifically noted that Discos would have to invest about $1.8bn (about N288bn) as capital expenditure over the next five years to attain efficiency and meet the required capacity.

Thus, another challenge which ties into the first challenge is that of financing. Patrick Mgbenwelu, Director and Head, Project and Structured Finance, FBN Capital Limited stated in Lagos at the 1st FBN Capital Project and Infrastructure Finance Conference that Nigerian banks would need the support of institutional and foreign investors to fund the huge resources needed to drive various ongoing infrastructure projects, particularly the estimated $8 billion required to meet the deficit in the power sector for the next 10 years. He noted that about $8 – $12 billion would be needed yearly for the next 10 years, to meet up with the large deficit of power demand and supply in the nation, which the banks alone would not be able to fund. “This funding cannot come from the banks alone. There is the need for institutional investors and foreign investment to bridge the funding gap.” In this regard, some reports indicate that although Nigeria’s vast natural resources and growing power and infrastructure demands have rightly garnered substantial interest from lenders and developers from across the globe, many of the foreign financial institutions are still reluctant to lend money to the owners of the power plants due to the unpredictability and volatility of the Nigerian economy. They are apparently worried about the government’s tendency to reverse policies in tandem with the current state of insecurity in the country as a whole. As a result, the new owners of the power plants may find it difficult to raise funds for their new found projects from international financiers.

The issue of inadequate supply of gas is also one of the major challenges facing the power sector as Nigeria is predominantly reliant on gas fired power plants.  For instance, previous regimes approved the construction of plants like Geregu and Egbema, without factoring in the issue of gas supply to those plants. Consequently, those plants remained unutilized long after they were commissioned. Furthermore, some other projects which were recently commissioned are still facing the challenge of gas supply.  One of the major causes of this problem is related to the issue of inappropriate commercial pricing which has deterred gas producers from investing in the country. “You want to make the whole chain, all the way from Discos up to gas exploration, commercially viable,” said Citibank’s Managing Director and Chief Executive Officer for Nigeria, Omar Hafeez. Making gas exploration commercially viable would entail having an adjustment to current fixed gas prices which at the moment is unfavourable in terms of spurring gas exploration in the country. Other factors such as poor fiscal terms, low prices and lack of infrastructure are also contributory factors to a lack of investment in the sector. The spate of pipeline vandalisations is another major cause of this problem, with already limited amounts of supply further reduced due to unnecessary pipeline shutdowns as a result of such activities. Peterside notes that while gas supply constraints arising from capacity shortfalls/lags can be foreseen, the impact of pipeline vandalisation is not so predictable and can induce damaging shocks to the health of the entire electricity value chain. At present the stranded generation capacity due to gas supply and transportation constraints is in the order of 1,500 MW.

Another challenge is the Transmission Company of Nigeria (TCN) which is seen by Peterside as the “life-blood” of this entire electricity “eco-system” but which is also potentially the “weakest link” at present. According to him, the stranded capacity due to transmission evacuation constraints is in the region of 100MW. The core reasons for the continued challenges facing the TCN include massive financing needs and clashes over control. Peterside states that the ability of TCN to catch up with generation availability and also keep pace with future expansion will depend on its continued access to financing for its huge capex needs and also its ability to execute and rigorously monitor project implementation to high professional standards. It is his view that the latter will inspire confidence and open the door to even more funding. Conversely, if that confidence is lost early on, then “third party financing” will dry up and the burden of financing TCN’s expansion will fall on the Federal Government of Nigeria (FGN). He has also expressed his concern over the squabbling and infighting going on at TCN. “Unfortunately, the Board of TCN is yet to get its act together. Since the appointment of a chairman and some initial board members was first announced some months ago, so much time appears to have been lost in squabbling over who does what, when and how,” he said. “If TCN does not deliver the goods in 2014, there will be a “crisis of sorts” when the ten NIPP power plants come on stream. The same can be said for the gas supply and gas transportation arrangements”.

Another challenge worth noting is how the tariffs that underpin all the agreements (Grid Connection Agreements (GCAs), Power Purchase Agreements (PPAs) etc.) are set by NERC and whether they will ensure full cost recovery across the entire value chain. As Peterside notes; “When all the parties are performing in accordance with expectations, the industry can attain a high growth trajectory and even grow exponentially. Unfortunately, the opposite is also the case and so the growth of the entire industry can be constrained by the limitations imposed by the weakest link in an inter-dependent chain. For instance, NERC’s Multi Year Tariff Order 2 (MYTO 2) assumes that the gross system capacity in 2014 will be 9,061 MW. If overall capacity falls significantly on account of the non-performance of one segment, an elaborate system of escrow accounts and/or partial risk guarantees can only keep payments going for so long (a few months) before the Federal Government gets called in to act as an “underwriter” for the bulk trader. This is because almost all the agreements apportion risk in a way that ensures that parties who have “performed” get paid irrespective of whether other parties have defaulted. In essence, most of the agreements are only bankable because they are “take or pay” agreements.” As such, if the tariffs do not ensure full recovery across the entire value chain, the whole chain will unravel.

Finally, another issue which may need to be addressed is the immediate challenge facing the investors in terms of potential deficits in skilled man power. There have already been reports of shortfalls in the power supply to certain areas as well as the overdue service of electricity bills since the hand over. This may have a lot to do with the fact that following the takeover of the various facilities by the new owners on November 1, over 60% of the workforce manning the privatised former Power Holding Company of Nigeria assets was sacked. This is coming at a time when the National Power Training Institute of Nigeria (NAPTIN) says it is faced by 8,400 deficits in skilled manpower, which according to Reuben Okeke, its Director-General, is set to rise to over 17,000 in the next four years. The core investors will be required to invest heavily and quickly in skilled manpower if they truly intend to achieve their targets. However, as the Director, Human Resources at the Ministry of Power, Grace Papka admits; the task of producing the required skilled manpower needed to achieve and drive the target capacity of 40,000MW in the long term is an overwhelming one.

Irrespective of the foregoing, the fact that the Federal Government on November 1, 2013 eventually handed over the privatised power utilities to their new owners who had successfully acquired them through a privatisation programme that is largely adjudged to have been transparent and which is also perhaps, the largest to have been holistically consummated is a feat to be commended. However, as noted above, this feat cannot be said to be an end in itself but only a means to the ultimate objective, which is providing regular, stable electricity supply across Nigeria for its vast populace.

 

 *Noma Garrick is a lawyer and consultant with extensive experience in oil and gas and energy related matters. 

 

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