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Following the physical handover of the privatised Power Holding Company of Nigeria’s (PHCN) successor companies by the Federal Government at the weekend, buyers of the assets are now set to begin the arduous task of carrying out proper evaluation of the acquired assets to ascertain the level of upgrade and investment that would be required, going forward, to improve power supply in the country, a cross-section of the investors told BusinessDay on the sidelines of the handover ceremonies.

Analysts, however, see the development as the beginning of a long-drawn journey fraught with pitfalls as the new owners may struggle to undo decades of rot in the electricity sector.

“You can only improve on something you understand. You don’t improve on something that you don’t understand. The entire process, the entire chain, the entire service that is being provided currently will be evaluated by us because we have never had the privilege of a shadow management. So we did not have the access into the building to evaluate the assets,” said Kola Adesina, chairman of the core investor group, New Electricity Distribution Company/KEPCO, buyer of Ikeja Electricity Distribution Company (Ikeja Disco).

“Everything to the minutest element will be evaluated against the global benchmark and then the upgrade of the asset will be done accordingly in those areas,” he added.

The challenge for the new owners stems from the fact that a low-margin electricity sector will be bumping against high needs for capital expenditure, even as private distribution and generation companies in other emerging markets still battle with difficulties many years post privatisation.

For example, Celpa, the largest power distributor in Brazil’s remote Amazon region, sought relief from creditors in February 2012 after fixed utility rates reduced earnings and debt surged.

In Pakistan, the electricity sector, privatised in 1994, still suffers daily blackouts as distribution and generation companies underinvested in capex as tariffs failed to keep up with rising inflation and so-called circular debt (consumers owing discos and discos owing gencos, etc) undermined the whole system.

The above examples serve to highlight the difficulty facing new private owners as they take over PHCN assets, amid heightened expectations from the public for an end to daily blackouts in Nigeria.

“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,” said Atedo Peterside, chairman, technical committee, National Council on Privatisation (NCP).

However, an inflow of investments worth about $40 billion is being expected in the sector in the next 10 years, according to Olusegun Aganga, minister of Industry, Trade and Investment, at the handover of Eko Electricity Distribution Company (Eko Disco), adding that the power reform would attract immense foreign investment into the country, increase access to electricity, improve infrastructure and create employment for the country’s growing population.

The handover, which marked the concluding stage of the transaction for four generation companies (Gencos) and 10 distribution companies (Discos), has been described as a vital step to stimulate further private sector investment into the power sector. The handover took place in Lagos, Ibadan, Port Harcourt, Abuja, Jos, Ughelli, Kano, Benin, Shiroro, Kainji and Gombe.

It was gathered that some of the networks have equipment that have been in use for over 40 years without major overhaul done on them. Both the Gencos and the Discos have dilapidated equipment that need to be completely overhauled.

At the handover of Egbin Electric Power plc, Adesina, who is also chairman of KEPCO Energy Resources Limited, promised Nigerians that the company would leverage on the experience and competence of its technical partners to turn around Nigeria’s power situation, adding that KEPCO successfully generates 82,000MW for the 45 million people of South Korea.

Charles Momoh, chairman, West Power and Gas, buyer of Eko Disco, said they would be investing $250 million at the initial stage as capital expenditure, adding that they would have to assess the assets on ground so as to know areas of intervention to improve distribution network infrastructure and operations.

“As at now we don’t have full knowledge of what we are going to deal with until we have a true picture of what is on ground. We are going to invest in metering, cleaning up the system, cablings, transformers, and making sure that everything is in line with what we have specified. It’s not going to be enough, but we will start with that. Our strategy is to continue to improve the system and eventually we will get there,” he said.

Oladele Amoda, chief executive officer, Eko Disco, described the privatisation of the power sector as a good development, adding that the task ahead might appear quite intimidating, but with the first step having been taken, it would succeed.

“We cannot but congratulate the Federal Government for this landmark achievement. What appeared like an impossible task when it began almost a decade ago is today ending on a very happy and hopeful note,” he said.

In Port Harcourt, the new Disco investors are targeting 14 million consumers from the current 530,000. According to Augustine Wokocha, chairman of 4Power, buyer of the Port Harcourt Disco, “PHED covers four states with a population of 14 million. As at now, only 530,000 consumers are connected to the national grid.”

Speaking at the handover ceremony at Ikeja Disco, Benjamin Dikki, director general, Bureau of Public Enterprises (BPE), who represented the vice president and chairman of NCP, Mohammed Namadi Sambo, admitted that the challenges facing the electricity sector in the country are enormous, “but we are equally convinced that the opportunities in the sector are enormous”.

He stated that the Federal Government was committed to creating the enabling environment that would incentivise private-sector investors to take on these challenges and the opportunities therein to ensure quality and cost-effective service delivery to the Nigerian electricity consumers.

Both the Nigerian Electricity Regulatory Commission (NERC) and the BPE will continually monitor the operations of the successor companies and would not hesitate to sanction any core investor that does not deliver on the performance agreement that was executed with the government.

Many of the successful consortia that acquired the Discos and Gencos have contractual undertakings with the BPE for aggressive capital development plans that will “require significant fundraising in 2014 and beyond”, according to Kayode Akindele, partner at 46 Parallel, a Lagos-based investment firm.

Capex estimates for the 11 Discos post privatisation is N60 billion per annum for each in the next 5 years, while Gencos will require $4.28 billion, just to achieve full-installed capacity of 6,976.4MW.

Getting to a successful private electricity sector, however, goes beyond just the Discos and Gencos to include other players that will influence the viability of the industry.

The Discos are at the end of a complex chain of players in the power sector which include the gas suppliers, IPPs/Gencos, the bulk trader, and the Transmission Company of Nigeria (TCN).

“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.

To make gas exploration commercially viable would entail having an adjustment to current fixed gas prices which industry stakeholders say is hurting gas exploration and production in Nigeria.

The fiscal terms, low prices and lack of infrastructure are the major impediments to new investments, with gas production projected to fall by 56 percent from current levels to 0.7 million barrels of oil equivalent per day by 2020, while 73 percent of new gas production would be uneconomic and up to $23 billion in new investments would be at risk.

“The new PIB fiscal regime means no gas project will come on stream, and getting gas to power plants is then a problem,” said Israel Aye, partner, Sterling Partnership and director, Aspen Energy.

Nigeria’s aspiration to produce 3-4 billion cubic feet (BCF) a day of gas by 2015 (from under 1 BCF today) will require a significant infrastructure spend of $30 billion, according to stakeholders, an amount the government or NNPC is unlikely to raise by themselves.

This would make it impossible to power existing plants which run mostly on gas as well as the 4,774MW from new NIPP plants coming on stream soon.

TCN is also seen as a potentially-weak link in the system, due to huge financing needs and quasi-government control, while the MYTO that underpins all the agreements must ensure full recovery across the entire value chain, or the whole chain unravels.

Nigeria, with a population of 170 million people, is estimated to need about 40,000MW of electricity over the next decade, but currently has less than 6,000MW of available capacity.

 

Information from Business Day was used in this report.

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