Why Federal Government has to make the Siemens deal work

The recent power agreement signed between the Nigerian government and Siemens, a leading German electric company on Monday, which is capable of doubling the country’s energy output represents a good opportunity to jumpstart the economy.

According to the power sector recovery programme document prepared by the World Bank and the Nigerian government, the deplorable power supply is costing the economy over $29.3 billion annually. This is about 7.25 percent of the total economy lost due to the epileptic power supply. No economy can thrive on generators.

This is why the Siemen’s deal is critical to Nigeria’s economic progress. The agreement seeks to fix transmission and distribution infrastructure by injecting $3billion in new investments. The last time the power sector saw a proposal for an investment of this magnitude was in 2013 when the power assets were sold to private investors.

Five years later, the privatisation exercise has failed. An analysis of the 2017 financial statements of ten electricity distribution companies (DisCos) show accumulated losses or retained earnings of N713.63 billion from N288.85 billion the previous year.

Losses in the sector rose to N1trn by June 30, 2019, while payments to both the Nigerian Bulk Electricity Trading Company (NBET) and the Central Bank of Nigeria stood at N2trn. The investors who purchased the power assets during the privatisation exercise are still indebted to the banks up to the tune of N500bn.

Interestingly, the Siemens deal is targeted at helping the Transmission Company of Nigeria and the DisCos improve capacity. We believe this is a good place to start. Nigeria’s weak national grid has collapsed over half a dozen times this year alone. Thirty percent of the power sent to DisCos often gets lost due to poor transmission lines. Lack of investments into network and power distribution infrastructure limit how much power consumers get from DisCos.

However, the most critical area to reform is the market. If DisCos are still unable to ramp collections the deal will go south. The investment by Siemens is sourced from export credit agencies and it is a loan to DisCos backed by a Sovereign Guarantee from the Ministry of Finance. A default could torpedo the power sector privatisation leading to total dilution of investors’ stake in the DisCos. It could also impair Nigeria’s credit ratings. We understand Siemens will get involved in smart metering, this is important to help DisCos raise collections above the current 60 percent threshold.

Commendably, the Ministry of Power has directed the Nigerian Electricity Regulatory Commission (NERC), the electricity sector regulator, to review tariffs to make them reflect the cost of producing power and compel operators to fulfil their performance contracts. This should top the To-do list of the next minister.

According to the Power Sector Recovery Plan (PSRP), Nigeria should have reviewed tariff upwards by 50 percent, between 2017 and 2021. The review would have addressed accumulated deficit attributed to the sculpting of the retail tariffs under MYTO 2015. Sculpting is a policy that compels Discos to under-recovery now by charging less than the cost of producing power and to fully recover losses in the future. This plan didn’t run its course because NERC prevented a tariff increase.

The Ministry of Power further directed NERC to strengthen the market by implementing existing orders promoting competition, approve pending mini-grid applications, enforce performance agreements in operator’s contracts and set up modalities to refinance accumulated debts.

The TCN was directed to progress implementation of grid expansion plans, enforce full payment of the Market Operator’s invoice in accordance with market rules and support transmission requirements of bilateral contracts with other investors to allow for more commercial use of transmission assets. These reforms should be implemented speedily.

Siemens who signed a similar agreement with Egypt in 2015 for the installations of 16.4 gigawatts (GW) gas plant and wind farm at the cost of over 8 billion euros has delivered improved power to Egypt’s 87million people. But for the project to succeed, the country was serious, reformed its power sector and even floated its currency. Today, the economy is growing at a 5 percent rate helped by improved power.
Siemens is betting that Nigeria’s power market can earn $40 billion more if it helped it reduce technical and commercial losses and expand generation capacity to 25,000MW by 2028. This is risky considering Nigeria’s cavalier attitude towards contract sanctity and lack of discipline to see through reforms. This time around the stakes are too high and everyone concerned should get their ducks in a row.