2014 & BEYOND
In this edition, I continue my random thoughts about some issues in the Nigerian Electric Power Sector. These, in particular, are issues connected with the privatisation of the PHCN successor power generation and distribution companies and post-privatisation expectations and realities.
On How the New Owners Can Surmount the Challenges in the Sector
There are several challenges which the owners of the newly privatized power generation and distribution companies would contend with. These include inadequate human capital and capacity, poor assets state and quality, high loss levels and poor operations. There are, nevertheless, a number of creative ideas which may be quite helpful in ameliorating these challenges. Some of these include managing old and decrepit electricity assets through asset strategy and planning, vigilance tools, technologies and measures. For reduction in collection loss levels, smart metering technology, must be embraced. Effective human resources strategy, organizational structure review, skill set mapping, clear job description, training and skills transfer would in the short to medium term help reduce the human capital problem.
The operations of the power generation and distribution companies can also become more efficient if there is proper capital expenditure planning, effective procurement systems and customer service mapping.
On Investment Opportunities in the Emerging Electric Power Sector
A vast understanding of the Nigerian Electricity Supply Industry (NESI) is required, in order to take advantage of the numerous opportunities in the power sector. In this respect, it is important to delineate the electric power value chain into its basic constituents, for a proper review of the emerging opportunities in every aspect along the value chain. Specifically, the NESI is divided into electricity generation, electricity transmission and electricity distribution.
Along the electric power generation aspect of the NESI value chain, opportunities that exist include the opportunities to develop Independent Power Projects or embedded generation such that eligible customers as defined by the relevant regulations (and industrial clusters) can be catered to, profitably.
Opportunities also exist along technical areas such as the provision of, or investment in, information technology related businesses in electric power generation. Furthermore, training of prospective employees of these companies is a service that can be provided as there are complaints around the dearth of manpower for the emerging electricity market.
Further, there is the opportunity to provide consultancy services, training, research and development to power generation companies. Information technology companies and experts have new areas of business to deploy their expertise and make returns.
Apart from the foregoing, there is also the opportunity to supply equipment and consumables. Furthermore, there are consultancy prospects, research and development activities particularly connected with provision of transmission services and even matters connected with remote sensing of any damage along the electricity network are also available for the skilled persons.
Provision of financing is also another opportunity which may be given due consideration, as funds in excess of US $3.5 billion are reportedly required annually for the next 7 years to achieve the 40, 000mw of power required for Nigeria to be amongst the top 20 countries in the world, by the year 2020.
The opportunities that exist along the distribution networks are innumerable and include services related to metering and collection. Other goods and services such as trading in recharge cards and provision of card technology are also viable business types. There are also countless opportunities to provide consultancy, research and development for new products as the market evolves with the opportunity for collaborations between Nigerians and foreigners with sufficient expertise. With time, there would be a strong market for swaps, derivatives and other modes of products and people already developing expertise would benefit from those.
What Areas Require Funding and what are the Funding Requirements for the Power Sector Post-Privatization
I believe tens of billions of dollars would need to be expended over a period of time (at least 10 years) from both private investors/ financiers. As things stand, the privatization rules bar the core investors in the privatized power generation and distribution companies from raising funds from the capital markets till about 2018; consequently, much of the funds for the next few years would not be obtained from the capital markets; although reasonably cheap funds may be obtained from international lenders too (albeit no more than 75% of any monies to be expended at least in the next 5 years should be from loans/debts according to the PHCN privatization rules). It is also important to remember that the Power and Airline Intervention Fund (PAIF), with a 7% all-inclusive interest rate, is expected to be another source of funding.
To experience real improvements, funds should be spent on Research & Development (R&D), on reducing electricity theft, particularly through the improvement of metering and reduction of damage to electricity equipment and infrastructure. Although, the country has got stringent legislative provisions on arson and damage to electricity installations particularly in the Miscellaneous Offences Act, investors need to invest in technology such as remote sensing equipment and even security personnel to reduce damage to such equipment and installations. Furthermore, state of the arts technologies, like the SCADA would need to be deployed to help improve the electricity supply value chain. Apart from the foregoing, the training of personnel in the sector is very pertinent for the impact of the funds expended so far and that would be further expended, to be felt.
In conclusion, I would say that there is an urgent need for the new investors in the power sector to engage in business process re-engineering to plug currently existing loopholes in the power sector. Further, there is the necessity for the deployment of new metering technologies.
Considering the Difficulty Many of the New Owners of the PHCN Faced in Raising Acquisition Finance, Whether they can Fund the Requirement of these Newly Privatised Power Companies
I understand that many of these companies can raise the money needed from banks (both local and international). From my interaction with some of these lenders, they still have the appetite to provide funds needed for capital expenditure and working capital. I understand particularly that, a lot of international financial institutions are looking to expend funds in Nigeria’s electric power sector with respect to providing working capital and Capex to the newly privatised companies and their owners.
The only challenges are the security structure (collateral) and the need for some form of confidence about the country risk (political) in terms of the 2015 elections. Despite those challenges I am aware some financiers are still willing to support the new owners of these companies with funds and are only looking to confirm the true state of the companies and the value of their assets base.
Individually these new owners may struggle to have such funds; at least some of them would. However, as I had previously stated, they should receive support from lenders because companies in the electric power value chain could be excellent revenue earners, if well managed, and financiers are likely to get their money back. It would have been much easier, if they could raise money from the stock market. I don’t think they can, though, until about 2018.
Continuation of Power Equipment Vandalism Post-Privatisation
I believe that the private sector sees business different from the way government does and the private sector would be more interested in spending money for research and development to fashion out ways to reduce the incidence of theft and vandalism of equipment and electricity theft, generally.
Legally speaking, there are provisions under Nigerian law, which already deal with issues of damage to power equipment. The problem is, as with other areas of Nigerian law, enforcement. The Miscellaneous Offences Act of 31st December, 1983, for example, stipulates serious improsonment terms for persons who temper with or damage meters, transformers, electrical equipment etc. There, is, nevertheless, poor enforcement of its provisions.
To reduce the incidence of theft, government should better enforce laws to provide an enabling environment for businesses related to the power sector. Furthermore, new security related technology should be adopted to stem this state of events. The new owners of power generation and distribution companies should adopt business process re-engineering and deploy new technologies which would easily help detect such activities.
I am conviced that many of the investors are thinking alongst these lines and it would be a matter of time before the theft of such equipment reduces substantially. I am in fact, aware that the Benin Electricity Distribution Plc. got someone convicted for electricity theft quite recently.
On Due Diligence on the Newly Privatised Power Generation and Distribution Companies Prior to Acquisition, Baseline and Other Assumptions
I don’t think it is absolutely correct to say that the new owners could not, prior to the hand over, assess the assets they now own. Many of them indeed had the opportunity to conduct legal, technical and environmental due diligence exercises on the formerly government owned electric power generation and distribution companies and assets. In many cases, the members of staff of these companies, who were on site, were co-operative. I, for example, conducted legal due diligence on a number of them and conducted site visits, unhindered.
It is, however, true that the new owners were obliged to rely, in some cases, on estimates and assumptions made by the BPE, NERC and their consultants. These estimates and assumptions include those related to loss levels, transmission loss factors and similar estimates. Incidentally, these estimates and assumptions in many cases form the fundamentals for the performance targets the new investors are obliged to meet. Therefore, where the assessments of the new owners reveal that the NERC and BPE assumptions and estimates are wrong (in fact, many of them are already claimimg that this is the case), those targets and the bases for achieving same, would need to be reconsidered.
For more information on the electric power sector, read the text “The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business” by Ayodele Oni.
Ayodele Oni ([email protected]), a solicitor, specializes in international energy (oil, gas, electric power & renewables) law & policy and has a Mini MBA in Power & Electricity. Follow me on twitter @ayodelegoni
