POWER MOST CHANGE HAND

President hands over utilities to new owners on Monday

By Tosin Falope

Behind any move,there must be a motive.

PRESIDENT Goodluck Jonathan will on Monday handover certificates and licenses to purchasers of the Power Holding Company of Nigeria (PHCN) successor companies.

Deputy Director in charge of press at the Federal Ministry of Power, Mr. Timothy Adedeji confirmed the development in Abuja Friday.

Meanwhile, Chairman, Technical Committee of the National Council on Privatisation (NCP), Mr Atedo N. A. Peterside, said Friday that The Federal Government of Nigeria is expected to earn approximately $3.3 billion from the ongoing privatisation of PHCN power generating companies (Genco) and distribution companies (Disco).

THE NCP technical committee chairman, in a presentation 'What Next After Privatisation Of The Phcn Assets?' at the “Special Forum on Financing the Power Sector Reforms for Economic Development” Organised by The Bankers’ Committee in Abuja, said the government would raise close to $5 billion from the ongoing privatisation of the following 10 new power plants being built by the Niger Delta Power Holding Company Limited (NDPHC).

Giving the breakdown, he said, “By the payment deadline of 21 August, 2013, private sector core investors had paid a total of $1.130 billion for 60% equity controlling stakes in nine Discos (namely Abuja, Benin, Eko, Ibadan, Ikeja, Jos, Kano, Port Harcourt and Yola).

'The core investors for the 10th Disco (Enugu) paid their $126m late and so the National Council on Privatisation (NCP) directed that they must pay a late penalty fee equal to Libor 5% for the number of days for which they were in default and the preferred bidder for the 11th Disco (Kaduna), which has a separate time-table, is expected to pay a total of $163m within 6 months, thereby completing the $1.419 billion that was originally targeted from the sale of all 11 Discos.

'For the Gencos, a total of $1.077 billion was received from the core investors by the same 21st August, 2013 payment deadline date for equity stakes ranging between 51% and 100% in four Gencos (namely Egbin, Geregu, Kainji and Ughelli), while the core investor for the 5th Genco (Shiroro) completed its $111.6 million payment a few days late and will also pay a late penalty fee equal to Libor 5% for the number of days for which they were in default.

'Meanwhile, the preferred bidder for the 6th Genco (Afam) is expected to pay a total of $260 million within 6 months, based on a different time-table.

'For the 7th Genco (Sapele) the preferred bidders are still in default, as they only paid $119.9 million out of the $201m that they promised to pay by the deadline date.

'The NCP has referred this default situation to the Federal Ministry of Justice and so, depending on whether the Reserve Bidder or the Preferred Bidder end up acquiring this asset, the gross proceeds from the sale of the 7 old PHCN Gencos could either be $1.65bn (best case) or $1.55bn (worst case scenario).

'It is clear from the foregoing, that there is some unfinished business with the privatisation of Kaduna Disco as well as with the Afam and Sapele Gencos.

'Meanwhile, the NCP also approved the sale of two newly completed PHCN power plants (Olorunsogo and Omotosho) via debt for equity swaps with the Chinese contractor that built these plants at valuations of $177.3 million and $217.5 million respectively.

Accordingly, a grand total of approximately $3.3 billion should accrue to FGN coffers from these PHCN Genco and Disco transactions.'

For the NDPHC 10 Gencos- Alaoji (961MW), Benin (451MW), Calabar (562MW), Egbema (338MW), Gbarain (225MW), Geregu (434MW), Ogorode (451MW), Olorunsogo (676MW), Omoku (225MW) and Omotosho (451MW making a total of 4,774MW, he said their completion of construction and the ongoing privatisation will bring in additional private sector stakeholders

He said, 'At a crude estimate of $1.2m per MW, the sale of an 80% equity stake to core investors will raise close to $5 billion in total and we can expect roughly 70% of this latter figure to be financed in 2014 largely through debt/loan instruments provided by Nigerian banks. I have been deliberately silent on “greenfield” Independent Power Plants (IPPs), as these should take on a life of their own (in perpetuity) and are not subject to specific payment deadlines at present.'

On the expected investment by the new investors, he said as at 10th Sept. 2013 9 PHCN Gencos (including Omotosho and Olorunsogo) only had available capacity of 2,692 MW as against a total installed capacity of 6,976.40 MW and that it would require an additional $4.28 billion to fund this incremental of 4,284.4 MW.

For the Discos, he said some very significant investments, particularly on meters required to improve efficiencies and reduce Aggregate, Technical Commercial and Collection Losses.

Specifically, he said they would require 6,517,998 meters in the first five years at at Year 1- 1,078,927 meters; Year 2- 1,433,373 meters; Year 3- 1,466,464 meters; Year 4- 1,476,461 meters ; and Year 5. 1,062,773 meters.

He said, 'Based on the proposals submitted by the core investors, new meters will be installed over the course of the next five years.

'At an estimated weighted average cost (purchase and installation) of N25, 000 per meter, this amounts to over N150 billion. The bulk of this should be recoverable from the consumer, but then the distribution infrastructure also needs to be modernised and expanded to achieve greater coverage. The 11 Discos are projecting annual capital expenditures in the region of N60 billion per annum for each of the next five years.'

On transmission, he said it 'is the “life-blood” of this entire electricity “eco-system” and it is also potentially the “weakest link” at present.

'I am reliably informed that, currently, stranded capacity due to transmission evacuation constraints is in the region of 100 MW. The other “weak link” is gas supply and gas transportation, as Nigeria is predominantly reliant on gas-fired power plants.

'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.

'I am reliably informed that at present the stranded generation capacity due to gas supply and transportation constraints is in the order of 1,500 MW. In answer to my enquiry, the Presidential Task Force on Power (PTFP) listed various funding sources which have been identified and which can be tapped to achieve the rapid expansion and modernisation of our transmission infrastructure. These include the Africa Development Bank, the FGN Eurobond, Agence Francaise de Developpement, NDPHC divestment proceeds, Islamic Development Bank and Contractor Financing from China. 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. 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). 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.

'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. From the foregoing, it is obvious that we can only have a Healthy and Self-Sustaining Electricity Value Chain if we are financing the expansion of all components of this intricately interwoven sector and if the various parties are competent, proactive and behaving responsibly. The architecture of the Federal Government’s Power Sector Roadmap rests on 7 critical pillars and these are:- 1) Empowering the Regulator (NERC); 2) Establishing a Bulk Trader; 3) Introducing Cost Reflective Tariffs; 4) Engaging a Management contractor for TCN; 5) Privatisation of Gencos; 6) Privatisation of Discos; 7) Strengthening of the Fuel-to-Power Arrangements; For financiers, an eighth pillar is the transfer of stranded liabilities and non-core PHCN assets to NELMCO.

'The healthy value chain becomes self-sustaining when the bulk of the consumers are paying the right price for electricity supplied to them by the Discos, who then pay the Bulk Trader for power wheeled to them in accordance with the Vesting Contracts between the Discos and the Bulk Trader.

'The Discos also pay a wheeling charge to TCN on the basis of the Use of Transmission Network Agreement (UTNSA) and Grid Connection Agreements (GCAs) which they signed with TCN. The Bulk Trader pays the Gencos on the basis of the Power Purchase Agreements (PPAs) executed between the Bulk Trader and the Gencos.

'The Gencos, in turn, pay for the Gas delivered/transported to them and also pay TCN on the basis of the GCA and Ancillary Services Agreement (ASA) that they also signed with TCN. The tariffs that underpin all these agreements are set by NERC and they should ensure full cost recovery across the entire value chain.

'The Bulk Trader is also allowed a margin/deduction to cover their own costs so they can remain in business.

'In my opinion, FGN should also continue to offer a “safety net” by subsidising the tariffs for the poorest consumers i.e. the R1 and R2 customers. Unlike the much abused petrol subsidy, which is consumed in the largest quantity by the wealthy elite who own multiple gas-guzzling motor vehicles, the electricity subsidy can be targeted so that it is enjoyed exclusively by the very poor who each consume a tiny quantity of electricity via single phase meters. 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. Viewed from this perspective, it is clear that the privatisation of Gencos and Discos represents only two out of the seven important pillars outlined above and which make up the FGN’s Power Sector Roadmap. This is not an attempt to down-play the significance of privatisation, but rather it an attempt to highlight and reiterate the vital inter-dependencies that I have alluded to earlier. In any case, I recall emphasizing in a media interview on 22 August, 2013 that the centre of gravity of Nigeria’s electricity sector has already shifted permanently. I pointed out at that time that the fulcrum has already swung in the direction of the private sector on account of the emergence of new owners for the Discos and the PHCN Gencos.'

The Governor, Central Bank of Nigeria, Mallam Sanusi Lamido, in his remarks, said the banking community regarded electric power supply as the prime development catalyst that deserves special attention due to its multiplier effect in the economy

According to him, 'The power sector privatization that kick-started in December, 2010 has reached an enviable milestone. Indeed, the Bankers' Committee wishes to identify with the Federal Government in its desire and zeal to fast-track the full implementation of the initiatives outlined in the EPSR Act.

'The Bankers Committee will continue to collaborate with government to create an enabling environment to attract private sector funding that will increase the national power generation capacity, ensure availability of gas for power generation, and reduce losses resulting from inefficient transmission/distribution network.'