The disposal is expected to be one of the biggest privatisations ever embarked upon in Africa, with asset sales likely to be in excess of $10bn. If it succeeds in boosting power generation where previous efforts have failed, Nigeria’s non-oil economy can be expected to grow exponentially over the next decade, bringing immense rewards for the power companies who succeed in helping Africa’s crippled giant to switch the lights on.
Despite decades of broken promises by successive military and civilian governments to reform power generation, expectations for the power sector asset disposal are high. Paradoxically, Nigeria is sub-Saharan Africa’s biggest oil and gas exporter, yet it has one of the lowest per capita supplies of electricity in the world.
The scale of the Nigerian power sector calamity is difficult to exaggerate. On a good day, Nigeria can generate around 3,000 mega watts of electricity – about one tenth of what South Africa generates with a third of Nigeria’s population. Even tiny Ghana, with one sixth of the population, generates more electricity than its giant neighbour.
But there aren’t that many good days. Power generation frequently falls below 1,000 mega watts, leaving the country with as little as a couple of hours of electricity a day. Blackouts and brownouts can last for days, even weeks, while some regions may have no power for months at a time – if at all. Estimates on the balance of supply and demand vary considerably, but it is generally acknowledged that demand is running about 25 times in excess of supply.
Consequently, the Nigerian economy – like those in many other African countries, has been forced to run on diesel generators. Nigeria currently accounts for 40 percent of all the generators imported into Africa. The Central Bank of Nigeria estimates that 60 million Nigerians are reliant on diesel generators for their main source of electricity, and they spend about $14bn a year on the imported fuel needed to run them.
An unhealthy reliance
Everything in Nigeria, from street corner mobile phone chargers to five star luxury hotels, rely on noisy, foul-smelling, diesel generators to run their businesses and bring light to their homes. For everyone else who can’t afford to buy and run a generator – the other 90 million Nigerians, kerosene lamps and candles are all that is available. Little wonder that jokes about the power sector are the main focus of Nigerian national humour.
The origins of Nigeria’s power sector failure date from the successive military regimes that ran and plundered the country prior to the return to civilian rule in 1999. Long-term planning, without which big ticket assets like power stations, cannot be designed, constructed, operated and maintained, was not a strong feature of military rule.
As a result, no new power stations were built in Nigeria for more than two decades. Most of the country’s existing power generation assets are now thirty or forty years old, and most of those break down constantly because of aging equipment, poor maintenance, a lack of spare parts, and an acute shortage of the skills needed to run them.
Former President Olusegun Obasanjo, who led the transition to democratic rule, attempted to reform Nigeria’s decrepit power sector with the 2005 Electricity Power Reform Act. It replaced the discredited state-owned generator, the National Electric Power Authority (NEPA) – known to Nigerians as “Never Expect Power Always” – with the new Power Holding Company of Nigeria (PHCN), which – because of its failure to bring about any improvement in electricity generation, soon became known to Nigerians as “Please Hold Candle Near”.
The 2005 Act broke up NEPA into its component parts, 11 regional distribution companies, six generating companies and one transmission company, in anticipation of their eventual privatisation. But then the reform impulse stalled. Instead, Obasanjo embarked in 2006 on a crash programme to build seven new, federally financed, gas-fired power stations, which were supposed to add 3,000 mega watts to the national grid within two years.
To date, nearly five years later, and after spending an estimated $15bn, not one of the new gas-fired power plants has come on line. After ten years of civilian rule, Nigeria is now generating less electricity than it was the generals were running the show, and Nigerians have had enough.
Obasanjo seemed to think that Nigeria’s power generation problem could be solved by just throwing large amounts of money at it. Unfortunately for Nigeria, it had the hard cash on hand to throw around. A poorer country would not have had that luxury, and would probably have achieved much more with considerably less.
But Nigeria lacked the power plant project management expertise and the domestic gas collection stations and transmission lines required to ensure that the new power plants were built on time, and were able to operate once completed. Even today, it is estimated that there are more than 250 shipping containers full of the generating equipment needed to run the planned new power plants sitting in Nigerian ports waiting to be collected.
Desperate to solve the one problem that effects every single Nigerian business and domestic household, President Goodluck Jonathan – with the backing of a new generation of reform-minded technocrats, has dusted off the old privatisation plans, and announced his intention to fast track power sector reform. There have been plenty of groans from Nigerians and foreign investors alike of “here we go again”. But this time things could be different.
Nigeria intends to keep the transmission grid as a federal asset, but will out source its management to a private sector operator. Three companies, including Manitoba Hydro of Canada, the Power Grid Corp of India and the Electricity Supply Board of Ireland have been short listed to operate the national grid, and a decision on who will win the contract is expected before the end of the year.
Majority stakes in the eleven regional distribution companies (discos) and six generating companies (gencos) will be offered to core investors, who will be required to form joint ventures with the state authorities, who in turn will exit after a five year transitional period, thereby leaving the new private sector operators in sole control of all Nigerian discos and gencos.
Interest grows
Expressions of interest in running the proposed joint ventures have poured in from all over the world, with China, Brazil, Germany, Canada, Turkey, India and Saudi Arabia leading the way. Each joint venture will be listed on the Nigerian Stock Exchange, and will be required to invest several multiples of the asset cost price in new generating and distribution assets in an effort to boost performance.
The proposed power sector privatisation was hailed by Bismarck Rewane, the head of Financial Derivatives, a leading Lagos-based consultancy, as one of the key pillars of Jonathan’s reform agenda. “If he can come through with power reform, and if it is sustained, it could be a political game changer,” Rewane said. If successful, power sector privatisation could transform Nigeria out of all recognition in three to five years, he added.
The Federal Government of Nigeria estimates that something in the region of $6bn a year for each of the next five years will need to be invested in the new gencos and discos in order to bring electricity supply into line with demand. Clearly, only investors with deep pockets need apply. But given that suppressed demand is currently running about 25 times in excess of supply, along with the fact that Nigeria’s population is expected to grow from around 150 million at present to 280 million by 2050, the medium to long-term demand for electricity can be expected to grow exponentially.
With a presidential election likely to be a little more than four months away, Jonathan failed to address himself to the issue of tariffs – upon which the fate of the entire privatisation exercise rests – for obvious reasons. Telling the electorate that it can have electricity but it will have to pay for it is a sensitive issue, and one that will have to be carefully managed.
Nigerians at present pay around seven naira ($0.047) per kilowatt hour. Neighbouring Ghana, for example, pays the equivalent of 22 naira per kilowatt hour. Even Liberia and Sierra Leone charge more for electricity than Nigeria. So prices are going to have to go up – and go up considerably.
Lamido Sanusi, the Governor of the Central Bank of Nigeria, and Professor Barth Nnaji, the Presidential Advisor on Power, have both suggested that tariffs will have to be tripled to around 22 naira per kilowatt hour to attract sufficient private sector interest. Jonathan has so far shied away from putting a figure on the required increase.
But Nigerians who are able to afford diesel generators are already paying 60 to 70 naira per kilowatt hour – ten times above grid prices – to run them. Even a tripling of grid prices would be cheaper by two-thirds than running private generators. Low income consumers will be catered for with a so-called lifeline tariff – a heavily discounted rate for a specified amount of electricity a month – to ensure that the poor do not suffer from the transition from a state-sector operated to a private sector operated power sector.
The inability to solve the power sector problem to date has been the single biggest drag on Nigeria’s economic development. Last year, while growth rates in much of the OECD were flat or negative, Nigeria notched up growth of 6.7 percent. Growth in 2010 todate has been around 7.4 percent, while growth in 2011 and 2012 is expected to reach double digits – and these impressive growth rates have been achieved – astonishingly – without mains electricity.
The Central Bank of Nigeria estimates that around 60 percent of the cost of producing manufactured goods in Nigeria is accounted for by energy – that is diesel – costs. What could Nigeria achieve if it was finally able to bridge the decades-old electricity generation deficit? The importers and distributors of diesel generators and diesel fuel would see their lucrative markets evaporate, and they are expected to use every dirty trick in the book to sabotage the power sector reform programme. But every other sector of the economy would receive an enormous boost.
Africa is littered with false dawns and broken promises, and Nigeria accounts for a great many of them. But with Jonathan at the helm, backed by a cadre of determined, reform-minded politicians, officials and technocrats, there are growing expectations that this time things could turn out differently. Admittedly, considerable political uncertainty remains on the short-term horizon. No one knows yet whether Jonathan will – or will be allowed – to stand as presidential candidate for the ruling People’s Democratic Party in the forthcoming poll. But he does appear to be the only candidate who can bring power to the people.
