Analysis of PHCN privatization

Written by Adebayo Alonge

Lagos Business School

Imperatives for PHCN privatization

• 1 Gw. Or 1000 megawatts(Mw) is required per every 1million people for industrial development.

• Nigeria with a population of over 160mn. people requires at least 160Gw. To be set on a sustainable path to industrialization.

• However despite annual injections of $2bn by the Federal government(FG) over the last two decades, the capacity of the state owned utility has been stuck at around 3000Mw.

Imperatives for PHCN privatization

• As a result the power sector has served as a source of waste and leakage for the FG’s meagre resources.

• The out of pocket costs for consumers and manufacturers in the absence of power from the state ranges from N60-N80/kwh for kerosene, petrol and diesel. The average cost of grid electricity even with recently reviewed and cost reflective Multi Year Tarriff Order(MYTO II) is 25% lower at N18/kwh.

Framework for PHCN privatization• To achieve 40,000mw as stated by the FG in its vision 20:2020,

spending in all of the electricity value chain will have to be at least $10bn. annually for 10 years. This the FG cannot afford hence need to privatize PHCN.

• The Electric power sector reform act (EPSR) was passed to serve as a regulatory framework to enable private sector participation.

• It handed over all of the assets, liabilities and workers of the defunct NEPA to PHCN and subsequently unbundled these into 18 successor companies.

• It provided for the establishment of a regulator i.e. the Nigerian electricity Regulatory Commission.

Roadmap of PHCN privatization

• The FG has divested 51% of its shares in 11 distribution companies i.e. discos by sale to core investors. Afam and Kaduna discos are yet to be concluded.

• The FG concessioned three of its power generating companies i.e. gencos because of water rights issues and divested 51% of its shares in three others.

• The 8 national independent power plants under the Niger-Delta power holding company are currently requesting for bids to purchase 80% of the government's shares in them.

Roadmap of PHCN privatization• The FG has contracted Manitoba Hydro international to manage the

Transmission company of Nigeria which due to its being a natural monopoly and its importance to national security would not be divested.

• Review of tariffs to be charged in the Nigerian electricity supply industry (NESI) to make them more cost reflective via the MYTO II in effect since 31st May 2012.This will encourage investors to invest in the electricity market as it indicates that they can recoup their investments and cover running expenses.

• As gas to power plants account for more than 80% of Independent Power Plants (IPPs), to encourage international oil companies to invest in infrastructure to distribute this gas to IPPs the price of gas for wholesale contracts has been raise from $0.2/mmbtu to $1.8/mmbtu with allowance to raise price to $2.44/mmbtu by 2016. This serves to remove the disparity between prices of gas for export and gas for power thus ensuring fuel availability for IPPs.

Roadmap of PHCN privatization• Set up of the Nigerian Bulk electricity trading company (NBET)

to guarantee power purchases agreements between gencos and discos until a time when discos are credit worthy to undertake bilateral contractual agreements. The National Assembly did not approve partial risk guarantee borrowing in the 2013 budget hence the government may have to make use of letters of credit or an escrow account using proceeds from privatization to provide liquidity to NBET.

• Operationalization of the Nigerian Electricity Liability Management Company (NELMCO)to take up all the liabilities e.g. PHCN’s debt to IOC’s for gas supplied, that cannot be transferred to sucessor companies.

Impact on Stakeholders• The Federal government has been able to make as much as $560

mn. Representing 25% of the value of divestments from the privatization process. Even more will be made at the completion of the process when the balance of 75% of divestment value is paid.

• Negotiated severance package worth N384bn. for former PHCN workers. In addition job enhancement and job creation will occur as new investors need experienced hands to achieve loss reduction targets.

• Consumers will be affected by increased tarriffs of more than 100% as contained in MYTOII. However for the next two years R1 customers(the poorest segment) will benefit from FG subsidies of N17/kwh while they only pay N500 fixed monthly charges and N4/kwh so long as they do not use more than 50kwh monthly.

Impact on Stakeholders• Increased prices for gas to power suppliers i.e.

international oil companies has reduced disparity between the local and export markets and helped share fuel supply risks between IOCs and IPPs.

• Frameworks developed for gas supply agreements and gas transport agreements have helped to further give structure to the emerging local gas industry in Nigeria.

• Since 2010 when the current administration restated the privatization process NERC and the BPE have become more central in the process and have gained a lot on the ground experience that will serve to inform subsequent processes.

Project bankabilitySince GENCos and Discos will be in control of private sector these will be discussed under this section. The transmission company is under the government and is thus risk free especially as its expansion will be funded by a fund guaranteed by the FG and will cover its costs via use of transmission system charges i.e. TUoS levied on Gencos and Discos hence the TCN is bankable.GENCOs• Gencos generate revenue by selling generated electricity using wholesale contract prices to

Discos and other customers. In the meantime these sales are guaranteed by the federal government via NBET

• Costs are incurred from purchase and set up of the power plants, staff salaries, transmission use of system charges, regulatory charges and on-going maintenance.

• In MYTO II, wholesale contract prices cover charges for energy and capacity and include a significant markup.

• Capacity costs cover fixed operations cost, maintenance cost and two-thirds tax cost while energy costs cover variable operations cost, maintenance cost and fuel cost.

• MYTO states wholesale contract prices at 9563, 10257, 12140,13172 and 14296 for 2012 to 2016 respectively in naira/mwh

Estimated net Income under MYTO II (2012 wholesale contract prices)

GENCO EstimatedRevenue Operating expenses Net Income

Sapele (generated 594gwh in 2009)

$36,181,031(594,000mwh*N9563/N157)

$1.3mn(using 2009 estimate.NB: under new owners this should reduce as they are meant to reduce losses and increase efficiency)

$34,881,031

Shiroro(generated 2280gwh in 2009)

$138,876,687(2280000mwh*N9563/N157

$11mn.(using 2009 estimate. NB: under new owners this should reduce as they are meant to reduce losses and increase efficiency)

$127,876,687

Performance of two select Gencos before and after privatization

Revenue($mn) Operating expenses($mn.) Net Income($mn.)0

20

40

60

80

100

120

140

160

Shiroro Genco performance af -ter privatisation vs. as PHCN

Shiroro Genco PHCNShiroro Genco MYTI II(privatisation)

Revenue($mn) Operating expenses($mn.) Net Income($mn)0

5

10

15

20

25

30

35

40

Sapele Genco performance after privatisation vs. as PHCN

Sapele Genco PHCN Sapele Genco MYTO II(privatisation)

Are GENCOs bankable?• The Gencos despite the significant losses and inefficiencies

under PHCN showed positive net income. • Under MYTO II Net income is expected to rise as efficiency

and operating expenses fall by at least as much as 300%.• Default risk is non existent as the FG guarantees contracts for

the counterparty i.e. discos• Union risk may arise that may affect operations and thus

performance but negotiations are ongoing between labour unions in the industry and the FG an this should not be of significance.

• Hence the GENCO project is bankable.

Project bankability

• Discos

• In tables above two discos are assessed in terms of losses onDistribution and collection from 2012-2014Losses on both counts are reducing implying higher operational efficiency for both the Eko and Abuja plants

EKO 2012 2013 2014Power delivered to plant (gwh) 2951 4025 4862Power delivered to customers(gwh) 2656 3662 4473Losses on distribution(gwh) 295 363 389Collected sales(gwh) 2197 3164 4033Losses on collection(gwh) 459 498 440

Abuja 2012 2013 2014Power delivered to plant (gwh) 3085 4207 5083Power delivered to customers(gwh) 2777 3829 4677Losses on distribution(gwh) 308 378 406Collected sales(gwh) 2297 3308 4216Losses on collection 480 521 461

Are Discos bankable?

• From the above table after deducting capex and opex costs from actual revenue(obtained by multiplying collected sales by N18 and N20 respectively foe Eko and Abuja representing average prices) we see that both discos show losses. However as we do not know how many number of residential, commercial and industrial customers they have or can have I could not determine the other part of revenue which is the Fixed monthly charges. Hence I cannot make a categorical statement as to whether or not they are bankable on the long term.

Actual Revenue 39546000000 56952000000 72594000000Capital expenditure 8510036 7091697 7091697Generation, Transmission and discos costs53858000000 71383000000 85413000000Net Income -14320510036 -1.4438E+10 -1.2826E+10

AbujaCollected sales(kwh) 2297000000 3308000000 4216000000Actual Revenue 45940000000 66160000000 84320000000Capital expenditure 5747203 5747203 5747203Generation, Transmission and discos costs1.07591E+11 1.14523E+11 1.78355E+11Net income -61656747203 -4.8369E+10 -9.4041E+10

Are Discos bankable?

• However given that the government guarantees them until when they are credit worthy in this transitional period, they are essentially risk free and thus bankable.