PROF. BART NNAJI, CON, NNOM SPECIAL ADVISER TO THE PRESIDENT ON POWER
CHAIRMAN, PRESIDENTIAL TASK FORCE ON POWER
THE PRESIDENCYFEDERAL REPUBLIC OF NIGERIA
NIGERIAN POWER SECTOR REFORMAn Overview of Power Sector Reforms in Nigeria
THE BANKERS’ COMMITTEE/BUREAU OF PUBLIC ENTERPRISES TECHNICAL WORKSHOP ON NIGERIAN POWER REFORM 25TH MAY 2011
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Presentation Overview
• Funding of the Nigerian Power Industry in the Past
• Reform Process + Service Delivery
• Critical Levers of Change
• Potential Cost of the Reform
• Achievements so far + Strategic Initiatives
Funding To The Nigerian Power Industry
0
100
200
300
400
500
Investment ('US$millions)
Source: Presidential Retreat On Power
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The Past
The Potential Rewards from Short Term Service Delivery Improvement (“SDI”)
Objective Importance of SDI to achievement of objective
What kind of SDI is required to meet the objective?
Has the objective been met?
Public support for reform
High Stability of power generation & consumption
Yes
Private sector investment
Low Stability of power generation & consumption
Yes
Adequate divestiture proceeds
V. Low Not really applicable. Assets heavily amortised regardless.
N/A
Short term improvement in quantity of power consumption
V. High Meeting Aug 2010 Roadmap targets
No. Principally because of failure to meet generation targets which (in turn) was principally because of failure to meet NIPP targets.
Short term improvement in quality of power consumption
V. High Stability of power generation & consumption
Yes
Radical transformation of the industry **
High (but derivative rather than direct)
The requirement is a derivative one
T.B.D.
** Note: Whatever operational changes can be effected through the PTFP’s monitoring activities is going to be of limited marginal value compared to what the country needs over the coming years. We have more than 150 million people. To achieve the same per capita power consumption as South Africa, we would need 120,000 MW. We currently have less than 4,000 MW (available). The NIPP will eventually add an additional 4,700 MW. That is nothing to be sneezed at and it will make a substantial difference in the short term. But, taken on its own, it will do little to effect the radical transformation this is required.
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The Dynamics of Reform1. The Nigerian Electricity Supply Chain needs vast amounts of investment – at each
point in the value chain.2. The capital required is enormous and the Government cannot fund even a
fraction of the necessary investments. Only the private sector can provide the sums required.
3. But for these investments to take place (on the requisite scale) requires a complex series of interlocking reform interventions.
4. And the success of these interventions requires: the sequencing and prioritisation of the efforts of the PACP & PTFP in light of a real-politick understanding of the dynamics of reform.
5. These dynamics are illustrated in the diagrams overleaf.6. The first diagram compares the current configuration of ownership & control of
the NESI supply chain with the configuration that will need to be in place to attract the mammoth sums of urgently needed capital investment.
7. The second diagram illustrates the interlocking reform steps that need to be taken in order to: a) reconfigure the ownership and control of the NESI; and b) provide the enabling environment for large-scale investment to take place post-divestiture.
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Targeted Change in Ownership and Control of the Sector
Gas Production
Gas Transmission
Power Production
Power Transmission
Power Distribution
Ownership Mixed FGN Largely FGN FGN FGNOperational Control
Largely Private
FGN Largely FGN FGN FGN
Gas Production
Gas Transmission
Power Production
Power Transmission
Power Distribution
Ownership Mixed FGN Largely Private
FGN Fully Private
Operational Control
Largely Private
[ TBD ] Fully Private Fully Private Fully Private
Current Configuration
Required Configuration
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Leveraging Pressure Created by Genco & Disco Transactions
Tens of billions of dollars of private sector investment
Change of ownership and control of Gencos and Discos
Major tariff change
Bulk Trader
WB & MIGA Guarantees (during transition)
Modest & stable increase in generation &supply
Information pressure system
LabourIssues
Transaction Strategy
PoliticalWill
Momentum on EOIs, RFPs, Due Diligence Transparency
Investor Confidence
Completion of existing PHCN & NIPP capacity expansion projects
Major FGN investments in power transmission
Major FGN investments in gas transportation infrastructure
Resuscitation of the NESI
ECONOMIC GROWTHJOBS
NATIONAL SECURITY
ELPS Expansion
OB3 Link
Mgmt Contract
Investment Pressure System
Other Medium Term Projects
Eventually…Gas Grid Concession
T.N.D.F.
NERCRevival
N.B. The amber boxes are the critical missing components. If we “fix” these 8 components, the dynamics of reform will be self-perpetuating.
Super Grid
CAKK Link
minimum 200MWPer 1 million headof population
=
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Leveraging (continued)• We can use the force of the domestic and international capital markets not just to
channel investment into the sector after the divestiture but also as a way to reinforce the government’s ongoing reform efforts.
• More particularly, as shown in the preceding diagram, the very act of shifting the generating companies and distribution companies into the private sector will ensure that the FGN is subject to sustained pressure to make correlative investments in the two sectors where ownership remains in the Government’s hands, namely: gas transmission and power transmission.
• And the Genco and Disco transactions will also serve to place added pressure on the government to complete the existing PHCN and NIPP expansion projects.
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Moving Towards A Self-generating Investment Pressure System: The Nine Levers Of Change
Presidential Task Force on Power
Roadmap Target Date
Roadshow Target Date
Current Target Date
Critical for Transaction Completion
Critical for Immediate Private Sector Investment
Major Tariff Change End of 2010 Mar 15, 2011
June Yes Yes
Bulk Trader Appointments
End of 2010 “Imminent” June Yes Yes
Issuance of Bidding Docs
Feb 1, 2011 Mar 15, 2011 June Yes Yes
Agreements with Labour
“Imminent” “Imminent” July Yes Yes
Appt of TCN Mgt Contractor
May 1, 2011 “Imminent” In View No. But need to be a lot further down the track.
Yes
Funding of ELPS Expansion (Oben to Itoki)
End of 2010 Not Stated In View No Yes
Funding of OB3 link End of 2010 Not Stated In View No Yes
Funding of CAKK Not Stated Not Stated In View No Yes
Strengthening NIPP Project Mgmt Process *
Not envisaged Not envisaged
June No Potentially* But critical for meeting Roadmap service delivery targets
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Reform and the Bulk TraderThe sale of the gencos and discos is dependent on the operationalisation of the Bulk Trader. Investors will not sign a Sale and Purchase Agreement until they have a counterparty with whom they can contract. At this stage in the evolution of the electricity market, bilateral contracts between power producers and distribution companies are not possible. Only a bulk trader (with the ability to sign PPAs backed by bankable guarantees) can bridge this gap. Absent this entity, the entire reform process will grind to a halt, investor confidence will haemorrhage and there will no new procurement of power.
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The Capital Cost Of Reform – Bounded And Time Limited1. The transformation of the ownership and control of the Nigerian Electricity
Sector is a massive undertaking.2. And it requires supporting injections of capital by the Federal Government at
various points in the supply chain.3. The scale of this FGN investment is not a bottomless pit with
unbounded dimensions.4. On the contrary, an indicative balance sheet can be drawn up on the basis of
estimates.5. The other point to note about this indicative balance sheet is that the
majority of the FGN liabilities that need to be incurred to leverage private sector investment (on a multiple of the FGN injections) are either “one-off” costs or strictly time-limited.
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The table below reveals the likely value of the contingent liabilities to which the Government might be exposed in 2015 were it to provide PRG indemnities for PPAs signed on commercial terms* for 9,000 MW
Assumptions: If the revenues earned by the distribution companies in 2015 were so low that the bulk buyer...
Likelihood of assumptionby 2015
Notes Annual cost of FGN’s liability
Couldn’t make any of the payments in the PPA
Impossible This would effectively mean that the distribution companies had stopped functioning altogether
US$ 3.6bn
Could only make 50% of the payments in the PPAs
Worst case scenario
This would mean that the reform process had completely stalled and no progress had been made between 2010 and 2015
US$ 1.8bn
Could make 75% of the payments in the PPAs
Definitely This would mean that the reform process had gathered some momentum but that progress was sluggish
US$ 0.9bn
Could make 90% of the payments in the PPAs
Expected This is the minimum expected scenario
US$ 0.36bn
Could honour all of the payments in the PPAs
Likely This would mean that the distribution companies were commercially viable
US$ 0m
* The example shown here assumes a wholesale tariff of N12/kWh.
Valuations Of The Fgn’s Contingent Liability – In Respect Of The Indemnities For PRGs For IPPs
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The Opportunity Cost Of Not Incurring The Contingent LiabilityThe provision of PRGs for IPP investments will create a contingent liability that will not become an actual liability (if at all) for at least three years (i.e. until completion of the IPP projects).
The maximum actual risk to the government (if it indemnified PPAs for 9,000 MW of power generation)…is likely to be less than $1bn per annum.
The opportunity cost of not incurring this liability (and simply waiting until the sector, post-privatisation, becomes commercially viable) is the cost of the GDP that would be lost as a consequence of delayed investment decisions.
The cumulative cost of delayed investments – in terms of lost GDP – will be more than 10x higher than the actual cost of incurring the contingent liability.
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Reform – Milestones Reached Policy consensus cemented; construction of Roadmap International investors galvanized (Roadmap launch, Presidential Retreat and investor
road shows held in 5 cities) Commenced privatisation process NERC Commissioners instated Payment of monetized benefits Negotiations commenced on severance and pension payments Bulk Trader incorporated and licensed World Bank PRG scheme initiated and fast-tracked Facilitation of progress towards genuinely cost reflective tariffs Privatisation strategies agreed by NCP CPCS appointed as Transaction Advisers Asset valuations in progress EOIs for PHCN successor companies received and evaluated Corporatisation of successor companies Committee to wind down PHCN constituted NELMCO operationalised Preparation of management accounts by Successor Companies Receipt of World Bank “No-Objection” for appointment of BPI as Transaction Advisers
for the TCN Management Contract
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Reform – Outstanding MilestonesTransactions Prequalification of bidders Issuance of RFPs Establishment of data room & conduct of due diligence by bidders Execution of transactions
Transitional Market Conclusion of negotiations with Labour Operationalisation of Bulk Trader Securing PRGs and other guarantees Implementation of Market Rules & Grid Code Signing of GSAs
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Other PTFP Strategic Initiatives
•Off-Grid Generation to Unserved, Remote Communities
•SuperGrid Implementation
•Power Growth via the Bulk Trader
•Five Year Generation Capacity Projections
•Proposed Allocation to Major Cities & Industrial Centres
•Transmission Network Development Fund (TNDF)
•Future Evacuation from Gbarain Power Station
•Electric Power One Stop Shop (Investment Information Web Portal)
•GIS Energy Map
•Energy Efficiency/Electricity Demand Side Management
•Issues with Emergency Power Plants
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Thank You
Visit:
www.nigeriapowerreform.org
for further information.
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