Transcript Slide 1

THE PRESIDENCY
FEDERAL REPUBLIC OF NIGERIA
NIGERIAN POWER SECTOR REFORM
An Overview of Power Sector Reforms
in Nigeria
PROF. BART NNAJI,
CON, NNOM
SPECIAL ADVISER TO THE PRESIDENT ON POWER
CHAIRMAN, PRESIDENTIAL TASK FORCE ON POWER
THE BANKERS’ COMMITTEE/BUREAU OF PUBLIC ENTERPRISES
TECHNICAL WORKSHOP ON NIGERIAN POWER REFORM 25TH MAY 2011
2
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
3
The Past
Funding To The Nigerian Power Industry
500
400
300
200
100
0
74
9
1
76
9
1
78
9
1
80
9
1
82
9
1
84
9
1
86
9
1
88
9
1
90
9
1
92
9
1
94
9
1
Investment ('US$millions)
Source: Presidential Retreat On Power
96
9
1
98
9
1
00
0
2
02
0
2
04
0
2
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.
4
5
The Dynamics of Reform
1.
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.
6
Targeted Change in Ownership and Control of the Sector
Current Configuration
Gas Production
Gas
Transmission
Power
Production
Power
Transmission
Power
Distribution
Ownership
Mixed
FGN
Largely FGN
FGN
FGN
Operational
Control
Largely Private
FGN
Largely FGN
FGN
FGN
Required Configuration
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
7
Leveraging Pressure Created by Genco & Disco Transactions
N.B. The amber boxes are the critical missing
components. If we “fix” these 8 components, the
dynamics of reform will be self-perpetuating.
NERC
Revival
Labour
Issues
Major tariff
change
Bulk
Trader
WB & MIGA
Guarantees
(during
transition)
Completion of
existing PHCN &
NIPP capacity
expansion projects
Mgmt Contract
Information
pressure
system
Modest & stable
increase in
generation &
supply
Change of
ownership and
control of Gencos
and Discos
Major FGN
investments in power
transmission
Investment
Pressure
System
Super Grid
Major FGN
investments in gas
transportation
infrastructure
Investor
Confidence
Momentum on EOIs,
RFPs, Due Diligence
Political
Will
Transaction
Strategy
Transparency
Tens of billions of
dollars of private
sector
investment
Resuscitation of
the NESI
T.N.D.F.
ELPS Expansion
OB3 Link
CAKK Link
=
ECONOMIC GROWTH
JOBS
NATIONAL SECURITY
minimum 200MW
Per 1 million head
of population
Other Medium
Term Projects
Eventually…
Gas Grid
Concession
8
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.
Moving Towards A Self-generating Investment Pressure
System: The Nine Levers Of Change
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
Presidential Task Force on Power
9
10
Reform and the Bulk Trader
The 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.
11
The Capital Cost Of Reform – Bounded And Time Limited
1.
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.
Valuations Of The Fgn’s Contingent Liability – In Respect
Of The Indemnities For PRGs For IPPs
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
assumption
by 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.
12
13
The Opportunity Cost Of Not Incurring The Contingent Liability
The 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, postprivatisation, 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.
14
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
15
Reform – Outstanding Milestones
Transactions

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
16
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
17
Thank You
Visit:
www.nigeriapowerreform.org
for further information.