Update on the Nigerian Power Sector Privatisation
March 2012

Introduction

• Nigeria has a population of more than 158 million (2010). It is the most populous country in Africa, with more than 78 million people estimated to be living in urban areas in 2010.
• Nigeria currently has installed capacity to generate approximately 6GW of electricity of which only about 3GW is actually generated. With trends from developed nations indicating that approximately 1GW of generating capacity is required for each million head of population, Nigeria is facing a huge capacity shortfall.
• Only half of all Nigerians are connected to the grid and self-generation is estimated to be at least 6GW, more than twice the average output from the grid in 2009.
• Per capita each Nigerian consumes just 3 per cent of the electricity that is consumed by the average South African and only 7 per cent of that consumed by the average Brazilian.
• Annual GDP growth in Nigeria between 2011 and 2016 is expected to average around 6.3 per cent. The Federal Government of Nigeria (the Government) aims to increase generating capacity to 40GW by 2020.
• Oil and gas dominate the Nigerian economy. Proven reserves are estimated at 37.2 billion barrels and 186.9 trillion cubic feet respectively.
• Nigeria has recently faced a wave of political unrest, including a national strike in protest of the removal of a fuel subsidy, as well as a campaign of violence orchestrated by Boko Haram militants. In addition, there is also the possibility of renewed violence in the Niger delta region, if the Movement for the Emancipation of the Niger Delta (MEND) militants should step up their campaign of bombings and kidnappings.

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Vision 20:2020

“By 2020, the energy sector will be the major engine of the nation’s sustainable social, economic and industrial growth, delivering affordable and constant energy supply efficiently to other sectors of the economy”

(Report of the Vision 2020 National Technical Working Group on Energy Sector)

Vision 20:2020 is a strategic roadmap for the social and economic progress required to rank Nigeria within the top 20 global economies by the year 2020. Nigeria’s energy sector is intended to play a leading role in reinvigorating economic growth and alleviating poverty.

The roadmap targets the provision of 40GW of generating capacity by 2020 which will be financed through a large scale commercialisation and privatisation of state owned energy assets. The Government estimates that investment in the power sector of US$3.5 billion per annum over the next eight years is required to reach this target.

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Historical progress

The origins of the Nigerian power sector privatisation date back to the National Electric Power Policy, which was approved by the Federal Executive Council in 2000. The policy called for fundamental changes to the ownership, control and regulation of the power sector. However, following numerous delays, it was not until 2005 that the Electric Power Sector Reform Act (EPSR) enshrined these policies in law.

Under the EPSR, the newly-incorporated Power Holding Company of Nigeria Plc (PHCN) assumed the assets, liabilities and employees of the state owned and operated National Electric Power Authority. The PHCN provided a temporary umbrella under which the power sector assets were unbundled into 18 separate successor companies, each responsible for the generation, transmission or distribution of electric power. Meanwhile, PHCN’s liabilities were transferred to an SPV called the Nigerian Electricity Liability Management Company, to give confidence to investors that they would not be responsible for unforeseen liabilities following PHCN’s dissolution.

The unbundling process resulted in the creation of the following successor companies:

Generation Company (Genco)	Transmission Company	Distribution Company (Disco)
Kainji Power PLC Shiroro Power PLC Ugheli Power PLC Sapele Power PLC Geregu Power PLC Afam Power PLC	Transmission Company of Nigeria	Abuja Electricity Distribution Company PLC Benin Electricity Distribution Company PLC Eko Electricity Distribution Company PLC Enugu Electricity Distribution Company PLC Ibadan Electricity Distribution Company PLC Ikeja Electricity Distribution Company PLC Jos Electricity Distribution Company PLC Kaduna Electricity Distribution Company PLC Kano Electricity Distribution Company PLC Port Harcourt Electricity Distribution Company PLC Yola Electricity Distribution Company PLC

The ESPR also established the Nigerian Electricity Regulatory Commission (NERC) as electricity regulator, whose responsibilities include, inter alia, setting the price of electricity. Under the ESPR, the NERC is to ensure that electricity prices are fair to consumers and also provide an adequate return to generators. In 2008 the NERC introduced the “Multi Year Tariff Order” (MYTO) structure, with the aim of making electricity prices in Nigeria cost-reflective. The MYTO also provides for continuous reduction in transmission and distribution loss, as revenue earned by operators is made dependent on achieving performance improvements.

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Current developments - privatisation

Although the pace of reform of Nigeria’s power sector following the unbundling of PHCN has been slow, renewed impetus has been given to the reform process under Vision 20:2020, whereby the energy sector has been assigned a key role in achieving Nigeria’s development goals. It is now the Government’s priority to privatise the generation and distribution sectors as part of this reform process.

The Government intends to retain ownership of the Transmission Company of Nigeria (TCN), but plans to sub-contract the management of the TCN to a private operator. The Bureau of Public Enterprises (BPE) has recently issued request for proposals to Manitoba Hydro of Canada and Power Grid of India to bid for this management role.

Power produced by the Gencos will be purchased by the Nigerian Bulk Electricity Trading Company (NBETC) on behalf of all the Discos. The role of the NBETC is to provide certainty to investors who might otherwise be reluctant to invest in Gencos given that the Discos do not have a proven track record in efficient metering, billing or payment. Under this structure, the NBETC will enter into Power Purchase Agreements (PPAs) with the Gencos, and the electricity purchased by NBETC will be sold on to the Discos (pursuant to Vesting Contracts) and, in turn, the end consumers. The NBETC will be backed by risk guarantees provided by the World Bank against payment default and other risks.

In addition, the Gencos and the Discos will be required to enter into a Connection and Interface Agreement and a Transmission Use of System Agreement (the Connection Agreements) with TCN to regulate their conduct as regards the transmission network.

The diagram below outlines the electricity trading structure between the Gencos, NBETC and the Discos during the transition stage of the privatisation process:

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Legal protection

In addition to the comfort which international investors can take from the role of the NBETC, Nigerian law provides investors with certain protections as regards their investments and profits generated. The Nigerian Investment Provision Commission Act (1996) allows for foreign ownership of Nigerian companies in most sectors and protects investors against nationalisation and expropriation, whilst the Foreign Exchange (Monitory and Miscellaneous Provisions) Act (1995) guarantees the repatriation of certain proceeds (dividends, profits, etc.) from foreign currency brought into Nigeria and invested.

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Privatisation timetable

The privatisation process is being coordinated by the BPE.

The initial, pre-qualification, stage of the bidding process is now complete and the BPE has shortlisted those bidders who have demonstrated that they possess the technical, commercial and financial capacity to operate the successor companies to a high level and to achieve the targets set by the power sector reform proposals. Those shortlisted were then given the opportunity to purchase a Request for Proposal (RFP), giving access to transaction and industry documents and inviting detailed bids.

Multiple bids will be welcome although no bidder will be allowed to win more than two Discos, one thermal Genco and one hydro Genco. Moreover, no bidder will be permitted to win both Discos operating in Lagos.

Bids will need to include detailed technical, commercial, financial and investment plans together with a bid bond. Bids will first undergo a points-based, technical evaluation assessing factors such as experience, quality of business plan and ability to raise finance.

Bidders who pass at the technical evaluation stage will be asked to submit post-qualification security and will be entered into the second stage commercial evaluation. The value of post-qualification security will depend on the category of assets being bid for. Those bidding for Discos and thermal Gencos will be expected to post US$10,000,000-20,000,000 of post-qualification security and US$23,000,000 for those bidding on the hydro Genco concessions.

For the Gencos, the commercial evaluation will be based on the purchase price offered by bidders. The purchase price for each Disco is fixed and specified in the relevant RFP. The commercial evaluation for Discos therefore will be carried out on the basis of the efficiency savings and loss reductions offered by bidders.

A successful bidder will be invited to negotiations with the Government which are expected to last between two to three months. Payment of the purchase price will be in parts; the first part being due shortly after the signing of the Sale and Purchase Agreement, the remainder being due on the terms specified in the relevant agreement (not yet disclosed).

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Opportunities

Although it is now too late for non-qualified parties to register for the process, the privatisation still offers international investors who are interested in the process a number of opportunities.

With the technical and commercial evaluation stages setting challenging thresholds across a broad range of criteria, a number of bidders are currently seeking partners to enhance the technical, financial and commercial strength of their bids. For example, Disco bidders, when demonstrating their technical and operational capabilities, are expected to demonstrate experience in power distribution and developing economies.

Furthermore, bidders will seek debt both to finance the acquisition of and to rehabilitate their target asset, whilst the rehabilitation itself will present further opportunities to construction contractors, equipment suppliers and international operation, maintenance and technical service companies.

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Timeline

The following timetable is correct as at the time of going to print:

Transaction Timetable

Milestone Event	Generation Date	Distribution Date
Issue revised legal documents	30 March 2012	30 March 2012
Submission of comments by bidders on legal documents	20 April 2012	20 April 2012
Distribution/issuance of final bid documents	11 May 2012	11 May 2012
Bid submission	17 July 2012	31 July 2012
Finalise technical evaluation	14 August 2012	28 August 2012
NCP approval of technical evaluation	28 August 2012	11 September 2012
Deadline for submission of letter of credit by bidders	18 September 2012	2 October 2012
Financial bid opening	25 September 2012	10 October 2012
NCP approval and announcement of preferred bidder	9 October 2012	23 October 2012

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Summary: opportunities and challenges

It is clear that the privatisation of the Nigerian power sector represents an opportunity for investors to enter a power market in which demand vastly outstrips supply. Meanwhile, the potential for consortium bids extends these opportunities to construction contractors, equipment suppliers and international operation, maintenance and technical service companies.

However, the programme faces numerous challenges, some of which are detailed below:

• The privatisation process is dependent upon the Government’s continuing engagement and political support. There are a number of powerful vested interests within Nigeria that oppose the privatisation, for a variety of different reasons, and it is essential that the Government continues to support the privatisation process in order to manage such opposition.
• The increasing amount of violence arising out of Boko Haram’s militancy and/or upswing in violence from MEND could adversely affect the privatisation process. For example, bidders may lose interest in the assets that are located in the North or in the Delta region, due to the ongoing regional instability.
• Questions remain with regard to the capacity of the BPE and related Government departments to coordinate the privatisation within the timetable that has been set. Indeed, this timetable has already experienced numerous delays and it is possible that the most recent timetable will not be adhered to.
• Bidders have raised questions with regard to the high valuations of the assets. There is seen to be a tension between the Government’s aims of attracting investment for the purposes of the rehabilitation of the power sector and also raising revenue from the sale of some of the assets.
• The standard of the industry agreements that it is proposed that the privatised Discos and Gencos will enter into, as produced by the Government, has generally been of a poor standard. The BPE has invited
  comments from bidders in relation to these agreements and it has undertaken to revise the agreements in order to address some of the bidders’ concerns. As of the time of print, the revised agreements have not been issued and it remains to be seen as to whether the agreements will be in a form that international investors can accept for the purposes of their investment.

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