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Sunday, 24 November 2013
Random thoughts about some issues in the Nigerian Electric Power Sector (Part 1)
This week, we put together some random thoughts of the author about some issues in the emerging electric power sector in Nigeria and other relevant matters that are worth considering.
Can investors in the newly privatised power companies neglect improvements in power supply for revenue generation and servicing their indebtedness?
I doubt that they all are only concerned about the repayment of funds obtained from financiers as I understand that there is on the average, a one year moratorium before they begin to service their loans. Also, recall that these companies have performance targets so it is unlikely that they do not care much about service delivery as they do, in connection with repayment of loans. What makes it really improbable that they are not focused on service delivery is the fact that the government, through the BPE, has a call option on those shares which they bought and the BPE can actually take over those companies, for paltry sums, if the new owners do not meet pre-agreed service delivery levels within the periods specified in their performance agreements.
Consequent upon the foregoing, I do not think that they are not focused on service delivery.
The foregoing notwithstanding, it is very germane to note that the power sector had been neglected for several decades and it would take more than a few weeks or months to put things right. For several years, as population grew in geometric progression, no additional power infrastructure was provided. The last grid enhancement was done in the year 1987. Therefore, I do not think anyone would realistically expect that things would change drastically immediately; especially since the new owners would face teething problems and would need to carry out audits to be able to properly situate where most of their efforts should be.
On the termination of the employment of some old staff of the now privatized power generation and distribution companies
The standard Transition Plan, annexed to the Share Sale Agreements signed by every new owner of the now privatised companies, gives the new owners the contractual right to retain or terminate the services of any employee of these companies. Specifically, Paragraphs 5 and 9 deal with the issues around relieving employees of those companies of their jobs or retaining their services.
A look at Paragraph 5.4 of the Transition Plan reveals that the new owners were only obliged to retain the employees of the now privately owned power generation and distribution companies. Further, Paragraph 9 of the same document stipulates that the BPE shall procure that on Completion Date, the management and employees that have not been retained by the generation and distribution companies shall cease operations and peacefully vacate the premises. Therefore, contractually, the new owners are not obliged to retain them.
Apart from the foregoing, it is trite in law that, you cannot force a willing employee on an unwilling employer and vice-versa. Consequently, the new owners of the power generation and distribution companies are at liberty to determine who they would retain especially since the employment contracts of the staff of these companies no longer have statutory flavour. Furthermore, these new owners may be terminating the employment of these staff because they reckon that they cannot work with them to achieve their new corporate goals and visions of these companies. I, therefore, cannot blame them for so doing and think it may just be part of what is required to move the power sector forward from the era of systemic failure. Note that the new owners had the right during the transition period to monitor the employees with a view to determining whether they would be retaining them or asking them to leave.
On interest shown in the privatization of the NIPP plants
The reasons for such interest would include the success recorded so far in the privatisation of the PHCN power companies, despite the attendant challenges especially since those challenges are unlikely to be encountered in relation to the NIPP plants.
Further, all of the NIPP plants are new plants and are unlikely to have much liabilities or labour issues as were encountered with the privatization of the PHCN power companies. I believe that these prospective financiers would have done their due diligence and are quite convinced of the actual state of the plants.
It is also pertinent to note that the federal government of Nigeria, under the leadership of President Jonathan, has shown a lot of political will in seeing the reforms in the power sector through. Apart from the foregoing, the gap in electricity demand, particularly where everything else is right, gives sufficient hope that the transactions in relation to the NIPP plants are bankable.
On metering gap and local capacity to the fill gap
It is no news that there is a huge metering gap in Nigeria. Personally, I am of the view that local manufacturing companies like Moman Meter Manufacturing Company Limited should first be encouraged (through incentives and patronage) by the federal government before looking outside Nigeria to close the gap. According to NERC, the ways the existing distribution companies can close the metering gap include, through funds obtained from their monthly revenue collection, capital budgets from new owners of the distribution companies and external funding from commercial or development banks at very low concessionary lending terms as means of bridging the gap.
These distribution companies and their technical partners should also be encouraged to patronise Nigerian companies which show the capability of producing high quality meters (in compliance with the Local Content Rules in the power sector). It is only where there is insufficiency as to quality and or quantity of meters and metering services, should distribution companies then seek to import meters. It is, therefore, my view that local manufacturing companies have a big role to play in relation to closing the metering gap. A good supplement may, however, be to have joint venture arrangements between Nigerian companies and their foreign counterparts, especially where it is clear that the available companies cannot sufficiently close the metering gap. Let’s encourage industrialisation in Nigeria.
Whether companies with captive power plants and which have excess capacity can sell same
Some of the companies who have captive power plants are not using all the capacity they have and are, indeed, willing to sell the spare capacity they have. However, for those companies to sell the spare capacity; beyond the captive generation permits they may have, they would also be required to obtain generation licences.
What to expect post-privatisation
It is great to be a part of the new vista that is opening in the electric power sector. I had always firmly believed that the current administration would achieve this feat provided the political will was in place. My belief had been premised on the fact that the structure adopted for the privatisation of the PHCN successor companies and the reforms in the electric power sector have been successfully adopted in several other countries of the world prior to this time.
With the taking over by the private sector of the formerly government owned electric power generation and distribution companies, efficiency should greatly increase as the tariff structure is such that it promotes efficiency and the more efficiently a company along the electricity value chain runs, the more profitable it is likely to be.
Further, no private sector generation or distribution company would accept the old order where equipment such as transformers etc. would be in disuse for several months without repair because that would affect profitability as meters won’t run where there is no electricity and then distribution companies cannot receive payments for electricity which did not flow (save for the fixed monthly fee). There would also be new revenue streams for businesses servicing the electric power sector and an expanded middle class in the country with a likely positive multiplier effect on the stock market (as knowledgeable people are likely to buy certain stocks which have some connection with the electric power sector), the purchase of luxury goods and general purchasing power.
A good power sector is also likely to attract more foreign business into Nigeria as Nigeria is already considered to be a profitable place to do business even with the electric power challenge. Africa is regarded as the new (if not last) frontier market with Nigeria seen as the largest piece of that. An improved electric power system would further increase Nigeria’s attractiveness for business. For more thoughts on the electric power sector in Nigeria, read the text ‘The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business’ by Ayodele Oni (www.nesi.com.ng)
Ayodele Oni (email@example.com) specializes in international energy (oil, gas, power & renewables) investment law and wrote Nigeria’s leading text on energy security and the Nigerian electric power sector.