May 7, 2013 6:02 am

Nigeria’s dysfunctional state power plants set to go private

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During the 1990s, Nigeria’s military rulers were obsessed with power. Unfortunately it was not the sort that turned on the lights. As the electricity deficit grew, not a single new power generation plant was built.

In the 14 years since the return to civilian rule, the record has not been that much better, with most of the state plants operating well below capacity.

Now, at last, change may be close, with the government’s decision to allow the private sector to run the six state generation companies.

In September 2012, it announced the names of preferred bidders for five of the six: three thermal power stations (which were sold in part or in full) and two hydropower stations (which were transferred as “concessions”).

The gas-fired plants are: Geregu Power (51 per cent sold to Amperion Power Distribution Company for $132m); Ughelli Power (100 per cent to Transcorp Consortium, comprising Transcorp, Wood Rock, Symbion Power LLC, Medea Development, PSL Engineering, and Thomassen Holding, for $300m); Sapele Power (100 per cent to a consortium of China Machinery Engineering Corporation, Eurafric Energy, British Power International and First Bank for $201m).

The hydro plants are: Kainji Hydro Power (concessioned to Mainstream Energy Solutions), and Shiroro Hydro Power (concessioned to North-South Power for $111m, with an annual fee of $23m).

A sixth plant, the gas-fired Afam Power was not sold because the bids failed to meet prescribed technical standards, according to the bureau of public enterprises.

It has been re-offered for sale. The gas-fired Egbin Power, Nigeria’s largest generating plant (1,320MW), and one of its best performing, was not included in this round of privatisation because it had been valued and sold to Kepco Energy, a joint venture between the Korean Electric Power Corporation and Nigeria-owned Sahara Energy in an earlier, inconclusive round, in 2007.

Negotiations between Kepco and the government were revived in 2010, and Kepco received, last April, an offer letter for acquisition of 70 per cent of the company, at a cost of $407m.

The five successful current-round bidders signed sale agreements with the government on February 21 2013. They have now paid 25 per cent of the bid prices and have until the middle of the year to pay the balance, after which they will gain full control of the assets.

The privatisation process has generally been well received, attracting hundreds of bids. More than 100 bidders passed the first stage of screening by the BPE, for the six generating companies.

Ikenna Emehelu, counsel at Chadbourne Parke, a US law firm that has advised on power deals in Nigeria, says he has seen a “wide diversity of investor interest” with companies from India, Israel and Kenya displaying keen interest alongside the traditional investor strongholds of Europe and North America.

The series of delays has not put off the foreign interests, he says, because they’re “used to things taking time”.

Valuations need to be made, contracts drafted and signed, tariffs agreed on. Investing in Nigeria can be tricky but “we’re not finding it in any way different from what we expected”, says Andrew Johnstone, managing director of African Infrastructure Investment Managers (AIIM), a joint venture of Australia’s Macquarie Group and the Old Mutual Group of South Africa, which is investing in Nigeria’s power sector.

It is early days yet and there is the constant possibility of deals falling through, undermined by any of the combination of issues generally described as “the Nigerian Factor”.

Huge investments lie ahead of the successful bidders, beyond what will be paid to acquire the companies. Obsolete equipment will have to be replaced to improve efficiency.

At the moment, Sapele Power, Nigeria’s second biggest plant (1,020MW), generates less than 20 per cent of its installed capacity. The 900MW Ughelli is slightly less dysfunctional, functioning at 30 per cent.

The new owners will have to contend with labour difficulties arising from a workforce that is unfamiliar with private sector efficiency.

Overall, however, investor optimism wins. The Transcorp Consortium says it plans to double output within two years and triple it by 2017. Nigeria’s “massive [electricity] shortfall, plus a market that can pay for it” makes investing “a no-brainer”, says Sola Arifayan, partner at Lagos-based lawyers Ikeyi Arifayan.

A petrol generator, he explains, costs N70 to N80 (about $0.5) per kilowatt hour (kWh), while grid electricity, costs, at the high end of pricing, only about N23 per kWh.

Mr Emehelu has advice for all foreign ventures unfamiliar with doing business in Nigeria: patience is critical.

“If you get your licence and permits too quickly in Nigeria, be [wary].” Partnerships, too, count. “You should never work alone. You need to make sure you’ve got partners – equity partners, lawyers, people who truly understand the market.”

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