Global: With the anticipated finalisation of the sale of power generation and distribution companies to private sector operators, are you confident that the management of Nigeria’s power sector can soon become sufficiently well harmonised for a new wave of investment in electric power to begin all across the country?
Atedo Peterside: Yes, I am very confident that there will be a massive new wave of investment activity. Many analysts overly emphasise insufficient power generation in Nigeria. They forget that 40-50 percent of the power we generate is traditionally lost on account of transmission and distribution inefficiencies. Of this total distribution losses alone account for 35-40 percent, while the transmission losses typically fluctuate between five and ten percent.
Privatisation of all the 11 Distribution Companies (Discos) is therefore the key. At present there is a very poor alignment of goals between staff of the Power Holding Company of Nigeria (PHCN) and the consumer. PHCN staff know that they will be paid their salaries in full whether or not they rectify a local distribution fault. With privatisation of the Distribution Companies, the new core investor pays out between NGN9.3 billion and NGN26.5 billion to acquire a 60 percent equity in a Disco. This is an upfront payment and a financial outflow. The core investor only receives financial inflows when there is electricity running through a consumer’s meter and so he has a vested interest in rectifying all reported faults/losses speedily, so that he can keep the inflows rolling in. Likewise, the private sector controlled Discos would accelerate new investment activity that will lead to a sharp reduction in power outage on account of distribution faults/losses.
The case for new investment activity in the Generation Companies (Gencos) and transmission is also very strong. New IPPs will spring forth as distribution becomes more efficient and electricity demand surges.
I expect an entire sector awakening, similar to what the Nigerian telecommunications sector witnessed over the course of the last decade.
For new investment to be sustainable, the traditionally low customer tariff will clearly have to be increased over time. How difficult do you think it will be to establish a pace of increase that is acceptable to both customers and investors?
Tariffs were increased on 1 June 2012 and that went a long way towards making the entire value chain healthy. All things being equal, we expect privatised Discos to collect enough cash via the pre-paid meters of consumers to cover all their outgoings, while also leaving them with a healthy profit. Of course, a major outgoing for the Disco is payments for the power they are consuming as stipulated in the vesting contracts they signed with the Bulk Trader. The Bulk Trader will, in turn, pay the Generation Companies via Power Purchase Agreements.
The tariff regime that was established in June 2012 is anchored on a formula built into a Multi-Year Tariff Order. The tariffs will adjust naturally from then on because they are tied to various parameters such as the cost of fuel and the inflation rate. The tariffs are also progressive and so the unit cost of electricity jumps up as the usage increases. The poorest consumers enjoy a subsidy from the Federal Government and a cross-subsidy too. The intention is that the very rich should pay more than they need to pay for electricity so that the very poor can pay tariffs which are significantly less than the cost of providing electricity to them.
Will the regulator be seen to be truly independent of government and free from political interference?
Yes, the National Electricity Regulatory Commission (NERC – the Regulator) is sufficiently independent. The Chairman of NERC and its commissioners cannot be fired except via a Senate vote.
Do you expect the power plants that are currently being built by government to be privatised sooner or later?
The power plants currently being built by the Government are the National Integrated Power Project (NIPP) plants. These are owned by all three tiers of Government (Federal, State and Local). I expect these plants to be privatised eventually after a consensus emerges to dispose of them. The plants that we are privatising in 2013 (the Gencos) are the Federal Government plants which belonged to the old State Monopoly Power Company – the Power Holding Company of Nigeria (PHCN). These are four Thermal plants (Afam, Geregu, Sapele and Ughelli) and two Hydros (Kainji and Shiroro). In addition, there is the Egbin thermal Genco, which was sold to Kepco of Korea by a previous government, but the transaction did not progress because it got bogged down by a protracted stalemate. This transaction is being re-activated and I expect closure soon on the basis of modified/re-negotiated terms. There are two other thermal plants (Olorunsogo and Omotosho) which were in the process of being built for PHCN by Chinese contractors when a decision was taken to privatise PHCN. These plants should be disposed of by offering the Chinese contractors the first right of refusal to purchase them. I expect substantial progress in this area very soon.
