Exclusive interview with Rahila Thomas, Country Manager, AF-Mercados EMI, Nigeria and panel discussion moderator at the upcoming WAPIC on “The Good, the Bad & the Future: Voices from the Private Sector”.
Your company is involved in several power projects in Nigeria – any updates on these that are particularly exciting?
There are three major initiatives we have found both challenging and exciting over the past two years.
Firstly we played a central role in establishing the baseline level of losses at the time of handover for six distribution companies (discos). The level of losses was much higher than some anticipated. Such high losses, which are greater than 50% for some discos, mean that the income of the sector is insufficient.
Reducing loss levels to reasonable levels is a contractual commitment for the discos under the privatisation but unfortunately it cannot be achieved overnight, requiring significant capital investments as well as capacity building for employees and sector-wide public relations support.
Then we have assisted the discos to work together in addressing industry wide issues, particularly in relations with the Regulator. Initially a roundtable of the discos met very informally. Early this year the roundtable was officially, and legally transformed into the Association of Nigerian Electricity Distributors (ANED).
Finally and very recently, we have assisted a number of discos in preparing submissions to the Regulator to establish their tariffs over the next 10 years – tariffs that will, over that period, bring sufficient income to the sector to ensure adequate investments can be made in generation, transmission, distribution and supply so that the sector leaves behind its troubled history and starts to deliver reliable and sufficient electricity to Nigerian consumers.
The exercise involves minimising tariff shock by projecting financial losses in early years that are recovered later in the period when electricity loss levels have been cut to internationally acceptable levels.
We are looking forward to assisting our clients in gaining acceptance for their proposed tariffs and in developing realistic plans for financing the early years’ deficits.
What in your view is the most challenging about working in the power sector in Nigeria?
The most challenging experience(s) about working in the power sector is helping key stakeholders, including the consumers of electricity, to develop their understanding of the complex workings of the sector.
A significantly greater understanding of these workings is essential for the Nigerian society to accept the changes that are required over the coming years.
For example, the massive lack of investment over the past 20 years has left more than half of connected household customers unmetered.
We find that the Nigerian society generally does not understand the mechanisms for charging unmetered customers nor understand the scale of the metering investments needed to put things right.
The supply of electricity touches many parts of Nigerian society aside from household customers. Federal and State administration are major consumers, which have an influence on licencing, sector policy and public relations. Bankers are needed in the sector to support capital investment as well as providing operational financial support.
Within the sector itself there is very limited understanding of the complexities around market operations or the equally complex workings of sector regulation. My company offers training services by providing tailored training and capacity building in several areas within the sector including:
- Regulation and regulatory affairs
- Power project development
- Power procurement and power trading
- PPA and vesting contract administration operation
We have trained several companies operating within the sector and other stakeholders.
Building capacity in terms related to electricity business in Nigeria in relevant sectors of the economy is an integral part of our plans going forward.
What in your view has been the most challenging experience for the new owners since handover?
I would say apart from trying to understand the business they have taken over in the absence of a thorough due diligence at the time given labour related issues, regulation and liquidity issues in the sector.
Electricity business in Nigeria was not a regulated business until 2005 when the Nigerian Electricity Regulatory Commission was established and operational. Since then elements of the regulation of the sector are clearly being developed on a day-by-day basis.
For example, tariffs have not yet been set at cost-reflective levels, which was the expectation of the private owners when they took over. Another example was the setting up and operation after handover of temporary interim rules intended to be for just a few months but lasting for a year.
These rules led to a substantial sector deficit that was subsequently funded by a CBN facility set up specifically for that purpose.
In April NERC took a decision to disallow collection losses in establishing tariffs leading to a drastic reduction in tariffs and causing Discos to be unable to fully meet sector cash flow needed to meet key obligations for operation.
Then there was an order that empowered customers not to pay fixed charges if there was no supply of electricity to them over 15 days. This of course increased collection losses for Discos.
Sudden and constant changes in regulation no doubt make financing very difficult. But all said, it is pertinent to state that privatisation and regulation in the power sector is still in an infant stage so I expect that so much has been learnt since November 2013 when the private sector took over and hopefully the required stability in regulation and improvement in electricity supply will be achieved.
What is your vision for the industry?
My vision for the industry is the existence of a functional bilateral market for the electricity industry in a stable regulatory environment. We know from our in-depth analysis of the sector that this is readily achievable. Nigeria has ample energy resources – oil and gas, some coal and significant renewable resources especially solar.
The privatisation design while complex provides a workable structure. The new private owners of the sector have plans that will introduce metering for all and reduce losses to acceptable levels and we see this as being doable within five years.
Once this is achieved with significant ramp up in generation levels we may see tariff levels drop. Two elements are essential if this is to occur: stable and fair regulation and short to medium term cash flow support. These issues are understood and we believe being adequately addressed by the sector players. Our vision is to continue to contribute to the process.
You are chairing a very dynamic panel from the private sector at WAPIC, “The Good, the Bad & the Future: Voices from the Private Sector”, giving a perspective from the private sector about doing business in the power sector. What are you expecting from this discussion?
I am expecting extensive and insightful discussions regarding private sector involvement in the power sector so far experienced given the calibre of speakers on the panel.
I also hope that the discussions that will ensue will throw light on the challenges and efforts being made to overcome them such that it encourages further private sector participation.
Nigeria is the largest economy in Africa and projected to become a significant world economy in the medium term. Yet it has one of the least well developed electricity sectors in the world – generation per person is a tiny fraction of that in the developed world and small even for Africa – e.g. it is 1/10th of that in Botswana. So the potential market for goods and services provision to electricity supply in Nigeria is unmatched anywhere else.
How would you describe the Nigerian investment landscape with particular regard to the power sector?
The Nigerian investment landscape as a nation is evolving; for power sector it is in its incubator stages in terms of attracting much needed investments across the electricity value chain. An attractive investment landscape is characterized by strong economic indices, sustainable business operations, demand and growth prospects, stable recurring cash flows, and a stable legal/regulatory regime.
The major challenge in the power sector at the moment is bringing it to a healthy financial state. The distribution companies are currently going through a tariff review process that will put in place cost reflective tariffs.
In designing tariffs consideration is being made to the sustainability of the business, affordability and willingness of customers to pay higher tariffs in the face of poor power supply, which would be the testimony of so many customers.
In achieving this Distribution companies will have to levelised tariffs such that they under recover their expected revenues in the early years and over recover in later years. This throws up a significant deficit that needs to be financed.
Generation levels need to rise significantly beyond 4700MW, which is about the peak that has been achieved so far. To make this happen the associated infrastructure to transmit and distribute the electricity generated has to be reinforced and expanded.
Related gas issues need to be addressed, which requires looking into the pricing of gas-to-power, construction of new pipelines and security over the network to prevent vandalism. With over 160 million people living in Nigeria with less than 50% access to electricity, this definitely presents a great opportunity for investment in Africa’s largest economy.
How important is WAPIC on the region’s power calendar?
From my perspective, WAPIC is gaining momentum in the regional power industry and it is a credible platform to discuss solutions to the current plethora of challenges in the industry.
The annual WAPIC conference will once again present the global investing community with another opportunity to access Nigeria’s efforts at reforming her electricity sector and provide huge investment openings in a market. It is a significant event, and I am very pleased to have been accorded the opportunity to participate at the event.
What are you most looking forward to at the event?
I am looking forward to insightful discussions on ways to move the power sector forward and also networking opportunities.