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Nigeria’s power sector reform

Reynolds Beks

Chairman of Nigeria’s presidential task force on power, Reynolds Beks Dagogo-Jack, spoke exclusively with African Utility Week programme director Claire Volkwyn on the challenges of reform and the objectives and proposed outcome of the process.

Reform: According to the Mirrian-Webster dictionary, reform means a: to put or change into an improved form or condition; b: to amend or improve by change of form or removal of faults or abuses and c: to put an end to by enforcing or introducing a better method or course of action.
An easy enough definition to source, but how do you go about reforming an entire utility sector in one of the world’s most populous countries, Nigeria? What do you get with a roadmap, unwavering political will and a presidential task force on power? The largest, most ambitious power sector reform ever undertaken.

The reform process has now started to gain momentum. What are the major milestones that are coming up, and what potential challenges do you foresee the industry facing in the next 12 – 18 months?
Now that the buyers have been identified, it is important to get the final agreements signed which will transfer the assets from government to the private sector. These include transaction agreements, industry agreements, the labour settlement agreement, etc as these are necessary for securing the payments which need to be made to the government for the assets. The current plan is to hand over the assets to the successful bidders by August 2013 – however, I am hopeful that we will be able to speed things up and do the handover earlier. The main reason for wanting to speed up the handover is that the assets will be operating at less during the transition because of ownership and funding issues; therefore the longer the handover is delayed, the higher the risks of reduced service reliability and this will impact market revenue too. I must remind you that by way of the transaction volume, our potential market size and the sheer number of assets being treated across the value chain, ours is one of the largest utility reform exercises currently going on in the world. It’s a huge challenge. However, we are confident we have the necessary commitments at all levels to deal with situations as they arise.

What is your background? Are you an engineer, do you have a technical background?
I’m not very good at talking about myself – I’m a civil engineer – I’ve been a civil engineer for several years – over 30 years, and my forte is project management. I’m able to take any project and put it into implementable milestones and recognise the underlying risk and pull out realistic timelines and be able to predict when that project will come to conclusion if all our resources are plugged in when they are meant to. My strong background in project management has helped me as chairman of the presidential task force, which is essentially the chief monitoring and performance evaluation agency for the reform.

Talking around the milestones – the handover of the distribution assets will be completed in August?
All things being equal, yes…

And my understanding then is that the Bulk Trader will operate as a bridge for a certain number of years between the generators and distribution companies until such time as the distributors are operating in a financially sustainable and comfortable manner. Is that correct?
Yes, that is correct. The Bulk Trader’s responsibilities go beyond the generation companies as we have them today, and the distribution companies as we have them today. Its responsibility is actually to grow new power through contracts with independent power producers. So it is designed to contract with independent power producers and give them the kind of contractual comfort they would need to source financing for their projects such as securities and PPAs.

Is this a permanent fixture on the Nigerian power scene, or is this an interim vehicle? Is it wholly owned and funded by the Nigerian government?
The Bulk Trader is a special purpose vehicle, a power market development enabler. Now you will appreciate that at this early stage of our transitional market, the distribution companies, which had been government entitites before privatisation, would not be credit worthy enough to buy power on the strength of their history. The Bulk Trader will bridge their weakness for a few years to enable investments in the generation and transmission segments. The Bulk Trader is expected to fall off as soon as the utilities can contract between themselves on the strength of their credit history and balance sheets.

I know that you have put significant time and effort into determining potential challenges – are you happy that enough mitigation processes are in place?
Yes. There may be challenges which arise that were not necessarily foreseen, but I am not anxious about our ability to deal with these as they arise. Privatisation doesn’t come cheap – it’s as much change as change gets to be – it doesn’t get more complex than this. On a human level, we are dealing with a large number of staff and this can lead to a number of unpredictable outcomes. That is why it is clear we must have a robust severance package that sorts out people and draws a line. But at the same time, the people who have the capacity and want to continue working can sign on immediately to remain with the new owners. For me, the electricity workers have the best deal in this privatisation – you pay them, you retire them and they are automatically in a position to close another contract for themselves.

Is the plan to retire all the current labour, or will some of the staff be automatically transferred over?
All of the current staff contracts, in both the generation and distribution companies, must necessarily be terminated because in any situation of ownership change, it’s imperative to terminate the old relationship and allow the new owner to establish his own relationship with the workers. But here again, out of concern for the workers, the sale conditions stipulate that the new owner has an obligation to roll them over automatically for six months. Before that, the old owner, which is the Federal Government, also has an obligation to rationalise the workforce to a manageable level which the new owner can live with. Now this exercise is a sensitive one and not easy to deal with but is a condition in the agreements that we have with labour so we don’t foresee much backlash from that. The new owner inherits the workforce for six months, and during that period does due diligence, and determines who will stay on and who will not. But don’t forget that everyone would have been sorted out in terms of their former engagement.

It must have taken quite a bit of negotiation to get this agreement in place.
It was a tough call and involved the highest level of government. At some point the secretary to the Government of the Federation, who is the highest ranking technocrat in the civil service, was commissioned to head a special committee which knocked out a final agreement with labour. Indeed, all hands are on deck, because when you are involved in something that critical to the reform, you cannot afford to take your eye off the ball.

It is hard to imagine the scope of the work that has gone on behind the scenes to get to the point where you are now.
This came with the sweat of so many people and sleepless nights, but for me, until we have transitioned the management and ownership of these companies into private hands, and set the stage for private capital to flourish in our power market across the full power value chain, we can’t celebrate. All of the energy put in will come to nought if we do not move the electricity industry away from government ownership into full market mode.

What will happen to those preferred bidders that don’t meet their financial or delivery commitments?
The money we are talking about for these assets cannot be described as peanuts by any standard: such funds don’t come from people’s ‘deep’ pockets but from institutions. The National Council on Privatisation did very extensive due diligence on all the vehicles to the privatisation and have ensured that only the most technically and financially sound bidders emerged through a transparent process. In terms of post sale performance risks, the worst case scenario in my opinion is that these sold assets will perform at least twice as well in terms of all round efficiency than what we currently have. In terms of financial capability, the underlying strength of our market gives me hope that the buyers will be able to put together the funding.

If I may ask then, what is your biggest fear around the privatisation process?
I’m going to disappoint you – I am extremely bullish, I am overtly optimistic and incurably positive – I can even tell that the underpinning argument for my position is not based on a ‘Cinderella feeling’ but the knowledge that that we have a real power market here which has great opportunities for investors.

We did have an industrial market that migrated, due to years of frustration over low power supply, it migrated to the west coast – Ghana and what have you – but they migrated to markets which do not command one fifth of our population, which means, if we get power right, these industries will migrate because of the comparitive advantages here. We have the right market for power growth. Even if we make a false start in the first part of the privatisation process, the market forces are so strong that there will be an automatic second wave of privatisation of willing investors who might even be more capable, who will buy up equity from the first wave owners and bring in their industry expertise to take market share, provide service and earn income.

That is as positive as I am. I think we may falter, but we will get it right – this is because wherever there is a huge demand for a utility as basic as electricity, the market forces will never give up that market, especially where government shows the will and committment to allow market forces to prevail. You can see what is happening with telecoms. When MTN came in, its business model, I am told, was built on a 15 million subscriber population in three years – they hit over 20 million in a year and as we speak they have well over 60 million subscribers. If I have any anxieties, they are so small in the sense that this is a learning curve, but I don’t get the sense that we will fail to succeed. I don’t get that sense at all. We will make adjustments and corrections, but the market is waiting to be served. This reform will reach a tipping point when it will be a runaway success. Do you know that, even now, people are getting used to the 12 hours of electricity access we are giving them – up from the four hours they used to get. If you take two hours off that, all our telephones are ringing endlessly because they are used to a 12 hour supply pattern in most parts of the country. I am one of those so optimistic about the future of the power reform, that anyone throwing fears around me won’t achieve much. I am a technical person so I can see all the areas where there could be challenges by way of sustaining efficiency in the team work.

If the various stakeholders do not correctly align their policies, areas of integration, commitment to timelines and funding, then there will be project slippage, but that is the worst case scenario. The reform has reached an irreversable stage and shall be concluded.

How much money has the government invested into this process to date?
The cost, as we speak on labour alone, for resolving labour issues is in excess of US$3 billion: just resolving labour issues – entitlements, severence and retirement accounts. The full works for labour is around $3 billion. I should also tell you that the opportunity cost of not dealing with this reform is at least 3 percentage points off our GDP, ignoring the non quantitive benefits in social security, improvement in life expectancy indices, etc.

So this privatisation process is not something that the Nigerian government has undertaken as a way to increase the money in its coffers?
Just the money made on the generation assets doesn’t cover the cost of your labour allocation… The truth of the matter is that our president is so passionate and so focussed on getting power right – anyone who has done elementary development economics will tell you that without a power base, nothing significant can happen in terms of growth. President Jonathan is tired, everyone is tired of talking about development without electricity. Electricity is at the forefront of the Federal Government’s agenda, and if you have to pay an unusual amount of money to labour or to other corridors of cost to provide adequate and reliable electricity, it is prudent to do so – because indeed compared to darkness these costs look small. I am glad we have a president who connects with that very well.

We want to get the electricity industry into market mode as this will unlock our economy and release the full potentials of our nation’s entrepreneurial drive. I’m sure you will agree with me that compared to other infrastructure segments, power has the unique capacity to pay back at a rate in multiples higher than any other infrastructure investment. So at this stage, spending a disproportionate portion of our revenue on power makes sense to me. It is reassuring the the economics of delivering the power sector are so clear to those who are in leadership, and to those of us who are on the technical and operational levels, that there is consistency, there is alignment. It will be tough not to win this battle.

There were a few of the generation and distribution assets which were not privatised – are they going to be offered in a second round of bids?
These assets have already been put back into the market. There was one generation asset and one distribution company and we currently have had more than 34 expressions of interest into these assets.

Ownership of the transmission lines will be retained by the Nigerian government, and the government will also continue as reserve owners of the hydro power stations in Nigeria. These are being run under concession agreements but ultimate ownership will be retained by the government due to international water rights agreements, which makes the outright sale of hydropower plants a little more difficult.

As the person who has played a significant part in the privatisation process, what do you feel your most significant accomplishments have been and what would you like to have done differently?
I would say my greatest accomplishment to date is refusing to be overwhelmed by the scale of the task ahead of us and staying focussed. Of course, a significant achievement will be when we hand over the assets later this year and have the market move into the transitional electricity market mode which will provide the platform for the accelerated market investments.

The issue with Manitoba Hydro last year raised some concerns around the transparency of the sector reform process, and the amount of political attention this process is receiving. Do you feel that there are sufficient safeguards in place to put investors’ minds at ease?
The challenges with the Manitoba Hydro contract were an anomaly, and should not be seen as anything other than that. It is important to understand the level of commitment and political will behind this process, particularly from the president.

I predict that the Manitoba issue will soon be resolved in the overall national interest and they will settle down to perform their contract.

What is next?
We have embarked on a review of the power sector reform roadmap. The original roadmap, launched in August 2010, needs to be reviewed, some adjustments made and realignments made for the next phase of the reform process. The reform roadmap v. 2, as we call it, will cover the years 2013 – 2020 and we are hoping to have a final draft ready for publication by end of April 2013. However, it is important to stress that we would rather be ‘process thorough’ than simply rush to meet deadlines when it comes to updating a document as technical and strategic as a reform roadmap. If the process takes a little longer to get a more accurate and reliable report, we would not mind. Nevertheless we hope to present the final draft to government during the second quarter of the year.

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