Power plant.

As Nigerians await October 2012 for the privatisation of the 11 distribution and six generation companies created from the unbundling of Power Holding Company of Nigeria (PHCN), Ejiofor Alike highlights the expectations of the various stakeholder

When President Goodluck Jonathan launched the power sector roadmap in August 2010, the programme envisaged that the corporatisation of the successor companies of the Power Holding Company of Nigeria (PHCN) with management performance contracts would be concluded in November 2010. It also targeted December 2010 for the complete winding up of the ailing power utility giant.

The roadmap also provided for the handover of the six generation companies to the private sector and the commencement of their operations under a private sector-led initiative that would be concluded by April 2011, while that of the 11 distribution companies was scheduled for June 2011. Also, the handover of the Transmission Company of Nigeria (TCN) to a management contractor was scheduled for April 2011.

However, both the corporatisation and the winding up have still not been successfully concluded, as these transactions have continued to linger, one year after they ought to have been concluded.

Some other pre-transaction actions such as the settlement of outstanding labour issues, employment contracts and technical boundary delineation, which were scheduled to be concluded in September 2010 are also still lingering.

The Bureau of Public Enterprises (BPE) had rescheduled the sale of the 17 PHCN successor companies from March 2012 to October 2012, being the third time the sale would be postponed. BPE spokesman, Mr. Chukwuma Nwokoh said financial bids for prospective investors for the privatisation process would take place between September 25, 2012 and October 10, 2012. According to the new schedule for the privatisation process, the BPE will formally announce the preferred bidder by October 23, 2012.

Expectations of Investors

The major expectation of government from investors is to buy the assets and successfully turn them around in line with international best practices as obtains in other privatised companies in advanced economies.

An energy and investment adviser, as well as Lagos-based lawyer, Mr. Iseoluwa Abiodun-Johnson told THISDAY that the major focus of the core investors include, reduction of electricity losses, improvement in the billing and collections regime, and the expansion of the distribution and transmission grid.

He noted that once the privatisation is concluded, the successor companies will no longer be “a drain on government purse,” as they will be privately-owned and managed. “Basically, what the government expects the core investors to do is to reduce technical losses, improve efficiency in billing and collection and also expand the grid,” he said.

Speaking on the expectations of the regulators and the government, the Commissioner in charge of Market, Rates and Competition at the Nigerian Electricity Regulatory Commission (NERC), Mr. Eyo Ekpo, aligned government expectations with the position of the Lagos lawyer. Ekpo disclosed that the basis for determining successful bidders for a distribution company is not the ability to pay huge amounts of money to the BPE but the ability to reduce technical losses.

“Now, the basis for determining a successful bidder is the ability of the investor to reduce aggregate losses that these distribution companies suffer over a five-year period. It is hard to imagine but for every one naira that is collected in this industry, we cannot collect 55 kobo. That is unacceptable,” he said.

He stated that estimated billing and poor quality services are the major challenges facing the industry, adding that these are the challenges NERC is trying to eliminate. According to him, tariffs must be seen to have been collected by the new investors.

Role of Government, BPE

More important is the ability of prospective investors to raise funding for the assets that they will be taking over. More often than not, one of problems of the privatisation programme has revolved around investors’ inability to fund the assets post-acquisition.

According to a financial analyst, “Raising funds to acquire the assets has never been the problem. It is their capacity to raise long-term funds under reasonable terms to upgrade, rehabilitate and expand the generation and distribution companies that will determine the success of the privatisation process.

“The BPE has to undertake proper due diligence of the prospective investors to determine their ability to raise capital for the assets they will be acquiring. Otherwise, assets will be sold and left to rot away or the investors will resort to asset stripping as has been the case with some previous transactions. So investors’ capacity to fund the expansion and turnaround phase is just as critical.”

He added that the BPE should de-emphasise what it will be generating from the sale of the assets and focus more on the investment that will take place after the sale of the assets. “For this reason, the process has to be extremely transparent and devoid of interference from pecuniary interests that may want to influence the outcome of the process,” he added.

The government as the seller of the assets is also expected to provide the enabling environment for the privatised entities to operate. This is will be achieved through the provision of an efficient regulatory framework. But with NERC, World Bank guarantees and Bulk Purchaser already in place, the major focus will be on cost-reflective tariffs that will guarantee reasonable return on investment.

Ekpo said that it costs $1.2 million to generate one megawatt of electricity in Nigeria. According to him, 1-kilometre transmission line in most parts of the country will cost $1 million, while about $1.2 million will be required to construct 1-kilometre of distribution line.

Speaking on the role of the BPE, one of the potential investors told THISDAY that the role of the agency is equivalent to a “housing agent” that midwives the sale of the assets by ensuring that processes are put in place to enhance their value and competitiveness. He stated that apart from conducting thorough due diligence on the investors, the BPE must also formulate a transparent procedure for the sale of the assets.