Issue 138 • 9 May, 2008

Nigeria’s ‘season of probes’ delays power financing among host of schemes

The latest initiative to revitalise Nigeria’s power infrastructure is on hold because of one of the many government investigations now under way, as President Yar’Adua’s government and parliamentarians tackle the darker side of their former sponsor Olusegun Obasanjo’s administration, writes Thalia Griffiths.

Nigeria’s ‘season of probes’, in which the government is investigating possible past malpractice in everything from oil contracts to the police equipment fund, is delaying a scheme to mobilise $2.8bn of finance with the help of the private sector to tackle the gargantuan task of bringing reliable and sufficient power to Nigeria. A Presidential Committee on Accelerated Expansion of Electricity Infrastructure has been set up to promote the initiative, chaired by Minister of State for Power Fatima Balaraba Ibrahim, but the government has halted the scheme while it looks into the procedure that Central Bank of Nigeria (CBN) followed when it made its initial investment in the powerful new Lagos-based investment bank Africa Finance Corporation (AFC).

AFC, set up last year to mobilise private capital for development projects, is a key member of the Presidential Committee, which aims to help Nigeria attain its present target of 6,000MW of power generation, transmission and distribution capacity by end-2009. CBN governor Chukwuma Charles Soludo was a strong supporter of AFC’s creation, reflected in his status as founding board chairman (see box article, below).

The Presidential Committee’s aim is to establish a special purpose vehicle (SPV) to mobilise the finance and undertake the work necessary to allow Nigeria finally to bite into its chronic electricity supply deficit. Similar public/private partnership approaches are planned for other big African power projects, including the Inga development in Democratic Republic of Congo (AE 137/1) and the West African Power Pool, where SPVs are planned for cross-border projects where individual utilities lack the capacity to raise the finance and carry out the work (AE 133/9). Nigeria generates less than 3,000MW, which is well short of national demand of about 6,000MW, though demand will grow rapidly if access to electricity is increased. The committee produced an interim report at the end of March, containing recommendations for bringing on stream an additional 16,000MW.

The previous scheme to sort out Nigeria’s electricity crisis, the National Integrated Power Project (NIPP), was launched with much fanfare under former president Olusegun Obasanjo, but several of the projects have run into difficulties. The House of Representatives Committee on Power and Steel is investigating how $13bn was spent in the power sector between 1999 and 2007, and says it has discovered widespread irregularities in the award of contracts. Ambitious plans for unbundling of state utility Power Holding Company of Nigeria (PHCN) are also running well behind schedule.

The government has launched a string of investigations into past contract awards. Sceptics say these are aimed more at discrediting the previous government and drawing attention away from President Umaru Musa Yar’Adua’s shortcomings than any real desire to clean up Nigerian politics and business.

On the power front, the House of Representatives launched its probe after Yar’Adua said in January that $10bn had been spent on the power sector under Obasanjo without producing any perceptible improvement in supply. The NIPP was supposed to deliver 10,000MW of installed capacity by end-2007. Representatives of Nigeria’s 36 states and 774 councils have called for a refund of the $3.2bn they contributed for its implementation.

While Obasanjo spent the last days of his presidency touring the country inaugurating energy projects, others have run into a series of problems and delays (AE 113/8). The 335MW Omotosho plant built by China National Machinery & Equipment Import & Export Corporation (CMEC) lacks gas, while the 2,600MW Mambilla hydro project has been delayed because of a disagreement between two contractors. The 350MW Egbema power project in Imo State, awarded in 2006 and due to be commissioned this year, has also been delayed. The 480MW Alaoji plant’s developers found the Imo River bridge would not be not strong enough to bear the weight of new turbines being transported across it, while the 335MW Papalanto project in Ogun State has little to show for the N58.8bn ($507m) already paid by the government to the Chinese firm handling its development.

The Presidential Committee on Accelerated Expansion of Electricity Infrastructure brings together government and private sector representatives including Dangote Group chairman Alhaji Aliko Dangote and Western Metal Product Company (Wempco) managing director Lewis Tung (both also on AFC’s board), Stanbic IBTC Bank chairman Atedo Peterside, AFC CEO Austin Ometoruwa, ExxonMobil Nigeria executive director Cyril Odu, Sahara Energy executive director Kola Adesina, National Electricity Regulatory Commission (Nerc) chairman Ransome Owan, the president’s chief economic adviser Tanimu Yakubu and special adviser on power Joseph Makoju (a former Nepa head who also advised Obasanjo).

“After working on its assignment for one month, the joint government/private sector committee has reported to President Umaru Musa Yar’Adua that the target of 6,000 additional MW within 18 months can be exceeded with the investment of $2.7bn and the Federal Government’s direct intervention in critical areas,” presidential spokesman Olusegun Adeniyi said in a statement on 30 March. “The committee said in its interim report to the president that 1,450 additional MW can be realised from existing PHCN plants, 3,368MW from ongoing NIPP projects, 640MW from the Shell Petroleum Development Company’s Afam/Okoloma Joint Venture and 805MW from legacy independent power projects.”

Adeniyi added: “The committee also submitted that the medium-term goal of 10,000 additional MW by 2011 could be jointly met by the PHCN, joint ventures, the NIPP and newly licensed independent power producers.” The committee also called for accelerated action on the multi-year tariff order (MYTO) and Power Consumer Assistance Fund.

AFC confirmed that the plan was on hold until the investigation into the central bank’s financing was over. A spokesman told African Energy he was confident the committee could resume work shortly.

The government has now announced plans to implement the long-awaited MYTO from 1 July. Designed by the Nerc, this aims to phase in higher prices over three years to make investment in the sector more attractive. Under the MYTO, Nigeria will spend N64.84bn on subsidies in the first year, N77.41bn in the next and N35.80bn in the third year. “The MYTO is expected to boost the confidence of lenders and investors alike in the profitability of investments in Nigeria’s power sector as it provides for reasonable returns on capital investment,” the president’s spokesman said in a statement.

International partners

An AFC statement published in Nigerian newspapers last month said that on the technical side, the committee would work with PB Power, which will lead a team of other international power specialist firms working with AFC’s Power Engineering and Project Development Groups.

McKinsey and Company will work with the committee on the management due diligence side, which entails designing and delivering the international management capacity for timely and cost efficient project development, execution and completion, to operate and manage a bankable power sector in Nigeria.

The committee’s remit also includes financial due diligence to design and deliver a bankable financial model and structure the optimal financing and business plan, and a bankable commercial term sheet for the immediate interim financing and the takeout long term financing that will be subject to a competitive bid by local and international banks. Leading international banks including Citigroup, HSBC, Morgan Stanley and Standard Bank, as well as leading Nigerian banks, are working with AFC in this direction, the statement said.

The committee will also work with local and international law firms on legal due diligence, which will entail evaluation and optimisation of contractual agreements, and designing commercial term sheets and SPV structure and other bankable contractual agreements required to make the arrangement viable and successful.

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