World Bank boosts Nigeria power reform

The Nigeria power reform bid has received a boost as the World Bank has provided the needed guarantee to prospective private investors that are interested in the power sector.

This became imperative as the Federal Government with its load of financial commitment could not provide the sovereign guarantee most of the investors were asking for and  also the proposed the electricity tariff increase that was to take off soon is on hold .

Giving this disclosure yesterday in Lagos, Director General of the Bureau of Public Enterprises, Ms Bonlale Onogoruwa said: “The Electric Power Sector Reform Act requires that the electricity tariff regime is cost reflective and guarantees a reasonable rate of return on investment.

“While it is accepted that ensuring cost-reflective tariffs is the best way to attract investment into the sector, it is also understood that in the transition to a credit-worthy electricity market that encourages entry of increased capacity and competition amongst service providers, securitisation or credit enhancement/support arrangements in the early stages of the transition will help to build investor confidence in the electricity market.

“Global experience indicates that World Bank guarantees have been of tremendous support in this regard. They catalyse private investment flows into the utility/infrastructure sectors of developing countries by mitigating critical government, commercial and regulatory risks that the private sector is reluctant to assume.

“In the Nigerian electricity sector reform/privatisation programme, the World Bank Partial Risk Guarantee (PRG) will provide credit support to the Bulk Trader as it enters into PPAs with successor generation companies and IPPs. Similar World Bank PRGs are also being put in place for existing and proposed gas supply agreements through the Nigerian Electricity and Gas Improvement Programme (NEGIP).

“For the electricity sector PRGs, applications have already been forwarded to the World Bank in respect of some IPPs, and are being processed. However, the Bulk Trader first has to be operational and then licensed by NERC before any new PPAs can be signed and PRGs provided by the World Bank.”

She said that “the ambition of the Federal Government is to meet the vision 20: 2020 target of 40, 000 MW which requires investment in power generating capacity alone of at least $3. 5 billion per annum for the next 10 years. In addition, large investments will also have to be made in power transmission and distribution.

Since the Federal Government cannot accommodate the cost alone, there is the need to incentivise the private sector to partner with the Federal Government in this endeavour”.

The BPE she said will draw up a shortlist of bidders over the next three weeks for power stations and electricity distribution firms that the government is offering as part of a multi_billion dollar privatisation plan.

According to her “Under the proposed privatisation strategy for distribution companies, a private sector operator will acquire controlling equity interest in any of the distribution firms with a view to rapidly improving its operational efficiency. So, unlike the traditional transaction approach where bidders merely bid on price for the equity shares, bidders will bid on the basis of a trajectory of technical, commercial and collection loss improvements, usually during the first five years of post_privatisation operation (or other number of years agreed with the regulator and advisers).

This method she stated “will be built around the Multi Year Tariff Order (MYTO) issued by the Nigerian Electricity Regulatory Commission (NERC), which essentially sets out the commercial and economic indices that provide the financial model for the entire NESI.

MYTO will stipulate the annual investment requirement, allowable operational expenditure, approved rate of return on equity and other allowable expenses for each distribution company. The valuation of the distribution companies will derive from the regulated asset base contained in the MYTO assumptions. This approach will eliminate the problem associated with undervaluation or overvaluation of public assets. NERC is currently valuing the assets of the distribution companies.

“Thus, the revised MYTO will ensure that cost reflective tariffs are charged in the NESI. NERC is now undertaking the review of the current MYTO with a view to promulgating a revised MYTO by July 2011. It would be recalled that the BPE had between December 13 and 20, 2010 placed advertisements in local and foreign media requesting for Expressions of Interest (EOIs) for the successor companies.

They are the 11 distribution companies; four thermal companies and two hydro firms. At the deadline for submissions of applications, 331 EOIs were harvested. They are 174 for generating companies and 157 for distribution companies. Pre_qualified bidders will be required to sign a confidentiality agreement and to pay $20,000 fee for each company of interest. Evaluation of the Expressions of interest is ongoing as we speak”.
Ms Onagoruwa, said companies would be chosen for the six power stations and 11 distribution firms on their ability to reduce transmission losses in the network.

According to her “Over the next three weeks we should have the results of who the short_listed bidders are before we then go to the actual submission of technical and financial proposals,”.

Utilities and engineering firms from Europe, North America, India and China are among those that attended road shows in Dubai, London, New York and Johannesburg earlier in the year. The BPE she further disclosed has received 174 expressions of interest for the four thermal and two hydro power stations, and 157 for the 11 distribution firms, in which investors will be allowed to take stakes of up to 70 percent.

Some industry executives have said they are reluctant to make final commitments until the outcome of the elections is clear and until they see that Nigeria is able to implement a solid regulatory framework to govern the sector.

She said “We basically told  them that the process has been designed in such a way that they don’t have to pay their money until they have a clear idea of what the next government will do. So that gives them some confidence”. They can start due diligence now

Source : Vanquard