This case study examines the ambitious power sector reforms being pushed through by the Federal Government of Nigeria. In contrast to past reforms, continued leadership from the head of government and ownership of a detailed road map of reform have so far signalled to investors that this government is committed to reform in the long run. But only the future will tell whether these reformers have truly learned from past mistakes.
As the largest country in Africa, with a population of 160 million growing at 6% per annum, Nigeria faces a number of challenges across the energy triangle. Above all, it needs to address an acute energy deficit. Ranking 116th on the energy access and security sub-index, only half of the Nigerian population has access to electricity (only 10% in rural areas), with power shortages affecting the quality of electricity for those who do receive it (Nigeria ranks116th for this indicator).83
Nigeria has plentiful natural resources. It has one of the largest natural gas reserves globally, with an estimated 182 trillion cubic feet (Tcf) of proven reserves.84 And with abundant levels of daily solar radiation, estimates suggest that the country could generate approximately the daily energy equivalent of the energy from a 192,000 megawatt (MW) gas power plant working at full capacity for 24 hours a day.85 However, consistent under-investment in capacity, sub-standard maintenance of power assets and poor management of resources mean that power consumption per capita is one of the lowest in the world. As a consequence, individuals and businesses pay huge amounts to access energy, adding up to 40% of the cost of doing business.86 This has a serious impact on Nigeria’s competitiveness.
The Federal Government of Nigeria estimates that the country requires 40,000 MW of additional capacity to address these constraints and support wider economic development.87 With current installed generating capacity at 7,500 MW, plugging this gap will require $10 billion of investment across the electricity supply chain to 2020.88 The government plans to increase the supply and use of gas across the country, with a total investment of about $25 billion. Nigeria also hopes to start exporting power beyond the West African region to Central and South African countries – but this hinges on the delivery of Nigeria’s electricity transmission super grid, estimated to cost about $5 billion.89 Overall, the levels of investment required to enable energy transition are significant.
Past attempts to reform the power sector offer a vivid reminder of the scale of these ambitions. Sadly, most have failed to live up to expectations – the National Electric Power Policy was launched in 2001, but stalled during the transfer of assets and liabilities to private partners; the Nigeria Electricity Regulatory Commission was created but later suspended; a multi-billion dollar National Integrated Power Projects was started but then stalled.90 These attempts resulted in “$40 billion spent with little improvement”.91
There are signs, however, that this time, the reform story could unfold differently. In 2005, the government’s Electric Power Sector Reform Act initiated a process of privatization of the power sector to address these challenges and improve access to electricity across the country. This started with the unbundling of the single generation and distribution body in Nigeria, the National Electric Power Authority, into 18 different assets for sale to private investors – remaining functions and assets were incorporated into the newly formed Power Holding Company of Nigeria Plc (PHCN). Last year, licenses and share certifications for all PHCN assets were sold, including generation and distribution companies. And earlier this year, the successful bidders for seven of Nigeria’s gas power plants with investments worth $5.8 billion were announced. A number of memorandums of understanding have been signed with foreign companies, including General Electric, Siemens AG and Daewoo E&C.92
Among the different factors contributing to the current positive direction of the reforms, two stand out. The first is the continued leadership of the reform programme by Nigerian President Goodluck Jonathan. Having assumed office in May 2010, Jonathan identified reform of the power sector as one of the “cardinal” priorities for his government.93 Since then, the President has set up a Presidential Task Force on Power and a Presidential Action Committee on Power. To date, this ownership of the reforms by the Head of Government appears to have broader buy-in by incumbents with potentially opposite priorities. The second factor is the government’s Roadmap to Power Sector Reform of August 2010, which lays out the key timelines the reforms need to meet in order to stay on track. These include the successful review of the Multi-Year Tariff Order II and the successful bidding of the different assets. Along with continued leadership from the government, following this road map truly sustained the momentum throughout the process and signalled to investors that the government was committed to reform in the long term.
Nevertheless, a number of challenges still need to be addressed before the government’s long-term goals become a near-term reality. Although a $213 billion intervention fund has been provided to offset legacy debt in the power industry, and the human capital and asset optimization efforts of the investors have also been deemed successful, many of the investors are still cash-strapped, and are seeking funds to carry out the significant upgrade the assets require. Another challenge is the pricing regime, with subsidies continuing to distort the market and undermine the effectiveness of the reforms under way. Legal objections raised by Ethiope Energy concerning the sale of three of the gas power plants and non-completion of some of the National Integrated Power Projects also cause some concern. Ethiope Energy has accused the Bureau of Public Enterprise of “bias, prejudice and conflict of interest”.94 Finally, persisting delays in declaring the Transitional Electricity Market State (originally due to begin in October 2013), risk undermining the success achieved so far.
This case study illustrates how visible leadership with reform backed at the highest levels, as well as commitment to a clear implementation plan along a defined road map, can support progress with reform at an acceptable speed. Although many other factors will play a role in defining investment decisions, the local regulatory and institutional landscape constitute some of the most important.