Review of the Reform and Privatization of the Power Sector in Nigeria Peter Kieran Dar es Salaam January 31, 2014
Corporate Overview -history -who we are today
Our History CPCS Limited Canadian Pacific Consulting Services (CPCS) established as rail consulting arm of CP Rail Management buyout of CPCS. CPCS Limited fully independent of Canadian Pacific. CPCS Limited merges with Hickling Transcom providing full spectrum of transport advisory services. Re-branded as CPCS. Power and Urban Development Advisory Practices established, in addition to full service transport advisory. 1969 1986 1996 2007
Global Management Consulting Firm Focused on transportation and power Strategy, investment advisory, economic analysis and policy Over 1,000 projects in more than 115 countries 4
Sector Expertise Rail Ports & Terminals Marine Urban Transit Multi-Modal Energy Urban Development 5
PPP Leaders CPCS s core business is working work with clients to promote private investment in infrastructure Since 1996, we have closed (financial close) 37 infrastructure transactions. Over the past five years, we have advised clients in PPP infrastructure transactions worth over US$10 billion We were advisors on successful PPP transactions of: Railways in 9 countries 1 new urban railway Ports in 9 countries Sale of 11 distribution companies Sale and concession of 6 hydro and thermal power plants - CPCS is unique in that we offer a full suite of PPP Services to our clients from feasibility studies to financial close and handover to the private sector.
Nigerian Power Experience - Background - Basis for Transaction - Sector Reform - Transaction Implementation - Outcome
Nigeria Country Profile Nigeria is the largest country in Africa with a population of over 150 million GDP per capita doubled between 2005 and 2010 Nigeria has one of the fastest growth rates of the world with growth of 6-8% per annum expected over the medium term It is expected Nigeria will be one of the future leading world economies Demand for power far exceeds supply Expensive private generators currently produce more electricity than the formal grid Estimates for projected demand by 2020 range from 12,000-40,000 MW Available generation capacity is currently around 4,000 MW 8
Generation Capacity (000 MW) Generation Capacity vs Population 140 120 100 Germany Brazil 80 60 40 20 0 UK South Africa Egypt Algeria Nigeria 0 50 100 150 200 250 Population (million) 9
Does electricity matter? 10
Background PHCN (Power Holding Company of Nigeria) 6 Generation Companies Gas-fired: Afam, Sapele, Ughelli, Geregu Hydro-electric: Shiroro, Kainji (including the Jebba power station) Transmission network (330kV and 132kV) operated by the Transmission Company of Nigeria (TCN) Eleven distribution companies NIPP (National Integrated Power Project) 10 generation plants to be privatized Total Production of Power Installed capacity of ~6,900MW in 2010 Available capacity of ~3,500MW
Background Tariffs Comparison of Nigeria to other countries in West Africa * - Average estimated cost of self-generation ^ - old regulated tariff Source: Presidential Task Force on Power (2011)
Distribution Losses Distribution Losses very high (estimated at 50%) Lack of predictable power large cost to economy
Background 1972: Creation of National Electric Power Authority Merger of Electricity Corporation of Nigeria and the Nigeria Dams Authority 1999: Of 79 generating units only 19 operational Average generating capacity of 1,750 MW less than the available capacity in 1970 Per capita electricity consumption at 125kWh System losses at 50% Over-sized workforce Aged and overloaded transmission and distribution network
Presentation Outline Background of the Power Sector in Nigeria Basis for Transaction Sector Reform Transaction Implementation Outcome
Legal Basis and Policy 2005: Electric Power Sector Reform Act (EPSRA) Enacted Legislate and frame the reform Establishment of Nigeria Electricity Regulatory Commission (NERC) Break up of NEPA into PHCN Successor Companies 6 generation companies 11 distribution companies 1 transmission company 2010: Roadmap for Power Sector Reform released by President Goodluck Jonathan Re-invigorate the reform process Remove remaining legal, commercial and regulatory hurdles to private sector investment January 2011: Appointment of CPCS - Beginning of the power transaction
January 2011 Framework and Plans Privatization The four existing gas-fired gencos would be sold through share sale of at least 60% of ownership The two existing hydro companies would remain government property but would be concessioned to private operators on long term concessions The 11 distribution companies would be sold to private investors following the approach used in Delhi The transmission company (TCN) would be managed under a management contract Liabilities all existing liabilities of the 17 companies would be stripped out and held by government (NELMCO) Staff all staff would be retrenched and paid off including pension obligations PPAs each generating company would contract with each distribution company
Problem Areas and Concerns Government would change its mind and abandon the exercise Credible bidders would not invest in Nigeria We could not run a transparent transaction in Nigeria There was not enough equity or debt $ available Organized labour would block the process The generator lobby would block the process
Big Unresolved Problem Areas Consumer tariffs were not high enough to pay the costs of generation, transmission and distribution Gas pricing, gas supply agreements and gas transport agreements were all based on nonviable domestic supply obligations PPAs with new private discos: Excessive risk for generating companies and inability to attract multilateral guarantees
Presentation Outline Background of the Power Sector in Nigeria Basis for Transaction Sector Reform Transaction Implementation Outlook
Commercialising the Power Sector The problems were not traditional transaction advisory problems but really depended on reform and commercialisation of power sector Our work was extended to design a commercial framework from gas to the final consumer that would facilitate private investment at every stage We analysed the commercial risks throughout the entire value chain and advised on the correct allocation of risks
Commercialising the Power Sector Gas Sale and Aggregation Agreement (GSAA) Genco & major gas producer (seller) & GACN (facilitators) re: sale of pipeline gas to power station Gas Transportation Agreement (GTA) Power Purchase Agreement (PPA) Vesting Contract (VC) Grid Connection Agreement (GCA) Transmission Use of System Agreement (TUOS) Ancillary Services Agreement NGC & Genco re: pipeline transport of gas from seller to plant IPP/NIPP plant/phcn SCs & NBET/other power purchaser re: sale of power Disco & NBET re: amount required of generation capacity required to be sold to discos from SCs/IPP/NIPP TCN & Genco/Disco/Eligible Customer re: connection charges and charges to use transmission system Disco and TCN re: wheeling of electricity from the generation company to distribution company SO & Gencos re: supply of power to ensure secure power system
Key Considerations for Agreements Minimum payments and fixed versus variable payments in various documents Gas: take or pay provisions, connection, etc PPA: capacity vs. energy payments Transmission: connection and wheeling charges, payments for ancillary services Retail: connection fees vs. energy payments Licensing and Tenor of agreements Force Majeure and Termination provisions between contracts Payment terms
Commercialising the Power Sector Not Simple, most agreements/contracts were under agencies separate from our client GACN/ Gas Suppliers NGC TCN NBET NERC TUOS PPA Market Rules GSAA GTA GCA Tariff ASA VC Final Approvals
Solutions: Tariff Restructuring A key part of the reform process is the design and implementation of a cost reflective tariff NERC chose to implement a cost plus tariff, allowable costs are preestablished by regulator through consultation with market participants CPCS aided the regulator in reviewing tariff model, provided comments in order to support private sector investment Average Tariff went from approx. 6 cents to 13 cents per KWh Ministry of Finance Set up 2 year subsidy to help phase in new tariff Earlier in the year the government had been forced to back track on an increase in the price of petrol but the increase in power tariffs was not a public issue
Solutions: Development of Gas Supply Gas Price: Phased move from Domestic Supply Obligations (DSOs) to export parity by end of 2014 Gas Aggregation Company of Nigeria (GACN) Incorporated to manage the implementation of domestic gas supply obligation and act as intermediary between suppliers and purchasers of gas National Gas Company (NGC) Owns main pipeline system for transmission of gas Subsidiary of Nigeria National Petroleum Corporation
Solutions: Credible Offtaker New entity required to purchase power (credit worthy offtaker) and sell to the pool of discos Nigeria created a new parastatal - the Nigerian Bulk Electricity Trading Company (NBET)
NBET- Credit Enhancement Existing Existing Existing GenCo1 GenCo2 GenCo3 New IPPs GenCo4 GenCo5 GenCo6 IPPs IPPs IPPs POWER PURCHASE AGREEMENTS PPAs BULK TRADER (NBET) Additional Capacity Eligible Customers VESTING CONTRACTS DisCo 1 DisCo 2 DisCo 3 DisCo 4 DisCo 5 DisCo 6 DisCo 7 DisCo 8 DisCo 9 DisCo 10 DisCo 11
Presentation Outline Background of the Power Sector in Nigeria Basis for Transaction Sector Reform Transaction Implementation Outlook
Transaction Process International competitive tender process Request for EOIs issued in January 2011 Roadshow held in Lagos, Dubai, London, New York and Johannesburg 331 EOIs received 207 consortia were shortlisted
Transaction Process RFP issued on September 1, 2011 Tremendous interest from the private sector 79% of firms shortlisted purchased the bid documents Short Listed Firms Purchasing Bid Documents Percentage Hydro 40 35 88% Thermal 87 56 64% Distribution 80 72 90% Total 207 163 79%
Transaction Documents Four main transaction agreements Bidders commented on draft documents during bid phase Bidders submitted initialled final documents with their bids This eliminated any substantive negotiations and strongly reduced timeline between declaration of Preferred Bidder and execution of agreements
Transaction Process 60,000+ document views in the virtual data room Site visits held in late 2011 over a three-month period Final bids received in July, 2012 6 Gencos 25 bids 11 Discos 54 bids Financial opening and preferred bidder announced in October 2012 Transaction and industry agreements signed in February 2013 Completion and Handover November 1, 2013
Results $2.4 billion paid by investors in year 1 (excluding future concession fees or sale of retained equity) Investment in rehabilitation and expansion will be approximately $4 billion over the next 5 years 5 year target: reduce distribution losses from 45% to 15% on average Increase generation by 2,000 MW
Presentation Outline Background of the Power Sector in Nigeria Basis for Transaction Sector Reform Transaction Implementation Take-Aways for Tanzania
Of Note Very long process nearly ten years since the EPSR Act was passed The fruits of the labour will be evident in two to five years: Increase in available capacity Fewer disruptions in power service Training for employees NIPP Transactions to be concluded in 2014 will add approx. 5,000 MW of generation capacity Goal is 20,000 MW of generation capacity by 2020
Challenges for Long Term Success Tariff implementation has not yet been fully successful Gas availability Transmission Capacity Public Patience
Conclusions High level political support is absolutely essential for a successful transaction Commercial environment (value chain) must be there for transaction to complete Credit worthiness of off-taker is critical Absolute transparency with bidders and all stakeholders is the key to broad support and a quick process
Questions and Discussion Peter Kieran President and CEO T: +1 613 237 2500 x 312 F: +1 613 237 4494 www.cpcs.ca 39