NIGERIA The state of Nigeria’s power sector reform Nigeria’s power sector reform has seen dramatic developments over recent years, but turning around a sector with horizons of decades takes time and it has been a journey of 15-plus years, one that is far from complete. O ne of those who have been intimately involved with the process for over a decade is Segun Sowande, partner and power sector lead of KPMG in Nigeria. “Some time back the government of Nigeria realised that it has no business being in business,” he says. “Olusegun Obasanjo who was president of Nigeria from 1999 to 2007 did the groundwork for the country’s power sector reform, while the last four years under current president Goodluck Jonathan have been the most significant in terms of execution.” A big milestone was the handover of the generation and distribution assets of the former Power Holding Company of Nigeria (PHCN) to the successful private sector bidders on 1 November 2013. The takeover by the successful bidders has been largely seamless with fewer hiccups than expected. However, few countries have undertaken such an ambitious power sector privatisation initiative and it was never going to advance without glitches. “There were legacy issues and teething problems have emerged post takeover. One of these is a result of the unusual nature of the privatisation programme, since the bidders did not have significant access to the plants until they paid up. The due diligence was largely desk top with limited access to the facilities,” Sowande tells ESI Africa. The other significant legacy issue came from labour, that obstacle taking the form of a powerful union that insisted on labour liabilities being settled before the transfer of the PHCN assets. These came to about 300 billion naira (US$1.8 billion), which fairly closely matched the proceeds of the privatisation from the bidders to the state. The timing and alignment of these payments and funding of the labour liabilities was an important part of the process. “The government of Nigeria did not make a profit out of ESI AFRICA ISSUE 1 2014 Segun Sowande, partner and power sector lead of KPMG in Nigeria. the sale of the PHCN assets; it was a question of undertaking transformation of the sector and the government doing what it thought necessary to create a different type of power industry. If you want results you have not gotten before, you have to do things you have not done before,” Sowande says. The Nigerian government has been able to deal with most of the labour issues and in essence these have been resolved, though bits and pieces of what labour demanded remain to be finalised. “There was an expectation that post the handover of the PHCN distribution and generation assets Nigeria’s electricity sector would phase into what is called the transitional electricity market. It had its rules, which are well defined. The reality on the ground, however, has made it imperative to go through an interim market phase that follows rules negotiated after the handover of the PHCN assets.” These interim rules have turned upside down the financial models of the bidders as the percentages of capacity and energy charge payments have changed. However, Sowande says that most stakeholders seem to agree that this is a necessary next step to stabilise things before they get better. This comes back to the assumptions made before the bidders had full access to the assets compared with the reality on the ground. Nigeria’s Multi Year Tariff Order (MYTO2), revised in 2012, to ensure cost reflective tariffs, was based on aggregate technical, commercial and collection (ATC&C) loss estimates of an average of 30% in its distribution system. “Since the takeover a strong sense has emerged that the loss levels are much higher in reality, and can range from the late 40% to 60%,” Sowande says. “The regulator has since agreed on terms of reference that will see the actual loss levels computed as from takeover date in November become the baseline.” Importantly, the regulator allowed for this study and has agreed in principle to adjust the tariffs accordingly. This interim period, which originally commenced on 1 November 2013 and was to end in February 2014, has now been extended to September 2014. Sowande believes that Nigeria’s power sector will enter into the transitional market stage during 2014. Taking into account that the power sector reform has continued through a change in government, there is confidence it can survive another such change should the current political The government has not been effective in holding the IOCs to the contracts in the existing gas supply agreements. 21