L
LequteMan
Guest
Seated on the dais at an investment conference in one of Lagos’s posher hotels are the luminaries of the Nigerian power sector: the minister of power, the head of the national electricity regulator, the chairman of the presidential task-force on power and chief executives of the newly privatised electricity generation companies and distribution companies. They are desperate for the money of the reluctant foreign private equity managers and local investors who mill about the room.
It is a tough call. On November 1 a year will have passed since the effective privatisation of electricity generation and distribution in Nigeria and it must now be acknowledged that the privatisation is on the brink of collapse. Yet this is a good thing for Nigerians and for future investors.
The flashy pitch books and marketing materials on display in Lagos are deceptive. The reality of Nigeria’s power privatisation has more in common with a chaotic and characteristically Nigerian scene that plays out a scant few miles away at Lagos’s sea port.
Along the dockside are hundreds of unclaimed shipping containers. Either they have been “misplaced” or the “fees” that customs officials demand to let them in are greater than the importer’s profit from their contents. This has given birth to a cottage-industry auctioning off these “overtime” containers. The rules are simple: the bill of lading may be inspected but not the actual contents of the container, and the highest bid wins. As the bill of lading rarely corresponds with the actual contents – this is Lagos after all – venturesome bidders hope that what is actually inside is more valuable than what is supposed to be inside.
Nigeria’s electricity industry has been privatised in almost the same way. When the new owners claimed their goods, they were horrified by the disparity between what had been advertised and what they actually got. They were told, for example, that they did not, in fact, own the buildings in which their equipment was housed. They were aghast to discover that agreements on the supply of gas to their generators due to be signed by the government before hand-over were still in the draft stage – and that they would be receiving less than a third of the gas they needed, yielding correspondingly little electricity for them to distribute.
If the initial privatisation seemed chaotic, things got worse. Two months after the handover, and in the name of “market stability”, all agreements in the industry were scrapped and “Interim Rules” were introduced by fiat. Nigerian Bulk Electricity Trading PLC (NBET), the statutory guarantor of payment in the system, was suspended and replaced by a “Market Operator”, a shadowy and vague entity even by the standards of Nigerian government. Capacity Payments to plants were capped at 45 per cent of the pre-contracted amounts, with payment of the balance put off to an unspecified date. Investors found that their financial projections, the basis for borrowing the money they used to buy their assets, were no more than scrap paper.
Since then, things have got even worse. Even the bills acknowledged as owed are being settled in incomplete dribs and drabs. Across the industry there are unpaid bills in excess of $1bn, as the amounts the distributors are able to collect fail to match what the generators are owed. Every day the financial chasm widens.
It was indicated that the “interim” rules would not last beyond February 2014 but they remain in place because of the unanswerable question of how this accounting manoeuvre will be resolved. The truth is that the interim rules will not be ended; they will simply collapse.
The big banks in Nigeria all have deep exposure to the power privatisation and widespread defaults would eviscerate the financial sector. To fix the problem the government must step into the breach, write a cheque to save the banks, relax its price controls and allow retail tariffs to go up. This will be politically unpalatable before the presidential election due in February, so the government will dawdle until then.
Nevertheless, hard as it may be to believe, the crisis will be good news for the people and for the discerning investor. It will compel a restructuring of the privatisation and a reorientation of the electricity industry towards market principles.
For the moment, the urgent gentlemen on the dais in Lagos have a hard job. But Nigeria’s is the irony of a voracious demand for power – a conservative deficit of 20 gigawatts – walled-off from supply by questionable regulation. In the near future, entrepreneurs will invest to provide supply and they will be sure of customers who can and will pay. At this moment of maximum pessimism, everyone knows that the privatisation faces imminent financial collapse one way or another. But the prospective investor is wise to heed Churchill’s maxim – “Never let a good crisis go to waste.”
Investments in an industry for which demand can only grow will be a good bet in the short and long term. This is why executives from Siemens, Cummins and General Electric are in the audience of every power conference, largely ignoring what’s being said on stage, seeking future business and laying the foundations for the rebirth of Nigeria’s electricity industry.
Culled from #BusinessDay
Timi Soleye is the President & Founder of Aratro, a chemicals and agriculture consultancy.
#Nigeria
It is a tough call. On November 1 a year will have passed since the effective privatisation of electricity generation and distribution in Nigeria and it must now be acknowledged that the privatisation is on the brink of collapse. Yet this is a good thing for Nigerians and for future investors.
The flashy pitch books and marketing materials on display in Lagos are deceptive. The reality of Nigeria’s power privatisation has more in common with a chaotic and characteristically Nigerian scene that plays out a scant few miles away at Lagos’s sea port.
Along the dockside are hundreds of unclaimed shipping containers. Either they have been “misplaced” or the “fees” that customs officials demand to let them in are greater than the importer’s profit from their contents. This has given birth to a cottage-industry auctioning off these “overtime” containers. The rules are simple: the bill of lading may be inspected but not the actual contents of the container, and the highest bid wins. As the bill of lading rarely corresponds with the actual contents – this is Lagos after all – venturesome bidders hope that what is actually inside is more valuable than what is supposed to be inside.
Nigeria’s electricity industry has been privatised in almost the same way. When the new owners claimed their goods, they were horrified by the disparity between what had been advertised and what they actually got. They were told, for example, that they did not, in fact, own the buildings in which their equipment was housed. They were aghast to discover that agreements on the supply of gas to their generators due to be signed by the government before hand-over were still in the draft stage – and that they would be receiving less than a third of the gas they needed, yielding correspondingly little electricity for them to distribute.
If the initial privatisation seemed chaotic, things got worse. Two months after the handover, and in the name of “market stability”, all agreements in the industry were scrapped and “Interim Rules” were introduced by fiat. Nigerian Bulk Electricity Trading PLC (NBET), the statutory guarantor of payment in the system, was suspended and replaced by a “Market Operator”, a shadowy and vague entity even by the standards of Nigerian government. Capacity Payments to plants were capped at 45 per cent of the pre-contracted amounts, with payment of the balance put off to an unspecified date. Investors found that their financial projections, the basis for borrowing the money they used to buy their assets, were no more than scrap paper.
Since then, things have got even worse. Even the bills acknowledged as owed are being settled in incomplete dribs and drabs. Across the industry there are unpaid bills in excess of $1bn, as the amounts the distributors are able to collect fail to match what the generators are owed. Every day the financial chasm widens.
It was indicated that the “interim” rules would not last beyond February 2014 but they remain in place because of the unanswerable question of how this accounting manoeuvre will be resolved. The truth is that the interim rules will not be ended; they will simply collapse.
The big banks in Nigeria all have deep exposure to the power privatisation and widespread defaults would eviscerate the financial sector. To fix the problem the government must step into the breach, write a cheque to save the banks, relax its price controls and allow retail tariffs to go up. This will be politically unpalatable before the presidential election due in February, so the government will dawdle until then.
Nevertheless, hard as it may be to believe, the crisis will be good news for the people and for the discerning investor. It will compel a restructuring of the privatisation and a reorientation of the electricity industry towards market principles.
For the moment, the urgent gentlemen on the dais in Lagos have a hard job. But Nigeria’s is the irony of a voracious demand for power – a conservative deficit of 20 gigawatts – walled-off from supply by questionable regulation. In the near future, entrepreneurs will invest to provide supply and they will be sure of customers who can and will pay. At this moment of maximum pessimism, everyone knows that the privatisation faces imminent financial collapse one way or another. But the prospective investor is wise to heed Churchill’s maxim – “Never let a good crisis go to waste.”
Investments in an industry for which demand can only grow will be a good bet in the short and long term. This is why executives from Siemens, Cummins and General Electric are in the audience of every power conference, largely ignoring what’s being said on stage, seeking future business and laying the foundations for the rebirth of Nigeria’s electricity industry.
Culled from #BusinessDay
Timi Soleye is the President & Founder of Aratro, a chemicals and agriculture consultancy.
#Nigeria
