Nigeria s Power Privatisation Process: Learning Curves. Chijioke Okonkwo Senior Consultant June 2015

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Nigeria’s Power Privatisation Process:

Learning Curves

Chijioke Okonkwo Senior Consultant June 2015

(2)

Learning Curves from Structure and Process

Adopted for the PHCN Privatisation

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Introduction

Review Reform Activities

Privatisation Plan

Transaction Strategy

Privatisation Transaction Process

Achievements

Challenges to Long Term Success

Lessons

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Introduction – Pre-Reform

Highly insufficient supply, dependent on

self-generation for consistent electricity

Highly Illiquid sector

Very high distribution losses

Approx. half of end consumers unmetered and

receiving estimated bills

Lack of clear and enforceable contracts

between entities

Insufficient maintenance and investment

carried out, assets deteriorated

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• The reform and privatization of NEPA/PHCN was

carried out to liberalize the NEI and integrate Private Sector Participation in the power sector

• The success of the reform and privatization exercise meant different things to different stakeholders:

– Government savings on budgetary allocation with the withdrawal from power business

– Investors saw an opportunity to invest and operate a very viable business

– Labour wanted job security and severance package

– Nigerians yearned for adequate and sustained electricity supply

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PHCN (Power Holding Company of Nigeria)

– 6 Generation Companies – 1 Transmission Company – 11 Distribution companies

Introduction - Unbundling

Generation • Production of Wholesale Power Transmission • Wheeling of Power from Gencos to Discos Distribution • Wheeling of power at low voltage levels (33KV and below) • Responsible for

retail functions of sale and collections

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CPCS was engaged as Transaction advisor in 2010

Reviewed the Due Diligence Reports and

preparatory activities for the transaction

– Financial and Accounting due diligence

– Technical due diligence

– Legal, HR and Organisational review

– Assets and Liabilities identification

– Business Plans of each SC

– Business Valuation of each SC NERC

– Signed Gas Supply Agreements (GSA) GACN/NNPC

Review Reform Activities

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Diagnostic Assessment and Development of

Privatisation Plans for SCs

– Evaluated operations of each SC – issues and

challenges

– Assessment of FG preferred privatization options

– Advised current and prospective competitiveness of

each SC

– Identified measures to attract private sector interest

– Assessed various transaction options for each SC

– Developed sales methodologies for each SC

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Privatisation Plans

Successor Company Transaction Type Reasoning Distribution Companies Share Sale (60% shares)

• Retain minority shares for states and for employees

• To list on stock exchange Geregu

Genco

Share Sale (51%)

• Geregu is newer plant

• low rehabilitation costs and higher returns expected Afam, Ughelli & Sapele Gencos Share Sale (100%)

• Very old plants

• In poor state of repair

Kainji, Shiroro

Concession (30 year)

• Due to water rights and other sovereign concerns, companies concessioned as opposed to sale

• Long term concession to ensure private sector has necessary incentive to make long term investments

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• Non – Divestment Options

– Management Contract

• Independent contractor operates the plant

• Ownership of plant retained by the government

– Lease

• Independent party acquires use of plant

• Payment to the government on an annual basis

• Asset returned at the end of the term

– Concession

• Independent operator runs plant

• Upfront payments at the commencement of the concession followed by annual payments throughout concession term

• Asset returned to the government at end of term

• Divestment Option

– Plant is sold to independent party/consortium

– Payment to current ownership at closing of sale

– Existing owner may opt to retain a minority interest

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• Bids for generation companies was evaluated based upon a standard highest bid value format

• Bids for distribution companies was evaluated based upon highest reduction in aggregate technical,

commercial and collection (ATC&C) losses

• ATC&C is a concept in the power sector used as a measure of the efficiency and effectiveness of a distribution company

• It accounts for the difference between power

purchased by discos and revenue collected by discos

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• A reduction in the ATC&C losses is equivalent to an increase in effective supply of electricity to end users

• Bidding on reductions in ATC&C losses is a method designed to use competition to maximize the

efficiency of the energy sector

• This method of evaluation was chosen to maximize the benefit to Nigerian consumers and the efficiency of the energy sector

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• Request for EOIs issued in early 2011

– 331 EOIs received by March 4, 2011

• Roadshows held in Lagos, Dubai, London, New York, and Johannesburg between January and February 2011

– Tremendous interest from the private sector

• 79% of firms shortlisted purchased the bid documents

Privatisation Transaction Process

Short Listed Firms

Purchasing Bid Documents Percentage Hydro 40 35 88% Thermal 87 56 64% Distribution 80 72 90%

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• RFP issued on September 1, 2011

276 Bid documents were subsequently issued to 163 bidders

on September 1st

• Bidders were given access to the Virtual Data Room when they

returned completed forms included in the RFP requesting such access

On September 12th, transaction documents were also

distributed to bidders and added to the Virtual Data Room

– Over 60,000 document views in the virtual data room

• Pre-Due Diligence Conference held in October 14, 2011

• Physical Data Rooms Opened in October 24, 2011

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• Site visits held in late 2011 over a three-month period

• Transaction and Industry Review Conference held in

November 2011

Final bids received

– Gencos – 25 bids by July 17, 2012

– Discos – 54 bids by July 31, 2012

• Technical Evaluation took place in August 2012

• Financial opening and preferred bidder announcements in

October 2012

• Negotiations with Preferred Bidders commenced

• Transaction and Industry agreements signed in February 2013

• Completion and Handover November 1, 2013

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Achievement -Discos

Successor

Company Bidder

Purchase Price

($) Purchase Price (Naira)

Abuja Kann 164,000,000 25,799,000,000

Benin Vigeo 129,000,000 20,215,000,000

Eko West Power and Gas 135,000,000 21,182,000,000

Enugu Interstate 126,000,000 19,803,000,000 Ibadan Integrated 169,000,000 26,505,000,000 Ikeja NEDC 131,000,000 20,638,000,000 Jos Aura 82,000,000 12,852,000,000 Kaduna* Northwest 163,000,000 25,612,000,000 Kano Sahelian 137,000,000 25,612,000,000

Port Harcourt 4Power 124,000,000 21,438,000,000

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Achievement - Gencos

Successor Company

Bidders Purchase Price ($)

Purchase Price (Naira)

Geregu Amperion 131,000,000 20,567,000,000

Sapele CMEC/Eurafric 201,000,000 31,557,000,000

Ughelli Transcorp 300,000,000 47,100,000,000

Kainji Mainstream 237,870,000 37,345,590,000

Shiroro North South 111,654,534 17,529,761,885

Afam* Taleveras 260,000,000 40,820,000,000

Total $2,660,524,534 N434,081,351,885

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Equity Participation

Nigeria China Guersney Korea Luxembourg Mauritius Niger Phillipines South Africa Thailand Turkey

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Equity Participation (excluding Nigeria)

China Guersney Korea Luxembourg Mauritius Niger Phillipines South Africa Thailand Turkey United States Zambia

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Revenue Gap in Sector

– Revenue collected inadequate to cover all costs till investments are made

• Gas availability

– Unpredictability about the availability of gas to cover all capacity expansion plus new NIPP plants

• Transmission Capacity

– Critical link between Gencos and Discos

– Large investments from FGN needed in order to avoid bottleneck

• Public Patience

– Results will not be overnight, public awareness needed on long term nature of increasing electricity supply

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Private participation in the sector necessitates the financial viability and liquidity of the sector

• Cooperation at the highest levels is key

– With so many actors (BPE, NERC, GACN, NNPC, TCN, NDPHC, PTFP, PHCN, etc.), cooperation from the highest level helps all actors work together

• While preparation is critical, cannot wait until every piece is

“perfect”

– While things need to be in place, if we were to wait until every item was exactly as we would have liked it to be, transaction could not have happened

– In some cases, private sector needs to be in the sector to

advocate for what it needs to make investments, cannot do this from sidelines

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Figure

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References

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