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Nigeria ponders sale of state electricity system

28 May 2010 – Nigerian officials have begun preparing a plan to sell the crippled state electricity system, in what would be one of Africa’s biggest privatizations if Goodluck Jonathan, the president, gives the go-ahead for sweeping reforms.
 
The Financial Times reports that President Jonathan has privately signalled his support for a reform blueprint, including a potential multi-billion dollar sale of state-owned distribution companies and power plants.
 
Nigeria is sub-Saharan Africa’s biggest oil and gas exporter, but the state power company provides only enough electricity to run a refrigerator for one in every 30 people among the 150m population.
 
The proposals under discussion would break up the Power Holding Company of Nigeria (PHCN) – known to Nigerians as “Please Have Candles Nearby” – and invite bids for 11 regional electricity distribution companies and six generating companies, each owning one or more power stations.
 
The Bureau of Public Enterprises has begun work on a bidding process to “hit the ground running” if Mr Jonathan decides to proceed, said an official close to the body, which handles privatizations.
 
The government might earn $4bn from the sale of existing power plants, along with others under construction, and a further $3bn from the distribution companies, according to advisers’ rough estimates. But restoring the power lines felled by neglect or theft and extending supply to the many Nigerians for whom even charging a mobile phone is a daily ordeal would cost many multiples of the sale price.
 
Investors could still turn the privatized distribution companies into “cash cows”, according to one industry expert, who said: “Supply will never meet demand for ten years.” Nigerians spend an estimated $8bn a year running the costly diesel generators that have become the main source of power.
 
The lack of electricity deprives the country of economic activity worth $130bn annually – equivalent to more than half of gross domestic product – according to a study produced for the power ministry. South Africa, with a population a third of Nigeria’s, has ten times the generating capacity, and still struggles to meet demand.
 
The Nigerian government has poured roughly $1bn annually into the power sector in recent years, yet there has been no large expansion in generation – evidence, insiders say, of widespread corruption.
 
Mr Jonathan was elevated from the vice-presidency to the top job in March following the death of Umaru Yar’Adua. Vowing to use the remaining year of his term to tackle corruption and address the electricity crisis, Mr Jonathan has dusted off electricity reforms that were shelved.
 
But another insider who favours the overhaul told the Financial Times that Mr Jonathan’s “encouragingly strident emphasis on reform in the sector” had recently given way to “disappointing confusion”.
 
Apart from resisting pressure from vested interests, he would have to triple the regulated tariff charged to electricity customers to make privatization commercially attractive. That would be hard to sell to a disillusioned public. Yet the higher tariff would still be less than half the cost of running the generators.
 
It could also help to harness Nigeria’s vast stocks of natural gas. The price the PHCN offers energy companies for gas is far below what they make by exporting it. This leaves some Nigerian gas-fired power stations standing idle.
 
The World Bank has offered $400m in risk guarantees to underwrite agreements between new power companies and gas suppliers. While no formal discussions with potential investors have taken place, some officials hope to attract European utilities. Others said interest was more likely from Chinese and Indian investors, as well as local companies.