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Investing in Nigerian power: Africa’s giant is re-energised

Investing in Nigerian power: Africa’s giant is re-energised

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In 2013, the US power investor Symbion Power participated in a competitive bidding process for the acquisition of a 972 MW natural gas-fired power plant in Nigeria.

We joined forces with a group of partners led by one of Nigeria’s pre-eminent public corporations and we submitted our offer to buy the plant.

There was considerable skepticism in the United States about whether or not we would be successful and most of my peers felt that we were wasting our time. Nevertheless, we participated in what turned out to be a comprehensive, highly professional and transparent process that was extremely well managed by Nigeria’s Bureau of Public Enterprises (BPE). At the time I called it “world class”. And It was.

Our consortium won the bid and we acquired the power plant. The acquisition was financed by the partners own cash in the form of equity contributions and by loans from Nigerian banks.We formed a local company and then proceeded with the successful rehabilitation of the plant. A few years later Symbion sold it’s share to the lead local partner in a successful, profitable and friendly exit.

For a foreign investor this was a text book investment success story. The skeptics in the United States were silenced, Nigeria did everything right and our partners proved themselves to be excellent to work with. Given the scale of the privatization It seemed to me that Nigeria’s electricity problems would soon be a thing of the past.

Yet here we are in 2018 and the transformation that we all anticipated has not occurred. Tens of millions of people still have no access to electricity, expensive diesel generators are everywhere and the flood of investors we expected to see entering the power sector is more like a trickle.

Nigeria’s power problems are overwhelming: There is still a massive shortage of generation capacity and the transmission system is hugely inadequate. Enormous investment is needed in the distribution networks before they will be able to operate efficiently and deliver revenues that will support the entire electricity value chain.

The Nigerian government has now launched the “Power Sector Recovery Program” which addresses many of the direct challenges the sector and it’s investors are faced with.

However, if major international investors and their banks do not participate on a huge scale and particularly in the distribution sector the results that Nigerians really want to see are going to take a very, very long time.

Nigeria must attract the worlds large utility firms. Those firms have the financial muscle and the experience to deploy large-scale financial and technical resources to bring about an adequate solution. Power plants will take between 2 and 5 years to develop and build depending on the type of fuel they use.

The distribution systems need to be fixed whilst these plants are being built and new transmission lines and substations must be erected at the same time.The amount of new capital that needs to be injected is enormous and far in excess of local financing capacity.

Investors do not like uncertainty and when they consider investing in a new country they barely know they scrutinize what possibly can go wrong in the future; as well as what has gone wrong in the past.

Issues such as the non-payment, or even short payment of generation companies, politically motivated tariff changes resulting in reduced sector liquidity and large currency devaluations will all destroy investor confidence. So in this regard the government needs to provide assurances that there will be economic stability and that due respect will be paid to long term contracts regardless of future changes of government.

The existing discos should either partner or even sell to utilities who are committed to invest large sums of capital for system rehabilitation and expansion. They must have “skin in the game”. This will undoubtedly require restructuring to allow them to enter but they will do so if the outlook is positive.

New transmission lines can if necessary be financed and built, at least in part by the private sector who will be ready to charge a toll for what is commonly called “Power Wheeling”. This will require changes to policy and to the law.

So are these things possible; or is it all a fantasy?

I believe the answer is yes and it can be done. It’s time for investors to dismiss the stereotypes of thirty and forty years ago and to take a long hard look at the opportunities that exist today in a new, vibrant Nigeria.

There is a forward thinking government that is clearly committed to addressing the power deficit, a robust private sector, a population of 186 million people and access to electricity of only 59% ( of which 40% is in rural areas) Nigeria’s energy sector is one of the world’s greatest opportunities for international power investors.

Hinks is the Founder and Chief Executive Officer of US Power Producer Symbion Power and Chairman of Invest Africa (US).

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