'How to attract investment to Nigeria’s power sector'

Power sector: Attracting investment

Proven technology, regulation, tariff regime, availability and price certainty of feedstock (fuel), standardization of (bankable) power purchase agreements, environmental compliance, access to long-term and competitively priced funding, off-taker credit strength as well as loan and security documentation acceptable to international lenders have been identified as some of the key issues which local and international banks will seriously consider when evaluating financing proposals for transactions in Nigeria’s power sector.

Patrick Mgbenwelu, an expert in project and infrastructure finance, who was also the Head of Project Finance (debt & advisory) at Stanbic IBTC Bank, said in Lagos that power projects by their very nature are extremely capital intensive and as such require huge initial investments which the public sector in most emerging economies, including Nigeria’s, cannot fund entirely through its budget or government-sponsored borrowing.

Speaking on the theme, “Financing opportunities in the emerging Nigerian power sector” at the 2011 Annual Power Conference organised by BusinessDay Media, Mgbenwelu disclosed that transforming the Nigerian power sector from a state-run business to a commercially-run, liberalized market, requires significant government commitment, private sector investment and ownership.

“A lot of work has been done by the Bureau of Public Enterprise (BPE), Nigerian Electricity Regulatory Council (NERC), the Presidential Task Force on Power and the Federal Ministry of Power, in paving the way to accelerate the power sector reforms – i.e. putting in place the building blocks for the privatization of  the country’s power sector, however, there is still some work to be done over the coming months and we understand these are currently underway.  Thus far bids have been received from investors indicating interest in various power sector assets across the power sector value-chain, i.e. feedstock, generation, transmission and distribution, although substantial interest is skewed within the generation and distribution areas, ” he said.

However, Mgbenwelu said acquisitions and subsequent investments in the power sector will be funded by lenders who will naturally scrutinize the entire value chain rather than merely just the asset being financed/ purchased. “It is one thing to address the asset alone, but more importantly for example, for a typical gas to power plant, financiers will evaluate the quantity and quality of gas (feedstock) in the production well, the gas supply pipeline to the power plant itself, technical and operation capacity of the power asset, and finally how the power will be evacuated and paid for.  Related matters will include, the investment required for transporting such feedstock, contractual provisions of the fuel supply agreements, contractual provisions of the power purchase agreements, environmental compliance of the value chain linking the asset, are some of the key considerations which financiers will seriously look at when assessing the business case and bankability of the opportunities in the emerging sector,” he stated.

The on-going privatization of the power sector, according to Mgbenwelu, will gain traction once the government and its agencies saddled with the responsibility of privatizing the country’s power infrastructure announce and put into law the detailed, policies and incentives / credit enhancements available to the private sector, such as tax waivers, World Bank Partial Risk Guarantee, ring-fencing of labor liabilities, import duty exemptions on equipment, and the form of government guarantees to lenders / investors, in clear terms to prospective investors. Other related issues which financiers will expect to have firm clarity on include the duration of the respective power purchase agreements, fuel supply agreements and general issues surrounding the eventual transition of the bulk electricity trader and MYTO.   

He indicated, whilst there are significant lessons to be learned from other developed economies, care is required when seeking to apply other foreign models to the Nigerian case.  Some of the Middle Eastern governments (i.e. Saudi Arabia, Qatar, U. A. E.) which were considered by investors as developing economies obtained significant comfort from some of the “investor friendly” packages which were put in place when developing their power sectors.  As a result, he also said that Nigeria can take a cue from the Middle East where governments provided adequate cover to both investors and financiers.

“They were provided with adequate debt and equity protections in the unlikely event of termination of the Power Purchase Agreements and or interruptions to feedstock supply. The foregoing PPA protections ensured that financiers (i.e. debt and equity providers) funds are repaid where given political and or economic risks occurred, synonymous with such investments in the emerging markets.  This explains why countries in the Middle East have since early 2000 been attracting international investments in generation, transmission and distribution of electricity. Countries such as Saudi Arabia, United Arab Emirates (UAE), Oman and Qatar have shown tremendous growth in electricity demand and installed capacity and are further poised to register impressive growth in coming years, given that this has augmented the growth of their key industries” he said. 

The beauty at this stage is that some of the initial guarantees / protections provided by the Middle Eastern governments have gradually fallen away without much investor nervousness because a substantial amount of the early phase risks have reduced and the markets have significantly matured in terms of government policies, commitment and bank financing.  The lesson learned here is significant and tangible commitment needs to be in place from the government in order to demonstrate seriousness to the investing and lending community – this is crucial to gain traction.

Amongst other suggestions for accelerating the implementation of the reform process, Mgbenwelu advised the key government stakeholders to ensure that both attractive and unattractive power assets / projects are bundled together to prevent cherry-picking by investors, while also targeting quick-wins by embarking on the implementation of easy projects with less technical and operational challenges within the ailing sector to fast track the on-going privatization process.  As witnessed in other emerging countries, the foregoing will assist the government to kick-start momentum which is key for generating investor’s appetite.  “The procurement/ privatization process must be managed in a way such that it ensures the losing bidders remain interested / incentivized to bid again for subsequent assets” according to him.