The Right Address

How would you assess the success of the unbundling of the Power Holding Company of Nigeria (PHCN)?

The unbundling of PHCN was the outcome of the federal government’s reform initiatives, and was part of its transformation agenda. It followed a pattern that had already been developed for telecommunications. The reform initiatives abrogated the monopoly law, liberalized the sector, and created a regulatory agency. The reforms will be considered successful if they delineate three major strategic rules: policy formulation, regulation, and operations in the sector. What we formerly had in place was the NEPA Act, which created a monopoly for the National Electric Power Authority (NEPA), authorizing it to undertake all activities within the sector, from generation to transmission and distribution. If electricity didn’t reach my area, and I decided to provide cables, poles, and transformers to take the power to my community, those assets became the assets of NEPA, according to the monopoly act. Therefore, the primary significance of the reform was its abrogation of the NEPA Act. That’s why we had to establish the PHCN as a transition vehicle to allow the unbundling of NEPA into successor companies, where the main objective of the unbundling was to foster competition. It was critical to ensure full revenue collection in the value chain as failure to do so would leave the sector with no chance of survival. When NEPA was an integrated company with transmission, generation, and distribution in one entity, those who generated power didn’t care if they collected the proceeds from the end user. The generation department generated the power and brought it to the grid, while the transmission people didn’t care if X amount of power was lost and, by extension, in distribution, the operators didn’t care if they collected the full value of the power transmitted or not. As a result, over the years, there were huge revenue leakages in the value chain. The government covered any shortfall, and any further investment to improve the system had to come from the government budget. Now, with the reform, the generation and distribution components of the business have been separated, and only transmission remains in government hands. The power generation part of NEPA was broken down into six power generation companies, and many independent power producers have invested in the sector. We’re quite happy with the results. In the distribution sector, monopoly pricing has been abolished thanks to the newly competitive nature of the sector, and the former distribution giant has been broken down into 11 distribution companies based in different regions and areas. Now, we can surmise which distribution companies are engaged in best practices, and ensure that the others play according to the same rules and apply the same standards to their operations. Generation is straightforward; you install a generator and crank up the power. But because of the risk of power losses in transmission and distribution, we decided to introduce an intervening party, the Nigerian Bulk Electricity Trader (NBET), which signs power-purchase agreements with the generation companies. The aim was to avoid disincentivizing power generating companies from investing in the power generation sector. The NBET basically guarantees that whatever power a company generates is bought and paid for in full. Meanwhile, the distribution companies were not sold on the basis of price, but on the commitment made to reduce aggregate technical and financial collection losses. After the unbundling, a regulatory agency was also set up, which has the power to grant and revoke licenses. This controls and ensures good behavior in terms of environmental issues, the appropriateness of the technologies employed, safety standards, and more. Most importantly, it provides a one-stop shop for anyone who wants to enter the generation or distribution sector. Another issue that the reforms addressed was pricing. Previously, under NEPA, the government had been subsidizing power for the public sector. It was therefore not economically viable for any private sector entity to invest its own capital and set up a generation or distribution plant. One of the major challenges prior to privatization was to figure out a tariff that was cost-reflective and that could yield an adequate rate of return on the investments of those wishing to enter the sector. This was done through the introduction of the Multi-Year Tariff Order (MYTO 2) in 2012. It provided the added confidence that investors needed to invest in the power sector. Because no matter what liberalization or reform measures you bring into the sector, if you don’t enjoy a good return on your investment, people won’t invest. Another element that attracted private investors into the sector was the role that public enterprises played in the privatization process. We set clear standards of international best practice in structuring the transaction, insisting on high standards of transparency and also setting clear rules and parameters. In evaluating the technical proposals, we opened it up for strategic stakeholders to view and oversee the evaluation process. The important fact here is that the president and the vice-president supported us in maintaining transparency, the success of which has demonstrated our desire to comply fully with international best practices. Our mandate is very clear; to create an environment that will attract international investments and foreign capital into the country. That is the aim of President Goodluck Jonathan, as well.

In what other sectors do you see opportunities for liberalization?

Our next focus area will be the transportation sector, the inefficiency of which today means that transport costs account for an average of 30% of all costs on transported goods and products. To give an example; a container lands in Lagos and is transported by truck to Kano, which takes three days. A trailer can carry no more than two 40-foot containers, or even two 20-foot containers. On the other hand, one railway wagon can carry 10 to 20 of those containers and get to Kano within 24 hours. Trucks are inefficient, and also damage our roads. As with the NEPA Act, we have the Railway Act, the Inland Waterways Act, and the Ports and Harbor Act, all of which restrict operations and grant monopoly rights in those sectors. Meanwhile, in the pipeline, we have a railway draft reform bill, an inland waterways draft reform bill, a roads reform bill, and a ports and harbor reform bill. We will also establish a regulatory agency called the National Transport Commission to provide intermodal regulation and promote intermodal development, such as ensuring major airports have railway links. Another area besides transport is the reform of the housing sector. It’s estimated that the middle class alone demands a minimum of 17 million housing units. Right now, we’re looking at what policies and legal and regulatory frameworks we need to put in place to encourage massive private sector housing investment. We’re also working on the privatization of development finance institutions, like the Bank of Industry and the Bank of Agriculture, at which privatization has already begun. Also, under the leadership of the Minister of Finance, we’re working on the establishment of a wholesale development bank. There is also the Abuja Commodities and Stock Exchange project, through which we intend to introduce a warehouse depository system. Currently, the Abuja Commodities and Stock Exchange only has a trading platform, so we’ve gone into advanced discussions with the Ministry of Agriculture, which has warehouses and silos located nationwide. It is set to cede a number of those silos to the Abuja Commodities and Stock Exchange for privatization. Two factors have been hindering the development of agriculture in Nigeria: one, the instability and unpredictability of prices; and two, the lack of a defined buyer. This initiative will thus seek to introduce a stable system for pricing and for identifying certain buyers. Another crucial sector is the minerals and mining sector. Nigeria has large mineral deposits that are virtually untapped. Coal, gold, columbite, and limestone are all there, but today we extract only oil and gas. Now however, we are working on removing the obstacles that seem to be holding investors back from entering those sectors. Refineries are also up for privatization, pending an amicable resolution of labor issues. We’re also looking at a concession of the Nigerian Gas Company and the Nigerian pipelines, which transport gas and petroleum products. The other sectors that I wanted to mention are tourism and sports. Nigeria has considerable potential to become a tourist destination when you consider that, among others, we have game and national parks. These have not been major revenue earners yet, and therefore we’re looking at how we can transform these assets into profitable ventures that will attract private investors. In terms of sports, we have stadiums all over the country and a population of 160 million that loves football.

What is your message to potential investors looking at Nigeria as a whole?

The Nigerian business environment is undergoing a major process of improvement, and through the privatization drive the government is taking the initiative to welcome investment across a range of sectors. We believe wholeheartedly in Nigeria as an investor address, and that it is one of the best propositions in the world today.

© The Business Year – May 2014