Nigeria: The Risks and Benefits of "Cheap" Financing for the Electricity Industry

11 mars 2014

This Day

Nigeria& acute;s appetite for improved electricity supply is driving her demand for cheap private financing from various sources across the globe. Chineme Okafor examines the implications of government´s choice of finance for the Nigerian Electricity Supply Industry (NESI) with regard to the new local content policy, which the Nigerian Electricity Regulatory Commission (NERC) is pushing to implement in the sector
The federal government is confident that it will strike a mutual balance with the global community of private and institutional financiers in its request for improved investment in Nigeria´s energy infrastructure expansion.
With respect to its keenness on galvanising the projected $900 billion investment expenditure for upgrade of Nigeria´s energy sector, the government has within its capacity pledged to stand with private sector and institutio nal financiers shoulder to shoulder in ensuring that both parties benefit from their business affiliations.
It is no doubt that this boisterous confidence exhumed by the government actually stems from the success it recorded in the almost concluded privatisation of successor generation and distribution companies created form the unbundling of defunct Power Holding Company of Nigeria (PHCN).

With the exception of Kaduna distribution company and Afam generation company that are behind schedule in the privatisation programme, the exercise which it initiated some years back was almost dusted, prompting its advancement to the next level of the reform exercise.
There is also no misgiving that its commitment to attracting cheap financing for the growth of Nigeria´s power sector has taken it to various parts of the world, from the World Economic Forum in Davos Switzerland to Honorary International Investors Conference (HIIC) in London and even to China where it had busied itself courting and making pledges to investors.

There is however every reason to evaluate the implications of the government´s choice of finance for NESI especially with regard to a new local content tradition which the Nigerian Electricity Regulatory Commission (NERC) is pushing to implement in the sector.
FG´s assurance

Addressing about 600 potential investors who attended a recent investment summit on Nigeria´s electricity sector in Abuja, President Goodluck Jonathan noted that his government had long realised that it would be difficult for it to solely fund critical national infrastructure projects to a sustainable level and that government will continue to rapport with private sector players in its demand for sustaina ble funding sources for the needed infrastructure upgrade.
Represented by Vice President Namadi Sambo, Jonathan said with regards to the funding requirements of the power sector, he was convinced in the ability of private and institutional financiers to extensively participate in the next phase of Nigeria´s power sector reform programme, which include huge investments in gas-to-power initiatives, renewable energy sources, as well as on-grid electricity generation, transmission and distribution projects, having concluded the first phase of the reform.
The president also informed the gathering that government would provide the right environment for investors who would be willing to invest in Nigeria´s electricity sector and set up an intervention fund for the growth of the sector.

He further said that the fund which will have an initial deposi t of about N300 billion will however be contributed in partnership with Development Financial Institutions (DFIs),  but there was no mention of how these funding mix would be harmonised with the expected local content law at the conference.
Projects´ financing

Conservatively, Nigeria has as at the last count received "cheap" funds for her power sector from various sources. These include the $500 million transmission network loan from the African Development Bank (AfDB) to be released in tranches of $100 million; the $800 million expected from the World Bank, $170 million from the French Development Bank and another $500 million from the Chinese EXIM Bank, for projects to upgrade the country´s transmission network.

These cheap funds may have also come with some concessions which may not be really disclosed yet creepy on the c ountry´s local content initiative for the growing electricity market.
In its quest to transform the country´s power sector through such cheap sources of finance, the government has also indicated that all its negotiated loan funding arrangements for the power sector have always come with favourable terms for the country.

Although it never disclosed details of these loan agreements but it has often insisted that such loan financing options were cheaper and affordable for Nigeria in terms of interest repayment and tenor but maybe not in terms of manpower and material losses, which had perhaps been conceded in such arrangements.
For instance, the government had in its negotiation with the Chinese Exim Bank for the funding of the 700 megawatts Zungeru hydro power plant, which was designed to cost about N162,990,364,379.30, disclosed that the tot al funding outlay would be shared between it and Exim Bank of China in the ratio 25:75 respectively.
But while it made public its share of the funding for Zungeru, which is about $309 million that is already domiciled within the Ministry of Power, the government however did not disclose its percentage interest repayment on the loan for the period of its operations as well as how much of in-country human and material resources would be employed in the construction process.
Beyond requesting for cheap finances to advance the country´s power sector, it is also important to understand what it means when the government such debt financing is a relatively cheaper form of finance than equity for projects in Nigeria´s electricity sector as well as possible concessions that are attached with them in any case.
It is of no doubt that innovative str ategies from the government, lenders, investors and power sector players alike could make it possible to raise private capital for independent power financing from wider, deeper, and cheaper sources, what is however uncertain is the character and components of whatever concessions that both parties are willing to and may have made in the process of striking a funding balance.
Local content initiative

In its bid to encourage greater participation of Nigerians in the emerging electricity market especially with consideration to the defining role played by local financial institutions during the PHCN privatisation exercise, the NERC recently initiated a framework that will drive greater application of local content elements in every operation within NESI.
NERC had in acting within its statutory mandate to safeguard operations in NESI, rolled out a draft regu lation to promote the utilisation of in-country supplies needed by operators. The regulation primarily seeks to insulate the sector from losing the core of its operations to foreign operators especially in the wake of government´s request for cheap finance.
It could also be said that NERC´s drive to compel new operators and investors in Nigeria´s emerging power market to as a matter of obligation utilise locally sourced requirements in their operations from the onset, was propelled mainly by lessons learnt from activities in Nigeria´s oil, gas and telecommunication sectors which hitherto lost a good substance of its operational inputs to foreign sources especially those with the penchant to insist on providing funds and controlling supply of materials and manpower for specified projects.
Implications of cheap financing

Without pre judice, China for instance had in providing funds for the construction of the Zungeru power station, insisted on the use of the Chinese consortium of CNEEC-Sinohydro by Nigeria to build the power station, perhaps as part of the concessions that were reached for the cheap loan facility. This by extension could also mean that most of the tangible materials to be used in the construction of the station may not be sourced locally albeit their availability.
No doubt, these are some of the possible subtle concessions that could hurt the growth of local capacities in the emerging electricity market. When the conditions for obtaining any cheap finance for NESI has to do with the lender making supplies for in-country capacities, then the possibility of growing the NESI alongside inherent local capacities may be quite difficult.
In as much as the government has successful ly overseen the divestiture of its commercially operating electricity generation and distribution companies and continued to invite private financing to take up its drive for growth of the sector, it will only be appropriate for it to also seek for ways to encourage healthy competition in the sector through prudent regulatory reviews of the market.
Again, the PHCN privatisation has ensured there are such conditions as purchaser´s commitment to making specified investments by making positive revenue streams available to give them the financial base to further invest in the expansion of the sector.

It will also be good to see the government encourage power projects developers with businesses that are listed on a stock exchange as well as those with well-capitalised balance sheets. The strategic goals of publicly held entities are likely to be more transparent an d longer term considering their obligations to public shareholders.
It is therefore important to state without mincing words that the drive for cheap financing options for the electricity market should be followed with some measured caution to avoid the pitfall of mortgaging a promising sector to the wrong hands, after all, simple economics explains that increased demands naturally leads to increase in supply.
As stated by a top power sector player, Nigeria´s cannot upgrade its power generation capacity to compliment its rising population overnight, rather it it will have to do that with careful planning and execution of considerate strategies.

Catégorie: Energie

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