[size=14pt]BPE, PHCN Privatisation and Journey so Far [/size]
13 Dec 2011


Minister of Power, Barth Nnaji

Penultimate week, the Federal Government through the Bureau of Public Enterprises (BPE) convened a meeting where it interacted with investors to aggregate their opinions on the transaction structure and process towards the privatisation of successor companies of the Power Holding Company of Nigeria (PHCN). Chineme Okafor writes on how the government has been backing up what it says with actions in the PHCN privatisation.

The electric power sector is unquestionably an essential sector to overall national development and any worthwhile reform of the electric power sector is perhaps one of the most challenging reform programmes any country can undertake. From all indications, the sector is critical to the developmental reform of any country and Nigeria is no exception.

For many years the electricity sector has been plagued with a plethora of problems from low capacity generation of power, decaying facilities, corruption, leakages, poor distribution, non- collection of tariff amongst others.

In consideration of global trends in the electricity sector, it became imperative that a holistic approach must be adopted in bringing changes to the sector, if it will in turn yield significant improvement that will drive the country’s quest for sustainable development. It is to this end that Nigeria in 2000 commenced programmes of reform in her electricity sector as part of its overall economic reform agenda, which she allegedly holds quite dear.

As a challenging process, which in most cases, the dividends of the reform is only realisable in the long term, the Nigerian scenario has neither been free of these challenges.

The nation’s power sector reform has proved even more challenging considering the poor performance of the sector over a long period of time occasioned by long term plans being disrupted by short term interventions programs, all of which only add to the growing problems of the sector. The implementation of the reforms processes has variedly thrown up several challenges, many of which are historical while some are fallout of organised resistance to the reform agenda.

The Power Roadmap

The roadmap to the reform process seemingly took shape when in 1999, the National Council on Privatisation (NCP), set up the Electric Power Sector Implementation Committee (EPIC) to undertake a comprehensive study of the electricity power industry. Membership of the committee was drawn from the then Federal Ministry of Power and Steel, National Electric Power Authority (NEPA), Bureau of Public Enterprises (BPE), Ministry of Petroleum Resources, Ministry of Finance, the Energy Commission of Nigeria, the organised private sector,  and other relevant professional bodies.

EPIC’s key objective was to prepare a power policy blueprint that will define government’s new direction for the electric power sector. EPIC produced the national policy on electric power and a draft electric power sector reform bill.  These instruments were approved by the NCP in 2002 and a draft bill was forwarded to the national assembly where it was passed in 2005.

It is instructive to note that reform Act has three key components; restructuring of existing utility, liberalisation and privatisation, as well as reinforcement of existing infrastructure through National Integrated Power Projects (NIPPs) and other government interventions. The reform therefore became a necessary tool for laying solid foundation of sustainable power generation and sector efficiency, not an end itself but a means to an end.

Key Provisions in the Act
Some of the key provisions of the Electric Power Sector Reform Act 2005 include creation of the initial holding company (PHCN) to assume the assets, liabilities and employees of NEPA, unbundling of PHCN into successor companies and ensuring greater operational autonomy, development of an efficient electricity market, privatisation of successor companies in which the BPE was empowered to undertake this responsibility, and establishment of the Nigeria Electricity Regulatory Commission (NERC).

Sadly, the implementation of the power sector reform was stalled and only came into full steam with the inception of the current administration of President Goodluck Jonathan. In August 2010, President Jonathan inaugurated the new roadmap, which is a comprehensive plan aimed at restructuring the power sector and achieve stable electricity in the country.

Further to the work plan approved under the road map document, the BPE published adverts, between December 13 and 20, 2010, in both local and international media inviting prospective investors to express interest in the privatisation of the eleven distribution companies unbundled from PHCN, as well as for core investors in the four thermal power stations and concessionaires for the two hydro power stations.

The initial deadline for receipt of expressions of interest (EOIs) was February 18, 2011. Potential bidders for the distribution companies are expected to be existing power distribution companies or core investor groups with power distribution companies as long-term technical partners and successful bidders will be responsible for operating the distribution companies, making the necessary investments to improve the distribution network and customer service in line with the objectives of the National Electric Power Policy (NEPP.)

Similarly, potential bidders and or concessionaires for the generating companies would have to be existing local and or international power generators or investors with power generators as long-term technical partners and they will be responsible for operating the stations, improving the generation capacity and making the necessary investments in line with the objectives of NEPP.

Role of BPE
Between January 18 and February 12, 2011, the BPE embarked on an investment drive to lure world-class investors to participate in the privatisation of the successor companies. The bureau tagged it the ‘Nigerian Electric Power Investors’ Forum’ which held in Lagos, Dubai, London, New York and Johannesburg.

All the stakeholders in the divestiture of government equity in the electricity utility namely, NERC, the Presidential Task Force on Power (PTFP), the Ministry of Power, the World Bank, and the Gas Aggregation Company Nigeria Limited were on board to reassure investors of the Federal Government’s commitment to the power sector reforms and the willingness of the government to provide investment incentives to bidders.

Following delays, which were assumed necessary to accommodate representations by prospective investors who attended the five-country electric road show, government approved the extension of the deadline for the submission of EOIs to Friday, March 4, 2011 and at the deadline for the submission of bids by prospective investors, the BPE received 331 envelopes of EOIs and this was broken into 174 for generation companies, 157 for distribution companies.

When the 331 envelopes were opened and individual bids sorted out, the total number of individual bids for the successor companies increased to 929, the breakdown of bids showed that 529 bids were submitted for discos and 400 bids for gencos. In other words, the BPE harvested 929 bids for individual successor companies from 331 EOIs received from prospective investors.

Upon developing evaluation criteria in accordance with the requirements of the EOI, the BPE prequalified bids through a strong inter-agency team that shortlisted 525 bids for the next stage in the privatisation of the PHCN. In detail, 253 and 272 bids were pre-qualified for discos and gencos respectively and the pre-qualified bidders were required to pay a $20,000 fee for each company of interest, at the same time sign a confidentiality agreement before receiving bid documents and admitted to the data room.

In the last few months, activities to stimulate the power sector reform programme have been initiated by government and under a revised privatisation timeline, draft industry agreements, issuance of Requests for Proposals (RFP) and information memorandum documents were effected on August 15, 2011 and September 1, 2011, respectively. Access to virtual data room also began on September 1, 2011.

The Pre-Due Diligence Conference took place on October 14, 2011 while the physical due diligence commenced on October 24, 2011.  Bidders’ site visits kicked-off on November 14, 2011 and with regard to the visits, there were hiccups emanating from labour resistance, but the BPE went ahead with its mandate, assuring that it would drive the exercise to its desired conclusion.

Between November 28 and 29, 2011, the BPE, in collaboration with NERC, organised the Nigerian power sector transaction and industry conference. The conference, which was declared open by Vice President Namadi Sambo, had the Minister of Power, Prof. Bart Nnaji, Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala in attendance. They assured the over 840 participants at the conference, which were mainly bidder and advisers from 38 countries of government’s commitment to pull through a successful privatisation programme of equality and efficiency.

Director-General of the BPE, Ms. Bolanle Onagoruwa, noted in her opening remarks that the objective of the conference was to interact with investors and aggregate their opinions on the transaction structure and process.

Onagoruwa took advantage of the forum to intimate prospective investors on developments and progress recorded so far in Nigeria’s bid to transform her power sector.
She said: “For us to reach this stage of the transaction and to accommodate the comments of investors on key issues, we have closely worked with the ministries of power and finance, NERC, the gas aggregator, Transmission Company of Nigeria (TCN) and the World Bank.”

The Federal Government is very much concerned about the welfare of the workers of PHCN. In its desire to be fair and just in resolving the pension liabilities and severances of the workers a path of negotiations to address this issue has been embarked upon with the unions of PHCN. Our ultimate goal is to resolve all labour issues before we hand over any of the successor companies to any successful bidder.”

It appeared from all indication that government quite interested in settling all labour related issues to the privatisation exercise and this much Nnaji reiterated when he explained that, “The Federal Government has set aside enough funds for the swift payment of retirement benefits to all the PHCN staff when transfer of the ownership of the PHCN assets takes place.

Despite the considerable economic challenges facing the nation, President  Goodluck Jonathan had last May,  graciously approved a 50 per cent salary raise for PHCN workers. And he had also approved that some 11,000 PHCN employees who have for years been working as casual workers been converted to the regular staff. In other words, the administration has honoured all the agreements with the labour unions in the power sector. We have, indeed, demonstrated good faith.”

Nnaji noted that, “the ongoing power sector reform will create greater employment and business opportunities for our people, as we have seen with the liberalisation of telecoms. It will enable electricity employees to earn competitive wages and enjoy generous serviced conditions. It will make the state of the art technology available in the sector. It will also boost capacity building and attract considerable Foreign Direct Investment.

The ultimate beneficiary of the reform will be the Nigerian people whose dying factories will be revived, whose service industry will receive a great boost, and who will begin to have constant and quality power supply in their homes. It will soon be a new dawn in Nigeria.”

Conclusion
So far, it thus appears that the government is gradually putting its money where it wants its mouth to be in the power sector.
The Federal government has signed a multibillion dollars partial risk guarantee (PRG) with the World Bank, set up an bulk electricity trader; the Nigerian Bulk Electricity Trading Company (NBET), which has got its official trading licence from the NERC.

The bulk trader backed by a government guarantee will be responsible for all power purchase agreements between the discos and gencos in the industry.
Also, the first round of meetings to kick-start negotiations between the Federal Government and the trade unions in PHCN held on May 16, 2011 in Abuja with Alhaji Hassan Sunmonu, the founding President of the Nigerian Labour Congress (NLC) as the Chief Negotiator/Conciliator.  Two rounds of negotiations have since held with the last on December 1, 2011.

Three decisions were arrived at the initial round of negotiation; it was agreed that a workshop will be organised for labour and other stakeholders in the sector, 50 per cent salary increase for PHCN workers and biometric verification of all PHCN workers.

The workshop for the workers was however held in Abuja where the BPE’s Acting Director of Electric Power, Mallam Ibrahim Babagana, disclosed in his presentation that 70 per cent of each distribution company would be sold to core investors and the net proceeds transferred to the Federation Account for distribution to all tiers of government.

Babagana noted that from the remaining 30 per cent, 10 per cent shall be offered equally among all states within the jurisdiction of each distribution company while two per cent of the remaining 20 per cent will be reserved for workers and the balance of 18 per cent will be sold to the general public through Initial Public Offering (IPO) when the companies start performing well.

He explained that the divestiture strategy for the distribution companies will be primarily based on the use of quality of service or efficiency parameters considered against investment proposals made by bidders aimed at reducing Aggregate Technical, Commercial and Collection (ATC &C) losses over an agreed timeframe. In addition, the strategy will be built around the Multi-Year Tariff Order (MYTO).

Babagana stated that the merits of the strategy were its emphasis on technical, financial and managerial competence of operators, its shortest curve for reducing subsidies, guarantees and section payment delinquency. In addition, he stated that, “government will for the first time begin to earn some return on its remaining equity interest in the distribution companies and can within a specified time cease financial support altogether.”

Managing Director of Gas Aggregation Company Nigeria, (GACN), Dr. David Ige, in his remarks, allayed fears over shortage of  gas supply for uninterrupted power supply in the country. He pointed out that an enabling policy framework was in place to support critical mass of gas supply development for the power sector, adding that progress was being made in the development of a robust gas grid that will enable rapid growth of supply from diverse sources.
“Medium term outlook is promising and power sector investors can be assured of supply,” Ige said.

In addition, between December 1 and 3, 2011, the BPE held a legal retreat in Enugu to harmonise and finalise industry agreements which include gas supply and aggregation agreements, gas transportation agreement, transmission use of system agreement, vesting contracts, power purchase agreements.

While the government  has expressed its intention to conclude the privatisation exercise within the first quarter of 2012, the march towards the last lap of this goal is very crucial.
With the milestones ahead, it is imperative to heed to the warning of the British government which had recently asked Nigeria to cautiously conclude her privatisation exercise with national interest at heart.

Nigeria will for the second time seek to successfully reform a major sector of her economy, with the telecoms sector being the first. So far, the process has been encouraging.  Despite some hitches, government also looks certain to walk its talk. It has shown an emphatic level of commitment to this and it remains to see how well it will pull through this very crucial last phase of the PHCN privatisation exercise.

http://www.thisdaylive.com/articles/bpe-phcn-privatisation-and-journey-so-far/104975/