Why power sector reform? by 26WIJj8


									Attracting Private
Investment in the
Power Sector
 The Perspective of the
 Nigerian Government
    Reform Agency
           Nasir Ahmad el-Rufai
              Director General
    Bureau of Public Enterprises, Nigeria

       Thursday 1st November 2001
Three Questions – One Reality
   Attracting private sector investment in
    the electric power sector:
       Why do we need private investment ?
       How do we attract private investment ?
       How does the government manage the
        process ?
   Public policy requires trade-offs –
    technocrats advise, politicians decide.
Why do we need private investment?
            National Electric Power Authority (NEPA)
   Under-funded, under-maintained, mismanaged power utility
   Supply and demand imbalances : Installed capacity of around
    5,900MW, maximum load ever recorded was 2,470 MW – demand
    estimated at 10,000MW in 2005 and 20,000MW in 2010
   Transmission lines are radial and mostly overloaded, switch gear is
    obsolete and transformers overloaded, and have not been maintained
   Overall transmission and distribution losses around 40%
   Collections less than 50% of power generated (theft, corruption)
   Power outages cost our economy $1bn per annum (2.5% of GDP)
   Heavy capital investment required to meet this need ($ billions)
   Financial pressures on FGN and inability of government managers to
    allocate resources efficiently mean:
        there is no sustainable choice but to seek private investment in the
         medium term
How to Attract Investment ?
Conditions Precedent:
 Appreciation of issues and constraints

 Clarity of policy - clear sense of direction

 Regime of incentives and will to sustain them

 De-monopolization and enactment of market-friendly
  legal framework
 Establishment of independent regulatory system

 Clear regulations and regulatory framework

 Clear, transparent licensing and competition rules

 Privatization of state-owned enterprises
National Electricity Policy
Approved by Cabinet on March 28, 2001. Key policy objectives include:
Short to Medium Term
       to ensure a system of generation, transmission, distribution and marketing that is
        efficient, safe, affordable and cost-effective throughout the country;
       to ensure that the power sector attracts private investment both from within Nigeria
        and Overseas and;
       to promote competition to meet growing demand through the full liberalization of
        the electricity market.

Long Term
       to ensure that electricity supply is made more reliable, economically efficient and
        equitable so as to effectively support the socio-economic development of the
       to minimise government guarantees for privately funded investment and;
       to ensure that subsidies are effectively targeted.
Transition Stage                          (1999 – 2003)
   Focus on getting the following conditions right:
        Electric power policy
        Regime of incentives
        Legal and regulatory framework
        Establish and staff independent regulator
   Open up the sector - corporate restructuring and unbundling of
    NEPA by creation of several gencos, transco and discos
   Privatization of all thermal and hydro plants to private operators
   Concessioning of management, ownership and control of
    selected distribution companies
   Privatization of transmission company and system operator
Legal/Regulatory Framework
   Robust framework is critical for creation of certainty and
    investor confidence
   Focus of the last two years has been on building this framework
   Electric Power Sector Reform Act currently before National
   Expected passage end December 2001
   Provides for:
        transfer of assets and liabilities to successor companies and their
         eventual privatisation
        development of competition in pre- and post-privatisation market
        licensing regime providing for investor-friendly license modification,
         renewal and revocation
        clear definition of the role of the Ministry – policy matters only
        establishment of Nigerian Electricity Regulatory Commission (NERC)
Electricity Regulatory Commission
   Establishment on passage of the Power Sector Reform Act
   Fully autonomous and independent body
   7 full time Commissioners with staggered five year terms
   Commissioners to be appointed by the President, but President
    must select from short list of three names for each vacancy
    submitted by independent selection committee
   Detailed selection criteria for selecting Commissioners to
    published in Official Gazette
   President cannot remove Commissioners unless exceptional
    circumstances – corruption, insanity, etc.
   Commission shall be funded largely through licensee levies
   Abuse of use of funds to be tackled by the Anti-Corruption Law.
Sector Liberalization
   Have embarked on the process of restructuring and unbundling
    in order to instil competition, mobilise private capital and take
    advantage of recent technological advances.
   Unbundling process will involve:
            the separation of transmission and dispatch from generation;
            the establishment of a transmission company;
            the establishment of a number of competing, privately owned
             generation companies from existing NEPA generating facilities;
            the opening up of generation to new market entrants – IPPs
             and MPPs, amongst others, and;
            the establishment of a number of distribution and sales
             (marketing) companies which will also be privatised.
Corporate Restructuring - Plan

                                                                     TASK 1                                                       OUTPUT
                                                            Information gathering and                                            OUTPUT
                                                             electricity sector review

                            TASK 2               TASK 4                TASK 7               TASK 5                TASK 3
                            Review                                                           Human              Technical and
                       of fuel sources for        Legal                Financial            Resources           Environmental
                       power generation           review                review               review                review

                                                  TASK 6                                     TASK 7
                                                Market Design                           Financial Modelling
                                                                    TASK 8
                                                                Development and
                                                             assessment of structural
                                                                options and initial
                                                                recommendations                               Further
                         Consultation                                                                     understanding of
                        and workshops                                                                      the issues and
                                                                    TASK 9                                  new results
                                                            Final recommendations on
                                                            structure and full detail on
                                                               the new companies

       Overall             Proforma
                          Proforma          Investment          Asset                       HR Staffing               Legal
      summary,             accounts,
                          accounts,       Investment
                                             needs and         Asset
                                                              inventory         Power
                                                                               Power       HR Staffing
                                                                                                 and                Legal
                                                                                                                       and       Environmental
     final structural
   final structural                        needs and
                         balance sheets 10 year financial
                       balance sheets                       inventory
                                                                  and           Trading
                                                                              Trading          and
                                                                                           Retrenchment              and
                                                                                                                    Contract         Audit
 recommendations,           & capital
                          & capital     10 year financial
                                            projections         and
                                                               allocation    Arrangements Retrenchment
                                                                            Arrangements        Plans              Contract
       & rationale
      & rationale       structure by BU
                      structure by BU     projections        allocation                       Plans                 Issues
Post-Restructuring Structure

                        IPP           IPP
   G1        G2
                     (existing)      (new)          KEY
                                                    D  : Distributor
                                                    EC  : Eligible Customer
                                                    G  : Generator
                                                    IPP : Independent Power
        TRANSCO/SO                 SPE                  Producer
                                                    PPA : Power Purchase Agreement
                                                    SO : System Operator
                                                    SPE : Special Purpose Entity
                                                    TRANSCO : Transmission
   D1        D2         D3                     EC       Company
Post-Restructuring Market Rules
                Electric Power Sector Reform Act

                    Licences issued by NERC

                          TransCo (TSO)              DISTRIBUTORS
         MPA          Market Rules and Grid           MPA
 SPE         MPA                                         ELIGIBLE

  MPA = Market Participation Agreement – Bilateral
  Contractual Relationship between Participant and TSO
Medium Term (2003 - 2007)
   Partial privatization of generation companies
   Competition among generating companies
   Energy trading between generation and distribution
    companies (primarily on the basis of bilateral
   Payment of full price by generators for natural gas
    and other fuels
   Sale of energy by companies generating power in
    excess of the needs of Discos
   Partial privatization of distribution companies
Medium Term – Sector Structure

          IG1   IG2    IPP1     IPP2      IPP3


          ID1    ID2      ID3          EC


                                       ID : Independent Distributor
                                       IG : Independent Generator
                                       EC: Eligible Customers
Full Competition (2007+)
   Well developed wholesale market with formal membership
   Optimal operation of generation, transmission and distribution
   Full privatization of distribution, transmission and generation
   Economic pricing of electricity to cover full costs of supply
   Reasonable risk-adjusted rate of return on capital
   Opportunity for large industrial consumers to choose their
   Full retail sales competition and full privatization thereof.
Managing the Reforms - 1
   Key challenge is how to plan and implement sector restructuring
    while trying to meet urgent needs for power and new
    investments by private sector
       Creation of panic by State-Owned Enterprises to attract treasury
        support – the more we gave, the less efficient funds were used.
       Impact of IPP’s requiring long-term contracts with fixed returns
        based on availability and security arrangements on implementation
        of medium to long term restructuring imperatives
   Need to avoid uneconomic long-term IPP arrangements that
    burden the treasury while at the same time encouraging IPP
    development – choice is MPP – the Enron Story.
Managing the Reforms - 2
   Restructuring and overall reform is an evolutionary process that
    will take many years to complete:
        1999-2000   –   Electric Power Policy
        2000-2001   –   Electric Power Sector Reform Act
        2002-2003   –   Establish and Staff NERC, Unbundle NEPA
        2003-2007   –   Privatization of entities unbundled from NEPA
   Policy makers tend to underestimate the complexity of, time
    needed for, and expense of an efficient power sector reform
    process – estimate of USD 15 million, over 8 years
   Fortunately, political will to fulfil the reform programme exists in
    Nigeria and must be sustained (both President and Vice
    President are political champions of power sector reform)
Managing the Reforms - 3
   Establish the right management framework to manage both
    policy dialogue as to the right approach and to manage actual
   Overcome bureaucratic hostility and inertia
   Create an empowered agency to coordinate the activities and
    balance the interests of key stakeholders:
            National Council on Privatisation/BPE
            Ministry of Power and Steel
            NEPA
            Donor Agencies
   Hire the best advisers:
            Legal and Regulatory - Cameron McKenna, Andersen
            Restructuring – PricewaterhouseCoopers, PB Power
            Privatisation – to be decided in 2002.
Managing the Reforms - 4
   Stakeholders – need to contend with entrenched
    interests, manage real fears and expectations:
   General Public
        Little hostility due to decrepit state of the existing utility
        Comprehensive communications masterplan to carry the people along
   Labour
        Treatment of surplus labour must be fair, principled and equitable
        Challenges include:
             Balancing conflicting objectives – NEPA managers, employees, entrenched
              interests and Unions
             Determining likely redundancy numbers and benefit payments
             Designing cost-effective retraining and deployment schemes
   The Nigerian power sector reform programme is well underway

   Key focus of the programme is the need to attract private

   A well designed and comprehensive programme to attract
    private investment is in place

   With sound management of the process we are sure to succeed
Feel free to email us for further

          Thank You!

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