The high level intrigues scuttling Manitoba’s takeover of TCN

High level intrigue at the Ministry of Power is preventing   Canadian based Manitoba Electric to formally take over the management of the Transmission Company of Nigeria (TCN).

The Intrigues have led to Nigeria’s Minister of State of Power redeployed to the Ministry of the Niger Delta while the Minister of State for Niger Delta was brought in to oversee the power sector.  The Vice President, who sit atop the National Council for Privatization (NCP) is also said have grown  cold feet over the deal despite being head of the NCP that approved it earlier in the year.

Namadi Sambo, Nigeria's vice President and Chairman of the National Council on Privatization (NCP)

 The Minister of State for Power and the permanent secretary at the Ministry, Dere Awosika, are said to be putting bottlenecks in the pathway of Manitoba from taking over TCN threatening the Federal Government’s reform programme in the sector. The Minister is said to have declined to sign the necessary documents that will formalize the handover of TCN to Manitoba two months after TCN should have been handed over to the company.  The Minister is insisting that the Bureau for Public Enterprises (BPE) should have obtained a no objection notice from the Bureau for Public Procurement (BPP).

There is no explanation on why the NCP that approved the deal did not ask the BPE to obtain the approval of the BPP before signing the concession deal with Manitoba.  Now that Manitoba signed the deal and moved in to begin the work of transforming Nigeria’s power sector, suddenly the due process argument is being used to block the company.

The President is said to have been told that TCN has been sold to Manitoba and that due process was not followed in the emergence of Manitoba. Following the allegation, the President has directed that the matter be looked into. Acting on the President’s order, the Permanent secretary is said to have issued a memo to the Bureau for Public Enterprises (BPE) demanding an explanation of the process that led to the emergence of Manitoba as the management contractor for TCN.

BPE is however at a loss on how to respond to the memo since the Minister of State for Power, who the Permanent Secretary reports to is a member of the National Council of Privatisation (NCP) that approved Manitoba’s bid to manage TCN and therefore actively participated in the process that led to the emergence of Manitoba that a subordinate is now questioning.

TCN is currently operating under two CEOs. One appointed by the Government and the other by Manitoba. 

The current situation could force Manitoba to declare a Force Majeure on the contract to manage TCN, said a legal practitioner familiar with the terms of the contract between the Federal Government and the TCN.  According to the lawyer, the terms of the contract are one of the best the Federal Government could have gotten from the deal. 

If Manitoba declares a Force Majeure it will delay Nigeria’s dream of stable power supply if not resolved as the independence of the transmission company is critical to the power reform programme of the government.  

A non-autonomous TCN will impact negatively on the business plans and projections of the winners of the five Generation Companies and 10 Distribution companies unveiled recently by the National Council on Privatisation (NCP), said our sources.

The TCN will act as an independent arbiter between the Generation Companies and the Distribution Companies, confirming actual power that is purchased by the Distribution Companies from the Generating Companies.  “You cannot have that company controlled by the Government or being dictated to by the Minister of Power which will be like the Ministry of Finance asking commercial banks what businesses to fun and not fund. No one is going to invest in power generation under such circumstances,” our source said. Investors are highly concerned about the current impasse. 

The Ministry is however keen on delaying the process because TCN is the last control they have over the power sector. If TCN goes, they will no longer have any form of control over the sector, depriving them of a source of revenue that they have milked in the past.

“We are aware that Manitoba Electric has not fully taken over TCN. There are issues that have to do with process and the issues are receiving the attention of the President and Attorney General is involved in the resolution” said Sam Amadi , Chairman Nigeria Electricity Regulation Commission (NERC). 

Atedo Peterside, Chairman, Technical Committee of the NCP, also acknowledged that there appear to be some bottlenecks but would not be dragged into a debate over which government department or official is responsible for the logjam.

“NCP’s work is to decide on who is to take up a government asset and then it moves on” He said.

Nigeria is estimated to currently have the capacity to transmit just 5,838MVA with a transmission backbone of just 4534km. This means significant investments will be needed in the transmission sector to boost transmission capacity if the government target of 10,000MW by 2015 is to be achieved.

Manitoba is said to be considering withdrawing from the management contract it signed with the Federal Government if the situation persists, sources say. The situation as it is today is that Manitoba is not legally in charge of TCN until the Minister signs the necessary documents. This has made Manitoba’s continuous stay in the process untenable, said sources.

If Manitoba is forced out of the TCN contract, it will be the third company that has had to be dropped from a management contract with TCN. Initial efforts to get Eskom of South Africa and an Indian company to manage TCN also failed.  This will further add to the perception of the high political risk of doing business in Nigeria with consistent failure by government functionaries to adhere to the terms of contracts willingly entered into.

But Amadi says that there is no fear of Manitoba exiting. “In a few days, I expect there will be some clarity on the issues.  Our concern was that the TCN should have a board, and the Federal Government has agreed to set it up”

BusinessDay reports that a former banker with many years of experience has been appointed as the chairman of the proposed board. The President is said to have given the ministry to go ahead to announce the board but the Ministry is delaying the announcement on the pretext that they are still investigating the process that led to the emergence of Manitoba as the management company for TCN.

Atedo Peterside also expressed similar optimism that Manitoba Electric will not leave saying he was confident that the President was working on a quick resolution of the impasse.

Manitoba had earlier in the year signed a US$23 million three year contract to manage TCN.

“MHI expects to turn TCN into a technically and financially efficient, stable, and sustainable company; a company that will be market-driven and capable of utilizing its maximum generation capacity and then distributing the energy throughout Nigeria 24 hours a day, 365 days a year,”  the company’s website stated after the deal was signed.

.

Canada based MHI comes with a strong pedigree in the electricity sector. It is a wholly-owned subsidiary of one of the largest and longest-standing electric power utilities in Canada, Manitoba Hydro. Manitoba Hydro was established in 1880 and currently holds assets approaching $13 billion, with $2.4 billion in annual revenues, and over 6,200 employees.

It is a major power utility, involved in the planning, design, construction, operation, and maintenance of all elements of power infrastructure, according to the statement obtained from the company’s website.

 As a utility operator, Manitoba Hydro serves over 537,000 electricity customers and 265,000 natural gas customers. In addition, Manitoba Hydro exports up to 40% of its energy production to the North American marketplace, which includes over 35 utilities and marketers in the mid-western USA, Ontario, and Saskatchewan. 

 MHI has provided utility and asset management; consulting; and training solutions to over 70 countries worldwide.  In Africa, MHI has electricity projects in Ghana, Liberia, and Uganda among other countries.

A slightly different version of this story has been published in BusinessDay

This blogger had earlier written on the challenges that Manitoba is likely to face  managing TCN. Click the link below to read my earlier post.  

 http://wabir.blogspot.com/2012/07/can-manitoba-deliver-on-nigerias.html

Australian Firm to exploit Nigeria’s Iron Ore deposits

An Australian firm, Energio Limited has completed plans to exploits Nigeria’s rich Iron Ore deposits.

Energio Limited, which is listed on the Australian Stock Exchange (NSE) expects to start exporting its first iron ore shipment in 2014 with a target of 20 million tonnes, according to a report in the Australian, an Australian newspaper, which first carried the report.

The iron ore the company is set to exploit is located in Agbaja, in Kogi State with an estimated deposits of 448 million tonnes, according to a document on the company’s website.

At a current market price of about US$ 120 per tonne, the value of the iron ore deposits at Abaja will have a market value of US$53.8 billion or N8.06 trillion.

Iron ore is the raw material smelted to produce pig iron (metallic iron), which is used to make steel. It is an important metal used in developed and developing economies.  China is reported to have plans of importing up to 400 million tonnes of Iron Ore per annum from Africa from next year.

Speaking to the Australian, Ian Burston, the non-executive Chairman of Energio Limited stated that he expects the price of Iron Ore will stabilise at around $US120 a tonne.

And even if it drops to $US80 a tonne, as some predict, he insists he won't be worried because his planned Agbaja iron ore mine in Nigeria will still make a very handy profit at that price, he told the Australian.

"I've done my figures on (the cost of) getting it onto the ship and it's less than $US50 a tonne," he says. "If the iron ore price goes down to $US80 a tonne, that's not going to worry me.

"Twenty million tonnes a year at $US30 a tonne is a profit of $US600m a year."

"The biggest problem we've got is everyone who doesn't know how to spell iron ore is telling us how to do it."

"Once we are successful, then the floodgates (in Nigeria) will open, because there's so much iron there you can't ignore it." Ian Buston was quoted by the Australian as saying.

Indications are that Energio will likely discover more iron deposits on its Agbaja site. The company says that there is “considerable opportunity for resource growth.” The 488 million tonnes of Iron Ore discovered is currently on a site of just about 14.7km square which is just 15% of the potential exploration site of 90km square that Energio is set to explore for Iron Ore deposits.

Energio holds 15 granted Nigerian Exploration Licenses, which cover a total area of  448 km square, The company notes that of special interest to it are eight exploration licenses covering 303km square including the Agbaja project, considered to have prospects of more iron ore deposits. The company expects that an average of 151 km square of the exploration site will likely have deposits of iron ore, presenting it a substantial potential to significantly increase its iron ore inventory in Nigeria, according to a document on Energio Limited website. 

Other Nigerian towns with significant deposits of are Tajimi, Itakpe, Ajabanoko, Ochokochoko Toto, Farin Ruwa, Birnin Gwari, Maru, Jamare, Kaura Namoda, Kakun, Isanlu, Roni, and Ogbomosho areas. Other areas in Nigeria with significant iron deposits include Agbaja, Kotonkarfi, Nsudde areas in the Northern central and South Eastern zones of the country respectively, according to information available on the Website of the Nigerian Ministry of Solid Mineral Resources, titled Iron Ore Opportunities in Nigeria.

The deposits are mainly found in Mid Niger basin, Benue trough, Anambra basin, Sokoto, Chad and Niger Delta basins and the Lokoja Okene axis. The numbers provided by the Nigerian Ministry of Solid Mineral Resources on its “Iron Ore Exploration Opportunities in Nigeria” document on its website were non-responsive when BusinessDay called.

Nigeria’s Ajaokuta Steel Company was built mainly to exploit Nigeria’s rich Iron Ore deposits but has been unable to do that profitably. 

The above article was first published in BusinessDay on October 7, 2012

The names of the 54 companies bidding for Nigeria’s power distribution companies

Nigeria’s Bureau of Public Enterprises (BPE) yesterday evening released a list of the 54 companies bidding for the 11 power distribution companies created from the unbundling of Power Holding Company of Nigeria (PHCN).

S/N	DISTRIBUTION COMPANIES	NO OF BIDS  RECEIVED	NAME OF CONSORTIUM
1	Abuja Electricity Distribution Company Plc	5	(1)Skipper Nigeria Ltd;(2) NAHCO Power Consortium; (3) KANN Consortium Utility Company Ltd; (4)Interstate Electrics Ltd; and (5)ENL Consortium Ltd.
2	Benin Electricity Distribution Company Plc	7	(1)Southern Electricity Distribution Company; (2) Cable & Rods Company Nigeria Ltd; (3) Copper Belt Consortium; (4) Rockson Engineering Company Ltd; (5) RENSMART Power Ltd; (6) Duncan Freeman Company/Draytom Energy Ltd; and (7) Vigeo Power Consortium.
3	Enugu Electricity Distribution Company Plc	4	(1)Rensmart Power Ltd; (2)Proglobal Power International Consortium;(3)Interstate Electrics Ltd; and (4) Eastern Electric Nigeria Ltd.
4	Eko Electricity Distribution Company Plc	9	(1)OANDO Consortium; (2)Integrated Energy Distribution & Marketing Ltd;(3) NPD Consortium; (4) SEPCO-Pacific Energy Consortium; (5)West Power & Gas; (6)Electric Utilities Nigeria Ltd; (7) KEPCO/NEDC Consortium; (8)ENL Consortium Ltd; and (9) Honeywell Energy Resources International Ltd.
5	Ibadan Electricity Distribution Company Plc	7	(1)Western Consortium; (2) ENL Consortium Ltd;(3) Integrated Energy Distribution & Marketing Ltd; (4)Skipper Nigeria Ltd; (5)ICOMM Energy Ltd; (6) Electric Utilities Ltd; (7) and KEPCO/NEDC Consortium.
6	Ikeja Electricity Distribution Company Plc	10	(1)Rockson Engineering Ltd; (2) SEO International; (3) OANDO Consortium; (4) Amperion Power Distribution Co Ltd; (5)Honeywell Energy Resources International Ltd; (6) Integrated Energy Distribution & Marketing Ltd; (7)West Power & Gas Ltd;  (8)Vigeo Holdings, Gumco, African Corporation AFC & CESC Consortium; (9) Daniel Power Plant Company Nigeria Ltd; and (10) KEPCO/NEDC Consortium.
7	Jos Electricity Distribution Company Plc	2	(1)Masters Energy Oil & Gas Ltd; and (2) Aura Energy Ltd.
8	Kaduna Electricity Distribution Company Plc	2	(1)NAHCO Energy & Power Ltd; and (2) Skipper Nigeria Ltd.
9	Kano Electricity Distribution Company Plc	2	(1) Sahelian Power SPV Ltd; and (2)Profile Energy Consortium Ltd.
10	Port Harcourt Electricity Distribution Company Plc	3	(1)Utility Integrated Management Services Ltd; (2) Rockson Engineering Company Ltd; and (3)4Power Consortium.
11	Yola Electricity Distribution Company Plc.	3	(1)SNECOU Group of Companies Ltd; (2)Vivadis Power Ltd (ORTECH Consortium); and (3)Integrated Energy Distribution & Marketing Ltd.
TOTAL		54

The release states that prospective core investors, who must be local and/or international power distributors or investors with power distributors as technical partners, 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 Federal Government of Nigeria.

According to the transaction deadline, the evaluation of the technical bids will take place between August 14 and 28, 2012. The National Council on Privatisation (NCP) will approve the results of the technical evaluation by September 11, 2012.

The deadline for the shortlisted bidders for generation companies to submit their letters of credit is September 18, 2012 while October 2, 2012 is the deadline for shortlisted bidders for distribution companies.

Consequently, NCP’s approval will pave way for the opening of financial bids of the shortlisted investors.

The BPE will on September 25, 2012 open the financial bids of prospective investors for the generating companies while October 10, 2012 is the date for the opening of the financial bids for the distribution companies.

The announcement of the preferred bidders for the generating companies is October 9, 2012 while October 23, 2012 is the date for the announcement of the preferred bidders for the distribution companies. 

The Nigerian electricity industry has been unbundled into generation and distribution companies and a single transmission company with a view to encouraging private sector participation and attracting foreign and local investment into the Nigerian power sector to ensure economic and reliable electricity supply.

54 investors bid for 11 electricity distribution companies in Nigeria

Nigeria’s power reform process is on track as the Bureau for Public Enterprises (BPE) announced this evening that it has received bids from 54 investors for 11 electricity distribution companies put up for privatisation. Today was the deadline set by the BPE to receive technical and financial proposals from investors interested in buying the distribution companies unbundled from the Power Holding Company of Nigeria (PHCN).

Namadi Sambo, Nigeria's Vice President and Chairman National Council on Privatization

The Federal Government of Nigeria intends to sell as much as 70% of its stakes in the distribution companies to interested investors.  The Nigerian government hopes that selling the electricity companies will not only bring the required efficiency in their management but also attract the significant level of investment required to meet Nigeria’s electricity needs.

Nigeria current produces less than 5000MW of electricity against an estimated need of about 30,000MW.

The breakdown of the bids received by the BPE shows that five companies are bidding for Abuja Electricity Distribution Company Plc, Seven companies are bidding for Benin Electricity Distribution Company Plc, Three Companies are bidding for Enugu Electricity Distribution Company Plc, Nine Companies are bidding for Eko Electricity Distribution Company Plc while Seven Companies are bidding for the Ibadan Electricity Distribution Company Plc.

Ten companies are bidding for Ikeja Electricity Distribution Company Plc, Two Companies each are bidding for  Jos Electricity Distribution Company Plc, Kaduna Electricity Distribution Company Plc and Kano Electricity Distribution Company Plc. Also Three companies each are bidding for Port Harcourt Distribution Company and Yola Electricity Distribution Company Plc. 

The BPE guidelines states that prospective core investors must be local and/or international power distributors or investors with power distributors as technical partners. The investors will be responsible for operating the distribution companies, making the necessary investments to improve the distribution network.

The transaction timeline reveals that the evaluation of the technical bids will take place between August 14 and 28, 2012. The National Council on Privatisation (NCP) will approve the results of the technical evaluation by September 11, 2012.

The deadline for the shortlisted bidders for generation companies to submit their letters of credit is September 18, 2012 while October 2, 2012 is the deadline for shortlisted bidders for distribution companies.

 NCP’s approval will pave way for the opening of financial bids of the shortlisted investors.

The BPE will on September 25, 2012 open the financial bids of prospective investors for the generating companies while October 10, 2012 is the date for the opening of the financial bids for the distribution companies.

The announcement of the preferred bidders for the generating companies is October 9, 2012 while October 23, 2012 is the date for the announcement of the preferred bidders for the distribution companies. 

The Nigerian electricity industry has been unbundled into generation and distribution companies and a single transmission company with a view to encouraging private sector participation and attracting foreign and local investment into the Nigerian power sector to ensure economic and reliable electricity supply

Can Manitoba deliver on Nigeria’s electricity needs?

Canadian based Manitoba Hydro International (MHI) takes over the management of the Transmission Company of Nigeria (TCN) today and the question on the minds of most Nigerians is if the company can deliver on its promises.

President Goodluck Jonathan 

In a press release on its website, the company has already outlined its plans for the TCN. MHI says it would be targeting three functional areas in the management of TCN operations. The three key functions that MHI plans to reform in the operation of TCN are its Market Operator (MO), System Operator (SO), and Transmission Service Provider (TSP) functions.

During the term of the three year contract, which will cost the Nigerian government $23 million, a key objective for MHI will be to reorganize TCN such that the TSP becomes a separate entity from the MO and SO allowing it to become commercial company.

“MHI expects to turn TCN into a technically and financially efficient, stable, and sustainable company; a company that will be market-driven and capable of utilizing its maximum generation capacity and then distributing the energy throughout Nigeria 24 hours a day, 365 days a year,” states the press release from MHI.  

A big challenge with the Nigerian power system, say those familiar with the sector, is the inefficiency of the transmission system resulting in a good chunk of the electricity generated being wasted.

 To resolve Nigeria power transmission challenge, MHI says it will have to focus on developing the capability of local personnel.

Specifically, MHI states that during the term of its contract it would be hoping to ensure a reliable, efficient, and cost-effective network for the transmission of electrical energy and help facilitate the increased availability and reliability of high voltage electricity throughout Nigeria.

Develop TCN’s technical, financial, and managerial capability to build for its long-term future and sustainability.

Improve financial management and increase profitability in line with modern business practices, ensuring the commercial viability of TCN and creating an environment conducive to private sector investment.

Develop an organizational structure for TCN such that the electricity transmission business (i.e. the Transmission Service Provider) can be separated from the MO and SO activities and incorporated into a distinct commercial TSP company, capable of being privatised on a long-term concession. The reorganisation will enable the MO and SO activities to operate as separate entities or as an Independent Systems Operation (ISO) company with two distinct units.

 Introduce appropriate modern business practices and effective application of information and communications technology; improve the overall efficiency and skills of the local personnel so that they may fully contribute to the effective management, operation, and performance of the company.

MHI’s main challenge however will be in tackling Nigeria’s aged powered transmission lines. A 2009 paper by Sunday Onohaebi of the University of Benin discloses that the last transmission line was built in 1987. The paper reveals that there were about 4,144 power outages in 2005, with the most common cause of power outages being “transmission line constraints, shunt reactor problems, overloading of transformers and vandalisation of transmission lines”

The challenges are steep. Just about 5.4 million Nigerian households are said to have access to the current epileptic power supply according to the Nigeria Electricity Regulation Commission (NERC).

Figures from NERC shows that Nigeria has installed generation capacity of 8,663MW but with only about half of this (4,300MW) available. On the transmission side, the country has the capacity to transmit just 5,838MVA with a transmission backbone of just 4534km. The challenge faced by Nigeria becomes glaring when it is realized that South Africa with a population of 50 million has installed capacity of 40,000MW while Egypt with a population of 85 million has installed capacity of about 30,000MW. The NERC estimates that Nigeria should currently be generating 100GW of electricity which would require total investment of $300 billion.

At the current rate of Nigeria’s economic growth of about 7% per annum, Nigeria’s energy demand is estimated to hit 28,360MW in 2015 and over 50,000MW by 2020. Nigeria currently generates less than 5,000MW. The government hopes that the current effort at privatising the power sector will create the needed platform to attract the much needed private sector capital to drive growth in the power sector and meet Nigeria’s energy needs. It is estimated that country will need about $40 billion of investments in the power sector between now and 2020 to attain the desired target 28,000MW.

The technical capacity of MHI to deliver is not in doubt. Canada based MHI comes with a strong pedigree in the electricity sector. It is a wholly-owned subsidiary of one of the largest and longest-standing electric power utilities in Canada, Manitoba Hydro. Manitoba Hydro was established in 1880 and currently holds assets approaching $13 billion, with $2.4 billion in annual revenues, and over 6,200 employees.

It is a major power utility, involved in the planning, design, construction, operation, and maintenance of all elements of power infrastructure, according to the statement obtained from the company’s website.

 As a utility operator, Manitoba Hydro serves over 537,000 electricity customers and 265,000 natural gas customers. In addition, Manitoba Hydro exports up to 40% of its energy production to the North American marketplace, which includes over 35 utilities and marketers in the mid-western USA, Ontario, and Saskatchewan

 MHI has provided utility and asset management; consulting; and training solutions to over 70 countries worldwide.  In Africa, MHI has electricity projects in Ghana, Liberia, and Uganda among other countries.

The biggest challenge however for MHI in its Nigeria’s operation, would most likely be navigating Nigeria political minefield where entrenched selfish interests will be waiting to discredit its operations for purely selfish motives. It is also not clear how much support the company will get from the federal and state governments in making the required investment in the transmission network to make the desired impact. 

Hopefully, MHI’s entrance into the Nigerian electricity sector will not end like that of Pentascope or Virgin Nigeria. Both ended very badly.  Nigeria needs MHI to succeed more than they need the $23 million management fee they are getting. 

What foreign investors hate about Nigerian companies

It is interesting how a good number of Nigerian companies complain of lack of capital to execute their expansion plans but do everything to ensure that they are not attractive to investors that could provide them with the capital they need.

Oscar Onyeama, DG, NSE 

As a financial journalist, I have the privilege of being in contact with several investors seeking to invest in Nigerian companies. However, most of them have similar complaints about Nigerian companies.

The common complaint is lack of information. It is not possible to make an investment without information. It is also not possible to monitor an investment without information.

Most Nigerian companies however see no need to provide information about their businesses. It is so bad that even listed companies do not consider it appropriate to provide information about their finances. In a modern world, the first place most investors go in search of information about a company is the company’s website.

I am not certain how many companies listed on the Nigerian Stock Exchange (NSE) have a website but they are few. Beside listed banks, most other companies do not deem it fit to have a website. Then, even for those that have websites, financial information is not adequately provided. Investors as much as possible want to see the company’s full current annual report. That is the minimum. Most companies will either provide basic financial information or none at all.

The Nigerian Stock Exchange (NSE) and the Securities and Exchange Commission (SEC) have also not helped in this direction. It would have been nice if both institutions would have considered it fit to have a link on their website for all listed companies to have their annual report uploaded. The world is too modern for this basic information about quoted companies not to be easily available.

The other thing that foreign investors hate about Nigerian companies is that they never pick their calls. “The CONTACT US” page on most Nigerian company websites is not functional. Put a call to the contact us number on the website, it is never picked up. The question is why provide a contact us number, if you do not intend to pick up your call. It is really frustrating.

Related to this also, is the contact e mail address provided on the website of most Nigerian companies. Send a mail to the number, and there is a 1 in 10 chance that you would never get a reply. The mails are never responded to. And no apologies are provided to even say we cannot respond to your mail.

Finally, foreign investors also hate the fact that you are never sure when dealing with a Nigerian company. An investor told me recently how he travelled all the way to Nigeria to discuss an investment deal with a company. It was only when the discussions had reached an advanced stage that he was  told by his supposed Nigerian business partner that the license they are talking about is not theirs but belonged to another company. He was only the middleman. The potential investor was so disappointed that he never bothered to continue with the discussions again.

There is also the issue of the governance structure of most Nigerian companies. This is usually dominated by the owner manager while most other directors on the board often tend to be beholden to the owner manager. The implication is that business decisions are always dominated by the owner manager. Most Nigerian companies that have sought listing outside the NSE have found themselves being forced to change their governance structure.

The above challenges are by no means restricted to Nigerian companies. In fact, Nigerian companies are quite ahead compared to most other companies in Sub Saharan Africa. But then, Nigeria is a very attractive market in Africa, and so naturally, there is a lot of interest in investing in the country and so it is expected that companies would subscribe to a higher standard of doing business to make them more attractive globally. 

How Nigeria can achieve an investment grade credit rating

Analysts at rating agencies have listed some initiatives that they will like to see in Nigeria that will help the country achieve an investment grade credit rating. They believe if these initiatives are put in place, Nigeria is one of the few African countries with the potential to attain an investment grade credit rating in the next 10 years.  

Sanusi Lamido Sanusi, Governor, Central Bank of Nigeria. 

Credit ratings usually reflect an opinion by a credit rating agency of an issuer’s capacity to meet its debt obligation when they fall due.

Fitch rating currently rates Nigeria BB- while Standard and Poor’s gives Nigeria a credit rating of B+/B which is three steps away from the minimum investment grade credit rating. A B+ rating is classified as a speculative grade by S&P which means that “is more vulnerable than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial and economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation”

A “B” rating is just grade above the C category of ratings which essentially means that a bond is junk and almost in default. For Nigeria, to move to the investment grade credit rating, it has to move a minimum of three steps upward in rating to an A credit rating which is the minimum credit rating on the S&P country credit rating scale.

“Debt issues that are rated as having higher credit quality are commonly referred to as investment-grade securities. Those that are assessed to have a relatively lower credit quality are often referred to as non-investment-grade, or sometimes speculative grade, securities. The term “investment grade” initially identified debt securities that bank regulators and market participants viewed as suitable investments for institutions such as banks, insurance companies, and savings and loan associations”  according to information on the website of Standard and Poor’s.

Basically, If Nigeria and other African countries can attain an investment grade credit rating; it would make the country’s debts eligible for investment from a wider range of investors. This has the potential of reducing the cost of borrowing in the international markets for both the country and companies operating in the country that may seek to borrow in the international capital markets.

Nigeria’s “B” rating put it in what analysts in the investment community call the “Trash ratio” category. Investors are usually restricted to just about 10% of their portfolio in any issue of countries in this category to reduce the risk of their exposure.

About 30 African countries are currently rated by Fitch ratings and S&P but none is rated as investment grade. So at this year’s 2^nd African Debt Capital Markets conference at the London Stock Exchange organised by the IC Group, publishers of African Banker and other pan African magazines, this blogger asked a key official of a rating agency what it would take for  Nigeria to attain an investment grade credit rating.

He suggests Nigeria will need to get inflation into single digits on a sustainable basis. Nigeria’s inflation figures in the last few years have hovered in the 10% to 20% range and in most cases trending upwards.

There is a need to see appropriate policy response to external reserve losses in periods of rapid fall in crude oil prices. An appropriate policy response that leads to a stronger reserve cushion will help to improve Nigeria credit rating. In this direction, he says, it is good news to hear that the State governments have agreed to the adoption of the Sovereign Wealth Fund (SWF)

He also sees as positive the reforms being pursued by Nigeria in the power sector. It would help the country credit rating if the Nigerian government get the reforms in the electricity sector right. He believes that getting the power sector reforms right could boost economic growth and improve Nigeria’s economic outlook.

It would also help if the federal government is able to tackle corruption. This will mean the government taking concrete and transparent steps to reduce significantly the incidence of corruption especially in the public sector.

For more information on credit rating click here

Does a falling crude oil price threaten Nigerian banks?

The Nigerian naira has come under heavy pressure in the last few weeks as crude oil prices head northwards. Brent Crude prices which closely mirror Nigeria’s Bonny Light dropped to a year low of $97 on Tuesday afternoon reflecting worries over the continuing economic uncertainty in the Eurozone. The fear, rightly expressed, is that if the Eurozone crisis is not resolved, global demand will weaken and consequently demand for crude oil.

Sanusi Lamido Sanusi, Governor, Central Bank of Nigeria

Reuters reported on Tuesday that a lack of U.S. buying interest led to the price of Nigeria’s Brent Crude falling to a six week low due to a significant overhang for July cargoes with three or four Qua Iboe cargoes unsold for July. "Demand is not great. There are probably only one or two cargoes that have traded this week," Reuters quotes a West African oil trader.

Fareed Zakaria on why crude oil prices will remain high

Nigeria, West Africa’s largest economy is already feeling the impact of the global panic. The Nigerian naira slipped to a 22 week low on Tuesday exchanging for N163.68 to the dollar at the Nigerian interbank market. Reuters report that dealers claim that the Central Bank could not meet the demand for dollars in the interbank market. The apex bank sale of $300 million in the market was not enough to meet the demand of foreign investors selling down the naira to get out of Nigerian held positions in securities.

Reuters quotes a dealer in Nigeria’s interbank market as saying that "The demand for the U.S. dollar is not being met at the central bank window. So we have all the oil importers as well as foreign investors exiting short term government securities exerting pressure (on the naira)"

Foreign investors’ hitting the panic button is understandable. Nigeria regularly auction dollars in the interbank market to stabilize the naira at a preferred rate. The dollars sold in the interbank market comes mainly from crude oil sales which brings more than 90% of Nigerian foreign exchange earnings. A steep drop in crude oil prices translates into less crude oil revenues and weakens the capacity of the CBN to defend the naira at its preferred rate. If the CBN cannot defend the naira, the naira will depreciate and depreciation of the naira mean whatever gains foreign investors have been made in currently held positions in government securities will be wiped out by the depreciation in the exchange rate.

The implication is that as long as crude oil prices continue to depreciate, the naira will come under pressure as foreign investors who are the dominant players in Nigeria’s equity and bond markets will want to get out of their positions as fast as possible to cut their losses or hold to their profits. Nigeria was in a similar position in 2008, when the sharp fall in crude oil prices from over $120 per barrel to about $40 per barrel led to a sharp fall in the value of the naira as foreign investors hit the exit button from Nigerian capital and money markets. This led to the eventual collapse of the Nigerian capital market, a rapid buildup of toxic assets on banking books and the eventual failure of some banks.

This time around, Nigerian banks are not heavily exposed to margin loans in the equity markets. However, most banks are heavily exposed to supposedly risk free government bonds on their books. The high yields on these bonds means most banks have exhibited a healthy appetite for federal government bonds. The Nigerian government is not expected to default on these bonds however banks may still incur losses if the prices of the bonds fall as demand for them drops. The liquidity of FGN bonds may also deteriorate if the revenue outlook for the government weakens. It is not however; very clear the extent of the negative impact a drop in liquidity and prices will harm Nigerian bank balance sheets. Nonetheless it is a risk worth watching.

The real risk may be in bank’s exposure to the oil and gas sector of the Nigerian economy. As at the close of 2010, an average of 20% of bank lending were to companies operating in the oil and gas sector of the Nigerian economy. Deterioration in the outlook for the sector is likely to have a significant impact on the balance sheets of most banks depending on the exposure of each bank to the sector.  Though, many Nigerian banks have capital adequacy ratios in the 10% to 20% range, there will always be a challenge if there is a simultaneous deterioration in risks in the sector which impacts on liquidity of held positions.  

Another point of transmission risk for Nigerian banks will for banks exposed through their Eurobond issues. A rapid depreciation in the dollar could mean rise in the naira value and servicing cost of these debts. It is not clear how well most Nigerian banks have been able to hedge this foreign exchange risk in their Eurobond debts.  

Nigeria banks risk to the global crisis will however largely depend on how low crude oil price fall. The lower it falls, the higher the risk. Unlike 2008 however, the sanctions against Iran and the crisis in Syria and even Boko Haram activities in Nigeria may mean that crude oil prices may not fall to 2008 low levels. 

Analyst speak on the impact of Euro crisis on Nigeria 

Barrels for guns and dollars

-an inside look at the stolen crude oil trade in Nigeria’s Niger Delta

In the creeks of Nigeria’s Niger Delta, home to the world’s third largest wetland, more than two million barrels of crude oil are pumped and exported daily, but an estimated 30,000 to 300,000 barrels are also stolen. The Niger Delta is home to about 31 million people, belonging to 40 different ethnic groups, bound by fishing, farming and hunting.

Since 1958 however, the people of the Niger Delta have also been bound by the misery of crude oil exploration.  Farmlands have been destroyed and water ways overtaken by thick slicks of crude oil. Amnesty International estimates that nine million barrels of crude oil has been spilled in the region since the first oil well was dug.

An oil bunkering scene in the creeks of the Niger Delta. 

The degradation of the Niger Delta environment was revealed in a 2011 study by the United Nation Environmental Programme (UNEP).

“In some areas of the Niger Delta, there was heavy contamination present, 40 years after an oil spill occurred”

Surface water throughout the Niger Delta creeks contain hydrocarbons with floating layers of crude oil varying from thick black oil to thin sheets, according to the UNEP study. It cites community actually drinking water from a well that is contaminated with benzene, “a known carcinogen, at levels 900 times above the World Health Organisation (WHO) guidelines.

Life in the Niger Delta is no longer the same.

Forced out of their traditional way of life, the people of the Niger Delta have found a new way to survive. Under the cover of darkness, in the midst of the forests, a trade is booming. Wooden Canoes once used for fishing have become transport vehicles for barrels of stolen crude oil. 

Crisscrossing the wetlands of the Niger Delta are long pipelines carrying millions of barrels of crude oil. These pipelines tap into a fraction of the 34 billion in proven crude oil reserves in the Niger Delta. The region also holds another 186 trillion cubic feet of gas reserves, the eight largest in the world.

The exposed pipelines are the source of stolen crude oil. A  copy of a  report  obtained by this reporter, describes how crude oil is stolen from the exposed pipelines. Hacksaws are used to damage to pipelines. This forces the Oil company to shut down oil flow on the affected pipeline to reduce the impact of any oil spill on the environment. As soon as this is done, the oil thieves install bunkering points on the hacked portion of the exposed pipes and attach hoses and suction instruments to the pipes. As soon as oil starts flowing on the pipelines again,  they siphon the flowing crude to waiting locally made barges; said to be able to store up to 40,000 barrels of crude oil at a time and large canoes called “Cotonu boats”. 

The oil thieves have two markets for their stolen oil, the local refineries in the creeks and offshore large tankers waiting patiently for such cargoes.  The obtained report confirms that the portion that is sold to the local refineries in the creeks is refined into diesel, transferred to a storage depot and then sold in the local Nigerian market.

A local journalist familiar with the Niger Delta says the stolen and locally refined diesel is sold at about N150 (59 pence) per litre compared to the official price of N190 (75 pence) per litre for the imported none locally refined diesel.

“In this region, if you want to be a small-time bunkering baron, you raise N10m (£39,000) and pay to a syndicate, then you get supplies as your share. Many people in the big dark jeeps you see here are in it. People introduce themselves as being in 'oil' business. That is it. It is no big deal here.”

Corrupt security agents are behind the trade, he says, explaining how large barges of stolen crude oil are able to move around the creeks unchallenged.

“If you go to Bonny Island, some soldiers lodge N3m (£12,000) daily in their accounts. My bank source tells me that some top brigade commanders get N25m (£98,000) lodgements at a time. There is piecemeal payment to security operatives and also one time pay-offs.  Has government agencies questioned the source of money?”

The exact number of barrels of crude oil stolen is not certain. But various reports put it between 30,000 to 300,000 barrels of crude oil every day. Ian Craig, Shell’s director for Sub Saharan Africa told an oil and gas conference in Abuja in December 2011 that Nigeria could be losing as much as 150,000 barrels of crude oil a day to the oil thieves.

Tony Attah, Vice President at Shell in Nigeria in an emailed response to this reporter’s enquiry disclosed that the “theft of equipment or leaks caused by crude oil thieves drilling into pipelines or opening up wellheads to steal oil, accounted for 74% of all oil spill incidents and 73% of all oil volume spilled from our facilities in the delta between 2007 and 2011.”

He puts the estimated cost of oil theft at “around $4.5bn a year to the Nigerian state and operators in lost revenue”

A special report by the United States Institute of Peace (USIP) titled “Blood Oil in the Niger Delta” estimates that the loss to the Nigerian economy from stolen crude oil between 2003 to 2008 could be as high as $100 billion.

Despite the significant loss of revenue to the Nigerian state, the government seem reluctant to deal with the massive theft of crude oil taking place in the creeks. The government is not only  scarred but may have been  compromised. 

Andrew Walker explains the reason for the Nigerian government reluctance, in a report in 2009 for the BBC titled “Blood Oil dripping from Nigeria” quoting a source close to the Nigeria’s former president Olusegun Obasanjo as saying that “This is an industry that makes £30m ($60m) a day, they'd kill you, me, anyone, in order to protect it”

"If the president goes after them, they could destabilise the country, cause a coup, a civil war. They are that powerful, they could bring the state down."

Toyin Akinosho,  publisher of “Nigeria Oil and Gas” confirmed the fears expressed by the BBC source in a phone chat with this reporter.

“It is not unusual to hear militants in the Niger Delta boasts that they will make the government uncomfortable if they are prevented from stealing crude oil. They always threaten that they will blow up the pipelines.”

Nigeria earns 90% of its revenues from crude oil exports. So blowing up the pipelines could collapse the government.

But the inability of the government to deal with the situation could also be traced to top level political involvement in the oil theft trade.

Top level involvement in the stolen crude oil business may explain how in 2004 a detained Russian Ship carrying an estimated $2.6 million in stolen crude oil vanished. The Nigerian Navy detained the ship and claimed they handed it over to the Nigerian police. The Nigerian police claimed that they never received any ship from the Navy. The Nigerian legislature launched an investigation into the missing the ship. The report of the investigation was never made public.

Since then, several more ship detainments have been reported in the media. In 2011, security agencies are said to have arrested 145 people and seized among others 18 tankers, 22 vehicles, 16 barges, and 35 locally made boats. Sources familiar with the stolen crude oil trade however say these arrests target just the foot soldiers fronting for local and international financiers.  

There is evidence of well-established international syndicates facilitating the stolen crude oil trade in Nigeria. The route to the international markets for Nigeria’s stolen crude oil is a collaborative effort between the foot soldiers in the creeks, the communities hosting the oil wells and pipelines, the Nigerian Navy and security agencies, and an international syndicate of oil thieves that finance the whole process.

The international syndicate involves well established players in markets for stolen Nigeria crude oil in West African countries like Sao Tome, Liberia, Senegal, Cote d’Ivoir, Gambia supported by Moroccan, Venezuelan, Lebanese, French and Dutch Financiers.

The stolen oil is usually exchanged for cash, illegal drugs and weapons from the ships lurking out at seas waiting for the stolen oil to be delivered. The large tankers that buy the stolen crude oil take them directly to spot markets like Rotterdam or directly to refineries in places like Cote d’Ivoire a neighbouring West African country.

“There are large international syndicates involved in this operation, which also handle the money laundry for the international players” according to the USIP report mentioned earlier.

The report notes that the players in the creeks are just the front end of a complex international trade in stolen crude oil.

“While the Niger Delta youth may handle the local tapping and loading, international players from Eastern Europe, Russia, Australia, Lebanon, The Netherlands and France all play roles in financing, transporting, and laundering the money associated with blood oil. One money trail followed a path from Senegal and Cote d’Ivoir, through French banks and French credit agencies to Syria and Lebanon.” The USIP report revealed.

The report reveals deep involvement in the stolen oil trade of Nigerian Lebanese (those of Lebanese descent, born or naturalized in Nigeria) “especially those with good political connections”

Attah, Shell’s Vice President says only international collaboration can stop the booming trade in stolen crude oil from Nigeria.

“Nigeria needs the cooperation of the international community to checkmate the organised crime syndicates engaged in crude theft.  Buyers can demand assurance that the oil they buy comes from a legitimate source.”

The Nigerian state may be too compromised to stop the massive oil theft taking place, unless as Attah suggests, the international community intervenes.