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