PROF. BART NNAJI , CON, NNOM SPECIAL ADVISER TO THE PRESIDENT ON POWER

1. NIGERIAN POWER SECTOR REFORM An Overview of Power Sector Reforms in Nigeria PROF. BART NNAJI, CON, NNOM SPECIAL ADVISER TO THE PRESIDENT ON POWER CHAIRMAN, PRESIDENTIAL TASK FORCE ON POWER THE BANKERS’ COMMITTEE/BUREAU OF PUBLIC ENTERPRISES TECHNICAL WORKSHOP ON NIGERIAN POWER REFORM 25TH MAY 2011

2. Presentation Overview • Funding of the Nigerian Power Industry in the Past • Reform Process + Service Delivery • Critical Levers of Change • Potential Cost of the Reform • Achievements so far + Strategic Initiatives

3. 3 The Past Source: Presidential Retreat On Power

4. The Potential Rewards from Short Term Service Delivery Improvement (“SDI”) 4 ** Note: Whatever operational changes can be effected through the PTFP’s monitoring activities is going to be of limited marginal value compared to what the country needs over the coming years. We have more than 150 million people. To achieve the same per capita power consumption as South Africa, we would need 120,000 MW. We currently have less than 4,000 MW (available). The NIPP will eventually add an additional 4,700 MW. That is nothing to be sneezed at and it will make a substantial difference in the short term. But, taken on its own, it will do little to effect the radical transformation this is required.

5. The Dynamics of Reform 5 The Nigerian Electricity Supply Chain needs vast amounts of investment – at each point in the value chain. The capital required is enormous and the Government cannot fund even a fraction of the necessary investments. Only the private sector can provide the sums required. But for these investments to take place (on the requisite scale) requires a complex series of interlocking reform interventions. And the success of these interventions requires: the sequencing and prioritisation of the efforts of the PACP & PTFP in light of a real-politick understanding of the dynamics of reform. These dynamics are illustrated in the diagrams overleaf. The first diagram compares the current configuration of ownership & control of the NESI supply chain with the configuration that will need to be in place to attract the mammoth sums of urgently needed capital investment. The second diagram illustrates the interlocking reform steps that need to be taken in order to: a) reconfigure the ownership and control of the NESI; and b) provide the enabling environment for large-scale investment to take place post-divestiture.

6. Targeted Change in Ownership and Control of the Sector 6 Current Configuration Required Configuration

7. Leveraging Pressure Created by Genco & Disco Transactions 7 N.B. The amber boxes are the critical missing components. If we “fix” these 8 components, the dynamics of reform will be self-perpetuating. WB & MIGA Guarantees (during transition) NERC Revival Labour Issues Major tariff change Bulk Trader Completion of existing PHCN & NIPP capacity expansion projects Mgmt Contract Change of ownership and control of Gencos and Discos Modest & stable increase in generation & supply Information pressure system Major FGN investments in power transmission Investment Pressure System T.N.D.F. Super Grid Major FGN investments in gas transportation infrastructure Investor Confidence ELPS Expansion Tens of billions of dollars of private sector investment OB3 Link Momentum on EOIs, RFPs, Due Diligence Transparency CAKK Link Other Medium Term Projects minimum 200MW Per 1 million head of population Resuscitation of the NESI = Transaction Strategy Political Will Eventually… Gas Grid Concession ECONOMIC GROWTH JOBS NATIONAL SECURITY

8. Leveraging (continued) 8 We can use the force of the domestic and international capital markets not just to channel investment into the sector after the divestiture but also as a way to reinforce the government’s ongoing reform efforts. More particularly, as shown in the preceding diagram, the very act of shifting the generating companies and distribution companies into the private sector will ensure that the FGN is subject to sustained pressure to make correlative investments in the two sectors where ownership remains in the Government’s hands, namely: gas transmission and power transmission. And the Genco and Disco transactions will also serve to place added pressure on the government to complete the existing PHCN and NIPP expansion projects.

9. Moving Towards A Self-generating Investment Pressure System: The Nine Levers Of Change 9 * But critical for meeting Roadmap service delivery targets Presidential Task Force on Power

10. Reform and the Bulk Trader 10 The sale of the gencos and discos is dependent on the operationalisation of the Bulk Trader. Investors will not sign a Sale and Purchase Agreement until they have a counterparty with whom they can contract. At this stage in the evolution of the electricity market, bilateral contracts between power producers and distribution companies are not possible. Only a bulk trader (with the ability to sign PPAs backed by bankable guarantees) can bridge this gap. Absent this entity, the entire reform process will grind to a halt, investor confidence will haemorrhage and there will no new procurement of power.

11. The Capital Cost Of Reform – Bounded And Time Limited 11 The transformation of the ownership and control of the Nigerian Electricity Sector is a massive undertaking. And it requires supporting injections of capital by the Federal Government at various points in the supply chain. The scale of this FGN investment is not a bottomless pit with unbounded dimensions. On the contrary, an indicative balance sheet can be drawn up on the basis of estimates. The other point to note about this indicative balance sheet is that the majority of the FGN liabilities that need to be incurred to leverage private sector investment (on a multiple of the FGN injections) are either “one-off” costs or strictly time-limited.

12. 12 Valuations Of The Fgn’s Contingent Liability – In Respect Of The Indemnities For PRGs For IPPs The table below reveals the likely value of the contingent liabilities to which the Government might be exposed in 2015 were it to provide PRG indemnities for PPAs signed on commercial terms* for 9,000 MW * The example shown here assumes a wholesale tariff of N12/kWh.

13. 13 The Opportunity Cost Of Not Incurring The Contingent Liability The provision of PRGs for IPP investments will create a contingent liability that will not become an actual liability (if at all) for at least three years (i.e. until completion of the IPP projects). The maximum actual risk to the government (if it indemnified PPAs for 9,000 MW of power generation)…is likely to be less than $1bn per annum. The opportunity cost of not incurring this liability (and simply waiting until the sector, post-privatisation, becomes commercially viable) is the cost of the GDP that would be lost as a consequence of delayed investment decisions. The cumulative cost of delayed investments – in terms of lost GDP – will be more than 10x higher than the actual cost of incurring the contingent liability.

14. Reform – Milestones Reached 14 • Policy consensus cemented; construction of Roadmap • International investors galvanized (Roadmap launch, Presidential Retreat and investor road shows held in 5 cities) • Commenced privatisation process • NERC Commissioners instated • Payment of monetized benefits • Negotiations commenced on severance and pension payments • Bulk Trader incorporated and licensed • World Bank PRG scheme initiated and fast-tracked • Facilitation of progress towards genuinely cost reflective tariffs • Privatisation strategies agreed by NCP • CPCS appointed as Transaction Advisers • Asset valuations in progress • EOIs for PHCN successor companies received and evaluated • Corporatisation of successor companies • Committee to wind down PHCN constituted • NELMCO operationalised • Preparation of management accounts by Successor Companies • Receipt of World Bank “No-Objection” for appointment of BPI as Transaction Advisers for the TCN Management Contract

15. Reform – Outstanding Milestones 15 Transactions • Prequalification of bidders • Issuance of RFPs • Establishment of data room & conduct of due diligence by bidders • Execution of transactions Transitional Market • Conclusion of negotiations with Labour • Operationalisation of Bulk Trader • Securing PRGs and other guarantees • Implementation of Market Rules & Grid Code • Signing of GSAs

16. 16 Other PTFP Strategic Initiatives Off-Grid Generation to Unserved, Remote Communities SuperGrid Implementation Power Growth via the Bulk Trader Five Year Generation Capacity Projections Proposed Allocation to Major Cities & Industrial Centres Transmission Network Development Fund (TNDF) Future Evacuation from Gbarain Power Station Electric Power One Stop Shop (Investment Information Web Portal) GIS Energy Map Energy Efficiency/Electricity Demand Side Management Issues with Emergency Power Plants

17. 17 Thank You Visit: www.nigeriapowerreform.org for further information.