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CHARTERED INSURANCE INSTITUTE OF NIGERIA 2014 BUSINESS OUTLOOK

CHARTERED INSURANCE INSTITUTE OF NIGERIA 2014 BUSINESS OUTLOOK. FULL PRIVATIZATION OF THE ELECTRIC POWER SECTOR: CHALLENGES AND OPPORTUNITIES. FOCUS: OPPORTUNITIES FOR THE INSURANCE SECTOR IN 2014. CONTEXT: 2014 NATIONAL BUDGET. Part 1: Summary of The 2014 Budget

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CHARTERED INSURANCE INSTITUTE OF NIGERIA 2014 BUSINESS OUTLOOK

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  1. CHARTERED INSURANCE INSTITUTE OF NIGERIA2014 BUSINESS OUTLOOK

  2. FULL PRIVATIZATION OF THE ELECTRIC POWER SECTOR: CHALLENGES AND OPPORTUNITIES

  3. FOCUS: OPPORTUNITIES FOR THE INSURANCE SECTOR IN 2014 CONTEXT: 2014 NATIONAL BUDGET

  4. Part 1: Summary of The 2014 Budget • Part 2: Top Level Review of The Insurance Sector • Part 3: Power Sector Performance & Privatisation • Part 4: Positioning The Insurance Sector CIIN: Full Privaization Of Power Sector

  5. PART 1: SUMMARY OF THE 2014 BUDGET

  6. 2014 BUDGET ASSUMPTIONS CIIN: Full Privaization Of Power Sector

  7. 2014 Budget Summary CIIN: Full Privaization Of Power Sector

  8. 2014 Budget Summary CIIN: Full Privaization Of Power Sector

  9. 2014 BUDGET: KEY SECTORS CIIN: Full Privaization Of Power Sector

  10. OVERALL COMMENTS • Weak fiscal performance • Need to move emphasis to efficiency of expenditure rather than expenditure per se • Economy remains very vulnerable to crude oil volatilities • A budget with reducing capital expenditure, increasing recurrent expenditure, and no visible increase in job creation and poverty reduction initiatives is not likely to achieve inclusive growth • High recurrent expenditure may be a next-best alternative if economy is massively reengineered and provision of key infrastructure is efficiently concessioned • Private sector needs to find a way to become major economic driver, ahead of government CIIN: Full Privaization Of Power Sector

  11. PART 2: REVIEW OF THE INSURANCE SECTOR

  12. 2014 BUDGET: BUDGET OF JOB CREATION & INCLUSIVE GROWTH • In spite of healthy GDP growth rates, poverty is still pervasive • 69% living below the poverty line – NBS estimates • Budget theme suggests realization that growth has been happening without inclusion. CIIN: Full Privaization Of Power Sector

  13. POOR QUALITY OF LIFE CIIN: Full Privaization Of Power Sector

  14. 10 WORST CITIES TO LIVE IN CIIN: Full Privaization Of Power Sector

  15. TRANSPARENCY INTERNATIONAL RATINGS CIIN: Full Privaization Of Power Sector

  16. 2014 BUDGET: BUDGET OF JOB CREATION & INCLUSIVE GROWTH • Why do we have high economic growth rates but high poverty rates? • Insurance is more positively correlated with economic well-being of the individuals than it is to general growth rates • Hence the budget theme is critical for the insurance sector • The question: • Is the budget really structured to achieve growth before talking of inclusive growth? • If it is properly structured for inclusive growth, how will execution ensure achievement? CIIN: Full Privaization Of Power Sector

  17. Source: Swiss Re: World Ins Report 2013 CIIN: Full Privaization Of Power Sector

  18. INSURANCE DENSITYSWISS RE: WORLD INSURANCE REPORT 2013 CIIN: Full Privaization Of Power Sector

  19. THE KEY STRATEGIC QUESTION FOR THE INSURANCE INDUSTRY • Are we going to be beneficiaries of inclusive economic growth growth? • Or • Are we going to be both catalysts/engineers of inclusive growth and beneficiaries of same. CIIN: Full Privaization Of Power Sector

  20. Sector Profile • Gross Premiums have grown by 25% from 2008-2012 reaching N300bn in 2012 • However this is still way below the industry target of N1 trillion • The industry was just 0.06% of GDP compared to its target of 3% of GDP. It was 0.048% in 2008 • According to Mr. Fola Daniel, the Nigerian Insurance Commissioner, only 800,000 adults have policies, a ration of 0.48% • Contribution to national economy is minimal CIIN: Full Privaization Of Power Sector

  21. Sector Profile • It is not very popular • Its reputation has improved but still needs further improvement • There was a lot of optimism after the banking consolidation with the expectation that insurance will be the next growth sector. This hasn’t materialised. CIIN: Full Privaization Of Power Sector

  22. SCETOR PROFILE – CAPITAL MARKEY PERFORMANCE • Market Capitalisation of N200bn (US$1.36bn) in 2006; grew to N550bn ($3.74bn) in 2008 • Today, it is less than N150bn • Lost substantial capital to the 2008 meltdown • The 2012 earnings performance suggests a delayed recovery – Average PAT of N448m and EPS of 7 Kobo • Market capitalisation is a discount of 40% of book value. CIIN: Full Privaization Of Power Sector

  23. THE KEY STRATEGIC QUESTION FOR THE INSURANCE INDUSTRY • Are we going to be beneficiaries of inclusive economic growth growth? • Or • Are we going to be both catalysts/engineers of inclusive growth and beneficiaries of same. CIIN: Full Privaization Of Power Sector

  24. PART 3:POWER SECTOR PRIVATISATION

  25. BACKGROUND • Prior to the on-going reform of the power sector, PHCN had a dominant position in power generation and a monopoly of transmission and distribution • The standard for industrial nations is the generation of 1 gigawatt (1,000 MW) per 1 million people. By this standard, Nigeria will require 168,000MW to support industrialised status. • Underinvestment, weak management and other poor operational practices associated with Govt ownership is thus evident in the installed capacity of 9,334 MW and available capacity of 4,841 MW as at 2010, less than 3% of the standard for industrialised nations. • Some have estimated that the per capita power generation is approximately equivalent to a light bulb per capita. CIIN: Full Privaization Of Power Sector

  26. Background • The costs of private generation of power is very high, making the economy very inefficient and uncompetitive. The cost can be up to 5 times the cost of power generated on the grid: • Current tariff N21/KWh • The poor pay N80/KWh burning candles and kerosene • Manufacturers pay N60/KWh on LPFO and diesel • Others pay N50-N70 on petrol and diesel • The performance of the power sector has thus been very poor. • Power sector became a clog to industrialisation, job creation and economic competitiveness calling for significant reform CIIN: Full Privaization Of Power Sector

  27. Power Sector Reform • The Govt Roadmap for Power Sector Reform was published August 2010. • The Reform objective is to improve efficiency through partial or full privatisation of FGN interest through the entire value chain – generation, transmission and distribution. • The target set for the reform is a ten-fold increase in generation capacity to reach 40,000MW by 2020. • The Nigerian Electricity Regulatory Commission (NERC) is charged with regulatory oversight including licensing, setting tariffs, consumer protection and generally ensuring that the sector achieves its objectives of a quantum leap in an orderly manner. CIIN: Full Privaization Of Power Sector

  28. Power Sector Reform • PHCN was thus unbundled creating 11 DISCOs and 7 GENCOs. Transmission Company of Nigeria (TCN) was created to takeover all transmission assets and manage that critical segment of the value chain. • The Nigerian Bulk Electricity Trading Company (NBET) was created to underwrite purchase risks for the Sector, since GENCOs require “take or pay” contracts for viability. • NBET is to execute Power Purchase Agreements (PPAs) with eligible GENCOs using MYTO 2 (Multi Year Tariff Order 2) • PPAs are to be backed with Partial Risk Guarantees of the World Bank. CIIN: Full Privaization Of Power Sector

  29. Power Sector Reform • NBET will thus guarantee that GENCOs will be paid for power supplied to TCN. • TCN is under the management of Manitoba Hydro International Limited • The Nigerian Electricity Liability Management Company assumed all the liabilities of the unbundled legacy companies including pension and terminal benefits of staff. This is a major investment by Government in the success of the reform. CIIN: Full Privaization Of Power Sector

  30. Privatization • BPE received 929 bids • 207 bids were prequalified • 152 met the requirement to pay $20,000 non-refundable deposit to gain access to the data room and perform due-diligence • Five preferred bidders emerged for the GENCOs and ten preferred bidders for DISCOs • The new owners have taken over the assets and operations CIIN: Full Privaization Of Power Sector

  31. SUMMARY OF FUNDING REQUIREMENTS CIIN: Full Privaization Of Power Sector

  32. FUNDING REQUIREMENT OF DISCOS CIIN: Full Privaization Of Power Sector

  33. FUNDING REQUIREMENT OF GENCOS CIIN: Full Privaization Of Power Sector

  34. Transmission Company of Nigeria • Funding Requirement in the next 5 years: • $2.416bn CIIN: Full Privaization Of Power Sector

  35. CHALLENGES • The operations of TCN could emerge as the weakest link in the chain. • While GENCOs and DISCOs are now substantially privately owned and controlled, TCN is under private management under contract with government • Ensuring reliability of the transmission grid lines is a huge responsibility. Failure means the Government risk underwriter, NBET, will continue to underwrite transmission losses. This must not be at a level where paying for it breaks down. CIIN: Full Privaization Of Power Sector

  36. CHALLENGES • It is also important that MYTO 2 works well, since the sector will continue to be subject to tariff control • There are also concerns that time may well reveal weaknesses in the operational capability of some of the successful bidders. • Overall the rollout process and sector dynamics is more challenging than Telecoms; • But overall, it is expected that the size and impact of the sector will dwarf telecoms within a decade. CIIN: Full Privaization Of Power Sector

  37. PART 4: POSITIONING THE INSURANCE SECTOR

  38. HISTORICAL PERSPECTIVE • So far, the insurance industry has been peripheral to major transformational initiatives in key sectors • The results of this approach are evident in the current profile of the sector • The Power sector is set for a major transformation. It will be slower and more difficult than the Telecoms sector • But it will dwarf the telecom sector within a decade CIIN: Full Privaization Of Power Sector

  39. THE KEY STRATEGIC QUESTION FOR THE INSURANCE INDUSTRY • Are we going to be beneficiaries of inclusive economic growth growth? • Or • Are we going to be both catalysts/engineers of inclusive growth and beneficiaries of same. • Are we going to provide service to the US$8.7bn of assets to be acquired over the next five years; or are we going to be part-financiers? CIIN: Full Privaization Of Power Sector

  40. ISSUES TO BE ADDRESSED IF THE SECTOR WILL BE CATALYTIC • Strong vision at the industry level • Strategic industry leadership • Recapitalisation • Human Capacity Building • More effective regulatory enforcement: CIIN: Full Privaization Of Power Sector

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