NIGERIA
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Nigeria’s power privatisation reaches its final act
Sola Arifayan and Chukwubuike Onwuzurumba of Ikeyi & Arifayan spoke with IFLR1000 about Nigeria’s power sector privatisation
distribution infrastructure in private sector hands, the reforms hope to completely re- shape the industry. Sola and Chukwubuike discuss the process, its success so far, re- maining risks and what it might mean for Nigeria’s diesel and petrol generator-dependent economy.
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When did you begin working on power sector laws and regulations and how has your practice developed since then? I started in 2000 with Arthur Andersen. Arthur Andersen was part of a group that was engaged by the government to do the work that resulted in the passage of the Electric Power Sector Reform Act (2005). I joined when that bit of work was running from 2000-02 and the Act was drafted as part of that exercise, al- though it did not get passed until March 2005.
By mid-2005, the Bureau of Public Enterprises (BPE), the entity largely re-
sponsible for driving the reforms, felt a need to fast track the reforms provided for in the Act. I think the background to that was that the end of the adminis- tration of former president Olusegun Obasanjo was approaching and BPE was under some pressure to implement the Act. This resulted in the legal work for the corporate restructuring of the PHCN (Power Holding Company of Nigeria), the legal drafting of the market rules for the sector (based on a draft prepared by BPE’s market design consultant) and the legal work for the transfer of the assets of the PHCN. I led the engagement while at my former firm. This also led to my serving on a committee set up by the then Minister of Power and Steel to coordinate the initiation of the Transitional Stage of the competitive market in the NESI. I went into partnership at Ikeyi & Arifayan in February 2007 and I have since spent about 50% of my time doing legal work in the sec- tor, advising various parties on sector rules and regulations, as well as contractual and other legal matters.
What’s your evaluation of the power sector privatisation process so far? What stage is it at, has it achieved what you hoped it would? I am somewhat surprised by how well the transactions have turned out. Starting in 2011, the government of Nigeria has been trying to privatise its entire power sector infrastructure apart from the transmission system, which is going to remain owned by the government through the Transmission Company of Nigeria Plc (TCN). Transmission here is defined as the conveyance of electricity at voltage levels equal to or more than 132kV. All assets for the generation and distribution of power below 132kV and delivery to customers are being privatised to strategic investors through a sale of majority shareholding. Nigeria’s three hydroelectric dams are being concessioned.
Over the last year and a half the government has gone through the process of privatising, essentially offering up for sale as separate companies entities in
he privatisiation process, initiated in 1999 and reaching a definitive milestone in 2013, has been one of the most talked about developments and investment opportunities in the region. In placing all power generation and
the power sector that up to this date have operated as a single, integrated com- pany. Although the successor companies that are being privatised were all regis- tered in November 2005, they continued to operate as one “PHCN”. The arrangements stipulated in the Market Rules for a shadow market were never implemented. It is not clear that the commercial and communication infra- structure required for these entities to operate independently in a functional power market are in place or have been adequately tested. Potential investors have raised many issues about the transactions and industry contracts and many of these issues remain unresolved. Yet on the February 21 2013, winning bidders for virtually all the companies offered for privatisation paid the initial 25% of the consideration. I find it surprising – if you had asked me three years ago if it was possible to privatise the system so quickly, I would have said no, we are not ready.
Hopefully the system will be able to accommodate the inevitable shock that
will come from the transition from a vertically and geographically integrated mo- nopoly to a sector with multiple players across various aspects of the value chain.
What measures did the government take to provide security to investors and incentivise bidders? There are two aspects to that. On incentives, investments in power utilities attract what in Nigeria is called ‘pioneer status’. This is a tax holiday for the first three years of a company commencing business renewable for up to five years. What that means is that essentially there should be no taxes to be paid by those companies for the first five years, including dividends paid out to shareholders. There are also other fiscal incentives for gas-fired generation and tax and duty exemptions for downstream gas-to-power generation.
“ 34 ENERGY & INFRASTRUCTURE | SUB SAHARAN AFRICA 2013
If you had asked me three years ago that if Nigeria were to privatise the assets, or if it was possible to privatise the system so quickly, I would have said no
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