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Distinguished Guests, Ladies and Gentlemen,

It gives me great pleasure to accept the invitation of this Forum to help outline "What Next after the Privatisation of PHCN Assets?"

Before doing so, I must emphasis that there is still some "unfinished business" with the privatisation of the Power Holding Company of Nigeria (PHCN) Successor Companies and so, like accomplished sportsmen, I believe we must stay focused and not take our eyes "off the ball" until the "game" is truly over.

Let us remember that, from the onset, a total of 19 PHCN Successor Companies were scheduled for "privatisation" and these were broken down into 11 Distribution Companies ("Discos"), 7 Generation Companies ("Gencos") and the Transmission Company of Nigeria ("TCN"), which was later "privatised" via the appointment of a management contractor (Manitoba Hydro International of Canada) in the second half of 2012.

By the payment deadline of 21 August, 2013, private sector core investors had paid a total of $1.130 bn for 60% equity controlling stakes in nine Discos (namely Abuja, Benin, Eko, Ibadan, Ikeja, Jos, Kano, Port Harcourt and Yola). The core investors for the 10th Disco (Enugu) paid their $126m late and so the National Council on Privatisation (NCP) directed that they must pay a late penalty fee equal to Libor + 5% for the number of days for which they were in default and the preferred bidder for the 11th Disco (Kaduna), which has a separate time-table, is expected to pay a total of $163m within 6 months, thereby completing the $1.419bn that was originally targeted from the sale of all 11 Discos.

For the Gencos, a total of $1.077bn was received from the core investors by the same 21st August, 2013 payment deadline date for equity stakes ranging between 51% and 100% in 4 Gencos (namely Egbin, Geregu, Kainji and Ughelli), while the core investor for the 5th Genco (Shiroro) completed its $111.6m payment a few days late and will also pay a late penalty fee equal to Libor + 5% for the number of days for which they were in default.

Meanwhile, the preferred bidder for the 6th Genco (Afam) is expected to pay a total of $260m within 6 months, based on a different time-table. For the 7th Genco (Sapele) the preferred bidders are still in default, as they only paid $119.9m out of the $201m that they promised to pay by the deadline date. The NCP has referred this default situation to the Federal Ministry of Justice and so, depending on whether the Reserve Bidder or the Preferred Bidder end up acquiring this asset, the gross proceeds from the sale of the 7 old PHCN Gencos could either be $1.65bn (best case) or $1.55bn (worst case scenario).

It is clear from the foregoing, that there is some unfinished business with the privatisation of Kaduna Disco as well as with the Afam and Sapele Gencos.

Meanwhile, the NCP also approved the sale of two newly completed PHCN power plants (Olorunsogo and Omotosho) via debt for equity swaps with the Chinese contractor that built these plants at valuations of $177.3m and $217.5m respectively.

Accordingly, a grand total of approximately $3.3bn should accrue to FGN coffers from these PHCN Genco and Disco transactions. If the participants and financiers respected the financial rules put in place for these transactions, then a maximum of 70% of this total would have been financed through debt/loan instruments. We know that the lion's share of the financing came via Nigerian banks and so our banking industry is now a major stakeholder and a long term player in the Nigerian power sector.

However, it is pertinent to remember that this is really the "beginning of a journey" and not the "end of a journey" as some have mistaken it to be. As we all know, the purpose of privatising the Discos and Gencos was not just to transfer ownership of the assets. The primary purpose was to bring into play new owners with "deep pockets" who could finance and/or access financing for the rapid restoration of lost capacity and/or add significant new capacity to make up for decades of Government neglect and mismanagement.

As the table below shows, the 9 PHCN Gencos (including Omotosho and Olorunsogo) only had available capacity of 2,692 MW as at 10th Sept. 2013, as against a total installed capacity of 6,976.40 MW:-

                                     Available                               Installed
                                    Capacity                               Capacity
                                 (Mid-Sept 2013)
                                     -----------------                ----------------
Kainji + Jebba.                       509                            1,338.4
Shiroro*                                 450                               600
Afam*                                     75                               776
Geregu.                                 138                               414
Sapele.                                   90                             1,020
Ughelli (Delta).                       340                               900
Egbin.                                   880                            1,320
Omotosho.                              42                               304
Olorunsogo.                           168                               304
                                         ---------                           ----------
TOTAL.                               2,692                            6,976.4

Financing the necessary capex to fund this incremental 4,284.4 MW that is required to achieve full capacity (crudely estimated @ $1m per MW approx.) will cost an additional $4.28bn.

For the Discos, some very significant investments will also be required to improve efficiencies and reduce Aggregate, Technical Commercial and Collection Losses. Based on the proposals submitted by the core investors, new meters will be installed over the course of the next 5 years as follows:-

                    No. Of New Meters
                    --------------------------
Year 1.                 1,078,927
Year 2.                 1,433,373
Year 3.                 1,466,464
Year 4.                 1,476,461
Year 5.                 1,062,773
                         -------------------
                           6,517,998

At an estimated weighted average cost (purchase and installation) of N25, 000 per meter, this amounts to over N150bn. The bulk of this should be recoverable from the consumer, but then the distribution infrastructure also needs to be modernised and expanded to achieve greater coverage. The 11 Discos are projecting annual capital expenditures in the region of N60 billion per annum for each of the next five years.

Transmission is the "life-blood" of this entire electricity "eco-system" and it is also potentially the "weakest link" at present. I am reliably informed that, currently, stranded capacity due to transmission evacuation constraints is in the region of 100 MW. The other "weak link" is gas supply and gas transportation, as Nigeria is predominantly reliant on gas-fired power plants. While gas supply constraints arising from capacity shortfalls/lags can be foreseen, the impact of pipeline vandalisation is not so predictable and can induce damaging shocks to the health of the entire electricity value chain. I am reliably informed that at present the stranded generation capacity due to gas supply and transportation constraints is in the order of 1,500 MW.

In answer to my enquiry, the Presidential Task Force on Power (PTFP) listed various funding sources which have been identified and which can be tapped to achieve the rapid expansion and modernisation of our transmission infrastructure. These include the Africa Development Bank, the FGN Eurobond, Agence Francaise de Developpement, NDPHC divestment proceeds, Islamic Development Bank and Contractor Financing from China.

The ability of TCN to catch up with generation availability and also keep pace with future expansion will depend on its continued access to financing for its huge capex needs and also its ability to execute and rigorously monitor project implementation to high professional standards. The latter will inspire confidence and open the door to even more funding. Conversely, if that confidence is lost early on, then "third party financing" will dry up and the burden of financing TCN's expansion will fall on the Federal Government of Nigeria (FGN).

Unfortunately, the Board of TCN is yet to get its act together. Since the appointment of a Chairman and some initial board members was first announced some months ago, so much time appears to have been lost in squabbling over who does what, when and how. If TCN does not deliver the goods in 2014, there will be a "crisis of sorts" when the ten NIPP power plants come on stream. The same can be said for the Gas Supply and Gas Transportation arrangements.

From the foregoing, it is obvious that we can only have a Healthy and Self-Sustaining Electricity Value Chain if we are financing the expansion of all components of this intricately interwoven sector and if the various parties are competent, proactive and behaving responsibly. The architecture of the Federal Government's Power Sector Roadmap rests on 7 critical pillars and these are:-

1) Empowering the Regulator (NERC);
2) Establishing a Bulk Trader;
3) Introducing Cost Reflective Tariffs;
4) Engaging a Management contractor for TCN;
5) Privatisation of Gencos;
6) Privatisation of Discos;
7) Strengthening of the Fuel-to-Power Arrangements;

For financiers, an eighth pillar is the transfer of stranded liabilities and non-core PHCN assets to NELMCO.

The healthy value chain becomes self-sustaining when the bulk of the consumers are paying the right price for electricity supplied to them by the Discos, who then pay the Bulk Trader for power wheeled to them in accordance with the Vesting Contracts between the Discos and the Bulk Trader. The Discos also pay a wheeling charge to TCN on the basis of the Use of Transmission Network Agreement (UTNSA) and Grid Connection Agreements (GCAs) which they signed with TCN.

The Bulk Trader pays the Gencos on the basis of the Power Purchase Agreements (PPAs) executed between the Bulk Trader and the Gencos. The Gencos, in turn, pay for the Gas delivered/transported to them and also pay TCN on the basis of the GCA and Ancillary Services Agreement (ASA) that they also signed with TCN.

The tariffs that underpin all these agreements are set by NERC and they should ensure full cost recovery across the entire value chain. The Bulk Trader is also allowed a margin/deduction to cover their own costs so they can remain in business.

In my opinion, FGN should also continue to offer a "safety net" by subsidising the tariffs for the poorest consumers i.e. the R1 and R2 customers. Unlike the much abused petrol subsidy, which is consumed in the largest quantity by the wealthy elite who own multiple gas-guzzling motor vehicles, the electricity subsidy can be targeted so that it is enjoyed exclusively by the very poor who each consume a tiny quantity of electricity via single phase meters.

When all the parties are performing in accordance with expectations, the industry can attain a high growth trajectory and even grow exponentially. Unfortunately, the opposite is also the case and so the growth of the entire industry can be constrained by the limitations imposed by the weakest link in an inter-dependent chain. For instance, NERC's Multi Year Tariff Order 2 (MYTO 2) assumes that the gross system capacity in 2014 will be 9,061 MW. If overall capacity falls significantly on account of the non-performance of one segment, an elaborate system of escrow accounts and/or partial risk guarantees can only keep payments going for so long (a few months) before the Federal Government gets called in to act as an "underwriter" for the bulk trader. This is because almost all the agreements apportion risk in a way that ensures that parties who have "performed" get paid irrespective of whether other parties have defaulted. In essence, most of the agreements are only bankable because they are "take or pay" agreements.

Viewed from this perspective, it is clear that the privatisation of Gencos and Discos represents only two out of the seven important pillars outlined above and which make up the FGN's Power Sector Roadmap. This is not an attempt to down-play the significance of privatisation, but rather it an attempt to highlight and reiterate the vital inter-dependencies that I have alluded to earlier.

In any case, I recall emphasizing in a media interview on 22 August, 2013 that the centre of gravity of Nigeria's electricity sector has already shifted permanently. I pointed out at that time that the fulcrum has already swung in the direction of the private sector on account of the emergence of new owners for the Discos and the PHCN Gencos.

The completion of construction and the ongoing privatisation of the following 10 new power plants being built by the Niger Delta Power Holding Company Limited (NDPHC) in 2014 will bring in additional private sector stakeholders:-

NDPHC Gencos                 Capacity (Net MW)
-----------------               -----------------------
1) Alaoji.                                961
2) Benin.                                451
3) Calabar.                             562
4) Egbema.                            338
5) Gbarain.                             225
6) Geregu.                              434
7) Ogorode.                            451
8) Olorunsogo.                        676
9) Omoku.                              225
10) Omotosho.                        451
                                        ------------------
TOTAL.                                 4,774

At a crude estimate of $1.2m per MW, the sale of an 80% equity stake to core investors will raise close to $5 billion in total and we can expect roughly 70% of this latter figure to be financed in 2014 largely through debt/loan instruments provided by Nigerian banks.

I have been deliberately silent on "greenfield" Independent Power Plants (IPPs), as these should take on a life of their own (in perpetuity) and are not subject to specific payment deadlines at present.

Nigeria's Power Sector Reform Roadmap has caught the attention of the whole world because of the "big bang" approach that was adopted, whereby all the 11 Discos were being privatised in one fell swoop and all the Gencos were being privatised in two distinct phases (9 old PHCN Gencos, followed by 10 new NDPHC Gencos).

In so doing, we have set high standards and helped introduce global best practices at great speed into a sleepy, corrupt and inept industry where workers historically felt it was appropriate to be disrespectful to their customers while exercising monopoly powers and where favoured contractors periodically held PHCN to ransom by seeking cost escalation and abnormal profits rather than completing projects that would deliver the nation from darkness.

My personal views on how to set new standards for the power sector have been expressed publicly on a number of occasions. I believe Nigeria's power sector will benefit from a major paradigm shift from October 2013 when the effective handover of the  bulk of the PHCN Discos and Gencos takes place. In the execution of the privatisation programme, I always favoured strict adherence to rules and argued against the granting of needless waivers and exemptions for minor and sloppy violations even where the rules gave the authorities such latitude to "forgive" minor unprofessional conduct . This is partly because I believe a little dose of indiscipline can easily be allowed to snowball. Besides, I do not like the idea of helping the nation to set dangerous precedents for future transactions.

Additionally, I believe that an industry that is undergoing major transformation, after decades of incompetence and graft, must be made to rapidly adopt high standards in order to signify to all the participants that it is no longer "business as usual". In any case, the "win-win" aspect of the reforms arise from the better alignment of goals between the industry players and the consumer, as the disciplined pursuit of revenue and growth by the Discos and Gencos should translate into many more hours of continuous electricity for the consumer who only pays for electricity supplied and consumed. Accordingly, there should be no place in such a sensitive industry for interlopers and undisciplined participants who are unable to organise themselves to deliver seamlessly against all odds.

Nigeria's banking industry must also play a leading role here in helping to set new high standards for the power sector. In any case, it is dangerous to lend massively to a sector without seeking to proactively raise standards in that sector above the low levels that some of its participants have grown accustomed to through the years.

In conclusion, let us agree to join hands to form a new partnership on the basis of adopting global best practices for our privatised power sector, aided and abetted by learned and responsible financiers.