ENDSIGHT ISSUE PROFILE: Nigeria Power Sector
October 2013
Overview
Nigerian power projects should be a strategic priority for investors and EPCs because:
1) A large pipeline of undeveloped projects with diverse potential financing sources
2) Recent reforms enabling privatization and improving governance
3) New vehicles for financing, including risk capital for project development
4) An opportunity for revenue in a large and expanding economy1 with 160 million people
and a projected average annual growth rate of almost 7% from 2010-2050.2
Key Considerations
FDI Is Flowing – U.S. Companies Are Late to the Game. Nigeria is a top 20 destination for
foreign direct investment in the world and receives the largest amount in Africa.3
Nigeria’s Power Sector is Deeply Underdeveloped: Nigeria has an installed electricity
generation capacity of only about 4,500 MW. Nigeria has no solution to develop and finance
its projected infrastructure investment requirements of $350 billion over the next ten
years4 and $2.9 trillion over the next 30 years5.
Diverse Generation Opportunities. Lagos State alone is equal to the entire economy of
Kenya. EPCs will find opportunities across Nigeria using a variety of technologies as the
government diversifies the power sector with more coal, hydro, and renewable projects.
Funding Deficit or Project Deficit? Recent growth in Sovereign Wealth Funds (SWFs),
securities, and DFI funds are creating new financing opportunities, but financiers claim the
weak pipeline of developed projects is a larger constraint than a lack of funds.
Dual Privatization Opportunity: Nigeria is likely to continue its current model of
commissioning new plants and then packaging and selling the built plant to an Independent
Power Producer (IPP) with permits and a Power Purchase Agreement (PPA) in place (see
below). EPCs may have opportunities to bid on engineering and construction contracts as
well as IPP agreements on pre-commissioned plants without spending resources on project
development. As the regulatory environment for privatization improves, Nigeria will
increasingly rely on the private sector to develop power projects.
1
Femi Aribisala, Stratfor, July 2013
Citigroup, February 2011
3 United Nations Conference on Trade and Development (UNCTAD); Stratfor, July 2013
4 African Development Bank (AfDB), July 2013
5 Shamsudeen Usman, Minister of National Planning, on required investment for the Nigeria’s
Infrastructure Master Plan, July 2013
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Significant IPP Risk: As of August 2013, Nigeria is utilizing only 58 percent of installed
generation capacity (2,628 MW) due to sabotage, theft, and transmission issues – entire
power plants have been rendered nonoperational. The result could be catastrophic for an
IPP dependent on power generation revenue. Considerable due diligence and risk
mitigation through insurance and security investments must be undertaken. Oil and gas
projects will likely be unattractive due to security threats, but technologies such as coal,
hydro, thermal, and renewables should be seen as opportunities.6
Sources of Financing Energy Projects in Nigeria
Sovereign Wealth Funds, namely the Nigerian Sovereign Investment Authority (NSIA)
Infrastructure Fund, is looking for large power projects and willing to invest a small amount
in project preparation (see below). NSIA has partnerships with GE and IFC.
Development Finance Institutions
 IFC expects Nigerian infrastructure funds to reach $2 billion in 2014, but it is currently
only financing $1 billion per year due to an inadequate project pipeline. IFC will fund
risk capital for power sector project development in Nigeria. African power projects
represent one of the most profitable areas of the entire IFC portfolio.
 Africa Finance Corporation specializes in infrastructure and is a leading source of risk
capital.
 Also, African Development Bank, partners of the EU-Africa Infrastructure Trust Fund
(the largest African infrastructure facility), U.S. Export-Import Bank, and OPIC.
Capital Markets
 Sovereign Infrastructure Bonds: The Nigerian Securities and Exchange Commission has
approved Nigeria’s first infrastructure investment fund of about $100 million
 Pension Funds: Nigeria has 6-8 pension funds that could invest in infrastructure.
International pension funds are also an option, particularly from South Africa.
African Banks can finance developers with risk capital for feasibility studies, legal fees, and
other project development expenses.
Private Equity, including US PE firms active in Africa, may offer risk capital to develop
access to a viable, bankable pipeline of projects
Power Privatization Schemes
Build-then-Privatize
The Government of Nigeria is privatizing 10 gas-fired power plants under development by
Niger Delta Power Holding Company (NDPHC) as part of the National Integrated Power
Project (NIPP) initiative launched in 2004. The NIPP plants will add more than 5,000 MW to
the Nigerian grid, doubling the existing installed capacity. Prior to their sale, plants will be
fully operational and contracted, complete with contractor warranties and fully agreed
long-term power purchase, gas supply, interconnection, and other project agreements. Sale
of the NIPP power plants will allow 80 percent private ownership interest in each of the 10
generating companies with the NDPHC holding 20 percent interest. Prequalification is
6
Ian Bremmer, Eurasia Group, October 2013
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complete and the process is on track to have negotiations closed by June 2014, when power
plant construction will be completed. Proceeds from the privatization sales will be
reinvested in the power sector, starting with transmission infrastructure before refocusing
on additional power generation opportunities.7 EPCs interested in construction and
engineering contracts should engage now in anticipation of a second wave of build-thenprivatize power projects.
Project Development
The NIPP serves as a bridge to open up the power sector to private developers. The
Nigerian government is seeking to diversity sources of energy beyond gas. Nigeria is also a
producer of coal, making the coal plants a strategic priority. While the national grid enables
power development almost anywhere in Nigeria, EPCs looking to develop projects will find
certain regions create better enabling environments for particular technologies. In the
North, weak infrastructure and better solar irradiation creates opportunities for renewable,
off-grid energy production – renewables also typically command a higher tariff in Nigeria. In
the Northwest and North Central regions, hydropower is a viable option. In the South,
existing gas infrastructure makes thermal energy more attractive.
Mitigating Risk
Prospective IPPs should conduct significant due diligence to evaluate local political risk, the
government has prepared enforceable agreements, and the NDPHC has the resources to
administer its minority stake and meet contractual obligations. For example, IPPs should
ensure that PPAs compensate for total generation capacity rather than megawatts delivered
to the grid.
The Nigerian Sovereign Investment Authority (NSIA)
The NSIA was approved in May 2011 to lead Nigeria’s SWFs, replacing the Excess Crude
Account (ECA). Launched with initial capital of $1B from the ECA, NSIA oversees three SWFs
aimed at achieving long-term economic growth and remains susceptible to oil price
fluctuations. The ECA has yet to be entirely merged with the new SWFs and is reported to
have approximately $5B in capital as of July 2013.
The NSIA is an independent authority governed by a Board of Directors and has signed
MOUs with General Electric (GE), African Finance Corporation (AFC), and International
Finance Corporation (IFC). KPMG was retained to source management, JP Morgan was
appointed global custodian, and Cambridge Associates serves as investment consultants.
The NSIA will receive monthly funding from Nigeria’s oil and gas profits into the following
funds with their respective initial capital:
Nigerian Infrastructure Fund (NIF) – $325M: NIF invests in infrastructure that
results in financial returns, stimulates growth, diversifies the Nigerian economy,
attract foreign investment, and create local jobs. Potential investment areas include
transportation, energy and power, water, and agriculture. The NIF will be mostly
managed in-house and in the future, NSIA intends to outsource to external fund
managers. Currently, NSIA relies on potential projects to be brought to them for
consideration.
7
Keith Larson, Hogan Lovells US LLP, August 2013
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Future Generations Fund (FGF) – $325M: FGF invests in a diversified portfolio of
growth investments to provide future generations of Nigerians a savings base for
the time when hydrocarbon reserves are exhausted.
Stabilization Fund (SF) – $200M: SF provides fiscal stabilization support in times
of severe economic stress, including oil price shocks.
Unrestricted Funds – $150M: A reserve fund for the other funds.
For more information, please contact Elizabeth Bradley at
elizabeth@endsightconsulting.com.
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