INTERVIEW Electricity distribution in Nigeria, a major obstacle – Symbion boss
LNigeria is a country of 173 million people, the largest in Africa 173 million people, a large majority of which don’t have access to affordable electricity basically. All over the country, people use diesel generators. The cost of producing power by burning diesel is something like $0.35 to $0.45 per kilowatt depending on location. But Nigeria has abundant natural resources - coal, gas, renewables and of course solar. There is plenty of land where biomass can be planted, and there is hydro. They don’t have to import really expensive diesel - that’s crazy - and it’s happening right across the African continent. Liquid fuel importation is a major source of corruption. If countries focused on getting rid of diesel for power supplies, they would save an absolute fortune. We have a policy at Symbion, which is that we prefer to rely on indigenous fuel resources. It’s only in emergencies that we will consider diesel. Our view is if locally available, fuel sources are used, rather than imports, It’s the best thing a country can do.
It’s pretty obvious that in a country with a 173 million people where just about everybody uses diesel generators, there is a huge opportunity for anybody in the affordable independent power business. We spent two years studying Nigeria before we actually started investing. We spent most of 2012 and 2013 bidding for the acquisition of Ughelli Power Plant. 2013 was when we actually made the investment. In November, we took over the plant.
Transcorp, Woodrock Energy Ltd and Heirs Holdings, mostly other Nigerian companies. Great partners.
When we took over, Ughelli was only producing 160 megawatts, although it has an installed capacity of 972 megawatts. So we started rehabilitation and have been working on that rehabilitation right up until today. Earlier this year, we got the plant up to 650 MW. Then, about three months ago Symbion decided that we had completed our role there. The partnership had created Transcorp Ughelli Power Ltd. We staffed it with our own people and with former employees of the Ughelli Paul Hinks, CEO of Symbion Power, has had a 30-year career in the energy sector, the last five focused on Africa. The independent power producer and engineering contractor builds, owns and operates electricity infrastructure. Since 2012, Hinks has also served as chairman of the Corporate Council on Africa. He was interviewed in the company’s Washington, DC headquarters. His company spent most of 2012 and 2013 bidding for the acquisition of Ughelli Power Plant power plant and worked out fine.
Transcorp Ughelli Power, Ltd. today is a self-sufficient, well managed organization. It doesn’t need Symbion as it did in the early days. We felt that we were at a good point and there was an opportunity to sell our interests. We had a minority position, and so not feeling that our value was as important anymore in terms of the rehabilitation and operation of the power plant - and with an opportunity to sell to our local partners, who were in an acquisitive mode, post-elections interestingly - we made a very amicable deal and exited.
So ours is an investment success story. In less than 18 months, we leveraged our expertise and we exited with a very acceptable multiple on our original investment - in a country where many American companies are frightened to invest. It’s a good story, an important lesson, because a private equity investor is
everything interested, not only in how to get into a deal and invest, but also how to get out and make good money. It’s a great story for Nigeria too.
We have a good pipeline of mostly gas projects, and we are looking at some embedded projects in distribution companies. We are seeking to make new investments where we will have a majority, or larger stake. We would hope that by the end of this year that we invest in another good Nigerian project.
I have been very close to the whole privatization program, so I see what Nigeria is really doing. Yes, the results in megawatts connected to the grid around the country are not yet satisfactory or on the scale they should be. But things have been happening. And generation has been improving. Ughelli Power is one success story. Egbin Power, a plant owned by Sahara Power is another example of the successful rehabilitation of a power plant that wasn’t producing to capacity. . When these plants are fully rehabilitated, it’s not going to be helpful if they are not able to transmit their electricity to the towns and the cities across Nigeria where the power is needed. It all has to go hand in hand. I come from the power industry, and I understand what it means to do a privatization on the scale Nigeria has embarked upon. They did really well until probably early 2014, when things started slowing down.
Let’s be realistic though. For the last 12 months, the election in Nigeria and change of government has delayed the privatization program because everybody has been focused on politics and elections. We are now seeing things start to recover but it may take a while longer for the privatization to get back up to full speed. Unfortunately though, the transmission infrastructure is very poor, and they haven’t been investing in a big way into the system. They must get on with that.
The other significant problem is with the new distribution companies. Distribution is probably the most difficult and risky investment to make in the power sector in Nigeria. To appreciate how difficult it is, you only have to walk around Lagos and look up at the power lines around the city and imagine what it will take to fix them and to go around to connect all the houses and install new meters. Prepayment metering was a condition that the Bureau of Public Enterprises set out for the privatization. I can’t imagine how difficult it’s going to be to get into some of those large blocks of condominiums to put prepayment meters in a place where many people have been used to not paying for electricity.
The distribution companies have a tough job, and some do not have the technical partners I think they need. Personally, I wish that some of the really large power utilities from the United States, UK and other parts of Europe who have a lot of spare cash available could muster the confidence to go into Nigeria and get involved in this. Those are the companies who can sort it out. It is a huge undertaking that needs a lot equity (cash) to be able to fix up those distribution companies. All of the three elements of generation, transmission and distribution must come together for this to be a success, and I think that eventually will be.
How serious is the shortage of available natural gas for generating companies like Ughelli?
I can tell you that Ughelli is already having gas shortage problems, and many of the other gaspowered plants are having problems too. Nigeria flares gas because it does not have the infrastructure to take the gas from where it is to the consumers. A lot of gas is stranded because the investment required for the gas infrastructure has not been made. There are complaints from investors in the gas supply and gas treatment plants who say they can’t get paid sufficient amounts of money to justify the investments. The tariff for gas in Nigeria is around $2.50 cents per MMBtu, compare this only to Tanzania, where gas coming from the south in Mtwara is likely going to be sold to Symbion for around $6 per MMBtu. Gas pricing is a huge subject all over Africa these days. We want cheap gas but the producers say they need higher prices in order to invest more money.
There’s also incessant vandalism and terrorism problems. People are blowing up pipelines. I was told recently that the condensate lines running parallel to the arterial oil pipelines in the delta are being punctured because the condensate can be used for cooking oil. People are cooking with it. And a while ago I was told that something like 21 IEDs (improvised explosive devices) went off simultaneously on an oil pipeline. That’s pretty sophisticated.
When we were working in Iraq the U.S. government and the Iraqi government deployed a pipeline protection force from the private sector. I think this is what Nigeria needs. They should outsource the security for pipelines and let the army focus on the other security problems that exist with Boko Haram. In Iraq they managed in those days to keep the oil flowing in the most dangerous parts of the country. Much more deadly than anywhere in Nigeria. The security firm worked with the indigenous population. It was successful.