How Nigeria can unlock international financing for energy, infrastructure projects - Velusami
Is a partner in Hogan Lovells’ infrastructure, Energy, Resources and Projects team. Arun has advised governments, developers and lenders in a variety of energy projects with a particular focus on power projects in Africa. These include renewable energy pr
Please give us an insight into what prepared you for these current roles? I suppose it is a combination of factors but one of the things that prepared me for working in the energy sector is the lack of power growing up which had an impact on my life. I was born in India and I grew up in a rural area in India for a part of my childhood and I remember several days can pass without power supply.
So when I moved from India to the UK, there, power was available 24/7 on demand. It really struck a chord with me. By sheer coincidence later on when I started my legal career and I had the opportunity to work in Africa, I was particularly focusing on the energy sector. I saw that many of the things that I grew up with, people were still experiencing it here and I really do appreciate the opportunity to help.
I have also spent time living in an emerging economy, one that has grown significantly and many African countries are in a similar state. They have so much potential, so much human capital and if I can play a small part in helping to develop the power sector here, it is something that has always been amazing to me.
There are over 600m people without energy access in Sub Saharan Africa, how can we unlock energy access for these people? What barriers need to come down?
There are three aspects to any power supply. First, is there enough power being generated in the country and it is the most obvious questions. Equally important is how do you get that power to people either in cities or rural areas. In cities, they generally have grids, it may not be perfect but most houses are connected to the national grid. When you get outside of the big cities and go to the rural areas then you may not have those grids, then it becomes a question of how do you get power to those people?
Do you build further transmission and distribution infrastructure or do you decide you want to focus on small scale rural electrification and have small scale solar plants or rooftop solar? There are a number of ways to do this and there are no simple solutions. I think you have to approach it from providing power and getting that power to major centres and also finding a way to get power to people in more rural economies.
The challenge has sometimes been what strategies to deplore to improve energy access to these people. What are your thoughts on this? It’s really a question of how will this infrastructure be funded. First, there is an infrastructure gap. There’s not enough generating capacity, there is not enough transmission capacity and there is not enough distribution capacity, so how do you attract the capital to fund these projects?
Traditionally, a lot of finance has been available for power generation and for new large scale power plants, increasingly small scale rural solar projects are attracting investments. Traditionally, transmission lines in most countries have always been state-owned, so they tend not to attract as much investments. So often, investments in transmission lines have been grant funded. It is incumbent for governments within Africa to make sure that transmission is a priority because without the transmission there is no point in having the generation.
Equally with distribution, there have been privatisations in the sector. In Uganda, the distribution service has been privatised, the same is true in Nigeria but I don’t think the distribution companies in Nigeria, for a variety of reasons, have been able to access international capital to invest in adequately improving their networks. So this is what governments in these countries should look at - how to unlock investments in the distribution companies.
Why has it been difficult to get private equity firms to invest in infrastructure especially in Sub Saharan Africa? I think it’s a question of ensuring that the business, and legal environment within the countries are stable, recognizing the rule of law, those are the key ingredients for promoting private investments. There are always people willing to invest in well structured projects where there is certainty and stability. To achieve this, governments must be willing to work with international development institutions such as the World Bank. If you have the World Bank supporting your project, providing credit support, political risk insurance, that greatly enhances the attractiveness of your project and will massively increase the pool of international capital and investors to that project.
The Azura-edo IPP, which I understand you worked on, was completed on schedule and on budget, what factors accounted for the project’s success? How can it be replicated elswhere?
All of these ingredients mentioned in the answer to the last question were there. You had the World Bank supporting that project through credit support from IDA and political risk insurance through MIGA. You had a government that was strongly supportive of the project and one of the key things government did was to issue a Put/call agreement which is essentially the government standing behind the project. If anything goes wrong investors and lenders need to know that the government is standing behind the project. So you had political support, you had a tariff that was reflective of the cost of generation and ultimately you had the international lending community who wanted to see this major project succeed. It took a number of years to close, but it has been very successful.
We know the ingredients that were there that allowed that project to close, its just a question of, is there the political will now? Is it a policy priority to provide more government support? The World Bank has also proposed a variety of reforms to be implemented in Nigeria’s power sector, so it is a political decision as to whether the government wants to implement those reforms which will potentially increase Nigeria’s power.