Nigeria’s Power Privatisation Process: Learning Curves Chijioke Okonkwo Senior Consultant June 2015

Learning Curves from Structure and Process Adopted for the PHCN Privatisation

OUTLINE Introduction Review Reform Activities Privatisation Plan Transaction Strategy Privatisation Transaction Process Achievements Challenges to Long Term Success Lessons

Introduction – Pre-Reform Highly insufficient supply, dependent on self-generation for consistent electricity Highly Illiquid sector Very high distribution losses Approx. half of end consumers unmetered and receiving estimated bills Lack of clear and enforceable contracts between entities Insufficient maintenance and investment carried out, assets deteriorated

Introduction – The Reform The reform and privatization of NEPA/PHCN was carried out to liberalize the NEI and integrate Private Sector Participation in the power sector The success of the reform and privatization exercise meant different things to different stakeholders: Government savings on budgetary allocation with the withdrawal from power business Investors saw an opportunity to invest and operate a very viable business Labour wanted job security and severance package Nigerians yearned for adequate and sustained electricity supply

Introduction - Unbundling PHCN (Power Holding Company of Nigeria) 6 Generation Companies 1 Transmission Company 11 Distribution companies Generation Production of Wholesale Power Transmission Wheeling of Power from Gencos to Discos Distribution Wheeling of power at low voltage levels (33KV and below) Responsible for retail functions of sale and collections

Review Reform Activities CPCS was engaged as Transaction advisor in 2010 Reviewed the Due Diligence Reports and preparatory activities for the transaction Financial and Accounting due diligence Technical due diligence Legal, HR and Organisational review Assets and Liabilities identification Business Plans of each SC Business Valuation of each SC NERC Signed Gas Supply Agreements (GSA) GACN/NNPC BPE

Diagnostic Assessment and Development of Privatisation Plans for SCs Evaluated operations of each SC – issues and challenges Assessment of FG preferred privatization options Advised current and prospective competitiveness of each SC Identified measures to attract private sector interest Assessed various transaction options for each SC Developed sales methodologies for each SC

Privatisation Plans - Gencos

Privatisation Plan - Discos

Privatisation Plans Successor Company Transaction Type Reasoning Distribution Companies Share Sale (60% shares) Retain minority shares for states and for employees To list on stock exchange Geregu Genco Share Sale (51%) Geregu is newer plant low rehabilitation costs and higher returns expected Afam, Ughelli & Sapele Gencos Share Sale (100%) Very old plants In poor state of repair Kainji, Shiroro Concession (30 year) Due to water rights and other sovereign concerns, companies concessioned as opposed to sale Long term concession to ensure private sector has necessary incentive to make long term investments

Transaction Strategy – Options for Gencos Non – Divestment Options Management Contract Independent contractor operates the plant Ownership of plant retained by the government Lease Independent party acquires use of plant Payment to the government on an annual basis Asset returned at the end of the term Concession Independent operator runs plant Upfront payments at the commencement of the concession followed by annual payments throughout concession term Asset returned to the government at end of term Divestment Option Plant is sold to independent party/consortium Payment to current ownership at closing of sale Existing owner may opt to retain a minority interest

Transaction Strategy Bids for generation companies was evaluated based upon a standard highest bid value format Bids for distribution companies was evaluated based upon highest reduction in aggregate technical, commercial and collection (ATC&C) losses ATC&C is a concept in the power sector used as a measure of the efficiency and effectiveness of a distribution company It accounts for the difference between power purchased by discos and revenue collected by discos

Transaction Strategy A reduction in the ATC&C losses is equivalent to an increase in effective supply of electricity to end users Bidding on reductions in ATC&C losses is a method designed to use competition to maximize the efficiency of the energy sector This method of evaluation was chosen to maximize the benefit to Nigerian consumers and the efficiency of the energy sector

Privatisation Transaction Process Request for EOIs issued in early 2011 331 EOIs received by March 4, 2011 Roadshows held in Lagos, Dubai, London, New York, and Johannesburg between January and February 2011 Tremendous interest from the private sector 79% of firms shortlisted purchased the bid documents Short Listed Firms Purchasing Bid Documents Percentage Hydro 40 35 88% Thermal 87 56 64% Distribution 80 72 90% Total 207 163 79%

Privatisation Transaction Process RFP issued on September 1, 2011 276 Bid documents were subsequently issued to 163 bidders on September 1st Bidders were given access to the Virtual Data Room when they returned completed forms included in the RFP requesting such access On September 12th, transaction documents were also distributed to bidders and added to the Virtual Data Room Over 60,000 document views in the virtual data room Pre-Due Diligence Conference held in October 14, 2011 Physical Data Rooms Opened in October 24, 2011

Privatisation Transaction Process Site visits held in late 2011 over a three-month period Transaction and Industry Review Conference held in November 2011 Final bids received Gencos – 25 bids by July 17, 2012 Discos – 54 bids by July 31, 2012 Technical Evaluation took place in August 2012 Financial opening and preferred bidder announcements in October 2012 Negotiations with Preferred Bidders commenced Transaction and Industry agreements signed in February 2013 Completion and Handover November 1, 2013

Purchase Price (Naira) Achievement -Discos Successor Company Bidder Purchase Price ($) Purchase Price (Naira) Abuja Kann 164,000,000 25,799,000,000 Benin Vigeo 129,000,000 20,215,000,000 Eko West Power and Gas 135,000,000 21,182,000,000 Enugu Interstate 126,000,000 19,803,000,000 Ibadan Integrated 169,000,000 26,505,000,000 Ikeja NEDC 131,000,000 20,638,000,000 Jos Aura 82,000,000 12,852,000,000 Kaduna* Northwest 163,000,000 25,612,000,000 Kano Sahelian 137,000,000 Port Harcourt 4Power 124,000,000 21,438,000,000 Yola 59,000,000 19,506,000,000 *Kaduna was completed in 2014

Purchase Price (Naira) Achievement - Gencos  Successor Company Bidders Purchase Price ($) Purchase Price (Naira) Geregu Amperion 131,000,000 20,567,000,000 Sapele CMEC/Eurafric 201,000,000 31,557,000,000 Ughelli Transcorp 300,000,000 47,100,000,000 Kainji Mainstream 237,870,000 37,345,590,000 Shiroro North South 111,654,534 17,529,761,885 Afam* Taleveras 260,000,000 40,820,000,000 Total $2,660,524,534 N434,081,351,885 *Afam was completed in 2014

Equity Participation *Kaduna and Afam were completed in 2014

Equity Participation (excluding Nigeria) *Kaduna and Afam were completed in 2014

Challenges to Long Term Success Revenue Gap in Sector Revenue collected inadequate to cover all costs till investments are made Gas availability Unpredictability about the availability of gas to cover all capacity expansion plus new NIPP plants Transmission Capacity Critical link between Gencos and Discos Large investments from FGN needed in order to avoid bottleneck Public Patience Results will not be overnight, public awareness needed on long term nature of increasing electricity supply

Lessons Private participation in the sector necessitates the financial viability and liquidity of the sector Cooperation at the highest levels is key With so many actors (BPE, NERC, GACN, NNPC, TCN, NDPHC, PTFP, PHCN, etc.), cooperation from the highest level helps all actors work together While preparation is critical, cannot wait until every piece is “perfect” While things need to be in place, if we were to wait until every item was exactly as we would have liked it to be, transaction could not have happened In some cases, private sector needs to be in the sector to advocate for what it needs to make investments, cannot do this from sidelines

Thank You!!!