PRESENTED BY BISMARCK REWANE CEO, FINANCIAL DERIVATIVES COMPANY LIMITED Privatization and Development of the Nigerian Power Sector: 20 th February, 2014 Challenges & Prospects for the Chartered Accountant

Audience Analysis Members of the governing council and ICAN membesr Founded in 1965 with membership of Mission is to produce world-class chartered accountants To regulate and continuously enhance their ethical standards and technical competence

Energy Gap in Nigeria Average Expected Power Generation is 6200MW Demand is estimated at 10000MW Average power Output in Nigeria ≤ 3500MW Nigeria is underserved by 65% Energy Sector operated as a state monopoly until 2005 Sector has recently undergone reform  Generation and distribution assets privatized  To encourage competition and boost efficiency

Objectives of the Presentation After this presentation, Audience understanding of power sector dynamics will be enhanced Unfolding opportunities will be appreciated Role of Chartered Accountants in the sector will be better understood

Outline Overview of Power Sector The Chilean Model The Reforms  Ownership Transfer  Current State  Constraints  Desired Outcome Risks Accountants as Catalysts or Agents of change

Overview of Nigeria’s Power Sector

Energy Crisis in Nigeria 69 power generating units in existence by 1999 Only 19 operational, average daily output of 1750MW  Newest generating unit built in 1990  Last transmission line built in 1987 Nigerian electricity demand about 10000mw in 2008  Output has never exceeded 4500mw  Demand-Supply gap met through alternative power generation Just about 50.6% of population has access to electricity

Energy Crisis in Nigeria Electricity Supply demand Balance Sheet (March 1991) High energy costs undermine the industrial sector  Constitute 30% of operating cost for manufacturers  Estimated industry losses believed to be in excess of 50% Plants Capacities (MW) Demand Situation (MW) InstalledEffectiveMorning Peak Evening Peak Highest demand Average demand Demand Excesses Shortages Remarks Source: Energy issues in Nigeria, 1991

Demographics & Power consumption Nigerian per capita electricity consumption: 148.9kwh  3% of Brazil’s and 7.5% of South Africa’s World electricity consumption per capita: 3,044 kwh SSA electricity consumption per capita kwh

Power holding back growth Industries crippled by high cost of alternative energy Cost in terms of lost GDP many times greater Current GDP growth rate is 6.87 Potential GDP growth rate 10.46% Cost by 2020 in terms of lost GDP would be $130bn per annum

Generation Capacity- Peer Comparison Generation capacity :15% that of south Africa, 29% that of Egypt Watts per capita: 40% that of Ghana

Effect of Power Outages Power outages are a major tax on Africa’s economies

Power Sector Privatization: The Chilean Experience Chile commenced restructuring of electricity in 1982 Vertical and horizontal unbundling of distribution, generating and transmission in 1981 Private participation was encouraged by establishing new investor-financed enterprises  To purchase existing facilities or to construct new facilities Privatization was financed through:  Public auction  Stock exchange listing, and  Sale of shares to the public in small quantities

Chile - Impact of Privatization During privatization process, GDP grew by 7% Competitive power generation market  11 generation companies in 1996 to 26 in 2000 Power generation doubled within 10years  30.75bn kwh in 1996 to 62.87bn kwh in 2006 Source: EIA

Improvement in Performance of 4 South American Electricity Distribution Companies from the time of Privatization until 1998

Nigeria’s Power Reform Story

The route to reform Change in legal and regulatory framework - The Electric Power Sector Reform (EPSR) Act was enacted in 2005 Change in shape of the industry NEPA transformed to an Initial Holding Company – The Power Holding Company (PHCN) A new Business unit with:  6 GenCos  11 DisCos  1 Transmission Company

Ownership Transfer - Unbundling the Monopoly

Aims & Objectives of Reform Improving efficiency and ensuring transparent management Encouraging and promoting private sector participation Eliminate government involvement in utility management Release government funds to finance core activities To ensure that Nigeria has an electricity supply industry that can meet the needs of its citizens in the 21st Century

The value chain GAS* NUCLEAR 6 PHCN PRIVATIZED GENCOS* 10 NIPP GENCOS* ~50 NEW & EXISTING IPPS* TRANSMISSION COMPANY OF NIGERIA 11 PHCN PRIVATIZED DISCOS* LARGE CONSUMERS & INTERANTIONAL CONNECTIONS* GENERATION TRANSMISSION DISTRIBUTION Power TradingPower Servicing Regulation RENEWABLES COAL* POWER INPUT GAS AGGREGATION COMPANY OF NIGERIA (GACN) NATIONAL ELECTRIC REGULATORY COMMISSION (NERC)* Nigeria Bulk Electricity Trading Company (NBET)* GENCO - DISCO BILATERAL CONTRACTS* GENCO – LARGE COMMERCIAL CONTRACTS* METERING & OTHER ELECTRICAL SUPPLIES TECHNICAL / O&M SERVICE PROVISION CUSTOMER SERVICE PROVISION MINISTRY OF POWER* 4

Annual Average Electricity Demand and Supply forecast Source : CIA World fact book, ECN, All Africa, Roadmap for Power Sector Reform,

The Multi Year Tariff Order - MYTO the 15-year pricing plan Inappropriate pricing regime one of the biggest obstacles to private sector investment in the power sector The MYTO is based on some core values:  Cost recoverability  Efficient use of the network  Incentives for improving performance  Transparency For the consumers, MYTO should ensure that there is no price shock as a result of sudden increase Incorporates government subsidy

Current state Daily Peak Delivery – Mw as at December 13, Distribution Licenses (both On and Off Grid) Electricity sources: Thermal – 76%, Hydropower - 24% Total licensed capacity (MW) 36 licensed on-grid IPPs13, licensed off-grid IPPs NIPP on-grid projects5, privatized gencos7,283

Constraints New Investors faced with: Debt instead of Equity  Buyers grappling with debt repayments instead of channelling funds to capacity expansion Dollar Borrowings instead of Naira  Risk of currency depreciation 50% hike in Gas price  MYTO likely to be reviewed upward Skill and Experience lacking  Purchasers inheriting an aged, undisciplined and unmotivated work force

Desired Outcome ,833MW MW ,000MW ,000MW

EXPECTATIONS – SHORT TO LONG TERM To meet the vision 20: 2020 target of 40, 000 MW  Requires investment of at least US $3. 5bn per annum for the next 10 years To ensure that electricity supply is made more reliable, To effectively support the socio-economic development of the country To develop a transparent and effective regulatory framework for the power sector To promote competition to meet growing demand To encourage Nigerian electric power sector operating companies to become global leaders in the industry

Risks

Gencos Non-Payment by Discos Gas supply and transportation counterparty risk Sudden increases in fuel costs Operating risks Legal and Regulatory Risks Discos Non-Payment by customers Sudden increases in costs Insufficient provision of power (Volume risk) Legal and Regulatory Risks

Accountants as Catalyst for Change

Challenges - What the Accountant must know Understanding the power industry  Value chain in power production and delivery  Role of each stakeholder  Amount of investments necessary What accounting technique should be adopted in valuation of power companies  Cash-based vs. Accrual  Adoption of modern techniques to replace obsolete ones  Must meet IFRS standards

Opportunities Financial Advisory Services to new power companies  Valuation of power assets  How much investments should be made  Where investments would be targeted  Revenue projections and Forecasting  How long it will take to recoup capital/ Break-even analysis  Financial valuation in line with the MYTO Audit services Advice on tax issues

Achieving the Core Values of Multi Year Tariff Order (MYTO) Cost Recoverability Signals for investment Allocation of risks Efficient use of the network Certainty and Stability Chartered Accountants can help power companies achieve some of the core Values of the MYTO MYTO Core Values

Thank You For Listening.