NIgeria Privatisation of the Power Holding Company: recent developments

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July 01 2013

Introduction
PHCN successor companies
Bidding and preferred bidders
Conditions for preferred bidders
Impediments to the handover of successor companies
Comment


Introduction

The deterioration of Nigeria’s electricity power generation, distribution and supply has attracted much national and international criticism. The resulting negative economic and social impact has prompted various government initiatives and legislation aimed at restructuring and reviving this strategic sector, including:

the National Policy on Electric Power 2001;
the Electric Power Sector Reform Act (6/2005); and
the Roadmap for Power Sector Reform 2010.
The policy sets out the government’s objectives for the sector, including divestiture by the government of its interests in state-owned entities within the sector and the promotion of competition through the full liberalisation of the electricity market.

The act seeks to enshrine these objectives and provide a framework for their implementation. It provides for:

privatisation of the former state-owned monopoly – the National Electric Power Authority;
unbundling of the National Electric Power Authority’s successor company – the Power Holding Company of Nigeria Plc (PHCN) – into distinct business units;
the subsequent transfer of PHCN’s assets, liabilities and staff to its successor companies;
liberalisation of the Nigerian electricity industry to allow for private sector investment; and
determination of market variables (eg, pricing) by market forces.
The road map indicates the government’s intention to divest from PHCN’s successor companies, other than the Transmission Company of Nigeria, which will continue to be responsible for the transmission of electricity; this is a natural monopoly for the state.

PHCN successor companies

Following the unbundling of PHCN, the following 18 successor companies have been incorporated:

six generation companies (Geregu Power Plc, Afam Power Plc, Sapele Power Plc and Ughelli Power Plc (thermal-generation companies) and Kainji Hydro Electric Plc and Shiroro Hydro Electric Plc (hydro-generation companies));
11 distribution companies (Kaduna Electricity Distribution Company Plc, Enugu Electricity Distribution Company Plc, Benin Electricity Distribution Company Plc, Eko Electricity Distribution Company Plc, Kano Electricity Distribution Company Plc, Ikeja Electricity Distribution Company Plc, Abuja Electricity Distribution Company Plc, Ibadan Electricity Distribution Company Plc, Jos Electricity Distribution Company Plc, Port Harcourt Electricity Distribution Company Plc and Yola Electricity Distribution Company Plc); and
the Transmission Company of Nigeria.
As a first step in their privatisation, the Ministry of Finance and the Bureau of Public Enterprises have been appointed as initial shareholders of the successor companies.

Bidding and preferred bidders

On July 16 2012 the Bureau of Public Enterprises opened bids for the takeover of the PHCN successor companies. In addition to considering technical bids, the bureau and the National Council on Privatisation considered the highest financial bids and those bidders with the best efficiency programmes aimed at reducing the chances of aggregate technical, commercial and collection losses.

On October 29 2012 the National Council on Privatisation approved North-South Power Limited as the preferred bidder for Shiroro Hydro Power Plc and Mainstream Energy Solutions Ltd as the preferred bidder for Kainji Hydro Power Plc. Transcorp, Woodrock, Sumbion, Medea, PSL and Thomassen emerged as the preferred bidders for the sale of 100% shares in Ughelli Power Plc and CMEC/EURAFRIC Energy JV Consortium as the preferred bidder for Sapele Power Plc.

Amperion Power Distribution Company Ltd was approved as the preferred bidder for the core investor sale of 51% of the shares of Geregu Power Plc. KANN Consortium Utility Company Limited and Vigeo Power Consortium were both approved as preferred bidders for the sale of 60% of the shares of Abuja Electricity Distribution Company Plc and Benin Electricity Distribution Company Plc, respectively.

Other preferred bidders and the respective distribution companies sold to them are:

West Power and Gas (Eko Electricity Distribution Company Plc);
New Electricity Distribution Company (Ikeja Electricity Distribution Company Plc);
Integrated Energy Distribution & Marketing Ltd (Ibadan Electricity Distribution Company Plc and Yola Electricity Distribution Company Plc);
Interstate Electrics Limited (Enugu Electricity Distribution Company Plc);
Aura Energy Limited (Jos Electricity Distribution Company Plc);
Sahelian Power SPV Limited (Kano Electricity Distribution Company Plc); and
4Power Consortium (Port Harcourt Electricity Distribution Company Plc).
​Preferred bidders are yet to be approved for Afam Power Plc and Kaduna Electricity Distribution Company Plc.

Conditions for preferred bidders

Each preferred bidder was required to provide a credit letter or bank guarantee for 15% of the transaction value within 15 business days of receiving notification from the Bureau of Public Enterprises. They were also required to make a down payment of 25% of the share purchase price within 15 days of signing the transaction documents. In addition, preferred bidders were required to pay the remaining 75% of the bid consideration in full within six months of signing the transaction documents as a condition precedent to taking over the successor companies.

Impediments to the handover of successor companies

Although the respective sale agreements between the preferred bidders and the Bureau of Public Enterprises were signed on February 21 2013 and the mandatory 25% consideration was paid by the preferred bidders, the successor companies are yet to be handed over to the preferred bidders/purchasers. This is due to:

the preferred bidders’ failure to satisfy the condition of completing payment of the outstanding 75% of the bid consideration; and
disagreements between the government and former PHCN employees over severance payments owed to them.
Preferred bidders have raised concerns that they lack access to the distribution companies, and have alleged that the data made available to them following their approval as preferred bidders and the actual operational state or condition of the distribution companies failed to reflect reality.

In addition, certain bidders claim that they have not been allowed to shadow manage the distribution companies as was agreed before the signing of the transaction documents with the Bureau of Public Enterprises. In view of these challenges, it remains to be seen whether the preferred bidders will proceed with closing these transactions.

Recently, and perhaps in a bid to address some of these challenges, the government inaugurated transition committees for each of the successor companies for which the mandatory 25% consideration has been paid, in order to enable the bidders/purchasers to commence the process of taking over management in line with the terms of the transaction documents. Each committee consists of representatives of the Bureau of Public Enterprises, the management of the requisite successor company and the preferred bidder. The committees are responsible for:

ensuring that preferred bidders/purchasers have sufficient access to their respective successor companies in order to enable them to prepare for the implementation of their approved business plans;
ensuring that the bidders/purchasers are allowed to monitor ongoing operations in the successor companies in order to ensure that they are carried out efficiently and in compliance with the transaction documents;
providing a platform for the preferred bidders/purchasers to interact with the management team and employees of the successor companies in order to allow for a smooth transition; and
facilitating the smooth transition of the management and operational control of the successor companies to the preferred bidders/purchasers at the appropriate time.
Comment

This privatisation exercise is an important step towards achieving the structural reforms intended by the government. It is expected that once the successor companies have finally been handed over to the respective preferred bidders/purchasers and are fully operated by them, the ensuing competition between these investors will lead to improved and more efficient electricity generation and supply throughout the country.

However, at present, the delay in the handover of these companies appears largely to be due to the failure of the preferred bidders to complete payment for the purchase of these companies, and to the disagreements between PHCN’s former employees and the government. On June 17 2013 the government agreed to pay a N384 billion (in excess of $2 billion) severance package to the disengaged PHCN employees. It is hoped that once these entitlements have been paid and the preferred bidders complete payment of the outstanding 75% purchase price, the handover of the successor companies will be relatively seamless.

For further information on this topic please contact Aniekan George Ikott at Udo-Udoma & Belo-Osagie by telephone (+234 1 263 4831), fax (+234 1 263 4541) or email (aniekan.ikott@uubo.org). The Udo-Udoma & Belo-Osagie website can be accessed at www.uubo.org.

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