Nigeria Plots New Siemens Deal to Lift Ailing Power Sector

Intro

Nigeria is improvising strategies for addressing foundational defects in its electricity industry by turning to German industrial manufacturer, Siemens. This proposed intervention will test government cooperation with the private sector and the resourcefulness of key decision-makers yet already, there are signs that this idea will need all hands on deck if it is to see the light of day.

Main Findings

President Muhammadu Buhari has directed his power and finance ministers to conclude talks with Siemens for a new Presidential Power Initiative. Nigeria wants to hire Siemens to upgrade its transmission and distribution facilities. The plan is sketchy for now, but procurements will be financed using a concessionary loan under Germany’s Euler Hermes export credit guarantee, and the government intends to on-lend the credit to the power firms - it’s not yet clear which specific firms will benefit. The goal is to raise output from under 4GW to 7GW in the short term, and to 25GW in the long term. The grid currently needs about 20GW to meet demand.

Nigeria fully divested from power generation and sold off a 60% stake in distribution firms in 2013. Since then, there has been a change in government and the current one (in place since 2015) has been exploring ways to review that privatization due to underperformance. In 2018, the 11 distribution firms averagely lost 53% of their supply due to technical, commercial and collection gaps. Government officials question the competence of these firms and blame them for the slow pace of progress. This month, the senate resumed efforts to probe federal funding of the sector post-privatization (over USD4 billion), and the Muhammadu Buhari administration now wants a valuation of the distribution firms.

One of our sources previously headed an association in the industry. He now tells us, “The coverage area allocated to each distribution firm at privatization is too large for them to run. Most of these firms had never run a utility before buying these power assets. They started with zero experience, and worse, they’re now insolvent. They just don’t have the capacity to meet the country’s energy needs.”

This proposed Siemens deal is the latest government intervention to address those foundational problems. In 2016, the Nigerian Electricity Regulatory Commission froze tariffs and the government began pressurisingthe distribution firms to improve performance and meter all customers. The regulator also did this to palliate rising inflation and GDP contraction. However, that tariff freeze has hindered the power firms’ ability to recoup costs, service debts and invest in pursuing the needed improvements. With over half of customers unmetered and one-third of consumer bills unpaid, the central bank has kept the industry afloat using a payment assurance facility.

Outlook

We’re learning on the ground that the government talks with Siemens have not been met with broad consensus, especially among distribution firms that consider this proposal intrusive and are concerned about ownership rights. The proposed Siemens engagement is an improvisation, and the success of this improvisation will hinge on robust stakeholder cooperation.

Abba Kyari, President Buhari’s highly influential chief of staff, was leading the government’s side in these discussions and was a central figure in the decision-making process before he passed away in April. The change in power dynamic could alter the nature and pace of the ongoing discussions as the president’s inner circle compete for control and the president himself remains detached.

The insolvent firms will also likely struggle to meet financial obligations under the proposed arrangement, and so will the federal government, given its current debt-to-revenue situation. In Q1 this year, the federal government spent 99% of its revenue on debt servicing as oil prices declined and COVID-19 disruptions took effect. Petrodollars make up about half of the government’s revenue.

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