Our prospects in 2014 may be brighter than expected
By Dr. Ngozi Okonjo-Iweala on 11/02/2014
Let me begin by thanking His Excellency, Mr. President, and His Excellency, Mr. Vice-President, for their strong leadership of the government’s power sector reform programme. They truly prioritised this sector right from the start, based on the realisation that if we get power right, this country’s growth and development will accelerate. Today, I want to talk briefly about the economic environment in which we are operating, before moving on to talk about investment opportunities and financing instruments for our country’s power sector.
On the economic outlook for the country, let me just say that globally there are still some strong headwinds as uncertainty persists in the global economic environment. Our prospects in 2014 may be brighter than expected just three months ago, largely on account of some recovery in advanced countries that are our major trading partners like the US and the UK. Recent IMF projections suggest that advanced economies will now grow by 2.2 percent in 2014, which is slightly higher than its projection of 2 percent growth just last October, and also higher than growth of 1.3 percent in 2013. However, the IMF revised downwards its growth projections for advanced economies in 2015, and growth in major emerging markets like China is expected to slow down over the short-to-medium term, so we are not out of the woods yet.
In spite of this, Nigeria’s economic fundamentals remain strong. GDP growth remains robust at 6.81 percent in the 3rd quarter of 2013 and expected 2013 growth is still at 6.5 percent, even though we face challenges of inequality and inclusion. This strong growth is sustained by the non-oil sector which recorded 7.95 percent growth in the third quarter of last year, with strong performance from the Agriculture, Solid Minerals, and Housing and Construction sectors, as well as wholesale and retail trade. The IMF expects our economy to grow at 7.4 percent in 2014, which is one of the fastest growth rates in the world this year and is above our own projections of 6.75 percent growth in 2014. Inflation has remained at single digits of 8 percent as at December 2013, while the exchange rate though there have been relatively stable within 155 – 160 naira to the US Dollar range, though there have been occasional dips.
Our efforts to diversify our economy from dependency on oil, is unlocking the potential for growth and job creation in key sectors like Agriculture where various government measures are already being implemented, Solid Minerals, and the Housing sector, with the recent launch of the National Mortgage Refinance Company (NMRC) which will provide affordable mortgages for Nigerians. Work is currently underway to rebase our GDP, and with the current projected growth rate this could make our economy the largest in sub-Sahara Africa, within very few years.
Distinguished ladies and gentlemen, regardless of our current economic performance, our economy will not reach its full potential if we do not address the significant gaps in our infrastructure, particularly in power and transportation infrastructure. According to a joint World Bank and African Development Bank study, we are losing at least 2 percent of GDP growth annually as a result of our infrastructure deficit, and we need about US$ 14.2 billion per year to bridge the infrastructure gap with about $10.5 billion needed for federal infrastructure alone but current spending is only $5.9 billion. This is why the government developed the 30-year Nigerian Integrated Infrastructure Master Plan for accelerating infrastructure development in the country. With the aim of raising our stock of infrastructure from the current 35-40 percent of GDP to 70 percent by 2043, there is enormous potential for private investment.
While our government continues to play its part in infrastructure development, it also recognises the need for private sector support. So what are the prospects for the Power Sector? A brief comparison with other countries will highlight the opportunities. But before I get to that, it is important to understand that a wholesale privatisation of the magnitude we recently experienced in our private sector has never been experienced elsewhere, not even in South Africa that is constantly used as a yardstick. Given the absence of precedents or templates for comprehensive power sector reform before Nigeria’s, this administration has to be praised for overseeing an outstandingly transparent transfer and transition of power assets from government ownership and operatorship to fully privatised entities, with a focus on massive improvements in sales and collection efficiencies and quality service delivery.
Now back to our comparisons, as of 2013. South Africa has a population of 49 million and electricity consumption per capita (kWh per person) of 4222.46kWh, Egypt with a population of 83.6M has 1383.71kWh, even our neighbours to the west, Ghana with a population of 24.6M manages a per capita consumption of 248.33kWh. Meanwhile, Nigeria with a population of 170 million people has a per capita consumption of 103.81kWh. Our per capita electricity consumption is abysmally low and as you can see, there is so much room for improvement in Nigeria and by implication there is so much opportunity for investment with good returns.
Opportunities also exist for manufacturing of cables, transformers, poles and pipes, among other products to be used by the sector. In addition, the local content requirement being promoted by the regulator will drive manufacturing development further. The local manufacturing of meters is a case in point. On the services side, given the historical challenge of maintaining our power assets, an opportunity presents itself for companies who are able to offer asset management services to the power stations that have now been privatised; and much like we buy recharge cards for our mobile phones, opportunities will exist to have a similar system in the power sector, to make it easy to buy and pay for power at the retail level.
Market-wise, as the electricity market evolves, it is very clear that the most urgent need is in capital investment to ensure steady growth in the quantity of energy available to Nigerians. A number of power purchase agreements (PPAs) are being negotiated with an increasing number of independent power producers (IPPs) under the Bulk Trader scheme. For the moment, it is clear that these IPPs will not be delivering energy to the national grid before Q1 2017. This clearly indicates an urgent need to deliver energy immediately, using the mechanism developed by the Nigerian Electricity Regulatory Commission through its Embedded Generation Regulation framework.
Financing the assembly and connection or embedding of packages of 20MW or less directly to the various distribution networks, therefore, presents a major opportunity during the coming three to four years, one that promises the immediate alleviation of the biggest single challenge to the system today, which is the availability of energy for Discos to sell to its demanding customers, particularly industrial clusters that provide employment to Nigerians. This development also implies the urgent need to support the introduction of off-grid power systems, to serve remote populations of the country.
In that context, we look to improve Nigeria’s energy mix. As such, we need to develop our capacity for renewables and encourage investments in this area, particularly, solar power which is an ideal fit for remote areas of the north and waste-to-energy for some of our cities, which would eventually take care of the problem of inadequate power and poor waste management. What would drive all these lies in the fact that power is actually generated. It is for this singular reason that the Federal Government together with its multilateral partners is putting systems and processes in place to guarantee power sector investments.
We have strengthened power market intermediaries such as the Nigerian Bulk Electricity Trading Plc (NBET), with sufficient working capital to ensure its solvency and creditworthiness based on the payment risk exposure posed by each of the DISCOs. NBET is now cash-backed with over N120 billion (US$750m) in financing to help stimulate greater private investments in the sector, guaranteeing monthly payments to the generation companies in the unexpected event of distribution company non-payment. Note that I said “in the unexpected event”.
In addition, the Federal Government has also developed the Put-Call Option Agreement that guarantees protection of equity and debt. Our partners at the World Bank and African Development Bank, through their Partial Risk Guarantee programmes, are providing additional guarantee of over US$1.2bn in support of the Bulk Trader for investments in generation. The regulator is putting into place, a cost-reflective tariff that will provide adequate provision for CAPEX and OPEX funding. This Multi-Year Tariff Framework ensures that, in the event of any changes in its underlying economic and technical indices, the tariffs will be modified accordingly. The guarantees and the tariff framework will go a long way to improve the attractiveness and upside potential of the successor companies and other new investors in the sector.
As the Federal Government did recently by raising a $1bn Eurobond for the capitalisation of the Bulk Trader, transmission upgrades and gas infrastructure, Government is committed to using the instruments of the Federal Government to support the sector. Let me at this juncture mention some additional good news which is the transfer of US$200 million to the infrastructure window of our SWF, the Nigerian NSIA, from the Eurobond proceeds to enable it partner with the private sector on gas to power PPPs. We are anxious to lift the bottlenecks on gas supply and wish to use this to encourage some good solutions. The NSIA will also manage $350 million of the liquidity facility for NBET so you can see that we have positioned finance to truly support this sector.
I have spelled out the enormous infrastructure investment potential we have as a nation. I have also spelled out the Federal Government’s willingness to engage in certain types of guarantee mechanisms to spur the power sector alone and together with multilateral partners. You have a great opportunity before you. I sincerely hope we can work hard to enable you seize these opportunities.
•Being excerpts of a speech entitled ‘Nigerian outlook and global funding requirement for infrastructure development’ delivered by the Coordinating Minister for the Economy & Minister of Finance, Dr. Ngozi Okonjo-Iweala, at the International Conference on Private Sector Financing/Support for Power and Infrastructure Development in Nigeria (Nigeria Power Sector Investors’ Conference) held at the State House Banquet Hall, Abuja, February 10, 2014. Photo shows Okonjo-Iweala.
By Dr. Ngozi Okonjo-Iweala on 11/02/2014
Let me begin by thanking His Excellency, Mr. President, and His Excellency, Mr. Vice-President, for their strong leadership of the government’s power sector reform programme. They truly prioritised this sector right from the start, based on the realisation that if we get power right, this country’s growth and development will accelerate. Today, I want to talk briefly about the economic environment in which we are operating, before moving on to talk about investment opportunities and financing instruments for our country’s power sector.
On the economic outlook for the country, let me just say that globally there are still some strong headwinds as uncertainty persists in the global economic environment. Our prospects in 2014 may be brighter than expected just three months ago, largely on account of some recovery in advanced countries that are our major trading partners like the US and the UK. Recent IMF projections suggest that advanced economies will now grow by 2.2 percent in 2014, which is slightly higher than its projection of 2 percent growth just last October, and also higher than growth of 1.3 percent in 2013. However, the IMF revised downwards its growth projections for advanced economies in 2015, and growth in major emerging markets like China is expected to slow down over the short-to-medium term, so we are not out of the woods yet.
In spite of this, Nigeria’s economic fundamentals remain strong. GDP growth remains robust at 6.81 percent in the 3rd quarter of 2013 and expected 2013 growth is still at 6.5 percent, even though we face challenges of inequality and inclusion. This strong growth is sustained by the non-oil sector which recorded 7.95 percent growth in the third quarter of last year, with strong performance from the Agriculture, Solid Minerals, and Housing and Construction sectors, as well as wholesale and retail trade. The IMF expects our economy to grow at 7.4 percent in 2014, which is one of the fastest growth rates in the world this year and is above our own projections of 6.75 percent growth in 2014. Inflation has remained at single digits of 8 percent as at December 2013, while the exchange rate though there have been relatively stable within 155 – 160 naira to the US Dollar range, though there have been occasional dips.
Our efforts to diversify our economy from dependency on oil, is unlocking the potential for growth and job creation in key sectors like Agriculture where various government measures are already being implemented, Solid Minerals, and the Housing sector, with the recent launch of the National Mortgage Refinance Company (NMRC) which will provide affordable mortgages for Nigerians. Work is currently underway to rebase our GDP, and with the current projected growth rate this could make our economy the largest in sub-Sahara Africa, within very few years.
Distinguished ladies and gentlemen, regardless of our current economic performance, our economy will not reach its full potential if we do not address the significant gaps in our infrastructure, particularly in power and transportation infrastructure. According to a joint World Bank and African Development Bank study, we are losing at least 2 percent of GDP growth annually as a result of our infrastructure deficit, and we need about US$ 14.2 billion per year to bridge the infrastructure gap with about $10.5 billion needed for federal infrastructure alone but current spending is only $5.9 billion. This is why the government developed the 30-year Nigerian Integrated Infrastructure Master Plan for accelerating infrastructure development in the country. With the aim of raising our stock of infrastructure from the current 35-40 percent of GDP to 70 percent by 2043, there is enormous potential for private investment.
While our government continues to play its part in infrastructure development, it also recognises the need for private sector support. So what are the prospects for the Power Sector? A brief comparison with other countries will highlight the opportunities. But before I get to that, it is important to understand that a wholesale privatisation of the magnitude we recently experienced in our private sector has never been experienced elsewhere, not even in South Africa that is constantly used as a yardstick. Given the absence of precedents or templates for comprehensive power sector reform before Nigeria’s, this administration has to be praised for overseeing an outstandingly transparent transfer and transition of power assets from government ownership and operatorship to fully privatised entities, with a focus on massive improvements in sales and collection efficiencies and quality service delivery.
Now back to our comparisons, as of 2013. South Africa has a population of 49 million and electricity consumption per capita (kWh per person) of 4222.46kWh, Egypt with a population of 83.6M has 1383.71kWh, even our neighbours to the west, Ghana with a population of 24.6M manages a per capita consumption of 248.33kWh. Meanwhile, Nigeria with a population of 170 million people has a per capita consumption of 103.81kWh. Our per capita electricity consumption is abysmally low and as you can see, there is so much room for improvement in Nigeria and by implication there is so much opportunity for investment with good returns.
Opportunities also exist for manufacturing of cables, transformers, poles and pipes, among other products to be used by the sector. In addition, the local content requirement being promoted by the regulator will drive manufacturing development further. The local manufacturing of meters is a case in point. On the services side, given the historical challenge of maintaining our power assets, an opportunity presents itself for companies who are able to offer asset management services to the power stations that have now been privatised; and much like we buy recharge cards for our mobile phones, opportunities will exist to have a similar system in the power sector, to make it easy to buy and pay for power at the retail level.
Market-wise, as the electricity market evolves, it is very clear that the most urgent need is in capital investment to ensure steady growth in the quantity of energy available to Nigerians. A number of power purchase agreements (PPAs) are being negotiated with an increasing number of independent power producers (IPPs) under the Bulk Trader scheme. For the moment, it is clear that these IPPs will not be delivering energy to the national grid before Q1 2017. This clearly indicates an urgent need to deliver energy immediately, using the mechanism developed by the Nigerian Electricity Regulatory Commission through its Embedded Generation Regulation framework.
Financing the assembly and connection or embedding of packages of 20MW or less directly to the various distribution networks, therefore, presents a major opportunity during the coming three to four years, one that promises the immediate alleviation of the biggest single challenge to the system today, which is the availability of energy for Discos to sell to its demanding customers, particularly industrial clusters that provide employment to Nigerians. This development also implies the urgent need to support the introduction of off-grid power systems, to serve remote populations of the country.
In that context, we look to improve Nigeria’s energy mix. As such, we need to develop our capacity for renewables and encourage investments in this area, particularly, solar power which is an ideal fit for remote areas of the north and waste-to-energy for some of our cities, which would eventually take care of the problem of inadequate power and poor waste management. What would drive all these lies in the fact that power is actually generated. It is for this singular reason that the Federal Government together with its multilateral partners is putting systems and processes in place to guarantee power sector investments.
We have strengthened power market intermediaries such as the Nigerian Bulk Electricity Trading Plc (NBET), with sufficient working capital to ensure its solvency and creditworthiness based on the payment risk exposure posed by each of the DISCOs. NBET is now cash-backed with over N120 billion (US$750m) in financing to help stimulate greater private investments in the sector, guaranteeing monthly payments to the generation companies in the unexpected event of distribution company non-payment. Note that I said “in the unexpected event”.
In addition, the Federal Government has also developed the Put-Call Option Agreement that guarantees protection of equity and debt. Our partners at the World Bank and African Development Bank, through their Partial Risk Guarantee programmes, are providing additional guarantee of over US$1.2bn in support of the Bulk Trader for investments in generation. The regulator is putting into place, a cost-reflective tariff that will provide adequate provision for CAPEX and OPEX funding. This Multi-Year Tariff Framework ensures that, in the event of any changes in its underlying economic and technical indices, the tariffs will be modified accordingly. The guarantees and the tariff framework will go a long way to improve the attractiveness and upside potential of the successor companies and other new investors in the sector.
As the Federal Government did recently by raising a $1bn Eurobond for the capitalisation of the Bulk Trader, transmission upgrades and gas infrastructure, Government is committed to using the instruments of the Federal Government to support the sector. Let me at this juncture mention some additional good news which is the transfer of US$200 million to the infrastructure window of our SWF, the Nigerian NSIA, from the Eurobond proceeds to enable it partner with the private sector on gas to power PPPs. We are anxious to lift the bottlenecks on gas supply and wish to use this to encourage some good solutions. The NSIA will also manage $350 million of the liquidity facility for NBET so you can see that we have positioned finance to truly support this sector.
I have spelled out the enormous infrastructure investment potential we have as a nation. I have also spelled out the Federal Government’s willingness to engage in certain types of guarantee mechanisms to spur the power sector alone and together with multilateral partners. You have a great opportunity before you. I sincerely hope we can work hard to enable you seize these opportunities.
•Being excerpts of a speech entitled ‘Nigerian outlook and global funding requirement for infrastructure development’ delivered by the Coordinating Minister for the Economy & Minister of Finance, Dr. Ngozi Okonjo-Iweala, at the International Conference on Private Sector Financing/Support for Power and Infrastructure Development in Nigeria (Nigeria Power Sector Investors’ Conference) held at the State House Banquet Hall, Abuja, February 10, 2014. Photo shows Okonjo-Iweala.
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