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Long road to making the lights work

02 May 2013, 13:00

Abuja -  In an unwanted daily routine lasting 17 years, Phillip Cleatus sits in the dark doorway of his shoe-making shop in Nigeria's northern city of Kaduna, waiting for the lights to come back on.

President Goodluck Jonathan is trying to persuade Cleatus and some 170 million other Nigerians that will soon change.

Yet while his plan to privatise power is creeping forward, it is likely to take decades to end the chronic electricity shortages that are among the main barriers to investment and growth in Africa's second biggest economy and top oil producer.

Nigeria is in the process of breaking up the defunct state power company into 17 private generation and distribution companies and selling them for about $2.5 billion in total, as part of efforts to increase electricity output tenfold over the next seven years.

It might be its most advanced effort yet to end its perennial power shortfall, but progress has been so slow that Jonathan's targets look far too optimistic. Industry experts believe some improvements will be felt in 2-3 years.

If Nigeria gets the lights working it would reduce business costs by up to 40 percent, add 3 percent to GDP and cut the mass unemployment that fuels unrest seen in oil theft in the south and a bloody Islamist insurgency in the north, economists say.

It could also spur a boom in labour intensive areas like manufacturing, food processing, textiles and pharmaceuticals, while opening up the opportunity for new low-cost service industries like the call centres that aided India's rise.

The $13 billion a year that Nigerians spend on diesel, most of which is imported, would be a bill of the past. Power from generators costs more than twice as much as from the grid.

"This is killing my business, I lose 45 percent of my annual profit to poor power supply," Cleatus, 38, told Reuters.


A glitzy ceremony hosted by Jonathan last week celebrated the first payment by private companies which are taking over the unbundled state electricity firm and a deal by the World Bank to give an initial $145 million risk guarantee for gas supply.

A close look at the private companies which won bids shows a mix of oligarchs and influential figures connected to Nigeria's political elite, and some recognised technical partners like Siemens and Manila Electric.

This has raised some questions about the expected efficiency of the privatisation process and what it can deliver, but there are those who argue that effective business in Nigeria is impossible without political connections and patrons.

"Much has been achieved, yet the race will not be over until Nigerians can take electricity supply for granted," Jonathan told dignitaries and power companies last week at his villa.

Electricity capacity had been in steady decline for a decade when Jonathan launched his reform plan in 2010, pledging Nigeria would boost generation from 3 000 megawatts (MW) to 10 000 MW by the end of this year, and 40 000 MW by 2020.

Generation has increased to around 4 000 MW but experts say there is zero hope of meeting government targets, while the scale of the task means power output will initially fall after the privatisation is completed at the end of this year.

Despite being Africa's top oil producer and holding the world's ninth largest gas reserves, Nigeria's power output is a tenth of South Africa's for a population three times the size.

"It will probably take Nigeria another 50 years before it attains the same level of electricity consumption per capita as South Africa currently enjoys today," said David Ladipo, whose company Azura is spending $700 million to build a 450 MW plant.

Ladipo thinks electricity output could grow to 6 000 MW in the next two years and to 9 000 MW by 2020, before seeing a potential boom as post-privatisation investment kicks in.

One industry expert told Reuters Nigeria's potential demand is estimated to be as high as 140 000 MW and rising, so just keeping up with demand will be a huge challenge.

The turnaround?

Even Ladipo's more modest projections, which several other industry experts broadly agreed with, face hurdles.

Privatisation is months behind schedule and government is struggling to get the funding it needs for crucial transmission and gas supply infrastructure. Powerful labour unions are blocking attempts to pay off 40,000 state electricity workers.

Nigeria says it has found 340 billion naira ($2.1 billion) to pay off the workers, but they remain reluctant to leave.

The African Development Bank is providing $150 million to aid with transmission and some of a $1 billion debut Eurobond would help with upgrades. But in Nigeria, just making the money available doesn't always mean it will be used wisely.

Some $40 billion has gone into several power reform drives in the last 20 years, industry experts say, much of it wasted.

"In the past the problem has not been capacity of government to find money for the power sector: billions have been allocated - and billions have been squandered or stolen," said Antony Goldman, head of Africa-focused PM Consulting.

Still, there remains optimism that wrestling power out of government hands will eventually lead to progress.

"Given the scale of the challenge and the history of the sector ... reform is progressing very well," said Fola Fabule, a Lagos-based investment banker focused on infrastructure finance.

"The key... will be commitment to see reforms through."

- Reuters


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