To put Nigeria’s aspirations to be Africa’s economic powerhouse into perspective, consider this: Eskom in South Africa, the continent’s largest economy, has installed capacity to generate 41,860 megawatts (mw) of electricity; the formerly-named National Electric Power Authority (NEPA), Nigeria’s state-owned power utility, has an installed capacity of 6000mw but generates only about 3000mw, and often less than that because of technical faults. The population of South Africa is about 41 million; the population of Nigeria is 130 million.

Eskom meets the electricity demands of household and industrial customers alike, and boasts being the lowest cost producer of electricity in the world. NEPA is incapable of meeting the estimated 6000mw demand of the Nigerian economy, meaning that power cuts are frequent and widespread.

Main challenge

For many investors, an unreliable power supply poses the most severe challenge to setting up a viable, profitable business concern in the country. Most investors are forced to incur the considerable additional and ongoing cost of on-site power generation. Some analysts have suggested the inadequate supply of electricity is costing the country more than $1bn each year.

The reliability of estimates of the size of the market is questionable and do not accurately factor in latent demand – that is, demand that would be created by the provision of service. The size of the market for mobile phone services was radically underestimated, quickly over-shooting the most ambitious expectations. By one modest estimation, and based on very reasonable economic growth assumptions, electricity demand in Nigeria could grow to 10,000mw by 2010.

What is clear is that there is considerable demand for electricity; what is less clear are the ground rules that will govern the industry. There is a growing sense of urgency within the government to solve the problem, though, and provide a private sector-friendly regulatory framework. It is an open secret that Nigeria’s president, Olusegun Obasanjo, will juggle his diary to meet with prospective power sector investors; he is also ratcheting up the pressure on the various ministries and agencies to clear the obstacles to new investment. The president has challenged the industry to generate 10,000mw by 2007.

The most significant recent development has been the signing into law of the Electric Power Sector Reform Act. The act focuses on five key areas: the restructure of NEPA; the privatisation of the unbundled operating units; the development of a competitive electricity market; the creation of a regulatory body to license and regulate generation, transmission and distribution; and a process for determining tariffs.

Iren Chigbue, director general of the Bureau of Public Enterprises, the government’s privatisation agency, has promised that the National Electric Regulatory Commission will be in place by December, a minimum requirement for any substantial progress towards liberalisation. NEPA will be broken up into 18 operating units and has now been renamed the Power Holding Company of Nigeria to reflect its imminent unbundling. The government says it can conclude the transfer of assets and liabilities in NEPA to the new holding group within eight months and commence selling off the separate companies.

Open to competition

The plan is for the government to retain some involvement in the sector but to open it up to private sector-led competition. To assist the ongoing process of reform in the sector, the World Bank approved a $172m loan in June.

Successfully overhauling the power sector is a key test of the government’s reform credentials. It has already missed two self-imposed deadlines to privatise NEPA, in 2001 and 2002, although analysts ascribe that to a failure to pass the Electric Power Sector Reform Bill, which became gridlocked between the executive and legislature and meant there was no legal or regulatory framework to the process. Signing the bill into law has given the process new momentum.

To encourage investment into the sector, the government has implemented a number of incentives. These include five-year tax holidays plus a capital investment tax allowance that can be carried forward after the tax holiday period. Investors are also exempted from duty on imported equipment.