US embassy cable - 04LAGOS239

UNCLAS SECTION 01 OF 02 LAGOS 000239 
 
SIPDIS 
 
STATE PASS TO EXIM AND TDA 
 
E.O. 12958: N/A 
TAGS: ENRG, EINV, PGOV, TRGY, NI 
SUBJECT: NIGERIA'S POWER SECTOR PRIVATIZATION 
 
SENSITIVE BUT UNCLASSIFIED 
 
1.  (U) Summary: The head of Nigeria's National 
Electric Power Authority (NEPA) told Embassy staff 
January 22 that the GON has begun unbundling the state- 
owned electric power monopoly to privatize the company, 
even before a power sector reform bill is passed into 
law. A dearth of managers experienced in the new 
processes that the parastatal company is implementing 
is slowing progress.  Foreign investment and capacity 
building is needed. End summary. 
 
2.  (SBU) On Thursday January 22, EconCounselor and 
EconSpecialist met with Joseph Makoju, Managing 
Director of the Nigerian National Electric Power 
Authority (NEPA), who confirmed that the unbundling of 
NEPA in advance of its privatization started on January 
1, 2004.  The first step was to make its ten 
distribution centers nationwide semi-autonomous. The 
heads of the distribution centers are now referred to 
as Chief Operating Officers (COOs) and are responsible 
for day-to-day operation of the centers, while NEPA 
headquarters sets revenue targets and supervises the 
COOs.  They report directly to NEPA's Managing 
Director. NEPA's executive directors for distribution 
and transmission monitor the performance of the 
autonomous units.  Revenue targets have been set for 
the distribution centers, and NEPA hopes to raise the 
service fee collection rate from 60 to 80 percent 
within the year. 
 
3.  (SBU) Makoju hopes that improved performance of the 
distribution centers in the next six to twelve months 
will help ensure NEPA's self-sufficiency to meet its 
liabilities and embark on new projects, such as 
replacement of old and faulty transmission lines. He 
opined that although the Federal Government provides 
NEPA with capital for some transmission projects, that 
funding stream will dry up given the government's 
"irrevocable" plan to privatize NEPA. 
 
4.  (SBU) According to Makoju, NEPA plans to grant 
autonomy to the transmission centers in the second 
quarter of 2004, while the six generating plants will 
be floated as private companies.  He did not specify 
when the generation plants would be granted autonomy. 
He confirmed that NEPA headquarters is undergoing 
restructuring. The headquarters is being reduced. 
After autonomy is granted the various units, much of 
the staff will be deployed to the field. 
 
--------------------------------------------- ------- 
Independent Power Projects: the Burden of the Dollar 
--------------------------------------------- ------- 
 
5. (SBU) Makoju admitted that more investments are 
needed to improve the transmission lines, and that 
independent power projects (IPPs) would go a long way 
toward improving power generation. He confirmed that 
NEPA has received IPP proposals, but it is exercising 
caution in entering into agreements.  Since the 
contracts would be dollar denominated, it would be 
"suicidal," he said, to enter into such agreements 
given current collection rates, low power rates or 
tariffs, and the continuing depreciation of the naira 
against the dollar. 
 
6. (SBU) Makoju said AES Corporation's IPP in Lagos 
supplies about 10 percent of the power to NEPA's 
national grid, for which AES receives about 20 percent 
of the total revenue accruing to NEPA. He said the 
agreement is a huge burden on NEPA's finances, now in 
very bad shape. Since NEPA pays AES in dollars, the 
naira's depreciation has made this agreement a losing 
proposition for NEPA. Makoju disclosed that NEPA is 
negotiating with AES to restructure the agreement. 
 
7. (SBU) Makoju opined that if the tariff were raised 
to economic levels and reviewed yearly to incorporate 
the reality on the ground, private companies would 
invest in Nigeria's power sector. He asserted there is 
huge investment potential. 
 
------------------------------------ 
NEPA Wants Help In Capacity Building 
------------------------------------ 
 
8. (SBU) Makoju said NEPA needs assistance in capacity 
building.  The unbundling exercise is leading to use of 
new and complex processes, such as transfer pricing, in 
which NEPA staff have little experience. Makoju 
appealed for continued assistance from USAID/NEXANT to 
complete the process. He hopes the USG and U.S. 
companies will show more interest in it, particularly 
as unbundling and privatization evolves. 
 
9. (SBU) Comment. Although NEPA's privatization is a 
huge task, it is a prerequisite to jumpstarting 
Nigeria's ailing economy, bedeviled as it is by the 
problem of poor infrastructure. If the power sector can 
be made more efficient, it will improve industry 
capacity utilization, which has long been conditioned 
by inadequate electric power. Since business firms in 
Nigeria depend on generators to provide power and use 
power from NEPA as a back up when available, this 
raises production costs and thus renders Nigerian 
products non-competitive in international markets. 
 
10. (SBU) A proposed Power Sector Reform Bill must be 
passed into law to give legal backing to NEPA's 
unbundling and privatization. Such a law would offer 
comfort to potential investors in the sector. In the 
absence of more action this year, the Obasanjo 
administration's efforts to reorganize NEPA may simply 
add to the number of failed privatizations in Nigeria 
in recent years. End comment. 
 
HINSON-JONES