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Premium Times March 21, 2016 Opinion Comment (3)

Even if the worst happens and the NIPP plant sale cannot be
remedied, there are still invaluable lessons for us to learn from this
admittedly tremendously expensive mistake. For me, the biggest
area where Nigerians should focus is the un-politicisation and
incorporation of strategic thinking in the determination of what and
where we make future infrastructural investments.

On the January 28, 2015, the Senate in response to a bill sponsored by Senator Mohammed Hassan
directed its power sub-committee to investigate the sale of the 10 gas-fired power plants under the
National Integrated Power Project (NIPP). The Senate felt the sale had to be probed because it only
netted $5 billion while the plants had reportedly cost the government over $8 billion – a $3 billion loss
to all the tiers of government, the investors in the project.

President Olusegun Obasanjo conceived the NIPP idea in 2004. In response to gas flaring problems and
chronic power shortages at the time, the Obasanjo government decided to kill two birds with one stone
by building 10 gas-fired power plants. In addition to providing the much needed generation capacity –
net total of 5.34GW – the NIPP plants were also to lead to more constructive gas consumption.

The project was to be funded from the Excess Crude Account (ECA), an account run for the three tiers
of government. Right from the inception, the idea was that upon completion, the plants would be
privatised. The returns (capital and profits) from the privatisation would then be paid back into the
ECA.

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The Niger Delta Power Holding Company (NDPHC) was set up as the pre-privatisation management
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holding company for the NIPP plants, akin to PHCN in the case of NEPA. As the state of the power
generation in Nigeria attests, NIPP has fallen well below expectations.
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As at April 2015, it was reported that four NIPP plants had been commissioned, three others were ready
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for commissioning, while the last three were at various stages of completion. None of the commissioned
opinion articles as they are published.
NIPP plants has been able to operate anywhere near its real capacity, hence why Nigeria’s peak
generation has more or less flat-lined since 2012; from 4,500MW in 2012 to approximately 5,100MW in Join 143 other subscribers

2016.

…just like the Senate, I believe that the NIPP plants were under-
valued during the sale process. However, unlike the senate, my
judgement is not based on the over $8 billion invested so far. This is
because according to James Olotu, Managing Director of NDPHC,
the $8 billion being brandished was the total investment made so far Recent Blog
into all the NIPP projects, which cover the entire power supply value
chain… Allister Sparks: Passionate Crusader Against
Apartheid, By Phillip van Niekerk October 5,
2016
The privatisation of NIPP plants commenced on November 11, 2013. As part of the privatisation
RIGHT OF REPLY: Facts Here, Conclusions
process, all the plants were provided with contracted power purchase and gas supply arrangements. The There, By Laolu Akande October 5, 2016
auction was held and the winning bidders for the 10 plants emerged on the March 7, 2014. The 10 PhD Truck Drivers And The Urgency Of Now,
plants were sold for $5.8 billion; this equates to about $1.06 billion/GW. Under the agreement, the By Okey Ndibe October 5, 2016
plants were to be handed over to the successful bidders by June 2014. Due to calls by the investors for In Defense of President Buhari’s Harem of
an extension of the handover dates, these plants are yet to be handed over. New Media Appointments, By Pius Adesanmi
October 5, 2016

Indeed, just like the Senate, I
believe that the NIPP plants were
under-valued during the sale
process. However, unlike the
senate, my judgement is not based on the over $8 billion invested so far. This is because according to
Nigeria’s Near Miss With Poliomyelitis – What
Is the Elephant In the Room?, By Muhammad
Ali Pate October 5, 2016
Dasuki: Is The ECOWAS Court Judgment
Binding On Nigeria?, By Inibehe Effiong
October 5, 2016

James Olotu, Managing Director of NDPHC, the $8 billion being brandished was the total investment Time to Integrate South-West States Into a
made so far into all the NIPP projects, which cover the entire power supply value chain i.e. generation, Regional Economy, By Rauf Aregbesola
October 5, 2016
transmission and distribution.
Nigeria’s Change Mantra In the Era of SDGs,
By Noimot Balogun October 5, 2016
Rather, my judgement is based on Nigeria’s most recent gas-fired plant project – the Azura-Edo IPP.
Azura is a 450MW (0.45GW) plant and its budget was set at $750 million; this equates to about $1.67 NLNG: Time for Shift In Strategy, By Dele
Agekameh October 5, 2016
billion/GW. I think Azura can be taken as a good measure of the true market value of the NIPP plants
Abdulmumin Jibrin as a Metaphor for
because the project was so highly regarded by the Nigerian government that the government through
Change, By Raymond Nkannebe October 4,
Nigerian Bulk Electricity Trading Plc (NBET), signed off an approximately $250 million World Bank 2016
Partial Risk Guarantee on it.

Based on Azura’s cost per GW capacity, the sale of the NIPPs should have netted $8.8 billion, excluding Like us on Facebook

the increase in revenue that would be accruable due to the elimination of construction and project
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development risks. This rather begs the question, how did we manage to lose $3 billion on a venture
where making a loss should have been virtually inconceivable – the proverbial “stealing defeat from the
jaws of guaranteed victory”.
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I have never been a fan of conspiracy theories but my relative ignorance of the finer details on some of
Time To Rally Round Bola
the NIPP transactions, right from inception to sale, has left me with little choice. I can only postulate Tinubu, By Femi Aribisala
some logical explanations for the severe undervaluation of the NIPP plants during the privatisation.
Dasuki: Is The ECOWAS Court
Some of the reasons my non-conspiracy theorist mind has been able to develop are as follows: First, I Judgment Binding On Nigeria?,
remember having a discussion with one of the integral figures behind the NIPP concept and the 2005 By Inibehe Effiong
Electricity Sector Policy Reform Act. I asked him why the NIPP dream had gone so badly wrong. In Defense of President Buhari's
Without giving too much away, he mentioned the issue of politicisation. I remember getting back home Harem of New Media
Appointments, By Pius Adesanmi
and immediately having a look at the map of Nigeria’s gas pipeline infrastructure. To my surprise, some

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NIPPs were sited in places that had no existing or planned gas pipelines at 2005 when the sites were Time to Integrate South-West

selected. It would appear that the political powers that be or other influential interests had forced the States Into a Regional Economy,
By Rauf Aregbesola
plants to be located in places that offered little to no strategic value.
RIGHT OF REPLY: Facts Here,
Conclusions There, By Laolu
I believe that the premature sale of the NIPP plants is a major Akande
contributory factor to the plants’ undervaluation. Therefore, I PhD Truck Drivers And The
believe the government should take the plants back, guarantee Urgency Of Now, By Okey Ndibe

secure gas supply (supply contracts and secure pipeline Changing Culture, Changing
Course, By Taiwo Odukoya
infrastructure) to them, develop and operate them at full rated
capacities for a sustained period before restarting the privatisation
bidding process. Advertisement

Another possible explanation for the low return from the sale of the NIPP plant is that they are not up
to the required standard. Before potential investors make a bid, they analyse the asset up for sale and #ChibokGirlsClock
measure how much is required to get it to optimum working condition. This number, rather than the
seller’s (in this case NDPHC) investment cost, determines how investors value a project. If this #ChibokGirlsClock
hypothesis is correct, that would be clear indication that many of the NIPP building projects were
riddled with contract inflation and/or low quality project assessment on the part of the NDPHC.

DAYS HOURS MINUTES

Finally, as highlighted above, even the completed plants have not been operable at their rated capacities
due, in no small part, to gas shortage problems. When you are attempting to sell an asset, the burden of
proving that the asset, i.e. NIPP plant, is in perfect working condition – in this case perfectly at rated
capacity – is on the shoulders of the seller i.e. NDPHC. Failure to do this adds an unwanted layer of risk
to the investment on the part of the buyer, thereby leading to a reduction in their valuation of the asset.
With this in mind, it would appear that the privatisation of the NIPP plants was done prematurely.

As they say, “there is no point crying over spilled milk”. Irrespective of the findings of the Senate’s
Power sub-committee, the question we all need to focus on is “how do we remedy the situation?”
Although as I have mentioned above, I am not privy to the finer details of the existing arrangement, the
decision of the preferred bidders to seek a postponement of their takeover of the plants could have
provided an opportune moment.

I believe that the premature sale of the NIPP plants is a major contributory factor to the plants’
undervaluation. Therefore, I believe the government should take the plants back, guarantee secure gas
supply (supply contracts and secure pipeline infrastructure) to them, develop and operate them at full
rated capacities for a sustained period before restarting the privatisation bidding process.

Even if the worst happens and the NIPP plant sale cannot be remedied, there are still invaluable lessons
for us to learn from this admittedly tremendously expensive mistake. For me, the biggest area where
Nigerians should focus is the un-politicisation and incorporation of strategic thinking in the
determination of what and where we make future infrastructural investments. Failure to do both of
these, Nigeria will likely continue to make investments that are overly expensive and/or massively
sub-optimal; both are problems that we can ill afford in our current fragile socio-economic state.

NOTE: Only 80 percent of the government’s stake in the NIPP plants was up for privatisation.
However, it has been assumed that the a 20 percent return on equity is reasonable for such capital
intensive projects. Therefore, the net sale value of the plants should have been $10.6 billion. Eighty
percent of that would be $8.5 billion. As the government only received $5.5 billion, it can be deduced
that there has been a $3 billion undervaluation/loss.

Yusuf O. Ali is a doctoral candidate in the Department of Engineering, University of

Cambridge; he can be reached on e-mail at: yoa20@cam.ac.uk, and Twitter: @YalyAli

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Electricity Sector Policy Reform Act, Excess Crude Account (ECA), National Integrated Power Project (NIPP), Niger Delta
Power Holding Company (NDPHC), Nigerian Bulk Electricity Trading Plc ( NBET), Senator Mohammed Hassan

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Deji • 6 months ago

Excellent piece, just a few comments:

1. Comparing Azura with NIPP, is like comparing oranges with pineapples. Azura
was project financed with several guarantees and contractual backstops, this
comes at a high cost. Besides, the Azura plant technology/design is not the same
as NIPP. Using Azura as a valuation metric is not appropriate in this context,
besides the final price was based on competitive bidding which typically includes
valuation premiums.

2. The government has not demonstrated its ability to manage these plants,
jumping to reverse the sale will not solve the problem, but create more problems.
It is in the government's best interest to work with credible investors to make the
projects work.
• Reply • Share ›

Wesley • 6 months ago

"...the Azura-Edo IPP. Azura is a 450MW (0.45GW) plant and its budget was set
at $750 million; this equates to about $1.67 billion/GW."

Quoting $/GW is misleading as the international benchmark is $/MW.

What's the price per MW for the Azura project vs. the average industry
benchmark price per MW for open cycle power plants (most of the NIPPs are
OCGT)? Average benchmark price for OCGT is $0.8m - $1.2m/MW. At $1.6/MW,
Azura is way past this average benchmark! Either Azura is an expensive power
project which will impact on electricity tariffs (higher tariffs) or the
contracting/procurement process for Azura was costly. It should be as the Azura
project is project financed with all sorts of whistles and bells. The NIPPs wasn't
project financed thus a lower cost. Lastly, there is a correlation between cost
($/MW) of a power plant and the tariffs ($/kwh) electricity consumers pay. The
higher the cost/MW of the power plant, the higher the wholesale electricity
tariffs. Please compare Azura tariffs to the NIPP/PHCN Successor Genco tariffs.
• Reply • Share ›

Wesley Wesley • 6 months ago

By the way, my comments should not be interpreted as disparaging the
Azura project. Its a landmark power project which I'm glad has finally
reached financial close after more than 3 years.
Reply Share ›
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