16 March 2015

Light Stuck in Transmission – Privatising Nigeria’s Transmission Network

This article was written by Neil Upton (Co-head of Energy & Infrastructure), Matthew Cavanagh (Partner), Marta Pink (Managing Associate) and Francis Iyayi (Associate).


The Chairman of Transnational Corporation of Nigeria Plc, Tony Elumelu, whose subsidiary (Transcorp Ughelli Power Limited) successfully acquired a state owned generation company in 2013, called for the Nigerian government to privatise Nigeria’s transmission network. Last year, the Nigerian Ministry of Power (the “Ministry”) announced plans to sell Nigeria's transmission network to private sector investors in order to facilitate the development, upgrade and management of the transmission network in Nigeria.

Although details of the proposed privatisation are yet to be finalised, the Ministry has stated that there has been significant interest from international investors. This article sets out how the transmission system may evolve post-privatisation and considers some of the relevant issues for investors.

The story so far

It has been over a year since the Nigerian government, in a programme administered by the Bureau of Public Enterprise (“BPE”), completed the privatisation of certain generation ("Genco") and distribution ("Disco") assets in the country. A second privatisation process is near completion with the BPE and Niger Delta Power Holding Company selling ten newly developed power plants under the Nigeria Integrated Power Project (the “NIPP Transactions”).

There has also been development in the independent power project sector, including the recent signing of the Azura-Edo Independent Power Project. Many stakeholders are hoping that this activity collectively signals a new phase for the Nigerian power sector and will lead to a sustained acceleration in the growth of the electricity generation and supply sectors across Nigeria.

Despite recent progress, Nigeria still suffers from a substantial and on some measures, growing deficit in supply that is hampering its economic development. Nigeria’s power output fluctuated between 1,800 megawatts and 3,000 megawatts over the past year, well below a peak of 4,000 megawatts in 2012 and a generation capacity of 7,000 megawatts (according to the Ministry). This deficit has now become a key political issue and a priority for the Nigerian government to resolve.

Privatising the Gencos and Discos along with the NIPP Transactions address only one part of the problem. Resolving the issues faced by the country’s transmission network is another major challenge. If Nigeria’s power plants were to operate at full capacity, its transmission lines could only presently carry 5,500 megawatts, less than a third of what the country requires to meet its electricity needs.

The existing transmission network needs to be upgraded, expanded and properly maintained in order to evacuate all generated power and reduce transmission losses. Projects for improving the transmission network will require substantial investment for many years. 

The current system

The only provider of transmission services in Nigeria is the Transmission Company of Nigeria (“TCN”). TCN’s operations span the entire country and are broken down into eight transmission regions, each of which contain various work centres that are responsible for the asset management in those regions. TCN is managed by three departments, the Transmission Service Provider ("TSP"), the Systems Operator (“SO”) and the Market Operator (“MO”). The TSP develops the transmission grid in new areas and maintains the infrastructure of the grid.

The SO operates the system including interaction with the Gencos and Discos. The SO also decides which power station comes on, when it comes on and by how many megawatts, along with which transmission line or transmission station should be supplied a quantity of megawatts.

The MO approves entry to and the registering of market participants, makes market settlements and administers compliance with and enforcement of provisions of the Market Rules.

In 2013, TCN commenced a process to devolve the management of Nigeria's transmission network to an experienced management company, Manitoba Hydro International (“MHI”), in a US$23.7 million contract award. MHI had a three-year mandate to reorganise the company, move it toward profitability and prepare it for privatisation. Market commentators have been critical of the outcomes to date under the MHI contract arguing that the state of Nigeria's transmission network has not been substantially improved.  

Transmission network

Nigeria’s transmission capacity (as mentioned above at 5,500 megawatts) supplies geographical coverage to roughly 40% of the country. This represents low per capita generation per person which is not improving as the population and its energy needs are growing faster than the energy supply. By contrast, Brazil is able to generate 100,000 megawatts of grid-based electric power for a population of 201 million people and South Africa generates 40,000 megawatts for 50 million people. As such, the pressure to improve supply in Nigeria is growing.

The Ministry has ongoing transmission lines construction programs which will increase the transmission line length and capacity, although details in relation to these are not publically available.


TCN has a difficult task ahead as it must not only deal with issues in relation to upgrading, operating and maintaining the network going forward, but also obsolete substation equipment, overloaded transmission lines and substations, and the inadequate coverage of infrastructure. Moreover, TCN must deal with the government's difficulties in raising sufficient third party financing which will also be hampered by recent weaker oil prices affecting the Nigerian government's revenues.

How the system may work?

Nigeria is not the only government currently seeking to privatise its transmission network. However, each energy sector privatisation has its own distinctive characteristics arising from its geographic and operating conditions, and also the unique economic, political and legal systems in place. For example, the New South Wales state government in Australia is currently in the process of privatising certain transmission and distribution assets. In contrast to the situation in Nigeria, the government of New South Wales is divesting functioning assets but the Ministry is selling assets requiring significant investment for development.

Adopting the right model

An early consideration is to establish exactly what is for sale and how the transmission system will look after the privatisation process has concluded. Adopting the right model for privatisation is important to avoid complications, for instance, in relation to market competitiveness and conflicts of interests. Below are some existing market models operating in other countries.

England and Wales: the independent transmission system operator model has been adopted in the United Kingdom under the umbrella of the National Grid. National Grid owns, operates and maintains the transmission network separate from the rest of the system which is maintained in private ownership in a competitive energy market environment.

Scotland: Scotland was separate from England and Wales and then later integrated for operation in the UK market. However, the difference between the Scottish system and that of England and Wales is that the ownership of the transmission network is split between Scottish Hydro Electric Transmission plc and Scottish Power Limited. These entities are responsible for investing in the electricity transmission network in the north and south of Scotland respectively.

Chile: this is a hybrid model where the Chilean state company sold its ownership in several transmission assets to private investors, while retaining ownership of the system operator function.]

The asset ownership and asset management split has been used in several countries successfully to both encourage investment and improve efficiencies bringing underdeveloped and underperforming assets up to international standards. Current assumptions are that Nigeria may adopt the hybrid model along the lines of that implemented in Chile. This may work if the SO and MO are separated from the TSP and ownership of the SO/MO rests with the Ministry.

The TSP and its associated transmission assets may be sold to private investors. This would mean that the TSP would have no systems operations functions, but private investors will own and be responsible solely for managing, expanding and maintaining the transmission network.

This asset ownership and asset management split (hybrid) model may work in Nigeria for the following reasons:

  • It has become clear that the Ministry has historically not been able to execute TCN’s activities effectively for (among other reasons) what is widely regarded as insufficient technical resources within TCN. The hybrid model should theoretically allow investors with technical expertise to develop and maintain Nigeria’s transmission network in exchange for a stable rate of return factored into the service fee.
  • It is important at this stage to ensure that there are no competition issues or potential conflicts in the system. Conflicts could occur if the beneficial owner of a generation company is responsible for the SO and/or MO, which may give rise to market dominance. The proposed model limits the ownership and responsibilities of any successful sponsor to the duties of the TSP.
  • This model has the capacity to attract a variety of investors with the capabilities to raise third party financing to develop and maintain the transmission network, which the Nigerian government to date has not been able to successfully procure.

By way of example, under the hybrid model in Chile, a leading international private equity firm, Brookfield Capital Partners and its partners, participated in the privatisation process and successfully acquired 100% of Transelec (a former state owned transmission company) from the government of Chile for $2.5 billion. In order to facilitate a large-scale transmission development project, Brookfield executed three financings from third party lenders, including the largest corporate bond issuance in Chilean history. 

Who will be interested?

The Ministry has not yet identified how it will sell its transmission network and what sale structure they would use. It is also unclear if the Ministry will retain some ownership and/ or remain as a minority or majority investor in any project company (similar to the approach taken when the BPE sold the Gencos and Discos to now sit as a minority shareholder). This makes it difficult at present for investors to determinate what, if any, control they may gain over the transmission network and limits investors' ability to assess the assets/investment opportunity.


It is likely that interested investors will include local investors with a greater understanding and comfort with/tolerance of the local market in Nigeria and international investors with technical expertise. These international investors will include multinational groups with portfolios consisting of transmission assets globally or with the capabilities to manufacture and produce transmission equipment.

The benefit of having international investors getting involved in these assets in Nigeria include their technical expertise, proven technology and the ability to offer and attract funding brought in to develop the assets. In addition, international investors also offer experience in running, maintaining and improving the reliability and efficiency of these assets. 


Nigerian commercial lenders led the vast majority (if not all) of the Genco and Disco acquisition financings. From a project finance perspective, we are likely to see Nigerian commercial lenders financing the privatisation and expansion of the Nigerian transmission network as well.

The leading project finance banks include First Bank of Nigeria's investment banking business (FBN Capital Limited), Guaranty Trust Bank Plc and United Bank of Africa Plc. These Nigerian Banks increased their volume of dollar lending to the Nigerian energy and infrastructure sector year on year in 2013 and again in 2014. A snapshot of select power sector financings produced by FBN Capital Limited include:

Project Company Closed Debt ($ million) Tenor
Eurafic Energy/CMEC 2013 90 5
KEPCO Energy Resources Limited 2013 278 7
Amperion Power 2013 45 7
Kainji Hydro Electric Plc 2013 102 Not publicly available
Transcorp Ughelli Power Limited 2013 106 Not publicly available
Shiroro Hydro Electric Plc 2013 112 Not publicly available

Nigerian commercial lenders may have their lending activities curbed by the need to absorb the economic shocks from the slump in oil prices due to their exposure to numerous loan agreements with indigenous oil companies in Nigeria.

From an international perspective, the World Bank and a number of development financial institutions (“DFIs”) have also shown interest in participating in financing projects in Nigeria, with some leading DFIs already participating in existing infrastructure projects. 

In addition, the World Bank, International Finance Corporation (“IFC”) and Multilateral Investment Guarantee Agency (“MIGA”) have closed a number of initiatives with the Nigerian government, all of which are aimed at providing "credit enhancing" products for the power sector in Nigeria. These products provide billions of dollars of support funding and include "payment guarantees" amongst others. 

Investors from jurisdictions with “Nigeria-friendly” Export Credit Agencies (“ECAs”) such as the United Kingdom Export Finance, Export-Import Bank of the United States, China Exim (and China Africa Development Fund) and Euler Hermes of Germany are likely to be important sources of long-term financing for the transmission infrastructure deals in Nigeria.

The ECA’s home country benefits from increased export flows (enabling the exporters to sell their equipment), commercial lenders can reduce or significantly eliminate the risks of financing these projects and sponsors are able to secure longer-term financing at lower interest rates.

The involvement of these highly regarded and experienced project finance players will bring a degree of confidence amongst international investors as to the strength of the structuring, due diligence and financing for these projects.

International commercial lenders such as Standard Chartered Bank, Standard Bank, Barclays Africa and Nedbank of South Africa are currently participating in financing opportunities in the energy sector in Nigeria. There is still a funding gap that can be plugged by alternative debt providers such as infrastructure debt funds providing financial instruments including mezzanine financing. These funds target assets that offer stable revenue streams, a steady rate of return on investment and relatively low construction or execution risk.

These factors (along with what will be hopefully a well-structured, transparent and stable government privatisation program) will hopefully encourage traditional bank project financing as well as new investors from the debt funds space (and other non-bank lenders) to enter into the Nigerian market, where currently it may be argued that the Sub-Sahara Africa infrastructure market has not matured fully.

Fund managers who have raised funds for the African infrastructure debt space (amongst others) include The Emerging Africa Infrastructure Fund and Gemcorp Capital LLP.    

Project risks to consider

At a high level, the success of energy and transmission infrastructure privatisation projects will be determined by a combination of the ongoing stability and transparency in the relevant market’s regulation, the robustness of the contractual arrangements in place and the associated revenues generated. At a more granular level, the following risks require specific consideration for projects of this nature in Nigeria.

Political risk: Nigeria's political environment is facing a particularly challenging period which is unlikely to be resolved until the outcome of the country's general election is known. Instability in parts of the country, most notably the continued insurgency of Boko Haram in the north and continued piracy across the Niger Delta in the south, is also causing substantial business interruption. Although these factors negatively impact the proposition of Nigeria as an investment destination, products offered by the World Bank (such as political risk insurance) go some way to protect and reassure investors.

Currency risk: The project will derive its profits from the margins on service fees paid by the Gencos and Discos. These fees will likely be denominated in naira (Nigerian currency). Due to the variety of participants investing in these projects, it is likely that most international sponsors and lenders will use dollar or euro currency third party funding. A weaker naira could make it more difficult for private investors to fund these projects. Market expectations are for the outlook of the exchange rate for the naira to remain uncertain and unstable for some time. The costs of currency hedging products will therefore need to be built in to overall project costs.  

Supply risk: The supply of electricity to the grid and the demand for electricity distribution is a risk that may be considered. These projects are relying on an increase in power generation from generation companies in Nigeria. The level of power being generated for supply to the grid in Nigeria is still subject to the resolution of the associated issues affecting their generation capabilities such as reliable gas supply.

Distribution risk: In relation to distribution, the Discos continue to struggle with the lapses in the billing and metering systems and vandalism of electricity equipment amongst others. However, despite these issues, progress is slowly being made to address these challenges. For example, recent changes to the market include the new domestic gas price regime to make gas supply projects more economically viable and the introduction of new technology to improve metering and billing systems.


Discussions are still being held as to whether and when the government will approve the privatisation of Nigeria's transmission network, how the process will be conducted and what sale structure will be used.

Given the essential requirement to encourage investment and improve efficiencies the Ministry might well do more than consider the possibility of multiple approaches to the existing asset upgrades as opposed to new investment and development of the transmission system. Many structures could work. For instance, a good option for both Nigeria and for possible participants, may well be to either move the existing management contract to a concession based/performance based contract for the existing system or in that regard, split the existing transmission system into eight separate entities and encourage competitive and improved efficiencies.

The problem with this option is that transmission on a national level requires central control of power loads to be absolute and it is complicated and risky to split that control.

It may be possible to introduce independent transmission operators with ownership and operating controls but the same point regarding operating efficiencies and overall system management would need to be considered.

Whatever the chosen option (and several may work), this is a good time for companies to be considering increasing holdings in Nigerian power and transmission assets provided the risks and opportunities are balanced.  

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