Huge Power Sector Potential, But Risks Abound

BMI View: While we have long believed that Nigeria has almost unmatched power sector growth potential based on strong fundamentals, our optimistic outlook is tempered by the entrenched and considerable risks to doing business in the country. As such, it is enlightening to look at our power sector Risk/Reward Ratings for Nigeria. To this end, the rewards side of the equation continues to be more favourable to Nigeria than the risks side, with the country's power sector privatisation drive appearing to be gaining traction, despite long-held concerns about the country's operating environment.

Nigeria's overall score reflects the country's healthy economic growth prospects but the still-modest size of the power market - highlighted by recurrent power shortages. Risks are generally high in industry terms and only slightly less significant on the country risks side of the equation - reflecting issues ranging from deep-rooted corruption and persistent insecurity to vested interests and fuel-related bottlenecks.

Rewards

Rewards Underscore Nigeria's Potential Within SSA
SSA Power Industry Risk/Reward Ratings, Scores Out Of 100

BMI View: While we have long believed that Nigeria has almost unmatched power sector growth potential based on strong fundamentals, our optimistic outlook is tempered by the entrenched and considerable risks to doing business in the country. As such, it is enlightening to look at our power sector Risk/Reward Ratings for Nigeria. To this end, the rewards side of the equation continues to be more favourable to Nigeria than the risks side, with the country's power sector privatisation drive appearing to be gaining traction, despite long-held concerns about the country's operating environment.

Nigeria's overall score reflects the country's healthy economic growth prospects but the still-modest size of the power market - highlighted by recurrent power shortages. Risks are generally high in industry terms and only slightly less significant on the country risks side of the equation - reflecting issues ranging from deep-rooted corruption and persistent insecurity to vested interests and fuel-related bottlenecks.

Rewards Underscore Nigeria's Potential Within SSA
SSA Power Industry Risk/Reward Ratings, Scores Out Of 100

Rewards

Industry Rewards

Nigeria's strongest attributes in the industry rewards indicator are its above-average scores for five-year growth in power generation and consumption. That said, this growth is from a low base and the country has largely exhausted its current power generation capacity and has been plagued by blackouts and power shortages for years. As a consequence, it is expected to push hard for private investment - underscored by its efforts to attract private capital by unbundling state-owned Power Holding Company of Nigeria (PHCN), which ceased to exist in November 2013, and selling gas-fired power plants under the National Integrated Power Plan (NIPP).

As things stand, the overall size of the power market in terms of capacity, consumption and generation continues to constrain Nigeria's overall score for this component of the RRRs. Just 50.6% of the population had access to electricity in 2011 (according to the Energy Information Administration), and some 90% of industrial customers and a significant number of residential and other non-residential customers have to provide their own power, at a huge cost to themselves and to the Nigerian economy. The fact that cement company Lafarge has mooted the idea of selling power from its own power station in an effort to bring an end to electricity shortages underscores the point.

Growth From A Low Base Boosts Industry Rewards
The Industry Rewards Component Of Our Risk/Rewards Matrix, Scores Out Of 10

Country Rewards

Nigeria's country rewards component of our ratings matrix is boosted by its expanding population, and strong scores for five-year growth in GDP per capita and real GDP. To this end, our Country Risk team has highlighted that Nigeria is one of the 'African Lions'; a term that describes SSA countries that will register nominal increases in GDP growth of close to 7% over our forecast period. With a population of 170mn people and BMI's Country Risk team forecasting annual average GDP growth of 6.5% in 2013 and 7.2% in 2014 (driven by construction, telecoms, wholesale and retail trade), the country's broader economic trajectory is underpinned by strong fundamentals and the potential opportunities on offer are huge - albeit we maintain that this economic trajectory currently belies Nigeria's true potential.

Meanwhile, broader household consumption in Nigeria has benefitted from relatively low inflation by historical standards, with headline price growth remaining in single digits since the beginning of 2013. This has preserved greater purchasing power for consumers and endowed the population with greater discretionary income, bolstering private consumption. That said, we emphasise that if Sanusi Lamido Sanusi is replaced by a more dovish central bank governor when his term expires in 2014, inflation could head higher leading to a less favourable growth environment and lower country rewards scores in the future.

BMI's Country Risk team also highlights that Nigeria's all-important oil and gas sector continues to struggle amid ongoing disruptions to production and theft in the Niger Delta, as well as continued uncertainty over the country's Petroleum Industry Bill (PIB) - a major cap on Nigeria's economic potential.

Risks

Industry Risks

Despite the government's efforts to drive the privatisation process forward (with the unbundling of PHCN and the successful sale of gas-fired power plants likely to push this score higher in the quarters to come), the country's industry risk profile is generally unattractive. Nigeria scores poorly for liberalisation, financing and the renewables components of the industry risk score. The transparency of the tendering process is also an issue for the country and although fears about corruption and the often opaque nature of the contract-awards process have been assuaged slightly, as the government presses ahead slowly with reform, they are still a major problem. Indeed, losing bidders often claiming that a relationship with important figures in government is the biggest deciding factor when awarding contracts - rather than technical skill or cost. Indicative of concerns about the broader business environment, in December 2013, it emerged that Nigeria's central bank had written to President Goodluck Jonathan - raising questions over the whereabouts of US$50bn in oil revenues that should have by law been remitted by the country's state-owned oil company to government coffers.

That said, if they are fully realised, regulatory changes and the ongoing privatisation process certainly have the potential to boost Nigeria's industry risk scores. Similarly, if the country can tap its non-hydropower renewables potential and bring online more than just a handful of small-scale projects, this score also has the potential to rise significantly.

Significant Rewards Trump Considerable Risks
SSA Power Industry Risk/Reward Ratings, Scores Out Of 100

Country Risks

In terms of external risk, we highlight that volatility in the price of oil would pose a significant risk to export revenues and government receipts. Hence, any significant deterioration in the economies of Europe, the US, or other major export markets could have negative implications for the Nigeria's economy. To this end, we have seen oil exports to the US tail off rapidly in recent months, as the US looks to reorient its energy policy so as to utilise cheap gas - an external threat to the country. While this is problematic for Nigeria, as it loses business from one of the world's biggest consumers of oil, we do however note that China looks to be attempting to capitalise on the situation; with the Asian giant pushing ahead with oil-for-loans deals.

Nigeria also fares relatively poorly in terms of short-term political stability, institutions and policy continuity. The country first transferred executive power democratically in 2007 in elections that were viewed as non-credible by many international observers. Elections held in early 2011 were a vast improvement, garnering international praise.

However, we note that downside risks to both the economy and political stability have grown over recent months - with wrangling within the ruling People's Democratic Party (PDP) meaning the passage of the long-awaited PIB is unlikely to happen in the foreseeable future. The troubles within the PDP stem from President Goodluck Jonathan's assumed intention to run in the 2015 election, something that rivals within the party have claimed violates the unwritten rule that the presidency rotates between the north and south. Jonathan has announced plans to establish a national dialogue, at the centre of which will be a drive to devolve power away from the presidency in an attempt to reduce the competition for the role. If this dialogue is not successful, the chance of widespread, economically disruptive instability in the lead up to the 2015 election will grow. If such risks materialise fully, then are likely to weigh not just on our macroeconomic forecasts, but also investor sentiment with regards to the power sector - something that will be critical as the privatisation drive proceeds.

Underscoring such risks, we highlight that sectarian conflict is rife in many parts of the country, with inter-religious tensions occasionally erupting into violence. Although there has been some measurable progress, particularly in terms of improved governance, Nigerian political risks, including corruption and security, will continue to weigh heavily on the sentiment of investors and other stakeholders for the foreseeable future - with power sector assets considered legitimate targets by militant groups like Boko Haram.

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This article is tagged to:
Sector: Power, Renewables
Geography: Nigeria
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