Page 1 of 3

When you first arrive in Lagos, the noise of Africa’s largest city is overwhelming. Horns blare in the endless traffic, vendors bark at passersby, clubs blast music onto the streets, and churches and mosques appeal to the faithful around the clock from public loudspeakers. Worried that the din is damaging the health of the city’s 17 million inhabitants, the state government recently launched a crackdown, closing more than 100 clubs, hotels and places of worship earlier this year.

There is another, more insidious sound that you gradually notice once you’ve been on the ground. It’s a low-level hum, the chorus of the thousands of diesel generators that keep the city going in the face of a chronic electricity shortage. At shopping malls and hotels, generators the size of shipping crates sit in parking lots, often secured in locked cages; on the streets people carry briefcase-size models. At outdoor markets such generators are passed from stall to stall as the need arises, which is often: Nigeria gets an average of three hours of electricity a day from the national grid, usually in short bursts. The average Nigerian uses barely one hundredth as much electric power as the average American — just enough to keep a lightbulb on. When the grid goes dark, the generators fire up with a loud roar before settling into a steady background drone.

Solving the power shortage is arguably the biggest development challenge for Nigeria, and for much of the African continent. Now, after years of talk, there are glimmers of progress. In a field of red dirt halfway between Lagos and the country’s main oil and gas fields, a consortium of local and international investors is building a gas-fired plant. The $877 million Azura-Edo Independent Power Project, as it’s called, is modest in scale, with an expected generating capacity of 459 megawatts when it comes on line in 2018. (By comparison, China installed 33 times as much capacity just in solar power last year.) Yet the project, which brings together an array of Nigerian entrepreneurs, foreign infrastructure investors and multilateral development banks, promises to have a much bigger impact by creating a financial and regulatory model that can be replicated elsewhere.

The principal equity investors include Amaya Capital, a Mauritius-­based firm founded in 2008 to invest in energy projects in West Africa; American Capital Energy & Infrastructure, an Annapolis, Maryland–based private equity fund headed by Paul Hanrahan, former CEO of U.S. utility operator AES Corp.; and Aldwych International, a British developer of African power projects. A variety of public and private lenders are providing $622 million of debt finance. They include International Finance Corp., the for-profit lending arm of the World Bank, and Netherlands Development Finance Co.; such foreign banks as Standard Chartered and South Africa’s Rand Merchant Bank; and Nigeria’s state-owned Bank of Industry, which is providing funds in naira to cover the project’s local currency costs. The World Bank Group has provided a political risk guarantee that has been crucial for attracting private investors.

“This transaction has managed to get about 20 investors comfortable with participating in the Nigerian power sector, and we expect most of them will look at more transactions,” says Richard Arkutu, manager of the IFC’s Africa Special Initiative for Infrastructure. Indeed, some of the participants in the Azura-Edo plant have been working to get a similar project, a 550-MW plant in the country’s oil-producing Niger Delta region, off the ground; the backers are already in negotiations to sell the project to Black Rhino Group, a Blackstone Group vehicle created to develop infrastructure projects in Africa. Black Rhino hopes to reach a gas-supply agreement with the government and begin construction later this year.

Extending power in Nigeria, Africa’s largest country, will be a major achievement. Roughly 42 percent of the population of 180 million has no access to the electricity grid. Such collaborative efforts could have a far wider impact across the continent, where the needs are, if anything, even greater: The World Bank estimates that as many as 600 million of Africa’s 1 billion people lack access to electricity. The Power Africa initiative, launched by President Barack Obama at a Washington summit meeting two years ago, set a target of adding 30,000 MW of new generating capacity across the continent and connecting 60 million more homes and businesses to the grid by 2030. Overseas Private Investment Corp. (OPIC), a U.S. government agency that’s playing a key role in Power Africa, has provided $50 million in loans to the Azura-Edo plant. The hope is that when enough power plants are built, grids rehabilitated and payment-collection systems overhauled, investors will no longer ask for help before committing to build. The result will be more power, more jobs, faster growth and higher living standards.

“Power is the missing link in Nigeria,” says Brian Herlihy, CEO of Black Rhino. “It’s going to create huge productivity gains once it’s there.”

The country badly needs the push that projects like the Azura-Edo plant can provide. Muhammadu Buhari generated high hopes for change last year when he became the first challenger in the country’s history to defeat an incumbent president in an election, but Nigeria’s woes have intensified since he took office in May 2015. The collapse in global oil prices has undermined the country’s biggest source of hard currency earnings and government revenue. Exports plunged by 40 percent last year, pushing the current account from a slight surplus to a deficit of 2.4 percent of gross domestic product and causing the government budget deficit to double, to 3.7 percent of GDP. The Central Bank of Nigeria initially spent a chunk of its foreign reserves to defend the naira, then let the currency depreciate by about 20 percent in late 2014 and early 2015 before targeting a fixed exchange rate of 199 to the dollar and imposing capital controls in April 2015.

Oil production has fallen further in recent months, touching a 22-year low of about 1.7 million barrels a day in early May, because of a resurgence in violence by militant groups in the Niger Delta region. These groups had been quiet in recent years thanks to an amnesty program that provided stipends and job training, and a government initiative that gave them security contracts to guard the pipelines they used to attack. But Buhari has adopted a harder line, canceling the security contracts, cutting funding for the amnesty program and prosecuting a former rebel leader known as Tompolo, who may be linked to the Niger Delta Avengers, the group behind several recent bombings.

Contrary to the advice of the International Monetary Fund, Nigeria refuses to let its currency float and has rebuffed the Fund’s offers of financial assistance. Finance Minister Kemi Adeosun defended the government’s stance at a panel discussion during the IMF’s spring meetings in Washington. “If we are sick, we have our own local medicine,” she told the audience. IMF deputy managing director Mitsuhiro Furusawa responded: “We aim to be a good doctor to you. It’s better to have many doctors.”

Buhari has introduced some much-needed reforms, notably at Nigerian National Petroleum Corp., the state’s famously opaque oil arm. When Lamido Sanusi, former governor of the central bank, alleged two years ago that NNPC had failed to turn over nearly $20 billion in revenue to the Treasury, he was removed from office by then-president Goodluck Jonathan. Buhari has injected transparency into the oil company. It now publishes a monthly newsletter with production and revenue updates. A full audit and annual report, the first since 2005, are expected later this year, says Alexandra Gillies, director of governance at the George Soros–funded Natural Resource Governance Institute. The president has led a military campaign to reduce terrorist group Boko Haram’s impact and has consolidated cash from the various bank accounts held by ministries and other agencies into a single one at the Central Bank of Nigeria, making financial flows easier to track.

But in many areas the pace of change is slow because Buhari appears reluctant to delegate matters to anyone he doesn’t trust, says Soji Apampa, a businessman who helped found a Nigerian anticorruption group called the Convention on Business Integrity. If the president has a wider plan beyond intervening in areas where he sees a need, he has yet to share it. “The campaign machine repackaged someone considered to be a brutal old soldier into the statesman Nigerians sought, but he seems to have jettisoned that persona,” Apampa says. Instead, Buhari is now popularly known as Baba Go Slow, a play on the term Nigerians use to describe traffic jams.

Nigeria’s electric plants have the capacity to generate up to 6,000 MW of electricity, or about 80 percent of what it takes to power Los Angeles. The system rarely runs at full capacity, though, typically generating less than 3,000 MW. Dilapidated power plants and an aging and inefficient power grid are major shortcomings. Roughly 35 percent of the power generated is either lost in transmission or effectively given away. Distributors in many cases either fail to bill customers accurately or can’t collect payment from them, a problem common to much of Africa as well as to other developing countries, such as India. In addition, the state regulator usually sets tariffs at levels too low to leave room for investment, even if the operators could collect all their revenue. Unpaid bills pile up, usually on the balance sheets of state-owned utilities, crippling their ability to borrow or attract outside investment.

Single Page    1 | 2 | 3