Power Sector privatisation & Dangote’s call for reversal: My expert opinion – J Duke Anago

The call by Alhaji Dangote for the reversal of Powerprivisitisation is timely due to continuous epileptic power supply post-privatisation. His views are well documented here – Read more at http://www.dailytrust.com.ng/news/general/dangote-to-fg-reverse-power-privatisation/169010.html#PafBklBw0MRL4d7G.99 . In a nutshell, the points Dangote raised is purely currency risk factor which is one of the key challenges emerging markets project finance face. Equally, most project finance journals suggest this risk has led to the failure of most PPP projects globally including Nigeria’s Lekki-Epe motorway.

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Currency risk in project finance occurs when there is the potential risk of loss from fluctuating foreign exchange rates when an investor has exposure to foreign currency or in foreign-currency-traded investments. For instance, the power privatisation was financed in dollars, but electricity tariffs are in Naira. Automatically, this creates an asset-liability currency mismatch. If naira depreciates against the dollar by 10 per cent, revenues remain unchanged, but the liabilities are now 10 per cent higher. In other words, the investors are at a loss for a decision that is not their making.

In every project finance, risks are allocated ex-ante to the party in the best position to manage each of the risks predicted to affect the project success. In this case, currency risk is the risk in question. Currency risk should be managed by the public sector (Govt) since they are the ones that manage currency exchange rate. Transferring this risk to the private sector is not optimal since they cannot possibly assume a risk where the decisions that can make the risk occur is outside their control.

Therefore, the call by Dangote for the reversal as a concerned citizen is in order if the privatisation is not working. However, it is not the best option available for Nigeria to adopt. Dangote’s option if adopted is a costly approach because the investors must be paid fully to buy back this project since the fluctuation in Exchange rate is not the making of the investors rather the public sector wrong policy choices.

More so, if Dangote’s view is the policy direction FGN plants to uphold,  the options available to the government is to look at the various exit strategies in the contract document. Exit clause such as “buy back” used by Lagos State government to buy back Lekki-Epe motorway when it failed and paid almost N87 billion for a project originally advertised to cost half of that money – is an ideal exit strategy. So if the government want to follow Dangote’s advice for reversal, this suggestion is the best exit strategy that would not see a prolonged court cases since the investors inserted clauses in Sovereign guarantee obtained before take over, prohibiting FGN from any forceful reversal of the privatisation.

NB: In my expert opinion, reversal may not yield the best result. Rather, it will make the project incur more transaction cost, which means an expensive Privatisation. Not to talk of loss of confidence it will bring to Nigeria’s PPP market. If federal govt want a professional advice on best strategy to adopt and save this privatisation, they should hire experts with the understanding of local conditions instead of hiring international PPP experts with little knowledge of Nigeria’s current conditions.

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