Ty Butler, Senior CorrespondentInternational Development and Conflict Last Modified: 16:32 p.m. DST, 06 September 2013

LAGOS, Nigeria - Nigeria’s long trek towards large-scale energy market reforms is witnessing rapid progress as the Power Holding Company of Nigeria finalizes the sale of 15 energy companies.

A total of ten distribution companies and five generation companies have been sold to private stakeholders as part of an eight year reform effort initiated by the country’s Electricity Power Sector Reform Act (EPSR).

The act seeks to increase private investment into Nigeria’s energy infrastructure in an attempt to address lagging electricity capacity. Brownouts are not uncommon in most Sub-Saharan African states, such inadequacies in power generation and transmission capabilities make it difficult for businesses, particularly manufacturing industries, to operate efficiently.

Publicly owned power companies faced large efficiency troubles in an atmosphere where subsidized tariff rates did not generate enough income to prevent power companies from operating at a financial loss. Such realities led to wide scale inefficiencies in energy companies, including poor maintenance which reduced overall energy capacities.

Low energy prices also made the market unattractive to private investment since companies could not expect to witness economic returns on any investments made. To address pricing distortions, Nigeria implemented the Multi-Year Tariff Order (MYTO) to gradually increase the cost of electricity, allowing the sector to become profitable for businesses to operate in.

To date, Nigeria has netted $2.73 billion through the sale of its energy assets. This money joins $1.6 billion in international loans which is slated to finance, among other things, new private-public partnerships and investments into new energy and gas infrastructure.

Nigeria’s reform efforts have not only attracted international bidders for public energy assets, but have boosted investor confidence as well, encouraging new energy construction efforts. The U.S. company General Electric has agreed to invest $1 billion over five years into a new manufacturing and assembly facility in the city of Calabar; a vote of confidence in Nigeria’s future economic prospects. General Electric has also partnered with the Nigerian firm Geometric Power Limited to construct a new 450 megawatt thermal power plant in Aba.

With over 162 million citizens, Nigeria is Africa’s most populous country, and one of the few in Sub-Saharan Africa with fairly large domestic consumer markets. This makes the country a prime location for the development of local small and medium scale businesses. Healthy domestic markets allow companies to form and compete with generally larger international companies. It also allows for infrastructure and service grouping known as economies of agglomeration to take place which reduces operational costs.

Power sector limitations and unreliability have traditionally bogged down Nigeria’s desire to promote growth outside of its considerable oil industry. With a more inviting and stable power sector, investor risks should decrease over time along with operational costs despite higher energy prices; allowing Nigeria an opportunity to better diversify its economic growth.

Follow Ty Butler on Twitter Twitter: @nahmias_report Senior Correspondent: @TywButler

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