Washington, DC —Paul Hinks, CEO ofSymbion Power, has had a 30-year career in the energy sector, the last five focused on Africa. The independent power producer and engineering contractor builds, owns and operates electricity infrastructure. Since 2012, Hinks has also served as chairman of theCorporate Council on Africa. He was interviewed in the company’s Washington, DC headquarters.
Let’s start with Nigeria, with great potential but also major challenges. Why are you doing business there?
Nigeria is a country of 173 million people, the largest in Africa – 173 million people, a large majority of which don’t have access to affordable electricity basically. All over the country, people use diesel generators. The cost of producing power by burning diesel is something like $0.35 to $0.45 per kilowatt depending on location. But Nigeria has abundant natural resources – coal, gas, renewables – and of course solar. There is plenty of land where biomass can be planted, and there is hydro. They don’t have to import really expensive diesel – that’s crazy – and it’s happening right across the African continent. Liquid fuel importation is a major source of corruption. If countries focused on getting rid of diesel for power supplies, they would save an absolute fortune. We have a policy at Symbion, which is that we prefer to rely on indigenous fuel resources. It’s only in emergencies that we will consider diesel. Our view is if locally available, er fuel sources are used, rather than imports, It’s the best thing a country can do.
What propelled you to take Symbion into Nigeria and what are you doing there now?
It’s pretty obvious that in a country with a 173 million people where just about everybody uses diesel generators, there is a huge opportunity for anybody in the affordable independent power business. We spent two years studying Nigeria before we actually started investing. We spent most of 2012 and 2013 bidding for the acquisition of Ughelli Power Plant. 2013 was when we actually made the investment. InNovember, we took over the plant.
You invested in partnership with Transcorp?
Transcorp, Woodrock Energy Ltd and Heirs Holdings, mostly other Nigerian companies. Great partners.
What subsequently happened with that investment?
When we took over, Ughelli was only producing 160 megawatts, although it has an installed capacity of 972 megawatts. So we started rehabilitation and have been working on that rehabilitation right up until today. Earlier this year, we got the plant up to 650 MW. Then, about three months ago Symbion decided that we had completed our role there. The partnership had created Transcorp Ughelli Power, Ltd. We staffed it with our own people and with former employees of the Ughelli power plant and everything worked out fine.
Transcorp Ughelli Power, Ltd. today is a self-sufficient, well managed organization. It doesn’t need Symbion as it did in the early days. We felt that we were at a good point and there was an opportunity to sell our interests. We had a minority position, and so not feeling that our value was as important anymore in terms of the rehabilitation and operation of the power plant – and with an opportunity to sell to our local partners, who were in an acquisitive mode, post-elections interestingly – we made a very amicable deal and exited.
So ours is an investment success story. In less than 18 months, we leveraged our expertise and we exited with a very acceptable multiple on our original investment – in a country where many American companies are frightened to invest. It’s a good story, an important lesson, because a private equity investor is interested, not only in how to get into a deal and invest, but also how to get out and make good money. It’s a great story for Nigeria too.
Do you have other investments in Nigeria?
We have a good pipeline of mostly gas projects, and we are looking at some embedded projects in distribution companies. We are seeking to make new investments where we will have a majority, or larger stake. We would hope that by the end of this year that we are invested in another good Nigerian project.
Nigeria’s power sector privatization has received good marks, but earlier this year the power generation in the country reached a record low level. Does that worry you as an investor?
I have been very close to the whole privatization program, so I see what Nigeria is really doing. Yes, the results in megawatts connected to the grid around the country are not yet satisfactory or on the scale they should be. But things have been happening. And generation has been improving. Ughelli Power is one success story. Egbin Power, a plant owned by Sahara Power is another example of the successful rehabilitation of a power plant that wasn’t producing to capacity. . When these plants are fully rehabilitated, it’s not going to be helpful if they are not able to transmit their electricity to the towns and the cities across Nigeria where the power is needed. It all has to go hand in hand. I come from the power industry, and I understand what it means to do a privatization on the scale Nigeria has embarked upon. They did really well until probably early 2014, when things started slowing down.
Let’s be realistic though. For the last 12 months, the election in Nigeria and change of government has delayed the privatization program because everybody has been focused on politics and elections. We are now seeing things start to recover but it may take a while longer for the privatization to get back up to full speed. Unfortunately though, the transmission infrastructure is very poor, and they haven’t been investing in a big way into the system. They must get on with that.
The other significant problem is with the new distribution companies. Distribution is probably the most difficult and risky investment to make in the power sector in Nigeria. To appreciate how difficult it is, you only have to walk around Lagos and look up at the power lines around the city and imagine what it will take to fix them and to go around to connect all the houses and install new meters. Prepayment metering was a condition that the Bureau of Public Enterprises set out for the privatization. I can’t imagine how difficult it’s going to be to get into some of those large blocks of condominiums to put prepayment meters in a place where many people have been used to not paying for electricity.
The distribution companies have a tough job, and some do not have the technical partners I think they need. Personally, I wish that some of the really large power utilities from the United States, UK and other parts of Europe who have a lot of spare cash available could muster the confidence to go into Nigeria and get involved in this. Those are the companies who can sort it out. It is a huge undertaking that needs a lot equity (cash) to be able to fix up those distribution companies. All of the three elements of generation, transmission and distribution must come together for this to be a success, and I think that eventually it will be.
How serious is the shortage of available natural gas for generating companies like Ughelli?
I can tell you that Ughelli is already having gas shortage problems, and many of the other gas-powered plants are having problems too. Nigeria flares gas because it does not have the infrastructure to take the gas from where it is to the consumers. A lot of gas is stranded because the investment required for the gas infrastructure has not been made. There are complaints from investors in the gas supply and gas treatment plants who say they can’t get paid sufficient amounts of money to justify the investments. (See New Tariff for Nigerian Gas.) The tariff for gas in Nigeria is around $2.50 cents per MMBtu, compare this only to Tanzania, where gas coming from the south in Mtwara is likely going to be sold to Symbion for around $6 per MMBtu. Gas pricing is a huge subject all over Africa these days. W want cheap gas but the producers say they need higher prices in order to invest more money.
There’s also incessant vandalism and terrorism problems. People are blowing up pipelines. (See How Oil Thieves, Cabal Milk Nigeria Dry.) I was told recently that the condensate lines running parallel to the arterial oil pipelines in the delta are being punctured because the condensate can be used for cooking oil. People are cooking with it. And a while ago I was told that something like 21 IEDs (improvised explosive devices) went off simultaneously on an oil pipeline. That’s pretty sophisticated.
When we were working in Iraq the U.S. government and the Iraqi government deployed a pipeline protection force from the private sector. I think this is what Nigeria needs. They should outsource the security for pipelines and let the army focus on the other security problems that exist with Boko Haram. In Iraq they managed in those days to keep the oil flowing in the most dangerous parts of the country. Much more deadly than anywhere in Nigeria. The security firm worked with the indigenous population. It was successful.
Looking to other parts of Africa, give us an overview of where Symbion is investing.
We are developing a large gas to power project in Tanzania . Tanzania has found huge amounts of gas off the coast of Mtwara in the south of the country, just North of the Mozambique border. There is an existing gas field there called Mnazi Bay, and there is already gas infrastructure and a small 18MW power plant on the mainland. In a public, private partnership with the utility TANESCO we are going to build a 600 megawatt power plant at Mtwara. We are also going to build a 550 kilometer, 400 kilovolt transmission line and then hand it over to TANESCO because the law requires that they own the transmission network. That line will connect the Tanzanian grid, which the utility is currently working to connect to other countries such as Kenya, Uganda, Rwanda Malawi and Zambia.
We are also in discussions with Electricite de Mozambique (EDM) about the construction of transmission from Tanzania to the northern towns of Palma and Pemba where huge developments will be taking place over the next 10 years. It is a very short distance from Tanzania and we are looking at how we can fast track power supply to that area. Mtwara is really an East and central African regional project that’s designed to introduce new large-scale power capacity beginning three years from now in late 2018, when the project is finished. Each year we are expecting to increase capacity and eventually hope this will be a very large, 1000-plus megawatt power plant on the Tanzanian coast and a regional energy driver that will mitigate the risk that low water levels in hydroelectric power systems create for the entire region.
In Rwanda we are investing in a gas to power project to use methane gas from Lake Kivu. Lake Kivu has quite a strange phenomenon – it emits methane gas from the bed of the lake, it’s a volcanic area. One of only three lakes in the world that does this. The methane is dissolved in the water, but right at the bottom of the lake. The depth of Lake Kivu is between 300 and 400 meters, so we will bring equipment to Rwanda and build four barges. From those barges we install HDPE pipes down to 300-400 meters and siphon the water up into a separation tank that is anchored below the surface. As the water is sucked from the bottom of the lake, the bubbles separate from the water – like a champagne effect. You then put the water back into the lake and you take the gas, compress it and send it to the land, and there we will have regular gas treatment facilities. We remove the carbon dioxide and put the methane into a gas-fired power plant to produce electricity. This has two benefits – it produces electricity and it reduces the methane load in the lake significantly reducing the possibility of an accident caused by methane and CO2 being evacuated into the atmosphere.
In Uganda we are doing a project in partnership with the Madhvani Group, a very reputable family who are well-known East African sugar farmers and hoteliers. We are the majority owners in a power plant development to produce electricity from peat. You dry the peat, turn it into a slurry and burn it in a boiler to produce steam [to generate] power.
In Kenya we are a minority partner in a consortium of three companies that is led by the geothermal power specialist Ormat, which is listed on the New York Stock Exchange, We have a concession at Menengai to build a 35 megawatt geothermal plant which is scalable in the future, once we have tested it at 35 megawatts. The other partner is the private equity firm Transcentury from Kenya.
Our latest venture is in Madagascar , an island of 22 million people in the Indian Ocean. During the course of the last year, since the new democratically elected government came into power, we have been working hard at this investment studying Madagascar and looking at what we can do to help them save money, and create a business for Symbion. Madagascar has over 100 power sites and no national grid at all – and the country is bigger than France. Can you believe that? And most of those sites run on diesel or heavy fuel oil (HFO).
The cost to this Island nation is mind blowing, and it has been like that for decades. What Symbion has done is to complete for them some studies, and we have made a proposal to implement a program to reduce the reliance on diesel-fired power across the island. We signed a protocol with the government – actually with the Presidency – to develop seven power plants over a three-year period. Three of them are biomass – we are going to grow bamboo – each one is 5 megawatts in different areas. We need about 3000 acres to grow the bamboo for each plant, and we are going to be buying biomass for a given price with newly created bamboo farmers producing and delivering the bamboo pellets that we will burn in our boilers. Each plant will have this large feedstock supply chain that will create jobs for literally thousands of people. It will also produce cheap electricity – and it’s renewable. The President of Madagascar and the power utility JIRAMA are keen to see job creation, so these small plants will be a great stimulant for the economies of rural areas.
We also have an agreement to build a nine-megawatts solar plant, photovoltaic solar. The other projects that we are involved in – one is a heavy fuel oil plant at a place called Tsimiroro. There is a company there that is extracting heavy fuel oil from the rocks by injecting steam into them. It’s called Madagascar Oil.
Power for Antananarivo [the capital] is all diesel and heavy fuel oil at the moment. You can imagine the huge cost. So we are going to build a 116-megawatts power plant at the oilfield and then build a transmission line of approximately 300 km to Antananarivo. The oil that we will buy locally is a lot cheaper than the oil that is now being imported. We will provide the power utility JIRAMA with a good tariff, which benefits the country and the people.
On July 29 we signed a Power Purchase Agreement (PPA) to invest in the 40MW Mandroseza power plant in Antananarivo. The plant is in poor condition although it is only about seven years old, it’s producing only 5MW. JIRAMA has signed a PPA with Symbion for a tenure of 20 years where we will rehabilitate the plant and operate it at the full 40MW.
When the news of the Mandroseza deal was announced there was some concern that the government was privatizing JIRAMA and that jobs will be lost, and there were reports in the local media about possible industrial action. But in fact that’s not the case at all. It is the complete opposite. There will actually be many new jobs created and the the utility is not being privatized. We are purely giving support to the utility and to the Malagasy people. The power is not going to cost much, and less than it does today. Most of the unions now understand that the deal that Symbion has done is supportive of both JIRAMA and its staff in a country that has very little electrification and chronic power shedding.
We are very optimistic about Madagascar. I have been all over the country, and it’s an amazing place with incredible, unique biodiversity found nowhere else in the world. With the level of political stability that we are seeing now, we will certainly see lots of investment going into Madagascar next year from both the donors and from the private sector. Later this year Madagascar will likely receive a credit facility from the International Monetary Fund, which will be the catalyst for these new investments. It’s all such good news for a country that has suffered from political turmoil in the past. The new government is doing a great job and this has been the reason we have chosen to invest on such a large scale there.
That’s quite a portfolio!
Yeah, it’s quite exciting here at the moment. But extremely hard work for all our staff and our partners.
Let’s conclude by getting your thoughts on the Obama administration’s Power Africa initiative, which is marking its second anniversary. You were there for the launch.
I was certainly there. The President delivered his Power Africa speechat our Symbion Power Plant in Dar es Salaam, Tanzania in July 2013. I gave him a tour of the plant and sat right in front of him, and I can remember every word he said and exactly what he promised the people of Africa. (See: Obama Initiative Aims to ‘Light Up’ Africa] Power Africa has set-up a very good network of people across the continent now. They are actively helping us on some of the transactions and they have transaction advisors in a number of countries. I think they are seen by the African utilities as being on their side of the fence as opposed to ours, which is fine and it’s very helpful to have them there. Power Africa is moving but – in my view – not moving fast enough. There is a lot more that they can do.
When Power Africa was announced, everybody in Africa seemed to think that there was a big pot of money. [They envisioned] the usual World Bank style of ‘here is the money, go spend it’. That’s not how the initiative was set-up from the outset and that’s not what President Obama said. In his speech that day, he said that Power Africa represents a different way of working – not traditional aid where you put a grant or a loan on the table. The program is coordinated by the United States Agency for International Development (USAID) from South Africa and in Washington, DC. Other U.S. government agencies – the Overseas Private Investment Corporation (OPIC), the EX-IM Bank, the Trade and Development Agency (USTDA)- were tasked with supporting the power sector in Africa and the Millennium Challenge Corporation (MCC) are providing huge energy grants to African governments.
The government also went to the private sector and asked them to commit to investing in power. I can speak from our own experience; they came to Symbion Power and asked us to be a partner in the initiative. We agreed, and they asked how much investment, how many megawatts we would do over the next five years. We said we would invest $1.8 billion and we signed a commitment letter to do that. So did many others. In our case I think we will surpass the commitment we made in that period of time. Our Mtwara project alone represents a project cost of over $1 billion USD.
What does the $1,8 billion commitment actually mean? It means we will use our own equity (cash), which is normally 30% of the project cost, and we will seek debt financing for the balance. And for that financing, we will ask agencies such as OPIC or Ex-Im Bank, if it is eventually reauthorized, to back the purchase of materials and equipment. The win for the United States is that if we get that financing or credit support, what we buy for our projects gets made in the United States. That keeps people employed and creates jobs here, and for me that’s where some of the Power Africa flag waving comes from. As more of these projects get going, there will be a better understanding of how Power Africa works and where the benefits are – to both the U.S. and to Africa. I hope that Power Africa continues after President Obama leaves office, and that will be more likely if the legislation passes that is called the ‘Energize Africa Act‘, which is bipartisan. Africa has support across the aisle, not much else does these days.
I think Power Africa, a bit like Nigeria’s privatization, may have slowed down a bit this year as they wait for new projects to get funded, but I fully expect them to start to deliver and show results as we now move into its 3rd year. Power projects take years to get off the ground before they generate, transmit and distribute the power they are supposed to. It’s still too early to judge the results of many of the Power Africa Initiative efforts. Very little has been translated into real electricity and much has to be done to aim for the trebling of access to power in Sub Saharan Africa as President Obama promised 50 Africa Heads of State at the African Leaders Summit in Washington, DC in August 2014. The United States has to deliver on this promise. If we don’t we will lose all credibility.
So you think Power Africa will have s long-term positive impact?
I have confidence in Power Africa even though I can sometimes be its biggest critic. But I do that privately. You just can’t build power plants in a few months or even a few years. It takes a lot of development time sometime two years, and then it takes time to construct the facilities. This alone can be another two to three years for the larger plants. Only after this time (up to five years) will we see the real results. But I do think that this initiative is going to deliver on President Obama’s promises although sadly, the biggest effect of it will only be seen after he has left office. We will have to hope for and count on the next administration to fully embrace Power Africa and continue the work that has been started.