An assessment of the Nigeria’s power sector reform

…an engineer’s review of Nigeria’s power sector reform with suggestions

By Olatunji Ariyomo

June 15 2012 | Sheffield, England

1.0       INTRODUCTION

A distressing fact about Nigeria’s repeated attempts to get electricity production and distribution right is that such attempts have failed repeatedly. This is despite the infusion of several billion dollars thus implying that government or the overall leadership will to fund and get result may not be the problem but the capacity of sector leadership to know the right thing to do. Put differently, it appears that what is lacking is the capacity of sector leadership to know the right strategy and path that will most efficiently produce the required results as the usual paths have significantly failed to generate envisaged results. Between 1999 and 2012, it is estimated that the country expended over $25billion (USD) on her electricity subsector of the energy industry yet production alone hovered between 2,500MW and 4,400MW at any time during this period with citizens even willing to commend government if they noticed stable electricity supply beyond 3 hours in a single day. Some have described this as an unprecedented and extraordinary expenditure to procure darkness.

Sector leadership in the context of this paper refers to the authority of the Minister of Power of the federation and any such sub-authority that derives its power directly or indirectly from the federal minister. Can current sector leadership end age-long epileptic electricity supply? Yes. Put differently however, can current sector leadership end age-long epileptic electricity supply if it continues on Nigeria’s present path to reform? No. It would take a pyrrhic victory to record an instance of yes if the current course of its reform is not altered.

2.0       THE FAULT LINE
A major fault line in the ongoing reform lies in the decision to make the unbundling of the Power Holding Company of Nigeria (PHCN) the core of the policy thrust of government when it should ordinarily have been the reform’s obiter dictum ­– important, but not critical enough to derail or define a negative outcome for the entire agenda. Current strategy appears to put privatisation before sector liberalization, a situation akin to putting the cart before the horse. If the cart were ahead of the horse, what would drive the cart? Also, the reform’s current direction is the equivalent of making NITEL privatization the core of the policy thrust of government during the reform of the telecommunication sector. That singular error has succeeded in fortifying the position of PHCN workers and enhancing their capacity to slow down, make or even mar the entire process. This was a tactical blunder that was avoidable from a strategy point of view.

Simplified electricity distribution grid diagram

Simplified electricity distribution grid diagram

This strategic error draws strength from another technical and tactical misconception which appears to punctuate some of the responses from government’s team – that the electricity reform matrix does not perfectly mirror the telecommunication sector scenario because of the pervasive nature and present ownership structure of the national power distribution and transmission backbone required by the former. This is erroneous and only gains currency when the crucial nexus that connects both and the parallels that define the core elements that qualify as critical success factors are overlooked even when it is easy to recollect that the participating private investors at the time of telecom sector liberalization initially relied on an equally pervasive national telecommunication backbone exclusively owned by NITEL for the bulk of their call terminations which gave NITEL some business edge and cost termination advantage in those early days.

Essentially therefore, current electricity sustainability strategy suggests a flagrant disregard of the knowledge curve gained from the successful liberalization of the telecommunication sector. Again put differently, Nigeria is today experiencing energy growth penalties from lack of inherent capacity to see a nexus between her telecommunication industry and the electricity sub-sector of the energy industry which is chiefly the result of not being able to view her entire electricity sub-sector as a value system, that is, see the mobility and dynamics of the value chain inherent in the totality of electricity generation, transmission, distribution and management stream. Present resistance by sector unions and workers as well as the strategic delays purportedly engineered by entrenched ‘interests’ and the herculean tasks and politics of aggregating, positioning and empanelling new leadership for various companies so created from the unbundled PHCN are self-imposed burdens that should never have been the primary duty or concern of the government’s core reform team. One can only imagine with pity the quantum of effort, resources and energy being devoted to the management of these avoidable distractions!

The huge expenses sunk into schemes aimed at fattening and conferring the status of ‘juicy investments’ upon the 18 successor companies of PHCN to make them appealing so that they could qualify as most sought after brides on the international market could have served a better purpose if deployed as counterpart funds with reputable Greenfield investors to address the same layers of national challenge portfolio. By the time the actual dollar value pushed into the sector is factored into consideration (estimated at $16billion as at May 2007 and presently approximately put at close to $25billion), it is doubtful that returns (based on actual sales) from bids by winners of the 17 successor companies would fetch the Nigerian people a quarter of what t has been expended so far. Hence, as it is today, the myriads of explanations being lobbed at the public in explaining the rationale for increase in salaries and tariffs when the target companies are candidates for privatization would have been unnecessary even as an informed public would easily identify them as executive spins and a way to ensure that the new high tariffs make takeover more profitable for the new owners at the expense of the Nigerian people.

3.0       THREE GOOD STEPS LADEN WITH LANDMINES
Three good steps have however been taken by the present sector leadership. These are listed below:

  1. Creation of a bulk electricity trading company (BETraC)
  2. Reported decision to outsource management of national power transmission backbone to a reputable Canadian firm (Nigeria will pay agreed fees to this firm for this role).
  3. Reported empowerment of states and local governments (LGAs) to invest in production and distribution.

These could be described as the three best things that have happened since the commencement of the reform. It is however pertinent to observe that these three have again been laden with the usual in-built ‘landmines’ and ‘reform viruses’ that have come to define reform processes in Africa.

3.1 HIGHLIGHTS OF THE LANDMINES
Available reports on the bulk electricity trading company (BETraC), the contract for the management of the national power transmission backbone and the involvement of the second and third tiers of government in the sector point to the following as facts:

  1. BETraC is a government bureaucracy rather than a system driven or institution propelled initiative empowered with robust legislation to utilize transparent accounting system, settlement capabilities, and self governance structures using bilateral cooperation involving limited government but sizable private sector involvement. Unending bureaucracy with its attendant road-blocks is a crucial problem identified by this writer as an impediment to sustainable energy growth in Africa and a direct inhibitor of real private sector involvement. Maintaining this structure as part of the current reform path makes it sure booby-trap.
  2. It appears strongly that the responsibility for the management of the entire national power transmission backbone covering the 910,768 sq km of the nation’s land space is being outsourced to one single monopoly. This has corresponding impact on the reform’s capacity to act as stimulant for massive job creation, widespread private sector growth and knowledge transfer along the transmission corridor as well the potential to impede the promotion of fair consumer price. Paul K. Ogden described this as “creating a government sanctioned monopoly for a private company” (Ogden, 2009). It also does appear that rather than receiving payments from the manager, government of Nigeria would be paying the manager. This is awkward. It directly negates the entire narrative behind a private sector led electricity sub-sector while potentially leaving room for collusion and ultimately corruption.
  3. Reported empowerment of states and LGAs is superficial as it is solely within the limitation imposed by Section 14(b), Part II of the Second Schedule (Concurrent Legislative List) of the Nigerian Constitution which restricts state’s investment to “areas not covered by a national grid system within that State”.  Any strategic manoeuvring beyond this constitutional intendment without actually amending the constitution to remove restrictions imposed upon states and local governments would limit the capacity of states to be real owners of their investments, promote conflicts and open up future avenues for possible abuse which could result from socio-political differences in a nation as diverse as Nigeria. An improvement would be a model that would guarantee stronger legislative protection, fairness and sustainability for states and local governments as well as private investors. This can be accomplished by way of amendment of the extant regulation.

4.0       SUGGESTIONS
What is the guiding philosophy of the reform? Shouldn’t sector liberalization precede privatization? If yes, do we have evidence of nations that have followed similar direction to success? Can Nigeria learn any lesson from Ghana’s success despite retaining state-owned public electric utilities such as the Volta River Authority (VRA), Ghana Grid Company (GRIDCo) and the Electricity Company of Ghana (ECG)?

What the reform intends achieving must be clear – for instance, would adding more government money qualify as privatization? If it is ultimately necessary for the reform to receive the injection of public funds in order to jump start the process, would that not be better infused as joint venture funds into enterprises sponsored wholly and primarily by internationally acclaimed Greenfield investors thereby bypassing the politics of PHCN altogether? Ordinarily the reform should be aiming at ultimately eliminating government fund while bringing in private fund, eliminating government control while promoting system driven control mechanisms, eliminating secrecy while bringing in transparency, eliminating established interest and pre-determination in order to bring in equity, fairness and spontaneity.

This writer empirically estimated Nigeria’s urgent electricity requirement to be a minimum of 55,694.50MW in order to merely get by. The nation needs more for optimum power stability. Putting the arrays of complex options required to properly govern the sector in context requires thinking outside the box as well as looking back to take advantage of what we did right in the past.

Among other considerations, the focus of government’s reform should include:

  1. Strategy for jumpstarting attainment of reform objectives. It is baloney to advance that because Nigeria has suffered electricity deprivation for 50 years, it must ultimately take another 50 years to get it right. No. A good sector reform strategy will lead to sustainable electricity that the people can begin to tangibly experience in the cities within 2 years.
  2. Strategy for technology transfer and knowledge enhancement
  3. Strategy for massive job creation (taking advantage of item number 2)
  4. Strategy for sustainability and ensuring reform cannot be truncated (robust legislation, sector leadership and masses’ support)
  5. Strategy for massive revenue generation for the people of Nigeria (government should earn payments – taxes, levies, rents etc – and not the other way round)
  6. Strategies for correcting the identified ‘landmines’ enumerated in 3.1.
  7. Strategy that would lead to the reform benefiting from contributions of professional bodies and other sector stakeholders. Sector leadership cannot be an island of knowledge. As part of wide consultation (before decisions are taken) the reform would benefit more if subject matter experts from the various professional organizations are allowed to make input. This is the tradition in the United Kingdom and the United States.

Getting Nigeria’s quest for steady electricity right requires the appropriate strategy, thorough industry expertise and objectivity. There is no such place where Nigeria’s current model of financially fattening up a moribund and non-performing government agency in order to sell it to private sector handlers does have a successful precedent as a cost effective model. It could only further promote corruption as well as serve as an opportunity for local elites to apportion national utilities among themselves under the guise of privatization.

In conclusion, Nigeria can get it right with sustainable electricity, put the years of epileptic electricity supply behind her and join the rest of the world in the pursuit of renewable energy alternative. This is however only possible if the nation is doing the right things.

Paper authored by,
Engr. Olatunji Ariyomo

Written by

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