By Akachukwu Okafor 10/02/2018
A few weeks before this year’s annual Nigerian Economic Summit, I was in conversation with an energy reporter from one of Nigeria’s leading dailies. In that dialogue, I mentioned that I did not see a situation in which further reforms in the power sector especially the Power Sector Recovery Plan (PSRP), would yield any results without the government reviewing the privatization of the electricity sector especially the distribution companies (DISCOs). I argued that part of the reason the DISCOs are not making required investments into network and systems upgrade is because they are not sure of how long they will be permitted by the regulators to be indisciplined before they are called to order. I told him that what most of the DISCOs are doing is cashing out, pending when there is certainty about which direction the sector is going. He argued that the government will not attempt any review of the privatization exercise as this will further place Nigeria’s electricity market on the negative for investment. We concluded the conversation after acknowledging that it may put Nigeria on the negative, but that government doesn’t have an alternative. Although I emphasized that while I foresee a review soon, what I do not know is how it will be handled by government, the nature that it will take, and what the outcome will be.
Soon afterwards, during the Nigerian Economic Summit, Nigeria’s Minister of State for Budget and National Planning, Zainab Ahmed, told the summit that government was considering a review of the power sector privatization, starting with the DISCOs. This, according to her, was necessary to attract the required investment into the sector, particularly the World Bank Group’s $2.5billion which can only be offered upon Nigeria’s fulfilment of 18 agreed conditions stated in the PSRP. In early April, I provided a preliminary analysis on the PSRP based on the Minister of Power’s briefing to newsmen during the launch of the plan, and promised more analysis when the entire PSRP document is available to me, which you will read in this article
Of the 18 conditions stipulated in the PSRP, there are conditions that will be difficult to meet due to the difficult and challenging environment where these problems are situated – the numerous stakeholder groups to engage with, the lack of a clear strategy for solving these problems, the political will to pursue any strategies and most importantly the lack of effective and strong institutions to implement plans/strategies that will meet these conditions. They include: review and implementing a cost-reflective tariff (per MYTO review schedule), development of a plan for the prevention of gas pipeline vandalism and its implementation, and also, identification of sources of funding for the PSRP. The last attempt by the industry regulator to review the tariff upwards to reflect cost of electricity production to distribution to consumers, was resisted by consumer groups through legal action.
Unfortunately, there seems to be no way that further investment that will make significant difference in the electricity sector can be made without a tariff increase. I remember one of the former heads of the regulatory commission telling me during a private chat that for Nigeria’s electricity sector to recover, electricity tariff needs to be set at a minimum of N62KW/h and that it will take at least 10 years should all stakeholders in the sector start doing the right thing once tariff was set at N62KW/h. He further pointed out that it is only at this tariff that the industry can achieve a levelized cost that will increase electricity generation especially from renewable energy sources and attract needed investment in the industry. This assertion is reflected in the PSRP which shows that there has being a steady decline of both naira and dollar denominated investment in the electricity sector since 2013 to 2017, with uncertainties for year 2019. The level of confidence in the Nigeria Electricity Supply Industry (NESI) has left the industry with only two dependable investors – the Central Bank of Nigeria (CBN) for Naira investment and the World Bank Group for dollar investments.
For gas pipeline vandalism, government is light years behind developing and implementing a sound plan that will effectively solve the problem due to the long historical background of violent agitation that has been part of exploiting resources in the region, it’s underdevelopment, continued pollution and political economy of resources there. Unfortunately, 85% of Nigeria’s current total generation output is powered by gas. This is part of the reason government is vigorously pursuing the development of more hydropower. So, it is difficult to imagine where the funds for implementing the PSRP will come from.
Other strategies laid out in the plan leave more questions than answers. They include: where and how the funds that will be used to fund future (2017 – 2021) sector deficit will come from, who is guarantying and insuring the funds? Will there be political will to match the need to ensure that DISCOs’ performance and implementation of credible business continuity plans are realized? This is a serious concern because of the political interferences on the work of the regulator which has long been a hindrance in compelling DISCOs to adhere to industry best governance practices. There must be a sustainable way to run Nigeria’s electricity market. Currently, it is run on very unsustainable shortfalls, the market shortfall for 2015 and 2016 is estimated at N473 billion, while the tariff shortfall is N458 billion. At this level of shortfalls, the subsidy that needs to be injected into the market to keep it running and simultaneously making investments for service improvements is simply not there, especially in a market that tariff increases will not be immediately supported by consumer groups. For subsidies in Nigeria most times, it is difficult to measure their effectiveness, and justify the subsidy mechanism. While subsidies can be a mechanism to correct market failures, however over the years we have come to experience it as an additional effective mechanism of providing more cash to a market that is usually not accountable and transparent for the sole benefit of market players that have access to the seat of power. This presents a trilemma for implementation of the PSRP.
Government has long realized this reality as it has quickly invoked the provisions of (Section 27) of the Electric Power Sector Reform Act 2005 to increase the ease at which four categories of electricity consumers can have access to electricity. With this development, these consumers (that consume more than 2MWhr/h) can buy electricity directly from electricity generating companies (GENCOs), hereby bypassing the usually inefficient and ineffective DISCOs from the line of business. This makes it possible for previously stranded generated capacities that cannot be wheeled out to reach consumers and for the market to be more demand driven in allocation of electricity to DISCOs. For instance, we achieve a situation where about 36MW which a certain DISCO failed to pick up for distribution to consumers from a power sub-station would not be sent to it in the first place. Other commendable measures have been the launch of the Mini-grids Regulation, the inaugurating of the board of several electricity entities including the board and management of the Rural Electrification Fund (REA) which will soon be launching its platform for accessing electrification fund for accelerated rural electrification. While all these measures are commendable, however, holistic policy, institutional and operational mechanism interventions need to take place more alongside implementation of these measures if Nigeria can dream to reduce the annual loss of over USD$29.3 billion to the national economy and approximately USD$470 billion loss in GDP in 17 years according to a World Bank’s Africa Infrastructure Country Diagnostic (ACID) and a 2015 McKinsey report.
In all, the PSRP is not adequate for the recovery of Nigeria’s power sector, this brings me to the governance culture in Nigeria’s public, quasi-public institutions and compliance to standing rules and adherence to industry best practices devoid of political interference. Without reforms in the public and civil service to improve efficiency of service delivery and effectiveness, reduce corruption and mismanagement, it is expected that the PSRP will lead to no recovery of the power sector.
Okafor Akachukwu is a 2017 Mandela Washington Fellow (Public Management, University of Maine) and a Science Policy Research Unit (SPRU), University of Sussex trained Energy Policy, Innovation and Sustainability Expert. Email: firstname.lastname@example.org