Thursday, 8th June 2023

Corruption is Nigeria’s power sector demon

By Zuhumnan Dapel
09 September 2021   |   3:30 am
Nigeria is home to over 200 million people, yet 85 million of its inhabitants live without access to grid electricity. To put this into perspective, the country has installed electricity capacity at the same level as Edinburgh...


Nigeria is home to over 200 million people, yet 85 million of its inhabitants live without access to grid electricity. To put this into perspective, the country has installed electricity capacity at the same level as Edinburgh, the capital of Scotland and a city of roughly half a million people. Why does Nigeria, which has almost 400 times more people than Scotland’s second-largest city, have such low levels of electricity access that claim its title as ‘the world’s most underpowered country.’

High spending in electricity
Not only is access low in Nigeria, but user spending is also high. Those with access to electricity in Nigeria pay more in Kilowatt per hour than some residents of high-income countries. For instance, Nigeria charges its citizens, in average end-user tariff, about twice as much as the United States.

The grim state of the power sector in Nigeria has fuelled demand for other energy sources. According to ILO estimates, approximately 60 per cent of businesses in the country own and use electric generators (self-generating 59 per cent of their total energy need, which is three times more expensive than from the public grid). Moreover, Nigerians spent $13 billion per year buying gasoline and diesel to power their generators, thereby constituting a huge dent in the nation’s foreign exchange and consequently balance of payments.

To close its energy gap and to meet the growing demand of its bulging population size (over 400 million by 2045), Nigeria would need an installed capacity of 213 GW, that is, raising the current capacity by more than 1500%. According to estimates, this will require a yearly infusion of cash of up to $10 billion over a decade.

Government and donor attempts reap limited gains
There have been attempts by past and present governments and international donors to upgrade the country’s power infrastructure and consequently boost the availability of electricity to households and industries. These efforts have been met with challenges which remain unaddressed and seem to be mounting. Motivated by this situation, many observers were of the view that the power sector will greatly improve if it is successfully privatised. The appeal was partially heeded by the government.

In the early part of the last decade, the federal government began a wave of reforms in the power sector. The generation and distribution arms of the industry were privatised, followed by the establishment of regulatory bodies and agencies to execute the government’s power sector road map. After a decade, access to electricity expanded by about 13 per cent, connecting millions more Nigerians to the grid.

Nigeria is also benefiting from international support. The World Bank recently approved half a billion-dollar investment in the sector. The goal is to strengthen the distribution capacity of the sector to cut its rate of energy losses. The US government, through its USAID-led Power Africa Initiative, is contributing over 3GW to the national grid by deploying its technical expertise and finances. China is also stepping in to provide 85 per cent of the roughly $6 billion needed to build the largest power plant in the country: a 3,050-megawatts Mambila hydroelectric power project in Taraba state.

Electricity challenges limit country’s growth potential
At the same time, however, data from a World Bank enterprise survey revealed that power outages in firms in a typical month remain high despite increased access. Specifically, outages rose from more than 25 in 2007 to roughly 33 as of 2014. Moreover, power outages occur more than 320 days per year.

In terms of efficiency, current power installations are not operating optimally. Nigeria has about 13 Gigawatts (GW) in installed power generation capacity, but 74 per cent of this is lost to transmission and distribution challenges (e.g., shortage of gas supply) as only 3.5GW are being dispatched to end-users: households and firms. Instead of powering industries to drive economic growth, close to 60 per cent of the distributed power winds up in residential homes for the purpose of lighting bulbs, charging mobile phones, watching television and other such domestic activities. This suggests that Nigeria’s power sector is not yet positioned to power economic growth in the country.

The current energy challenges moreover are not without cost. Power shortages severely cripple businesses in the country, especially tech firms. The World Bank estimated annual economic losses of $26.2 billion, i.e. about 2 per cent of the country’s GDP, stemming from a lack of reliable power. It also noted that some firms across the country incur additional payroll costs of up to 10 to 15 per cent because of their use of power generators. Moreover, the Manufacturing Association of Nigeria claimed that, within a decade, 820 manufacturing companies folded up or moved abroad in just a decade primarily due to poor power supply.

Instead, a study by academics at the universities of California (San Diego) and Arizona showed that eliminating the outages could raise wages to 26 per cent in Nigeria because “the number of modern firms increases and existing modern firms rent additional capital and purchase more electricity, all of which increase the marginal product of labour.”

Addressing the power sector ‘demon’
Several factors are driving the poor performance of the power sector. The non-commercial viability of the sector is a major constraint. Tariffs are often difficult to collect from the end-users. For instance, in 2015 and 2016 alone, the electricity distribution companies (DISCOs) complained of losing US$1.4 billion to non-payment of energy bills as most customers were not willing to pay for the service because the power supply is sporadic.

The power sector has also been sucking up and haemorrhaging huge amounts of money. In 2015, after a fact-finding mission, a member of the Nigerian parliament claimed that Brazil generated 12,000 Megawatts of electricity with $12 billion but Nigeria is unable to generate 4,000 Megawatts after spending close to $16 billion. What could explain this but corruption at the highest level of government?

Ultimately, corruption is the power sector demon. It heavily bleeds government investments in energy and stifles efforts that are designed to boost the availability of electricity in the country. Until this monster is vanquished – regardless of how much cash & expertise are infused into the sector – many Nigerians will remain in ‘darkness’ with sporadic voltage supply.

But how can corruption be addressed? Corruption might exist in the public sector but through the power of robust institutions, corruption can be prevented from destroying the systems. However, those with the mandate to build the institutions are known to be the primary beneficiaries of the current status quo, which points to misaligned incentive structures that may be at the root of the problem in the absence of adequate checks and balances. Moreover, research has shown that it is harder for an oil-rich country to build strong institutions decades after it discovered oil, pointing to the age-old resource curse and its implications for the power sector.

Finally, since government intervention creates corruption avenues, rents for bureaucrats, and misallocation of resources, full privatisation of the power sector might be one of the ways out of the problem. In any case, Nigeria must find a way out of this situation if it must extricate itself from the iron grip of energy poverty.

Dapel is a researcher at the Scottish Institute for Research in Economics in Edinburgh and a former IDRC fellow at the Center for Global Development.

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