Power sector failing to perform despite privatisation

In 2013, the Federal Government took a bold step of privatizing the power sector. The change in ownership was against the backdrop of the despondent nature of the sector, which affected standards of living and crippled economic growth with only a miserable 4,000 megawatts of power to a population of about 180 million people. Five years after the much-trumpeted privatisation, the sector has been trapped in a dilemma. In this report, KINGSLEY JEREMIAH writes on the state of the sector, especially the challenges and way forward.

The development of Nigeria’s electricity sector has been weighed down since 1898, when the first power generating plant was installed in Lagos. In 1951, then colonial administrators introduced the Electricity Corporation of Nigeria (ECN), which acted as the major provider of electricity across the country.

In 1962, the Niger Dam Authority (NDA) was created as an independent body to provide hydropower. Series of intervention followed in the 1970s, and this included the merger of the NDA with ECN. That development gave birth to National Electric Power Authority (NEPA) Plc.

After becoming a public limited company, NEPA was rechristened Power Holding Company of Nigeria (PHCN), preparatory to its unbundling.

For decades, despite consistent investment by the Federal Government, localised as well as nationwide power outages became a constant.

Nigerians expected that power generation, transmission and distribution would significantly improve after the 2013 privatisation, but unfortunately, the sector is currently in a state of uncertainty despite leaving the control of generation and distribution in the hands of private investors in order to ensure adequate, regular and stable electricity supply.

Indeed, to most stakeholders, challenges besetting the sector appear to have compounded more than they were when the government controlled the levers.

While government is still in charge of transmission, the Electric Power Sector Reform Act of 2005, unbundled the national power company into a series of 18 successor companies: six generation companies and 12 distribution companies covering all the 36 states.

Statistics from the Bureau of Public Enterprises indicated that as at takeover date in November 2013, available generation capacity was 4, 500. It currently stands at around 7,000. Installed generation capacity stands at 13496MW as against 12500 Mega Watts (MW) at take over.

In December last year, the Transmission Company of Nigeria (TCN) said the country’s transmission capacity has increased to 8, 100 MW from 5, 000 MW three years ago.

While these appeared as an improvement, distribution companies have been unable to transport half of the generated electricity to consumers.

Minister of Power, Works and Housing, Babatunde Fashola, who had vowed to turnaround the country’s power situation stated recently that no fewer than 90 million Nigerians are still without electricity.

When Fashola was appointed to head the ministry, he promised to ensure incremental, steady and uninterrupted supply by completing projects dismountling bottlenecks. All these objectives have remained elusive.

Endless Blame Game
Instead of progress, the crumbling power sector has been enmeshed in a blame game, and most stakeholders are of the view that it was time to revisit the privatisation exercise.

They include the former Chairman of the Nigerian Electricity Regulation Commission (NERC), Dr. Sam Amadi; a leading energy expert, Dan Kunle; President of the Nigerian Association for Energy Economics, Prof. Wumi Iledare; partner, Nextier Power, Emeka Okpukpara; Executive Secretary of Association of Power Generation Companies (APGC), Dr. Joy Ogaji; Director, Research and Advocacy, Association of Nigerian Electricity Distributors, Sunday Oduntan; pioneer Managing Director of the Nigerian Bulk Electricity Trading (NBET) Plc, Rumundaka Wonodi, as well as President, Nigeria Consumer Protection Network (NCPN) Kunle Olubiyo.

And for these stakeholders, the challenges include, but not limited to structural arrangement, market operation, metering, weak infrastructure, market governance, capacity input, leadership, finance, stranded power, historical public sector inefficiency and gas related problem.

A good number of them equally believe that the privatisation arrangement was marred by corruption as evidenced in the fact that most of the beneficiaries lack necessary capacity to deliver.

Indeed, while the companies were mandated to have competent foreign partners, majority of the partners disappeared as soon as licenses were awarded. This ugly development contributed immensely to the inability of these companies to meet up with the terms of agreements that they entered into with the Bureau of Public Enterprises (BPE).

For Amadi the former NERC boss, the model for privatisation was unrealistic because it hinged so much on the private sector and didn’t think of a holistic government reform. “For example, we expected that if we sell these assets the private sector would come in and play big. But a major challenge as metering that would secure revenue was not dealt with. So, you expect them to come in, build a power plant for you, build distribution networks, provide all the meters for everybody and then wait till they make their money in the next 10 to 20 years. Truth be told, some of the models were not realistic,” he said.

Leading energy expert Kunle noted that privatisation of the power sector was not completed before the new government came onboard, just as he alleged that in the last three years, the APC-led administration has done nothing about the sector, thereby escalating loopholes in the privatised entities.

He maintained that government’s inability to allow market mechanism to drive tariff would continue to worsen the sector’s financial crisis, saying “while paying subsidy for petrol, government has refused to pay the deficits for electricity tariff that it has disallowed from being reflected in daily charges.”

Without a cost reflective tariff, addressing of power theft and blatant estimated billing, Wonodi fears that the sector could collapse if nothing is urgently done.

Like Kunle, Wonodi claimed that the current administration was compounding challenges in the sector, especially in the area of leadership, stressing that some power agencies were currently without boards, or have cloned their boards. This is coming to light at a time when investigations have indicted heads of some of the agencies for violating extant laws, by awarding contracts for personal gains.

“I think the leadership of the sector has not been consistent and steady, especially after the change of administration. The fact that most of the boards of the agencies like TCN, Nigerian Bulk Electricity Trader (NBET), were never constituted is not good enough as government is not talking as one. We found out that different arms or agencies were not aligned under the power sector recovery programme of the government, therefore implementation has been elusive,” Wonodi said.

While distribution companies were mandated to meter consumers, industry regulator, the Nigerian Electricity Regulatory Commission (NERC) reported poor performance by the DisCos. In fact, a new programme called Meter Asset Provider (MAP), which was set up to fast-track bridging of the gap has remained elusive.

Okpukpara captured the situation aptly: “The distribution companies who are the link to the consumers do not have adequate asset to meter not only consumers, but also transformers. Due to aforementioned lack of assets, consumers are billed arbitrarily under the context of estimated billing, which has eventually eroded consumer confidence in the sector. With high incidences of energy theft coupled with consumer apathy in electricity bill payment, the sector has got stuck with an eye-popping market shortfall of nearly N2t ($5b).

According to him, the sector currently lacks effective contract management, compliance to industry regulations and governance codes, which is within the overall co-ordination of an independent regulator – NERC.

“The distribution companies are withholding customers’ remittance beyond the MYTO allocations, and entities are not bound by sound contractual agreements to ensure efficiency and competition,” Okpukpara added.

Even though Nigeria has about 202 Trillion Standard Cubic Feet (SCF) of gas reserves, harnessing the potential to power generation plants has remained a mirage, especially because of low investment, inadequate funding of projects, and huge indebtedness to gas suppliers.

This is why Ogaji informed that GenCos are unable to pay gas debt due to the liquidity challenge in the sector. She added that the inability to pay for contracted gas led to the immediate cutting off of gas supply to some power plants.

Under the Electric Power Sector Reform Act (EPSRA) 2005, the electricity market in the country should be administered by a number of industry contracts and market rules. The investment on generation is at the instance of the off-taker (in this case NBET). The declaration of Transitional Electricity Market (TEM) on February 1, 2015 was to signal the commencement of all contracts, but contrary to the TEM promise, the conditions for declaring it are still far away. Without effective contracts, that is Power Purchase Agreements (PPA), Ancillary Agreements, Gas Supply Agreements (GSA), Vesting Contracts between DisCos and NBET, and other industry contracts, TEM cannot be said to have taken off.

Also, the TEM Promise of 100 per cent GenCos invoice settlement by NBET has failed, thereby placing a big financial burden on the GenCos. The failure by NBET is linked to the inability of the DisCos to remit collection and a poor tariff system.

Loses Rise, Financial Burden Grow As Investment Crisis Worsens
According to industry statistics, while about N2.9t worth of investment has been brought into the sector, losses caused by water, gas and transmission line constraints alone costs the sector about N1.5b monthly. The figure is estimated to be about N90b in the past five years.

Similarly, the sector has received bailout fund from several bodies, including Barack Obama’s Power Africa, and the USAID-Federal Government, through the Central Bank of Nigeria (CBN), provided the sum of N213b as Power Sector Market Stabilisation Fund at a concessionary single digit interest rate, and another N701b as gas assurance guarantee. The Japanese government provided about $11m, the World Bank issued about $5.6b, as well as other funds from the African Development Bank.

While the $5.4b liability left after the selling off of power assets was described as a critical burden for the sector, last year, the GenCos dragged the Federal Government to court over debts in excess of N1t.

Currently, with a totally weak distribution network and inability to meet up with metering challenges, DisCos currently require over $4.262b (about N1.549t) for funding for new transformers and injection substations.

Between Selling Off Govt’s 40% Share And Continuous Stay On The Board Of DisCos
There have been concerns over the continuous stay of government officials on the board of the distribution companies and the inability of the Federal Government to divest its 40 per cent share in the companies.

The Bureau of Public Enterprises (BPE) on behalf of the Federal Government signed the Sale Purchase Agreements (SPA) and Performance Agreements (PA) with the distribution companies at take off. The Nigerian Electricity Regulatory Commission (NERC) and BPE have a common goal in ensuring that the companies achieve high standard in performance. Both agencies also set up joint monitoring teams. BPE represents the Federal Government on the board of the distribution companies, while the performance agreement provides it with the basis for its monitoring role.

About two years ago, while industry players insisted that there was need for government to hands off the distribution firms and remove public servants from the board of the organisations, the Minister of Power, Work and Housing, Babatunde Fashola vowed to consult Nigerians before such decisions are taken, but the outcome of the consultation is still vague.

Analysts are divided on the prevailing situation. Some of them insist that talking of a private sector owned and managed institution when the government controls 40 per cent shares, sits on its board, takes critical decision and still plays the role of a regulator smacks of double standards.

An Economist and investment analyst, Buchi Ejiogu had told journalists that, “In such an arrangement there could be a conflict of interests because, essentially, government is playing the role of both a regulator and an operator.

According to him, when the operator is inefficient or does something wrong it becomes impossible for the regulators to sanction.

With the DisCos struggling to survive along with the inability to declare profit, some players insisted that government’s roles in stabilising the sector remained critical.

In fact, they noted that investors would   not buy the stake since the companies have not been declaring profits because they are still working on upgrade of their facilities and equipment for optimal performance.

On his part, Wonodi said: “This is not the time for the government to sell its shares. I do not buy into the idea that government should sell of its asset in the distribution companies. The investors have not made meaningful investment. If government sells its asset, the sector will be affected.”

He is against the continuous stay of government officers, particularly agencies with oversight roles on the board of the 11 companies, adding that the development is simply double standard.

In his contribution, Amadi believes there is a conflict of interest for oversight if BPE staff, who jostle to be posted to man directorship of the DisCos are not replaced.

Instead, Amadi advocated that civil servants from other ministries, professionals or private sector experts, who could represent government on the board, should occupy the position.