Privatisation of power sector and calls for reversal
Should Nigeria allow the private sector to continue the ownership of the nation’s power infrastructure, or return the sector to the days when government was in charge of electricity supply?
The answer to this question, is what has left the Federal Government, end-users, as well as other stakeholders in the energy sector on tenterhooks regarding the best approach to addressing the lingering challenges bedeviling the nation’s power sector more than five years after the sector was handed over to private investors.
Last month, the Senate President, Ahmed Lawan, during the deliberation of a motion on Nigeria’s power sector recovery plan, and the impact of the COVID-19 pandemic, said that power sector privatisation has failed, and called for its review.
Lawal’s comment came in the wake of massive public outcry over the inefficiency of the power sector to provide electricity to Nigerians since it was privatised in November 2013, with the distribution and generation sub-sectors split and sold to private owners. One of the aims of the split was to enhance power distribution in the country, as only the transmission component, through the Transmission Company of Nigeria (TCN), remains a public property.
Insisting that they the failure of the exercise was glaring, Lawan in his remarks during plenary said:
“If we leave them for the next 10 years there would be no power in Nigeria… We gave them our common patrimony and they still come back as DisCos and GenCos to look for money from the public. I think it’s time for Nigeria to consider reversing the privatisation of the power sector or they should just cancel the entire privatisation process completely.
“The privatisation has so far not been successful. We expected efficiency, effectiveness in power supplies but probably on both sides, maybe the purchase agreements were not adhered to on both sides. What is obvious is that the DisCos particularly have no capacity at the moment to supply us power. The GenCos have challenges too. It is not good that we give them money – these are businesses. If there are areas we must intervene as a government it must be seriously justified.”
Earlier in October 2017, President Muhammadu Buhari, even though peeved with the poor quality power supply in the country said his administration cannot cancel the privatisation of the power sector because it was a complex investment and there would be dire consequences taking such a step.
He also added that his administration’s decision to review the power sector privatisation was aimed at opening it up for investors with the financial capacity and technical expertise to inject fresh investments and to turn the sector around.
Apart from Buhari, some high-ranking officials of his administration, including the immediate past power minister, Babatunde Raji Fashola, and his successor, Saleh Mamman, have equally spoken of government’s dissatisfaction with the performance of the DisCos and GenCos and hinted at a review of the privatisation exercise.
All these notwithstanding, in late January ahead of the planned submission of reports on power sector reforms, the National Economic Council (NEC) hinted at backing the reversal of the power privatisation by the former President Goodluck Jonathan-led administration.
This decision was part of the recommendations being proposed by the Governor Nasir el- Rufai-led committee inaugurated last year by the NEC as part of efforts to ensure stable power supply.
While briefing State House correspondents after the monthly NEC meeting presided over by Vice President Yemi Osinbajo, El- Rufai, who lamented that “electricity supply in the country is broken down completely,” added that the reversal was “one of the recommendations we are putting forward, but we know that it has implications.
“The problems are many; the entire sector is broken, there is a fundamental structural problem. The Federal Government has supported the industry with N1.7t in the past three years. The government will take some very tough decisions. There is a lot of blame game. Over 80 million Nigerians are without electricity… It is either we continue to allow the Federal Government pump in N1.7t every three years, or we take the tough decision that will ensure a stable power supply,” he said.
Without a doubt, when the Federal Government privatised the power sector, Nigerians expected total overhauling of the power infrastructure considering the fact that the private investors were expected to be efficient and productive managers. Citizens therefore anticipated stable supply of electricity since the projections were that generation, transmission and distribution capacities would increase significantly.
In the Roadmap for Power Sector Reform designed by the Jonathan-led government, which championed the privatisation pact, it was clear that Nigeria has always known the importance of the power sector and the things to do to overhaul the sector.
The document also stated that, “stalled expansion of Nigeria’s grid capacity, combined with the high cost of diesel and petrol generation has crippled the growth of the country’s productive and commercial industries. It has stifled the creation of jobs, which are urgently needed in a country with a large and rapidly growing population; and the erratic and unpredictable nature of electricity supply has engendered a deep and bitter sense of frustration that is felt across the country as a whole, and in its urban centres in particular.”
Based on that prevailing reality, the Federal Government planned that by this year, the country would have increased its power generation capacity to 40, 000MW, with an investment of $3.5b per year. But as of Tuesday last week, the country’s peak power generation stood at 4, 950.80 MW.
In 2012, the country had an installed generating capacity of about 7, 500MW, and operating capacity of about 4, 000MW. It is therefore obvious that the sector has only been on a round trip in the last seven years.
Even though the installed capacity for power generation increased with the TCN’s claim that transmission infrastructure has doubled since takeover in 2013, but this claim does not currently reflect across homes and industries. No thanks to bottlenecks allowed by both the Federal Government and the investors. Indeed, the Federal Government’s undue interference and the lack of technical and financial capacities have contributed immensely to leaving the sector near comatose.
Barely two years after the privatisation exercise, the All Progressives Congress (APC) during the 2015 electioneering, without a proper strategy, pledged to vigorously pursue the expansion of electricity generation and distribution of up to 40, 000 MW in four to eight years. It also boasted that it would make available “24/7 power supply by 2019. But several months into 2020, millions of families still go without electricity for days. The country is obviously far from reality as far as power availability is involved.
Indeed, some stakeholders believe that speculations by key officials in the Buhari-led government on the possible reversal of the privatisation deal did a lot to deter investors from the sector, and added to the financial constraints, which hitherto pushed the sector toward the brink of bankruptcy.
While state actors, civil society organisations, trade groups among other well-meaning Nigerians have decried the confused state of the sector, and called for a probe of the roles played by previous administrations, the then Director of Media and Publicity of the APC Presidential Campaign Organisation, Garba Shehu, had accused the Peoples Democratic Party (PDP) of selling the power sector to their friends, adding that even with generous financial assistance to the operators, the sector still failed woefully.
Since coming on board, the Buhari-led government has, despite privatisation, reportedly spent N1.532t as intervention fund in the last five years.
Just recently, the Federal Government disclosed that over N200b was paid to gas supplier to ensure stable electricity during COVID-19 pandemic. It is critical to note that the Federal Government’s fund in the sector is mainly subsidy for consumption, instead of investment. If the present administration had allowed the sector to run on its own without interference, the need for subsidy may not exist.
Shortly after Fashola took the reins in the defunct Ministry of Power, Works and Housing during his first term as minister, he appeared at the 5th European Union (EU)-Nigeria Business Forum dousing tension on possible reversal of power privatisation.
At the forum, which theme was, “Harnessing Nigeria’s Potential for Economic Growth,” in Lagos, he stressed that the Federal Government would not revoke the privatisation of the power sector, and also in 2017, at a Policy Dialogue on the Power Sector organised in Lagos, by the Lagos Chamber of Commerce and Industry (LCCI), he again ruled out the possibility of revoking licences given to private sector investors to run the country’s power sector.
However, the Eight National Assembly had at some point considered the reversal of the power deal, a development, which forced the Nigerian Electricity Regulatory Commission (NERC) to advise the Senate Committee on Privatisation, whose members were on oversight visit to the Commission against it.
The then acting Chairman, Dr. Anthony Akah, specifically told the senators that the Federal Government may not have the money to buy back the utilities, and may be acting in contravention of the agreement entered into with the new owners. Any attempt to reverse the sales of the utilities, he added, will send a wrong signal to potential investors.
In 2018, the Minister of Information, Lai Muhammed, specifically told Nigerians that the Federal Government only resisted the temptation to cancel the privatisation agreement, stressing that companies that bought over the sector were under-capitalised, ill-equipped, and lack the necessary expertise.
Just recently, the Nigeria Labour Congress (NLC) called for the reversal of privatisation exercise due to “chronic failures.”
The President of NLC, Ayuba Wabba said: “Since the privatisation of electricity distribution, Nigerians are yet to see the fulfillment of the promise of efficient service delivery. Instead, the electricity situation has gone worse with chronic failures by DisCos to supply prepaid meters, exploitation of Nigerians through estimated billings and reluctance to attend to basic complaints.
“We call on the government to reverse the power sector privatisation because it has failed. The privatisation of public utilities has not generally proven to be the correct thing to do in most countries, even developed ones; according to a study released by Public Services International.”
As loud as the calls for improvement in the nation’s power situation is, it is important to know that the country’s electricity market is confronted with a number of challenges, which most stakeholders link to government, as well as the players.
For instance, some stakeholders believe that the 2013 privatisation arrangement was unrealistic because it hinged so much on the private sector, and didn’t think of a holistic government reform. Some accuse the current administration of not completing the privatisation pact, especially as government still controls power transmission with attendant bottlenecks, including the persistent collapse of the national grid.
Also, with most power generation stations running on gas, the gas segment of the market is still being held by government.
There have also been repeated call for tariff review, which is solely in the hand of a government agency – NERC, even as some private players have shown gross lack of technical and financial capacity to deliver on the privatisation mandate.
Apart from the fact that the sector is mired in endless blame game, with different committees set up by the executive arm, corruption and undue political interference negate the initial plan of the market.
For instance, last year, the NERC ordered DisCos to meet a minimum remittance for power supply invoices, insisting that it would cancel licences of eight DisCos within 60 days for defaults in the remittances, especially under the 2016 – 2018 Minor Review of the Multi Year Tariff Order (MYTO), and minor remittance order for the year 2019. The Senate Committee on Power reportedly asked NERC to waive the order due to petitions by DisCos.
NERC, an independent regulatory agency, which was inaugurated in 2005 was borne out of the Electric Power Sector Reform Act 2005 enacted by the NASS. Hence it was, through an act of parliament established to regulate the electricity industry in Nigeria.
In order to adequately monitor the activities of NERC, the EPSR Act mandates that it (NERC) renders its quarterly report to the National Assembly as provided for in Section 32 (G) of the Act.
Expectedly, the quarterly reports that are submitted to the lawmakers, if properly reviewed, would have forestalled incessant interference in the activities of the sector, as the clause was specifically designed for necessary direct collaboration and feedback.
Even though the NERC has been accused of not living up to expectations, the discordant voices in the sector have damning implications on it as the regulator, especially in the presence of its licensees, among others.
Last week, DisCos sued the Federal Government, restraining NERC, TCN, as well as the National Economic Council (NEC) from interfering in their corporate activities unless the boards of the DisCos are duly consulted.
Distribution companies including, Abuja, Benin, Eko, Enugu, Ibadan, Ikeja, Jos, Kaduna, Kano, as well as Port Harcourt also asked the court to stop NERC from sending forensic auditors their way as part of measures to ensure that only the boards of the DisCos can approve forensic auditors.
However, as opinions continue to differ on whether canceling the privatisation arrangement is the way to go, stakeholders including the former Chairman of NERC, Sam Amadi maintainED that attempting to cancel the exercise would undo all forms of successes recorded so far in the reform process, including policy continuity, which leads to lower perception of risks. This, he considers as the biggest success that the country has recorded so far.
“Perception of political risk is dangerous. It will dry up foreign and domestic investments. No one would understand why government has to cancel privatisation after five years. It will look obviously like nationalisation, which is the major fear of investors in a capitalist global economy. So, we will get back to 2009 when Yar’Adua backpedaled on the reform,” Amadi said.
According to him, the country could achieve similar results through industry-based regulatory strike out of non-performing entities, stressing that the market would accept that because it is a market and regulatory decision not a political decision.
For the sector to move forward, Amadi noted that there was need for government to internalise the losses in the DisCos and GenCos, adding that this could be done by regulatory interventions. The country also needs to be smart to benchmark operators and closely enforce while revising operators franchise through a credible regulatory process that is peer-reviewed so that those who can’t deliver lose to those who could, or to new market entrants.
He added that there was need for new private-public partnerships that expand capacity where the DisCos can’t, or help them to perform.
Energy expert, Madaki Ameh, who shares a similar opinion with Amadi, stressed that should government decide to go ahead to reverse the exercise, there would be lawsuits aplenty.
“In fact, some anticipatory lawsuits have already been filed by the DisCos. This will also send the wrong signals to investors that Nigeria cannot be trusted with large-scale, long-term policy stability, which could have a negative impact on Foreign Direct Investments (FDIs),” Ameh said.
He distanced himself from those calling for a reversal of the pact, noting that with a clue from the telecoms industry, privatisation itself is a good policy, even though its implementation in the power sector has remained faulty due to the approach adopted, especially where the successor companies in a privatised power sector ended up in the hands of politicians.
“But the solution does not lie in a full-scale reversal of the privatisation of the sector. What should happen is to improve the regulation of the industry by setting high standards and monitoring compliance vigorously. If that is done, companies that do not measure up to standards will just be acquired by more competent ones, or get wound up,” Ameh said.
While the sector needs urgent attention, Ameh’s solution entails a drastic approach that would either make the investment perform, or give way, but what step must follow due process.
Ameh said: “Well, I think we need reliable, efficient and affordable power. At the moment, the sector is still quite epileptic, and everything has to be done to ensure that this is addressed. If this entails some GenCos and DisCos losing their licenses, so be it, provided due process is followed.”
The convener of PowerUp Nigeria, Adetayo Adegbemle, insisted that it is not a wise decision to consider the reversal of the privatisation deal, adding that those pushing for a reversal have not given the country alternative positions.
“They should not quickly forget what led to the power sector reform in the first instance, which was gross corruption in the old NEPA. Apart from that, we will be shooting ourselves in the foot. No serious international investor would ever consider Nigeria again in the near future,” he stated.
From policy angle, Adegbemle noted that the country needs people, who have the foresight, and understand what it would take to address issues in the sector.
“We should be able to nominate three or four individuals to NERC, and let them make public presentation to the National Assembly on what, and how they hope to solve our problems, else let’s look at the body of their works that make them qualify for that position. And we need to ensure that NERC is truly independent so that it can take far-reaching decisions and be responsible for it,” he said.
Acknowledging the progress made with power generation, he said there was need to breakdown the national grid to smaller units that could be managed efficiently and effectively, stressing that the DisCos must recapitalise, or the government should bring in more core investors, and further breakdown the DisCos.
On his part, the pioneer Managing Director of the Bulk Electricity Trading (NBET), Rumundaka Wonodi, kicked against the reversal of the privatisation arrangement, insisting that it would not solve whatever problem it has created, but rather compound it.
He specifically noted that the government has not met its obligations in the deal, therefore it lacks the moral standing to reverse the transaction. Should it decide to, it may have to make significant payments to the investors.
“The implication of the reversal will be dire in many ways. If you want to know how things will turn out, ask how well the government is doing with Yola DisCos and imagine the government taking over the other 10 DisCos and the 10 or so GenCos. It will be a huge nightmare in terms of operations and legal dismantling of agreements between lenders, investors and the government,” Wonodi stated.
He added that government spendings in the sector are mainly payments to GenCos for power generated, but could not be paid by DisCos due to a combination of the DisCos’ poor performance and government’s reluctance to adjust tariff to market levels.”
To him, the reform is not a magic wand, but requires diligent execution and realistic expectations, stressing that the assets were oversold and the new investors grossly underperformed at the early stages leaving a big gap.
“Our greatest challenge is leadership. The MDAs and legislature must pull in the same direction so that the industry and financial markets can predict the pathway. The Nigerian Electrification Roadmap holds good promise if executed efficiently. We must have retail tariffs with clear service levels,” Wonodi stated.