Privatised Electricity Utilities:  Mounting challenges and options for stakeholders

When on November 1, 2013, the Federal Government handed over the electricity distribution and generation companies to private investors; there were high hopes that things would quickly change for the better. While government sold some of the plants 100 percent, it retained 40 percent shares in the distribution companies and concessioned the hydropower plants.

Three years down the line, Nigerians are still battling with the same epileptic power supply that necessitated privatisation of the utilities. Now voices are getting louder. People who hitherto had bottled up their thoughts and anger are unable to stomach them anymore.  The message is clear:  government should cancel or review the privatisation process.

As the calls echo and become louder, it is also becoming clear that government is not willing to explore the outright cancellation option.There was a general consensus, however, that the utilities have failed to deliver on their performance contract with government.

The reasons, according to respondents who spoke to The Guardian, are clear: an outright reversal of the process would send the wrong signals to the international community about Nigeria’s investment climate. Intense litigations would follow. For a government that is currently struggling to raise financial resources to spend Nigeria out of recession, it would be near impossible to garner the required financial muscle to ‘buy back’ the utilities from the new owners.

Above all, if government manages to gather the required resources and decides to dare it, it would have to contend with other matters like government’s ability to manage business

A Presidency source captured government’s position in a chat with The Guardian at the weekend. The source said: “The only thing that I can say is that such calls are uncalled for because the consequences will be too grave and will further worsen the already precarious situation. The cost implication will be unbearable. Recall that the proceeds were used in paying workers severance and entitlements and those left are still being verified for payment. Besides, the investors are continuously making huge investments to upgrade their facilities.”

So, what are the options before government? Some experts who spoke to The Guardian called on government to strengthen the Nigerian Electricity Regulatory Commission (NERC) to make it more alive to its responsibilities. As part of a more creative review process, this school of thought says that instead of cancellation of the privatisation process, the licenses of non-performing utilities should be revoked by the regulatory.

“The only feasible thing to do now is to radically shake-up the market to make the reform work. The cost of reversal to a recessed economy is unthinkable. Moreover, after reversal, you must still privatise the sector for private investors to expand it. A radical shake-up is required, not reversal,” a top Ministry source who did not want to be named said.

But some hardliners insist that outright cancellation is the way out. “If privatisation of electricity utilities has not achieved results three years down the line, what is wrong in cancelling it,” General Secretary of the National Union of Electricity Employers (NUEE), Joe Ajaero, fired in an interview at the weekend.

He was emphatic that the privatisation of the utilities has not worked and “that is why I stopped talking.” He added, “I said Nigerians would talk last, and they are talking now.”

On what gives him this renewed confidence, he said: “I was in Yola for the past few days. The Yola Electricity Distribution Company was abandoned under the pretence of force majeure that was contained in the purchase agreement. Yola DISCO was the least in terms of revenue generation receipt in Nigeria. It was sold as an appendage to the Ibadan DISCO that was doing pretty well.  Now, for the same investors who bought Yola and Ibadan to say they were dropping Yola Disco and took only juicy Ibadan Disco is what I call a fraud.

“However, since the private sector buyer abandoned the place and it reverted to government, it has been doing pretty well.  It is doing well under government control. Power supply in Yola is now excellent. They are not rejecting electricity load from the Transmission Company of Nigeria (TCN). Yola is paying higher to the Market Operator (MO), meaning that they pay for the power that they receive. It used to take three months or more to pay staff salary salaries regularly.”

He went on:  “Compare such a place that is hit by Boko Haram, doing so well under government and the so called investors telling you they can’t break even. You don’t need to go to the moon to look at these two scenarios. Yola DISCO was the worst.  We don’t need to go far to know that this is the way to go. If you get the right people at the right places, the power sector could be run effectively.

“What is happening now is not privatisation.  In places like Egbin, what they did was what they called willing seller willing buyer. Why would you force Egbin, a big plant with 1000 megawatts on someone through willing buyer, willing seller and no bidding? How did you come up with the concept of the second preferred bidder?”

As a first step, Ajaero wants the entire process subjected to scrutiny. He shrouded in secrecy. “We have to investigate all these things,” he said.

But United States of America based energy lawyer, Felix Ayanruoh is optimistic that the sector would eventually shake off its present challenges. He ruled out outright reversal, but recommends that a shakeup is the right way to go. “A tough operating environment as ours, demand a pragmatic re-evaluation, strategies and interventions to tackle the series of problems the sector is facing,” he told The Guardian.

Ayanruoh, who is a recipient of a Special United States Congressional Recognition Award, proposed key areas which government should quickly look at. He stressed:  “Although, Nigeria is a major gas producing nation with proven natural gas reserves, lack of infrastructure, pipeline vandalism and long-term gas flaring activities, have caused gas supply to be a real concern for the sector and investors.  It is common fact that about 81 percent of generation is gas-based. The activities of pipeline vandals had led to a colossal cost of over N174b in product losses and repairs of pipelines within the last 10 years. The government has tried several policies and approaches to tackle this menace with no end in sight.

“I will urge the government to go back to the drawing board and formulate a new policy on pipeline security. This can be done by inviting law enforcement agencies, experts and the host communities to come up with a way forward. Also, the Petroleum Industry Bill (PIB) should be passed with the Host Community Fund intact. Furthermore, the government should invest in research and development of bomb resistance pipelines.”

To further boost the confidence of investors, he called for the extension of the duration of license usually issued to generation companies. “Potential investors are wary of the duration for generation license as prescribed by the 2005 Reform Act and NERC regulations, which provide for a generation license to have a duration of 10 years, renewable for a further five years. This time frame may present challenges to potential investors and their lenders given that such time frame (15 years) may be well short of the useful life of the assets involved.

“NERC should address this issue by increasing the license tenure to about 15 to 20 years and subsequent five years renewal for operators that are compliant with license obligations. Also, non-performing licensees for both GENCOs and DISCOs (including licensees not complying with their reporting obligations to NERC) should be revoked,” he noted.

He described government’s decision to concession the Transmission Company of Nigeria (TCN) as a right one and advocated that the process should be made more transparent and participatory than previous processes.

His words: “The transmission segment is the weakest link of entire value chain of the nation’s power sector. The government’s decision to concession the transmission segment is a welcome development. I will advise that unlike the privatisation of the nation’s generation and distribution segment of the power sector, which was bedeviled with various problems, things should be done differently this time around.

“A well-designed concession arrangement should earmark tasks, obligations, risks, and rewards among the stakeholders in an optimal way. Pursuant to the basic principles of economic efficiency and effective risk management, rewards should go to those who take risks, and the contractual obligations are designed to allocate risks to the parties who are best able to manage them. Concession should be given to those that understand the business and not as a political or economic favour. This should include foreign investors.”

President of the Manufacturers Association of Nigeria (MAN), Dr. Frank Udemba Jacobs, kicked against reversing the privatisation process, noting that it would create a negative impression on the minds of foreign investors about Nigeria’s seriousness to attract investors.

He also stressed that it could be seen as seen as policy inconsistency, which he said would impact negatively on the country; and possibly lead to a drawback on the quest for constant power supply.

He, however, threw his weight behind a review of the entire process. For the review process to work, he called for the strengthening of the sector regulation to be able to ensure compliance of the players in the electricity value chain to the rules of agreement, and to ensure that whomever that intends to participate in the power sector value chain has the requisite capacity to do so.

He spoke on steps that could be taken to strengthen the regulator: “The Act that established the Electricity Regulator (NERC) should be reviewed with a view to strengthening the regulator to be able to execute its mandate. There is also the need to insulate the regulator from interference from the political class.  This should be done by placing the regulator in the supervision of the Presidency. Moreover, the appointment of the Chairmen and members of the commission should not be done on political consideration but on competence or merit.

“I strongly think that government should revisit the entire power privatisation because it is obvious that the current operators do not have the capacity to achieve effectively. With less than 5000 megawatts of electricity at the peak in a country with a population of over 180 million people, you can see that there is a huge challenge. To improve supply, there may be need to hasten the introduction of the micro-grid or community-grid system.  Embedded generation has been recommended, as it will increase power generation. More players with requisite capacity should be brought in. Hiking up tariff is not the solution.

“Again, the problem of gas-to-power, which appears to be hydra-headed should be addressed. Pipeline security is a challenge while the issue of disruption of the production process of oil companies should be addressed urgently. Non-implementation of the Gas Master Plan fully is also there. Unless these are addressed, gas to power may be difficult to achieve and consequently, power generation cannot be fully realised. Similarly, transmission must be overhauled and improved upon as it is apparent that current transmission facilities are inadequate.”

The regulator believes strongly that the reforms that are ongoing (the electricity power reform), which is being done pursuant to the Electricity Sector Power Sector Act is the right step in the right direction. Acting Chairman of the Nigerian Electricity Regulatory Commission (NERC), Dr. Anthony Akah, came to the defence of the regulator, insisting that it was up to task in its duties. He also spoke against reversing the privatisation programme.

He explained:  “One, the reform was predicated based on contracts. There were legal contracts that were signed between the operators and the Federal Government. If the transaction is reversed, there would be multiple litigations. Two, it would add to the increase in risk factors to doing business in Nigeria. No serious investor would ever like to come into the country, as they would not be sure if the government would respect the sanctity of contracts. It will also affect our financial institutions, which in performance of their job, have large loan portfolios with the operators.”

He called for patience, stressing that the sector had made tremendous progress since the reform began. “The decay in the power sector is a cumulative of over thirty years of neglect, over thirty years of misplacement of priorities and over thirty years of poor planning.  Decisions that were made in the past were done mainly due to political exigencies. We are now operating based on a clear master plan on how to ramp up power. I think Nigerians need to be patient. In other places where this kind of reform was undertaken the first five years is usually a very challenging one.

“We have done three years. Yes, we have some serious issues about liquidity, but those issues are not things that we cannot not surmount. We are working very hard with the Ministry and other stakeholders to resolve this. There is an inter-ministerial and inter agency committee working on liquidity issues. They have submitted their report to the Presidency. We are confident that the President would look at the recommendations that border on policy intervention and approve what he feels are exigent to address the liquidity issue.”

He went on: “We strongly believe that it is premature for anybody to say the reform has failed. The reform has not failed.  The generation aspect of the value chain has ramped up generating capacity. The transmission is being looked into. We have serious challenges with the distribution network but we are working with them for maximum performance. We are doing what we need to do to get out of this and we affirm that Nigeria will be better off in a private sector driven electricity sector.”

On possible drawbacks if the process is reversed, he stressed:  “It means that government has to buy back the facilities. Where is the money to do that? There were stipulations and penalties in the contracts if the government cancels the process for no just cause.