Nigeria's Power Crisis – Light At The End Of The Tunnel?

VENTURES AFRICA - Many Nigerians will remember a time when private power generators were largely unheard of and most people enjoyed a steady supply of power to their households.
Many Nigerians will remember a time when private power generators were largely unheard of and most people enjoyed a steady supply of power to their households. The country built its first power plant in 1896 with a 20 megawatt (MW) power station at Ijora, near Lagos, and in 1929, the Nigeria Electric Supply Company (NESCO) was established to manage it and other power sources. In June 1972, the Federal Government promulgated decree No 24, which formed the National Electric Power Authority (NEPA). NEPA became operational in 1973 and for two decades fulfilled its mission to generate, transmit, distribute and trade electricity to all parts of Nigeria. The law empowered NEPA to function as a vertically integrated monopoly. Many people feel that Nigeria’s electricity problems first began during the military regime of the 1990s and slowly worsened as corruption increased. The military brought with it a culture of ineptitude; nepotism ruining many of the functioning systems in place. In 1999, the military handed over power to the first democratically elected administration in almost 20 years. Many Nigerians hoped that democracy would work miracles for the power sector. Unfortunately, this has not been the case.
Past Efforts, Comparative Success
Currently, the country’s national electricity grid currently comprises nine generating stations: three hydro and six thermal. These include Kainji, Jebba and Shiroro hydropower stations and Afam, Delta, Egbin, Ijora, Oji and Sapele thermal stations. Some 70 percent of Nigeria’s power comes from the thermal stations while the hydro power stations generate the remaining 30 percent. Experts estimate the private power generation figure (petrol and dieselpowered generators) to be over 2,000MW.
As an economic policy, the government of Chief Olusegun Obasanjo, president of Nigeria from 1999 to 2007, tried to limit its involvement in most sectors of the economy. Instead, it chose to privatise industries where possible – something easier said than done. Private industry provided some tantalising examples for the Obasanjo government. The telecommunications industry, for instance, thrived when investors chose to build it from scratch, with their own support structures and without relying on any pre-existing telecommunications facilities. The national telecommunications body, Nigerian Telecommunications Limited (NITEL), received its GSM licence (Global System for Mobile Communications) just as two private companies – MTN and Econet Wireless – launched in Nigeria. Today, the government managed GSM licence holder is dead and forgotten; instead, private operators provide the much-needed telecoms services, all while making a handsome profit for their investors. But perhaps the greatest success of the telecoms revolution was the number of jobs it created and continues to create today.
The Obasanjo government tried to replicate this success story in the electricity sector. It put into place a framework of enabling laws, suspending those laws that encouraged a government stranglehold on the industry. Two years into Obasanjo’s presidency, the National Electric Power Policy (NEPP),responsible for determining the pace of the electricity reform, came into effect. In March 2005, the Electric Power Sector Reform Bill passed into law in the National Assembly.
The Privatisation Process
This marked the end of NEPA, which was unbundled into 18 semi-autonomous companies that included one transmission company, six generation companies and 11 distribution companies. The law also provided for an independent National Electricity Regulatory Commission (NERC), which commenced operations in October 2005, passing various regulations to direct the industry and prepare the rules for public/private sector participation.
The power company was broken into a number of companies based on function: generation, transmission and distribution. With the 17 private generation and distribution outfits all sold to institutional investors, the plan to improve electricity output over the next decade seems to be on course – at least according to the government, which intends to control the transmission aspect of the power industry by holding onto the Transmission Company of Nigeria (TCN). Even this company will have a private sector stamp as it will be run by the international firm, Manitoba Hydro International of Canada.
Some of the people behind the newly created companies are well known, while others are relatively unknown. But they have one thing in common: confidence in their ability to fix the current power crisis. With the exception of the Afam power plant, the sale of which has been postponed due to a controversy surrounding the interests of former Minister of Power and Steel Barth Nnaji, the generating companies are in the hands of their buyers. A consortium headed by Transcorp and banking guru Tony Elumelu bought the Ughelli power company for $300 million; Femi Otedola’s Forte Oil bought the Geregu Power Plant for $125 million; a consortium of Nigerian, Chinese and British companies acquired the Sapele Power firm for $201 million; Mainstream Energy, a group including the Russian firm RusHydro, in collaboration with several Nigerian companies, won the contract to manage the Kainji Power Company, a privilege for which the organisation paid a sum of $257 million; and North-South Power, a mostly Nigerian consortium, won the contract for Shiroro Power at a cost of $111.6 million. The Nigerian Bulk Electricity Trading Company, on behalf of 11 distribution companies, will purchase the power produced.
The power-reformation process delineated roles for all direct stakeholders. The federal government will be in charge of policy direction, monitoring and evaluation of implementation and performance, while the regulatory commissions will license private operators and provide technical and economic regulations.
Investors agreed not to increase tariffs to accommodate the inability of a distribution company operator to deliver on the Average Technical, Commercial and Collection levels (ATC&C) submitted by investors. Rather that the ATC&C levels will be adjusted downward annually to reflect the agreed ATC&C loss levels irrespective of the operator’s ability to meet its contractual obligation. What this means is that the investors, having submitted their projected ability to cut off losses for themselves (thereby increasing the likelihood for gain), will not arbitrarily increase electricity tariffs to earn more money through wider profit margins.
Nigeria’s power sector now had the legal and regulatory environment to support competitive markets. But market investors envisioned a possible challenge: what if the tariff fails to sustain their interests and justify their investment? They raised the issue with the regulatory NERC, which then adopted the Multi Year Tariff Order (MYTO), charged with reviewing the electricity tariff rates every five years. The government claims that the second MYTO review, which came into effect on 1 June 2012 and which will stand firm until 31 May 2017, is sufficient. The tariff is not uniform given the power use of the urban rich, who consume more electricity and who pay more than the urban poor and their rural counterparts. The government also still subsidises the industry, to the tune of N60 billion ($372 million) for 2012 and N50 billion ($310 million) for 2013.
Big Names, Bigger Hurdles
It is not yet clear whether Nigeria’s new power magnates will be able to deliver on the promises they have made to the government and the Nigerian people, or whether the industry will continue to experience the instability of the past. Privatisation, which has worked so well in other sectors, may turn out to be the solution, especially considering the track records of some of the consortium buyers and the personalities associated with them.
According to the power production timetable, the successful bidders should have taken over the companies by June 2013, some six months after signing the sale and purchase agreements – a process originally scheduled for December 2012 but completed only in February 2013. Speaking with State House correspondents shortly after the signing the agreement, a confident Tony Elumelu promised that the investors would ensure the improvement of the power supply. But on that front so far little has changed, despite investors putting up the required 25 percent of the total bid amount.
The resolution of the labour unions appears to be the major stumbling block. Investors had negotiated to hold off paying the 75-percent balance of the purchase price for the distribution companies until the federal government sorted out all labour-related issues. But the government now insists that the companies pay the balance so that the workers may be compensated. The government had initially relied on the pension scheme to take care of some of the workers, only to discover that not all of the Power Holding Company of Nigeria companies had complied with the pension law and that, in some instances, pension funds had been embezzled or misappropriated.
The government, in trying to enforce the law against the workers, has met stiff resistance from the unions, which enjoy tremendous public goodwill in Nigeria. The unions’ inclusion of casual workers in the severance benefit arrangement has escalated costs further. Labour is insisting that the Federal Government issue letters of appointment to 40,000 casual workers under the severance benefits scheme, which will increase the settlement bill far above the N384 billion ($2.37 billion) projected originally. On top of all this, investors are reluctant to hand over more money unless they are allowed to take control of the companies’ assets, in accord with their agreement with the government.
The Ripple Effect
Delays in finalising the privatisation process have started to drag on all parties involved, with the exception, perhaps, of the labour unions. The federal government faces a huge loss of credibility. When President Goodluck Jonathan stated during a recent CNN interview with Christiane Amanpour that the electricity situation had improved in Nigeria, he was met with sarcastic outbursts from Nigeria’s online community. Furthermore, if the government does not see the process through with strong political will, future attempts to privatise other sectors could meet with scorn. The investors, too, are at risk: Many of them procured the funds invested by taking out loans from domestic and international lending institutions. If the labour situation is not resolved soon, they may well suffer huge losses.
Sadly, it is the average Nigerian consumer who bears the brunt of all of this. Several times this year already, grid system disturbance has caused national blackouts, with power supply dwindling daily. Furthermore, there is no budgetary provision for the generation and distribution companies in the 2013 budget – as of early this year, the burden of financing the companies was to shift from the government to the investors. As a result, the companies have few funds available to deal with vandalism, lack of gas and other infrastructural challenges.
Businesses and consumers will have to wait a while longer to reap the benefits of the privatisation of the power sector, though the general consensus remains that privatisation was the right thing to do.