Theoretical basis for successful electric power sector reforms

Without doubt, I could pass for a modern day Nostradamus, as far as the Nigerian electric power sector is concerned. Over 2 years ago, I predicted the success of the reforms in the electric power sector. I had stated very clearly that the privatization of the Power Holding Company of Nigeria (PHCN) successor electric power generation and distribution companies, in the midst of vast pessimism, would come off.

Almost all of the successor companies were on September 30 2013, handed over to their new owners; although, there are a few issues that still require the attention of the government. Since the birth of many of us in the 1980s I am sure, we have not experienced before now, what we are about to experience in Nigeria, as a stable electric power sector would have a positive multiplier effect (recall the benefits the telecommunications reforms have brought to Nigeria).

Prior to this time, we had known NEPA (also mischievously referred to as ‘Never Expect Power anytime’), the state owned vertically integrated power sector monopoly which was inefficient and was fraught with various challenges which meant that there was hardly ever power supply to the only 35%-40% of Nigerians that were connected to the national grid in the first place.

Many Nigerians have had to, since the 1980s; self-generate electric power with the attendant risks and outlandishly high costs. There were several reasons for the failure of NEPA (which later became the PHCN, in the course of reforms) and indeed that of the electric power sector as a whole.

Well, with the structure adopted for the privatization of the power sector privatization, I could from the outset bet that it was bound to succeed, if the political will accompanied the structure. Hence, what I would be doing in this edition and the next is an expose of theoretical basis for successful electric power sector reforms and privatization that have taken place in the World.

Where We Were:

The challenges in the power sector had included poor operational performance as a result of poor plant maintenance, lack of adequate spare parts, the vandalism of electric utilities across the country and the general lack of investment in the electricity supply industry. All of the foregoing contributed to ensuring that installed capacity, which itself had been, and still is, grossly inadequate, almost always far exceeded actual generated capacity. There had also been poor transmission and distribution infrastructure. The long years of neglect and inadequate investments by previous governments resulted in dilapidated, weak and obsolete transmission and distribution networks, and high technical and non-technical losses. The foregoing had always translated into erratic power supply.

Other challenges which are being tackled head-long are the low tariff, poor revenue collection, gross inadequate metering, poor billing and electricity theft; the effect of which had been that the electric power utilities operated at huge losses. The situation referenced above, therefore, led to a position where the former State-owned utility company, relied heavily on government allocations to keep afloat. A despicable maintenance culture, low level of technological upgrade together with abysmally poor maintenance and investments levels also all contributed to the pathetic state of the sector. Finally, there was very ineffective regulation, inappropriate industry and market structure, unclear delineation of roles, duties and tasks.

Today:

The Federal Government of Nigeria, on September 30, 2013, handed over almost all of the 17 formerly government owned power generation and distribution companies to new owners after a tedious and challenging process which span several years. The process experienced serious setbacks along the way with a number of very important persons playing key roles to the success we now see today, losing their positions.

Yes, there are still challenges around labour, the state of the contracts with government, financing, the initial challenges which the Transition Electricity Market would face, the national grid, gas supply and gas infrastructure. However, it must be said that a lot has been achieved already. The reforms and privatization are moving along very well and the administration of Goodluck Jonathan must be commended together with several persons including Prof Barth Nnaji, Mallam El Rufai, the officials of NERC, Asue Ighodalo, Shola Arifayan and the guys at CPCS; consultants to the BPE in the ongoing power sector reforms. Others include the World Bank, the firm of Banwo & Ighodalo which worked on the unbundling of the PHCN and incorporated the 18 successor companies and the firm of Benchmac and Ince who advised on the privatization process, President Olusegun Obasanjo, Bolanle Onagoruwa, amongst a few other notable persons.

The new owners have minimum performance targets they are expected to achieve with efficiency, now the name of the game. A new class of business people now exists and support industries would also grow with attendant multiplier effect on the Nigerian economy.

Theoretical Basis for Electricity Market Reforms:

Several years of research have proven that the process of a full electric power sector reform program for a government-run power sector (similar to what Nigeria previously had) typically consists of what can be described as ‘the four pillars of reform of a government-run electric power sector’ (See for example, research conducted by R. W. Bacon and J. Besant-Jones and published by the World Bank).

Research has shown that most successful reform processes undertaken in connection with formerly State-run electricity sectors have been built around these basic elements, with the detailed design of each program reflecting the particular circumstances of the country and its electricity sector. These pillars will be briefly examined in the next edition of this column. For more information on this topic and the electric power sector, read the text ‘The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business’ (www.nesi.com.ng) by Ayodele Oni.

Ayodele Oni, (ayodeleoni@yahoo.com), a solicitor, specializes in international energy (oil, gas & power) investment law and policy.  

By: Ayodele Oni