Power Sector Reform: Not Yet Uhuru, By Ibrahim Dan-Halilu

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,UhuruThe National Assembly, early last month, sponsored a two-day stakeholders’ interactive dialogue to look into the numerous problems bedeviling Nigeria’s power sector and proffer solutions. The conference is an initiative of the National Assembly to provide a legislative approach to the lingering problems of the power sector.

As one of the participants of the two-day event, I must say that even from the various presentations of key stakeholders, panel discussions and final Q/A session, it was obvious that no solution is in sight, as most of the speakers dwelt on shifting blames and covering their own shortcomings as representatives of the generating, transmission or distribution companies.

It’s only the former Special Adviser to President Goodluck Jonathan on Power and CEO of Dangote Cement, Engineer Joseph Makoju who hit the nail on the head by identifying the genesis of the current challenges and what needs to be done to bring the privatization programme of the power sector back on track.

At the centre of the problem is the Generating Companies (GENCOs) which are supposed to generate power and sell to Nigerian Bulk Electricity Traders (NBET) that in turn sells to the distribution companies (DISCOs).  Any obstruction in this chain of supply creates a permanent damage that may take time to rectify.  That’s the situation Nigerians are facing currently. The darkness enveloping the country is a consequence of breaking the chain of supply of electricity due to one reason or the other.

Since the unbundling of the defunct National Electric Power Authority (NEPA) by the Obasanjo Administration in 2005, which gave birth to the Power Holding Company of Nigeria (PHCN) and the new 11 distribution companies, 6 generating companies, none of the operators has lived up to their responsibilities, which resulted in pains and sufferings to the Nigerian consumers who are the end users of electricity.

The GENCOs have not improved generation as they promised when they were bidding for the generating companies. They promised to give Nigerians N20,000 megawatts within five years of their taking over. The closest to this figure they generated was when they generated about 7,000MW under the defunct Power Holding Company of Nigeria but were only able to transmit a little above 4,000 megawatts.  Since then, the generating capacity has been falling.

As of now nobody is sure how much they generate, but it must be something below 2,000 megawatt which authorities attributed to several factors that are well known to some Nigerians but unknown to most of the victims of this rushed privatization programme.

One of the reasons is the shortage of gas supply which both GENCOs and DISCOs have mentioned in their presentations at the dialogue.  They both blamed the Nigerian Gas Company and the activities of the Niger Delta militants who vandalise gas pipelines in protest against perceived injustice on their communities by the oil companies and the Nigerian government.

Without adequate and regular gas supply, most of the power stations will shut down and no electricity can be generated. And once this happens, the nation will remain in total darkness as happened few months ago.

The second reason is the reduction of the water level at the hydro plants like Kainji and Jebbawhich depend on the water pressure for the turbines to work and generate current.  We are currently facing this challenge because as the dry season hits hard, the dams dry up and lose much of their water.  This could be due to natural or artificial factors.

The other artificial cause of this problem is the deliberate action of the DISCOs to not sell electricity to the consumers.  Inside sources confirmed to this writer that at times, the DISCOs withhold the electricity allocated to them by NBET and make a report of non-utilisation because they have realized that they cannot meet up the remittances to NBET if they sell to their consumers due to poor patronage or low pricing of electricity.

If the GENCOs solely depend on NGC for gas supply, why does the gas company cut off supply of the most important component of the value chain?  The answer is very simple. The NGC is in business to make profit, and GENCOs have been very bad debtors. They owe the gas company over N70bn for previous supply of gas.

The GENCOs have in turn blamed DISCOs for their predicaments accusing them of not paying for the electricity supplied to them by NBET.  NBET is a silent participant in this chain because nobody except the operators knows the crucial position they occupy in the chain as wholesalers of electricity. Some wonder why an artificial middleman was created in this chain of supply when the GENCOs could have sold directly to the DISCOs, which may make the price low.

Experts argued that Federal Government adopted global best practice of engaging a bulk purchaser who then sells to retailers (DISCOs) because allowing the GENCOs to sell directly to DISCOs may create liquidity problems since GENCOs are not in the capital market where they could raise fundsto service some of their commitments and they lack the structure to engage in the complex monetary transactions that NBET does.

But I tend to disagree with this argument.  The truth is that Nigeria’s privatization guru, the Bureau for Public Enterprises (BPE) adopted the Indian model which incorporated bulk traders as part of the value chain, and our experts did not brainstorm to find a better structure that will suit our circumstance. The fact that the telecommunications sector privation has brought in dealers and retailers into their value chain does not mean it will work for the power sector reform.

The mobile networks have retail outlets all over the country, in addition to dealers who supply recharge cards to retailers.  The outlets are doing more than selling recharge cards as they provide other ancillary services to clients. It must be noted that such ancillary services in the power sector are provided by DISCOs, which makes them the best fit for bulk purchasing directly from the GENCOs.

The role of the NEC has also being questioned by some observers. Why do we need an electricity council whose main function is to deliberate on policy and regulations yet received a huge sum of money as allowances and other benefits that even the CEOs of the operators don’t enjoy? They argued that the NEC is a parasitic institution that is not adding any value to the performance of either GENCOs or TCN.

“If the NEC is doing its job, how comes that TCN is facing serious underfunding problem that makes it difficult to maintain broken transmission lines or build new ones to match the increasing demand for electricity,” said one of the observers.

Both GENCOs and DISCOs have pushed the blame on the Federal Government for privatizing the two sectors but holding monopoly of the transmission through its own agency, the Transmission Company of Nigeria. They argued that as long as transmission is under government’s control and TCN is not adequately funded to maintain the transmission grids and expand their reach, the promise to provide adequate supply of electricity to Nigerians would remain a mirage.

The Nigerian Society of Engineers (NSE) too blamed the FG for the poor performance of the sector. The NSE wanted the FG to take sole responsibility of supplying gas to the power plants instead of pushing it to the GENCOs who cannot purchase the commodity at the current market price and be expected to sell electricity atthe old MYTO price. They also called on the National Assembly to amend existing laws to accord local content in electricity generation, transmission and distribution a pride of place.

“Our engineers should be given a chance to drive the sector instead of depending on foreign experts. We have capacity to manage the plants, if government gives us the opportunity to do so, said the President of NGE at the two-day dialogue.

From the perspective of the GENCOs which was presented by Kola Adesina, CEO, Sahara Power, the FG needs to revisit the MYTO II policy introduced in 2010 under which gas pricing and inflationary rate were determined before fixing the price of electricity. He believes that the regime has outlived its relevance and is now time to come up with an alternative policy of balancing the cost of generation and the pricing of electricity in Nigeria.

He noted that in 2013, the exchange rate was N270/$ but now it has gone up to above N450/$ in the parallel market where most of the GENCOs source their foreign exchange to purchase equipment and pay their foreign technical experts for the services rendered.  He also noted that MYTO II has further predicted inflationary rate at 1.3% in 2010 but now the inflation rate is 9.8%.

With such huge gaps, it would be difficult for the operators to perform at optimal level as expected by the consumers and regulators.  Kola dismissed the claim that the operators have not invested anything since they took over the generating companies, arguing that over $2.7bn has been injected into the sector by Nigerian investors.

The Sahara Power CEO blamed the poor performance of operators to the FG’s inability to fulfill its own part of the bargain, which include maintenance of the existing transmission lines and providing an effective mechanism to bridge the difference between the cost of generating power and the price that consumers pay for it.

For instance, one thorny issue raised by Mr. Adesinawas lack of Turn Around Maintenance for at the Itakpe Dam which is the main source of generating power by Sahara Power Company.  He revealed that the dam was not given a TAM for 30 years.

He outlined some of the commitments that Sahara as an operator has made in the bid to make electricity available to the consumers.  These include replacement of the obsolete meter control system with an automated type which cost Sahara over $2.7bn, employment and training of more than 1000 staff, mass metering which cost the company millions of dollars in bank loans.

Proffering solutions to the problems, Mr. Adesina said the Federal Government should pay for gas so that the price of electricity can come down. He also urged Nigerians to obey the law by paying their bills on time and stop tampering with pre-paid meters, as well as vandalizing electricity equipment.

Mr. Adesina also called on the Federal Government to settle outstanding debts of Ministries, Departments and Agencies (MDAs) which runs into over N30bn, and focus its budget for 2017 on the power sector.

Besides, debt settlement, some operators are calling for an intervention fund to be resided in an independent body, not as a subsidy, but as a fund that operators can access when in need.

It is alarming to note that the GENCOs distributed only 50% of the power generated in 2016 due to power interruptions and load rejection.  According to the statistics provided at the dialogue 170 interruptions were recorded in 2016 with 88% loss.

The consensus is that TCN is ill-equipped to carry out its functions of maintaining the power lines due to poor infrastructure (obsolete), poor funding, bad debts and vandalism of transmission equipment.  It is evident that without government intervention and citizens’ participation, there is nothing much that TCN can do to establish and maintain reliable transmission grid and ensure equitable load allocation, which is the mandate given it under the Electric Power Sector Reform Act 2005.

For this to happen, the FG must do three things: Pay all outstanding electricity bill owed Ministries, Departments and Agencies (MDAs) which runs into some N30bn as of two months ago; address the issue of tariff by either making consumers pay actual price or create an intervention fund to pay on behalf of consumers; ensure security of installations like grids and power plants.

Participants at the two-day dialogue advised that the National Assembly should not tamper with the Power Sector Reform Act but instead amend the Petroleum Industry Bill (PIB) to separate government from the investors, and define regulatory function of state, legal ownership and operation of the downstream sector.

Theyalso called for a new gas policy that promotes private sector participation in the development of gas infrastructure, exploration, and supply instead of the current monopoly by NGC which has left much of the nation’s gas reserve untapped. According to them, this will not only make gas available and affordable to users but also reduce gas flaring that has become an environmental concern to Nigerians.

The beauty of the PIB is that it has separated gas from petrol as a sector, which means the gas is recognised as a commodity that can be developed and sold to those that can afford it.  The experts are of the view that the sector needs huge investment for both expansion and increased participation, which is the area where the intervention of the National Assembly becomes imperative.

Some of the key speakers rightly observed that DISCOs need to be committed to fulfilling their obligations of paying their bills to NBET. As of January, they paid less than 23% of their bills which is quite embarrassing. But to many observers, DISCOs may not be able to fulfill their obligation unless the supply improves, because without regular supply, there is nothing they can sell to their customers, or when what they sell is far below the bills they are expected to pay to NBET.

To resolve this liquidity challenge, some of the operators have recommended a new Payment Support Programme (PSP) whereby NBET will raise funds from the capital market with loan guarantee from the Central Bank of Nigeria.  Then it should have its noted paid through direct credit agreement signed with DISCOs in which the latter will have a baseline payment to NBET annually. The shortfall that is now the bone of contention could be converted to loans that can be repaid over a period of time.

This proposal sounds fantastic on paper but the snag that some observed is that not all the DISCOs may have the political will to fulfill this obligation, which may in effect leads to series of litigations that can ground the sector.

As both operators and regulators search for permanent solutions, the answer on the lips of most Nigerians is this: Is there any solution in sight?

Some have recommended a reversal of the privatization of the power sector which some experts described as no solution. Those recommending a reversal seem to have forgotten why the sector was privatized in the first place. All the privatizations that have taken place in Nigeria were as a result of the perceived inability of government to manage enterprises.  The assumption was that private investors are in a better stead to manage businesses since they are in business to make profit and without quality service to consumers, the possibility of making profit would be slim.

What may be responsible for the seeming failure or poor performance of Nigeria’s privatization programmes is either poor implementation or lack of readiness by those who took over the enterprises. In the case of the power sector, the view of some insiders is that both factors apply. The federal Government’s implementation of the reform programme was haphazard and lacking of transparency.

For instance, it was pointed by EngineerMakoju that all the foreign investors that participated in the initial bidding process withdrew from the exercise midway without giving any reason. But some critics have attributed their withdrawal to lack of adequate information on the status of the GENCOs and DISCOs they were buying.  Some also added corruption or extortion as another reason. That some of the officials handling the privatization process demanded bribe from the investors which they were not ready to comply with.  Whatever may be the case, the withdrawal of most experienced and reputable power sector investors has called to question the credibility of the process.

As Makoju also pointed out, some of the Nigerian investors who rushed in to purchase those companies did not understand the sector very well. Many of them thought it was a money spinning business when it is the direct opposite.  As he puts it “It takes no less than 30 years for an investor in the power sector to start making profitsbecause it is a value chain sector where money made are recycled among the gas supply companies, generating plants, transmission companies and distribution companies.”

Power sector is not like any other conventional business where you put in money to buy and sell products or services and draw profits. It’s more complex than this, as a slight disruption of the cycle can affect the entire process with severe consequences. That is where Nigeria is today.  The failure of the operators to assess risk and provide cushioning effects are boomeranging and causing a disruption of the entire sector.  Any solution that fails to take into cognizance the price fluctuation of gas and foreign exchange will not work. This is the advice of experts. A stich in time, they say, saves nine.


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