As Nigeria continues to bask in the accomplishment of social justice through public engagement and discussions on twitter (and other social media), we have in the recent times seen how public outcry can upset the status quo in matters relating to different aspects of socio-economic activities in the country. In the area of power sector for example, we have seen how ineptitude, celebration of mediocrity over merit and appointment based on the principle of quota system led to the sale of NEPA assets to “investors who lacked the financial and technical capacity”.
In response to the allegations by Dr Sam Amadi, former Chairman, Nigerian Electricity Regulatory Commission (NERC), who presided over the regulatory regime that led to the eventual handover of the assets to investors in November 2013, the Bureau of Public Enterprises (BPE) has provided fresh information on twitter to enlighten the public on some of the details of the process that led to the sale. As the 5-year review period from November 2013 ended in November 2018, the public push asking for a review of the privatization was technically avoided and may now take place in November 2019. In view of this, it is important, ahead of any such review, to understand what went wrong, learn from these and reposition the sector on the right path by “rethinking the privatization model”.
The appointment of non-power sector professionals, especially lawyers and accountants, as commissioners of NERC during the first few years of privatization up to the eventual transfer of the Assets to private investors led to the problems we are now facing with the performance of the operators. The lesson here is that we must never celebrate mediocrity over merit and appointment should always be based on merit and professionalism. Square pegs should be put in square holes. To quote the Bureau of public Enterprises (BPE), :” It therefore beggars belief that somebody who was appointed Chairman of NERC with zero years of experience in the power sector should seat in judgement over the outcome of PHCN successor company’s evaluation”. The power sector is a highly technically intensive sector and it amounts to mere wishful thinking to assume that non-power system professionals such as lawyers, economists and accountants are the professionals that will lead the sector to “eldorado”. These professionals are by no means necessary in what is a multidisciplinary industry, but those to be in charge and in the lead of relevant agencies have to possess significant power sector experience. This is more so as Nigeria is at the lowest ebb of the development of the power sector having reached, at its very peak, a per capita electricity consumption of 157kWh in 2012. Even if the system gets to the level of uninterrupted power supply, my recommendation is to ensure power system experts continue to provide leadership in the management of power systems.
Another reason for the dismal outcome of the privatization exercise is the little importance attached to the technical prowess of potential investors. It was mentioned that the bar for technical capacity was lowered to allow companies with little or no experience in power distribution to compete alongside industry giants who later withdrew from the process. The BPE denied that it lowered the bar but the devil is in the details. As per the rules set by BPE, potential investors with no technical capabilities had the liberty to look for technical support to qualify them to bid for the power assets. Since the aim was for the investors to manage and operate the distribution assets, the premium that should be put on technical qualifications had to be significant. This was not to be the case with the privatization of the NESI. “BPE made it clear that a Technical Service Agreement (TSA) was mandatory for all bidding entities where the technical partner is not a shareholder or holds less than 5% of the equity shares. Where a technical partner had taken the major step of also holding 5% or more of the equity shares, the TSA becomes redundant for the purpose of bid evaluation but mandatory for financial close or handover”. It appears to reason that the privatization was thought of up to “handover only” because with a 5% stake, it is very easy for a technical partner to walk away from the joint venture. To be frank, if the technical partner in a joint venture like this walks away, the bid offer is void during the life time of the agreement. As per the financial capability of the investors, the inability of the investors to raise the required long-term investment capital for the expansion of the distribution network indicates clearly that they are not financially capable. The kind of financially capable investors for a power sector development are not those who borrow from local commercial Banks as the scale of investment required is huge. So, if anything, the BPE has just confirmed the position that the privatization process was designed to fail because the power assets were sold to investors who lacked the financial and technical capacity.
Also, the potential investors had competed on the basis of aggressive reduction in the aggregate technical, commercial and collection (ATC&C) losses within a period of five years. To win, a bidder had to score above 75% in the technical evaluation and have a leading ATC&C loss reduction offer. Therefore, one would have expected that a high premium would have been placed on the determination of baseline ATC&C loss levels in the NESI rather than going by mere assumptions as was the case with the privatization process. The lawyers put in charge of the sector assumed from “the toss of a coin” a 25% ATC&C loss levels as a baseline in order to progress the transactions. It must be said however that it was agreed that a review would be implemented after a year if the actual loss levels were determined so that MYTO tariffs can be adjusted. According to the BPE, the actual loss levels was determined after a year via a supervised study to be up to 49%. This led to the introduction of a collection loss component in the tariff on February 1, 2015. But in a dramatic move, NERC removed the collection loss component from the tariff after commissioners decided, and rightly so, that it will encourage inefficiency and further impoverish consumers who would be asked in effect to pay for losses apart from being unfairly made to bear responsibility for the development of the power sector. This is a chicken and egg situation as without improvements in the quality and quantity of power supply to consumers, consumers will be naturally unwilling to pay increased tariffs and without “cost reflective tariffs”, DisCos claim they cannot carry out needed network expansion projects. The BPE believes “that the removal of collection loss component of the ATC&C loss was the single most devastating decision so far taken in the power sector…. as it meant a breach of the contract signed with core investors, a reduction in revenues in the sector thereby worsening the liquidity situation, a loss of investor confidence and the inability of DisCos to attract needed investment in the NESI”.
To make progress, a system has to be designed to ensure cost reflective tariffs are matched with operational, metering & collection efficiencies in the face of improvements in customer service, evaluated by, among other metrics, quality of faults and complaints handling or resolution mechanisms.
Now that the contract signed with these investors when they acquired the successor companies come to an end, careful thought needs to be put into performance improvement plans for operators in the NESI. A performance based incentive and penalty regime based on carefully defined outputs will be needed. This has to be monitored and I can provide the required templates for the BPE or NERC if asked. In addition, as I stated in 2013, a special arrangement between the federal government (FG) and DisCos in a way that customers will be the ultimate winners is the way forward. This requires significant and sustained investment in the power sector by government (perhaps through foreign direct investment) and core investors. This has to be carried out in a specific manner to achieve success. In this regard, the power sector recovery plan (PSRP) put together by the FG and World Bank to put the power sector reform back on track is apt. The success of this initiative depends on the faithful implementation of this policy which hinges on the principle of meritocracy.
Idowu Oyebanjo is a power system professional from the UK.
