The Federal Government (FG) is under pressure to cancel the non-performing agreements with the current operators in the Nigerian Electricity Supply Industry (NESI). Such a step will not be unprecedented as there are documented examples of failed privatization of electricity supply industries worldwide. However, the power sector reform in Nigeria can still avoid that label. Such a decision is laden with a lot of legal and institutional problems that may be counterproductive given the political cum socio-economic situation of Nigeria.
In view of the stagnation in the power sector, there is a dire need to press the reset button on the privatization process with a view to rejigging and repositioning it for greatness.
A careful review of the privatization process reveals that the FG has continued to subsidize the privatized industry from the beginning and till date. This will continue into the forseeable future as a matter of exigency to pay for the shoddy manner in which the privatization was conducted.
A NEW BEGINNING
We may not be able to account for the total amount of money already spent by tax payers in bailing out privatized companies/operators in the NESI since 2013. The FG started by paying 213 billion naira as a stabilization fund shortly after privatization. Since then, it has paid 600 billion Naira and 701 billion Naira in succession; and these types of payments will continue. While the FG continues to provide financial interventions in the NESI, this has to be complemented by a revised approach to its governance structure, and technical considerations.
What must change
He who pays the piper, dictates the tune is an appropriate dictum. The FG needs to assert its authority decisively in the governance and administration of the NESI. The very first step to be taken towards repositioning the power sector for greatness is a comprehensive technical and financial audit of the sector. It has to be ascertained what investments have been done in the sector since privatization to provide a baseline for financial prudence. Also, the actual status of power system plants (switchgear, transformers, overhead lines, cables, substations etc) needs to be determined to serve as a benchmark or datum upon which a link between further investments and reform initiatives can be drawn.
This should be done before any form of recapitalization or intervention by the FG, World Bank, Siemens and others.
New Ownership Structure for Distribution Companies (DisCos) in Nigeria
The privatization under review allowed for a joint venture between Nigerians and investors in the ratio 40:60. The federal, state and local governments, on behalf of Nigerians, own 40% stake in 10 of the DisCos while the investors own 60%. A force majeure in the wake of unrest in the north eastern part part of the country has meant that Yola Electricity Distribution Company (YEDC) is 100% owned by the government. It has to be stated also that some state governments have part-ownership in some of the DisCos.
Prior to this time, the government has not been well represented in the governance of the DisCos in terms of board representation. Now, a new structure has to evolve with at least four (4) representatives of government for every ten (10) board members. The ownership ratio for governmental authorities is Federal [13%], State and Local governments [27%]) to make up the 40% stakeholdership.
This is not an uncharted territory for the government which already has a Joint Venture partnership with multinational oil companies operating in the oil and gas industry. The government simply needs to replicate the concept and ensure that appointed members of the board should have cognate experiences in the technical and financial matters of the power sector.
The board composition of DisCos would now include representatives from Federal, States and Local governments, the Bureau of Public Enterprise (BPE) and their Independent Directors.
NERC will have to enforce a requirement for each DisCo to have independent directors while BPE would exercise its veto rights in supervising DisCos’ management.
Regulatory Regime
The structure of the Nigerian Electricity Regulatory Commission (NERC) as we have it today is the best for the NESI in terms of the percentage of established power engineers and other professionals in the leadership of the commission. This has to remain so for the forseeable future. The forum offices of NERC should also have power engineers in sufficient number so as to have a full grasp of the technical challenges facing consumers wherever they serve. The regulator has to be independent and devoid of undue political interference for investors to have confidence in the power sector reform. The issue of more than one regulator should be cleared. The most popular regulatory model in the world of power systems is to have a single regulator for both technical and economic aspects of the privatized electricity industry. In relatively few cases, the technical regulator is different from the economic regulator. As of today, there is a kind of duplication of roles and responsibilities between NERC and the Nigerian Electricity Management Services Agency (NEMSA). This needs to be addressed.
Performance- Based Regulation
The principal basis for benchmarking performance will be the availability of standards, policies and specifications. Thus, the NESI requires standards and policies for the design, planning, construction, protection, control, inspection and maintenance of the power network.
NERC has to do a lot more monitoring of the activities of the DisCos and other operators in the NESI based on their submitted performance improvement plans (PIPs). The output measure technique should be used to link investment with performance. Transparent evaluation of key performance indicators (KPIs) should lead to incentives for over-performance and penalties/sanctions for under-performance. All of these have to be done without stifling innovation and development in the industry.
Furthermore, NERC should train its staff in various aspects of power system regulation and encourage tertiary institutions to include it in their curriculum.
NERC should be given the free hand to execute its statutory obligations, entrench regulatory norms, create and implement efficient market design while ensuring quantitative and qualitative improvements in the NESI.
Additionally, NERC has responsibilities to ensure that the governance structure in all the DisCos is focused on adherence to the extant regulations, rules, and contracts that will lead to efficient investment in infrastructure, and world class customer service delivery.
Procurement and related party transactions should follow core project management principles and best practices providing value-for-money in technical agreements.
The Electricity Market
There is no electricity market in Nigeria. What we have is a pseudo-marketplace. We need to have a functional power system before we can talk about an electricity market. The conditions precedent as outlined in the Electric Power Sector Reform Act (EPSRA) 2005 have to exist.
Contracts have to be sacrosant. The sacrosanctity of contracts means that payment and performance guarantees are assured and sector players obey the set of rules governing the market.
To date, electricity market shortfalls is over 2.4 trillion Naira with a potential to keep increasing if nothing drastic is done to stem the tide. This is an aggregation of a collection loss of 1.335 trillion Naira reported by the DisCos and a tariff shortfall of 1.109 trillion Naira based on the tariff that the regulator would have approved if all the factors affecting tariffs are used in the determination of service reflective tariffs.
Already, some of the current financial interventions in the NESI include the $1.6 billion earmarked for the transmission company of Nigeria (TCN), the World Bank facility of
$1.55 billion for the rural electrification agency (REA). As of the time of writing this article, the commercial terms and financial intervention of the Nigerian Electrification Roadmap (NER) project with Siemens has not been concluded.
Whatever the case, the FG needs to provide clear policy guidelines to enhance the operations of NERC, central bank of Nigeria (CBN) and all other participants in the market.
FG should now agree to accept all the financial losses that may arise as a result of the failure of the privatisation process, tariff shortfalls/ unwillingness to allow market parameters govern the market, including tariff and recovery of investment by the core investors.
The Ministry of Power will have to implement these recommendations and drive these initiatives. Some of the policies will include but not limited to the implementation of the power sector recovery programme, the eligible customer policy, the so called willing-Buyer-Willing-Seller arrangements, Meter Asset Provider (MAP) regulation, the electricity distribution franchising, distributed generation, deployment of off-grid/on-grid systems and more.
Idowu Oyebanjo MNSE CEng MIET
