Will Liberalizing the Power Sector solve the Problem of Capacity Shortage?

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By FELIX AYANRUOH

Introduction
Nigeria has one of the most problematic electricity sectors in the world, with an estimated installed electricity generation capacity of 8,644 MW, and available capacity of only approximately 3,200 MW, to cater for the needs of a population of about160 million. By comparison, South Africa, with a population of just 50 million, has an installed electricity generation capacity of over 52,000 MW. On a per capita consumption basis, Nigeria is ranked a distant 178th with 106.21 KWh per head, – well behind Gabon (900.00); Ghana (283.65); and Cameroon (176.01); and Kenya (124.68).
The historic gap between the demand for electricity and the available capacity has led to the current widespread power shortage and inefficiency and, consequently, self-generation of power by both industrial and residential consumers. The Manufacturers Association of Nigeria (“MAN”) and the National Association of Small Scale Industries (“NASSI”) have estimated that their members spend an average of about two billion naira (about $12 million) per week on self-power generation. To this end, the Nigerian power sector presents immense opportunities for private investment in the electricity power sector.
It is self-evident that the poor performance of the electricity power sector in Nigeria has been a significant barrier to private investment in the country and to overall development and economic growth. The sector’s market structure, like most economies of the developing world, is dominated by the state-owned power entity – National Electric Power Authority (“NEPA”) – in a monopolistic, vertically integrated business model.
The dissatisfaction with the performance of NEPA – symptomized by its low capacity generation; high costs; inadequate distribution of electric power; inability to finance new or expanded infrastructure; and inadequate machinery for effective billing and collection of bills – fueled the debate on the theoretical and empirical justification for its involvement in Nigeria’s electricity power sector, and became the driving force behind liberalization.
Heuristic analyses, by experts in the field such as Robert Bacon and John Besant-Jones of the World Bank conclude that the process of reform and liberalization of a capacity-deficient electricity power sector such as Nigeria’s, should include the following key elements:
·    Mandating NEPA to operate according to commercial principles.
·    Introduction of competition.
·    Restructuring of NEPA’s supply chain to enable full liberalization. This entails unbundling NEPA’s business structure into several generation and distribution enterprises.
·    Privatization of the unbundled electricity generators and distributors under dispersed ownership, to encourage private investors and operators to bring in financial resources and technical and managerial expertise to correct NEPA’s deficiencies
·    Development of economic regulation that is independent from government and industry capture.
·    Restricting government’s role on policy formation and execution.
History of Reforms
Beginning in 1896 when electricity was first produced in Lagos, with a generation capacity of 60KW, and continuing to the establishment of NEPA in 1972, several efforts have been continually made to increase capacity output. The promulgation of the Privatization and Commercialization decree No.25 of 1988 which established the Technical Committee on Privatization and Commercialization (“TCPC”), led to the review of the failures of state monopolies including NEPA and proposals to commercialization the operations of NEPA. Following enactment of the Public Enterprises Act of 1999, the Bureau of Public Enterprises (“BPE”) replaced TCPC, with the power to shift emphases from commercialization to encouraging core investors, and promoting foreign investment in the privatization program.
Despite the foregoing broad statutory framework, the Nigerian electricity power sector continued to experience low electricity supply. In response, the Federal Government adopted the National Electric Power Policy (NEPP) in March 2001, setting out the following critical objectives:
·    Attract private investment both from Nigeria and from overseas
·    New legislation to provide the legal framework for the reform Agenda
·    Establishment of an independent regulatory agency
·    Development of a wholesale electricity market
·    Establishment of a consumer assistance fund to ensure the efficient and targeted application of subsidies to less privileged Nigerians
·    Establishment of a Rural Electrification Agency (“REA”) to manage the rural electrification fund.
The Electric Power Sector Reform Act of 2005 (EPSR) codified the preceding objectives, creating a new legal and regulatory framework for the sector, including the elimination of NEPA and provisions to ensure privatization of successor companies; establishment of the Nigeria Electricity Regulatory Commission (NERC); establishment of the Rural Electrification Agency; and a Consumer assistance fund to bridge the funding gaps for low income earners.
The Failure of Reforms
After five years of implementation of the 2005 Reform Act, the liberalization process has remained stalled and mired in intractable challenges. Power shortages, poor operational performance, a lack of foreign investment, the absence of a sustained and deliberately deployed long term power development strategy, under-exploitation of the nation’s abundant energy endowments and the inadequate implementation of reforms, were readily conceded by Government in the Presidential Road Map of 2010.
In a nutshell, liberalization has not enjoyed the predicted success. The challenges facing the sector can be summed up as both institutional and regulatory. Some have argued that, for liberalization to attain its objectives, the government must have political will and also allow for a captive-free regulation regime.
To be continued.
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====== PART TWO=======
[Part One of this article reviewed the history of liberalization of Nigeria’s electric power sector from 1896 to the present, noting that the capacity shortage nevertheless remains pervasive.]
Failure of Reforms, (Continued)
Nigeria like many countries of the world provides subsidies for the electricity power sector explicitly or implicitly, to producers and consumers. Justifications for their use vary from social welfare protection, job creation, the encouragement of new sources of energy supply, and economic development to energy security. Consequently, the government is faced with formulating a tariff structure to incentivize power generation and distribution on the one hand and social implication of market determine by subsidies for those at an economic disadvantage position on the other.
The government should be concerned with the effect of subsidies to increase of output capacity, and the encouragement of private participation. It is undeniable that Nigeria has one of the lowest electricity rates in the world, not simply because of a lack of efficiency or healthy competition in the sector but because of subsidies and the reluctance of government to authorize tariff revision. The resultant effect of such policy includes poor funding, inefficiency, poor state of infrastructure and most importantly the dearth of private sector participation. The right policy approach is to get market signals right so that prices can reflect to the true cost of producing and consuming power. A cost-reflective tariff regime is seminal to the recovery of expansion and efficiency in the sector.
It is axiomatic (and supported by the empirical evidence) that corruption discourages private investment, retards growth and inhibits poverty reduction efforts. In the energy sector for example, the delivery of energy moves from generation to transmission, to wholesale distribution and finally to retail distribution. Corruption can occur anywhere along the line. In generation, for example, it can occur in the licensing stage – where government officials might be tempted to ask for kickbacks in the issuance and renewal of generation licenses. Also, contracting for Power Purchase Agreements with state entity including payments for power generation can attract corrupt practices.
Furthermore, management of public finance is crucial to sector performance. For this reason, there are frequent attempts to explore vulnerabilities on both the expenditure and revenue sides of public finance. Due to the intricacies involved, budget management is frequently afflicted with inefficiencies and corruption. This can take the form of diversion of budgetary allocations towards activities that have greater potential for kickbacks, bribery, and fraud or theft. In the energy sector for example, this can occur in both the legislative and executive arm of government – budgetary approval process for the electricity power sector in the allocation of subsidies, procurement etc.
A close examination of Nigerian electricity sector reforms suggests that corruption was a major factor in the cycle of failure, inefficiencies and capacity shortage. It is a public fact that the Nigerian society is plagued with serious corruption, hence the creation of the Economic and the Financial Crimes Commission (“EFCC”) and the Independent Corrupt Practices and Other Related Offences Commission (“ICPC”) to fight this vice. The EFCC until recently was very effective in fighting graft and financial crime in Nigeria.
The current investigation by the Nigeria legislature into the abrogation of oil subsidy and the privatization of state owned entities has brought to light the issues of corruption and mismanagement as a catalyst to power sector reform. The investigation revealed serious graft issues by both government officials and private participants in the petroleum industry. The legislature cited a government-sponsored investigation on oil subsidies (conducted by the accounting firm of KPMG) which revealed that between 2007 and 2009 alone, the Nigeria National Petroleum Corporation (“NNPC”) – a government owned entity misappropriated subsidy claims to the tune of N28.5 billion, and unaccounted for. The investigations also discovered that fraudulent practices by government agencies fuelled a five-fold rise in spending on gasoline subsidies in the past three years. However, the same government is probably paying more than 2 trillion naira ($12.6 billion) to importers of fuel, to cover the difference between market costs and state-regulated prices for last year.
Furthermore, Nigeria’s Senate panel investigating the privatization of government entities found that illegal and fraudulent acts were carried out by government officials in the sale of government entities. There were cited instances where very top government officials acquired and paid little or nothing for some of these entities.
A peaceful end to the violent struggle for resource control in the Niger Delta region (where oil and gas, the major sources of power generation is obtained) can also be a catalyst to capacity increase in the electricity power sector. The incessant and pervasive acts of sabotage on crude and condensate evacuation pipeline system which caused serious and protracted interruptions to the gas supply to power plant, are significant contributors to the power shortages.
Conclusion
The liberalization of an electricity power sector can be a cumbersome process whose impact can be viewed as both short-term as well as long-term in nature. At the same time, the success or failure can only be measured by past mistakes and corrective measures. The concerns about the liberalization process in capacity-short countries have centered on the process followed, the transition management and the final destination of the reform process.
As will be readily apparent from the foregoing discussions, a tremendous amount of effort and resources – both institutional and regulatory – have been brought to bear to adopt Bacon and Besant-Jones’s prescriptions on liberalization as a panacea for a capacity deficient electricity power sector. Yet, the problems persist. The question, then, is why? It is the author’s opinion that at every stage of the liberalization process a constant theme is the issue of corruption. Clearly, the leadership and the very entities charged with policy implementation have collectively failed to recognize – or just as likely, abdicated responsibility for – this endemic and corrosive social problem. For example, TCPC (which later become BPE) was itself indicted by the Nigerian Senate for corruption of the privatization process. Ironically, TCPC itself had relied on “corruption” as one of the reasons for recommending the privatization of NEPA.
To advance the liberalization process towards its laudable objectives, this author offers the following recommendations:
·    A robust and radical reform in the sector demonstrating changes to improve and strengthen both the regulatory and institutional framework to enhance accountability and minimize corruption;
·    Elimination or minimization of concerns about security of supply of gas associated with resource control agitation in the Niger Delta region.
·    Adequate incentives for investors and a climate of predictability, through consistency in formulation and execution of policy.
·    The country should immediately establish a permanent, special unit of the EFCC – dedicated to the Petroleum and Electricity Power sector, with independent powers of investigation, arrest, and prosecution in all instances of corruption in the sector, without recourse to the Ministry of Justice. Such a draconian approach is justified: after all, this sector is the lifeblood of the nation.
Felix Ayanruoh is a US energy attorney licensed in the state of New York State and District of Columbia.

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