Do not reverse power sector privatization

By Rafiq Raji, PhD

Power supply in Nigeria remains epileptic. Four years after the privatization of the sector, this is a sad state of events. Naturally, there is growing public clamour for a reversal of the sale. This is ill-advised. At the forefront of this advocacy – and incidentally also with the power to act on the issue – is the Nigerian Senate. Recently, while debating the continued fraudulent overbilling of customers by the privatized power distribution companies, the lawmakers wondered why the supposedly “technically bankrupt” firms should not be reappropriated. They probably mean well. But in doing so, they would do more harm than good.

Reversals cost economy
Many investors, foreign and local, can usually handle the challenges of investing in less than ideal markets. Unprecedented regulatory hurdles (sometimes borne out of needless officialdom, ignorance or archaic rules) and undercapacity, corruption, and foreign exchange scarcity, are a few of the difficulties that have come to be expected when investing in African countries. So these do not tend to be as bothersome for investors as some might think. What tends to be really frustrating is the penchant by African governments to move the goalposts midway into the game. Considering they are forever travelling global financial capitals cap in hand seeking investors, it is somewhat absurd that their travels have not enlightened them to the debilitating costs of holdups. Any country, no matter how challenged, but with a reputation for abiding by agreements, would still attract investors easily if the potential return is worth the risk. Nigeria, which acknowledges its reputation problem, would be better served if its officials devote more energy to keeping their word than to paying expensive image-laundering fees. Were Nigeria not so attractive an investment destination, most foreign investors would long have been put off by its government’s quirks. As there are now numerous other attractive locations, however, any country that takes them for granted does itself a great disservice. The Senate’s proposal – if adopted – would have repercussions beyond the sector. Thankfully, there are viable market mechanisms that can be used to correct the obvious rot in the sector.

Use market mechanisms
It is public knowledge that a couple of the privatized power companies are highly levered. Their woes emanate not from their debt load primarily, however, but from their lack of matching revenues to meet their obligations. This should not be totally surprising. A mismatch of assets and liabilities would always be problematic. The gripe of these companies, however, is that legacy debts owed them by mostly public entities remain unpaid. And since they cannot necessarily cut off the electricity of what are sometimes vital public assets without repercussions, the vicious cycle continues. Additionally, a significant number of the beneficial owners of these power companies are politically-exposed or highly-placed persons. Within the Nigerian context, there are not many who would have the daring to challenge them. Besides, political undertones may inevitably be read into why the Senate is choosing to put its searchlight on the problems of the sector at this time. That said, the government has the power to legally take over a company that is crucial to the public interest but has evidently demonstrated a lack of capacity to fulfill its mandate. For instance, the government’s “bad bank” was recently used to intervene in the aviation sector. It would not be farfetched if a similar mechanism is deployed to rescue the even more crucial power sector.

Enforce pre-paid metering
Curiously, one senator described the erring power firms as “technically bankrupt”; suggesting perhaps that their current deplorable state of affairs is suggestive of incompetence. This is farther from the truth. Most of the current staff of these firms used to work for the defunct public power utility. And one is well aware of how highly trained they are; albeit their orientation is more towards maintenance and minor repairs. (Most could not confidently demonstrate competence along the whole gamut of engineering, procurement and construction.) Still, they are competent for their current tasks. Besides, the firms have foreign technical partners; who incidentally either built the facilities or at one point, were contracted for major maintenance and repair works. In any case, needed specialist labour can be easily acquired if the system is market-oriented. On the commercial side, there is not a skills shortage as being touted. It is not all too difficult to adapt the old billing systems (or replace them) for now ubiquitous technologically savvier ones. Furthermore, pre-paid metering is even simpler. So what then is the motivation for the continued use of an estimated billing system by these power companies? A much-used excuse relates to pre-paid meter procurement difficulties. Even so, it is more likely the companies are really just employing any means they can get away with to boost revenues, which insiders say have been below expecations. Because of the information asymmetry between the supplier and customer, the distribution firms profit more from an estimated billing system than they would from a more transparent and accountable pre-paid system. In this regard, the industry regulator cannot escape blame. Thus, if the Senate must do something, this is what it should try to change.

Expand and diversify grid, empower players
Only about 30 percent of electricity generated can be passed through the grid. Were all of the sector’s problems solved without resolving this bottleneck, power shortages would still persist. As the grid remains publicly-owned, it behoves the government to make expanding it a priority. Newer but smaller grids can also be allowed. In the few instances where the same investors own both a generation and distribution company, this would be ideal. Thankfully, generation companies were recently granted leave to sell power directly to qualified customers. Off-grid solar power producers have also been licensed. With the Niger Delta at relative peace, gas supply and pricing, which were hitherto – and perhaps remain so – major constraints for generation companies, have also improved. But as gas is priced in US dollars and power producers earn revenue in naira, they suffer another mismatch problem with their finances. Were the authorities to facilitate a special naira market window for them to procure gas, wouldn’t that go a long way? To this end, they already put in place a naira payment guarantee scheme to allay their fears and those of gas suppliers. More fundamentally, the sector needs additional investment if the country’s power supply deficit gap is to be narrowed anytime soon. Making sure the sector is investor-friendly is hardly a subject for debate.

Also published in my Premium Times Nigeria column. See link viz.

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