TheNigerianVoice Online Radio Center

INTERNATIONAL EXAMPLES IN FAST-TRACKING POWER REFORMS

By NBF News
Click for Full Image Size

The Nigerian Power Sector is witnessing interesting verve of recent. Most significant is the government's resolve to carry through the sector reforms kick-started in 2005 but which recorded a lull following the 2007 political leadership transition.

Obasanjo had commenced a full-blown reform regime with the enactment of the Electricity Sector Act in 2005 and the subsequent establishment of the sector regulator, the Nigerian Electricity Regulatory Commission. That was followed by the unbundling of the public monopoly PHCN into a single transmission company, six generating companies (GenCos) and 11 distribution companies (DisCos). Investors' kindled interest in the sector was, however, dimmed with the stalling of the reform measures by the Yar'Adua government's inability to withstand pressure from interest groups who wanted the status quo to remain.

Reason given for suspending the process was that the PHCN needed to be stabilised and made economically attractive to investors. Three years down the line, with monumental investment in the sector and little or virtually nothing to show for it, it was obvious PHCN's excuses can't fly anymore, with an already fed up public. And certainly not after an embarrassing open ridicule on government, arising from its non-achievement of the much-touted 6000 MW target.

Good news is that President Goodluck Jonathan has made electric power provision a cardinal agenda of his government and has put the much needed sector reforms back on track. With the launch of the power sector road map, the president has shown a commendable resolve to fast track the reforms in such way that makes its implementation irreversible. Now that the reform agenda is in the public space, it is expected that the necessary discourse on the envisaged strategies can begin in earnest so as to fine tune the process and engender the required public buy-in.

One of the major planks of government strategies to improve electricity supply is the privatisation exercise. This, of course, is a matter of necessity as the major paradigm shift in economic development of nations is to make the private sector the engine room for industrialisation and national development.

The country won't be the first to go this way. In fact, Nigeria qualifies in all the parameters that virtually force governments to privatise the energy utility. According to the International Bank for Reconstruction and Development, a lending arm of the World Bank, these parameters include (a) the poor performance of the state-run electricity sector, in terms of high costs, inadequate expansion of access to electricity service for the population, and/or unreliable supply; (b) the inability of the state sector to finance needed expenditures on new investment and/or maintenance; (c) the need to remove subsidies to the sector in order to release resources for other pressing public expenditure needs; and (d) the desire to raise immediate revenue for the government through the sale of assets from the sector.

Already government is matching its word with action with the recent directive by the National Council on Privatisation to the Bureau for Public Enterprises to commence the privatisation and concessioning of PHCN successors, GenCos and DisCos. The implications of this action become significant when situated in the context of the Chilean, Argentina and Brazil reform examples.

Chile initiated electricity sector reforms in the 80s, set up an Independent Regulator for the sector, privatised the state owned GenCos and introduced competition in wholesale power market in order to encourage more Independent Power Providers to set up generation companies. It, however, retained state monopolies in transmission and distribution for many years before putting them in private hands. Argentina's reforms took off in the 90s by allowing private ownership in distribution, generation and transmission to go hand in hand. Brazil, on the other hand, chose to undertake phased reforms by first privatising the distribution networks followed by the generation and transmission entities in the second phase.

On the face value, one may not notice any significant difference in the three countries' privatisation process, but they had different impacts. For instance, Chile was only able to grow its generation capacity to 15,940 MW by 2010 and that feat was only achieved after it liberalised the distribution and transmission sectors. Meanwhile, Argentina, by 2006, was generating over 24,000 MW, while Brazil had recorded monumental figure of over 96,000 MW. So what happened? By delaying action in privatising distribution and transmission, Chile committed a fundamental error as private investment in generation was hampered by lack of a competitive market. The GenCos found it rather difficult to locate worthy off-takers until the private sector got involved in distribution. Argentina avoided that pitfall by privatising the three segments, but fell to the pressure of capping the tariff rate during a crisis period. It thus stifled a somewhat steadily growing generation capacity. However, Brazil not only liberalised the entire sector but also sustained market sensitive tariffs, thus creating credit-worthy power off-takers capable of purchasing wholesale power from the GenCos.

This hugely served as an incentive for private sector investment in generation. In fact, Brazil, by adopting a phased process, significantly reduced the period that an intermediary wholesale power purchaser had to operate before the DisCos became financially strong and efficient. It didn't take too long before private players were falling over themselves to invest in power plants.

True, we do not have to go the Brazilian long haul, but modifying the Argentine model, which focuses on privatising both the GenCos and DisCos while at the same time combining the initiative with a cost reflective tariff regime will suffice. This becomes more germane if we take into consideration that almost all the licensed IPPs in the country have been unable to make any progress beyond the paper, which they hold because they do not have credit worthy off-takers to sign power purchase agreements with. It maybe argued that the establishment of the bulk trading company is expected to fill this gap but it remains a stop gap measure, which would last only five years. The time is short and if we are not to go back to square one, privatisation ought to be fast tracked especially for the DisCos.

By opting to select preferred bidders on the basis of verifiable financial and performance track record, Nigeria is trying to avoid a major pitfall – the temptation to hand over the DisCos to highest bidders with little or no technical competence expected to engender efficiency and reduce technical losses, especially in power distribution. While placing these firms on performance-based contracts, institutional structures should be in place to ensure compliance with agreed benchmarks while applying stiff penalties for failures. Chile, Argentina and Brazil adopted this strategy and were able to greatly enhance operations efficiency and reduce technical losses to less than seven percent well below their regions' 13.5 percent average. Nigeria's estimated aggregate technical, commercial and collection losses currently hover between 40 to 50 percent of distributed electricity.

These are indeed, useful lessons for Nigeria. Gladly, the government road map shows that government is thinking in same course. The National Council on Privatisation should, therefore, fast track action in this direction, as that remains ultimately the most pragmatic way to encourage greater private sector participation and enhance efficient and reliable service delivery.