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Amadi: Power sector privatisation due for review

Sam Amadi

Immediate past chairman of the National Electricity Regulatory Commission (NERC), Dr. Sam Amadi, in this interview with KINGSLEY JEREMIAH, noted inherent flaws in the country’s power sector privatisation. Amadi, who is also the Executive Director, Centre for Public Policy and Research, insists that unless models for the privatised entities are remedied, attempts to make the sector flourish could remain a mirage.

It’s five years after the power sector privatisation, would you say that we have got the right result?
The result is mixed, but we could rightly say that we’ve not achieved the result we expected. In terms of delivery, we’ve not had significant improved power delivery and of course we’ve not had an increase in capacity growth as expected.

The cost of power to consumers is still very high. But the question is, are we going to be better off? There is significant progress in terms of a much more efficient electricity market. We now have some public-private sector confidence in the sector. There are also some investments from private sector. To some people, this represents a level of success. Generally the sector presented a mixed feeling.

Some of us think that privatisation does not really lead to fantastic results as expected, especially in countries that do not have fairly developed regulatory and corporate governance institutions. Some problems create enhanced context to which it can be optimised, but even at that, the way we privatise, the timing and the sequencing of our privatisation was more ideological than pragmatic. We did not follow even the process outlined by the Electric Power Reform Act.

For example, before you privatise after you unbundle, you fully corporatise, and after that you fully commercialise so that those companies can achieve some financial footprints, corporate governance and culture, which shows their capacity and level of efficiency before they are privatised. That would have ensured that people, who have access can be much more competitive, and accepted bidders are people with greater capabilities and corporate experience to turn things around. But because we were in a hurry, we sold those assets as dead assets and the only people who it could be accredited to are people who are not big players in the world and that was what we got.

Specifically, what are the major challenges affecting distribution, transmission and generation?
The challenges are intertwined. The idea is a value chain and most value chains take their stimuli from distribution. If distribution is poor, generation will be poor. Generation companies go to expand capacities and make investments in maintenance and expansion, of course, which would constrain transmission as well. The DisCos lack of quality network constrains generation, and have limited them from making long-term investment plans.

It has also made transmission capacity redundant. If those capacities are not being commercialised, there would be little funding to expand because you can’t just go on with 13, 000 megawatts facility when you can only deliver 4000. Those redundancies are not economically viable. Don’t also forget that this sector was unbundled and practically integrated before we started the reform and so that means that all these shortcomings cut across the three value chains of generation, distribution and transmission, including gas supplies because we have not been developing our gas for utility market. We have improved from the pricing methodology to pricing by problem, but we have not improved on infrastructure to deliver as and when needed.

What are the primary challenges that gave birth to these other challenges being experienced with the DisCos, TCN and others?
The primary challenge that we have is historical public sector inefficiency and corruption. If, like other countries in the world we’ve been making investments that are guaranteed and well managed and those investments are in good condition since 1896 that we started our first grid power, maybe by 2000 that we started this reform we would have had about 20, 000 megawatts of power. The problem would be less because those powers are available and you don’t need to improvise investments to build the power plants anymore.

So, our first problem was a legacy of totally corrupt and inefficient public sector and that was the logic for privatising instead of reforming.
The second problem was that even when we started privatising, we had some kind of unrealistic models, which postulated too much on the private sector and didn’t think of a holistic government reform. Where it has worked, government had contributions. For example, we expect that if we sell these assets the private sector would come in. The private sector should not come in and be dealing with metering that would secure revenue. In other words, we expected them to come in, build power plants for us, build distribution networks, provide all the meters for everybody and then wait till they make their money in the next 10 to 20 years. I would like to say that some of the models were not realistic. Perhaps the realistic model would have been to quickly improve public sector management to a regulator like NERC, ensure metering and then at some stage, create competition so that the shares with DisCos will be divested after which they would be regulated while efficiency keeps on improving. So, it was a short therapy.

We suppose that the private sector participants would come in with their funds, but the fund inflow was limited because the sector was not attractive. Yes, we’ve done the regulation and we have a good regulatory framework, but if people are not paying and if the money is not coming in, it’s still not going to be attractive. So it was not properly designed.

There are fraudulent contracts awarded to people, who have no capacity to deliver, or people who are influential and then after four to five years, you go back to the drawing board to re-award the contract. These problems compounded the problem of design in the power sector.

Going forward, what are the solutions?
The solution is to look backward. Going forward is to go back first and going back is not recrimination, and is not even an idea of probe. Government can continue with their so-called probe of $16bn and other funds, but to me, no probe would result to improvement. Probe would only lead to dealing with those who committed crime in the past but the kind of looking back that I am talking about is a diagnostic review. What did we miss out? How did we fail? How has this plan gone?

The first articulation of a road map of the Nigerian Electric Power Policy was in 2000, by the Nigerian National Council on Privatisation (NNCP) and now that plan ought to be reviewed.

What are the assumptions that are no longer useful in the global market? What assumptions about privatisation and about private sector that we know can work? For me, I think we should take a forensic review. We need a new roadmap that now factors in what we know about how the market behaves, what we know about the behaviour of private enterprises, and what we know about a regulated market. After this, we should start work on corporate governance, on helping to create oversight and transparency in the service sector. Those works have not been fast-tracked and so we need to think about how to make the market open, transparent and accountable. We should also think about structuring tariff. We need to de-politicise the sector so that it can run like a national emergency and in a consistent logic of improvement.

What is your take on NERC performance, government shares in DisCos and continuous stay of BPE on their boards?
Government may be connected to a lot of shares. It should be a strategic decision if they would eventually let go; especially if it has to do more with economics and maybe ideas of comparative efficiency. When we were there, we had issue with the Ministry of Power and with BPE particularly. Later on, we supported the Ministry of Power to take over the work as BPE is supposed to maintain some degree of post privatisation oversight. However, we should not forget that BPE sold these assets. The BPE and the Ministry of Finance ought to own these assets on behalf of the Federal Government. They have to maintain and monitor to ensure that those owners are not diluting their assets and are meeting up to the contractual agreement. The question therefore is, should such a person who has this responsibility be a director? So, our view was that there is a conflict of interest position and disincentive for oversight. BPE staff struggle to be posted to directorship positions where they have salaries and jeeps and all other financial benefits. So, we argued that the Ministry of Finance should take over the responsibility and appoint people from other part of government. So, the main issue should not be about the government having shares, it should rather be whether an agency that has oversight role should be on the board. The answer is No. So, these are some of the issues that we are talking about.

On the issue of shares, government divesting shares in reckless manner might not improve anything because it might lead to the 70 per cent shareholders buying off the remaining 30 per cent through proxy.

Government should also strengthen NERC, allow independence and by the way, if the DisCos see that the regulator is not independent and has no strength because it’s muscled by the ministry, they may have no take, but directing substance. They would launch upstairs to counter. When this government came in, I discovered a pattern where people were going directly to Vice President Yemi Osinbajo to complain, and I issued a directive that any DisCos CEO who goes to the VP to complain about NERC will be sanctioned and they stopped because I thought it was dangerous for operators to be meeting the Presidency and complaining about the work of the regulator, instead of meeting with the regulator. More so, you know that some people in the villa who may not understand the issues will now start making case for them. After issuing the directive, I spoke to the people in the villa and that trend was stopped. So, the issue is strengthening the regulator and making sure that the regulator is efficient and capable.

The system is hampered by a financial crisis, which involves about N4t. How can this be addressed?
The sector is almost bankrupt and this is tragic because the reason for privatising was to improve the financial viability to the sector as an inducement for efficiency. Today, the sector is not financially viable and debts overtime have increased. We sold the assets because we wanted to avoid indebtedness. In fact, at some point, government had to wash off some debts and that was why we bought the N213b injection of equity, through debts by the CBN to buy off some legacy debts and they are growing. All these are happening because the market is not performing as far as consumers are concerned. If power is constantly supplied, consumers have enough incentives to pay, although those funds are used to pay all the value chain suppliers. The point therefore is that government should intervene quickly, not by floating another bond, or making another present intervention, but by carrying out a diagnosis so that we can mitigate the financial exposure.

Government is dangerously introducing toxic materials into its balance sheets. So, there is need to redress the sector and there is need to arrest the slide in revenue recovery. There is a need to look at the financing of this sector. We either improve tariffs, or improve the recovery of revenue.

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