The politics of power sector reform

As the National Council on Privatisation (NCP) meets again today to progress the sale of the nation’s power assets, there is understandably, heightened expectation around the country. 
The reality today, which the President seems to have tacitly acknowledged, is that his place in Nigerian history depends significantly on how he tackles the challenges of Nigeria’s electricity sector. No matter what else he does, his scorecard is merely average, if electricity reforms are not concluded with  tangible results.

When President Jonathan first took office as Acting President, the entire sector was in a mess. Daily generation was as low as 2,500 MW; privatisation had been halted by President Yar’ Adua on the very bad advice of Rilwan Lukman; while NERC, the regulator, had been decapitated by a coup against its leadership, perpetrated using another Rilwan – then Minister of Power,  Rilwan Lanre Babalola.

Into this blighted landscape, President Jonathan injected the Presidential Task Force on Power (PTFP), chaired by  Bart Nnaji, in April 2010 with a clear mandate to get the sector back on the track established by the Electric Power Sector Reform Act (EPSRA). By December 2010, daily generation was climbing again, the regulator was reconstituted with a new set of leaders, and the privatisation programme had restarted.

EPSRA is all about an electricity sector guided by well-defined institutional policy pillars: one, the separation into three sectors – generation, transmission and distribution; two, the separation of policy-making by the Ministry of Power from regulation by NERC; three, private sector-led investment and management in the three sectors; and four, the provision of regulatory certainty by a NERC that has the full powers and authority to set standards of behaviour and performance in both the economic (tariffs, competition and customer care) and the technical (network engineering and operations, health, safety) aspects of the market. Anyone who cares to read the National Electric Power Policy, 2001, reinforced by President Jonathan’s August 2010 Road Map to Power Reform, will see these pillars clearly.

The PTFP’s task in 2010 was three-fold: restart the privatisation programme; restore the regulator to health; and get daily generation and supply of electricity back to the best level that a dilapidated network can deliver and maintain. As earlier noted, the latter two tasks were completed in six months.

Consistently, the trend of daily generation capacity was generally upward, so much so, that today daily output above 4,000MW has become the norm. Say what you will about President Jonathan and Bart Nnaji, these three achievements are due largely to their joint political and technocratic drive. They have repositioned Nigeria as arguably the electricity market with the greatest potential for growth globally.

I stand to be corrected, but no other market has reformed itself so far and so deeply in two years. Unfortunately, Nnaji lost his way in the maelstrom of privatisation and his place another may soon take. 
It is now very clear that despite having about 5,500 MW capable of being delivered to the national grid daily, unless massive investment is deployed and sustained over a number of years, the Nigerian electricity system cannot generate, transmit and distribute better than 4,500MW daily. In other words, about 1,000 MW is now stranded daily for various reasons, including lack of fuel, lack of transmission capacity and lack of distribution capacity. Put differently again, there is no point seeking to increase generation capacity unless we can find money for commensurate investment in the transmission and distribution sectors.

Another stark truth is that even 4,500MW daily may not be sustained without resulting in massive system failure caused by the unbearable pressure on an aged and decrepit transmission and distribution sector. This reality is brought about by decades of underinvestment and neglect, leading to very bad engineering management practices. Ultimately, nobody cares about the available 6-, 7, or 8,00MW. We only want to know about what is delivered to our homes; and so anybody who promises the President anything better than 4,500MW delivered to consumers daily, is, quite frankly, a shameless liar.

Today, in Nigeria’s power sector, there should be ONLY four key players and four sets of key responsibilities. First and foremost is the Minister of Power whose primary responsibility must be to ensure that daily generation delivered to the distribution companies stays between 4,000MW and 4,500MW. Second, is the BPE whose task is to deliver completed privatisation transactions by first quarter 2013 according to already established timelines. Third, is NERC whose job is to establish the body of regulatory rules and orders that will set standards of behaviour and performance for all players. Finally, there is NIPP led by the Vice President whose sole task is to complete the various generation, transmission and distribution projects that assure the country of continued supply, until around mid- to Q3 2014 when the gains of privatisation via the various rehabilitation and capacity recovery projects and improvements brought about via investments by new private sector owners and managers of the electricity companies.

Therefore, the first point is that the President DOES NOT NEED THE PTFP in its present form. Its work was done since last year. However, reprising the PTFP with no change in name, form or function merely sets the scene for one of two things to occur – either continued battles for turf with the Ministry or total capture by the Ministry. Either way, the PTFP will be ineffective and thereby become a catalyst for loss of public support for ongoing sector reforms. At this point, it is not clear that the PTFP and its new boss, Reynolds Dagogo-Jack, have a clue as to what to do or how to do it. It is also not clear whether the Minister of State, Darius Ishaku and the Ministry, which has a very savvy Permanent Secretary, Dere Awosika, will allow the PTFP to usurp their well-defined Ministerial role.

What the President desperately needs now, is a tool for maintaining a nuanced view of the performance of the sector in attaining the milestones along the road to reform, thus assuring himself of continued strategic focus on electricity sector reform. This is why the Presidential Advisory Committee on Power (PACP) was established and it is the PACP, not the PTFP that the President should focus on. The maintenance of the flow of information that goes into creating a big picture for the President is the traditional role of the Ministry, especially now that it is the PACP’s secretariat, which role it should be allowed to play unconstrained by the presence of a PTFP that has been and continues to be in limbo along the corridors of power. Instead of standing on its own, the PTFP ought to be absorbed into the Ministry and should play an information management and data processing role for the PACP. Otherwise, we will see a tug of war between the PTFP and the Ministry.

Today the Ministry of Power has two key roles – first, ensure the flow of strategic information on the performance of sector reforms to the President and the PACP; and second, maintain pressure in ensuring that generating companies and IPPs generate 4,300MW daily, TCN transmits the resulting energy to the distribution companies and the eleven distributing companies sell that energy to their customers AND collect the revenues thereby earned. This latter aspect, revenue collection, is where there continues to be massive system failure. Which takes us on to the next question.

Given the stated objective of ensuring high quality management and the introduction of players who have the capacity to raise the massive sums of money required to rehabilitate and grow the sector, the NCP/BPE must now ensure that they deliver on this promise via a patently fair and transparent process that also gives value-for-money to long-suffering Nigerian citizens and consumers.

Already, Manitoba Hydro of Canada has assumed the role of management contractor for the FG-owned Transmission Company of Nigeria (TCN), but what about a board of directors for the company? TCN, regardless of who manages the company, will fail if competent, responsible directors are not appointed. Nigeria cannot afford to continue with the previous system of constant interference from the Ministry of Power. Rumours have been making the rounds that the President has approved a board of directors including respected private sector individuals. This would reassure the investing community, especially as the privatisations are coming to a critical point. Yet, it appears that the President is reluctant to sign up to the appointment of Manitoba Hydro to run TCN, and to announce the appointment of TCN’s directors, two major achievements of the reform programme. Why? Are we about to witness another case of politics curtailing national progress?

Similarly, in the privatisations themselves, the BPE must ensure that Nigerians do not find themselves transferred from the frying pan of insensitive public sector (NEPA/PHCN) monopoly distribution companies to the hellish fire of private sector players who will ruthlessly seek to exploit such monopolies. One of the best ways to prevent this draconian result is to ensure that the winners of the generation and distribution company sales are consortia that clearly demonstrate multiple ownership, respect for regulation and rules of corporate governance, the ability to attract significant amounts of equity and debt capital and a preparedness to get quoted on the Nigerian Stock Exchange within the shortest time, so that Nigerians can at least be part-owners of the monopolies that facilitate (and even control) their daily lives.

One hears whisperings of chronic debtors whose massive loans from banks have been taken over by AMCON, and well-known government contractors, adept at collecting mobilisation payments and disappearing, now running around the corridors of power looking to take over distribution companies. The CBN has established a practice of rigorous due diligence on major shareholders and directors of banks. In determining the winners of the privatisation bids, the NCP/BPE must go beyond superficial desktop evaluations of the bidding groups and examine their antecedents. Do they include people whose bad debts caused the near-collapse of the banking sector in 2008 – 2009? Well-connected Nigerian big men who have expensive habits and plenty of greed but no sector experience? Or do they include responsible equity holders such as financial institutions that tend to uphold rules of corporate governance and ethical behaviour? Do these bidders demonstrate respect for the separation between owners and managers by presenting experienced managers from their technical partners. These are some of the vital questions that must be asked.

Third, post-privatisation, the work of NERC, the regulator, in setting the parameters and standards of market performance and behaviour will become most critical. One hopes that NERC will be up to the task of analysing industry performance metrics, anticipating the behaviour of both consumers and operators and putting in place and enforcing or implementing the right kind of rules that ensure the achievement of the policy objectives of sector reform. The biggest fear is, of course, that of regulatory capture. The leadership of NERC must be alive to the need for effective and knowledgeable regulation and must go beyond rhetoric and flowery language in getting its regulatory task done. Unfortunately, the tendency in many markets, even developed ones, is for various interested parties to seek to unduly influence the regulator towards their self-interests. In Nigeria, NERC’s biggest problem in these early days, is likely to come from public sector players, especially ministers and civil servants who cannot bring themselves to accept the shift in regulatory oversight from the Ministry/Minister to the regulator. Therefore, it behoves the President to validate NERC’s existence by putting the weight of his office behind NERC and to seek its analysis, opinion and advice on the progress of reforms in the sector. The President also has to ensure that NERC is adequately resourced financially and in human capacity, to take the tough regulatory actions demanded in a reforming environment.

Finally, this talk of resources then leads on to the question of the 2013 budget for the power sector. On the whole, there is cause both for excitement and for concern. As the BPE takes us ever closer to the conclusion of sale transactions, there is also the worry that the President may be misled into thinking that more should be done to “fatten the cow” before selling it.  Nothing could be farther from the truth. The public sector has done its best and should be maintained “as is” even as it is being privatised.

The days of massive capital budgets for the power sector must be firmly ushered out. The focus of the 2013 budget for the sector should be on ensuring that the FG-owned transmission company is provided with funds that can be leveraged to cater for the massive rehabilitation and construction projects that are necessary to transmit new generation capacities that will become available within the next three years and annually thereafter. Adequate provision should also be made to build up and enhance the credibility and capacity of the regulator, NERC, which must become to the electricity sector, what the CBN is to the financial services sector.

Third, attention should be paid to meeting the needs of the bulk electricity company and this essentially means making provisions in the FG balance sheet to support the short-term counter-guarantees that must be provided to enable investors enter the generation sector and remain there in the long term. Fourth, the budget should propose financial instruments (not just cash) that will be used to provide for the huge sector liabilities that will remain with the FG post-privatisation. Therefore, the Ministry of Finance must say a capital “NO” to the demand by the Ministry of Power for a huge budget to cater to all manner of wasteful spending on unplanned power projects that will never be commissioned, feasibility studies that give the country no value and investments-with-no-returns in things that are best done by the private sector.

All told, these are very interesting times, but the President must remain firmly focused on continuing to solidify the sector reform programme that is designed around privatisation by BPE, regulation by NERC and the maintenance of daily supply to Nigerians, around the 4,500MW-level.

Credit: BusinessDay