Wole Abayomi, Head of Strategy; E.D. Business Strategy, Vanetti Advisory Limited; Powerex Limited
Subjects of Interest
- Electric Power
- Private Sector Development
Privatised Nigerian power sector defies free market efficiency 11 Mar 2021
It’s been over seven years since the electricity market deregulation in Nigeria was concluded. But the question remains whether the privatisation of all generation and distribution assets has produced the desired outcomes, either in terms of increased private sector investment or power supply. The evidence is that the promises and expectations that heralded the privatisation process have failed to appreciably materialise.
Much of what has happened in the power sector since 2013 has defied basic principles and expectations of private sector-led free-market operations. There were fears about some deficiencies in the reform process and those fears did not take too long to crystalise. For instance, low investments in critical areas by the new private owners led to large financing interventions by the Federal Government at different times after the transfer of assets to the private owners. This punctured the notion that the new owners possessed the financial capacity needed to turn around the sector.
It was also curious that the operators were insistent on estimated billing, which is often done arbitrarily, in spite of widespread outcry against it by the customers. Till date, the operators’ preference for estimated billing has not changed. This is why there has been a slow-paced rollout of prepaid metres to customers. Seven years after the privatization, over six million households/customers are unmetred.
A much deeper concern is the escalating electricity tariffs. This is happening without a significant increase in supply and against the backdrop of estimated billing of customers. The hike in electricity tariffs has been inflationary, inflicting more hardship on the citizens.
It was amusing years back when a power distribution company (Disco) embarked on an advocacy against electricity wastage. It is a no-brainer that there is no better initiative against energy wastage than metering. With metering, every connected customer pays for their usage as well as ‘wastage’ of electricity.
Hence, metering is the key to addressing the consumers’ attitude to efficient energy use. Most metered customers automatically become energy ‘police’, considering the prevailing economic situation and increasing electricity tariffs.
High Aggregate Technical and Commercial (AT&C) losses are definitely not good for Discos given the need to recover capital investment and make profit. At the time of privatisation, Discos set targets for themselves, including remarkably improving technical efficiency while reducing commercial loss by 2018. But that target was missed as AT&C – which entails the component of energy supplied for which payment is not realised – is still at over 40 per cent. Rather than focus on achieving their targets through improved technical efficiency, the priority appears to be on tariff increase. The blame here does not lie with the operators alone, but also with the regulator of the industry.
Given the fact that technical efficiency and cost dynamics play major roles in energy economics, no right-thinking consumer should expect that operators in the electricity value chain would run their businesses at a loss. In the same vein, no one would have expected that incompetent operators would be rewarded for failing to optimise operational efficiency or achieve cost reduction in the most basic areas. But what we have seen post-privatisation is that operators are getting away with their inefficiencies. Therefore, as long as the system allows for indiscriminate transfer of questionable or avoidable costs to consumers without recourse, there would be no incentive for technical efficiency in the system.
In terms of oversight, the regulator cannot afford to be lax in its obligations. The compliance of operators in critical areas like investments in system capacity, service quality, technical efficiency is very important. It is important to properly manage how all these impact final costs. Electricity supply is a critical sector, which requires innovation, huge capital outlay and hands-on technical and management capacity. A lot in the Nigerian economy is dependent on adequate and reliable power supply. For this reason, the operators in the sector cannot be in a rent-seeking relationship with the regulator.
Operators must make the right investments and create evident value to justify not only their revenues and profits, but also their capacity to continue to hold an operational licence. Customers must not be left with a sense of being robbed each time they get their estimated bills.
When the operators demand tariff increase, customers have the right to know how much of the price change is due to inefficiency and ineptitude, and how much of it comes from real value that is being delivered, even if it is just in terms of increased investment. Avoidable inefficiencies should not be passed down by operators to consumers as price increases. Customers should get more value for their money, not less.
The system operator in Alberta, Canada, recently announced a $1.4 billion investment in the grid infrastructure. The investment will be spread over four years. During this period, the transmission cost in kilowatt-hour (kWh) is estimated to increase by 0.5 cents. Put in perspective, this is roughly the equivalent of N2 in Nigeria’s currency. It is rational to ask how much the Nigerian operators have invested in the electricity infrastructure over the last seven years and what value they have added in terms of improving the wellbeing and quality of life of Nigerians.
The Nigerian regulator needs to ensure that the operators discharge their obligations. Consumer protection groups may consider stepping in to keep the regulator on its toes and demand accountability from the operators.
The power sector should be primed to a point where even when tariffs increase, customers are sure that they are paying for the actual power they consume, rather than the operators’ inefficiency. Even in the context of government interventions and subsidy, it must be clearly understood that scarce public resources are not channeled into subsidising or bailing out inefficient businesses. Otherwise, the whole essence of privatisation would have been lost.
While it would be difficult to have the government put money directly in people’s pockets, the government’s decisions and actions (through oversight and regulation) can help citizens save their hard-earned resources. Those bearing the harshest brunt of the inefficiency in the system are consumers who are at the mercy of estimated billing. Among this group are citizens who sometimes find their electricity bills competing with their food budgets and businesses whose energy costs are competing with their wage bills.
In a truly deregulated electricity sector, successful operators are normally those with more than a passing knowledge or basic familiarity with the business. They have the requisite capacity, burning passion, compelling vision, and management capability to deliver value to their customers. The telecom sector that continues to be a reference point for successful privatization in Nigeria did not achieve its successes with a rent-seeking approach. Telecom operators were very clear about their plans, investment, infrastructure rollout, industry data, management, personnel, billing, revenue assurance, etc., right from day one. They have continued to increase their investment in the sector without having to seek government bailout funds.
The telecom sector was never perfect from the start, nor is it perfect now. It cannot be soon forgotten the high cost of GSM telephone services at their inception in Nigeria two decades ago. But the sector has generally operated based on market forces, as business survival hinges largely on innovation, operational efficiency, adequate investments, skillful management, and value-driven revenue, among others. As the operators addressed these factors, and based on strong demand, the cost of service to customers have come down over time.
Admittedly, the privatisation of the telecoms sector did not follow the same paradigm as the power sector. Not all the telecom operators had to acquire assets with crippling liabilities as some power operators did. However, sectoral comparison is not the focus here. There are lessons the power sector can learn from the telecoms sector and move on to set a new paradigm for private sector investment in Nigeria.
It is possible for the power sector to rise above its current limitations and improve its image, which has largely been shaped by low levels of service availability and outrageous revenue model. With the right focus and strategy, the power sector can evolve a new public perception and achieve its targets.
Wole Abayomi is the Head of Strategy, Vanetti Advisory Limited, and also E.D. Business Strategy, Powerex Limited. He can be reached at firstname.lastname@example.org