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Why electricity privatization failed (2) 16 Apr 2024

In the first part of this series, I argued that electricity privatisation in Nigeria failed partly because it was poorly designed. The poor design was a result of ideological fixation with privatisation and less attention paid to the differing contexts of the Nigerian electricity market. Privatisation was prescribed and hurriedly implemented without considering the weak regulatory and operational environment of the Nigerian electricity market. It was poorly phased because the promoters were fanatical about the power of private capital to overcome all structural inefficiencies that they failed to learn the lessons of policy reform across the world, which is that local contexts matter more than analytical models and rules not ownership of capital determine economic efficiency.

But beyond poor design, the implementation of the reform contributed hugely to the failure of the privatisation. Privatisation was not the only prescription of the National Electric Power Policy (NEPP), 2001. Even as the NEPP was largely steeped in neoliberalism and its fascination with privatisation, it wisely lays out a phased approach. First, the industry would be liberalised, and the monopoly utility unbundled into different generation, transmission, and distribution companies. This requires corporatisation and commercialisation. These would be transitional phases to build the software of a new electricity market before its full scale privatisation. None of these was done, or at least done in meaningful manner.

Commercialisation brings onboard the public utility the market disciplines that would lead to better service delivery and profitability. Once the industry is properly commercialised, inefficient operation will no longer rely on soft budget line to survive. The utility will be faced with a hard budget line and the necessity to be profitable by being efficient. In the case of generation, which is liberalised, it would mean in the medium and long terms that competition will force the entity to be commercially efficient. None of these necessarily requires that government divests its shares in the utility at this point.

The hasty march to privatisation without following through the implementational roadmap in the NEPP meant that Nigeria failed to improve the operational efficiency of the industry before private investors took over the utilities. Many of them complained when they took over that they underestimated the decay in the network and the huge financial and managerial resources required to turn things around. The ineffective or no implementation of the reform roadmap made change management post-privatisation more difficult.

There is a bigger aspect of project implementation failure that, together with the design errors, explain the failure of privatisation of electricity. Nigeria adopted its reform plan from India, United Kingdom, and Chile. Of course, these countries were some of the earliest to privatise their electricity grids, especially the United Kingdom. But these countries had significant supply of electricity before privatisation, especially the UK. In the UK case, privatisation was seen as a measure to bring about efficiency in the electricity supply industry. The capacity existed but its management was inefficient costing the treasury so much. So, as a measure of reducing public sector expenditure and ensuring a more efficient allocation of resources (and also as part of the neoliberal economic triumph under Magaret Thatcher’s Conservative Party), the UK commenced privatisation of utilities, especially power and rail. The important point is that it had generation and distribution capacity. It just needed efficient management.

Nigeria’s case was different. It lacked capacity in everyway, whether generation, transmission, or distribution; when it began the reform in 2001, it could only supply 2,000MW from the national grid to businesses and homes. This was acute scarcity. At this point, there was no market to regulate. It needed to speedily build up capacity in generation, transmission, and distribution. Wisely, in 2005, as it unbundled the monopoly supplier, NEPA, the government conceived of the Nigerian Integrated Power Projects (NIPP) to be handled by the Niger Delta Power Holding Company, jointly owned by the federal, state, and local governments. The NDPHC’s brief was to build 10 power plants that will supply over 10,000 additional megawatts to the paltry installed capacity of less than 6,000. The NDPHC would also enhance transmission and distribution networks across the country. The first phase of 5,000MW was to be harvested in 2010 while the second phase would be delivered in 2015.

By the time the government sold the generation and distribution companies hived from the monopoly NEPA to private investors in November 2013, less than 20% of the initial 5,000MW was suppled to the grid. What happened? Through series of bad procurement and ineffective project management, the power plants were not completed. A few that had been completed by 2013 did not have access to gas supply. Corruption and lack of discipline in project management resulted in contract awarded to cronies who lacked capacity to construct power plants. In many cases, after four years, government had to re-award the contracts because the initial contractors could not deliver. The worst case of project management failure is that power plants were sited and constructed without considering availability of gas. Nigeria’s gas supply is in the Niger Delta but many of the plants were sited in the Northcentral and the Southwest to cater to strategic political interests at the expense of economic and logistic reasons.

If the Nigerian government was less corrupt and more efficient in project management, by 2015 it could have added extra 10,000MW to the existing 6,000MW power generation. With daily supply of 16,000MW, the electricity industry will have enough supply to transition to willing buyer willing seller and unlock the virtues of competitive market that would have corrected the liquidity and commerciality problem that plague the sector. To understand what daily supply of 16,000MW means for reliable electricity supply, note that Nigerians at the present enjoy less than 4,000MW daily supply.

Sam Amadi, PhD, a former Chairman of the Nigerian Electricity Regulatory Commission, is the Director of Abuja School of Social and Political Thoughts.