Beyond CBN’s power sector stabilisation fund

One of the recent laudable interventions by the government to put the power sector reform back on track is the Central Bank of Nigeria (CBN) Power Sector Stabilization Fund which seeks to liquidate outstanding debt incurred by market participants during the interim rule period and legacy gas debt outstanding prior to privatisation.

But for the quick and timely intervention of the CBN and other stakeholders, the reform almost came to a screeching halt due to liquidity constraint which, largely, impaired industry ability to meet obligations and execution of investment plans by new investors.

Whatever may be the shortcoming(s) of the CBN power sector stabilization fund (there certainly is), there hardly was any better way of breaking out of the mould of illiquidity occasioned by higher than expected loss levels and substantial revenue shortfall by electricity distribution companies. Of course, the major drawback of the fund is in the recovery mechanism with the insensate socialization of private losses, avoidable inefficiencies and possible misuse of the past.

Beyond the redemptive role of the CBN stabilisation fund, there are still crevices in the wall. The fund is not a silver bullet to the epileptic power supply, other challenges persist which are yet to be adequately addressed, with particular reference to what is here referred to as the trilemma of transmission constraint, inadequate gas and entrenched interests which still hang around menacingly.

One of the reasons often adduced for the poor state of the power sector in Nigeria is inadequate funding of the erstwhile state-owned vertically integrated power company. I do not quite agree. The huge capacity gap in electricity supply and delivery in Nigeria today is, arguably, less about funding inadequacies of the past as much as it is about public sector accountability and transparency. And talking about the transmission segment in its current ownership and management structure, it is extremely doubtful if the way out of the transmission bottleneck is just a funding solution. According to Amartya Sen (winner of the Nobel Prize in Economics) in his book ‘Development as Freedom’, “the usefulness of wealth lies in the things that it permits us to do”.

Amartya is correct but he should have also added that the usefulness of money or wealth also lies in what we allow it to do.  Yes, agreements have been signed and funds (will be) disbursed under the Stabilization Fund but enforcement of those agreements is as, if not more, important for the attainment of the fund’s set goal(s).

It is for the aforementioned reason that continued ownership and management of any part of the electricity value chain is unsettling, especially a critical segment like the transmission system. Any model that takes control and preferably ownership of the transmission grid away from government is therefore here recommended.

The national security argument often advanced for public sector ownership is stale. In any case, is the preference for private sector control and ownership by any means an ideological bent towards any form of economic or political credo or  does this necessarily imply the infallibility of the private sector?

Far from it. Pertinently, Deng Xiaoping, the former Chinese leader, was reported to have said “I don’t care if it’s a white cat or a black cat so long as it catches mice”. It is abundantly evident that the mouse has escaped the public sector for so long. It is time to turn to the private sector. Policy makers may want to refer to suggested policy options for reform of the transmission system enunciated in my article of July 9, 2014 titled ‘Nigeria’s Electricity Transmission Grid Requires Reform’.

Taking the argument further, there equally exists the challenge of regulating a government entity that plays such a critical role. In all honesty, how can NERC regulate transmission still under government ownership through the Ministry of Power (the supervising ministry)? The implication therefore, is that the Transmission Company of Nigeria (TCN) may, by design, be substantially impervious to regulatory directives by virtue of its ownership structure. As Juvenal, the first century Roman satirist, noted, “quis custodiet ipsos custodes” (who can guard the guard?).

Again, what the CBN stabilization fund seeks to address is to solve the current liquidity problem to enable parties defray legacy gas debt, commendable. But defrayment of past debt is not a price signal for future investment.  Government appears to recognize this point clearly which is why there is an upward adjustment in gas price for power generation to US$2.5/per thousand standard cubic feet (mscf) in addition to US$0.80/mscf as transportation cost.

The new price has attained export parity, some would argue. If this is true, should we then not transit to market-based gas price formation mechanism? Yes, the new price has attained North American export parity but still falls short of prices in the European and Asian gas markets which are the major markets for Nigerian LNG.

Clearly, Nigerian domestic gas price for power generation does not have to attain EU and Asian price parity. However, since Nigerian gas trade (LNG) flow to Asia Pacific and Europe/Euroasia combined is consistently over 84 percent of our gas export, we hope that the new price is the outcome of satisfactory negotiation between the government and gas producers. Otherwise, gas investors may demand a price which thins out European/Asian gas premium which, in this context, is the observed difference between average domestic price of gas in Nigeria and EU/Asia markets.

On the strength of public opinion, Nigerians are not averse to paying cost reflective tariff (which, in any case, is still lower than self generation cost) if power supply is regular and reliable. After all, the social cost of inadequate gas for electricity generation is much higher than the social cost of paying a cost reflective tariff. Put differently, the social benefits of paying market reflective tariff to make power available is higher than associated social cost. And importantly, consumer classification in the Multi-Year Tariff Order (MYTO) protects, to a large degree, those at the bottom of the pyramid from rate shock. But really, is lack of electricity not a more insidious shock that Nigerians have painfully endured over the years?

Sometimes, well intentioned government policies create, entrench or get railroaded by vested interests. We need to be mindful of this. At a time when logic demands prudence in the face of fiscal pressure and the need to be consumer focused, it is doubtful if this is the right time (if there ever is) to duplicate regulatory functions – exactly what the government has done with the creation of a parallel regulator to NERC on technical matters, a task already within the purview and capacity of NERC. In addition, rather than laboring to cultivate relevance and engage in supremacy-shopping among service providers for reasons that may not be consistent with consumer or national interest, efforts should be geared towards serving public interest.

In all fairness, government deserves credit for some of the bold choices made so far to see through the reform in spite of the teething challenges. However, it must be said, and at full volume, that the reform must be deepened if any meaningful outcome is to be secured. In an age when “almighty formula” has completely lost its “almightiness”, it defies every righteous logic that Nigeria is yet to exorcise the mischievous spirit of inadequate and unreliable power supply. No one denies that Rome was not built in a day but it is equally certain that Abuja City did not take a century to create.

Ubohmhe Glenn Olowojaiye