• Thursday, July 25, 2024
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Powering Lagos: Lessons from Georgia

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Sabotage, endemic corruption, theft, cabals, incompetence and deteriorating infrastructure were some of the challenges facing the electricity industry before it was privatised. The country was Georgia in the 1990s.

Less than 30 percent of Georgians paid their electricity bills, assuming power supply was regular. Corruption networks, an “energy mafia”, government officials running a diesel racket, customers’ ingrained habit of not paying for electricity, they were accustomed to bypassing power lines, and mounting debt led to the privatisation of Georgia’s electricity industry.

In terms of population and economic heft Tbilisi is a minion compared to Lagos. On the surface, Tbilisi, capital and largest city of Georgia, is the last place you’d expect Nigeria to learn about privatisation of power assets.

At the 7th Lagos Economic Summit, Mikheil Saakashvili, president of Georgia from 2008 to 2013, will be sharing his experience. Saakashvili came into power through the peaceful “Rose revolution”. That same year AES, a US-based independent power company sold Telasi, an electricity distribution company in Tbilisi to RAO UES, a Russian company.

Though in terms of scale and complexity the Georgian experience is nothing compared to Nigeria’s, we can learn a lot. National security is Georgia is hinged on energy security; Eduard Shevardnadze, the predecessor of Saakashvili is known to have said “If the lights go out, I go out.” Georgia owed $520m for fuel oil, electricity and gas imported from Russia.

A patchwork of fiefdoms meant vested interests had a stranglehold of the sector; mafia and politics intertwined; non-payment of electricity bills was rife. A strange fire gutted the country’s only thermal power station (80 percent of Georgia’s power is hydroelectric but during winter fuel oil, electricity and gas are imported). To make matters worse there were few alternatives: powerful people had cornered the market for kerosene, the other source of power for lighting homes and keeping warm.

This was the socio-economic political environment of business in Georgia when AES, paid $25.5m for Telasi, an electricity distribution company. The degraded state of infrastructure inherited was staggering. The billing system archaic and collection rates were overstated; there was a power shortfall from day one.

In the first year of operation AES-Telasi struggled to keep the lights on. It had to re-meter its 410,000 customers who, thanks to corrupt meter readers, had found a way to continue enjoying free electricity supply. The tariffs were far from cost-reflective. Nominal revenue per kilowatt hour was $0.0005; less than 50 percent the cost of generation. Things were so bad that AES spent in one year, refurbishing substations, transformers, metering, salaries etc, more than the $84m it had projected to invest over 10 years.

On paper the privatisation process was supposed to be a success. An analyst quipped that “if you believed the contract AES was guaranteed a 20 percent return on its investment.”

The sequencing of reforms followed practice: the Georgian National Energy Regulatory Commission (GNERC) was set up before unbundling the sector. In a 2004 presentation, Mike Scholey who managed AES-Telasi noted that the privatisation process was “well organized, resulting in clear rights and obligations and an appropriate allocation of risk”.

However, things didn’t go as planned. Providing electricity regularly and getting consumers: households, commercial and industrial, to pay were Herculean. Scholey discovered that this one adventure that required strength, courage and the power of enchantment.

In Georgia, the way it was supposed to work was simple: re-meter every customer, introduce billing, accounting and information systems with tools for analyzing and finding losses, hire and motivate skilled staff, improve collections, service level and customer satisfaction etc.

AES-Telasi found out that it would cost twice the budgeted amount to re-meter each customer doubled and even though collection improved from 10 percent to 60 percent, incomplete re-metering “severely weakened” AES-Telasi’s financial projections. In addition, although salaries were raised by factor of three for “highly-motivated ‘MBA’ types”, overall there was still a deficit of skills.

Towards 2004 AES-Telasi was breaking-even. But the “fatal flaw, the failure to complete re-metering”, unbearable working requirements and a dysfunctional socio-economic environment frustrated the economic sustainability of the project. Eventually AES exited Georgia losing 90 percent of its investment.

Imagine the AES-Telasi experience in Nigeria but on a bigger scale. Investors in Nigeria are battling with collecting cash for the power they sell, servicing their bank debt, finding cash for new investments, finding staff for their operations, paying their bills: salaries, fuel costs, power costs, fully understanding the technical issues in the assets, reducing theft and energy losses.

In 2012/2013 the electricity bill of Nigerian households was N91 billion per month, according to data from National Bureau of Statistics (NBS). This amount is 24 percent of Nigerians’ total energy bill i.e. kerosene, petrol, firewood, gas, diesel, charcoal, candle, and other liquid cooking fuel. In the same period, about 16.8m households said they experienced a blackout everyday; 9m experienced a blackout several times a week.

The foregoing illustrates the potential and problems the newly privatised electricity supply industry is facing. Of course, Lagos, the largest consumer of electricity and Nigeria’s commercial capital, stands to benefit the most. Lagos which currently gets a paltry 850MW reckons it requires 10,251MW to power its homes, commercial activities and industries. With experience and hindsight from countries like Georgia the impact of a successful privatization process will be vast and visible on the scale of GDP.

Tayo Fagbule