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Explainer: Why Nigeria’s power sector privatisation is causing uproar

On May 19, Gabriel Suswan, representing Benue north-east senatorial district moved a motion on the floor of Senate that called for the reversal of the power sector privatisation policy.

Ahmad Lawan, the senate president considered and approved the motion on the power sector recovery plan and asked the Federal Government to consider a comprehensive review of the power privatisation policy to reverse the current arrangement.

The red chamber argued that Nigerians would not enjoy stable power supply in the next 10 years if the activities of the distribution companies were not reviewed and restructured.

 

Is this motion justified?

A little background is needed here to put Nigeria’s power sector privatisation policy into context. The rule of thumb for an industrial nation is about 1 megawatt (MW) for every thousand of population.

This puts Nigeria’s energy needs in the 200,000MW range given its population of 200 million people. The Federal Government had a target of 40,000MW by the year 2020. However, electricity Distribution Companies (DisCos) barely distribute 4,000MW of electricity, that is 10 percent of the projection.

The size of Nigeria’s power challenge led to the government’s release, in August 2010, of the “Roadmap to the Power Sector Reform”, a blueprint to conclude the privatisation of the power sector. Since the release of the Power Sector road map, the privatisation started gathering steam but current realities show the sector is beginning to lose steam. Tales of near bankruptcy litter the sector.

The performance of Nigeria’s Distribution Companies (DisCos) is getting worse, with negative consequences for the sector, systemic risk to the entire economy.

BusinessDay’s analysis of 2017 financial statements of 10 DisCos shows that the combined accumulated losses or retained earnings hit -N713.63 billion in the period under review, from -N288.85 billion as of December 2016.

Retained earnings are a firm’s total profits over time minus dividends issued to stockholders. A retained earnings deficit also called an accumulated deficit, happens when cumulative losses are greater than cumulative profits.

The DisCos are in a dire position as surging operating expenses, huge finance costs and absence of new investments to help expand metering and halt electricity theft have short-circuited profitability.

Data from the financial statements of the 10 DisCos show that in 2017 alone, they recorded a combined loss of N446.85 billion which is 63.88 percent higher than N301.18 billion loss recorded the previous year, an indication that the power sector woes may be worse than many thought.

This pattern of losses has been replicated since 2013 but analysts say it worsened considerably since December 2017 with accumulated losses around N1 trillion by June 30, 2019, while payables to both the Nigerian Bulk Electricity Trading Company (NBET) and the Central Bank of Nigeria would now be approximately N2 trillion.

  

Symptomatic bailouts

The Federal Government had provided N213.4 billion bailout in 2014 through the Central Bank of Nigeria (CBN) – Nigeria Electricity Market Stabilisation Facility (NEMSF) and N701 billion through the same CBN in 2017 to the power sector. It also intends to provide addition N600 billion already approved to support the sector as of December 2019.

“The privatisation of the power sector has, so far, not been successful. It is not a good commentary that we should continue to give them money. They’re private businesses. We need to review this privatisation,” Lawan had said.

Suggestions from experts

Nigeria’s 2013 power sector reform removed the natural monopoly of the National Electric Power Authority (NEPA), but inadvertently created a new one by allocating vast franchise areas to distribution companies (DisCos) who lacked the financial and technical competence to manage them, experts say.

However, the Nigerian Electricity Regulatory Commission (NERC) had advised the Senate Committee on Privatisation which members were on an oversight visit to the Commission against the reversal of the Federal Government sales of the power sector utilities.

In 2016, Anthony Akah, the acting chairman of NERC said that the Federal Government may not have money to buy back the utilities and may be acting in contravention of the agreement entered with the new owners. Any attempt to reverse sales of the utilities, he added, will send a wrong signal to potential investors.

To ensure the sustainability and minimise debt accumulation across the value chain, Nigeria may need to implement a true cost-reflective tariff to encourage more efficient service delivery and enable cost recovery for the investors in the sector.

The Federal Government may need to sell some government shares to raise capital and take steps to attract new investors. Experts have also advised that the distribution network needs a boost, metering expanded, customer and asset enumeration completed and energy demand studies carried out.

Gas sector reforms in terms of adjusting gas prices to be cost-reflective, clearing outstanding debts to suppliers, signing pending supply and transportation agreement, and reinforcing risk mitigation requirements and gas supply commitments are other elements needed to revitalise the power sector.

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