An Open Letter to the Honorable Minister for Power
Dear Honorable Minister,
Belated congratulations to you on your appointment as the new Minister for Power, Federal Republic of Nigeria, by President M. Buhari. Permit me to write you this open letter, which I hope would be well received by you and your team in the Ministry.
The poor state of the power sector is well documented, thus no need to repeat the problems and challenges in the sector. In your address upon assuming official duties as Minister, you mentioned that you were not a magician, but will be focusing on adding value to the work being done by the ministry. As an informed Nigerian in the power sector, this is a realistic statement. I also know that the Minister for Power does not have full control of the power sector. One of your predecessors, Babatunde Raji Fashola, SAN was once famously quoted as saying that the Minister of Power does not have the power to provide electricity to Nigerians. I concur with that statement. As the Minister of Power, your duty is not to provide electricity to Nigerians. That is the role of the operators in the sector, namely the GenCos, TCN, and DisCos, working in consonance.
However, and as you may already know, the primary role of the Minister of Power in a privatized and regulated electricity market is policy formulation, coordination, and implementation within the power sector. Unfortunately, policymaking and policy implementation in the power sector are uncoordinated and rather chaotic. Aside the Ministry of Power, there are several Ministries, Departments, and Agencies (MDA), as well as government officials who make policies and policy pronouncements in the power sector – from powerful officials within the Presidency and the Office of the Vice President, to organs of government such as the National Council on Privatization and National Economic Council. Chairmen and members of the respective power committees in the National Assembly are also not left out. Even the Central Bank of Nigeria, statutorily tasked with regulating the monetary landscape and ensuring the stability of exchange rates, has become a key policymaker in the power sector. Foreign NGOs, international donor agencies, and multilateral institutions are also actively involved in policy formulation and implementation (in the name of providing advisory and government assistance to different agencies of the government). Many times, these government policymakers issue conflicting policies and policy signals that stymie the sector.
Consequently, the Nigerian Electricity Regulatory Commission (NERC) has been saddled with the onerous and unenviable task of playing its statutory role as the Regulator, and also coordinating the confusing policy landscape in the power sector. The Bureau of Public Enterprises (BPE), which is where many of the policy initiatives and legal structures in the power sector were birthed, is complicit in its inability to initiate and formulate sound and developmental policies, post-privatization of the power sector. Under the BPE’s watch, government policy initiatives that would engender better management and corporate governance in many DisCos are non-existent, or even resisted by the BPE. It is curious that the BPE has only one sole director representing the interests of the Federal Government and 200 million Nigerians on the respective boards of the eleven DisCos.
Policy Suggestions for the Ministry of Power:
Honorable Minister, I have taken the liberty to highlight a few policy suggestions which if implemented faithfully, would set you apart from your predecessors and improve the fortunes of the power sector for all Nigerians:
1. Set Minimum Capitalization Requirements for Market Participants in the NESI
Capital is essential for any business, and the importance of adequate capitalization by market participants in the Nigerian Electricity Supply Industry (NESI) cannot be overstated. Many market operators in the NESI lack adequate capitalization to support their operations. Specifically, DisCos are in financial distress. Many (if not all) Discos require an urgent capital injection to support their operations. Same with GenCos, in view of the shortfalls in market revenues. The Nigerian Bulk Electricity Trader (NBET) has negative capitalization. TCN is on perpetual FGN life support. Given the inadequate capitalization of market participants in the NESI, the Federal Government and the CBN continue to inject scarce public capital into a privatized power sector. This has created a fiscal burden on the Federal Government, and also monetary pressures on the economy.
How can the Ministry of Power under your watch, solve this challenge?
You will recall that Prof. Charles Soludo, within his first 100 days as the CBN governor increased the minimum capital requirement for banks from two billion naira, earlier set by his immediate predecessor, to twenty-five billion naira. This was a 1,250% increase in the minimum capital requirement for deposit money banks. That singular policy decision, as well as the rigid implementation of the banking re-capitalization policy by the CBN, increased Nigeria’s GDP more than ten-fold and was the bulwark that saved the Nigerian financial markets from the collapse of the global financial markets in 2008/2009. Post the banking re-capitalization policy, Nigerian banks are able to participate in large ticket financial transactions, and also access capital from the international capital and domestic markets. The banking re-capitalization policy propelled Nigeria’s capital markets to Africa’s biggest capital markets by size. The CBN also used the effectiveness of the recapitalization process to fine-tune the performance of banks in Nigeria (Enya Emori, Stephen Nkamare, Ikenna Nneji, 2014).
A similar minimum capitalization policy should be replicated in the power sector to address the liquidity challenges in the power sector. Under the right capitalization policy and regulatory framework, there is significant international and domestic capital seeking to invest in DisCos, brownfield GenCos, TCN and even NBET. The benefits of setting minimum capitalization requirements for operators in the NESI are numerous. Specifically, a capitalization policy for DisCos will inject long-term “patient” capital in DisCos, potentially bring in new board and management teams, and enhance corporate governance practices that would improve service delivery across the power sector. It could lead to M&A activities in the power sector, to the benefit of the Nigerian capital markets. Most importantly, it would reduce or eliminate the government’s fiscal interventions in the power sector and lead to a more viable power sector.
Under your leadership, the Ministry of power should spearhead the development and implementation of this important policy. The rigid implementation of a minimum capitalization policy in the NESI would be a lasting legacy to the government of President Muhammadu Buhari.
2. Unbundle TCN and develop a policy framework for the establishment of merchant transmission lines under PPP arrangements.
The unbundling of the Transmission Company of Nigeria (TCN) is long overdue. It is imperative now more than ever before to conclude the unbundling process as it would bring about more efficiency in the transmission segment of the power sector value chain. Permit me to say that the unbundling of the TCN is low-hanging fruit for you. Under your leadership, this should now be concluded and the new unbundled structures operationalized within the remaining time left for the Buhari administration.
A key policy suggestion is the development of a policy framework for merchant transmission lines constructed and operated under PPP arrangements. The development and concessioning of merchant transmission lines is a more preferred route for the impending privatization of TCN. The market failures inherent in the wholesale privatization of DisCos have demonstrated that wholesale privatization of TCN being pushed by the BPE, will be disastrous to the power sector.
3. Development of Market Competition in Electricity Distribution
The perception that DisCos have exclusive monopoly rights to distribute and sell electricity within their license areas, is a misconception not supported under the Electric Power Sector Reform Act (EPRSRA). The EPSRA does not in any way grant market monopoly status to licensed electricity distribution networks. Specifically, Section 62 (2) of the EPSRA makes provisions for other electricity distribution entities to operate within licensed DisCo network areas, provided the distribution capacity operated by these entities are within the capacity limits which the NERC may determine from time to time. By implication, the license terms of DisCo licenses do not support the present monopoly arrangement of Discos to distribute and sell electricity to customers within their network areas.
Regrettably, DisCos presently operate as market monopolies within their geographical network areas. As such, DisCos have abusive market powers, in clear contradiction of section 24, sub-section 2(b) of the EPRSRA.
In the absence of any policy framework to allow for the establishment and operations of competitive electricity distribution entities, the NERC has had to innovate with several regulations such as the Eligible Customer Regulations, the Independent Electricity Distribution Network (IEDN) regulations, and the Franchising and Mini-grid regulations, amongst others. These regulations, which are indirect ways of liberalizing electricity distribution, have unfortunately not yielded significant successes. The lack of success of these regulations may be attributable to the fact that these regulations were not designed to create any competition, or competitive entities within the existing electricity distribution networks. The Federal Government has also intervened in the quasi liberalization of electricity distribution through the activities and initiatives of the Rural Electrification Authority (REA) and the Niger Delta Power Holding Company (NDPHC). However, these regulations and interventions by the Federal Government are a confirmation of the urgent need for a deliberate government policy that would create competitive entities in the electricity distribution segment so as to improve electricity access to Nigerians.
Developing market competition in the electricity distribution segment will require very deliberate government policies to establish/license new and competitive electricity distribution entities that may operate in under-served and unserved areas within existing (successor PHCN) DisCo networks. Under your leadership, the Ministry of Power should develop a policy framework that would lead to the licensing of new electricity distribution entities whose operations would cover smaller geographical sites within the present areas served by the existing DisCos.
At the recently concluded United Nations General Assembly (UNGA), President Buhari committed to bringing electricity to 5 million unserved households by 2030. I dare say this target can be achieved within a two-year timeframe if such policy framework and appropriate regulations as described above, is implemented by your Ministry.
4. Push for the amendment of the EPSRA to allow States to enact their own electricity Laws
Electricity is listed under the concurrent legislative list of the 1999 Constitution (as amended), which in summary, provides for state houses of assembly to make laws for electricity within their states. One important policy intervention under your watch would be the amendment of the relevant sections of the EPRSA to implement forthwith, the provisions of section 14 of the concurrent legislative schedule of the 1999 Constitution. Due to the vertical structure of the power sector since the days of the Electricity Corporation of Nigeria (ECN) down to NEPA and PHCN, the Federal Government has always assumed control of the power sector and continues to do same even post-privatization of the sector. This is not sustainable.
Thus the need to now create a policy framework backed by an amended EPSRA, for state governments to implement their own electricity laws within their states. While states do not need the EPSRA to be amended for state houses of Assembly to pass electricity laws within their states, amending the EPSRA as federal law will establish the national framework within which state electricity laws can complement the provisions of the EPSRA. Allowing state governments develop their electricity laws, thus attract more investments into the power sector, is beneficial to the Federal Government’s goal of accelerating electricity access to 80 million Nigerians who have no access to electricity. It will also free up scarce budgetary resources for the Federal government to re-direct to other critical areas of the economy in need of government intervention such as infrastructure, secondary and tertiary education, and healthcare services, etc.
In this regard, the Ministry of Power should actively liaise and partner with States such as Ondo, Lagos and Edo States, that have already started, or may have concluded the process of enacting their state electricity laws. It will be to the credit and legacy of the Buhari administration should States establish their electricity laws which would accelerate electricity access to 80 million Nigerians.
In closing, let me say that policy formulation is the foundation for law-making and the regulatory processes. Thus any desired improvements in the power sector must start with the right policy formulation and implementation. As we approach the eight-year post-privatization anniversary of the power sector, the Ministry of Power needs to play a greater role in the sector. Under your watch, the new focus of the Ministry of Power should be to lead the process of policy formulation, coordination, and implementation within the power sector. The agencies of government in the power sector such as the NERC, NBET, etc and the respective operators in the NESI would be more effective in the discharge of their statutory and market duties.
Consequently, even though you are not a magician, I would urge you to be magical and revolutionary in developing and implementing policies that would transform the power sector for the benefit of all Nigerians.
Godspeed to you and may the power sector succeed.
Odion Omonfoman is the Managing Director / Chief Executive Officer of New Hampshire Capital Limited. He can be reached at email@example.com