Federal Government reform activities and economic liberalisation (Part 2)

The Power Sector Reform

The Electric Power Sector Implementation Committee (EPIC) produced the National Policy on Electric Power and a draft Electric Power Sector Reform Bill.  The two instruments were approved by the National Council on Privatisation (NCP) in 2002.  The draft bill was forwarded to the National Assembly and passed in 2003.

In 2005, a significant landmark that was to change the Nigerian Electricity Industry landscape was undertaken with the enactment of the Electric Power Sector Reform (EPSR) Act. The EPSR Act, 2005 gives legal authority and support to the reform activities i.e. restructuring and eventual privatisation of  the National Electric Power Authority (NEPA) which was re-designated Power Holding Company of Nigeria (PHCN) and incorporated as a public limited company, in line with the reform of the electricity industry. The EPSR Act 2005 also repealed all previous legislations (NEPA Act, Electricity Act and Utilities Charges Commission Act as applicable to NEPA).

The Federal Government power sector reform had three key components namely: Restructuring of existing utility; Liberalisation and privatisation; and Reinforcement of existing infrastructure through NIPP and other government intervention.

The electricity industry reform was/is aimed at improving the overall industry efficiency through restructuring, private sector participation, and competition. Competition which is a major driver of the industry’s efficiency, through additional power generation, improved customer satisfaction and reduced tariff, is introduced at the various levels of the market as it develops from stage to stage. The reform process will be completed when full competition in all the competitive parts of the industry, namely generation and supply is attained.

The reform is a necessary tool to lay solid foundation for sustainable power generation and sector efficiency. It is a means to an end and not the end itself. It is therefore expected that the Federal Government will in the short-medium term, continue to provide funding support for the electric power sector, through yearly FGN’s appropriations so as to improve transmission, and distribution infrastructure which are key components of the energy value chain.

By 1999, the Nigerian electric power sector reached, perhaps, its lowest point in its 100 years history with the following statistics: Of the 79 generation units in the country, only 19 units were operational. Average daily generation was 1,750 MW. No new electric power infrastructure was built between 1989 and 1999.  The newest plant was completed in 1990 and the last transmission line built in 1987. An estimated 90 million people were without access to grid electricity. Accurate and reliable estimates of industry losses were unavailable, but were believed to be in excess of 50percent.

Objective of the Reform

There are two key objectives for embarking on the Power sector reform. These are: the need for improvement in the efficiency of the distribution, generation and transmission network and the need to provide the people with the basic and affordable infrastructure to enable them create employment for themselves.

Approach

Power Sector Policy formulated in 2001: Aimed at ensuring electricity supply by creating a conducive investment environment for private sector investment and managerial expertise; investor-friendly Electric Power Sector Reform Act enacted in 2005.

Breaking the Monopoly: Introduction of a competitive electricity market

PHCN unbundled into six generating companies; one transmission company & eleven distribution companies (6-1-11 configuration).

18 successor companies corporatised and assets, liabilities and employees of PHCN transferred to the successor companies.

Successful privatisation/concession of the Successor Companies which have been handed over to private investors.

Regulator: NERC established in 2006

Securitisation arrangement to mitigate financial and regulatory risks; The Nigeria Electricity Bulk Trading Company Plc (NBET) & the Nigerian Electricity Liabilities Management Company (NELMCO) established and capitalised to stabilise the market in the interim for 5 to 7 years; NELMCO to absorb legacy liabilities and stranded assets as the PHCN SCs.

Seaports Reforms

The NCP in 2000 inaugurated a steering committee to develop a National Transport Sector Policy. The resultant policy thrust focused on improving asset management and structural reform by redefining the role of government and the private sector. One of the key objectives for the reform in the Transport sector was to promote trade competitiveness of Nigeria through an effective and affordable integrated transport network. BPE championed the reforms of the nation’s seaports and carried out the concession of the various port terminals to the private sector. Before the reform, it was practically impossible to carry out meaningful business activities at the ports as it took months to clear goods. Ports operations were characterized by long waiting periods, diversion of Nigerian bound vessels to neighbouring countries and very high and duplicated charges to ports users.

The benefits of the Ports reform are of two types

Primary benefits: Direct savings in resource costs, such as ships’ time, port labour costs and investment. Specifically these are: Faster ship turn-round time; faster cargo turn-round time; faster truck turn-round time; use of larger ships; increased port capacity, postponing the need for further investment; lower port operating costs, and opportunities for inland distribution by rail.

Secondary benefits: Such as reductions in freight rates and port charges, and fiscal transfers between government and the private sector. These show how the primary benefits are re-distributed within the economy and affect ordinary Nigerians. Specifically, these are: Increased competition; lower port charges; lower freight rates; increased private sector investments; labour force improvements, and net financial transfers to the government (including taxes).

Pension Reforms in Public Enterprises

The Pension Reform Committee was inaugurated in 2001. Membership of the committee cut cross all stakeholders in the public and private sectors. The committee was saddled with the following responsibilities amongst others; Review existing studies, reports and other background materials on the pension scheme, particularly in public enterprises of the public sector of the Nigerian economy; Review existing regimes, studies, reports and background materials on the implementation of pension systems in other countries, especially countries that share common economic characteristics with Nigeria; Determine the actual amount of unfunded pension liabilities in all Public Enterprises (PEs), particularly those slated for privatisation and commercialisation as of December 2000; Advise the Federal Government as to the best way forward for handling the matter in a manner that would not jeopardise the expectations of the gains of the privatisation programme and prepare draft legislation on the new pension system to be debated upon by all relevant stakeholders before presentation to the National Assembly for eventual enactment into law for implementation.

The work of the Committee led to the passage of the Pension Reform Act of 2004 and the establishment of the National Pension Commission (PenCom).

Prior to the enactment of the Pension Reform Act 2004, Nigeria operated a defined benefit scheme type of pensions whereby PEs habitually deducted pension contributions from their employees and lumped same with recurrent expenditure and spent it. That resulted in huge funding deficits in most of the PEs thereby creating serious social problems for retirees.

The strategy midwifed by BPE simply separated the agency that deducted pension contributions from the agencies that manage such contributions. The scheme is popularly referred to as the Chilean model or Contributory Scheme. With the establishment of the National Pension Commission and entrenchment of a stable pension policy in Nigeria, retirees are now guaranteed payment on retirement.

Yakubu, a Reform and Privatisation specialist, writes from Lafia.