By Ayinde Oluseye
Over the past decades successive governments have endeavoured to tackle Nigeria’s energy deficit problem by maintaining a monopoly in power provision and pumping money into the poorly managed sector. Since the return to civilian rule in 1999, governments have spent on average about US$2bn annually on electricity provision, but with darkness to show for it.
However, in August 2010 President, Goodluck Jonathan, launched the Power Sector Reform Roadmap, aimed at shifting the running of power utilities to the private sector. It included the privatisation of the state-owned Power Holding Company of Nigeria (PHCN). And when in late 2013 almost all of the six power-generation plants and 11 distribution companies unbundled from PHCN were eventually sold there was high public expectation that the new owners would bring a rapid end to frequent power outages in Africa’s largest economy but 5years down the line the story is yet to change.
There has been some improvement in the generation of power in recent months but the problem isn’t just about generation but the transmission and distribution of the generated power to the final consumers. Power generation reached a new peak of over 7,000 mw in December 2017 which remains grossly inadequate. For example, Nigeria has a lower electricity capacity than Switzerland, a country with about 2% of Nigeria’s population.
The privatised electricity firms may have been freed of the state bureaucracy that previously hamstrung their operations, but these utilities still encounter a myriad of structural problems that continue to hamper growth in the power sector. These include shortage of gas supply for thermal plants, high levels of unpaid electricity bills and the country’s outdated and poorly maintained transmission network, which the government still owns but put under private management in 2012.
Indeed, the transmission network cannot handle much more load than current peak electricity production. Unsurprisingly, many of the new power operators have struggled to make progress, especially as they have had to contend with ageing facilities requiring substantial amounts of investments to upgrade and expand which they are not ready to invest on due to unstable government policies and their lack of financial clout.
To help the companies to get on their feet the Central Bank of Nigeria in early 2015 launched a N213bn (US$1.1bn) Nigeria Electricity Market Stabilisation Facility to provide operators with soft loans. The government has also raised prices paid by electricity consumers under the Multi-Year Tariff Order (MYTO), introduced in June 2012 to gradually make tariffs more cost-reflective to encourage private investment.
The latest adjustment in the current MYTO (2015 2024), which took effect on February 1st, raised prices by an average of 45%. In Lagos, Nigeria’s commercial capital, heavy domestic users pay N29 per kwh small residential power users now pay N24 (US$0.12) per kwh but in reality, this is not accurate because most residence cannot correlate the amount billed in relation to the amount of power supplied.
Trade unions, anti-poverty groups and politicians have condemned the rises saying that they are unjustified because there has been no significant improvement in services delivered by power companies and that the new charges are unaffordable to the majority of the population who exist on low incomes.
The nation’s two main central labour organisations, the Nigeria Labour Congress and the Trade Union Congress, have organised protests in major cities across the country to demand the reversal of the tariff increases. In mid February the upper chamber of the National Assembly, also passed a resolution calling for the revocation of the tariff rises. Senators contended that the tariff is retrogressive and amounts to extortion and exploitation of ordinary Nigerians.
The points made by the critics reflect the grievances of consumers, both households and businesses, who have suffered years of incessant power outages that have blighted lives and curtailed productive activities.
However, the contention that electricity companies must first improve their services before raising prices may seem morally sound but is inconsistent with how a market economy works. Power providers need to invest substantially more money in equipment and employing skilled manpower to improve services—this process will take time and invariably raise production costs.
To sustain the production of any good or service in the medium to long term requires the producer’s revenue to at least cover their costs. In the case of electricity and other infrastructure services this cost is paid by either the end consumer or by government through subsidies or a combination of both.
One of the main economic issues facing Nigeria today is that its governments are unable to finance the degree of subsidy support required to sustain current levels of infrastructure provisions, let alone expand their coverage to include the millions without access to the services.
The federal government’s projected revenue in its proposed 2018 budget, currently before parliament is barely enough to cover its planned recurrent expenditure, including debt servicing. The federal government does intend to borrow more to fund expenditure and the administration has said that it is working to establish a US$25bn infrastructure fund to be financed from local and international sources, to invest in the energy and transport sectors.
Nonetheless, the government’s high debt service to revenue ratio means that it is approaching the limit of its capacity to increase its debt burden without risking a slide back into debt troubles.
Private investors are unlikely to put money into infrastructure projects if they believe that there is little or no prospect of achieving profitable returns on their investment. Government-imposed utility and fuel prices that have made it difficult for investors to attain acceptable levels of returns have been one of the main obstacles to private-sector involvement in infrastructure development in Nigeria. For example, the shortage of gas that has for years constrained the operations of thermal power plants despite Nigeria possessing large deposits of natural gas has been partly due to government pricing policy and incessant destructions.
Low gas prices paid by power companies discouraged international oil companies from investing more in the construction of the facilities to gather and process the country’s gas for domestic consumption. The state has since 2010 gradually raised gas prices to encourage gas firms to expand their capacity, but it has been a slow process. Similarly, despite the authorities having in recent years issued several licences to private companies to build oil refineries in Nigeria, no major plant has been constructed.
The reluctance of investors to commit has been at least partly due to the failure of the government to deregulate domestic fuel prices and a lack of confidence in the petrol subsidy system. Nonetheless, it is an unenviable job for Nigerian policymakers to explain the realities of market economics to a public that has come to regard subsidised state-provided services as entitlements in a country with abundant energy reserves and that has also grown weary of the poor quality of these services.
Acrimony over the power sector is set to remain more significant than actual development in the coming years.