What went wrong in power sector? (1)

Embedded-PowerTHE nation continues to groan under chronic power supply shortage which has regressed from epileptic to comatose condition and defied all projections for improvement despite massive injection of public and private funds.

The major drivers for reform and privatization of the power sector were inadequacy of funding and non-judicious management of the resources available which is better known as corruption. The sector suffered unprecedented neglect under successive military administrations.

Attempts to revamp it in the Fourth civilian administration were bungled by over-bearing political influence. Political administrators muzzled the technocrats and usurped their roles in the conception and award of contracts leading to shoddy execution of projects and protracted delays.

We are witnesses to power projects being uncompleted more than 10 years after contract award! The doctrine of urgency with which they were conceived without detailed planning and awarded did not translate into expedition in execution. Project completion costs bear no comparison with prices on award! The problems of inadequacy of funds and corruption are seen, albeit to varying degrees in other developing countries.

They have been successfully solved in several countries through reform and privatisation processes similar to what was recently adopted here. The list of countries where power sector reform and privatization has taken place includes Chile, Mexico, Ghana, Kenya, Egypt, India, Tanzania and Turkey.

Driven by the desire to relieve the public purse of the burden of funding the power sector, European countries like Norway, UK, Russia and Ukraine have also gone through reform processes.

The key success factors in these countries especially in the emerging economies are: a) Strong political will b) Transparency of privatization process c) Special tariffs for the poor/small consumers d) Payment guarantees e) Effective regulation, etc.

The question boggling the mind is: How have we fared along the line? Strong political will Although President Olusegun Obasanjo initiated the reform process as far back as year 2000, he could not get the much needed support of the legislature to push through the power sector reform bill during his first term in office.

The Electric Power Sector Reform Act was eventually passed in April 2005 when the much needed legal backing took effect. Rather than continue where his predecessor left off, President Umaru Yar’Adua back-pedalled on the reform process and re-appointed two sacked directors of PHCN who turned the hands of the clock backwards by re-integrating unbundled PHCN entities.

Nudged on by the doggedness of his minister of power, Prof. Bart Nnaji, President Jonathan, in a rare display of courage, demonstrated the political will to get it running again.

Thus a clear road map was launched in August 2010 anticipating completion of privatization by mid-2011. However, external and internal entrenched interests determined to frustrate the process manifested their opposition through the various workers unions and caused untold delays to the privatization exercise which was finally concluded two and half years later in November 2013.

Transparency of privatization process From an external observer’s viewpoint, the privatization process of PHCN successor companies can be adjudged to be largely transparent.

The credit goes to the no-nonsense stand of Mr. Atedo Peterside, Chairman of the Technical Committee of the National Council on Privatisation (NCP) who refused to be compromised.

The minister who midwifed the process lost his job on account of his vested interest in some of the assets to be privatized leading to cancellation of the bidding process for the assets and re-launch at a later time.

The conclusion of the sale of two assets was not without controversy but, by and large, the process deserves commendation rather than condemnation. Special tariffs for the poor/small consumers The tariff structure has in-built subsidy for residential consumers which was billed to be phased out over a five-year period.

On top of this, the poor and small residential consumers have a concessional tariff provided they do not consume more than 50 kWh per month. These are usually households supplied at single phase.

Where they do not have meters, they pay nominal charges. Payment guarantees The investors rely on borrowing to finance the acquisitions; hence their ability to repay the loans rests on being able to recoup costs and, as business concerns, they need a decent profit margin for sustainability of their operations.

The investors face several payment risks along the value chain. The ability of the DISCOs to recover costs hinges on curtailment of technical losses through improvements in distribution network, elimination of commercial losses through deployment of modern metering devices etc. as well as government fulfilling its obligation to pay subsidies.

The GENCOs must be able to collect revenues for energy purchased by the Bulk Trader for them to be able to meet payment obligations to their gas suppliers.

In the event that they are unable to produce power up to their available capacities, the take-or-pay mechanism must be triggered to relieve them of the forfeiture of income.

In order to ensure that the reform is successful, the government has to guarantee the ability of the Bulk Trader to pay the GENCOs on top of its obligation to pay DISCOs for subsidies on the tariffs.

However, these are transitional provisions. The level of investment we have witnessed is beyond the capacity of local banks; a substantial portion is sourced offshore.

In a situation where the revenue from the business is only in local currency, the ability of the borrowers to repay foreign loans is influenced, among other things, by availability of forex and other factors collectively referred to as political risks.

For projects endorsed by the World Bank, the latter provides a Partial Risk Guarantee acceptable to the lenders. Ultimately, the risks are underwritten by the government. • To be continued tomorrow. • Dr. Oye Eribake, a Fellow of the Nigerian Society of Engineers, resides in Lagos.

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