The power sector was privatised in 2013, with the hope that it will grow like the telecoms sector. But the challenge that led to its sale still loom large. However, with new policies being considered by the government, a new vista might just be opened in the sector, BENJAMIN UMUTEME writes
When in 2013, Nigeria commenced a comprehensive reform albeit privatisation of the power sector, it was proclaimed as one of the boldest power reform initiatives globally.
This was done by the President Goodluck Jonathan’s led administration to address chronic efficiency gaps in the Power Holding Company of Nigeria (PHCN), and attract private capital needed to propel the sector to meet Nigeria’s fast growing electricity demand.
However, with the events playing out in the power sector over the years, it appears the government took the wrong decision.
While the power sector reform in Nigeria has its gains, the pains associated with the reform process has eroded the intentions of starting the reforms in the first place.
From feedstock availability to electricity units delivered to the end user, there are severe strains that not only threaten the financial viability of the sector. And it asks the most fundamental question: with the ways it is at the moment can the sector attract new investors.
According to a report published by United Capital PLC earlier this year, the continuous challenge has thrown up the need to address lingering bottlenecks such as; the suboptimal utilization of generating capacity; inadequate transmission infrastructure and high distribution losses; and low rates of collection.
And as the immediate past chairman of the Nigeria Electricity Regulatory Commission, Dr. Sam Amadi did put it, there were mistakes in some of the decisions taken at the inception of the process.
Route to Bankability: Like Telecoms, like Power?
For many Nigerians the growth of the power sector was expected to take the template like the telecommunications sector but als it has not.
However, events post-privatization have proven disappointing as the sector continues to grapple with systemic challenges, with negligible improvement in supply relative to the pre-reform era. It would appear that stakeholders took too long to come to terms with the dissimilarities between the two sectors.
Getting the economics right: The tariff question
The biggest challenge of the sector still remains its commercial viability espciallyin the Nigerian electricity value chain. The vexed issue of tariff continues to be topical in discussion involving the Generating Companies (GenCos) on one hand and the Distribution Companies (DisCos) on the other hand.
It has been difficult for both parties to agree on what makes a cost effective tariff. While the GenCos are pointing an accusing finger at the DisCos for pocketing monies that should have been paid to them, the DisCos say they are doing what is best for them. In fact, it has been a rather daunting task aligning the charges for electricity consumption with the cost of electricity generation, transmission and distribution
The Disco Challenge: Liquidity crisis compounds capital shortfall
The power sector report notes that the delay in the implementation of the Transitional Electricity Market (TEM) was the first post-sector setback in the way of capital inflows into power privatization.
“Whilst the Interim Rules Period lingered, creating what was effectively a string of nonenforceable contracts, a liquidity overhang was built up. The role of government in the settlement and payments system extended far longer than it should, with debilitating impact on investor confidence and the operational efficiency of the market. Further down the value chain, lax regulation and enforcement of sanctions at the Discos level with respect to collection efficiency created cash flow shortages which continue to impede the overall efficiency of the sector. With regard to capital investment, the Discos are currently overleveraged, hence equity injection is the most efficient way to plug capital shortfalls in the subsector. Like President, Association of Distribution Companies, Barrister, Sunday Oduntan did rightly say; “the government should convert current revenue shortfall into regulatory assets to enable them asses funds.
Investment Outlook: Long term value, short term pain
In spite of the numerous headwinds confronting the Nigerian power sector today, the electricity market remains an attractive long term investment opportunity. In the medium term, there should be new investment inflows in the distribution and generation chain.
With the federal government recent suggesting that it was considering selling it stakes in the privatised power firms to attract new investment, there might just be light at the end of the tunnel.