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The poor state of electricity supply in the country: Government as a co-conspirator

Tuesday, 22 October 2019

The poor state of electricity supply in the country: Government as a co-conspirator

The basis for the privatization of the Distribution Companies (DisCos) in Nigeria is the Franchised Monopoly model. A Franchised Monopoly, which is usually government-sanctioned, is typically established in sectors that require high levels investments to function. These are usually in sectors like oil and gas, power, rail, and roads. This type of monopoly allows the investors ample time to make a return on investment over specific periods. In such a case, the government, in order to make such services affordable to citizens, offers subsidies and interventions because most times, these sectors are price regulated and restrict what is chargeable by the franchisees.

The Nigerian Power Sector is a typical example of a Franchised Monopoly. The Distribution utilities, totaling eleven in number, cover more than one state except for Lagos State, which has two DisCos (Eko and Ikeja). Due to the vast areas covered, substantial levels of investments are required to function effectively, efficiently, and profitably. Thus, providing quality service for the consumers in franchised monopolies like the DisCos is highly cost-intensive and would require the Federal Government to make available subsidies and interventions to bridge funding and infrastructure gaps.

Prior to privatization, the government promised to create an enabling environment for these utilities to carry out business while making a return on investment. One of the ways to achieve this is the approval of a cost-reflective tariff for energy retail and the regularization/liberalization of gas pricing. These two conditions have not been possible post-privatization and have contributed to the creation of a hostile environment for the business. Additionally, the federal government has not been living up to its responsibility in terms of providing required subsidies at the right time and in the right amount. Also, federal government interventions have been haphazard and inadequate. 

While these factors affecting the power sector have not been addressed, the Government can seek to improve on the sector in other ways with a detailed implementation plan that targets all identified gaps. The implementation of statutory subsidies and financial/infrastructural interventions can improve the performance of these utilities in the power sector. In Nigeria, the implementation of subsidies and financial interventions has been poor, and this has resulted in little or no expansion in the sector to accommodate growing demand. The bickering between the DisCos and TCN is a testament to this fact.

The issue of cost-reflective tariff has been with us for a while, and the logic behind this is commonsensical; the regulator has not denied the legitimacy of the claims for cost-reflective tariff but rather they engaged in the no-win argument of performance before tariff increase. Without addressing the shortfall between cost of production, transmission, and distribution of power, the power sector will remain in a tailspin. This issue is in addition to the lackluster performance of government in terms of subsidies and interventions.

The Federal Government has previously approved some intervention schemes for the power sector, some of which include the N701bn GenCos Intervention Fund, the 72bn (TCN administered) distribution enhancement fund, and the latest 600bn GenCo intervention fund. These facilities sought to assist the GenCos with funding to address the liquidity gap within the sector and to support the DisCos in the provision of infrastructure. However, these funds are finite and not sustainable. The continuous interventions by the Government, though necessary, do not obviate the need to fix certain critical gaps in the industry for optimal performance by all stakeholders.

The issue at the center of the sector performance debate is that of cost-reflective tariff and the unwillingness of the government to deal with the political backlash. Cost reflective tariff means one thing to the customer, increased cost of electricity. Nigeria is a mono-economy in the sense that more than 90% of the country’s GDP is from crude oil. This reality means that the wellbeing of the country is tied to the price of oil in the international market, and these prices have been volatile lately, even while on a downward trend; therefore, the capacity to provide subsidies and interventions across actors, power sector inclusive, is unsustainable. Consequently, what is required are measures that promote sustainable operations and allow for profitable operations, while at the same time protecting the customer from unfair prices and practices. In this regard, while the franchised monopoly, as practiced worldwide, has failed in Nigeria, the onus is on government to weave practical solutions that focus on the broader role electricity plays in economic development, beyond the immediate considerations for cost escalations, buoyed by fears of public backlash.

About IWIN

The Independent Energy Watch Initiative (I-WIN), an enterprise of Energy ConServ and the Roundtable for the Growth and Development of Power (RODEP), is an online/web based power sector portal that strives to engage stakeholders and the Nigerian public on topical issues in the power sector.

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