The Impact and Challenges of the Power Sector Reforms

Since the first production of electricity in Nigeria in 1896, the electricity sector has gone through a number of reforms but is yet to achieve effective and reliable supply of electricity. The present reform embarked on took a new dimension with the government shifting from its monopoly over the power sector in Nigeria to inviting private sector participation with the intent of eventual divestiture to the private sector either by concession, privatization or management contracts. In furtherance to this, the Bureau of Public Enterprises (BPE) with the authority to prepare public enterprises approved by the National Council on Privatization (NCP) for privatization and commercialization has commenced the privatization exercise. The Power Holding Corporation of Nigeria (PHCN) has since been unbundled to 18 successor companies and the Nigerian Electricity Regulatory Commission (NERC) has been established to ensure the orderly development of a competitive power market, safe and adequate production of electricity and to promote competitive private sector participation.

This article intends to briefly consider the impact the reforms should have on the industry and the nation as a whole and challenges experienced by the government particularly those involving the privatization of the successor companies.

Without a doubt if the reforms are properly implemented the benefits would be numerous and would outweigh by far any challenges and costs that come with implementation. It would promote growth and efficiency not only in the electricity sector but also other industries such as the manufacturing, agriculture and construction industries which are heavily dependent on electricity. The Nigerian market would open up thereby encouraging private sector participation from both local and foreign investors which would greatly improve the quality, efficiency and ensure reliability of power supply. In addition to foreign direct investment, a key benefit is the transfer of technology especially in generation and distribution as the current technology is obsolete.

There would be more employment opportunities across disciplines as the sector (and various others) expand and become more competitive. It would also free up the government resources used to subsidise the low tariffs and these resources can now be diverted to other infrastructure development.

A far reaching effect would be the facilitation of economic development and reduction in the cost of doing business. Inadequate power supply has been known to be the death of many businesses in Nigeria as the cost of investing and maintaining backup systems is very high. Cost of doing business would drastically reduce as small/medium enterprises (SME) and large organisations would not need to invest in expensive back-up systems.

Generally the major challenge is with respect to uncertainty. The Power Sector is extremely capital intensive; potential investors would want to be sure of the true status of the company to be certain they will receive adequate returns on their investments.

Whilst there are various challenges ranging from environmental issues to credit enhancements, end user tarriffs, liabilities and labour issues stand out as primary concerns.

1.    END USER TARIFFS

Electricity prices are currently below production costs. Therefore, the industry is barely able to generate enough revenue to cover its operating costs let alone meet its considerable capital expenditure needs¹.This results in PHCN having to seek funds from the Government to be able to meet its recurrent expenditure. Without a pricing regime that supports financial viability in the sector private investor would not be interested in the market.

To address this issue, Nigerian Electricity Regulatory Commission (NERC) has been charged with the dual function of ensuring that the prices charged by licensees are fair to the consumers and sufficient to allow the licensees to finance their activities and to allow for reasonable earning and profits for efficient operation.

NERC has developed a new tariff order at the centre of which is a multiyear tariff model which calculates electricity prices based on revenue requirements of the whole industry. The approach adopted in the tariff formulation and development is one in which the allowed revenue is equal to the sum of underlying components consisting of return of capital, depreciation and operating costs².This approach is aimed at ensuring the necessary support for operating and capital expenditure of the various sub sections (i.e. generation, transmission and distribution) and at the same time end user tariffs are fair.

The Multi Year Tariff Order also provides a 15 year tariff path for the electricity industry, with limited minor reviews each year in the light of changes in a limited number of parameters (such as inflation, exchange rate and gas prices) and major reviews every 5 years, when all of the inputs are reviewed with stakeholders³.

In addition to the above, to ensure adequate returns on investment for the investor in the Generation Companies, the Federal Government established the Nigerian Bulk Trading Company (NBET) to serve as the ‘middle man’ between the Generation Companies and Distribution Companies for the purpose of power sales. The aim of setting up the Bulk Trader is to ensure payment for the power produced by the generation company. The Bulk Trader is a transitional entity that will exist for as long as it takes for the distribution companies to establish their credit-worthiness.

2.    SIZE OF THE LEGACY OF PHCN LIABILITIES

In order to adequately calculate their risks and in securing finance, information as to the assets and liabilities should be made available to the investors. In this area there is paucity of information as PHCN was poorly run and failed to keep its books and accounts in order.

In addressing this, the Nigerian Electricity Management Company (NELMCO) was established as a government Special Purpose Vehicle on the understanding that it would assume and manage extant assets, liabilities and other obligations that could not be easily transferred from PHCN to the Successor Companies. The envisioned role is that NELMCO would inherit PHCN’s liabilities. This would give the potential acquirers a degree of certainty as to the size of the PHCN legacy.

3.    WORKFORCE

The employees of PHCN have been averse to the privatization of the sector as they are uncertain as to the future of their employment and all outstandings (arrears in salaries, pensions, severance and other benefits) owed to them.

In an effort to resolve these issues, the governmenthas engaged the labour union in dialogue with emphasis on the following:⁴

The uncertainty for the investors is with respect to all outstandings owed to current PHCN employees as this poses a financial and operational risk to the potential acquirer of the successor company when wanting to know who will bear the burden of offsetting the outstanding.

As, mentioned above, the role of NELMCO is to absorb these liabilities, however what is not clear is the PHCN employees that would be retained upon privatization, what criteria would be used and upon what basis.

The sector indeed is in dire need of an effective change, this intervention is critical to the survival of Nigerian industries and businesses; it will also guarantee an improvement in the standard of living. The challenges mentioned although not exhaustive, the Government is aware of them and the actions mentioned are just some of those that have been put in place to address them and with the establishment of the NERC the reforms are fast becoming a reality.

---

Since the first production of electricity in Nigeria in 1896, the electricity sector has gone through a number of reforms but is yet to achieve effective and reliable supply of electricity. The present reform embarked on took a new dimension with the government shifting from its monopoly over the power sector in Nigeria to inviting private sector participation with the intent of eventual divestiture to the private sector either by concession, privatization or management contracts. In furtherance to this, the Bureau of Public Enterprises (BPE) with the authority to prepare public enterprises approved by the National Council on Privatization (NCP) for privatization and commercialization has commenced the privatization exercise. The Power Holding Corporation of Nigeria (PHCN) has since been unbundled to 18 successor companies and the Nigerian Electricity Regulatory Commission (NERC) has been established to ensure the orderly development of a competitive power market, safe and adequate production of electricity and to promote competitive private sector participation.

This article intends to briefly consider the impact the reforms should have on the industry and the nation as a whole and challenges experienced by the government particularly those involving the privatization of the successor companies.

Without a doubt if the reforms are properly implemented the benefits would be numerous and would outweigh by far any challenges and costs that come with implementation. It would promote growth and efficiency not only in the electricity sector but also other industries such as the manufacturing, agriculture and construction industries which are heavily dependent on electricity. The Nigerian market would open up thereby encouraging private sector participation from both local and foreign investors which would greatly improve the quality, efficiency and ensure reliability of power supply. In addition to foreign direct investment, a key benefit is the transfer of technology especially in generation and distribution as the current technology is obsolete.

There would be more employment opportunities across disciplines as the sector (and various others) expand and become more competitive. It would also free up the government resources used to subsidise the low tariffs and these resources can now be diverted to other infrastructure development.

A far reaching effect would be the facilitation of economic development and reduction in the cost of doing business. Inadequate power supply has been known to be the death of many businesses in Nigeria as the cost of investing and maintaining backup systems is very high. Cost of doing business would drastically reduce as small/medium enterprises (SME) and large organisations would not need to invest in expensive back-up systems.

Generally the major challenge is with respect to uncertainty. The Power Sector is extremely capital intensive; potential investors would want to be sure of the true status of the company to be certain they will receive adequate returns on their investments.

Whilst there are various challenges ranging from environmental issues to credit enhancements, end user tarriffs, liabilities and labour issues stand out as primary concerns.

1.    END USER TARIFFS

Electricity prices are currently below production costs. Therefore, the industry is barely able to generate enough revenue to cover its operating costs let alone meet its considerable capital expenditure needs¹.This results in PHCN having to seek funds from the Government to be able to meet its recurrent expenditure. Without a pricing regime that supports financial viability in the sector private investor would not be interested in the market.

To address this issue, Nigerian Electricity Regulatory Commission (NERC) has been charged with the dual function of ensuring that the prices charged by licensees are fair to the consumers and sufficient to allow the licensees to finance their activities and to allow for reasonable earning and profits for efficient operation.

NERC has developed a new tariff order at the centre of which is a multiyear tariff model which calculates electricity prices based on revenue requirements of the whole industry. The approach adopted in the tariff formulation and development is one in which the allowed revenue is equal to the sum of underlying components consisting of return of capital, depreciation and operating costs².This approach is aimed at ensuring the necessary support for operating and capital expenditure of the various sub sections (i.e. generation, transmission and distribution) and at the same time end user tariffs are fair.

The Multi Year Tariff Order also provides a 15 year tariff path for the electricity industry, with limited minor reviews each year in the light of changes in a limited number of parameters (such as inflation, exchange rate and gas prices) and major reviews every 5 years, when all of the inputs are reviewed with stakeholders³.

In addition to the above, to ensure adequate returns on investment for the investor in the Generation Companies, the Federal Government established the Nigerian Bulk Trading Company (NBET) to serve as the ‘middle man’ between the Generation Companies and Distribution Companies for the purpose of power sales. The aim of setting up the Bulk Trader is to ensure payment for the power produced by the generation company. The Bulk Trader is a transitional entity that will exist for as long as it takes for the distribution companies to establish their credit-worthiness.

2.    SIZE OF THE LEGACY OF PHCN LIABILITIES

In order to adequately calculate their risks and in securing finance, information as to the assets and liabilities should be made available to the investors. In this area there is paucity of information as PHCN was poorly run and failed to keep its books and accounts in order.

In addressing this, the Nigerian Electricity Management Company (NELMCO) was established as a government Special Purpose Vehicle on the understanding that it would assume and manage extant assets, liabilities and other obligations that could not be easily transferred from PHCN to the Successor Companies. The envisioned role is that NELMCO would inherit PHCN’s liabilities. This would give the potential acquirers a degree of certainty as to the size of the PHCN legacy.

3.    WORKFORCE

The employees of PHCN have been averse to the privatization of the sector as they are uncertain as to the future of their employment and all outstandings (arrears in salaries, pensions, severance and other benefits) owed to them.

In an effort to resolve these issues, the governmenthas engaged the labour union in dialogue with emphasis on the following:⁴

The uncertainty for the investors is with respect to all outstandings owed to current PHCN employees as this poses a financial and operational risk to the potential acquirer of the successor company when wanting to know who will bear the burden of offsetting the outstanding.

As, mentioned above, the role of NELMCO is to absorb these liabilities, however what is not clear is the PHCN employees that would be retained upon privatization, what criteria would be used and upon what basis.

The sector indeed is in dire need of an effective change, this intervention is critical to the survival of Nigerian industries and businesses; it will also guarantee an improvement in the standard of living. The challenges mentioned although not exhaustive, the Government is aware of them and the actions mentioned are just some of those that have been put in place to address them and with the establishment of the NERC the reforms are fast becoming a reality.

---

Since the first production of electricity in Nigeria in 1896, the electricity sector has gone through a number of reforms but is yet to achieve effective and reliable supply of electricity. The present reform embarked on took a new dimension with the government shifting from its monopoly over the power sector in Nigeria to inviting private sector participation with the intent of eventual divestiture to the private sector either by concession, privatization or management contracts. In furtherance to this, the Bureau of Public Enterprises (BPE) with the authority to prepare public enterprises approved by the National Council on Privatization (NCP) for privatization and commercialization has commenced the privatization exercise. The Power Holding Corporation of Nigeria (PHCN) has since been unbundled to 18 successor companies and the Nigerian Electricity Regulatory Commission (NERC) has been established to ensure the orderly development of a competitive power market, safe and adequate production of electricity and to promote competitive private sector participation.

This article intends to briefly consider the impact the reforms should have on the industry and the nation as a whole and challenges experienced by the government particularly those involving the privatization of the successor companies.

Without a doubt if the reforms are properly implemented the benefits would be numerous and would outweigh by far any challenges and costs that come with implementation. It would promote growth and efficiency not only in the electricity sector but also other industries such as the manufacturing, agriculture and construction industries which are heavily dependent on electricity. The Nigerian market would open up thereby encouraging private sector participation from both local and foreign investors which would greatly improve the quality, efficiency and ensure reliability of power supply. In addition to foreign direct investment, a key benefit is the transfer of technology especially in generation and distribution as the current technology is obsolete.

There would be more employment opportunities across disciplines as the sector (and various others) expand and become more competitive. It would also free up the government resources used to subsidise the low tariffs and these resources can now be diverted to other infrastructure development.

A far reaching effect would be the facilitation of economic development and reduction in the cost of doing business. Inadequate power supply has been known to be the death of many businesses in Nigeria as the cost of investing and maintaining backup systems is very high. Cost of doing business would drastically reduce as small/medium enterprises (SME) and large organisations would not need to invest in expensive back-up systems.

Generally the major challenge is with respect to uncertainty. The Power Sector is extremely capital intensive; potential investors would want to be sure of the true status of the company to be certain they will receive adequate returns on their investments.

Whilst there are various challenges ranging from environmental issues to credit enhancements, end user tarriffs, liabilities and labour issues stand out as primary concerns.

1.    END USER TARIFFS

Electricity prices are currently below production costs. Therefore, the industry is barely able to generate enough revenue to cover its operating costs let alone meet its considerable capital expenditure needs¹.This results in PHCN having to seek funds from the Government to be able to meet its recurrent expenditure. Without a pricing regime that supports financial viability in the sector private investor would not be interested in the market.

To address this issue, Nigerian Electricity Regulatory Commission (NERC) has been charged with the dual function of ensuring that the prices charged by licensees are fair to the consumers and sufficient to allow the licensees to finance their activities and to allow for reasonable earning and profits for efficient operation.

NERC has developed a new tariff order at the centre of which is a multiyear tariff model which calculates electricity prices based on revenue requirements of the whole industry. The approach adopted in the tariff formulation and development is one in which the allowed revenue is equal to the sum of underlying components consisting of return of capital, depreciation and operating costs².This approach is aimed at ensuring the necessary support for operating and capital expenditure of the various sub sections (i.e. generation, transmission and distribution) and at the same time end user tariffs are fair.

The Multi Year Tariff Order also provides a 15 year tariff path for the electricity industry, with limited minor reviews each year in the light of changes in a limited number of parameters (such as inflation, exchange rate and gas prices) and major reviews every 5 years, when all of the inputs are reviewed with stakeholders³.

In addition to the above, to ensure adequate returns on investment for the investor in the Generation Companies, the Federal Government established the Nigerian Bulk Trading Company (NBET) to serve as the ‘middle man’ between the Generation Companies and Distribution Companies for the purpose of power sales. The aim of setting up the Bulk Trader is to ensure payment for the power produced by the generation company. The Bulk Trader is a transitional entity that will exist for as long as it takes for the distribution companies to establish their credit-worthiness.

2.    SIZE OF THE LEGACY OF PHCN LIABILITIES

In order to adequately calculate their risks and in securing finance, information as to the assets and liabilities should be made available to the investors. In this area there is paucity of information as PHCN was poorly run and failed to keep its books and accounts in order.

In addressing this, the Nigerian Electricity Management Company (NELMCO) was established as a government Special Purpose Vehicle on the understanding that it would assume and manage extant assets, liabilities and other obligations that could not be easily transferred from PHCN to the Successor Companies. The envisioned role is that NELMCO would inherit PHCN’s liabilities. This would give the potential acquirers a degree of certainty as to the size of the PHCN legacy.

3.    WORKFORCE

The employees of PHCN have been averse to the privatization of the sector as they are uncertain as to the future of their employment and all outstandings (arrears in salaries, pensions, severance and other benefits) owed to them.

In an effort to resolve these issues, the governmenthas engaged the labour union in dialogue with emphasis on the following:⁴

The uncertainty for the investors is with respect to all outstandings owed to current PHCN employees as this poses a financial and operational risk to the potential acquirer of the successor company when wanting to know who will bear the burden of offsetting the outstanding.

As, mentioned above, the role of NELMCO is to absorb these liabilities, however what is not clear is the PHCN employees that would be retained upon privatization, what criteria would be used and upon what basis.

The sector indeed is in dire need of an effective change, this intervention is critical to the survival of Nigerian industries and businesses; it will also guarantee an improvement in the standard of living. The challenges mentioned although not exhaustive, the Government is aware of them and the actions mentioned are just some of those that have been put in place to address them and with the establishment of the NERC the reforms are fast becoming a reality.

---