In this Tuesday, Aug. 24, 2010 photo, Esther Jacob sells cassava flour by lantern light in Lagos, Nigeria. Nigeria's president announced a multi-billion-dollar plan Thursday to repair and privatize the oil-rich nation's decrepit national power grid that forces people to rely on private generators to provide electricity. (AP Photo/Sunday Alamba)

There is a lot of chit-chat that one of the ”ministerless” wonders of the Buhari administration electricity supply to Nigerians across the nation have “improved”. The question is have the blackouts and brown outs stopped? Or has the kilowatt-hour per capita consumption measurably improved? This is an indictment of successive governments that have for decades underdeveloped the power sector then privatised it expecting magic.

The turn of the 21st Century was an interesting time for energy (electric power) development in Nigeria and elsewhere. Independent power production (IPP), build-operate-transfer (BOT) and project finance (PF) where the new way Nigeria was to finance, produce and supply electricity to its citizens as dictated by multilateral agencies.

Electricity was going to be run by “market forces”. However, the Olusegun Obasanjo administration thoroughly squandered the best opportunity revive the sector which other developing nations had successfully harnessed. One wonders when such an opportunity will manifest itself again for Nigeria.

Nigeria does not have “constant electricity” (i.e. uninterrupted power supplies of electricity to those who can pay for it) today because of poor governance and failed management. According to several executives of energy companies and financial institutions the way things are done in Nigeria is not conducive for proper foreign investment in the electric power sector. Nigeria as a nation presents serious investment risks to foreign investment consortia.

There are hardly any nations in this world that had their electric power sector developed to the current level assurance without government ownership or support. Even when private capital was the dominant paradigm in nation there was always strong government intervention (funding, financing, R&D) by way of strong industrial policy to build the electric power sector. By implication most nations in the First World protected their nations electric power industries against “risks” of failure. It is a sheer inappropriate expectation for foreign concerns to invest and take on a myriad of risks in providing adequate electricity supplies in Nigeria. The perception of risk for electric power sector in Nigeria is particularly negative.

And remember the Nigeria government is not willing to invest in the power sector, it has been privatised. The cost of power project development many insist on is no longer the government’s problem.

We must remember “perceptions” of risks about investment projects in a foreign developing nation can be either exaggerated or underplayed depending on the industry and the investment size involved. Investors will not mind going into a violent war-torn nation to extract diamonds and oil. However, they will not take the same risk with electricity supply. However, it will be important to examine some of the risks that discourage foreign investment on the template of a privatised industry, non-technically.

Country risks are usually political. They include the likelihood of war, civil strife, expropriation, strikes and coup d’etat,  all leading to force majeure situations. The conflict between Boko Haram or Niger Delta militants and government forces present serious risks to foreign investors. Security advisers will also inform foreign investors of the rapid potential capabilities of the Al-Majiri, the Odua Peoples Congress (OPC), Bakassi Boys and youth movements.One example of how such was mitigated was the Enron-AES IPP in Lagos which was set up in 30MW ocean going generation barges which could be easily towed away by a foreign navy in the advent of serious violence or sabotage.

Corruption in Nigeria also presents serious political risks. Corruption often enables rent-seekers in power to sign fraudulent contracts that can be easily rescinded by a new government causing major losses to investors. Also the government just like under state-ownership would have to eventually provide large subsidies to fund the electric power sector. The governments of most developing nations often struggle with such an unforeseen contingency and since foreign investors have commercial not social interests in the host nation, such presents risks to them.

Economic risks involve the Nigeria government’s ability to pay for electricity supplies, foreign exchange movements, the size of the market, fuel prices, revenue collection from end-users (who pay for the projects). The sliding naira is not a good incentive to investors neither is the sheer dependence on oil revenues. Dependence on oil means few industrial consumers in an already small market.

The entrenched culture of energy end-users’ reliance on personal generators is a strong but indirect risk to the revenue collection process. The incidence of power theft is very high and prepayment metering has not solved the problem. The incidence of vandalism and equipment theft is also high. Does it make sense that end-users have to pay for blackouts and brown outs? Furthermore, the payback period for electricity projects exceeds a decade which is a very long to an investor in a nation beset with political and economic risks.

Project risks relate to the actual projects. Once projects are located on land in a host nation they cannot be removed escalating any perception of risk investors might have. Nigeria is notorious for incomplete projects and as a result investors have low confidence in local contents (i.e. entrepreneurs) in setting up operational projects. Import licences and port corruption can affect the smooth running of a power project from an operability and maintenance perspective. Then there is the lack of trained local personnel and the high cost of expatriates is also a risk.

With the shape the transmission network in Nigeria generation companies might not be able to deliver the electricity they competently generate with any significant efficiency and the same goes for distribution companies; such is an embarrassing risk. Then there is the of perpetual risk community extortion from project managers as protection money by youths and elders.

The list of risks are not exhaustive. Nevertheless, in order to mitigate or eliminate the aforementioned off-putting risks besetting the electric power sector, Nigeria needs consistent and constant  good governance delivered within the framework of robust enforceable institutions not just a good looking risk management framework. With the best efforts and intentions good governance and far-reaching enforceable institutions do not manifest overnight; the cost such a change to Nigeria would be monumental and trying.

Till such a time Nigeria meets the challenges of investor friendliness adequately constant electric power in Nigeria will remain a very risky business.

Grimot Nane

Comments
  1. ASM says:

    Gangrene has set-in in the chronic wounds of the Nigerian power sector that the only solution is to amputate – but how?

    Like

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