Constant Electricity in Nigeria is Very Risky Business

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’s 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. Electricity is now an “avoided cost” for the governemnt; is not willing to invest in the power sector, so it has been privatised. The cost of power project development many  Nigerians expect the government to shoulder is no longer the its problem but it continues to use electricity as a potent political tool.

The turn of the 21st Century was an interesting time for electric power development in Nigeria and elsewhere. Independent power production (IPP), build-operate-transfer (BOT) and project finance (PF) were the new way Nigeria was going to finance, produce and supply electricity to its citizens as dictated by multilateral agencies like the World Bank. Electricity was going to be run by “market forces” and the invisible hand would do its magic. However, the Olusegun Obasanjo administration thoroughly squandered Nigeria’s best ever opportunity revive and develop the electric power 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. The vision of industrialisation / development without adequate even surplus supplies of reliable electicity is imposible and keeping the power sector going is risk-laden no  matter how developed a nation is. Constant electricity is a function of risk management and robust institutions. According to several executives of international 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 of assurance without government ownership or support. Even when private capital was the dominant paradigm in a 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.

Let us look at 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 several youth movements if they take up arms. One example of how such a risk was mitigated, is exemplified by the Enron-AES IPP in Lagos which was set up in a series of 30MW ocean going generation barges which could be easily towed away by a foreign navy in the advent of serious violence or sabotage in Lagos. Nevertke less not all power projects in Nigeria can be located by the sea.

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. The government just like under state-ownership would have to eventually provide large subsidies to fund the electric power sector for all its attempts to avoid the cost of developing electricity industry. 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 burdens presents risks to them that are discouraging.

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 and a lack of industrial diversification of the economy simply means few industrial consumers who can better pay revenues for massive grid developments in an already small market.

The entrenched culture of electricity end-users’ reliance on personal generators is a strong but indirect risk to the grid-supplied electricity development and revenue collection process, if it is available. Unfortunately, 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 time 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 undertaking incomplete projects and as a result investors have low confidence in local contents (i.e. entrepreneurs) in setting up operational projects. The Nationa Integrated Power Projects (NIPP) failure is a classic internationally cited example.. Then there is the lack of trained local personnel and the high cost of expatriates is also a risk; skill-shortage is a far bigger problem than the public can imagine. With the atrocious shape of the electric power 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.

These listed risks are not exhaustive. Nevertheless, in order to mitigate or eliminate the aforementioned off-putting risks to investment besetting the electric power sector, Nigeria needs consistent and constant  strong institutions of governance and much seriousness. Till such a time Nigeria meets the challenges of investor conduciveness, adequately constant electric power in Nigeria will remain a very risky business.

Grimot Nane

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