This Day (Lagos)

30 September 2012

Nigeria: Making Sense Out of Power Sector Privatisation

Photo: Leadership
Electric transmission lines

opinion

If ever there was a time to emphasise competence driven by knowledge more than a political call or sentiment for re-invigorating the nation's battered electricity sector-this is it. The National Council on Privatisation (NCP) last week approved the technical bid evaluation of 31 firms for the various distribution companies. The financial bid opening has been scheduled for October 10, upon the submission of their individual post qualification bonds.

However, industry watchers said the challenge is making sense of the whole process, finding connection and getting those that understands the complexities to do the job.

But experience of past failures of power privatisation elsewhere in the world should be instructive for our nation. The experts maintain it is vital the need to appropriately choose distribution companies with the capacity to make far reaching changes (which is the traditional focus of the electricity sector reform) in the way electricity is delivered to consumers, companies with on-the-ground experience that can focus on integrating the various aspects of utility operation in an efficient manner...things such as network rebalancing, accurate metering, revenue management and asset optimisation.

The investment that is needed is huge and we are pleased that government will open the commercial space for quality private sector-led intervention. The Federal Government has said it would no longer invest in the distribution companies once sold but it would be holding 40 percent shares. That means that those lined up to run the distribution of electricity to consumers and households must have the capacity to deal with the converging priorities that will challenge the urgency to address distribution.

They will be looking to make that fiendishly complex investment to accommodate the problems (excessive losses, broken lines, dead substations) created over the years, in the aging key assets to reduce maintenance costs and improve reliability.

The issue of local knowledge and the support of local authority is critical for the success of the business. This brings up the case of distribution companies located in the difficult and trouble areas like the Niger Delta Region, Lagos, Kaduna and Kano, particularly Port Harcourt and Benin Discoms. The support of states is vital for seamless synergistic expansion, offering to provide state assistance in the right of ways issues, legislation against electricity theft and policing to arrest electricity theft and improve collections.

They will have to invest in substations and lines configuration to improve reliability and narrow the increasing customer expectations as well as narrow the gap between urban and rural expectations. There has to be investment also on technology to facilitate efficiency and demand management.

It is important for the authorities to duel on technical plans, relevant experience of the technical partners with regards to the size of Discoms they have operated in the past as against their 5year loss reduction figures to make their pick. Studies have shown clearly that optimization of losses, particularly technical losses in electricity transmission and distribution is an engineering issue which requires huge capital outlay, logistics experience involving also proper tools of power systems planning and modeling.

Again, the loss reduction proposals should be viewed as neither here nor there, because there are too many unknowns to hold winners to their loss trajectories as proposed by them without almost immediate adjustments. Indeed, it is not certain the power regulator already have a way to monitor the loss proposals by prospective winners nor do they know the current state of the losses. This indeed could subject the entire exercise to negotiation and frequent adjustments.

There are global examples of bad choices that have truncated programmes for the electricity sector. India is currently battling to stave off crisis in the sector despite investment made over the last two decades. The recent power outage underscores the brewing crisis in the country's electricity sector.

The country's rural electricity distribution network ranks as the most neglected infrastructure in Sub-Saharan Africa and ranks also as one with the highest inefficiencies, where the World Bank estimates that Power Holding Company of Nigeria (PHCN) is capturing only 25 percent of revenues owed. PHCN failed abysmally to fulfill its responsibility to maintain the infrastructure, which means also that the in-coming distribution companies are entering new high-risk area.

The need to expand the country's distribution infrastructure as well as install new distribution infrastructure to meet the population and demand growth will also require continued investment.

There has to be continued investment in voltage distribution networks, particularly in theft-prone areas as well as in the replacement of old meters with accurate electronic meters.

They will have to invest in substations and lines configuration to improve reliability and narrow the increasing customer expectations as well as narrow the gap between urban and rural expectations which the states will play a significant role in handling the later. There has to be investment also on technology to facilitate efficiency and demand management.

They will have to invest in personnel and change management, they will have to invest to set up direct and open contact with communities, their leaders, and the authorities involved in order to create awareness about the commercial nature of electricity as a 'good' with a price, they will have to invest in efficiency and educate consumers on the culture of regular payment of electricity bills and preservation of electricity infrastructure.

And as these companies make these investments in new infrastructure, they will be focused on new technologies, advanced metering infrastructure (AMI), automatic meter reading (AMR), communications networks and database systems that will modernize the grids.

Analysts reckoned that the electricity companies will have to spend well over N200 billion to re-build and strengthen distribution systems in the next five years, in order to maintain reliable supply. Only financially and technically viable companies with relevant experience can address this huge investment expectation to meet at least 50 percent electrification target in the next five years.

There are global examples of bad choices that have truncated programmes for the electricity sector. India is currently battling to stave off crisis in the sector despite investment made over the last two decades. The recent power outage underscores the brewing crisis in the country's electricity sector.

The country's power ministry is saddled with dealing with over $32 billion debt of some of the distribution companies who can't pay generation companies to get light to consumers. The current status of the companies is rubbing-off negatively on the generators with negative consequence also on the financial sector. The Central Bank of Nigeria's (CBN) directive a fortnight ago on debtor companies thus underscores the need for careful scrutiny of the financial sustainability of the distribution companies shortlisted for the October financial bid opening. In all the CBN barred banks in the country from extending loans to 113 companies and 419 directors and shareholders of the companies listed.

Two of such companies barred are in the shortlist while some directors and shareholders barred are said to have substantial interest in some of the shortlisted distribution companies as well.

It is also not enough for the authorities to duel on technical plans or five year loss reduction plans to make their pick. Studies have shown clearly that optimization of losses, particularly technical losses in electricity transmission and distribution is an engineering issue which requires huge capital outlay, involving also proper tools of power systems planning and modeling.

Again, the proposals should be viewed as neither here nor there, because there are too many unknowns to hold winners to their loss trajectories as proposed by them without almost immediate adjustments. Indeed, it is not certain the power regulator already have a way to monitor the loss proposals by prospective winners. This indeed could subject the entire exercise to negotiation and frequent adjustments.

Therefore, key success factor that must be taken into account is which firms and consortiums have the financial muscle, experience and sustainable business model do the job best. The other fundamental factor must include local on ground experience.

The reason is that the power utility sector is laden with serious challenges to successful privatization of the distribution companies that demand careful consideration by the authorities before the award of each and every franchise.

The distribution companies will face political risk, they will contend with the restiveness in the north and Boko haram and ransom demand in the south. They require the local experience to deal with disputed lands and as one analyst put it; local taboo/petrified lands, hostilities towards utility staff, lack of bill payments by some communities who have enjoyed free electricity, illegal electrical network activities, rough terrain, ancestral burial grounds, tribal and communal strife.

All of these could hamper access to project sites and restrain the number of expatriate hands that could be sent as utility business experts into seemingly hostile territories.

But one of the most crucial factors must be proven partnership link with state governments that are closer to the grassroots. The state governments know the people and cultures and would be more willing to assist in providing peace and security, land and right-of-way access and local law and authority than if they are not stakeholders and part of the process.

Some companies already display this trait. One of such shortlisted for the Benin distribution has composition with four state governments lined up as partners and equity investors. The States include Delta, Ondo, Ekiti and Edo states. The states offer opportunity for synergistic expansion, offering to provide state assistance in the right of ways issues and with legislation and policing to discourage electricity theft and improve collections.

That should be the way forward.

Akinluyi wrote from Lagos.

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