Amadi: We’ve Had Four Wasted Years in Power Sector

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A former chairman of the Nigerian Electricity Regulatory Commission, Dr. Sam Amadi, in this interview with Chineme Okafor, says the country’s privatised electricity market has performed badly in the last four years. In fact, Amadi argues that the future of the sector is very bleak. Excerpts:

What do you think may have gone wrong with a market that was reformed for productivity and efficiency?
There are historic and new problems. Historic problems are that I believe the design of the electricity market in the reform has some faults which relate to some fundamental assumptions. The reform was designed at the height of what is known as liberal market reform. In the third world, that reform had too much faith in the market. Most economic underdevelopment were described as market failure because of the failure of government ownership of means of production, and based on that, the diagnosis in the National Electric Power Policy (NEPP) and the prescriptions were a bit overboard in terms of their ideological character.

The fact that it was a reform borne out of deep-seated ideological problem with the state and over confidence in the role of the market created problems; and some assumptions especially that when you privatise and liberalise, the private sector investors will have enough incentive to invest heavily in capacity growth are from evidence flawed in my view.
There was also the assumption in the reform that somehow private investment or capital will drive up corporate practice quickly and management change such that without a very strong regulatory framework and hands-on public sector, the electricity market can exist as an efficient island in the midst of inefficiency, and that again was a wrong assumption.
These assumptions coupled with very poor project management created failure even before we left. First we had a false hypothesis about how the market worked, and then poor project management.

But, did we skip any steps in the reform process?
We skipped some vital processes in the transition from liberalisation to privatisation. The notable phase that we skipped was corporatisation and commercialisation. Even as flawed as the reform plan and Act was, the idea was that when you liberalise and unbundle the public monopoly, you will now fully corporatise them to engender efficiency and full commercialisation after which the option of privatising them arises. So by 2005 when the Act came into force and NERC became functional in 2006, the PHCN was established but we did not fully corporatise and commercialise which would require that you create a fully autonomous board for the successor companies of the PHCN and independent management team. They will then run as fully corporatised and commercialised entities and that would have given us the opportunity to build good corporate practices, audit accounts and create financial viability in terms of footprints and recoveries so that they become at least efficient going concerns and you’ll privatise entities that are already performing in the market because you want to acquire greater efficiency and take off government bureaucracy from the balance sheet and transfer ownership to the public sector who will now take ownership and bring the finance.
However, we continued to run them as part of the ministry of power; made policies for them; fathered them; subsidised them; and created moral hazards such that they were not exposed to any degree of market discipline.

Was the idea of corporatising the successor firms originally in the NEPP and reform law?
Yes, it was part of the NEPP and structured aspects of the EPSRA. The idea was to unbundle and corporatise which was why it was called Power Holding Company of Nigeria, 18 companies with different corporate entities. It was done in a formal sense but they were all incorporated that way but were managed and centrally administered in the ministry of power.

And, was this done deliberately?
Deliberately or creeping bureaucracy. Because the government did not first respond to regulatory challenge by connecting everything to a regulatory entity. The idea for the ministry of power was a policy making entity distinct from the operations of the market. However, we saw where these entities that were supposed to be independent, were now working as units of the ministry of power.
From 2005 to 2010, when we came in, it was basically a dead-end. No improvement both in the financials and corporate behaviours of these entities. Even until 2013 when they were sold off to the private sector, there were still little improvements.

We commissioned the first audit of accounts of the PHCN companies for the first time – because there was no data of their operations, and what that meant was that these were thoroughly inefficient companies. By 2013 when we were selling, we sold entities that were not attractive to the market and they were basically dumped to people who had little knowledge about the market and had not much to lose and were capable of asset striping. So, we sold on the wrong assumption that the private sector will come with equity and improve it but we have seen that they cannot come with that equity because they all bought with borrowings from the banks and cannot access capital.

How about the sequencing of the reforms, was it proper?
Some people have argued and I am one of those, that perhaps we should have phased the privatisation process. Sell those that were a bit ahead of others in corporate efficiency and create competition between them and sell off overtime, but not necessarily the idea of divesting no matter the results. Power all over the world is not an ideal product for privatisation because of several other positive and negative externalities like the level of increment in cost reflectivity that the private market might demand in a country like Nigeria with several risks, might not be feasible given the socio-economic conditions.

There are many public interests that the power sector caters for, these are things that necessitate a strategic process on how you privatise, you phase them, but we did not phase ours. Phasing would have allowed us to think about what we sell first. Again, the model for the sales was problematic, some argued that government should have sold on notional prices with secured undertaking to make defined and quantified investments. Instead of extracting money, we could have given it up based on verifiable investments they can make and managerial competence they can bring. When NERC did its ‘fit and proper’ test, none of the entities qualified, but we discovered later that the BPE lowered its entry level to allow the investors in and we sold to people who had little financial assets to invest and didn’t have too much managerial competence to recover losses. So, all these came together to create problems post-privatisation, and what we now have as an almost collapse sector.

What about projects like NIPPs that were designed to provide buffers?
Even projects like NIPPs which were to provide buffer, so that while we made gains from the privatisation efforts with about 10,000 megawatts between 2005 and 2015 from its first and second phase, have not delivered up to 4,800 megawatts fully in the first phase due to corruption, inefficiency and poor project management. That should have actually happened in 2010.

So, imagine adding 10,000 megawatts to this market, we would have effectively been regulating a 10,000 to 15,000 megawatts electricity market and that would have helped create enough power to encourage payers to pay more, as well as provided lower tariff and perhaps enough money for investment in metering and network expansion. That project failure and design and methodology failures created the crisis we have now.

Experts have largely blamed the government for the problems of the sector. Before you left, what red flags did you see that are obvious now?
I saw this ideological obstinacy around the market. I had my doubt about whether a country should rely on private sector for its power growth. I think power globally has grown from public sector investment. When countries have some capacity, they now go for factor productivity efficiency to make sure that one kobo gives you 100 per cent yield, and so, efficiency has be dynamic as against factor productivity.

We can bring private sector in, but they may not be able to create the level of investment we need, and even at that they may not be efficient investment at the beginning. We took our design from the UK but by the time they started their privatisation in earnest in 1991, they had already established large quantities electricity in the market. They were only inefficient in the sense that government production was inefficient and needed to bring in private investment but they had capacity while we didn’t have capacity and it was wrong.
I knew we were later not going to have capacity because the private sector would not find enough attraction to make the level of investment we need to grow into any of our national economic visions. Apart from the oil majors, how many megawatts have come into the sector since 2005? If you look at the level of non-oil investment in the sector, you will find that it is very negligible which suggests that the private sector cannot be the driver of electricity growth, it has to be the government leveraging on private market.

We see a model of development in East Asia where we see Govern through the Market (GM) as against Free Market (FM) model. I prefer the govern through market in the sense that government is the one strategically making decisions about allocation and leveraging on private skills and financing as well as providing comfort for those private persons to make decisions. For instance, when going into renewables, government should not wait for the private sector, but go in and stimulate it for the private sector. So, I expected that these private companies will not be willing and unable to expand their exposure to the sector because of the risks that are not been covered and at that point government continuous dependence on them would hurt our strategic objective. I also expected that the power sector would now be a site for all kinds of political meddling if the regulator is not well managed, and that is dangerous because the Nigerian policy management has been easily manipulated by private business interests – it is easy for businesses to capture policy makers, and they strategically misdirect policy making. I knew that at some point, there will be this torpedoing or NERC will be constrained by hurdles. I also expected that at some points, the government will fall out with the investors because they would not have been able to carry out the promises they made. There was also the risk that politics will overcome real positive thinking in the sector, gimmickry and short-term political gains will now crowd out strategic objectives.

Did this government contribute to this seeming torpedoing, especially of the NERC?
When they came, there was a sense in which they swallowed the lines and fictions of the Lagos business class, which was that the regulator was killing the market, and they should give them the opportunity to grow it and they were swept off their feet. But this sector has to be fixed by an intelligent and capable public sector. What that means is that the electricity sector is not for easy experimentation because it has huge public good asset. It needs to be regulated properly and I had fears that the sanity we achieved briefly before 2015 will be carried away by the public sector sewage we were trying to clean out, and then fire NERC off the line.

So, what has not been done in the sector?
What we have not done in this sector apart from shouting down on Discos and others is that we have not used strategic regulatory tools to put upon them bearable, but significant burden. And after now, it is the right time to review their agreements like their franchise areas which are too large. Of course, the Act talked about unbundling retail and distribution so that customers can have choices on level of service supplies. There are many things that can happen in this sector – we need an active regulatory process that will work with public spirited policy framework because we have had so much of self-interests masquerading as public interest – too much political projects here and there that cannot expand the network or create capacities. They are at best soundbites for political noise.

Some experts believe the last four years of this government is a wasted one for the power sector, do you believe it is?
I think in a way it is a wasted four years. I wrote over three letters alerting the government that our tenure would be over, and it took government too long – even the stop-gap measure we did was not right, there was a discontinuation of regulation which weakened a lot of things. At the tail-end of our tenure, we were doing forensic regulation and moving away from political issues, and more into the model of problem-solving that the Presidential Taskforce on Power that Prof. Barth Nnaji headed used. If we had a team come in immediately and were debriefed, there would be strong continuity in sector regulation as designed originally. Government missed that boat completely and it took them time to confirm appointees. NERC lost steam, there was degradation and downgrade of policy and regulatory framework put in place and the industry had gone higher than the regulator in terms of knowledge base. The industry has very little regard for the regulator; and then the ministry almost usurped the regulator further reducing the prestige and credibility of the regulator – which is the key thing about regulation.

So, government’s commission and omission created a state where NERC was unnaturalised, and no longer had the clout to regulate the market. Today, with a wonderful staff, I think the NERC no longer have a full-arm embrace of the sector. There are rejections which have resulted in lawsuits because regulatory stability and authority has collapsed partly due to government’s policy failure and failing to empanel a full regulator in time.
Where then is the sector headed if all these are not fixed quickly?

I think the future of the sector is very bleak. We are not seeing technical improvements from a technical market based approach. We have no capacity growth, but flash in the pan improvement. We have not seen qualitative improvements even in regulatory perspective. We have also seen the regulator drop in terms of credibility, public and industry acceptability, as well as authority. Financially, it is not looking good for the sector. At some point when we were there, there were up to 80 per cent remittance level and to think that the debate has gone further down four years after means that where we are now is similar to where we were in 2013, when out of fear we enabled the interim market rule. So, evidence- based, we have moved backwards and it is fair to say we have not made progress within the last four years. In a chart of one to 10, we probably have recorded just two points, which is very poor because growth in four years after privatisation should be greater than growth in 10 years before privatisation when we did a lot of work and should be seeing rapid growth.