Still on remedying the power sector
In reaction to my article on “Remedying the power sector for service delivery”, an interesting and well thought-out piece by Carl Umegboro, published in several national dailies exposed the realization of a comical truth; that “Up NEPA” is among the first few words mastered by infants in Nigeria. A phrase unanimously chorused even by adults, whenever there is flash of power especially after long hours of no supply.
The stimulating piece rightly acknowledged that tariff adjustments, government bailouts and subsidies are “positive ideas” towards solving the sector’s liquidity issues. It further posited that these ideas are “not feasible means of revenues” and advised DisCos to first, “Consider all unconnected population to the grid as neglected, untapped or unexploited revenues”.
Incidentally, a high number of unconnected populations without access to electricity are majorly in rural areas. Emphatically, Section 88 of the Electric Power Sector Reform Act (EPSRA) 2005 established the Nigerian Rural Electrification Agency responsible for promoting, coordinating and administering electrification of rural and unserved population. In other words, electrification of “unconnected population” is outside the purview of DisCos responsibilities.
Additionally, the concept of sourcing revenue through this medium does not support economies of scale. Due to the sparse nature of rural areas, they are powered by 33KV voltage level compared to urban areas that can be powered with 11KV voltage level. Impliedly, rural areas may consume higher levels of electricity making connection to these areas more cost consuming coupled with reluctance to pay electricity bills by majority of the rural population as they consider it a social benefit.
Until urbanization rates increase, grid extension is not cost-effective for providing access to electricity and therefore, may not happen without provision of subsidies or government funding. This is supported by the provisions of EPSRA which provides eligibility criteria for electrification of unconnected population to the extent that such activity must demonstrate technical, economic and financial viability for a sustained period. Until done, DisCos may be unable to extend service to potential rural customers as a way of increasing market share and earnings.
Asserting, “the key factor affecting the sector is the defective privatization that myopically mortgaged it to the people without in-depth knowledge of the sector unlike the government’s apt action in the telecommunications industry” appears to be an indictment on the National Council on Privatization and the Bureau of Public Enterprise. They are required to conduct its affairs with high levels of transparency and accountability by ensuring investors meet the set technical and financial criteria.
Conversely, comparing the power sector with the telecommunications industry is an unfair analogy. For example, the private wireless telecommunications companies in Nigeria have operated for 18 years (since 2001) while the power sector postprivatization era is 5 years (November 2013). Similarly, big telecommunication giants like MTN is a product of foreign direct investment characterized by deregulation of the telecomm sector and not privatization. Undeniably, the defunct NITEL is still battling the vagaries of an unfortunate privatization exercise.
Furthermore, the telecom sector tariff was market determined (and relatively high) at inception giving these companies time to stabilize financially. Irrespective of process, profit and return on investment are major motives and guide behind prudent private sector investments.
Over 40 years of underinvestment in the sector cannot be remedied by private finance alone. Given its importance, government support for the sector is imperative. Development finance institutions like World Bank advised FGN of the need to support the sector until service delivery levels improve to the point where electricity customers accept automatic tariff adjustments because of improved service. At privatisation, FGN conceded the need for this support and committed a financial sum post-privatisation, which is now reneged. Till date, FGN retains 40% stake in DisCos and if DisCos declare profits, 40% of agreed dividend goes to FGN.
Suggesting that, “DisCos as public limited liability companies can effectively source for funds from the public for enhanced capacity on operations” is brilliant but currently impractical. While public funding is an efficient means of raising funds by public companies, DisCos do not meet the criteria for enlistment on the NSE yet. DisCos are not yet profitable; an attempt to issue IPOs in the face of liquidity crisis and non-cost reflective tariff will fail until they achieve financial viability and profitability. Companies seeking admission to the Official List of the NSE must comply with SEC’s Rules, Companies and Allied Matters Act, Investment and Securities Act and other relevant laws.
I agree in entirety that the system should be “firmly run on accountability and prudent management” by DisCos tightening all loose ends to enhance effective ATC&C loss recovery through reinforcement of the revenue protection arm to checkmate bypasses and illegal connections. By extension, also checkmate their corrupt and unscrupulous workforces that device means to divert company’s earnings resulting in gross losses.
In conclusion, for DisCos like any other real business to thrive, cost reflective tariffs must be set and products sold at marginal profit. A cost reflective tariff reflects the true cost of producing and supplying electricity; otherwise, Government subsidies should cover the variance between the current tariff and the true cost of electricity supply. Importantly, obtaining commercial loans is also not a solution to the sectors lingering liquidity issues. In the short term, DisCos should focus on customers, service improvements, revenue and profitability as these serve as foundation for reaching longterm fundable milestone.
Nkemjika Nnenne wrote from Abuja.