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Why adequate power will remain elusive!

By Les Leba
Inadequate power supply has chocked the development and growth of Nigeria’s economy, particularly in the last two decades.   The Punch Newspapers editorial of 22/3/2010 explicitly paints this reality.  That editorial specifically notes that “Poor power supply has been at the heart of the nation’s wobbly manufacturing sector whose capacity utilization has today plunged to 29 per cent.

The Manufacturers Association of Nigeria has been crying out over continued closure of factories occasioned by a hostile business climate.  MAN estimates that the imperative of providing alternative power supply in the face of power shortages adds up to 40 per cent to the cost of factory products.”

What may not be immediately obvious from the above excerpt is the serious adverse collateral damage to the welfare, dignity and survival of 99% of our estimated 140 million fellow countrymen as a result of grossly inadequate power supply.

Thus, when expected capacity utilization falls to 29%, the first line of victims are the workers, who will be thrown out of jobs in a hostile environment without any social safety net.  The net product of a scenario of increasing unemployment, particularly among the youth will be rising crime wave and palpable insecurity in the land.  Low industrial capacity utilization constitutes double jeopardy for all entrepreneurs, particularly the Small & Medium Enterprises, who are traditionally the major employers of labour in serious economies.

The high cost of lending (double digit interest rates ranging from 17 – 25%) coupled with the inefficiency of low capacity utilisation and high fuel costs needed to run generators inevitably reduce the competitive edge of local industry to the advantage of cheaper, even if inferior, imports and loss of valuable foreign exchange!  The cumulative effects of these burdens are reflected in a contracting industrial landscape and tragic poverty in the land and if the situation does not improve, according to the Punch editorial, the few surviving industries, in spite of our huge market potential will be forced to take their businesses elsewhere outside Nigeria!!

In a report titled  “Jonathan to Implement Electric Reform” (ThisDay 24/4/2010, pg 4), erstwhile Ag. President, Goodluck Jonathan established a ‘Presidential Action Committee on Power’ (PACP) in addition to several other ineffective measures taken in the past on this same problem.

According to ThisDay report, President Jonathan observed at a meeting of PACP in Abuja that “demand for energy is far greater than available capacity,…” and further noted that  “South Africa, a nation of some 47 million people generates about 50,000MW.   For Nigeria, a nation of 150 million people to realize the ambition of becoming one of the 20 largest economies in the world by the year 2020, we should be thinking of producing some 80,000MW as soon as possible.”

Now, the question is, how feasible is it to bridge the gap in just 10 years, as this would require annual supplementary provision of about 7.700MW annually for the next 10 years to supplement the meager current capacity of 3000MW!  Well, the Punch editorial of 22/4/2010 notes that “former President Obasanjo was believed to have spent $10bn to revive the sector through the National Integrated Power Projects (NIPP) without commensurate results.  Under his successor, Umaru Yar’Adua, a special intervention fund of about $5.09bn (N7626.92bn) was disbursed in a futile bid to generate 6000MW by the end of 2009! …”

Thus, Nigeria expended about $15bn to increase power supply by about 3000MW to the projected 6000MW; in other words, each 1000MW cost about $5bn (with the target still elusive)!  In view of President Jonathan’s expectation of 80000MW, a schedule of 7700MW annual capacity expansion will be needed at a cost of about $38.5bn; meanwhile, the total federal budget for 2010 for all government recurrent and projected capital expenses may be less than $27bn, about N4.5 trillion!

It is impractical to expect that all federal revenue projections will be devoted exclusively to providing the required 7700MW annual target as no other expenditure, such as wages, workers emoluments, road construction, provision of health services, education, etc or indeed, legislators’ salaries and allowances can be accommodated because of the huge cost of power capacity building.

Indeed, the additional new money creation of about N500bn (about $3.5bn) which the CBN hopes to make available to finance power emergency projects across the country may rightly be seen as inconsequential and a drop in the ocean!!  The CBN would do better to resuscitate the economy by bringing the cost of borrowing for industrialists to single digit;

i.e. about 4 – 7% rate of interest across the board.  Indeed, if the CBN continues with such unbridled monetary strategy, it would need to create millions of billions of more fresh naira notes to finance other sectors in addition to energy, agriculture and textiles which are slated to receive such largesse under the current dispensation.
The downside, of course, is that such indiscriminate expansion of money supply will herald inflation indices of over 20% and further deepen poverty in the land.

So, in view of the above dilemma, where is the way out?  The answer to this question is probably simpler than expected.  In the same manner that telephone facility was once touted as ‘not for the poor’ by a one-time Minister for Communications, regular access to power supply is now the prerogative of those who can afford generators and pay their own share of the N796bn that the Punch editorial reports that Nigerians spend annually to buy fuel for their generators.

However, the welcome phenomenon of the general availability of GSM facilities now enjoyed by even the ‘poor’ can also be extended to the power sector so that we can witness the same beeline made by foreign direct investment to the Nigerian Telecom sector also in the energy subsector.

In reality, international investors with deep dollar pockets are always on the lookout for commercial gaps to fill and make money and indeed an annual investment of $37bn in such potentially profitable ventures will not make these heavy duty investors to lose a good night’s sleep so long as they have reasonable control over their investments and are assured of the security of their investments.

The fact that investors have flocked into the telecom sector from all over the world is a confirmation that, in spite of infrastructural deficits and social insecurity, the investment climate in Nigeria is relatively conducive!!

But the million dollar question is, why are we not witnessing such positive motions in the energy sector?  Again, the answer to this question is quite obvious; even if potential investors in power supply are assured of the security of their investment, investors are constrained by the absence of a level playing field, particularly with regard to market restrictions which inhibit large scale investments with undue market interference!  For example, while the GSM companies can supply their services unimpeded or without local or limited geographical boundaries, anywhere in Nigeria, the counterpart investor for energy supply does not have such luck or freedom.

This is because, although the issue of electric power supply falls within the concurrent legislative list in the 1999 ‘federal constitution’, and consequently gives the right to make laws on power supply to both federal and also to state government assemblies, it, however, limits the states’ power for generation, transmission and distribution of electricity only to areas not covered by a National Grid system within that state”.

The implication of the above is that in an industrial state like Lagos, one is unlikely to find any industrial or heavily populated captive areas which are not currently covered by the PHCN’s National Grid!!  Thus, potential investors can only project for power generation plants that will serve unpopulated or sparsely populated areas where PHCN is not currently present, if they wish to participate in this market.
On the other hand, investors who wish to fill the gaps in industrial or densely populated areas where there is a huge captive market for its service must restrict its generation to servicing only the clientele within the immediate vicinity of its plant, which is not covered by PHCN’s transmission and distribution network.

Any surplus output beyond the capacity of immediate locality consumption must by law be transmitted through the National Grid, which is managed by the PHCN or any of its many subsidiaries!  Readers will agree that this constitutional provision reduces the possibility of the commercial advantages of large scale production, which potential investors would naturally expect to enhance profitability and competitiveness of their services.  Thus, investors can generate power but cannot control transmission or distribution freely within the state or the nation!

We can imagine that the Nigerian Telecom market would not be so successful if service providers such as MTN, Zain, etc are restricted to cover limited markets such as local governments or community development areas, and if they had to channel any available excess capacity through NITEL!!

The cost of creating self sufficient mobile network systems exclusively for each ‘square mile’ or local government would have kept such GSM service providers outside the Nigerian market and we would all be made worse off by such constitutional commercial impediment!

It will be clear from the above analysis that adequate power supply  can only  become available when the 1999 constitution is urgently reviewed to allow states to diligently assess their individual power needs and invite bids from potential investors to satisfy their state requirements.  In such event, a state may pick any reasonable number of power providers who will enjoy a captive market for, say, 10 – 15 years.

Each successful service provider will, of course, be required to pay the partner State a fee similar to the $250m paid into the federal coffers for the opportunity of participating in the potentially lucrative Nigerian GSM market.

Thus, the state will earn revenue, both from such down-payment and other taxes; industries in the state will be revived and more Nigerians will have a source of livelihood.  In addition, the state will also benefit from income taxes from a growing population of employed citizens.

Each state should also have its own independent Electricity Regulation Commission (without an overbearing current federally controlled NERC) to moderate pricing and other activities of the services providers in line with best practices and social welfare of its citizens.  Of course, excess power output in any state may be sold to contiguous states at competitive market rates or mutually agreed terms.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.