Electricity In Nigeria, Buhari’s Biggest Test Other than Oil

Electricity In Nigeria, Buhari’s Biggest Test Other than Oil

In his candidacy declaration speech on Sept. 18, 2010, former President Goodluck Jonathan said, “We could begin a turnaround in our power sector by involving the private sector in power generation and distribution. As you can see from the lower quantities of diesel that you are buying today, power generation has significantly improved.”

And in the conclusion to the speech chanted, “We will fight for all Nigerians to have access to power.”

Jonathan won the election in 2011 with such promises. He could not fix the power sector and voters punished his party in the 2015 election for more than simply not keeping his promise to turn around the power sector.

Electricity in Nigeria

In 2013, six spinoff companies from the Power Holding Company of Nigeria (PHCN) were sold by the government to a local consortium in an effort to privatize the industry.

Daily peak generation remained poor at 3.4 GW as of September 2015, compared to approximately to 3.7 GW in September 2014. Nigeria’s national goal was 40 GW of operational capacity by 2020, bolstered by the new state-funded National Integrated Power Projects (NIPPs) and the private sector independent power projects (IPPs).

But these projects have struggled to make headway, with officials tapering the goal down to 28 GW by 2020, and research analysts generally projecting 13 GW by that date.

The National Integrated Power Projects started in 2004, projected to add 10 new stations and 4.8 GW by 2012. Today, only five are complete, two are half finished, and three have not started construction.

Less than 3.5 GW has been added in that period.

Independent power projects have not fared much better with the biggest ones coming on line from exploration and production (E&P) companies — Eni, Shell — due to long-standing relations with the Nigerian National Petroleum Corporation (NNPC).

Transmission, partially privatized in 2012 through the Manitoba Hydro International management contract, has improved. Total or partial system collapses declined 43 percent since 2012.

But the capacity, physically built to support 5.5 GW, cannot handle load levels above 4 GW with critics largely questioning the funding of 100 percent state-owned Transmission Company of Nigeria (TCN).

The 11 distribution companies privatized between 2012 and 2014, have struggled, reportedly losing more than $100 million per month according to their spokesman.

What can Buhari do?

There are four problems plaguing the Nigerian system that ultimately hurt the privatization effort.

  • The long term investment needs are tens of billions of dollars (which is high risk for most equity investors).
  • Tariffs are too low to incentivize investment across value chains.
  • Security risks.
  • Commercial challenges in the Nigerian governmental systems such as non-payments and lack of supporting local banks including African Development Bank.

Cutting fuel subsidies would go far in creating extra cash for investing in other sectors. The cost for the government is hovering around $18 billion. Some analysts suggest it is higher than $20 billion.

Regardless, the money could better serve the economy through investment in other value chains or through subsidies to low-income households. A new system will ultimately face similar criticism but the current environment begs for change.

President Muhammadu Buhari has transferred pipeline surveillance contracts to the security forces. A new power peak generation of 4.8 GW was achieved in August for the first time in three years.

Research analysts suggest that a reduction in crude theft could conservatively boost Nigerian revenue by 10 percent (which suggests a bump north of $2.5 billion in the fiscal year ending June 2016).

Above all, the new regime can build government capacity to finish the National Integrated Power Projects, to strengthen regulatory capability and to be a better economic partner. Nigerian entrepreneurship and local fortitude is, at its core, looking for a supportive partner in the government.

Buhari’s new cabinet engenders new hope for Nigerians open to the change and steers the overall economic system in the right direction. One need only see how operations — refineries, power — changed in the first two months of his presidency.

Yet no voter can ignore the reality of Buhari’s challenges in improving power in addition to other sectors. That reality includes a depreciating naira, low oil prices, and an entirely new regime with few remaining officials from the previous leadership. Just a little better attitude towards spending and finishing projects could go a long way.

Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at kurt.davis.jr@gmail.com.