The global power sector reform trend, initiated in the 1990s, aimed to privatize state-owned utilities and introduce competitive markets. This approach, driven by institutions like the World Bank, was based on the assumption that private capital would bring efficiency and solvency. However, a 2020 study by Foster and Rana found that only a dozen out of 88 developing countries that adopted this model completed the full reform. Nigeria, among them, implemented the reform but encountered significant challenges.
The Indian states of Odisha and Andhra Pradesh provide contrasting examples of power sector reform. Odisha privatized its distribution companies in 1999, but the experiment failed due to inaccurate baseline data and a lack of political consensus. The state's distribution networks were eventually taken back amid litigation. In contrast, Andhra Pradesh kept its distribution network public but managed it like a business, focusing on corporate governance, transparent performance tracking, and investment in feeder metering.
Nigeria's power sector privatization, completed in 2013 under the Goodluck Jonathan administration, followed the textbook model. The Power Holding Company of Nigeria (PHCN) was dismantled, and six generation companies (GenCos) and eleven distribution companies (DisCos) were created. However, the new DisCos lacked the financial capacity to sign long-term contracts, leading to the creation of the Nigerian Bulk Electricity Trading Plc (NBET) as a stopgap.
The NBET, intended to be temporary, became a permanent middleman between GenCos and DisCos. With NBET in the way, there was no direct commercial relationship between power producers and distributors. DisCos collected only a fraction of their billed amounts, and retail tariffs were kept below cost, leaving NBET to fill the gap. This created a circular-debt crisis, with NBET relying on interventions from the Federal Treasury and Central Bank of Nigeria.
The Electricity Act of 2023 and the Nigerian Electricity Regulatory Commission (NERC) are now pushing for a correction in Nigeria's power sector. The strategy is to end NBET's role as a single buyer and promote bilateral contracts between GenCos and DisCos. This move aims to create a more efficient and sustainable power sector, with a focus on corporate governance and cost-reflective tariffs.
Minister of Power, Joseph Tegbe, and NERC are driving the reform efforts, which include unbundling NBET and promoting a competitive market. The goal is to increase private sector participation, improve efficiency, and provide reliable electricity to households. The reform also aims to address the financial risks associated with the power sector and reduce the burden on the sovereign balance sheet.
The success of Nigeria's power sector reform will depend on its ability to learn from global experiences and adapt to its unique challenges. The country's experience with privatization and the single-buyer trap provides valuable lessons for other developing countries. With a focus on corporate governance, transparent performance tracking, and cost-reflective tariffs, Nigeria can create a more efficient and sustainable power sector.
Key points
- Nigeria's power sector reform is shifting focus towards bilateral contracts and unbundling the Nigerian Bulk Electricity Trading Plc (NBET).
- The country's experience with privatization and the single-buyer trap provides valuable lessons for other developing countries.
- A focus on corporate governance, transparent performance tracking, and cost-reflective tariffs is crucial for a more efficient and sustainable power sector.
