Case Study: Mini-Grid Solution to Corruption in Nigeria’s Electricity Sector

Nigeria’s electricity sector, plagued by inefficiency and corruption, presents a daunting challenge for reform efforts. This case study is an example of where a feasible strategy for curbing corruption and improving energy provision in Nigeria consists of creating new horizontal checks among Small and Medium Enterprises (SMEs).

The SOAS-ACE approach offers an innovative framework for tackling policy-distorting corruption. It focuses on politically feasible reforms, uses a systemic perspective, and acknowledges that the behaviours and relationships of actors are significantly influenced by their relative powers, capabilities, and interests. Ultimately, the approach aims to not only combat corruption but also enhance development outcomes.

A poorly implemented privatisation process of Nigeria’s electricity sector, which began in 2012, had solidified a distribution of power whereby only politically connected companies were confident in bidding for contracts in the sector, with Nigerian banks absorbing all the risk. Privatization gave these politically connected companies significant new rents that increased their already substantial power.

The privatization of the power sector created a regulatory architecture that was meant to provide strong oversight through vertical checks, including an independent regulator, the Nigeria Electricity Regulatory Commission (NERC). However, despite these designs being good on paper, the privatisation process attracted politically connected and therefore powerful players without the technical and financial capacity to become efficient generators or invest in upgrading.

While the transmission sector remained under Federal Government ownership, legacy underinvestment combined with the inability of generation companies (GENCOs) and distribution companies (DISCOs) to meet electricity demand created significant challenges. The result was erratic and low-quality electricity supply for all consumers— residential, commercial, industrial, as well as SMEs.

This prompted high levels of electricity self-generation, increasing electricity theft, and non-payment of bills. Consumers rationalized this behaviour on the grounds that they had little choice given steadily increasing tariffs without improvements in electricity supply. Most large industrial customers disconnected from the grid entirely, building their own electricity generating plants or buying power directly from the grid.

The large number of customers stealing electricity or not paying bills led to huge revenue shortfalls, and distribution companies were unable to effectively monitor these widespread violations. Large industrial customers, who might have pressured the regulator to improve compliance and supply, had no incentive to do so as they no longer depended on the grid.

The politically connected nature of the generation and distribution sectors meant that regulators like the Nigeria Electricity Regulatory Commission lacked true independence, rendering vertical enforcement mechanisms ineffective.

SOAS-ACE’s analysis revealed that formal vertical accountability mechanisms were ineffective and no effective horizontal checking could be found. However, the team identified an important opportunity: SMEs faced legitimate constraints that led them to break rules by not paying for grid electricity, yet they were already organising collectively to find solutions to their power needs.

This was an encouraging sign that trust was emerging and that it might be possible to enable new horizontal checking behaviour. Indeed, some clusters of SMEs had sufficient power relative to each other to enable horizontal checking, productive capabilities that would benefit from reliable electricity, and aligned interests in reducing their costs.

The research team then tested a hypothesis that providing reliable electricity through mini grids for clusters of SMEs would incentivise peer monitoring amongst these enterprises, creating effective horizontal checks outside the politically captured national grid. Surveys confirmed SMEs’ willingness to pay for reliable power at a price point between grid tariffs and costly self-generation. Research also suggested that new investors, operating outside the politically captured national grid, might be attracted to supply local SMEs through mini-grids.

Based on this analysis, the SOAS-ACE team designed a field-based behavioural experiment to help quantitatively validate the hypothesis of rule-following behaviour. The objective was to explore how MSMEs respond to different group contracts with positive incentives, punishments, shared responsibility (joint liability) and peer monitoring mechanisms in modelled scenarios. Read more about this phase of the research here.

Read the full case study here

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