The privatisation of the Nigerian electricity sector was a much-anticipated reform exercise. Launched in 2010, the exercise was intended to modernise the sector and cater to the country’s growing demand for electricity. However, a decade on, the desired outcomes have still not materialised and the electricity available on the national grid to light homes and power the economy has stayed at an almost constant 4,500 megawatts (MW), well below the 8,400 MW projected for 2018. One reason for this is the technical inefficiency of the grid, beginning with inefficient gas supplies, the inability of the transmission system to deploy adequate electricity, and poor collection of user tariffs by distribution companies. Revenue shortfalls have resulted in extensive government bailouts.
Such inefficiencies in the sector are compounded by ‘legacy’ corruption that has led to poor maintenance of the transmission network during state-ownership and to the presence of politically connected bidders in the recent privatisation efforts. The design of contracts and lack of regulatory oversight has further deterred credible and technically competent investors during the bidding process. The politically connected nature of many of the acquisitions also mean the government is reluctant to take any tough decisions with regard to the sector.
The conditions in which consumers lack supply and firms are unable to make profits have given rise to a host of interdependent corruption mechanisms. As the sector moves deeper into loss, the space for formal earnings becomes narrower, and the perverse incentives to be corrupt deepens. This has now pushed the sector into a state of low-level equilibrium, with significant restructuring needed in order to turn things around.
Our analysis of the political settlement in the sector suggests anti-corruption-related solutions for Nigeria’s power sector should follow a two-track approach – one for the short-to-medium term, and one for the long term. The latter strategy includes capital investment and debt restructuring but this is not going to be easy to achieve. The medium-term strategy is focused on the most vulnerable segment of Nigeria’s economy, namely small and medium-sized enterprises (SMEs).
Inclusive, diversified growth in the country depends on growth of the SME sector. Hence, the short-to-medium-term solution must focus on easing power-supply constraints for this sector in particular. Our research recommends a disaggregated, embedded power-generating solution using natural gas as feedstock for existing SME clusters whose chief constraint to achieving competitiveness is inadequate electricity supply. SMEs should be incentivised to support the recommended strategy, however solutions must be developed with local political economy considerations in mind, not only in a technocratic manner.
Read the Working Paper.