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Examples Of Reversal Of Privatization In The Power Sector

Let me start with a disclaimer – I am not for a reversal to full public ownership of the privatization of the Nigerian Electricity Supply Industry (NESI). I favour a comprehensive review and a tweak in the arrangement to reflect the realities of the power sector as I suggested in October 2013 shortly before privatization.

In the early 1980s, privatization and deregulation became the twin terminologies from financial institutions such as the International Monetary Fund (IMF) and the world Bank, among others. The global paradigm shift from public ownership to private ownership became the norm in developed economies for the purpose of saving costs, improving efficiency, giving choices to consumers, meeting climate change targets, security of energy supply and becoming innovative among other reasons given for embarking on the journey.

The most important step to take before the privatization of an electricity supply industry is to identify the reasons why privatization was required and to answer in convincing detail, whether privatization or indeed deregulation will provide overwhelming answers to the questions before embarking on a journey that may be regretted years down the line. Unfortunately, Nigeria joined the band wagon without knowing why it should privatize the moribund electricity sector back then. This was especially so, when IMF and the world Bank made offer of new credit conditional on the implementation of austerity measures, privatization of public enterprises, and financial liberalization. A move the financial institutions, hopefully, have regretted. No one size cap can fit all economies.

Worldwide, the succeses and failures of privatization in different sectors have been well documented. One sector that economic theories of the 1990 model of privatization shouldn’t have applied is the power sector of developing economies, certainly not in Nigeria with the status of its electricity supply industry. What is applicable in the developed economies with decades of structures and infrastructural development cannot be applied hook, line and sinker to developing nations. Like the experience of COVID-19 has revealed, we cannot “be doing follow- follow” on ideas from the western world without developing models or strategies that work for ourselves.

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In developed economies, the theory of privatization of electricity systems hovers around the trilemma of environmental sustainability, security of supply, and affordability/access to varying degrees of importance.  In Nigeria, for example, the overriding factors include the socio-economic dimensions: affordability, ability and or willingness to pay, electricity theft, corruption, etc, factors which are the least of problems in developed economies.

There are many instances where the goals of privatization have not been met and the governments of the countries have had to renationalize already privatized entities. Examples abound in the water sector where over 36 countries have renationalised their water sector. However, our focus is on the electricity sector.

In 2003, the government of Dominican Republic renationalized two distribution utilities previously acquired by Spanish Utility Union, Fenosa. In Germany, between 2007 and 2015, over 234 municipalities withdrew concessions of electricity networks from their previous private operators after the expiration of the concession contracts. The two most prominent cases of renationalization in Germany took place in Berlin and Hamburg. Swedish energy utility, Vattenfall had operated for 10 years in the city of Berlin. In a landmark referendum, over 600,000 (83%) of electorate voted in favour of the renationalization of the power sector and the Berlin State announced in March 2019 that the state owned company, Berlin Energie will be awarded the contract for the power grid licence and thereafter be responsible for grid operations for the next 20 years. A similar renationalization took place in Hamburg in 2014 with government paying back where applicable. In Brazil, the regulator had to take over privately owned distribution companies when the power supply in five states was threatened by the danger of the ownership going bankrupt. Niagra falls hydro in Ontario,  Canada, Bolivia, Republica Bolivariana de Venezuala, Albania, Cabo Verde, Comoros, The Gambia, Orissa of India, Kazakhstan, Mali, Peru, Senegal, Togo, Venezuela, and Argentina are some of the recent examples in reversal of privatization of electricity supply industries.

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It has to be understood that any form of ownership, privatization or nationalization, is inevitably imperfect. While proponents of privatization may emphasise government failure, champions of nationalization will focus on the failure of markets especially based on exploitation of consumers by profiteering investors. Thus, the recommended reverse privatization process, if at all,  should not be a return to the direct public ownership monopoly delivery model of old NEPA. Instead, it should usher in the emergence of a new balanced position which contains the use of markets, corporate governance, and long term strategic planning in reaching decisions which may be both efficient and more socially optimal. I have written about this in 2013 shortly before the privatization of the NESI.

To be sure, the decentralization of the grid is the most economical, efficient, technical and suitable approach for the development of the NESI. I have made presentations to the 8th Senate with full scheme design on how it will all work.

For privatization to be a success, alot of factors need to be in place. The starting point of the country is a factor. The status of the power network is important. Transparency and corporate governance are also required. The role of an independent, and well informed regulator and an appropriate market with sanctity of contracts cannot be over-emphasised. All of these are/were lacking in Nigeria and so she should not have engaged in privatization of the power sector in the manner she did. Now, a review is necessary to tweak the privatization process towards success.

The Siemens’ deal, if correctly implemented, with subject matter experts who have demonstrable experience of power systems included in the project management team on the Nigerian side of the bargain, will likely be a success.

Contributor: Engr Idowu Oyebanjo, CEO of Idfon Power Engineering Consultants (iPEC) Limited

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