THOUGHTS ON DELIVERY OF AFFORDABLE , SUSTAINABLE AND NATIONWIDE POWER FROM A CONCERNED CITIZEN
Dear Hon Minister
Please permit me to extend profound felicitation so to you and family as you tackle what is arguably the most complex assignment of our time.
I must say that I am one of your numerous admirers who is confident that you possess the pedigree to make the difference in delivering your tasks based on my perception your tremendous achievement as two-time governor of complex Lagos State. I am sure that many us still remain excited with your appointment even as the take-off so far can at best be described as quite bumpy.
I do want to share with you the benefit of my experience in the energy sector that I hope can truly push you and your team to think outside the box as you seek to change the landscape of power supply in our dear country.
Permit me to start with a quote from the Deputy Prime Minister of Singapore :
“You cannot simply assume that the natural workings of the market or of society will produce social harmony or equal opportunity. They won’t, Shanmugaratnam said. Government — an elected government — has a role to play. And it’s not about speeches and symbols. It’s about specific mechanisms and programs to achieve the outcomes we all seek.”
Hon Minister, it is my fervent hope and prayer that despite all I have continued to hear from you on the so called price-reflective-tariff for power that you have not been irredeemable sucked in by incompetent Shylocks that parade as private sector investors in power infrastructure.
This is because, pricing power out of the reach of ordinary Nigerians and the manufacturers as has been the case and worsened by the recently announced tariff cannot be what you intended to do. I watch you on various media trying to justify again and again the increase based on the so called cost-reflective-tariff. Clearly , whilst I understand the pressures you face in your office for early delivery, the price of a life-wire product like power cannot be based on the model you describe which is bound to make products manufactured in Nigeria highly uncompetitive . This is because in the short term, the only comparative advantage that Nigeria has as a country is low energy cost. I continue to maintain that Nigerian manufacturers cannot compete on technology and productivity so the only way of competing even in local market is through very low cost of power and energy. The government cannot eat its cake and have it back by maximizing rent of energy at wellhead and squandering it through inefficient utilization and pervasive corruption and at the same time charging so called cost reflective tariff to poor citizens and industry that should generate jobs through growth if energy is priced appropriately. In actual fact, if energy is priced correctly to trigger rapid industrialization , your model will include tax revenue (payee) within appropriately drawn productivity and economic value added envelope.
It is my strong view that the damage we suffer today was caused by the wrong-headed policy of various governments which shutdown all gas export projects in a country with over 185TCF gas reserves in the so called preference for “domestic gas obligations” of 2~5 BCF per annum thereby making the unit cost of gas for which finding and development which is over sixty percent of delivery cost very prohibitive . If the gas export has been aggressively pursued, local power producers world have had to buy gas at marginal ex treatment prices thereby making it affordable in the local market. In addition , LNG plants could have also put power into the grid at far cheaper prices than even combined cycle producers on independent far flung sites with separate supporting infrastructure .
I have focused mainly on cost of gas because that appears to be the main defensible basis for the so called cost-reflective-tariff. However, you will agree with me that the case for increase can hardly be justifiable when you think of the massive inefficiencies in the transmission and distribution sectors of the supply chain which you are trying to pass on to consumers. This is because in a stable polity and well managed macro economic environment , the efficiency improvements which will typically have 2 years return on investment are usually paid for through borrowing short term . It surely will amount to double counting in favor of asset owners when you make consumers pay for assets improvements that should traditionally be financed through banks or bonds raised in capital markets. The truth is that the owners of the Distribution companies borrowed too much to buy the assets and upon discovery of that by government, you should force them to deleverage through dilution of their equity. This would have ensured that they can then borrow to finance needed asset upgrades for improved efficiency and lower unit cost.
Hon Minister Sir, my thoughts shared with you above are essentially because I am convinced that you will use this unique opportunity to serve our great nation and given your pedigree to be flexible to non-stereotype inputs from citizens. Permit me therefore to further explain the fundamental principles that anchor my reasoning. Power assets even though constructed and managed as businesses through the usual mix of equity and debt are essential trans-generational infrastructures that must be financed by government using proceeds of taxation and long term debt. The only reason private players are increasingly allowed to play in the power sector is because they do it more efficiently hence the need for a strongly regulated sector that does not get captured by excessive profit takers. The private sector players typically have investment life cycle of 20 to 25 yrs to recoup their capital and make reasonable profit but the assets if properly managed during that period will be inherited by the incoming generation thereby making the unit cost of utilization therefrom quite competitive. A model that places the full burden of cost of infrastructure on current users-on the so called cost-reflective-tariff is not properly premised and cannot engender the needed comparative advantage to manufacturers and SMEs in a world of minimal trade barriers . The payback for government is increased tax revenue due to unleashing of suppressed massive economic growth that the new infrastructure will trigger thereby ultimately paying for itself. I am afraid that due to the excessive abuse of fuel subsidy regime, people in government and perhaps the larger society are beginning to think that subsidy is abominable but I beg to differ. A government exists to tax , regulate and spend in a way that drives up the aggregate productivity of citizens within an accountable and transparent framework .
I am by no means trying to simplify a very complex infrastructure delivery policy framework which is why it is usually easy for leaders and policy makers to default to so called market forces in an area where it is obviously not a fit but lends itself as easy explanation. However , the current approach of trying to fund trans-generational infrastructure requires a deep intellectual rethink to arrive at a sustainable model that does not cripple economic growth and worsen the already high unemployment situation.
Permit me once again to congratulate you for job done so far even as I apologise for my rather long treatise above.
Please accept the assurances of my most esteemed regards.