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PUBLIC SECTOR REFORMS AND PERFORMANCE OF PUBLIC CORPORATIONS: THE CASE OF PHCN (1999 – 2007)

Abstract

This research examines the restructuring of the Nigeria electric power sector and the performance of the sector. The specific objectives of this research includes: i. To ascertain whether or not restructuring of Nigeria electric power sector has led to increase in electricity generation and consumption in Nigeria. ii. To find out if reform of Nigeria electric power sector has led to increase in revenue generation by PHCN. iii. To enquire whether or not restructuring of Nigeria electric power sector has led to increase of investment in the sector. The theoretical framework applied in this study is Systems Theory which empowers us to analyze Nigeria electric power sector as a system which receives input of demand and support from its environment and produces output in the form of supply of electricity to its environment. The data for this study was obtained from secondary sources such as text books, magazines, and internet materials and were analyzed with simple percentage method of analysis. The findings of the study show that the restructuring of the Nigeria electric power sector has led to increase of investment in the power sector; increase in revenue generation by PHCN; but has not led to increase in electricity generation and consumption in Nigeria. Thus, we have recommended for intensification of the fight against corruption; gas industry reform; formulation of environmental policy; encouragement of competition in the power sector; provision of favourable environment for private investment; appropriate billing method; and intensive consumer education.

Chapter One

General Introduction

1.1 Introduction

The performance of Public Enterprises in both developed and developing countries has been generally disappointing. There are widespread doubts as to whether the benefits of public ownership are worth the cost. According to Paul and Simon cited in Obadan (2000), in country after country, unbridled state expansion has led to the following: 1. Economic inefficiency in the production of goods and services by the public sector, with high costs of Production, inability to innovate, and costly delays in delivery of the goods produced. 2. Ineffectiveness in the provision of goods and services, such as failure to meet intended objectives, diversion of benefits to elite group, etc.
Specifically, on power sector reform, Adoghe (n.d.:1) observes that the reform that is taking place in the electricity sector is increasing rapidly and the nature of the reforms that are being adopted is becoming more sophisticated. Thus, both developed and developing countries have embarked on a program of liberalizing and reforming their power sectors while many large countries like China and very small countries like Bolivia have adopted earlier reform models according to there own needs and circumstances. Adoghe (n.d.:1) maintains that a number of authors have noted that some of the principle driving forces behind the need for the reform movement include: • The poor performance of the state-run electricity sector in terms of high cost, inadequate expansion of access to electricity services for the population, and/or unreliable supply. • The inability on the state-owned sector to finance the needed expenditures on new investment.

Adoghe (n.d.:1) further maintains that in many countries in Africa especially some West African countries, all the aforementioned factors have presented at the same time with the exception of some developed countries and although, some state-owned utilities have performed well, there was awareness during the 1980s that a lengthy period of state ownership, without the forces of competition or the incentives of the profit motive to improve performance, will eventually result in excessive costs, low services quality, poor investment decisions and lack of sensitivity in supplying customers. Consequently, despite the fact that rapid changes in technology have occurred in both the generation of electricity and in the computing systems used to meter and dispatch power which have made new industrial structures possible, state utilities have been too slow in adopting these modern changes while the private sector offers many new approaches to proving power at lower cost, especially to consumers with low levels of demand through innovations in customer services and cost recovery mechanisms. Most public enterprises, of which Power Holding Company of Nigeria (PHCN), the successor of National Electric Power Authority (NEPA) is one, operate at loss, and therefore, constitute a massive drain on government resources through transfers and subsidies. Umezuruike (2005), opined that the public enterprises in Nigeria enjoyed the following transfers in 1998 alone:

A. Subsidized foreign exchange – N156.5 billion

B. Import duty waivers – N12.5 billion

C. Tax exemption arrears – N15.0 billion

D. Unremitted revenues – N29.5 billion

E. Loans and guarantees – N35.0 billion

F. Grants/subventions – N35.0 billion

In spite of all efforts by government, the performance of most public enterprises and PHCH in particular has been very poor. It is in the light of this that the Federal Government of Nigeria decided to embark on reform of electric power sector in Nigeria. Thus, in March 2001, the Federal Executive Council received and approved from the Electric PowerImplementation Committee an electric power policy which became known as the National Electric Power Policy (NEPP) of 2001. The policy provided for corporate restructuring, unbundling and privatisation of National Electric Power Authority (NEPA) through sale or license of all plants to private operators or concessionaires and transfer of management, ownership and control of selected distribution companies. This is aimed at making electricity sector in Nigeria to become private sector driven and to introduce competition in the sector (www.nigeriafirst.org, 2005:1).

Based on the National Council on Privatisation approved implementation blueprint for the restructuring of NEPA released on 26th August 2002, the restructuring will involve the creation of six Generation Companies (Gencos), an Independent Transmission Company that will also be responsible for system and market operation, and eleven Distribution Companies (Discos), matching NEPA’s existing zonal structure, with the exception that the Lagos zone (which takes 45% of supply and provides up to 60% of revenues) will be structured into two separate companies. While the objective of this restructuring is that each one of these companies will become a commercially viable independent company, the restructuring programme is expected to be followed by a shadow trading period during which the new Wholesale Electricity Market will remain government-owned and work up to establish some track record of performance. Then there will be divestiture of the Federal Government’s interests in the Distribution Companies (Discos) followed by the Generation Companies (Gencos). Consequently, on 29th November 2004, the power generating arm of NEPA was unbundled into six new semi-independent companies, namely, Kainji/Jebba Hydro Power Plant Business Unit, Shiroro Hydro Business Unit, Egbin Electric Power Business Unit, Delta Electric Power Business Unit, Afam Electric Power Business Unit, and Sapele Electric Power Business Unit. The power generation companies will generate and sale power to Transmission Company at bulk unit cost (www.nigeriafirst.org, 2005:4). According to Bello and Alike (2008:4), the Transmission Company of Nigeria (TCN) was conceded to the Power Grid Corporation of India Limited (PGCIL) on Management Contract by the administration of former president Olusegun Obasanjo when the company emerged the preferred bidder in the bid for the management contract of the TCN.

The Electric Power Sector Reform Act of 2005 upheld and legalized the reforms already initiated in the electric power sector in Nigeria since 2001 and also broadened the reform process by not only abrogating the monopoly of NEPA in the electric power sector, thereby providing for private investment by Independent Power Producers (IPPs), but also provided for replacement of NEPA with Power Holding Company of Nigeria (PHCN) Plc. PHCN took over the functions of NEPA and all its assets, liabilities and staff (www.nigeriafirst.org, 2005:3), (Federal Ministry of Power and Steel, 2006:6, 9). Although the process of privatising PHCN was formally initiated in 2001, PHCN still remains state-owned and has not been privatised. However, the Electric Power Sector Reform initiated in 2001which if carried through will lead to eventual privatisation of the Generation Companies (Gencos) and Distribution Companies (Discos), has resulted in the liberalization of electric power sector in Nigeria. Therefore, what this study seeks to do is essentially an assessment of the impact of the electric power sector reform in Nigeria on PHCN’s performance as well as on electricity generation and consumption in Nigeria as a whole.

1.2 Statement of Problem

The problem of inadequate and irregular electric power supply in Nigeria coupled with constant power outage is no longer alarming but has gone out of proportion. Many industries and manufacturing firms have closed down while the smarter ones are daily relocating to neighbouring countries where the cost of energy is not capable of crippling their business (Orode, 2009:50). Some other companies are operating at very low capacities. Public and private institutions, artisans and households are not left out of the electricity fiasco. PHCN’s ineffectiveness has increased unemployment as employees of both large and small organisations have been thrown out of jobs. Regular power outage has also encouraged criminalities to thrive in the cities. Incidents of inferno and loss of lives and properties have been on the increase. Consumers of electricity in the country h0061ve lost hope and become helpless as far as the issue is concerned.

i. As a way out, most people have resorted to the use of power generating plants. However, it is a known fact that the use of these generators is associated with a number of problems such as high cost of fuel, noise, pollution and poisonous gas emitted by the plants. The seriousness of PHCN’s problem has attracted the attention of the Nigerian Government. This has forced the government to begin to restructure the Nigeria Electric Power Sector. So far this reform has led to the abrogation of monopoly hitherto enjoyed by NEPA and the replacement of NEPA with PHCN, and the liberalization of the electric power sector in Nigeria, with a target of eventual privatisation of the Generation Companies (Gencos) and the Distribution Companies (Discos) of PHCN. This reform of electric power sector in Nigeria is aimed at achieving adequate, efficient, and regular electricity generation and consumption in Nigeria through introduction of private investment and competition in the sector. The extent to which the reforms of the electric power sector has achieved its goals remains a subject that deserves indepth inquiring. Therefore, this study seeks to provide answers to the following research questions:

i. Has restructuring of Nigeria electric power sector led to increase in electricity generation and consumption in Nigeria?

ii. Has reform of Nigeria electric power sector led to increase in revenue generation by PHCN?

iii. Has restructuring of Nigeria electric power sector led to increase of investment in the sector?

1.3 Objective of the Study

The main objective of this study is to find out if restructuring of Nigeria electric power sector has actually improved the performance of the sector and PHCN.However, the specific objectives of the study include:

i. To ascertain whether or not restructuring of Nigeria electric power sector has led to increase in electricity generation and consumption in Nigeria.

ii. To find out if reform of Nigeria electric power sector has led to increase in revenue generation by PHCN.

iii. To enquire whether or not restructuring of Nigeria electric power sector has led to increase of investment in the sector.

1.4 Significance of the study

The crisis on provision of electricity in Nigeria has been blamed on among other things, poor revenue generation by the public utility in charge of power sector in Nigeria, and inadequate investment in the power sector. As a result, government embarked on restructuring of the power sector in Nigeria in order to reverse these ugly trends. Therefore, an appraisal of the impact of such reform on electricity generation and consumption, investment in the power sector as well as revenue generation by PHCN is a very important exercise that has both theoretical and practical significance. Theoretically, this study will provide information that will help to clarify whether it is more beneficial to pursue state-ownership approach or liberalized approach on the provision of electricity in Nigeria. Practically, the findings of this study will help to illuminate whether or not the major problem with power sector in Nigeria has been really that of legal framework of operation or the operators of the power sector with reference to power generation and consumption, revenue generation by the public utility in charge of the power sector, and investment in the power sector. Thus, the result of the study will help the government and the operators of Nigeria electric power sector to fashion out policies that will ensure that there is adequate investment in the power sector in Nigeria, adequate return on investments made in the sector, and provision of adequate quantity and quality of electricity in Nigeria for domestic, industrial, and commercial usages. 

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