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Digitally Signed by: Content manager’s
Name
DN : CN = Weabmaster’s name
O= University of Nigeria, Nsukka
OU = Innovation Centre
Fred Attah
AGBO, HENRY CHUKWU
PG/M.Sc./13/66959
POLITICAL ECONOMY OF PRIVATISATION OF POWER HOLDING
CORPORATIONAND REVENUE GENERATION,2005-2014
Faculty of the Social Sciences
Department of Political Science
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POLITICAL ECONOMY OF PRIVATISATION OF POWER HOLDING
CORPORATIONAND REVENUE GENERATION, 2005-2014
BY
AGBO, HENRY CHUKWU
PG/M.Sc./13/66959
A PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF MASTER OF SCIENCE (M.Sc.) IN
POLITICAL SCIENCE (POLITICAL ECONOMY)
DEPARTMENT OF POLITICAL SCIENCE
FACULTY OF THE SOCIAL SCIENCES
UNIVERSITY OF NIGERIA,NSUKKA
SUPERVISOR: PROF. A.M OKOLIE
SEPTEMBER,2014
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APPROVAL PAGE
This project report has been examined and approved by the Department of Political
Science, University of Nigeria, Nsukka, for the award of Master of Science (M.Sc.) Degree.
By
…………………………………………….. ………………………………………
Prof. A.M Okolie Prof. Jonah Onuoha
Supervisor Head of Department
Date:……………………………………… Date: ……………………………….
…………………………………………….. ………………………………………
Prof. A .I Madu External Examiner
Dean of Faculty
Date:……………………………………… Date: ……………………………….
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DEDICATION
To the Almighty God for His mercies and blessings and to my little sister Ezinne whose
continuous thought has been a motivating force for my academic quest.
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ACKNOWLEDGEMENT
With gratitude to God Almighty and with heart filled with inestimable joy I bless God for
the inspiration and enablement in helping me to conclude this studysuccessfully. I owe my deep
gratitude to my supervisorProf. A.MOkolie, an intellectual think thank and a harbinger of
knowledge, whose academic and scientific rigor is thorough in analytic profundity, is yet
versatile and dynamic. You have indeed been a father, your contribution, chastisement and
creative guide helped me so much in accomplishing my research work, may God bless you and
your family.
Secondly, the prestigious influence of the lecturers in Department of Political Science,
University of Nigeria,Nsukka(A home of intellectuals) towards my general intellectual
development; the Head of Department Prof. Jonah Onuoha the amiable and ever working Head
(Omereoha).Prof. A.M Okolie(Most creative and innovative P.G Coordinator) Prof. Ken
Ifesinachi (Methodological rigor), Prof. Obasi Igwe, Prof. E.O. Ezeani, Dr. H.C. Edeh,Dr. C.
Ezirim(my Motivator, Dr fix it), Mr. P.C. Chukwu, Dr. Peter Mbah, Dr. C. Umezurike, Dr. I.
Abada, Dr. H.N. Agbo, Dr. C Ezeibe, Mr. C. Adibe, Mr Ugwueze, and Mr.C. Nwangwu. Your
works and publications have been of great contributions to the scientific community. I would
surely have done nothing without your intellectual contributions.
The contributionsof some of my friends toward my academic pursuit will never be
forgotten, likes of Edward Nsemba Lenshi, Nwangwu Chikodili,Ejikeme Cannis, Odii
Ogbonnaya,Nnaegbo Obiora (the class representative),Onokwai John, Ibekwe Ikenna (PLC),
Ogbonna Confidence (O.G.B), Ugochukwu Uneke, Otuesieme (Grey), Ugwu Simeon, Attu
Samson, Odigbo Jude, Omenka,Otuonye Beta in a very special way, your encouragement has
continued to put me through, I must thank you all, I make bold to declare that meeting you in this
programme has no regrets.
It will be a height of ingratitude if I failed to recognize my parents Mr and Mrs Stanley
Agbo, and my affectionate siblings Onyinyechi,Onyeka, Nnamdi,Arinze and Ezinne Agbo your
prayers, support and financial assistance had been the fuel that motorizedthe engine when the
going was tough.
Finally my uncles Mr and Mrs Joseph Agbo, your hospility, advice and moral support
were also very crucial. Engr. Dr. and Mrs Bonniface Ugwuishiwu, Mr and Mrs Daniel
Ugwuishiwu (Dannex),you set the stone rolling again I ever remain grateful.
May the blessings of the Lord never elude us all through Christ our Lord. Amen!!!
Agbo, Henry Chukwu
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TABLE OF CONTENTS
Title Page ---------------------------------------------------------------------------------------------- i
Approval Page ----------------------------------------------------------------------------------------- ii
Dedication ---------------------------------------------------------------------------------------------- iii
Acknowledgment ------------------------------------------------------------------------------------- iv
Table of Contents ------------------------------------------------------------------------------------- v
List of Tables ------------------------------------------------------------------------------------------ vii
List of Figures ----------------------------------------------------------------------------------------- viii
Abstract ------------------------------------------------------------------------------------------------ ix
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study ---------------------------------------------------------------------------1
1.2 Statement of the Problem --------------------------------------------------------------------------7
1.3 Objectives of the Study----------------------------------------- -----------------------------------10
1.4 Significance of the Study ------------------------------------------------------------------------.-10
CHAPTER TWO: LITERATURE REVIEW
2.1 Literature Review----------------------------------------------------------------------------------12
2.2 Political Economy of privatization--------------------------------------------------------------12
2.3 Privatisation of PHCN and Revenue generation-----------------------------------------------19
2.4 MYTO and Sustainable Operating cost recovery----------------------------------------------23
2.5 Dynamics of gas Supply Generating Capacity and revenue----------------------------------25
CHAPTER THREE:METHODOLOGY
3.1 Theoretical Framework---------------------------------------------------------------------------32
3.2 Hypotheses -----------------------------------------------------------------------------------------36
3.3 Research Design -----------------------------------------------------------------------------------36
3.4 Methods of Data collection-----------------------------------------------------------------------39
3.5 Methods of Analysis ------------------------------------------------------------------------------40
3.6 Logical Data Framework (LDF) -----------------------------------------------------------------42
CHAPTER FOUR: PRIVATISATION OF PHCN AND REVENUE GENERATIONS OF
THE POWER SECTOR.
4.1 Unbundling of PHCN and revenue generations---------------------------------------------------48
4.2. Analysis of the significant stake holders in the reform process----------------------------------------53
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CHAPTER FIVE:THE INTRODUCTION OF MYTO AND SUSTAINABLE
OPERATING COST RECOVERY
5.1 Introduction of MYTO and operating cost recovery---------------------------------------------------59
5.2 Tariff methodology----------------------------------------------------------------------------------------62
5.3 Determination of distribution or Retail price--------------------------------------------------------62
5.4 Tariff Review and subsidy design-------------------------------------------------------------------------63
CHAPTER SIX: GAS SUPPLY GENERATING CAPACITY AND ANNUAL REVENUE.
6.1 Energy resources in Nigeria and the processes of Gas to power---------------------------------------69
6.2 Energy Demand and Supply scenario in relationship with generating capacity---------------------71
6.3 Energy Generations and Energy Demand in Projection-------------------------------------------------72
6.4 Key sector indicators on power Generation a nexus of poor Generation Capacity-----------------74
6.5 power generations and annual revenue generations-----------------------------------------------------77
CHAPTER SEVEN: SUMMARY, CONCLUSION AND RECOMMENDATIONS
7.1 Summary---------------------------------------------------------------------------------------------91
7.2 Conclusion ------------------------------------------------------------------------------------------94
7.3 Recommendations ---------------------------------------------------------------------------------96
BIBLIOGRAPHY -----------------------------------------------------------------------------------------98
APPENDIXES---------------------------------------------------------------------------------------------105
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LIST OF TABLES
Table 4.1: PHCN revenue generation Table----------------------------------------------------------55 Table 5.1:Annual revenue table on generation, operating cost and sustainable cost
recovery---------------------------------------------------------------------------------------64
Table 5.2: t-test one sample analysis ------------------------------------------------------------------66
Table 5.3: t-test one group test statistics---------------------------------------------------------------67
Table 6.1:Electricity Demand Projections per scenario--------------------------------------------73 Table 6.2 Installed thermal stations and generation capacity--------------------------------------76 Table 6.3 Gas consumed and Energy generated 2010----------------------------------------------77 Table 6.4 Gas consumed and Energy generated 2011----------------------------------------------79 Table 6.5 Gas consumed and Energy generated 2012----------------------------------------------81 Table 6.6 Gas consumed and Energy generated 2013----------------------------------------------83 Table 6.7 Gas to power and annual Revenue Generation 2000-2013----------------------------87
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LIST OF FIGURES
Fig. 4.1 Unbundling the monopoly PHCN to the period under review----------------------52
Fig. 4.2 Scarter diagram of revenue generations 2001-2013----------------------------------57
Fig.4.3 Regression analyses on Pre and Post privatization era-------------------------------58
Fig. 6.1 Graphical illustrations Gas consumed 2010 -------------------------------------------78
Fig. 6.2 Graphical illustrations Energy Generated 2010 ---------------------------------------78
Fig. 6.3 Graphical illustrations Gas consumed 2011--------------------------------------------80
Fig. 6.4 Graphical illustrations Energy Generated 2011----------------------------------------80
Fig.6.5 Graphical illustrations Gas consumed 2012--------------------------------------------82
Fig. 6.6 Graphical illustrations energy generated 2012-----------------------------------------82
Fig. 6.7 Graphical illustrations Gas consumed 2013--------------------------------------------84
Fig. 6.8 Graphical illustrations Energy generated 2013---------------------------------------84
Fig. 6.9 gas to power consumption and losses --------------------------------------------------89
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LIST OF APPENDIXES
APPENDIXE I: VALUE CAHAIN OF POWER FROM PRODUCTION TO DELEIVERY.
APPENDIX II: PPP INTEGRATION OF THE POWER SECTOR.
APPENDIX III: INFRASTRUCTURAL POSITION OF GAS SUPPLY
APPENDIX IV: LOCATIONS OF THE GAS LINES AND FEEDER FIELDS.
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LIST OF ABBREVIATIONS
LIST OF ABBREVIATIONS AND ACCRONYMS
CBN CENTRAL BANK OF NIGERIA
CEON CONSUMER EMPOWERMENT ORGANISATION OF NIGERIA.
ECN ELECTRICITY COMPANY OF NIGERIA
FDI FOREIGN DIRECT INVESTMENT
IPP INDEPENDENT POWER PROJECT
JV JOINT VENTURES
MW MEGAWATTS
MYTO MULTI YEAR TARRIF ORDER
NDA ELECTRICITY DAM AUTHORITY
NEMCO NATIONAL ELECTRICITY MANAGEMENT COMPANY
NEPA NATIONAL ELECTRIC POWER AUTHORITY
NERC NIGERIAN ELECTRIC REGULATORY COMMISSION
NIPP NATIONAL INTEGRATED POWER PROJECTS
NNPC NIGERIAN NATIONAL PETEROLEUM CORPERATION
PHCN POWER HOLDING COMPANY OF NIGERIA
REA RURAL ELECTRIFICATION AGENCY
SAP STRUCTURAL ADJUSTMENT PROGRAMME
TCN TRANSMISSION COMPANY OF NIGERIA
TCPC TECHNICAL COMMITTEE ON PRIVATISATION AN COMMERCIALISA
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ABSTRACT
The interaction between the state and the market, politics and the economy within the social relations of production in line with its legal transactions forms the basis of political economy. This interaction is manifested in the state policies (either adopted or home grown) rational or irrational which in turn formed the basic interest of major political actors and on the other hand determines the political economy of nations. It is with this binocular that we are engaged in studying the political economy of privatization of PHCN and its impact on revenue generation: Previous studies have all looked at the pre- privatization exercise, the unbundling of PHCN and its effects on generation, transmission and distribution of power but none has satisfactorily looked at the: Post privatization of PHCN and its impact on revenue generation in Nigeria. The one shot expost facto research design was used and the qualitative method in which our data was generated through secondary sources like text books, journals, newspapers and other evident documented materials. The maxist political economy approach was seen to be most appropriate in analyzing our data and we reached our findings that: there was an increase in the revenue generation of PHCN after its privatization but the increase in revenue was not able to supersede or sustain its operational cost and that the dynamics of gas supply and generation failed to impact on annual revenue generation. We concluded by recommending that for success to be achieved in the post privatised Nigerian power sector, effective operation cost recovery must be a milestone to be achived viz a viz a workable tariff plan that is consumer friendly. Therefore stringent and stiff measures should be applied in collection of bills. New Discos should be empowered by laws to guide the use and consumption of electricity by pronouncing illegal connections, bypass of metering a punishable offence by law. It is only by this means that unmetered consumption of electricity can be stopped thereby generating high revenue for the power sector.
Key words: Power holding corporations,Revenue generation, sustainable operation cost recovery, Gas to power.
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CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
Electricity market has been a sensitive arena that continually attracts global attention and
forms a top agenda in to do menu of virtually all governments globally. The threat it poses to a
national economic sustainability, development and appreciable growth is conspicuously visible
in the way each country of the world seeks and exploits various alternative energy sources of
generating electricity in the most economical and environmental friendly way. In the 2012
United States of America (USA) presidential debate, increase in power supply was seen by both
contestants as the roadmap to job creation and national economic improvement (Clarke, 2012).
The trend of economic growth in some Middle Eastern countries like the United Arab
Emirates (UAE) and Qatar cannot be dissociated from their electric power consumption per
capital growth over the years. Nigeria has tremendous energy resources in the form of abundant
gas, water and mineral resources. Yet, it is highly energy deficient (Tallapragada, 2009). The
country is rated first among the Oil Producing countries in Africa with average of 2.5 million
barrels per day, with highest natural gas reserve in Africa of 176 trillion cubic feet of natural gas.
It also has extensive coal resource with inferred reserves estimated ranging from 1.5 billion
metric tonnes to 2.75 billion metric tonnes (CPE, 2009) and renewable resources such as water,
wind and sun energy from which appreciable electricity can be generated. With the abundance of
energy resources, Nigeria need not import energy to achieve a sustainable generating capacity
suffices the targeted economic growth. Nigeria had been able to trace the collapse of her
industrial sector, small and medium scale businesses and economic downturn to the inadequate
and erratic state of the country’s electricity market – several commitments by different
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government of Nigeria, both financial and human capital, have been thrown behind the power
sector in Nigeria with its effect not being felt (Olugbenga, et al 2013).
Electricity is the bedrock for economic growth and industrialization of any country. The
process of setting up of an electricity generating system is costly and time consuming but once it
is in place, it is expected to experience a decreasing average costs as the output expands. Also,
the system is expected to innovate and make use of advances in knowledge and technology
(Audu, 2013:25). These learning and experiences so far gained on the production process should
enable the system expand and produce better output than previously as a result of the existence
of the economy of scale as well as the learning effects.
Nigeria has never enjoyed an adequate supply of electricity in its history as unmet
demand and constant losses have been the characteristics of electricity generation. Prior to
Nigeria’s independence, electricity was known and used only by some government headquarters
and the first electricity plant was built in 1950 and government incorporated a department to
form the Electricity Corporation of Nigeria (ECN) with the sole responsibility for generation,
distribution, transmission and sale of electricity to all consumers in the country.
After independence in 1960, the Niger Dam Authority (NDA) was promulgated in 1962
by an Act of parliament with similar functions as the ECN and it operated the electricity industry
from 1962 – 1972 (Audu, 2013:25). To make the industry efficient, the two agencies (ECN and
NDA) were merged and transformed to the Nigerian Electric Power Authority (NEPA) in 1973
as a limited liability company. It acquired Ijora, Delta, Afam and Kainji power stations with a
total installed capacity of 532.6MW serving more than two million Nigerians. But the supply is
still far short of demand and in turn led to non-commensurate returns in revenue, which is
estimated to range from 700MW to 900MW. Given the electricity tariff at £0.15 per kWh is
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extremely costly for the Nigerian standard which has an average monthly earnings of £60 (CBN,
1973 as cited Audu N.P 2013:25). However, electricity was increased to 2948MW in the mid 80s
to late 90s before it jumped sharply to 5958MW in early 2000 with electricity tariff at N12.50
per kWh is extremely costly for the Nigerian standard which has an average monthly earnings of
N18,000 (CBN, 2011, NEPA, 2001). This led to the Electricity Power Sector Reform (EPSR) in
2005 with the view of making private sector the major engine of growth as well as reintegrate
Nigeria into the global political economy as a platform to attract foreign direct investment (FDI)
in an open transparent manner. This metamorphosed into the repeal of the NEPA Act and it’s
restructuring. This gave birth to Nigerian Electricity Regulatory Commission (NERC), Rural
Electricity Agency (REA) and the National Electricity Management Company (NEMNCO) to
manage the residual assets and liability of the defunct NEPA. This gave birth to a company
called Power Holding Company of Nigeria (PHCN) all in 2006. These efforts led to an increase
in power generation of 4042MW between 2001 and 2008 yet it was far below the net demand of
10000MW and the performance is unsatisfactory as it continues to loss 50% of its production as
unmetered consumption.
Thus, the company has no option but to learn and innovate to improve the performance
(Audu,2013:25). Nigerians increasingly buy electrical appliances to consume the power (energy)
produced by PHCN or by chemical batteries, generators and solar panels while the industrial
consumers often set up stand–by generators to complement the PHCN supply. It is not
economical for every individual to operate her own electricity generating system. If the
consumers in Nigeria increasingly demand or plan to demand high consumption to energy, it will
be learned that they are willing to pay for the electricity they consumed; and PHCN provided that
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its cost structure exhibits economies of scale, should be in the position to increase output to make
up the demand that is increasingly offered by both households and the industrial consumers.
The Nigerian government has made efforts to increase foreign participation in the electric
power sector by commissioning independent power projects (IPPs) to generate electricity and
sell it to PHCN. In April 2005, Agips 450-MW plant came online in Kwale in Delta State. The
NNPC and Joint Venture (JV) partners, ConocoPhillips and Agip, provided the $480 million to
construct the plant. IPPs currently under construction include the 276-MW Siemens station in
Afam, Exxon Mobils 388-MW plant in Bonny, ABBs 450-MW plant in Abuja, and Eskoms 388-
MW plant in Enugu. Several state governments have also commissioned Oil majors to increase
generation including Rivers State, which contracted Shell to expand the 700-MW Afam station.
The Nigerian government also approved the construction of four thermal power plants (Geregu,
Alaoji, Papalanto, and Omotosho), (Sambo, et al 2010), with a combined capacity of 1,234 MW
to meet its generating goal of 6,500 MW in 2006.
In addition, fourteen hydroelectric and Natural Gas plants were planned for kick-up but
yet to commence since then. Chinas EXIM Bank Su Zhong and Sino Hydro have committed to
funding the Mambilla (3,900-MW) and Zungeru (950-MW) hydroelectric projects. In addition,
Sino Hydro proposed that it should construct the two power projects. Also, NNPC, in a JV with
Chevron are to construct a 780-MW gas-fired thermal plant in Ijede, Lagos State. The project is
expected to be constructed in three phases, with the first two phases expected to have capacity of
256 MW each. The plants are expected to be operational in 2007 in accordance with the
privatization plans yet only a few has been installed.
Administrations in the past have all tried to create sustainable change in the power sector
since independence. A summary look at the privatisation and post privatisation administrations
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of PHCN revealed that President Olusegun Obasanjo signed the Power Sector Reform Bill into
law in 2005, enabling private companies to participate in electricity generation, transmission, and
distribution and this privatization process later unbundled PHCN into: 6(six) Generation
companies: Afam power plc, Egbin power plc, Shiroro hydro power plc, Kainji hydro electric
plc, Sapele power plc, Ughelli power plc. 1(one) transmission company: Transmission company
of Nigeria (TCN) and 11(eleven) Distribution firms: Abuja electricity distribution company plc,
Benin electricity distribution company plc, Eko electricity distribution company plc,Enugu
electricity distribution company plc,Ibadan electricity distribution company plc ,Ikeja electricity
distribution company plc, Jos electricity distribution company plc, Kaduna electricity distribution
company plc, Kano electricity distribution company plc, Port Harcourt electricity distribution
company plc, Yola electricity distribution company plc.
The administration of late President Umar Musa Yar’Adua and Good luck leaning on the
already privatized PHCN, in 2007 had set for the Country the Vision 20:2020, which simply is
the target of being one of the world’s 20 (twenty) best economies by the year 2020.In order to
achieve this Vision, an efficient electricity sector is a prerequisite, as there can be no industrial
development without electricity. In line with his 7 point agenda, Yar’Adua’s administration
declared a state of emergency on the power sector and promised a stable, efficient and
sustainable power generation, transmission and supply within 100 days in office with a target of
10,000MW and a projection of 50,000 MW by the year 2050.
To fast track the efficient delivery of the power to both domestic and industrial
consumers, shortly after it set up Power the power sector reforms presidential committee, chaired
by Dr Rilwanu Lukman to review the reforms of the past administrations and map out strategies
to address the sectors challenges. Yar’Adua in his administration also suspended funding of the
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National Integrated Power Project (NIPP), alleging that over 10 billion dollars had been
expended by the previous administration with no noticeable improvement in the sector.
President Goodluck and Sambo continued in that projectile with the introduction of the
transformation agenda with power at the front burner of their administration. This we saw in the
change in the minister of power from prof. Barth Nnaji to prof. Chinedu Nebo who on assuming
office promised a total revolution and cleansing of the power sector with an utmost target of
reducing the corruption in the power sector, sensitization of electricity consumers on the use of
prepaid metering system, stoppage of unmetered electricity consumption and an increase revenue
generation which in turn lead to an increase in the economy of the country. However, it is from
the ongoing that the focus of this study is to examine the political economy of the pravatised
power holding corporations and its impact on revenue generation.
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1.2 STATEMENT OF THE PROBLEM
Africa’s power sector has faced a lot of challenges within the last decade. The challenges
include under investment in the sector, lack of infrastructural facilities which has resulted in
insufficient generation of power, inadequate supply of electricity to consumers, and rising fuel
prices leading to high production cost. Others are inflexible tariff system, distribution and
transmission losses, and nonpayment of large bill arrears especially by government, large
commercial and industrial consumers (Gambia, 2013). Yet there has been increasing demand for
electricity in Africa. For instance it is estimated that the demand for electricity in Sub-Sahara
Africa has grown from 153 kilo watts hour (KWH) per capita and will get to 235 (KWH) in 2020
(Kaberuka, 2013) even though this is low compared with the global average of 2,730 kWh
recorded in 2009.
The per capita electricity consumption in North and South Africa is 620 kWh still not up
to the world average. The increased demand for electricity supply in Africa is attributed to
increased population and personal income levels. This suggests that the increasing demand is not
matched with increase in power sector infrastructural development. The electric power sector as
public enterprises are not operating as commercial enterprises hence cannot generate sufficient
financial resources to maintain and upgrade existing infrastructures which are too old and lack
adequate maintenance. In 2012 for instance, South Africa experienced power outage which
resulted in loss of not less than R500 million (South African Chamber of Business, 2013) one
can imagine the loss in Nigeria. Governments all over Africa believes that liberalizing the energy
sector would help to attract private sector participation in provision of electricity and that would
help in improving the cost effectiveness of providing electricity (Kaberuka, 2013).
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Some African countries like Ghana, Gambia have taken drastic measures in an effort to tackle
the infrastructural problems in their power sector by involving other entities in power generation
and Nigeria having the same power sector problem as other African countries has also engaged
in electricity reform process by involving the private sector in generation and distribution of
electricity in the country. Tariffs have been increased using the Multi-Year Tariff Order (MYTO)
in 2008 to last for five years. The MYTO was reviewed in 2012 (Ofoegbu et al, 2013)
The physical hand over of Power Holding Company of Nigeria (PHCN) to new owners in
November 2013 marked a turning point in Nigeria’s power sector. It was a culmination of 14
years of effort to reform and liberalise electricity. The onus of regulation now lies on the
Nigerian Electricity Regulatory Commission (NERC) to propel the industry through robust
policies (www.leadership online.com feb.23. 2014).
There exist various studies on the tenets and determinants of electricity demand. These
studies focus on the demand for electricity as a function of its own price, income of the
individual among numerous variables deemed to be relevant. Some of these other variables are
climatic condition Hondroyannis (2010), household size to plasma display panel television Yoo
et al (2007), Joskow (2008). Other studies reveals that electricity was found to be a basic
necessity of living, Louw, et al (2008), Isola (2007), Narayan, Smyth and Prasad (2007),
Narayan and Smyth (2005), Makoju (2002), Bhagavan (1999). Electricity demand was also
found to be unitary elastic in response to changes in income (Joutz et al, 2004). In a similar vein,
studies by Yoo et al (2007), Joutz et al (2004), Hondroyannis (2010) and Joskow (2008) found
electricity demand to be price inelastic. This is true for the electricity market because it has no
close substitute in the short–run while a study by Hondroyannis (2010) revealed that electricity
demand in Greece is a luxury. The own price of electricity was found to be insignificant,
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Ziramba (2008); Isiola (2007 and 2005); Ugbongu (1985) and Taiwo (1982). This can be
attributed to price discrepancies, distortions as well as measurement error often associated in the
electricity market.
On matters of electricity scholars such as Megginson et al (1999), Poole (1996), Mankiv
(2001), De Sonto (1996) Medema (1999) Easterly (2001) and Cook et al (2003) have all tried to
study generally privatization of the power sector viz a vis the political economy of the power
sector. They all identified the failure of the power sector to function under the government as the
main reasons to the transfer of control to the private sector.
Also Jerome (2008), Zayyad (2007), Izibili, et al (2007) and Jerome (2003) were all
concerned with the pre privatisation period of the power sector and the all corroborated that
financial burden of public enterprise to the government are the reasons behind the privatization
of the power sector.
Researchers have carried out various studies on the reform of electricity in Nigeria. For
instance Adoghe, Odigwe and Igbinovia (2009) examined the “Effects of Power Sector Reform
on Electricity Supply Reliability and Stability in Nigeria”. Abiola and Adebayo (2012)
researched on “Towards a Public Private Partnership in the Nigerian Power Sector: Challenges
and Prospects”. None of this was on the post privatization period of PHCN and its impact on
revenue generation of the power sector.
However, it is from the above that we shall be guided by the following research questions:
1. Did the privatization of PHCN lead to an increase in the revenue generation of the Power
sector?
2. Did the introduction of multi-year tariff order (MYTO) ensure a sustainable operating cost
recovery in the power sector?
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3. Does the dynamics of natural gas supply and generation capacity impact on the annual
generated revenue of the power sector?
1.3 OBJECTIVES OF THE STUDY
This study has two main objectives, the broad and the specific objectives. This study in
its broad objective will examine the political economy of privatized power holding corporations
and revenue generation.
On the other hand, its specific objectives are:
1. To determine whether the privatization of PHCN led to an increase in revenue generation of
the power sector.
2. To examine if the introduction of multi-year tariff order (MYTO) ensured a sustainable
operating cost recovery of the power sector.
3. Finally to ascertain if the dynamics of natural gas supply and generation capacity has an
impact on the amount of revenue generated per annum.
1.4 SIGNIFICANCE OF THE STUDY
The study has two main significances, the theoretical and practical. The meaning of
research is to search again when there is an already existing search (Ifesinachi, 2014).
Theoretically, this research seeks to contribute to the existing body of knowledge and will add to
the bulk body of literatures already existing on this area of research. It will also help readers to
understand the pros and cons that privatization program embodies which we have neglected and
politicized within the past.
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Therefore this study will serve as reference material to researchers seeking to understand the
dynamics tied to the political economy of privatization of PHCN and its implications on revenue
generation of the power sector.
Nevertheless this study has practically significance, which includes political and
economic significance. Politically, this study touches on the political interest of policy makers on
the part of the government to have a rethink and work towards real implementation of our
findings and recommendations thereby creating a room for the rapid growth and development in
the country.
Economically it will take into considerations the market dynamics of the unbundled
monopoly of PHCN and its interactions within the economy of Power sector and that of the
nation in general. It will bring to fore pragmatic approach to practical economists the capacity of
the power sector vis a viz revenue generation, cost recovery implications and the market
dynamics of generation, transmission and distribution in relations to its returns of investment in
the electricity market of the power sector.
Finally this study, therefore, has the onus of proof to unravel the nature and manner in
which state and non-state actors have managed and mismanaged the power sector without
putting into considerations the political, economic and social implications of this act of
management and mismanagement on the entire populace.
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CHAPTER TWO: LITERATURE REVIEW
This study reviewed thematically the following themes: The political economy of
privatization, privatization of PHCN and revenue generations, the introduction of Multi Year
Order (MYTO) and sustainable cost recovery and the dynamics of natural gas supply, generation
capacity and impact on annual revenue generation. Quite a number of extant literatures were
reviewed on the subject area in other to identify a gap therein which this study will seek to
address.
2.0 POLITICAL ECONOMY OF PRIVATIZATION
Political economy is the mutual interactions of the state and the market. In the modern
world the presence of these two create the existence of political economy. Without both state and
market there would no political economy (Gilpin,1987:8). In the absence of the state, the price
mechanism and the market forces would be determined by the economic activities: this will be
pure world of the economist. In the absence of the market, the state or its equivalent would
allocate economic resources; and this would be the pure world of the political scientist. Gilpins
(1975:8) In addition to the above, Okolie (2014) in corroboration with the physiocratic school
added that political economy is the mutual interactions between the state and the market, politics
and the economy in relations to production within the ambit of its binding legal transactions. It is
with this binocular with which we shall view political economy with respect to privatsation in
Nigeria.
A world-wide era of privatization has been picking up momentum in recent decades,
making it a fairly new trend in the area of economic policy. The modern idea of privatization as
an economic policy was pursued for the first time by the Federal Republic of Germany in 1957,
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when the government eventually sold majority stake of Volkswagen to private investors. The
next big move in privatization came in the 1980s with Margaret Thatcher’s privatization of
Britain Telecom and Chirac’s privatization of large banks in France. Privatization spread to other
continents as Japan and Mexico privatized government owned communication companies
(Megginson,et al 1996). Another major contribution to the world-wide process of privatization
has been the fall of the communist regime in Eastern Europe and the former Soviet Union. In
recent times, countries like China and Cuba, as well as many other developing countries have
begun to implement privatization in the hope of stimulating economic growth. Over the period of
10 years between 1984 and 1994, there has been a world-wide shift of $468 billion in assets from
the public sector to the private sector (Poole, 1996:234).
The theoretical framework behind the idea of privatization is largely dependent on
understanding the concept of property rights. In order to develop an expanded, specialized
market system, a society must have an efficient way of dealing with numerous transactions that
take place in a specialized economy. Specialization and allocation of resources depends on low
transactions costs, which are dictated by prices in market economies. Competitive markets, in
which transactions are effectively handled by market prices, rely heavily on formal, well-defined
property rights (Mankiw, 2001). De Soto explains, “To be exchanged in expanded markets,
property rights must be ‘formalized’, in other words, embodied in universally obtainable,
standardized instruments of exchange that are registered in a central system governed by legal
rules” (Soto,1996:41). In fact, De Soto argues that the lack of formal property rights is “the
missing ingredient” that is keeping underdeveloped countries from sustaining long-term growth.
Furthermore, the lack of property rights limits the amount of goods and services that can be
exchanged in the market. An important implication of well-defined property rights is that it
26
creates strong individual incentives, which, according to Easterly, is a significant factor in the
quest for long term growth. By creating strong incentives, property rights lead to an increase in
investment since people are certain and secure about the ownership of their property.
Furthermore, individuals gain an access to credit since they can use their formal titles as
collateral for loans, ultimately leading to an increase in investment. Finally, property rights give
people an incentive to pursue long-term rather than short term economic goals. In the case of
land ownership, individuals who have secure and well-defined ownership will invest in their land
instead of continuously draining new land (Soto, 1996).
Another fundamental aspect of privatization, which plays an essential part in the
efficiency improvement associated with privatization, is embedded in the Coase Theorem.
Ronald Coase proposes that the private sector is effective in solving the problem of externalities,
through costless bargaining, driven by individual incentives. According to the Coase Theorem,
individual parties will directly or indirectly take part in a cost-benefit analysis, which will
eventually result in the most efficient solution (Mankiw, 2001). Thus, Coase argues the role of
the legal system is to establish rights that would allow the private sector to solve the problem of
externalities with the most effective solution. A major implication of the Coase Theorem is the
fact that the initial allocation of rights does not affect the outcome as long as the rights are well-
defined. Furthermore, the solution that results from bargaining of private parties will be a Pareto
optimal solution. From the perspective of privatization, the Coase Theorem implies that by
shifting the assets from the state to the private investors, the market will become more effective
in dealing with numerous externalities Medema et al (1999).
There are many theoretical economic benefits that are connected to the process of
privatization. One of the main reasons why countries pursue privatization is in order to reduce
27
the size of the existing government, based on the idea that many governments have become too
large and overextended, consisting of unnecessary layers of bureaucracy. Therefore, many
countries require restructuring in order to improve efficiency, which can be achieved through
privatization. The private sector responds to incentives in the market, while the public sector
often has non-economic goals. In other words, the public sector is not highly motivated to
maximize production and allocate resources effectively, causing the government to run high-
cost, low-income enterprises. Privatization directly shifts the focus from political goals to
economic goals, which leads to development of the market economy (Poole, 1996). The
downsizing aspect of privatization is an important one since bad government policies and
government corruption can play a large, negative role in economic growth (Easterly, 2001). By
privatizing, the role of the government in the economy is reduced, thus there is less chance for
the government to negatively impact the economy (Poole, 1996).
Privatization can have a positive secondary effect on a country’s fiscal situation. As
Easterly discusses, privatization should not be used to finance new government expenditures and
pay off future debts. Instead, privatization enables countries to pay a portion of their existing
debt, thus reducing interest rates and raising the level of investment. By reducing the size of the
public sector, the government reduces total expenditure and begins collecting taxes on all the
businesses that are now privatized. This process can help bring an end to a vicious cycle of over-
borrowing and continuous increase of the national debt (Poole, 1996).
Along with creating incentives, privatization gives ownership to a larger percentage of
the population. Given the level of established property rights, individuals become more
motivated and driven to work on and invest in their property since they are directly compensated
for their efforts. Therefore, privatization will cause an increase in investment for yet another
28
reason (Poole, 1996). Furthermore, state ownership leads to crowding-out of investment from the
private sector. In order to retain a monopoly in a particular industry, state enterprises prevent the
private sector from getting to credit (Cook and Uchida, 2003). Additionally, privatization leads
to an increase in foreign direct investment which can potentially play a significant factor in the
quest for growth. Foreign investment has “positive spillovers of improved technology, better
management skills, and access to international production networks” (World Bank, 2002).
Easterly stresses the importance of the possible benefits from technological improvements as
well as the spillover effect created from new innovations. In fact, Easterly presents the theory
and examples of how underdeveloped countries might have an advantage over developed
countries when it comes to new technology. He points out the possibility that underdeveloped
countries have less invested in old technology, and are therefore more willing to invest in new
technology. Thus, foreign direct investment could potentially have multiple positive effects on
the growth of underdeveloped countries.
In Nigerian contexts Privatization is largely viewed as relating to transfer of ownership of
enterprises from the government to private owner(s). According to the Privatization and
Commercialization Act of 1988 and the Bureau of Public Enterprises Act of 1993, privatization
in Nigeria refers to the relinquishment of part or all of the equity and other interest held by the
federal Government or any of its agencies, in enterprises whether wholly or partly owned by the
Federal government. To Jerome (2008) privatization is often employed to describe a range of
policy initiatives designed to alter the mix in ownership and management of enterprises away
from government in favour of the private sector. Even in Zayyad’s (2007) description, transfer of
ownership is also central wherein the principle of privatization means ‘transfer of government-
owned shareholding in designated enterprises to private shareholders, comprising individuals and
29
corporate bodies’. In essence, privatization describes a socio-economic re-organization of
activities in which social services that were hitherto provided by government are now transferred
to private investors. That is, policy allows the government to divest itself of provision of social
services (Izibili and Aiya, 2007). Put in another way, privatization may be said to be the opposite
of nationalization or indigenization where the latter is the conversion of ownership from private
owners, usually foreign owners, to the government.
Jerome (2003:43) captured the state of Nigeria’s financial burden before the wave of
privatization more succinctly:
The estimated 1,500 enterprises accounted for about 57% of aggregate fixed capital investment and about 66% of formal sector employment… The magnitude, scope and persistence of failure of Nigeria’s public enterprises (PEs) have been extraordinary. These enterprises require continuous massive subsidies but deliver only intermittent and substandard services, industrial enterprises typically operate at 10-35% of capacity… Investment in the public enterprise sector exceeded US$35 billion, comprising US$12.5 billion in equity, US$10.2 billion in government loans, and another US$11.5 billion in unspecified and largely unrecorded subventions to various enterprises.
Given the scenario above, and the pressure from international lending organizations, the Federal
Government rolled out the economic policy of deregulation and privatization with the
inauguration of an 11-person Technical Committee on Privatization and Commercialization
(TCPC) in 1988. We want to point out that the inter-national Monetary Fund and the
International Bank for Reconstruction and Development (now World Bank) had earlier
recommended privatization as part of the Structural Adjustment Programme (SAP). The policy
thrust of SAP, observes the Consumer Empowerment Organization of Nigeria (CEON, 2008)
was focused ‘on economic reconstruction, social justice and self-reliance through the alteration
and re-alignment of aggregate domestic expenditure and production patterns for the purpose of
restoring the economy back to the path of steady’ and a very fundamental aspect of the
30
recommendation to government was the ‘rationalization and privatization of public enterprises to
encourage competition through liberalization and deregulation’. In this regard, therefore, the
TCPC was directed to coordinate the rehabilitation of government enterprises and oversee
Nigeria’s privatization programme in which the actual divestiture commenced in the early
months of 1989 (Jerome, 2008) From 1988 to 1993 when the privatization process was
suspended, 55 firms had been privatized by the TCPC vis-à-vis five methods namely, public
offer of equity shares for sale, private placement of equity shares, sales of assets, Managements
buy-out and differed public offer. The TCPC encountered numerous challenges between 1988
and 1993 when the programme was suspended. Some of which include: excessive bureaucratic
bottle-necks, imbalances in the geo-political spread of shareholders distribution, lack of access to
credit, over-subscription, ideological warfare between the government and those who saw
privatization as imperialistic and labour antagonism (Zayyad, 2007; Jerome, 2008)
The government replaced the TCPC with the Bureau of Public Enterprises (BPE) with the
promulgation of Decree No. 78 of 1993. BPE experimented with the lease of PEs for a while and
due to criticism by foreign investors, the scheme was dropped. Hence, the second round of
privatization in Nigeria never took off until 1998 after the then military, General Abdulsalam
Abubakar, announced his commitment to privatize-given IMF’s resolve to resume with Nigeria
only after the government has expressed commitment to pursue the policy (Obadina, 1998;
Jerome, 2008)
From the extant extant literatures reviewed such as On matters of electricity scholars such
as Megginson et al (1999), Poole (1996), Mankiv (2001), De Sonto (19996) Medema (1999)
Easterly, (2001) and Cook et al (2003) have all tried to study generally privatization of the power
sector viz a vis the political economy of the power sector. They all identified the failure of the
31
power sector to function under the government as the main reasons to the transfer of control to
the private sector.
2.1 PRIVATIZATION OF PHCN AND REVENUE GENERATION:
The conceptual framework upon which this privatization exercise was conceived in
Nigeria, was through the public –private partnership (PPP). Public-Private Partnership (PPP) is
not a new phenomenon; it has been identified world over as a means of providing infrastructure
growth in an infrastructural deficient state or nation. Public-Private Partnership (PPP) is a
contractual relationship between the public and private sector organizations which provide the
private sector the opportunity of supplying public services or infrastructure under the control and
monitoring of the public sector.
The private sector finances the service and brings innovations, technology and its
resources while the public sector provides sufficient control and monitoring of these contracts
(Njidda, 2009) to ensure that the service is supplied in a cost effective manner. Traditionally
government projects are supposed to be financed from capital funds or loans from foreign
organizations. Innovations and public sector reforms have discovered that a better alternative to
government funding of provision of services or infrastructure is private sector participation.
Through PPP the burden of providing public services is shifted. The public sector services can
now be effectively provided or delivered by the private sector financial challenges of the time
when the government’s ability to provide service was constrained, still the demands for public
services increased as is the case in Nigeria today, though the responsibility remains that of the
public sector. The success of any PPP relationship depends largely on the design, terms of the
contract, operations, constraints and effective monitoring of the contract procedures (Zero
Emission Communities, (Zeroco, 2011). Some developed countries have found PPP useful in
32
public financial management and have recorded successes. In the U. S. it was initiated in the
1980’s and the vision then was that of down-sizing government as a result of financial challenges
of the time which was a constraint on the government’s ability to provide service, still the
demands for public services increased as is the case in Nigeria today. Many developed and
developing economies have imbibed it as a sure way to enhance infrastructural development in
areas such as education, industry, roads networks, railways, airport, seaports, power supply and
others. Innovative ideas such as “market based reforms” and “the New Public Management” all
advocate that partnership with the private sector is a means of improving accountability and
quality of service in the public sector (Battaglio, 2009).
No government can be sufficient as to providing all the infrastructural facilities.
Countries such as USA, Canada, UK, Britain, Italy, Spain, Australia and others, use Public-
private partnership as solution for deficiency in infrastructural growth and development. Many
countries of the world have successfully transformed their power sector through public-private
partnership. For instance in Asia private sector was involved in the construction of IPP power
projects. Countries in Latin America, Central and Eastern Europe, Former Soviet Union (FSU)
all focused on divestitures of utilities while the Government controlled the operation of the
system through regulation. The common belief was that the commercialization and economic
efficiency objectives would not be achieved if the power sector continued to be completely
operated by the public sector (Deloitte, Touch, Toumatsu, 2004).
The authors recorded 20 case studies of successful private power financing projects in
emerging markets. For instance in Argentina, the study recorded that through PPP, Edenor
company established to provide electricity distribution services in northern Buenos Aires,
recorded successful significant improvement in operations and finances. The PPP arrangement
33
resulted in the reduction in energy losses from 30% in 1992 to 10% in 1999; improvement in
quality of service, decrease in average interruption per customer a year from 13% to 5.7% within
5years; reduction in average duration of interruption from 22% to 8.6% per annum. In addition
the access to electricity supplied by poor households was ensured. Peru, South Africa,
Philippines all has success stories of PPP in electricity supply (Deloitte, 2004). As Deloitte,
Touch, Toumatsu, (2004) states, with the prevalence of political interference, mismanagement or
lack of management, corruption, and lack of incentives for improving efficiency in the state
owned utilities, transferring ownership to the private sector was seen as the best means of
instilling commercial discipline, and economic efficiency. Recently the Federal Government of
Nigeria and U.S. signed an MOU for $ 1.5bn dollar life line for IPPs expansion in Nigeria
(Nnaji, 2011). This is expected to bring improvement in the power sector as has been the case in
other countries.
Power supply in Nigerian has been unstable, inadequate and unreliable. The problems
have been attributed to the power sector’s inability to generate enough revenue to maintain the
system due to under-pricing of electricity service. The industry has not been able to generate
enough revenue to cover its operating costs let alone its considerable capital expenditure needs
(NERC, 2013).
Amadi (2012) maintains that the absence of a cost reflective tariff caused the inability of
the power sector to render effective services. The Transmission Company of Nigeria (TCN,
2007), states that inappropriate pricing helped to compound the poor operational and financial
performance of the industry. Part of the reform programme of the government is increase in
tariffs. Power tariffs in Nigeria before the introduction of Multi-Year Tariff Order (MYTO), was
34
said to be below the cost of supply. The pricing failed to consider commercial viability of the
sector and the tariffs were not frequently reviewed.
According to Kaitafi (2011), the average tariff in Nigeria was low for a very long time
due to government control. The average tariff in Nigeria before 2002 was N4.50/kWh. In 2002, it
was increased to an average of about N6.00/kWh (NERC, 2005). The first attempt to prepare an
effective cost recovery policy/plan was made by NERC in 2008 when the agency introduced the
Multi-Year Tariff Order (MYTO). It was believed that this new tariff order would ensure cost-
effectiveness (NERC, 2012). Consequently, the price was increased to an average of
N11.20/kWh in 2008 under MYTO. This increase of about 50% was still considered as one of
the lowest in the world (Kaitafi, 2011). It was also below the price paid in most West African
countries (The Presidency, 2010). As a result the MYTO was again reviewed in 2012 which
raised the electricity tariff to an average of 23.89/kWh which is currently in use.
Efficient power pricing contributes immensely to proper functioning of the power sector
Briceno-Garmendia et al (2011) because it ensures that tariff is cost reflective. It is only full
recovery of all costs associated with electricity service that can guaranty sustainability in the
power sector under the Public-Private Partnership being arranged by the Federal Government of
Nigeria. The question is whether this increase has made full operational cost recovery possible?
Has it made any significant impact on the revenue generation of the power sector? Has the
increase in tariffs in any way positively affected power generation of the Nigerian power sector?
The private sector in business to make profit and will not tolerate non recovery of cost.
However the summary of literatures reviewed on this theme such as Zeroco (2011), Battaglio
(2009), Deloitte (2004), Nnaji (2001) revealed that on the conceptual framework for the
privatization process exits in Public private partnership (PPP).
35
Amadi (2012), Kaitafi (2011), NERC (2012),Briceno et al (2011) all corroborated that
the nature of the sector before the privatization needed a change to ensure a return of investment.
Hence they did not satisfactorily answer our research question.
2.2 THE INTRODUCTION OF MULTI-YEAR TARIFF ORDER (MYTO) AND
SUSTAINABLE COST RECOVERY
Cost recovery simply means recouping what was invested in providing services. Cost
recovery is closely related to tariff. Tariffs mean payments made by beneficiaries of the service.
They are streams of revenue from the users that would enable investment cost to be recovered
(Mannapbekov, 2011).
Tariff in the power sector is defined according to Kaitafi (2011) as the aggregate price
paid by the final consumer of electricity for a It is through this that the provider of electricity
whether public or private investor will be able to recover costs of energy consumed. Obviously
the public sector finances invested in electricity supply are provided from tax payer’s money and
other sources of Government revenue. To ensure continued supply of the service and long-term
sustainability, there is the need to recover all costs associated with the power service (IRC,
2013). Sustainability according to (IRC, 2013) connotes that the power programme is able to
deliver as appropriate level of service in terms of quality, quantity, convenience and continuity.
Cost recovery becomes imperative now that the Federal Government has handed over the power
sector to private operators. For the private sector funds are often times provided by finance and
credit institutions both local and international. They include international finance institutions
(IFIs) or multilateral development banks (MDBs) such as The World Bank; African
Development Bank (AFDB); International Finance Corporation (IFC); International
Development Association (IDA), and others (Mannapbekov, 2011).
36
The private operator would want to get involved in projects that will ensure recovery of
investment cost and reasonable return on investment. According to Villarreal and Martinez
(2012:15), “no reasonable investor would put his money in a project that could not, at least,
recover its fixed cost”. Given a predetermined set of service standard and tariffs, the operator
assesses the financial attractiveness of the project using internal rate of return (IRR) or return on
capital employed (ROE). Any revenues (tariffs) that will enable the operator to maintain, replace,
modernize, and expand its services and assets may be acceptable (ADB, 2008).
Costs expected to be recovered are electricity generation cost, transmission and
distribution costs and they are capital intensive. The costs actually involved in service delivery
are: the capital costs, operational and maintenance costs, and the connection costs. Capital cost is
the infrastructural cost; for example the cost of land and building. Operation and Maintenance
(O&M) costs are costs involved in production and distribution of services in addition to cost of
maintaining the system. Connection costs are costs involved in connecting the user to the system
(ADB, 2008). The totality of these costs is recoverable from consumer tariffs and or subsidies.
However, Mannapbekov (2011), Kaitafi (2011), villareal et al (2012), stated that the introduction
of MYTO was crucial to resuscitating the declining revenue generation but they did not review
this with sustainable operating cost recovery. Hence there is a need for our second research
question.
2.3 DYNAMICS OF NATURAL GAS SUPPLY, GENERATION CAPACITY AND
ANNUAL REVENUE GENERATION:
Electricity is also energy made available by the flow of electric charge through a
conductor. The fundamental principles of electricity generation were discovered during the
37
1820s early 1830s by the British scientist Michael Faraday, and his basic method is still used
today (Wikipedia, 2011).
Electricity generation is the process of generating electric energy from other forms of
energy. Electricity is generated by the movement of a loop of wire, or disc of copper between the
poles of a magnet (Presidential Task Force on Power, 2011). Electricity is often generated at a
power station by electromechanical generators primarily driven by heat engines fueled by
chemical combustion or nuclear fission, but also by other means such as the kinetic energy of
flowing water and wind. There are many such as photovoltaic and geothermal power. Natural gas
is a fuel used by heat engines which produces the energy with which electricity is generated from
the turbine. Natural gas is a gas consisting primarily of methane, typically with 0-20% higher
hydrocarbons. It is found associated with other hydrocarbon fuel in coal beds, as methane
cathrates, and is an important fuel source and a major feedstock (Oyem, 2013:434-443).
Before natural gas can be used as a fuel, it must undergo processing to remove almost all
materials other than methane. The bi–product of that processing includes: Ethane, Propane,
Butane, Pentane and Higher molecular weight hydrocarbons, Elemental sulfur, Carbon dioxide,
Water vapor, Helium and nitrogen sometimes (Oyem, 2013:434-443).
After natural gas has been processed and transported through pipelines to the plant, the
gas mixes with compressed air in the compressor and burns in the combustion chamber. The
product of the combustion is the energy required by the turbine for power (electricity) generation
.The product from the turbine (i.e. electricity) is directly proportional to the energy produced by
the combustion of the fuel (natural gas) in the combustion chamber (Oyem, 2013:434-443).
This implies that natural gas (the fuel) for power generation is of great interest and importance,
because of the role it plays in the generation of power. And for a nation like Nigeria one of the
38
world’s largest/leading producer of natural gas, it is deplorable to note that even with this
technology and her large natural gas reserves of about 187 TCF, she still suffers from the
availability of power (electricity) which is a tool for growth and economic development.
The first electricity generating plant in Nigeria was installed in Lagos in 1896. The Plants
were installed at isolated units owned and operated by either Native Authorities as in Ibadan and
Kano, or by the public works departments as in Warri and Port-Harcourt. The isolated units were
merged together when Nigerian Colonial Government passed the ordinance No.15 of 1950 which
set up the Electricity Corporation of Nigeria (Uwaifo, 1994).
The Corporation and the Niger dams Authority set up by an Act of Parliament in 1962 to
exploit the water resources of the River Niger were unified into the National Electric Power
Authority in 1973 through the Federal Military Government Decree No. 24 of June 27, 1972
(Uwaifo, 1994). The first electricity generating plant to be commissioned in Nigeria was Ijora 'B'
Power station (Lagos) in 1956 by the head of British Common Wealth and the Queen Elizabeth.
A grid power transmission system that evolved connecting large power stations in Kainji, Jebba,
Shiroro, Afam, Delta (Ughelli), Sapele (Ogorode) and Egbin (Lagos) came into being in the first
half of the 1960s. That grid system served every state capital in Nigeria. By 1992, the total
installed generation plant capacity was about 5,900 Mw. The total electricity available was 3,000
Mw and the coincident maximum demand had reached 2,400Mw (Uwaifo, 1994). In 2009, the
electricity generating station installed capacity in Nigeria was 5000Mw, but only 2900Mw was
generated as at November, 2009 (Babalola, 2009).
Electricity can be generated at Hydro, Thermal, Wind, and Solar generating stations.
Electricity is generated at thermal generating stations where fossil fuels such as crude oil, natural
gas, coal are burnt to produce high pressure (typically 2400 to 3500/1b/in2) and high temperature
39
(1000oF) steam, which is used to drive turbines at 3600 rev/min which in turn drive electrical
generators to produce electricity (Donald, Beaty, Miley and Clapp, 2000).
The concentrated solar power generating stations use mirrors or lenses to concentrate
sunlight into a relatively small area and then use the resulting heat to raise steam to drive steam
turbines and generators to produce Alternative Current (AC) power. There are two methods of
generating electricity namely; conventional method and non-conventional method. The
conventional method makes use of prime movers such as petrol engine, diesel engine, steam
turbine, while non conventional method do not use prime movers. This includes Magneto Hydro
Dynamic (MHD) generators, solar cells, fuel cells, wind, thermoelectric generators etc. Most of
electricity generators are three phase-ac generators known as synchronous generators or
alternators. They use rotating rectifiers called brushless excitation systems to maintain the
generator voltage and control the reactive power flow at 30KV, 50Mw to 1500 Mw capacities
(Hadi, 2004).
The availability of natural fuels such as coal, crude oil, natural gas of 180 trillion cubic
feet (Amotsuka, 2008) and Rivers in Nigeria lead it to utilize hydro plants and steam gas turbines
for electricity generation at Afam, Delta, Egbin, Sapele, Kainji, Shiroro, Jebba and the proposed
Monbila electricity generating stations. Another source of fuel for generating electricity at very
small scale in Nigeria is Uraninium use at National Nuclear Research Centre Zaria.
Electricity generation, transmission and distribution account for less than 1 (one) per cent
of Nigeria’s Gross Domestic Products [GDP], but 54 (fifty-four) per cent of the share of Utilities
(electricity and water supply) in the GDP. They constitute a small economic activity in Nigeria in
relation to her size and population.(National bureau of statistics 2014) However, it is a growth
industry which, permitted to operate with minimal Government intervention, could be a major
40
contributor to the national economy. The electric power sub-sector in Nigeria was dominated by
the Power Holding Company of Nigeria [PHCN], a Government parastatal. PHCN supplies most
of the electricity consumed in Nigeria, supplemented with power generated from privately-
owned plants. In Nigeria, there is widespread private provision of electricity usually referred to
as ‘captive power supply’. In most cases, captive electric power supply has been a response to
irregular public power generation and transmission (National bureau of statistics 2014).
Before the advent of hydro-generated electricity from the Kainji Power Station,
electricity supply in country was largely by the thermal system. However, the hydro system
ushered in by Kainji in the early 1970s started giving way to the thermal dominated system again
some years later. This was due to the perennial water-flow problem of the River Niger at Kainji,
escalating costs of establishing hydro-plants and their long gestation Lags (National bureau of
statistics 2014). Electricity generation in Nigeria is characterised by excess capacity and
inadequate supply. It has been observed that peak demand is often about one-third of installed
capacity because of the non-availability of spare parts and poor maintenance. A poorly-
motivated workforce, vandalisation and theft of cables and other vital equipment, accidental
destruction of distribution lines, illegal connections and resultant over-loading of distribution
lines, are additional major problems of the PHCN. These have been responsible for unannounced
load shedding, prolonged and intermittent outages which most consumers of electricity in
Nigeria have had to contend with over the years (National bureau of statistics 2014).
The Total Installed Capacity of the currently generating plants is 7,876 MW (Table 3),
but the Installed available Capacity is less than 4,000MW as at December 2009. Seven of the
fourteen generation stations are over 20 years old and the average daily power generation is
41
below 2,700MW, which is far below the peak load forecast of 8,900MW for the currently
existing infrastructure. As a result, the nation experiences massive load shedding (Sambo 2013).
Accordingly he asserts that Through the planned generation capacity projects for a
brighter future; the current status of power generation in Nigeria presents the following
challenges: Inadequate generation availability; Inadequate and delayed maintenance of facilities;
Insufficient funding of power stations; Obsolete equipment, tools, safety facilities and
operational vehicles, Inadequate and obsolete communication equipment, Lack of exploration to
tap all sources of energy form the available resources; and Low staff morale (Sambo, 2013).
A summary of extant literature here scholars such as Oyem (2013) discussed the
processes of gas to power. Presidential Task force on power (2011), uwaifo (1994), Babalola
(2009) and Hadi (2004) all corroborated on the concept of gas to power and the impact of gas
supply to energy generation and the reciprocal impact of the gas supply to generating capacity.
However these scholars neglected the dynamics of gas supply, generation capacity and revenue
generation.
GAP IN LITERATURE
There exist various studies on the tenets and determinants of electricity demand. These
studies focus on the demand for electricity as a function of its own price, income of the
individual among numerous variables deemed to be relevant. Some of these other variables are
climatic condition Hondroyannis (2010), household size to plasma display panel television Yoo
et al (2007), Joskow (2008). Other studies reveals that electricity was found to be a basic
necessity of living, Louw, et al (2008), Isola (2007), Narayan, Smyth and Prasad (2007),
Narayan and Smyth (2005), Makoju (2002), Bhagavan (1999). Electricity demand was also
42
found to be unitary elastic in response to changes in income (Joutz et al, 2004). In a similar vein,
studies by Yoo et al (2007), Joutz et al (2004), Hondroyannis (2010) and Joskow (2008) found
electricity demand to be price inelastic. This is true for the electricity market because it has no
close substitute in the short–run while a study by Hondroyannis (2010) revealed that electricity
demand in Greece is a luxury. The own price of electricity was found to be insignificant,
Ziramba (2008); Isiola (2007 and 2005); Ugbongu (1985) and Taiwo (1982). This can be
attributed to price discrepancies, distortions as well as measurement error often associated in the
electricity market.
On matters of electricity scholars such as Megginson et al (1999), (Poole 1996), Mankiv
(2001), De Sonto (1996) Medema (1999) Esterly (2001) Cook et al (2003) have all tried to look
at generally privatization of the power sector viz a vis the political economy of the power sector.
They all I identified the failure of the power sector to function under the government as the main
reasons to the transfer of control to the private sector.
Also Jerome (2008), Zayyad (2007), Izibili, et al (2007) Jerome (2003) were all
concerned with the pre privatisation period of the power sector and the all corroborated that
financial burden of public enterprise to the government are the reasons behind the privatization
of the power sector.
Researchers have carried out various studies on the reform of electricity in Nigeria. For
instance Adoghe, Odigwe and Igbinovia (2009) examined the “Effects of Power Sector Reform
on Electricity Supply Reliability and Stability in Nigeria”. Abiola and Adebayo (2012)
researched on “Towards a Public Private Partnership in the Nigerian Power Sector: Challenges
43
and Prospects”. None of this was on the political economy of post privatized Power holding
corporations and on revenue generation of the power sector. We shall attempt to fill the gap
created from the literature therein.
44
CHAPTER THREE: METHODOLOGY
This chapter presents a methodological approach to better grasp the basic tenets and
propositions of this study. The study like any academic exercise is guided by a methodology
which according to Manion (1980) is the specific technique and objective procedure employed in
carrying out scientific investigation. According to Kaplan (1964:18 cited in Ogban-Iyam 1998)
methodology is regarded as techniques and the scientific procedures used in a given science or in
particular context of inquiry in that science. It deals with the problem, prospects, assets and
liabilities of the techniques. However, the methodology for this study contains: the theoretical
framework where the maxian political economic approach of dialectical materialism, hypotheses
which is a tentative answer to the afore raised research questions, research design the ex-post
facto was employed, method of data collection was specifically on secondary data, method of
data analysis centered on qualitative descriptive analysis, and a logical data framework which is
a tabular summary presentation of our data.
3.1 THEORITICAL FRAME WORK
The study employs the Marxist Political Economy paradigm as a tool for the political
economy of privatized PHCN and its effect on revenue generation. The Marxist paradigmatic
orientation arose as a counterpoise to the dominant bourgeois political economy which was
expounded and popularized by Adam Smith and David Ricardo in the 18th century. This
paradigmatic prism is propounded in Marx (1884), Marx (1967) and Marx (1977) but
extrapolated and expanded in Ake (1981), Nikitin (1983), Ihovbere (1985), Akpuru-Aja (1998),
amongst others.
45
The political economy approach is essentially based on dialectical materialism. As
propounded by Marx, the theory of dialectical materialism is characterized by the primacy of
material condition, the dynmic character of social reality and the relatedness of different
elements of society (Ake 1981:1-3). The theory is premised on the belief that man is principally
motivated by economic or material needs. Labour is the essence of material existence, hence,
economic activity is man’s primary concern. According to Akpuru-Aja (1998:16), the thrust of
this perspective is that the understanding of a society’s politics and culture depends primarily on
the understanding of its economic structure as defined by the relations between employers of
labour and the working class in the process of production. To Marx, every political system
corresponds to and reflects its kind of economic structure. Thus, in the Preface to his work: A
Contribution to the Critique of Political Economy, Marx places premium on the sub-structural
component of the economy (otherwise called the base or foundation) which plays a determinant
role on its super-structural counterparts like politics, ideology and culture of society.
Accordingly, he asserts that:
neither legal relations nor political forms could be comprehended whether by themselves or on the basis of a so-called general development of the human mind, but that on the contrary, they originate in the material conditions of life...in the social production of their existence, men inevitably enter into definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the development of their material forces of production. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the general process of social, political and intellectual life (Marx, 1984:20).
Thus, from the substructure, one easily understands the nature of internal relations, how a society
organizes, manages and reproduces itself, the causes of tension, conflicts or contradictions in any
given society as well as the direction of social change. Marx holds that the primary cause of
46
tension and other social dislocation in a society is economic factor. He first employed the
political economy approach for analyzing the root causes of conflicts and contradictions in
human societies. Corroborating the above argument, Akpuru-Aja (1998:17) asserts that if one
understands the economic structure of a society, the relations between the people in production
process, it is easier to understand the nature of politics, culture, national security, socio-
psychological consciousness, ideological inclinations, etc.
APPLICATION OF THEORY.
We shall anchor our analysis within some basic propositions emanating from the Marxist
theory of political economic paradigm. The theory basically arose in reaction to the western
liberal theory of the state which, inter alia, contends that the state is impractical and independent
force; as well as a neutral umpire that caters for the main interest of every member of the society.
They equally posit that the state emerged to protect lives and property; and hence rises above
class interests in the process of production and distribution of social wealth. Meanwhile, the
western liberal theory has been criticized by Marxian - oriented scholars for their inability to see
otherwise similar "function" of state as definite historical and qualitative circumscribe'; natures'
according to the social modes where they are operative.
The basic attributes of the state as adumbrated by the Marxist oriented scholars are: the
states as an instrument of class domination; the centrality of the state and it apparatuses as the
main instruments of primitive accumulation especially by the dominant class and their
collaborators (Alavi, 1973: 146). The classical Marxist theory of the state has been further
developed to take into consideration the peculiarity of the neo- colonial states.
However, the unique attributes of the neo- colonial state can be traced to the colonial era. In
order to secure their economic interests, the colonial governments discouraged the emergence of
47
a strong indigenous capital class. Worse still, the new indigenous bourgeoisie that inherited
control over the neo- colonial state apparatuses had a weak economic base, and hence relied on
this control for its own capital accumulation and self-reproduction. Consequently, the state and
its apparatuses and institutions have become the main instruments for perpetuation of class
interest and for willful alienation, appropriation and self-reproduction of the dominant class.
While corroborating the above, Odejidi (1987,1986: 12) remarked that in the periphery of
capitalism, such as Nigeria, factors which have to do with the level of development of the
productive forces make the state through its several institutions and apparatuses, a direct
Instrument of accumulation for the dominant class of its agencies.
Thus, the state in the peripheral social-formations has remained largely 'the source of
economic powers well as an instrument of it, the state is a major means of production" (Martins,
1993). Indeed, given the low level of autonomy of the state occasioned largely by low level of
development of productive forces, the ruling class, use their economic advantages, social
networks and political clouts often determine the course of political and economic processes.
Using this theory to explain the privatization of public enterprises in Nigeria, it is obvious that
the problems of inefficiency , poor management, corruption, poor return on investment, political
interference, lack of equipment, etc. which, ostensibly led to the privatization of public enterprise
in Nigeria, cannot be substantiated.
The truth is that the state in Nigerian lacks autonomy and in the process, becomes an
instrument for primitive accumulation by the dominant class. The purchasers of these enterprises
are wealthy Nigerians who have at one time or the other served or sapped Nigeria with all their
strength. With the ill-gotten wealth, they become empowered to inherit these public enterprises
via privatization and in the process translated public monopolies into private monopolies and
48
thus enhance social inequality. Moreover, the privatization of public enterprise in Nigeria an
international Monetary Fund (IMF) and World Bank induced economic policy option. The twin
international financial institutions, have never hidden their insistence that countries wanting to
benefits from their credit facilities, should embark on structural economic measures like drastic
reduction in government expenditure on certain social services such as education, health etc.
They also strongly favour privatization of certain parastatals, as well as the removal of
subsidies on petroleum products, electricity, water and certain food items. The privatization of
public enterprise in Nigeria is not unconnected with the stance of these two' foreign financial
institutions and in fact, in partial fulfillment of the conditionality of the IMF. By this economic
package, the Nigerian economy would become weaker and more dependent on foreign capital.
3.2 HYPOTHESES
The study shall interrogate the following hypothses:
1. The privatization of PHCN led to an increase in revenue generation of the power sector.
2. The introduction of multi-year tariff order (MYTO) failed to impact a sustainable operational
cost recovery in the power sector.
3. The dynamics of natural gas supply and generating capacity of the power sector have failed to
impact on the revenue generated per annum.
3.3 RESEARCH DESIGN
Research design is a plan that guides the investigator in the process of data collection,
analyses and the interpretation of observations. It is a logical model of proof that permits the
researcher to draw inferences concerning causal relationships among variables being investigated
49
(Asika, 1999:27). This study is based on a one shot ex-post facto , analyses of documentary
evidences because it is qualitative and non-experimental. The ex-post facto, which is also ‘after -
the fact’ research design is based on the examination of the independent and dependent variables
after the events have occurred and the data are already in existence.
The ex-post facto design, according to Kerlinger (1977) is a form of descriptive research
in which an independent variable has already occurred and in which an investigator starts with
the observation variable, then studies the independent invariable in retrospect for a possible
relationship to and effects on the dependent variable. In addition, cohen, manion and Morrison
(2011) noted that ex-post facto means after the fact or retrospective studies which are
investigations geared towards knowing the plausible causal factors . In other words, the ex post
facto design, attempts to identify a natural impetus for specific outcomes without actual
manipulation of the independent variables.
This design is found to be most appropriate for this study because it is a method of testing
possible antecedents of the events that have already occurred, therefore, it cannot be engineered
or manipulated by the investigation (cooper and schindler, 2006). In this method of research
design the researcher can only report what has occurred or what is occurring by holding certain
factors constant. This type of design is most utilized when it is not possible to control the
experience, exposure, or influences which may affect participants (Kerlinger, 1977, Cohen,
Mansion and Marrison 2011). The researcher deliberately manipulates a treatment (or
independent variable) and measures how it affects the behavior or reaction of subjects (the
dependent variables).
50
The analytical routines involve testing structural causality based on ex-post facto analysis
of the independent variable(X) and the dependent variable (Y) is based on the concomitant
variations. This is to demonstrate that (X) is the factor that determines or causes (Y). in other
words when (X) occurs there is a tendency for (Y) to occur. This design therefore will guide the
research process of testing the independent variable (the privatization of PHCN) and the
dependent variables. This is because the effect of the former on the later has already occurred
before the investigation.
where
=Observation
=Random assignment of subjects to experimental group treatment to experimental
= Independent experimental variable.
=dependent experimental variable.
Source: Asika (1991).
B3 B1 R B2 A1 A2 A3
O
R
X
Y
51
3.4 METHODS OF DATA COLLECTION
Methods are techniques and approaches employed to gather data which are used as
criteria for inference, interpretation, explanation and prediction (Cohen and Manion, 1980:26).
On the other hand, data are the information, evidence or fact from which conclusion can be
drawn. This study relied on the qualitative method of data collection in gathering data for the
purposes of testing our hypothesis. Qualitative research is a set of non-statistical inquiry
technique and processes used to gather data about social phenomena (MacNabb, 2005:341).
The qualitative technique is most desirable because this study relied essentially on non-
statistically based and numerically immeasurable data which nevertheless can be empirically
studied. In other words, the aim of qualitative method is not to establish numeric or statistical
relationship between variables. This is because although qualitative data may cover a few
numbers of cases, the target is to establish relationship and validity within the social or concrete
reality. The qualitative technique also deals with real world situations because it conducts its
observations under natural settings, often devoid of artificialities and related computational
manipulations. The implication of this is that it studies people’s behavior and attitudes using
ordinary or natural language rather than mathematical, statistical or numerical forms. Although it
does not test hypotheses in the statistical sense of the term, the above hypothesis shall be proven
using the deductive logical method.
The research utility of this technique cannot be over-emphasized. The technique is
usually applied to obtain in-depth information, concept/variable clarification to facilitate
instrument designs and in the conduct of pilot studies (Biereenu-Nnabugwu, 2006:373). This
52
data gathering technique enables access into the inner recesses of group life, organizational
structure, bureaucratic processes as well as motivations for the individual behaviour.
The study is based on secondary data sources like books ,journals, newspapers and
magazines, articles and other written works on the internet that deal with political economy of
privatization of public enterprise. Beyond the use of secondary date the researcher has been an
obtrusive observer in the trends of privatization before 2005 and since 2005 till date.
3.5 METHODS OF DATA ANALYSIS
This study adopted qualitative descriptive analysis. According to Asika (1991:118)
qualitative descriptive analysis verbally summarizes the information generated in the research.
Based on this above postulations, we systematically analysed the documents and information
retrieved to eliminate possible errors and unwanted variables. Thus the objective of this process
is to ensure that systematic analysis will provide an ample opportunity to arrive at a plausible
conclusions and valuable deductions.
The qualitative method of data analysis is concerned identifying with and understanding
the attributes and characteristics and traits of the objects of inquiry (Kelinger, 1973, Seltis, et al,
1979, Hulton and Burnett, 1997). This is why it has to do with the summary of information
generated in the research, so that appropriate and analytical methods can be used to further
discover relations among variables. The adoption of this method of data analyses is because the
study relied on qualitative descriptive analyses. The qualitative descriptive analysis is mainly
associated with the content analyses of already existing information on issues being researched.
53
The content analysis of document fact was adopted to analyse data generated from the various
contents that are that are within the purview of this research, which includes speeches or public
addresses ,and other related publications (Meyer and Barnes, 2005:20). The presentations and
analysis involves the reading, prognosis, critique, and discussions of relevant information
gathered from different secondary sources from which conclusion can be drawn (Fraser,2004).
The adoption of this method of analyses is informed by the simplicity within which it
summarized exposed and interpreted relationships implicit in a given data by given a qualitative
description and explanation to the variables under study.
54
3.6 LOGICAL DATA FRAME WORK
Topic Research Questions
Hypotheses Major Variables of the hypotheses Independent (X) Dependent (Y)
Empirical Indicators of Variables
Source of Data
Method of Data Collection
Method of Data Analysis
The political economy of privatisation of PHCN and its impact on revenue generation.
Did the privatisation of PHCN lead to an increase in revenue generation in the power sector?
The privatization of PHCN led to an i
( X ) The privatization of PHCN
Empirical indicators of X
• The signing of the privatization Act by president olusegun Obasanjo in 2005
• The unbundling of PHCN into 6 generating companies, 1 Transmission Company and 11 distribution companies 2006.
• The emergence of successor companies in 2006
• The establishment of Nigerian electricity regulatory commission (NERC).
• The complete handover of successor companies to the regulation of NERC in November 1st 2013.
• With signing of the
Books, magazines, journals, government publications, The laws & Acts
Qualitative method of data collection based on secondary sources.
Qualitative descriptive method of data analysis, specifically content analysis of secondary data/ documented evidence.
55
Dependent
variable (Y)
Increase in revenue generation.
privatization bill in 2005 there was an Increase in revenue generation from 102,435,925.00 in 2004 to 12,005,317,752.00 in 2006.
• Continuous increase from 12,005,317,752.00 in 2006 to 12,010,880,168.00 in 2007
• Continuous Increase revenue generated from 12,122,558,200.00 in 2009 15,890,465,079.00 in 2010
• Continuous increase 20,528,360,582.00 in 20011
• Continuous increase 22,756,380,543.00 in 2012
• Continuous increase to 23,846,758.421.00 in 2013.
56
opic Research Questions
Hypotheses Major Variables of the hypotheses Independent (X) Dependent (Y)
Empirical Indicators of Variables
Source of Data
Method of Data Collection
Method of Data Analysis
The political economy of privatisation of PHCN and its impact on revenue generation.
Did the introduction of multi-year tariff order (MYTO) create a sustainable impact on cost recovery of the power sector?
The introduction of multi-year tariff order MYTO failed to create a sustainable change on cost recovery in the power sector.
( X ) The introduction of multi-year tariff order (MYTO)
Empirical indicators of X
• The establishment of NERC in 2006 placed the onus of regulation upon NERC as a body.
• Average of tariff before 2002 was �4.500/kwh
• Increment in Electricity tariff from �4.500/kwh to �6.00 /kwh in 2005.
• Introduction of MYTO in 2008 and there was an increase in tariff from� 6.00 as was obtained in 2005 to � 11.20.
• A review of the MYTO in 2012 also had an increase in tariff from 11.20 to � 23.89/kwh which is still in use today.
Books, magazines, journals, government publications, The laws & Acts
Qualitative method of data collection based on secondary sources.
Qualitative descriptive method of data analysis, specifically content analysis of secondary data/ documented evidence.
57
Dependent
variable (Y)
failed sustainable change on cost recovery of the power sector.
• Despite the increase in tariff , it was not commensurate with the operating cost of the power sector.
• In 2008 at the introduction of MYTO the generated revenue was greater than the operating cost. Revenue generated:10,779,449,144.00 as against operating cost:6,682,617,710.00
• In 2009, there was a twist as the operating cost rose above the generated revenue per annum. revenue generated 12,122,558,200.00 and operating cost :14,221,532,814.00
• In 2010 and 2011 the trend continued as the operating cost could not suppers the amount of revenue generated per annum.
• In 2012 after the review of the MYTO from �11.20 to �23.89 there was another twist as revenue per annum rose above the operating cost of the power sector. As replicated: 22,756.380.543.00 and 21,567,802,203.00
58
Topic Research Questions
Hypotheses Major Variables of the hypotheses Independent (X) Dependent (Y)
Empirical Indicators of Variables
Source of Data
Method of Data Collection
Method of Data Analysis
The political economy of privatisation of PHCN and its impact on revenue generation.
Did the internal dynamics of natural gas supply and generation capacity create an impact on the amount of annual revenue generation?
The internal dynamics of natural gas supply and generation capacity failed to create an impact on annual revenue generation.
( X ) The internal dynamics of natural gas supply and generation capacity.
• Empirical indicators of
(X)
• The privatization of the power sector retained the use of thermal generating plants creating a need for gas to power.
• The maintenance of the thermal generating plant maintained a reciprocal relationship with gas supply from 2005-2013.
• The shortage of gas supply affected the capacity generation of the power sector.
• the onus of generation was also transferred to private investors with in accordance to the privatization act of 2005.
Books, magazines, journals, government publications, The laws & Acts
Qualitative method of data collection based on secondary sources.
Qualitative descriptive method of data analysis, specifically content analysis of secondary data/ documented evidence.
59
Dependent variable (Y) Failed to impact on the amount of annual generated revenue.
• Against the logic that low generating capacity will lead to low supply and then low returns on revenue, in 2008 the high generating capacity did not impact or lead to higher revenue generation as the sector lost in 2008.
• Reverse was the case as poor generation capacity in 2012 could not i9mpact on revenue generation of the sector as the sector recorded returns of investment and gain of over �1 million.
• The continues strike of private investors NUPENG and PENGASSAN 2011, 2012 and 2013did not impact of the revenue of the sector as the sector recoded continues increase in revenue generation.
60
CHAPTER FOUR
PRIVATISATION OF PHCN AND REVENUE GENERATION.
This section takes on a more pragmatic approach in presenting empirical data to
validating our hypothesis that: the privatization of PHCN has led to an increase in revenue
generation in the power section. In line with our ex-post facto research design i.e after the fact, a
study of 5 years before the signing of the privatization bill into law by president Olusegun
Obasanjo in 2005 was reviewed and after the fact which is the privatisation of the power sector
subsequent years after the post privatization period 2006-2013.
4.1 UNBUNDLING OF PHCN AND REVENUE GENERATIONS.
As a country, Nigeria first experienced electricity in 1896 when the British Colonial
Government generated electricity at Ijora, Lagos. The following years 1929, 1951, 1962, and
1972, represent significant milestones in Nigeria�s electricity history as respectively saw:
,
• The Nigerian Electricity Supply Company (NESCO) commenced operations as an
electric utility company with the construction of a hydro electric power station at Kura,
near Jos.
• The establishment of the Electricity Corporation of Nigeria (ECN) to control the diesel
and coal plants, and also distribution and sale electricity.
• The construction of the first 132kv line linking Igor power station to Ibadan power
station.
61
• The establishment of the Niger Dams Authority (NDA), with the authorization to develop
the hydropower potentials of the Country, the construction and maintenance of the dams
and other works on the River Niger.
Decree No. 24, which creates NEPA, gave it the statutory monopoly to generate, transmit,
distribute and supply electricity throughout the Federation.10 “NEPA’s responsibilities cut
across the Nigeria territorial borders as it was also responsible for the supply of electricity in the
neighbouring Countries of Chad and Benin Republic” NEPA�s sources of funding were the
central government budgetary allocations through the Energy Ministry and loans from
multilateral institutions. “The government also controlled all procurements and foreign exchange
transactions” Nigeria’s primary fuel sources for electricity are mainly coal, oil, gas and water.
Nigeria, fortunately, is rich in these resources, thus, providing for their availability. NEPA
owned and operated a greater part of the installed capacity, which as at 1998 was 6,000MW.
Nonetheless, much of this capacity is non-operational making generating capacity range between
1500MW and 2500MW.
This huge disparity between installed capacity and generating capacity resulted in the
Electricity sector being characterized by recurrent outages and epileptic power supply. Reports
show that “45% (forty-five) of the Nigerian population have access to electricity, whilst 30%
(thirty) of this population have their demand being met. The population in question is those in
urban areas. The consequence of recurrent power outages is that 90% (ninety) of industrial
customers and a significant number of residential and other non-residential customers provide
their own power”.
62
A number of reasons have been given for this incomprehensible situation, where a country in
spite of its abundant endowment with the resources needed to fuel its electricity sector, still
cannot produce sufficient electricity to meet the demand of it populace. These reasons are:
• 36% (thirty-six) of installed capacity are over 20 years old; 48% (forty-eight) are over 15
years old, and 80% (eighty) are over 10 years old. This clearly shows that the machines
are obsolete, in dire need of rehabilitation and replacement.
• Inadequate funding, mismanagement of utility (lack of maintenance and use of
substandard materials), electricity theft (from illegal connections), non-payment of bills
by consumers (the government parastatal are infamous for this), technical loses (high
energy system losses to the tune of 30% - 35% from generation to billing), vandalism,
corruption, and so on.
This reform still did not get the desired effect of producing an efficient Electricity sector.
This led to the present reform, which includes Restructuring (unbundling) and Privatizing the
Electricity sector. The present Reform started in 2000 with the formation of the Electric Power
Implementation Committee (EPIC). This Committee prepared the National Electric Power Policy
(NEPP) in 2001 and Electric Power Sector Reform Act (EPSRA) 2005. The ESPRA is the legal
backing for the Reform; it also “removes operational and regulatory responsibilities of the
electricity sector from the federal government”.
As stated above, the Reform has two components, which are restructuring and privatization.
This package involved “change in the industry structure, with the aim to stimulate competition,
choice and promote financial accountability; unbundling into constituent factors (generation,
distribution and transmission); establishing commercial trading arrangement, and finally, change
63
in control and/or ownership of the Electric Utility”. 24 The aim and objectives of the Reform
includes:
• Improvement in the performance and the operation of the utility through increased private
sector participation
• Private sector investments
• Meeting current and future demand for electricity
• Establishing new market structure/rules and trading arrangement
• Setting up an independent regulator to oversee the affairs of the sector
• Promote competition, transparency and efficiency
The reform process kicked off in 2005 with the unbundling of NEPA into 11(eleven)
distribution companies, 6 (six) generation companies, a single transmission company, and the
incorporation of an initial holding company Power Holding Company of Nigeria Plc ( PHCN)
The Reform proposes that a single subsidiary will control the transmission sector leaving the six
generating companies and expected independent power producers to sell electricity to the eleven
distribution companies. The distribution companies will in turn, control the supply of electricity
within a designated geographical area. For more clarifications of the unbundling process see
figure 4.1 below.
64
Figure 4.1
UNBUNDLING THE MONOPOLY TO THE PERIOD UNDER REVIEW
Source: Field study
NATIONAL ELECTRIC POWER AUTHORITY (NEPA 1973-2005)
NEPA
TRANSFORMED
POWER HOLDING COMPANY OF NIGERIA
(PHCN 2006)
GENERATION
COMPANIES
TRANSMISSION COMPANY DISTRIBUTION COMPANIES
AFAM POWER PLC.
EGBIN POWER PLC.
SHIRORO HYDRO POWER POWER
PLC.
KAINJI HYDRO ELECTRIC PLC.
SAPELE POWER ELECTRIC PLC.
UGHELLI POWER PLC.
TRANSMISSION
COMPANY OF NIGERIA
(TCN)
ABUJA ELECT. DIST. CO. PLC
BENIN ELECT. DIST. CO. PLC
EKO ELECT. DIST. CO. PLC
ENUGU ELECT. DIST. CO. PLC
IBADAN ELECT. DIST. CO. PLC
IKEJA ELECT. DIST. CO. PLC
JOS ELECT. DIST. CO. PLC
KADUNA ELECT. DIST. CO. PLC
KANO ELECT. DIST. CO. PLC
PORTHARCOURT ELECT. DIST. CO.
PLC
POST PRIVATISATION
(PERIOD UNDER REVIEW 2005-2014)
UNBUNLED
65
4.2 ANALYSIS OF THE SIGNIFICANT STAKEHOLDERS IN THE REFORM
PROCESS
The Federal Government; Under Paragraph (13) & (14) Part II Second Schedule of the 1999
Constitution of the Federal Republic of Nigeria, both the Federal Government and the State
Government have concurrent jurisdiction with regards to regulation of the electricity sector.
Nevertheless, the State government participation in electricity provision is limited to “supplies in
the rural areas through the Rural Electrification Board (REB) where there is no PHCN supply.
The Federal Government is the initiator of the reform process; it has the paramount and
supervisory authority to ensure that precise laws, regulations and measures are enacted to support
its policies pertaining to the Electricity sector.
The National Council on Privatization: Established in 1999 by the Public Enterprises Act of
1999 has the primary purpose of supervising and determining the economic, social, and political
objectives of the privatization and commercialization of Public enterprises. NCP is the lead
policy making body in charge of privatization and commercialization in Nigeria. Its supervision
functions are exercised through the Bureau of Public Enterprise (BPE).
The Bureau of Public Enterprise; Established also in 1999 by the same Act, BPE was
empowered to “change emphasis form commercialization to encouraging core investors and
promoting foreign investment in the privatization programme”. The role of NCP and BPE in this
present reform is to prepare the 18 (eighteen) companies created by the Unbundling for
privatization.
The Ministry of Energy: “This is the Ministry in charge of the power sector in Nigeria.” This
previously used to be responsibility of the Ministry of Power and Steel but in the bid of creating
66
a more efficient power sector, the Ministry of Energy came into existence in 2007. “The Ministry
is charged with formulating, monitoring, and evaluation of energy policy in totality”.
Taking the responsibility of the Ministry of Power and Steel also implies that the Minister
can issue directions to the Nigerian Electricity Regulatory Commission (NERC) on matters
relating to the electricity supply process, such matters are not limited to overall system planning
and co-ordination. However, such directions must be consistent with the Constitution of the
Federal Republic of Nigeria and the Electricity Power Sector Reform Act (EPSRA).
Furthermore, it is important to note at this point that a Ministry of Power has recently
been created by the Jonathan Goodluck administration in August 2010, shortly after been sworn
in as President. The Ministry is headed by the President and is said to “work in close harmony
with the sub-committee of the Presidential Advisory Council”. As very little has been made
known as to the clear functions of the Ministry of Power, the Paper will still refer to the Ministry
of Energy.
The Nigerian Electricity Regulatory Commission: The regulatory supervision of the
Electricity sector is divided between the Ministry of Energy and NERC. NERC is established as
an independent and self-funding regulator. As provided under the ESPRA, it is the main
regulatory body for the Nigerian Electricity sector.
NERC is vested with the powers to promote competition and private sector participation,
establish or approve appropriate operating codes and safety, reliability and quality standards,
license and regulate persons engaged in the generation, transmission, system operation,
distribution and trading of electricity, monitor the operation of the electricity market, and so on.
However it is on this basis that we are challenged with our first research question to examine if
the unbundling act has impacted on the revenue generation of the power sector.
67
We compiled figures of average monthly revenue generated by the power sector to create the
yearly or annual revenue generation. As evident in table 4.1:
TABLE 4.1 PHCN REVENUE GENERATION TABLE.
YEAR AVERAGE OF MONTHLY
REVENUE(�)
REVENUE GENERATED PER
ANNUM (�)
2001 3,265,676.33 39,188,116.00
2002 5955331.67 71,463,980.00
2003 6629448.75 79,553,385.00
2004 8536327.08 102,435,925.00
2005 9037041.25 108,444,495.00
2006 100,0443,146 12,005,317,752.00
2007 1000906681 12,010,880,168.00
2008 899954095 10,779,449,144.00
2009 1010213183 12,122,558,200.00
2010 1324205423 15,890,465,079.00
2011 1710696715 20,528,360,582.00
2012 1896365045 22,756,380,543.00
2013 1987229868 23,846,758.421.00
Source: Adapted from PHCN Annual Reports and Accounts Enugu.
Table 4.1 reveals the rate of average revenue generated per month which culminated into the
annual revenue generated per year. At first glance it is so revealing that there was an increase in
68
revenue generated but in critical analyses it was better revealed that though there was an increase
in revenue generated per annum from 2001 -2005, the increase has been very minute because of
the state of the power sector before its privatization.
From 2006 – 2013 though the privatization process was said to be in a test run period, it
has witnessed a much more increase than what it used to be. The amount of both monthly and
annual revenue generated rose with a drastical effect and this can be attributed to the bundled
monopoly of the mother company because into 6 Gencos, 1 transmission company and 11
Discos. This period saw a total over haul in management and this led to introduction of new
policies. For example after the unbundling there was high increase in revenue generation from
2004-2007 and it witnessed a decline in 2008 which led to the introduction of multi-year tariff
order (MYTO), which restored high revenue generation to the sector. For better graphical
illustrations figure 1.2 revealed the trend of movement of revenue between the privatization of
PHCN which forms our x and the increase in revenue generation which forms our Y.
69
FIGURE 4.2 A SCARTER DIAGRAM SHOWING AMOUNT OF REVENUE
GENERATION FROM 2001-2013.
SOURCE: AUTHOR
The diagram above reveals an upward trend in revenue genration of the power sector. It
is eveident that between 2000- 2005 there was a cripling movement that is to say that the sector
was almost in state of comatos before the unbundling process revived its capacity in revenue
generation.
From the above, a prognostic analysis can be made that with all factors remaining
constant, the power sector in its present state will continue in its light of increased revenue
generation as evident in the above graph from 2005 and 2015. There validating our 1st hypothesis
that the privatisation of the PHCN has led to an increase in revenue generation of the power
sector.
70
Nevertheless, however impressive this result may look, a regression analyses was caried between
the preprivatisation era 2001-2005 and the post privatised era of 2006-213 PHCN to reveal the
strength of the growth in revenue generation as shwon in 1.3 below.
FIGURE 4.3 REGRESSION ANALYSES ON THE PRE AND POST PRIVATISATION
ERA.
SOURCE: AUTHOR
Our regression analyses revealed that the relation is weak at R=0.4302. That despite the
increase revenue generation of the pravatised power sector, that the pace of increase is weak.
The rate at which it is growing is slow. By implication it simply means that there is an increase,
in revenue generation but this increase is very slow; it can only change when there is an
intervening variable. For example a change in governmental policies or a change in the method
and strategies in method of revenue collection by the new successor companies. However we
71
validate our hypothesis that the Privatisation of PHCN has led to an increase in revenue
genration.
72
CHAPTER FIVE
MULTIYEAR TARIF ORDER AND SUSTAINABLE OPERATIONAL COST
RECOVERY.
Since Ex post-facto research method was adopted in this study because the study aims at
measuring the relationship between one variable and another. The variables involved in the
ex post-facto work are not manipulated by the researcher. They are from annual reports and
accounts of the power holding company of Nigeria. Secondary data were obtained from relevant
journals both national and international, textbooks, and internet downloads. Others include
PHCN publications quarterly magazines, and newsletters, PHCN annual report from 2001 to
2005, and its records from 2006 to 2013. The data were presented using tables, bar charts, and
graphs. The hypotheses were tested using t - test.
5.1 INTRODUCTION OF MULTI YEAR TARIFF ORDER (MYTO) AND
SUSTAINABLE COST RECOVERY.
Inadequate supply of electric power has been a big problem confronting Nigeria. It has
led to high cost of using generator as an alternative supply of power. Less than 40% of the
Nigerian population is supplied with electricity leaving the rest without. The generating capacity
of electricity in Nigeria in 2000 when the reform started was 2000MW. By generating less than
4,000MW of electricity, the Nigeria’s per capita consumption was 0.03kw. This per capita
consumption of electricity evidences the level of industrial activity going on in the country,
hence the level of development and the standard of living of people in this country. The problem
was attributed to lack of increase in the existing generating units from 1990 to 2000, lack of
overhauling for up to a period of 15 years, and rapidly decaying of existing generating
infrastructure and underpricing of electricity services.
73
To tackle the problem the Federal Government embarked on transformation of the sector
through some reform processes. The transformation agenda includes maintenance, rehabilitation
and upgrading of existing units in the 8 power stations in Nigeria. The government embarked on
construction of four thermal power stations in various parts of the country; the unbundling of
NEPA into18 companies and establishing PHCN in 2005. The 18 successor companies created
consist of: 6 power generation, 1 transmission and 11 distribution companies (Muhtar, 2009).
Approval was also given for the construction of seven new power stations in the Niger
Delta in order to take advantage of the huge gas resources in that area. As part of the reform
programme, the Federal Government embarked on the process of deregulating the power sector
and therefore encouraged private sector participation in generation of electricity under the
Independent Power Producers (IPP) arrangement so that the IPPs would generate power and sell
to PHCN under power purchase agreement. The administration’s target then was to generate up
to 10,000MW by the year 2007 when it would hand over power to another government but this
objective was not achieved.
The Public Private Partnership (PPP) is now being extended to the distribution of power
in the country. Involvement of the private sector becomes imperative because Nigerian
Government alone cannot afford the capital requirements for development of the electricity
sector in the country. Their call for participation is a welcome development because it is
expected that Partnership project would provide growth for the sector, instill financial discipline,
reduce corruption in the public sector (Ogunloye, 2010), and reduce the financial burden of
infrastructural provision on the national budget. The reform gave rise to the establishment of the
Nigerian Electricity Regulatory Commission (NERC) to regulate and control tariffs by providing
different pricing options for arriving at tariffs to power generators via the Multi-Year Tariff
74
Order {MYTO} (TCN, 2012).It was in order to attract the private sector investment that a system
of electricity pricing called MYTO was established. MYTO was described as a tariff regime
which determines electricity price based on revenue requirements of the whole industry.
Its aim was to provide a pricing structure that would ensure that efficient industry
operators earn a moderate return on investment in addition to protecting consumers against
excessive pricing. It is to provide for continuous reduction in transmission and distribution
losses. In compliance, the Federal Government approved the implementation of MYTO and
market rules in April 2008 and February 2009 respectively thus providing a framework for tariff
determination and rule of engagement in the electricity industry (Okafor, 2012). MYTO was now
put into operation in 2008 for the first time and was reviewed in 2012. Its success will depend on
how seriously the stakeholders (the Government, the private sector operators and the electricity
consumers) handle the implementation. However, no significant change has occurred in
electricity supply in Nigeria. For instance, Available generating capacity of electricity in Nigeria
by December 2011 was about 3800 MW (Nnaji, 2011) as against 6000MW which is the installed
capacity (TCN, 2012). This is considered grossly inadequate for a country with a population of
150m people when compared with South Africa that generates 41,000MW for only 40million
people (Transmission Company of Nigeria {TCN}, 2007). United Kingdom with a population of
57.5m generates 76,000mw with per capita consumption of 1.33kw. United States of America
and Brazil with populations of 310m and 201 respectively generate 1,010,172MW and
100,000MW (The Presidency, 2010).
75
5.2 TARIFF METHODOLOGY
The pricing principle adopted by NERC is the Building blocks approach to determine
tariffs payable by consumers. This method ensures that every cost from generation, transmission
and distribution are included. Using this approach, the overall revenue requirements of the
industry were established and used as the basis for calculation of the revenue to be collected per
unit of sales. By this approach the government agency (NERC) has taken care of under-pricing
of electricity and full cost recovery if customers are able and willing to pay. The distribution
losses are also built into the tariffs and passed on to the consumers.
5.3 DETERMINATION OF DISTRIBUTION/RETAIL PRICES
Since the building blocks approach gathers together all the industry cost, it then follows
that the retail tariff in Nigeria comprises costs of natural gas, wholesale generation, transmission,
distribution, metering and billing to the consumer. These costs are more detailed as follows:
• Cost of supply of wholesale electricity injected into the transmission network.
• Charge for use of transmission system for each mWh delivered to distributor/retailer’s bulk
supply provided
• Cost of distribution through the local distributor’s/retailers network.
• Marketing, metering, billing and revenue collection costs
• Institutional charges
• Federal Government tariff subsidy targeted at vulnerable tariff classes
The generation and distribution charges are determined and set out by the Nigerian Electricity
Regulatory Commission. The distribution costs comprise allowance for a return on capital
invested; depreciation cost; cost of operation and maintenance of network; distribution losses
across the network, and meters and metering costs.
76
5.4 TARIFF REVIEW
In Nigeria, MYTO provides a fifteen year tariff path for the electricity industry with
minor reviews bi-annually and major reviews every five years. A major review in existing tariffs
is required when there are material variations greater than plus or minus 5% in the rate of
inflation, exchange rate fluctuations and change in cost of gas. The tariff order schedule of 2008
was reviewed in 2012 as a result of increasing cost of power, cost of operation and management
expenses and declining revenue as a result of absence of growth in electricity generation
capacity. An inflation rate of 13% was applied to compensate investors against rising cost of
business operation and to ensure that workers in the industry are paid living wages.
Consideration of the service standard desired and determination of total cost to be
recovered will reveal whether there is any need for subsidies and the availability of such.
Sometimes the tariffs may not be enough to achieve complete cost recovery which is the
situation in Nigeria. Where cost recovery is not achievable through tariffs, there must be an
arrangement to determine the subsidies that may lead to complete cost recovery (ADB, 2008). In
Nigeria the tariff subsidy is targeted at the two tariff classes of low income earners.
77
TABLE 5.1: SHOWING ANNUAL REVENUE GENERATION, OPERATING COST
AND SUSTAINABLE COST RECOVERY OF THE POWER SCTOR FROM (2001-2013).
YEAR AVERAGE OF
MONTHLY
REVENUE(�)
REVENUE
GENERATED PER
ANNUM (�)
OPERATING
COST PER
ANNUM (�)
SUSTAINABLE
COST
RECOVERY(�)
2001 3,265,676.33 39,188,116.00 55,003,314.00 -1.5815148
2002 5955331.67 71,463,980.00 85,098,263.00 -13634282
2003 6629448.75 79,553,385.00 89,391,150.00 -9837765
2004 8536327.08 102,435,925.00 101,857,010.00 578,915
2005 9037041.25 108,444,495.00 518, 111,147.00 -409,666,652
2006 100,0443,146 12,005,317,752.00 5,643,465,546.00 6,361,852,204
2007 1000906681 12,010,880,168.00 5,365,194,445.00 6,645,685,715
2008 899954095 10,779,449,144.00 6,682,617,710.00 4,096,831430
2009 1010213183 12,122,558,200.00 14,221,532,814.00 -2,098,974,610
2010 1324205423 15,890,465,079.00 17,607,696,686.00 -1,717,231,610
2011 1710696715 20,528,360,582.00 20,638,712,106.00 -110,351,520
2012 1896365045 22,756,380,543.00 21,567,802,203.00 1,188,578,340
2013 1987229868 23,846,758.421.00 22,743,563,342.00 1,103,195,080
Source: Adapted from PHCN Annual Reports and Accounts Enugu and improved by
author.
78
Table 5.1 above shows the revenue generated, operating cost and sustainable cost
recovery by the Nigerian sector from December 2001 to December 2013. The power sector was
able to recover cost and had excess of revenue over operational cost in 2004, 2006, 2007, 2008,
2012 and 2013. Even after the increase in 2008 under MYTO, the power sector still had excess
of operational cost over revenue in 2009 and 2010. The operational losses in these two years
were �2, 098,974,614 in 2009 and �1, 717,231,607 in 2010 and �-110,351,520 in 2011. This
result may not be surprising because the Nigerian power sector is not run as commercial
enterprise hence emphasis is not on profit making. There is general lack of enthusiasm or zeal to
make profit.
On a closer study it was revealed that the sector upon introduction of MYTO made profit
of revenue over operating cost in 2008 but this tariff order could not keep up with cost of
operation the subsequent years after as shown in the table above. Reasons owing to the sectors
inability to put on check some of the problems inherited from the unbundled PHCN which top
most are the incidences of corruption within the sector, unmetered consumption of electricity
supply and low return of investment because of the dynamics of gas supply to power.
The order was reviewed again in 2012 leading to the sector return of revenue over operating cost
but just like the case of 2008 could not sustain the return of revenue over operating cost thereby
validating our hypothesis 2 that:
Introduction of multi-year tariff order (MYTO) failed to result in sustainable operating cost
recovery in the power sector.
To determine the significance of cost recovery for the specified period, a t-test analysis was
conducted on the operating cost for the study period. The results obtained are presented in Table
5.2.
79
5.2 T-TEST ONE SAMPLE STATISTICS
N MEAN STD.
DEVIATION
STD. ERROR
MEAN
OPERATING
REVENUE.
11 7.6126E9 7.66835E9 2.31210E9
One sample Test
The one-sample t-test statistics table reveals that the mean cost recovered for the period under
study is approximately N7.6bn. From one-sample t-test result, a t-value of 3.292 was obtained.
This value is greater than the critical t-value of 1.812. With p-value (0.008) < 0.05, this result is
significant. This reveals that there is difference in cost recovered over the study period and this
recovery is significant. Therefore, the hypothesis is accepted thus, the extent to which cost is
recovered is significant.
To determine whether a significant difference existed between revenue generation before
and after the implementation of MYTO, the 2-independent samples t-test analysis was used. The
results are presented
Test value=0
T
df
Sig.(2-tailed)
Mean diff.
95% confidence interval of the difference.
Lower
Upper
Operating revenue
3.292
10
.008
7.61256E9
2.4609E9
1.2764E10
80
Table 5.3
One group t-test statistics
Era
N
Mean
Std. Deviation
Std. Error Mean
Operating revenue Before MYTO
After MYTO
7
4
3.4882E9
1.4830E10
5.82025E9
4.37162E9
2.199851E9
2.18581E9
Levene’ test
for Equality
of variences
t-test for Equality of mean
95% confidence interval of
the Difference.
T
df
Sig(
2
Tail
ed)
Mean Diff. Std.Error
Diff.
Lower
Upper
F
Sig.
Operating Equal
Revenue
variance
Assumed
1.037 .33
5
-
3.363
9 .00
8
1.13420E9
-3.37265E9 -1.89715E10
3.71257E9
Equal
Variance Not assumed
3.657
8.034
.00
6
1.13420E1
0
-3.10114E9
-1.84880E10
4.19603E9
Source: Author.
From the T-test Group statistics table, it is revealed that the mean operating revenue
generated after the commencement of the implementation of MYTO in 2008 (N14.8bn) was
more than the mean operating revenue generated before the commencement of the
implementation of MYTO (N3.5bn). Upon further analysis of the mean operating revenue
generated in two different eras, a t-test value of -3.363 was obtained. This value is less than the
corresponding negative t-critical value of -1.833. This implies the existence of a difference
between operating revenue generated after the commencement of the implementation of MYTO
81
and the operating revenue generated before the commencement of the implementation of MYTO.
Also, with value (0.008) < 0.05, this result is significant. Therefore, the introduction and
implementation of MYTO generated more revenue for PHCN but failed to maintain a sustainable
operating cost recovery. Therefore, we validate our second hypothesis that the introduction of
MYTO has failed to led to a sustainable operational cost recovery.
82
CHAPTER SIX
GAS SUPPLY AND REVENUE GENERATION CAPACITY OF THE POWER
SECTOR.
This chapter examines our third research question the dynamics of gas supply and
generation capacity and on revenue generation of the power sector. The question arises why gas
supply? why generation capacity? In appreciation of methodological rigor, Ifensinachi (2014)
illuminates on the concept of unraveling hidden relations. By this it simply means that hence the
relationship between A and B can be understood without much analytic rigor, the relationship
between A and C is hidden therefore needs to be unraveled. In extrapolating this concept of
hidden relations as related to this study, Okolie (2014) explained this relation thus: that power in
Nigeria has a cyclical movement that more gas supply will lead to more power generation, more
power generation will lead to more power supply and constant power supply will lead to more
consumption and payment by electricity consumers and invariably lead to return of investment
and increase in revenue generation by the power sector. It is with this binocular that we shall
study the dynamics of gas supply, generating capacity and revenue generation.
To accomplish this task, the following processes enumerated were employed in data
collection, monthly and yearly plant status of gas supplied (or Total station Volume of gas
consumed, ScF) by Shell Petroleum Development Company (SPDC) and Nigerian Gas Company
(NGC) Warri and Energy generated (MWH) by the plant were recorded and analysed.
6.1 ENERGY RESOURCES IN NIGERIA AND THE PROCESS OF GAS TO POWER.
Nigeria is Africa's energy giant. It is the continent's most prolific oil- producing country,
which, together with Libya, accounts for two- thirds of Africa's crude oil reserves. It ranks
83
second to Algeria in natural gas. Most of Africa's bitumen and lignite reserves are found in
Nigeria.
In its mix of conventional energy reserves, Nigeria is simply unmatched by any other
country on the African continent. It is not surprising; therefore, that energy export is the
mainstay of the Nigerian economy. Also, primary energy resources dominate the nation's
industrial raw materials endowment. Electricity energy production in Nigeria over the last 40
years varied from gas –fired, oil – fired, hydroelectric power stations to coal-fired with
hydroelectric power system and gas – fired system taking precedence.
This is predicated by the fact that the primary fuel sources (coal, oil, water, gas) for these
power stations are readily available. Nigeria’s coal reserves are large and estimated at 2 billion
metrictonnes of which 650 million tonnes are proven reserves (Sambo, 2013). About 95% of
Nigeria’s coal productionhas been consumed locally; mainly for railway transportation,
electricity production and industrial heating in cement production. Nigeria has an estimated 176
trillion cubic feet of proven natural gas reserves, giving the country one of the top ten natural gas
endowments in the world and the largest endowment in Africa. Natural gas is a natural occurring
gaseous mixture of hydrocarbons gases found in underground reservoirs. It consists mainly of
methane (70% - 95%) (Sambo, 2013).
With small percentage of ethane, propane, butane, pentane and other heavier
hydrocarbons with some impurities such as water vapour, sulphides, carbon dioxides, etc. Apart
from the export potential of the Nigerian gas, local demand opportunities are power generation,
cement industry, iron and steel plants. The largest single consumer of natural gas in Nigeria is
PHCN and it accounts for about 70% used to operate electricity generating gas plants at Afam,
Ughelli, Sapele and Egbin.
84
6.2 ENERGY DEMAND AND SUPPLY SCENARIO IN RELATION WITH
GENERATION CAPACITY.
Electricity plays a very important role in the socio-economic and technological
development of every nation. The electricity demand in Nigeria far outstrips the supply and the
supply is epileptic in nature. The country is faced with acute electricity problems, which is
hindering its development notwithstanding the availability of vast natural resources in the
country. It is widely accepted that there is a strong correlation between socio-economic
development and the availability of electricity.
The Energy Commission of Nigeria (ECN) was established by Act No. 62 of 1979, as
amended by Act No. 32 of 1988 and Act No. 19 of 1989, with the statutory mandate for the
strategic planning and co-ordination of national policies in the field of energy in all its
ramifications. By this mandate, the Commission which is the apex government organ empowered
to carry out overall energy sector planning and policy co-ordination. As part of its contribution to
the resolution of the problems of the electricity sector along the line of its mandate, the ECN has
been collaborating with the International Atomic Energy Agency (IAEA) under an IAEA
regional project titled “Sustainable Energy Development for Sub-Saharan Africa (RAF/0/016)”.
The project entails capacity building for energy planning and the determination of the actual
energy demand and the strategies for supply for each participating country over a 30-year time
horizon. The implementation of the project requires the establishment of a Working Team (WT)
and a Country Study Team (CST) both of which include the major public and private
stakeholders in the energy sector of the country. The working team consists of technical experts
that directly implement the project and reports to the CST, which serves as the steering
committee for the project on a regular basis. Members of the WT were trained on the use of the
85
IAEA models and have computed the Nigeria energy demand and supply projections covering
the 2005-2030. The project involves the use of the following IAEA Energy Modelling tools:
• Model for the Analysis of Energy Demand (MAED)
• Model for the Energy Supply Strategy Alternatives and their General Environmental Impact
(MESSAGE).
6.3 ENERGY GENERATION AND ENERGY DEMAND IN PROJECTION
The energy demand projections were computed using MAED with the key drivers of
energy demand, namely demography, socio-economy and technology. The application of MAED
requires detailed information on demography, economy, energy intensities and energy
efficiencies. This information is first assembled for a base year which is used as the reference
year for perceiving the evolution of the energy system in the future. Selection of the base year is
made on the basis of availability of data, assessment that the data are representative of the
economic and energy situation of the country.
MAED allows the breakdown of the country’s final energy consumption into various
sectors and within a sector into individual categories of end-uses in a consistent manner. The
breakdown helps in the identification of the social, economic and technical factors influencing
each category of final energy demand. In modelling the Nigeria’s energy case, four economic
scenarios were developed and used as follows:
• Reference Scenario - 7% GDP Growth;
• High Growth Scenario - 10% GDP Growth;
• Optimistic Scenario I – 11.5% GDP Growth; and
86
• Optimistic Scenario II – 13% GDP Growth (based on Presidential Pronouncement for the
desire to be among the first 20 economies by 2020).
Economic growth and structure of the economy are the major driving parameters in the four
scenarios. Projected electricity demand has been translated into demand for grid electricity and
peak demand on the bases of assumptions made for T&D losses, auxiliary consumption, load
factor and declining non-grid generation. Table 1 shows the electricity demand projections for
the scenarios. It must be emphasized that the demand indicated for 2005 represents suppressed
demand, due to inadequate generation, transmission, distribution and retail facilities. Suppressed
demand is expected to be non-existent by 2010.
For the 13% GDP growth rate, the demand projections rose from 5,746MW in the base year
of 2005 to 297,900MW in the year 2030 which translates to construction of 11,686MW every
year to meet the demand. The corresponding cumulative investment (investment & operations)
cost for the 25-year period is US$ 484.62 billion, which means investing US$ 80.77 billion every
five years within the period. In conducting the studies, all the available energy resources in the
country were considered in order to broaden the nation’s energy supply mix and enhance its
energy security. This is typical as shown in the table below.
TABLE 6.1 ELECTRICITY DEMAND PROJECTIONS PER SCENERIO, MW
Scenario 2005 2010 2015 2020 2025 2030
Reference(7%) 5,746 15,730 28,360 50,820 77,450 119,200
High Growth(10%) 5,746 15,920 30,210 58,180 107,220 192,000
Optimistic I (11.5%) 5,746 16,000 31,240 70,760 137,370 250,000
Optimistic II(13%) 5,746 33,250 64,200 107,600 172,900 297,900
Source: Sambo (2013)
87
6.4 KEY SECTOR INDICATOR ON POWER GENERATION A NEXUS OF POOR
GENERATION CAPACITY.
Nigeria currently has 14 generating plant, which supply electric energy to the National
Grid. Of the 14 generating plants, 3 are hydro and 11 are thermal (gas/steam). The national grid
is made up of 4,889.2km of 330kV line, 6,319.33km of 132kV line, 6,098MVA transformer
capacity at 330/132kV and 8,090MVA transformer capacity at 132/33kV.
Due to the importance of the sector, President Umaru Musa Yar’Adua, immediately after
he was sworn in on May 29th 2007, recognized the urgency of the emergency on the Sector by
specifically addressing the problems of the Sector in an urgent and immediate basis and
eliminating the usual bureaucratic time wasting procedures of treating issues of the sector, while
ensuring that Due Process is not compromised.
Accordingly, a program of action was formulated to address the problems of the Sector in
the Short term, Medium term and Long term. In the next nine months in the Short Term (2005),
it may be realistic to concentrate mainly on the effective and efficient utilization of the existing
generation and transmission infrastructures as well as completing the NIPP. The following
should be achieved:
• Maintaining and sustaining a minimum generation of the available capacity of 5,800MW;
• Reduce Transmission and Distribution power outages by at least 75%;
• Reduce Transmission and Distribution technical losses;
• Increase revenue collection in PHCN by 50%;
• Improve on Customer Service Delivery in the Distribution and Marketing section of PHCN and
• Improve on Health, Safety and Environmental measures in generation, transmission and
distribution of electricity.
88
To achieve these, the issues that must be addressed in generation, transmission, distribution and
marketing are as follows:
The Total Installed Capacity of the currently generating plants is 7,876 MW, but the
Installed available Capacity is less than 4,000MW as at December 2009. Seven of the fourteen
generation stations are over 20 years old and the average daily power generation is below
2,700MW, which is far below the peak load forecast of 8,900MW for the currently existing
infrastructure. As a result, the nation experiences massive load shedding. As presented by
(Sambo, 2013) through the planned generation capacity projects for a brighter future the current
status of power generation in Nigeria presents the following challenges:
i. Inadequate generation availability;
ii. Inadequate and delayed maintenance of facilities;
iii. Insufficient funding of power stations;
iv. Obsolete equipment, tools, safety facilities and operational vehicles
v. Inadequate and obsolete communication equipment
vi. Lack of exploration to tap all sources of energy form the available resources; and
vii. Low staff morale.
89
TABLE 6.2 INSTALLED THERMAL STATIONS AND GENERATION CAPACITY.
Source: As adapted from Sambo, et al (2013).It is evident from the above that that Nigeria’s major energy sources are thermal driven this goes to explain the relationship of gas to generating capacity, generation capacity to power supply which in turn has a causal relationship with revenue generation.
SN
PLANT PLANT TYPE
LOCATION STATE
AGE (YEARS)
INSTALLED UNIT
INSTALLED CAPACITY
UNITS AVAILABLE
1 EGBIN THERMAL LAGOS 22 6 1320 4
2 EGBIN AES THERMAL LAGOS 6 9 270 9
3 SAPELE THERMAL DELTA 25-29 10 1020 10
4 OKAPI THERMAL C\RIVER 2 3 480 2
5 AFAM THERMAL RIVERS 25 20 720 3
6 DELTA THERMAL DELTA 17 18 840 12
7 OMOKU THERMAL RIVERS 2 6 150 4
8 AJAOKUTA THERMAL KOGI Na 2 110 2
9 GERUGU THERMAL KOGI 1 3 414 3
10 OMOTOSHO THERMAL ONDO NEW 8 335 2
11 OLORUNSUGO\ PAPLANTO
THERMAL OGUN NEW 8 335 2
12 KAINJI HYDRO NIGER 38-40 8 760 44
13 JEBBA THERMAL NIGER 24 6 540 6
14 SHIRORO THERMAL NIGER 22 4 600 2
TOTAL SUB-THERMAL=
93 5976 44
TOTAL HYDRO= 18 1900 14
GRAND TOTAL 111 7876 58
90
6.5 GAS CONSUMED, ENERGY GENERATED AND ANNUAL REVENUE
GENERATION:
To accomplish this work ,the following processes enumerated were employed in data
collection, monthly and yearly plant status of gas supplied ( or Total station Volume of gas
consumed, SCF) by Shell Petroleum Development Company (SPDC) and Nigerian Gas
Company (NGC) Warri and Energy generated (MWH) by the plant were recorded for a period of
about five
TABLE 6.3: GAS CONSUMED AND ENERGY GENRATED IN 2010
MONTH
GAS CONSUMED (SFC)
ENERGY GENERATED (MWH)
JANUARY
498,943,548.86
207,658.00
FEBRUARY
554,326,987.01
155,416.00
MARCH
79,311,578.45
153,908.00
APRIL
709,533,310.33
104.291.00
MAY
533,717.916.62
109,793.00
JUNE
669,339,754.22
100,139.00
JULY
680,114,101.19
130,656.00
AUGUST
811,985.041,65
103,874.00
SEPTEMPBER
804.870,138.00
120,663.00
OCTOMBER
865,012,844.62
120,663,00
NOVEMBER
977,924,669.35
109,748.00
DECEMBER
997,142,582.43
104,915.00
91
Source: Adapted from Oyem (2013)
Fig.6.1 Graphical illustrations of gas consumed (2010)
Source: author
Fig.6.2 Graphical illustrations of Energy generated (2010)
92
Source: Author
TABLE 6:4 GAS CONSUMED AND ENERGY GERATED IN 2011
MONTH
GAS CONSUMED (SFC)
ENERGY GENERATED (MWH)
JANUARY
1,515,583,33.00
111,920.00
FEBRUARY
986,903,125.00
72,879.00
MARCH
1,600,042,708.00
118,157.00
APRIL
1,506,767,708.00
112,062.00
MAY
385,815,625.00
28,491.00
JUNE
603,358,333.00
44,600.00
JULY
1,611,620,833.00
199,012.00
AUGUST
869.632,292.00
64,219.00
SEPTEMPBER
356,457,292.00
26,323.00
OCTOMBER
116,647,917.00
8,614.00
NOVEMBER
0.00
0.00
DECEMBER
29,804,288.21
2,018.00
Source: Adapted from Oyem (2013)
93
Fig.6.3Graphical illustrations of Gas consumed in 2011
Source: Author
Fig.6.4 Graphical illustrations of Energy Generated in 2011
94
Source: Author
TABLE 6:5 GAS CONSUMED AND ENERGY GERATED IN 2012
MONTH
GAS CONSUMED (SFC)
ENERGY GENERATED (MWH)
JANUARY
1,290,168,750.00
86,289.00
FEBRUARY
1,208,620,834.00
89,252.00
MARCH
1,517,194,792.00
112,039.00
APRIL
1,109,157,292.00
81,907.00
MAY
1,275.097,875.00
106,074.00
JUNE
1,1385,521,250.00
115,260.00
JULY
826,804,669.00
76,100.00
AUGUST
723,855.119.83
64,627.00
SEPTEMPBER
785,453,270.00
65,341.00
OCTOBER
1,025,304,958.33
85,294.00
NOVEMBER
1,325,304,958.00
110,250.60
DECEMBER
0.00
0.00
Source: Adapted from Oyem (2013)
95
Fig. 6.5 Graphical illustrations of Gas Consumed in 2012.
Source: Author
Fig. 6.6 Energy generated 2012
96
Source: Author
TABLE 6:6 GAS CONSUMED AND ENERGY GERATED IN 2013
MONTH
GAS CONSUMED (SCF)
ENERGY GENERATED (MWH)
JANUARY
737,373,949.58
63,178.20
FEBRUARY
607,950,078.21
33,492.00
MARCH
607,950,078.21
106,619.00
APRIL
1,527,705,195.00
148.595.00
MAY
1,379,915,820.00
134,220.00
JUNE
1,870,188,967.00
181,907.00
JULY
1,614,188,96.00
157,007.00
AUGUST
1,597,615,995.00
155,395.00
SEPTEMPBER
1,126,139,616.00
109,536.00
OCTOMBER
1,136,709,512.00
71,416.00
NOVEMBER
763,156,341.00
71,416.00
DECEMBER
416,627,244.00
40,524.00
Source: Adapted from Oyem (2013)
97
Fig.6.7 Gas consumed 2013
Source: Author
Fig.6.8 Energy generated 2013
Source: Author
98
In the first two (2) months of year (2010) were high but fell towards the end of the year,
In the year 2007, apart from the tremendous increase in the amount of gas consumed by the
plant, there was a steady decline in energy generation. The average energy generation was
127,006MWH (274MW) giving 45% of total installed capacity.
The quantity of gas consumed and power generated having a maximum peak on the
second and seventh months of 2008and fell steadily for almost second half of the year, were
there was shortage of gas supply to the plant resulting to non-generation of power. The average
energy generation was 59,024.5MWH (127.5MW) giving 21% of installed capacity.
Similar pictures could be painted for the preceding years- 2011, 2012 and 2013,resulting in
average power generation of 82,702.8MWH (178.6MW), 101,155.8MWH (219MW) and
72,036MWH (127MW) respectively In the year 2012 for example, the gas consumed and energy
generated rose gradually and fell steadily below the expected power generation for that year. The
average power generation for the year 2011 and 20112 was 178.6MW, 219MW of about 29.7%,
36.6% of the installed capacity respectively. And in the first four (4) months of 2013, an average
power generation was 127MW which is about 21% of the installed capacity.
In general, it was observed that when large amount of gas was consumed, no equivalent
amount of power generation was obtained. In some situations, a low amount of gas was
consumed that resulted into a higher value of power generation. There was no definite pattern in
their gas consumption and power generation.
Throughout the year under consideration (2010-2013), there was constant fall of power
generation and gas consumption from year to year. This explains the dynamics of Gas to power.
It is only made significant by when we understand the interlocked relationship between these
99
intervening variables as the case may be. Therefore we assert here that there is constant change
in the quantity of gas supplied, gas consumed and energy generated.
100
TABLE 6:7 GAS TO POWER AND ANNUAL REVENUE 2000.2013.
YEAR
GAS CONSUMED (SCF)
ENERGY GENERATED (MWH)
GEN. IN BILLION (KWH)
CONSUMPTION IN BILLION (KWH
LOSS IN BILLION (KWH)
ANNUAL REVENUE GEN.
2000 - - 14,750,000,000
13,720,000,000
1,030,000,000
-
2001 - - 18,700,000,000
17,370,000,000
1,330,000,000
39,188,116.00
2002 - - 18,700,000,000
14,770,000,000
1,130,000,000
71,463,098.00
2003 - - 15,670,000,000
14,550,000,000
1,120,000,000
79,553,385.00
2004
14,355,289.82
1,325,301
15,670,000,000
14,550,000,000
1,200,000,000
102,435,925.00
2005
6,439,001,174.00
2,118,213
19,850,000,000
18,430,000,000
1,420,000,000
108,444,495.00
2006
48,158,183,257.00
3,4432,776
15,590,000,000
14,460,000,000
1,300,000,000
12,005,317,752.00
2007
44,126,568,292.00
3,459,012
19,060,000,000
17,710,000,000
1,350,000,000
12,010,880,168.00
2008
41,799,273,329,82
3,933,785
22,110,000,000
15,850,000,000
6,260,000,000
10,779,449,144.00
2009
37,985,279,00.45
3784,058
22,110,000,000
15,850,000,000
6,260,000,000
12,122,558,200.00
2010
51,570,873,327.67
2,697,033
21,920,000,000
19,210,000,000
2,710,000,000
15,890,465,079.00
2011
38,216,355,188.90
1,510,988
21,920,000,000
19,210,000,000
2,710,000,000
20,528,360,582.00
101
2012
322,044,922,892.84
1,510,988
20,130,000,000
18,140,000,000
1,990,000,000
22,756,380,543.00
Source: Index Mundi (2013) http://www.indexmundi.com/g/.g.aspx?c=ni&v=79
102
Fig 6.9 For more graphical illustrations of gas to power generation, consumption and
losses.
Source: Ofoegbu (2013).
Electricity generation stabilized in 2008 and 2009 with 22.11billion each. In 2010 there
was an increase from 22.11 to 21.92billion, an increase of 3.66%. In 2012 electricity generation
decreased to 20.13billion, a decrease of 8.166%.
This figures as we can see are not reflective on the revenue generated annually by the
power sector. This changes in gas supply and gas consumption affected power generation
making it to fluctuate between 2000-2013, the fluctuation never affected the amount of annual
revenue generated by the sector.
103
This is evident as electricity generation stabilized in 2008 and 2009 with 22.11 billion,
yet the power sector had a poor revenue generation of �10,010,880,168.00 and lost in revenue
generation of �4,098,831,430.00 in 2008 as revealed by our finding in fig.4.1. And also while
there was a decline in generation of 8% in 2012 it did not affect the amount of revenue generated
that year. In fact there was an increase of revenue generation of �22,756,38,543.00 and a gain of
�1,188,578,340.00. Thereby validating our hypothesis 3 that:
The dynamics of natural gas to generation capacity failed to impact on the amount annual
revenue generation of the power sector.
104
CHAPTER SEVEN
SUMMARY, CONCLUSION AND RECOMMENDATIONS
6.1 SUMMARY
The study investigated some empirical indicators of political economy of privatization of
PHCN and revenue generations in Nigeria. Accordingly, the study examined the post
privatization era to establish its contributions to revenue generations of the power sector. To
systematically or rather adequately investigate this problem, we thus, posed the following
questions;
1. Did the privatization of PHCN lead to an increase in the revenue generation of the
Power sector?
2. Did the introduction of multi-year tariff order (MYTO) ensure a sustainable operating
cost recovery in the power sector?
3.Does the dynamics of natural gas supply and generation capacity affect the amount of
annual revenue generation of the electricity market?
However, the above research questions formed the basis for the specific objectives of this study
which included:
1. To determine whether the privatization of PHCN led to an increase in revenue
generation of the power sector.
2. To examine if introduction of multi-year tariff order (MYTO) ensured a sustainable
operating cost recovery of the power sector.
3. Finally to ascertain if the dynamics of natural gas supply and generating capacity has
an effect on the amount of revenue generated per annum.
105
Thus, the study was discussed using the analytical framework of political economy
approach as proponent by Karl Marx and later extrapolated in Ake (1981). Our choice of
political economy approach as a tool of analysis was informed by its analytical utility in which
basically arose in reaction to the western liberal theory of the state which, inter alia, contends
that the state is impractical and independent force; as well as a neutral umpire that caters for the
main interest of every member of the society. In relations to the state, how the material condition
of a man determines his social relations. In essence the political economy approach unraveled the
contradictions that inform the privatization of public enterprise as Instrument of accumulation for
the dominant class of its agencies.
Thus, the state in the peripheral social-formations has remained largely 'the source of
economic powers well as an instrument of it, the state is a major means of production" (Martins,
1993). Indeed, given the low level of autonomy of the state occasioned largely by low level of
development of productive forces, the ruling class, use their economic advantages, social
networks and political clouts often determine the course of political and economic processes.
Using this theory to explain the privatization of public enterprises in Nigeria, it is obvious that
the problems of inefficiency , poor management, corruption, poor return on investment, political
interference, lack of equipment, etc. which, ostensibly led to the privatization of public enterprise
in Nigeria, cannot be substantiated.
Nevertheless, our tentative answers to the research questions are drawn to enable us
arrive at a satisfactory or make a plausible conclusion. The hypotheses include:
1. The privatization of PHCN led to an increase in revenue generation of the power
sector.
106
2. The introduction of multi-year tariff order (MYTO) failed to impact a sustainable
operational cost recovery in the power sector.
3. The dynamics of natural gas supply and generating capacity of the power sector failed
to impact on the revenue generated per annum.
The qualitative method of data collection was employed in the study while we relied on
secondary sources of data such as text books, journals, official publications, seminars,
conference and workshop papers, magazine, newspapers, internet documents etc. Hence, content
analysis was also adopted to provide descriptive explanations and interpretations to statistical
tables, figures and appendixes in our study and also to determine the reliability of the findings of
the study. The entire work was divided into seven chapters. In chapter one, the study established
a research problem and emphasizes the goals and need for addressing the problem.
The chapter two was a review of the extant literature which a enabled us to identify a gap
in the literature. This was followed by chapter three. Chapter three dwelled extensively on the
methodological requirements for the study. Then subsequent chapters four, five and six were
used to test our first, second and third hypotheses respectively. The test of first hypothesis in
chapter four revealed that the privatization of the power sector led to an increase in revenue
generation of the power sector. Before the signing of the privatization act of 2005, the power
sector witnessed a crippling return to revenue from 2001-2004. And after the privatization act
was signed the sector witnessed an increase in revenue generation from 2006-2013 respectively.
In the light of this, we accepted and validated our first hypothesis which states that the
privatization of PHCN has led to an increase in revenue generation of the power sector.
Chapter five tested our second hypothesis and revealed that the introduction of multi-year
tariff order (MYTO) failed to lead to a sustainable operating cost recovery of the power sector.
107
This is evident in 2008 and 2012 as the revenue generated could not surpass the operating cost of
the power sector. Therefore validating our second hypothesis as stated.
More also, chapter six examined the dynamics of gas supply and generation capacity of
the power sector and impacts on annual revenue generations. The unraveled relations here
revealed that while quantity of natural gas supply affected the generation capacity of the power
sector, the generation capacity impact on the annual revenue generations. Finally, the last
chapter of the work covered the summary of the entire work, the conclusion and our
recommendations.
6.2 CONCLUSION
In conclusion, if privatization of PHCN must of necessity bring forth the desired benefits
it has to be viewed not as an end itself, but as a means to get government interested in fostering a
new division of labour between the public and private sectors in order to increase the efficiency
and contribution to development of both sectors. Therefore, the success of privatization should
be judged not in terms of the sale, the contract itself, the price paid to government, the survival
or expansion of the enterprise sold, but rather, on the basis of the net benefits to the economy.
Privatization of PHCN must result in better service at lower prices as desired by
consumers who, often times, are not much bothered about economic philosophies. If this does
not bring tangible benefits in one form or another, the opponents of privatization who argue that
the benefits are not worth the cost would feel justified. As Adeyemo (2005) also correctly
observed, the primary argument for privatization and commercialization is that the efficiency and
profitability of the investments will improve after the exercise. At the end of the day, it is
perhaps only a clear demonstration of such improvement that will convince people who hold
such (opposing) views.
108
The Electricity Sector Reform firstly is not yet reality as presently plans are still being
made to have not been effective on the general populace. Though structures have been put in
place, for example the ESPRA 2005 and NERC Reform is yet to realized promised benefits, as
targets have not been achieved. Lack of political will has been a major problem in the
implementation of policies. There is also lack of policy-continuity as every new administration
comes in with its own agenda and policies. This creates an unstable environment, which
discourages both domestic and foreign investor participation in the Reform.
However in order to phase out PHCN privatisation challenges in Nigeria, approaches to
this include: A workable privatization model, improving its framework, enactment of effective
oversight laws, fighting corruption, transparency of the bidding process by the BPE, public
accountability, regular audit of the process/earnings, enhancement of corporate governance
among investors and most importantly, making public the BPE’s post privatization monitoring
and evaluation exercise reports, on the concerned privatised companies.
It is in this light that the following findings arose from this study:
• That there was an increase in revenue generations of the power sector after the
privatization of the power sector. However this increase seemed a regression analyses
revealed that the increase is moving at a very slow pace that may not sustain the running
of the sector even in the hands of private investors.
• That the increase in revenue generation even after the introduction of MYTO failed to
ensure a sustainable operating cost recovery of the power sector. Hence the sector
recovered but it is not sustainable as the recovery was insightful only on constant review
of tariff price.
109
• That the dynamics gas supply and power generations failed to impact on the amount of
annual revenue generated by the sector. Thereby creating an incongruence on the internal
logic that more generation of power will led to an increased revenue generations of the
sector.
6.3 RECOMMENDATIONS
For success to be achieved in the privatised Nigerian power sector, effective cost
recovery must be given adequate attention especially now that power sector has been handed
over to private sector. A tariff plan that takes into consideration the cost of and reasonable return
on investment should be adopted if success is to be achieved. A tariff plan that considers the
private investors’ cost recovery will make the project attractive. However the component of an
effective tariff system should not be neglected, that is the quality of service and ability of
consumers to pay. It is not good to draw up a tariff policy that is not affordable and may not be
strictly enforced creating loopholes that may turn around to frustrate the investors.
In the light of the above findings of this study, we put forward the following recommendations
for policy makers or decision makers in the power sector:
• Efforts must always be made by the electricity supplier to ensure collection of payments
due from users in order to balance income and expenditure and achieve the financial plan
of the project. Failure to collect all charges due from users is a common reason for
financial deficits which may not augur well with private investor. The prepaid metering
system.
System may take care of this collection problem. Honesty of workers must be seriously
considered during engagement of staff especially for the private operators.
110
There regulation against payment defaulters should be re-enforced. Now that the Federal
Government has handed over to private investors, adequate provisions should be made to
protection them. They should also be legally empowered to deal with defaulter.
• The cost recovery plan must try to balance cost of investment, quality of service, and the
tariffs that customers are willing to pay. These three factors are very critical and
interrelated aspects of sustainable service delivery. Presently the quality of service
rendered by the PHCN is very unacceptable despite the increase which has run from 2008
May 2013. Tariff increase must be supported with adequate and regular service delivery,
and increased efficiency. The new tariff must ensure full cost recovery not only
operational cost but fixed cost included.
• There should be a steady supply of gas from Nigerian Gas Company and Shell Petroleum
Development Company to gas plant. The gas supplied should fully be maximized by the
thermal power plants. This is because the large quantity of gas supplied does not
commensurate with the energy generated. Therefore efforts must be made to drastically
reduce transmission/distribution losses so that it can impact on the revenue significantly.
111
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Former Soviet Union. Washington, D.C.: The World Bank www.accessgambia.com/information/nawec-water-electricity Retreaved on 4th July, 2014 Zero Emission Communities (ZEroco2), (2011), Guideline on PPP Setting Up and Management,
Abuja, The Government Press
CONFERENCE PAPER
Bennett, John. Privatization Methods and Economic Growth in Transition Economies. Centre for
Economic Policy Research Discussion Paper, No. 4291, March 2004.
117
OTHER ARTICLES
Amadi, S. (2012), “PHCN Staffs are Exploiting Electricity Consumers”, Abuja, Leadership
www.royaltimes.net Retreaved on 4th July, 2014
Editorial (2011)“Jonathan’s and Public Private Partnership”, Nigerian Tribune,
www.tribune.com.ng/…/24598-Jonathans-public-private-partnershipRetreaved
Wednesday, July 2011.
Nnaji, B. O. (2011), Bright Future for Electricity Power in Nigerian Power Holding Corporation
Of Nigeria,
Okafor, C. (2012), FG, Others Owe PHCN 110billion, www.thisdaylive.com>HOME>NEWS05
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UNPUBLISHED WORKS
Ifesinachi, (2014) .Lecture note on Research Methodoly. July 2014.
Okolie, A.N (2014). Lecturer note on Theories of Political Economy.July 2014
Ogban-Iyam (1998).Lecture notes on Reaseach methodology. Feb.2009
118
APPENDIXES
APPENDIXE I: VALUE CAHAIN OF POWER FROM PRODUCTION TO
DELEIVERY.
SOURCE: Dikki B.(2014)
119
APPENDIX II: PPP INTEGRATION OF THE POWER SECTOR.
SOURCE: Dikki B.(2014)
120
APPENDIX III: INFRASTRUCTURAL POSITION OF GAS SUPPLY
Source: Aderingbe (2010)
121
APPENDIX IV: LOCATIONS OF THE GAS LINES AND FEEDER FIELDS.
Source: Aderingbe (2010)
122
APPENDIX V: KEY ELEMENTS TO IPP SUCCESS AND FAILURES.
Source: Aderingbe (2010)