Nigeria’s national grid has been collapsing with reckless abandon. Of course, we know that if that trajectory does not change, the harmattan season may come earlier, economically. So, there are many ideas on how to fix it; one is coming from the nation’s former Vice President and PDP presidential flagbearer, Atiku Abubakar: “The IDF [infrastructure debt fund ] will have an initial investment capacity of approximately $20 billion. In addition, I’ll cause the creation of an infrastructure development credit guarantee agency to complement the operation of the IDF by de-risking investments in infrastructure to build investor confidence in taking risks and investing capital”.
In their words,” Dear customers, we regret to inform you of a system collapse on the national grid at precisely 11:27 a.m today July 20. We are in talks with the transmission company of Nigeria to ascertain the cause of the collapse and a possible restoration timeline. We will keep you updated on the situation”.
Also displeased with the constant national grid collapse is People Democratic Party (PDP) Presidential aspirant Atiku Abubakar who via a series of tweets on Twitter proposed a solution to put a stop to the incessant collapse of the national grid.
See what he said, “I am reliably informed that there was a total national grid collapse at precisely 12:23 pm today. This is one collapse too many. It is the 6th time this is happening in this year alone. Due to the priority that I place on the power sector upon which the successes of other sectors are hinged, I am proposing infrastructure that will involve the facilitation of a review of financial, legal, and regulatory environment to promote private investment in power among the sectors.
”I’ll promote the identification, with tax breaks, a consortium of private sector institutions to establish an infrastructure debt fund (IDF) to primarily mobilize domestic and international private resources for the financing and delivery of large infrastructure projects across all sectors of the economy.
“The IDF will have an initial investment capacity of approximately $20 billion. In addition, I’ll cause the creation of an infrastructure development credit guarantee agency to complement the operation of the IDF by de-risking investments in infrastructure to build investor confidence in taking risks and investing capital”.
I commend Mr. Abubakar for coming up with a solution; we need just that as the campaign season picks up. This proposal is not novel; Nigeria has tried it in many forms and it has one big problem: “credit guarantee” does not scale.
In a 2018 presentation in Washington DC, at Ronald Reagan International Trade Center (see link here), I made a case that credit guarantees cannot help Africa. My thesis was based on this: if you want someone to invest $1 million and guarantee $1m, when that person finishes investing that $1m, he will expect you to guarantee more funds, to unlock new investments. If you do not have more capacity to guarantee more, scaling that project will stall. That is what has happened in most parts of Africa: credit guarantees work but are also limited once the guarantor cannot expand them.
What was my proposal in Washington DC? Go back to the root cause why a guarantee was even necessary? If you remove those impediments, investors will come and if they find opportunities, they can scale that mission, not just in the small pilots for guarantees, but for every part of the nation.
My suggestion to the nation is simple: credit guarantee is not scalable since it is bounded. However, we need to address the reasons why people see opportunities in the energy sector and yet refuse to invest. Interestingly, we know the #1 reason: a court now determines how much producers of power can charge their customers, irrespective if that will bankrupt the sector.
Sure, price ceilings are necessary for products produced by utilities but what is happening in Nigeria goes beyond managing oligopolies in municipalities. What we have is simple: many Nigerians believe that power has to be free and the court has blessed that thinking, making it hard to price energy reflectively. The result is evident: many players in the energy sector are collapsing.
Yes, someone has to fight for investors so that investing in Nigeria’s energy sector does not translate to burying cash. We need to tell the court that while it can fix the prices customers pay for DStv and Zee World, when it comes to electricity, we need to modulate.
How do you reconcile a scenario where investors see HUGE opportunities in Nigeria’s electricity sector and yet few want to invest in the sector? Focusing on credit guarantees will not help. In my opinion, we need to focus on removing the bottlenecks and whatever makes it necessary to even guarantee people to come and make money!
Comment on LinkedIn Feed
Comment: I think a bigger question is where are they going to get the funds to guarantee investments made through the IDF in the first place. After all, the country is practically broke. The only possibility I see to guarantee such funds is to borrow again, and we all know how that goes in Nigeria with corruption?
My response: a great point. That is like 50% of the nation’s budget depending on the exchange rate of choice.
