In a conversation on fixing Nigeria’s electricity, many have proposed that government should do what it did on telecoms: fully privatize power. The thinking is that full privatization will fix the industry. That is what we read on newspapers.
Interestingly, I do not really think so. I believe in market forces but any government that allows full market forces to work on the electricity sector in Africa will see riots on the streets.
As I noted this morning on a piece on Tekedia, if you allow full market forces, the discos can send their full supplies to say 30 companies in Nigeria. Those companies would gladly pay upfront! Dangote Group can absorb 20% of our present national capacity and shut down its power assets. Magically, discos will become profitable because marginal cost of serving all those millions who never pay will go. They would focus on 30 customers pending when gencos add capacities.
So, instead of having 10 customers to bring $1 million, the discos have to look for 200,000 customers for the same revenue. And those 200,000 customers may not even want to pay. But those that can pay are not interested in the services offered by discos because they are generating their own power. For me, this is one of the biggest challenges in the industry: discos do not serve the customers they need to boost revenue and drive investments. They are left with the masses who command higher marginal cost making it tougher for them to break-even.
But because government will not allow them, they cannot serve only the best customers who have money to pay with possibility of making them profitable. So, instead of selling 20% of national capacity to Dangote, they would be banned from selling more than say 0.01% even though Dangote can absorb 20% and pay upfront.
In telecoms, that restriction does not apply due to the nature of the product. If you think any government will sign-off full privatization, always remember that discos can decide to sell only to the most profitable clients who technically can absorb the present national capacities. But with partial privatization, they remain regulated to balance the game with their supplies from gencos/transmission companies. There is a reason they are called utilities – you have one disco in your house to supply you electricity unlike telecom services where you can easily have as many sim cards as you want.
Simply, electricity is not an ordinary product. It is only an ordinary product when the nation can generate full 100% capacity to serve all types of demand (residential, commercial, and industrial). But when that is not the case, government cannot allow FULL PRIVATIZATION as discos will shut down lines to families and focus on commercial and industrial customers who have the money to pay, and possibly upfront.
Sure, you may reason they would be regulated to balance the demand. If that is the thinking, that is not full privatization as market forces really demand that you move products to those with capacities to pay and save you money. Where government stops discos from doing just that, the whole argument breaks. When government does that, it is trying to protect homes and families. Discos can make money and be fine if you give them the same level of autonomy the telcos have to sell to who they want to sell. But doing so will result to riots on the streets!
LinkedIn Summary of this Piece
Many have written that govt should do full privatization (F.P) in our electricity sector. A handy comparison is the telecom sector.
In this piece, I argue that govt is right on not allowing F.P. to the extent that it cannot dictate who the discos sell to. Until Nigeria gets to full equilibrium (supply at parity with demand), our electricity product cannot be seen as an ORDINARY product.
Unlike what most newspapers are writing, if govt allows full privatization, discos can send all available power to about 30 companies in Nigeria who will willingly pay upfront! Those firms can absorb our present capacity. Then none for homes and small offices.
That kind of situations does not exist in telecoms: no govt tells MTN, Glo and Airtel how to balance allocation of sim cards. But in power, govt cannot allow Ikeja disco to send 100% of its capacity to the Ogba factories even though they can pay upfront.
Market forces work but if you allow that in our power sector today, there would be riots. Govt is not stupid; it is very complex. Any disco can be profitable by next week if you allow full privatization (100% private capital, 100% decision on customer base). Why deal with 20 million customers when Dangote Group can absorb 20% of total capacity?
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