Infrastructure

Commentary

Facilitating whose power? WB and IMF policy influence in Nigeria’s energy sector

2 April 2008 | At Issue

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Introduction

Despite rhetoric to the contrary, the World Bank’s energy portfolio still fails to reap the double dividend of renewable energy technologies that would tackle both energy poverty and climate change. Nigerian economic policies shaped by World Bank and IMF recommendations, policy agreements and conditionality have so far lead to a dysfunctional electricity privatisation process, a heavy and as yet unfulfilled reliance on reform of the gas sector, and the failure to make any widespread practical progress on pro-poor, decentralised renewable energy.

It would be simplistic to lay the disaster and inequity of Nigeria’s energy and power sector at the feet of the IMF, World Bank and other international donors. However, their influence can not be disconnected from the corruption carried out by the country’s elites that has exacerbated poverty and failed to provide power to the nation. Nor can it be separated from the decades of egregious violations committed in the interests of international oil companies and their subsidiaries.

IFIs have ignored embezzlement of public funds by Nigerian authorities

Nigeria is the region’s largest oil producer and holds approximately one third of the proven gas reserves of Africa. Yet at least 60 per cent of its population lack access to electricity for their basic needs, with only a fifth of rural households covered.1

Nigeria’s epileptic energy supply is one of the key factors hampering its development. In 2005 the Bank estimated that to increase access to 75 per cent would require over $10 billion in investments. Under the tutelage of the IFIs a major neo-liberal economic reform programme was undertaken by former president Olusegun Obasanjo during his 1999-2007 administration, which found him heavily in favour with Washington. Though he promised to reform the energy sector, investments of up to $16 billion made by the federal government during his eight years in office did not lead to any tangible improvement. In March 2008 this expenditure was the subject of a corruption investigation by the House of Representatives. Former finance minister, Ngozi Okonjo-Iweala, now managing director of the World Bank, and former minister of solid minerals Oby Ezekwesili, currently African vice president of the World Bank, appeared before the investigative panel. Both played crucial roles in power sector reform during Obasanjo’s administration. The committee is expected to submit its findings to the house in April 2008. 2

IFI medicine

Core elements of World Bank and IMF policy in relation to the power sector include:

  • unbundling and privatisation of the state electricity company;
  • a power bill to accelerate transformation of the electricity sector;
  • legislation and technical assistance to promote domestic gas sector reform;
  • liberalisation of the downstream petroleum sector;
  • funding to address key infrastructure constraints; and
  • legislation for bills on fiscal responsibility, procurement, and the Extractive Industries Transparency Initiative.

Nigeria was the first country to “benefit” from the IMF’s policy support instrument (PSI) (a non-lending instrument which began in mid-2005, see Update 48), to which reform of the power sector is central. The PSI was central to the cancellation of Nigeria’s foreign debt with the Paris Club in 2005, which needed IMF endorsement for the deal to go ahead. Former finance minister Ngozi Okonjo-Iweala, now managing director of the World Bank played a key role in the agreement. Considered a triumph by some, for many people such debt ‘forgiveness’ came at a heavy price in view of the IMF policy advice and conditionalities that accompanied it. A number of key ingredients of the IMF’s PSI were controversially passed during president Obasanjo’s last few days in office, leading to a national strike in June 2007. These included the sale of the Kaduna and Port Harcourt oil refineries; the sale of the Egbin power station and other national assets; an increase in the cost of petroleum products; an increase in value added tax; and the non-implementation of the 15 per cent increase in civil service salaries.

Though the volume of donor financing to Nigeria is much less than to other sub-Saharan African countries, at a policy level the World Bank, the IMF and DFID are highly influential in the country’s macro-economy. Overall World Bank assistance to Nigeria is based on a joint World Bank/ DFID Country Partnership Strategy (CPS), approved by the UK government and the Bank in June 2005 for assistance to the country from 2006 to 2009. The CPS is based on the priorities of the “home grown” poverty reduction framework, the National Economic Empowerment and Development Strategy (NEEDS), which began in 2002. The World Bank’s strategy in Nigeria’s electricity sector is one of consistent and long-term engagement. In 2005 it claimed that it was “the only large international development institution active in the sector”. Since 2001 it has given approximately $300 million to support the reform and privatisation of Nigeria’s energy sector, through three IDA credits.

  • the Privatisation support project, May 2001, $114.29 million, co-financed with DFID and USAID;
  • the Transmission development project, August 2001, $100 million; and
  • the National energy development project (NEDP), May 2005; $172 million

The ongoing National Energy Development Project (NEDP) which began in 2005 is almost entirely Bank-funded. It consists of five components: transmission; distribution; access expansion and renewable energy; technical assistance for gas pipeline and gas to power projects; and technical assistance for reforms and private participation.

The Bank-supported privatisation of the electricity sector is being overseen by the Bureau of Public Enterprises (BPE), established in 1999 under the direction of a consortium lead by Union Capital Markets and CPCS Transcom. The former state power company National Electric Power Authority (NEPA), popularly known as ‘never expect power again’ was restructured into the Power Holding Company of Nigeria (PHCN) which quickly earned the title ‘please hold candle now’. BPE, PHCN and the Federal Ministry of Power and Steel (since restructured to the Ministry of Energy) are central to the IMF and Bank-endorsed Electric Power Sector Reform Act, passed in March 2005.

Deregulation fuels kleptocracy

Deregulation of the downstream petroleum market (refining, supply and distribution) has been a key ingredient of World Bank and IMF policy advice since 1999. The most contentious of the IMF’s structural benchmarks was the sale of the Kaduna and Port Harcourt oil refineries. The process turned into a mockery. The sale was first put on hold due to the difficulty in attracting high quality international investors. Then having been valued at $800 billion, the refineries were sold off during Obasanjo’s last days in office in May 2007 for a paltry $500 million to a consortium close to the president called Bluestar Oil Service Limited. The ensuing protests which contributed to a June national strike saw Bluestar withdraw from the deal and its money refunded.

The privatisation process of the downstream oil and gas industry has seen strong opposition from labour groups over the absence of due diligence3. The government is heavily criticised for its willingness to sell state assets without ensuring the development of national refining capacity, which would eventually remove the need to import much of the refined petroleum products that Nigeria consumes. The federal government spent a total of $18.6 billion from 2000-2006 to import refined petroleum products. Oil workers have said that the amount spent on the importation of refined products could build at least six new refineries across the country. The failure to develop refining capacity favours the few elites who benefit from the monopoly that they hold a monopoly over refined oil imports. The Nigerian Labour Congress (NLC) requested that the Bureau of Public Enterprises (set up to oversee the privatisation process) make public the studies carried out by the consultants Credit Swiss First Boston and BNP Paribas in order to establish the estimated reserve prices for the refineries upon which their sale was eventually based. The NLC questioned the methods of calculation employed by the consultants which it estimated seriously undervalued the refineries.

The sale of the Eleme Petrochemicals plant, in Port Harcourt, was a structural reform of the PSI in October 2005. The plant is the largest of its kind on the continent. National newspapers report that it was sold for approximately $225 million to the Nigerian subsidiary of the Indonesian firm, Indorama Group. The National Union of Petroleum and Natural Gas Workers described this amount as “not worth the spare parts available at the plant”.4 The World Bank’s private sector lending arm, the International Finance Corporation (IFC) provided a loan of $75 million and mobilised another $80 million from commercial lenders. The Eleme takeover took place following a presidential directive to commission it. Informal reports state that following the Nigerian National Petroleum Company’s (NNPC) refusal to hand over the plant on orders from the Presidency, troops took it by force. Following the assessment of a government committee on staffing needs, staff strength was then reduced from 1000 to 296. A memorandum of understanding between the government and Bureau of Public Enterprises (set up to oversee the privatisation process) apparently agreed that state assets should be sold at the ratio of 51/49 per cent. However, Indorama was given a 75 per cent equity stake in the case of Eleme. In Febuary 2007, Rashad Kaldany, IFC’s director of Oil, Gas, Mining and Chemicals stated “We hope that the successful privatisation and turnaround of Eleme will attract further private investments in Nigeria’s petrochemicals industry and pave the way for a major transformation of this sector”.

The controversial sale of the Egbin power station to Korea Power Corporation and Energy Resources Limited for an under-priced N 280 million (approximately $2 million) was protested by the National Union of Electricity Employees for the lack consultation with stakeholders and workers. Egbin is the largest generating station operated by the Power Holding Company of Nigeria and is being privatised through an international competitive tender as one of the unbundled units of the Bank-supported privatisation process.

Protecting property rights over due process

The World Bank funded the implementation of the bill for the implementation of the Nigerian Extractive Industries Transparency Initiative (NEITI). NEITI is central to the energy question in Nigeria, particularly in light of the failure to channel massive oil and gas revenues to for the benefit of national development. NEITI was developed together with the procurement bill and the freedom of information bill. However, in the event only NEITI was approved by both the Senate of the National Assembly and the House of Representatives, and with a significant amendment. This appeared without explanation, at the last minute and allows much greater leeway to oil companies over the issue of disclosure. To the provision on the power of NEITI to obtain information from companies’ volume of sales of oil, gas and other minerals extracted was added the caveat that “provided that such information shall not be used in any manner prejudicial to the contractual obligation of proprietary interests of the extractive industry company”. According to the Civil Society Legislative Advocacy Centre, these clauses have the potential “to defeat the entire essence of the transparency campaign in the extractive industry”. Despite this blatant violation of both due process and disclosure, the IMF praised the NEITI bill as “good progress in efforts to improve governance and reduce corruption”. The bill was passed by the Nigerian Senate in May 2007, days before the end of Obasanjo’s tenure.

Failed gas sector reforms

The Bank has been a driving force in terms of technical assistance for reform of Nigeria’s gas sector. International oil companies have played a major but entirely secret role in formulating the Bank-supported strategy on reform of the sector. The World Bank provided assistance to the Nigerian government to come up with a national gas strategy5 by financing and supervising two major studies in 2004, the Nigeria strategic gas plan and Nigerian LP gas sector improvement study. The former was carried out by IHS Energy group based in Washington, Houston and London and the latter by C.I Services Limited of Ireland.

The Nigeria strategic gas plan calls itself “the first comprehensive analysis and integration of corporate proposals to develop gas resources prepared by the seven largest International Oil Companies operating in Nigeria, along with NNPC.” These proposals are integrated into one “Gas Master Plan”. However all project proposals “are covered under a strict confidentiality agreement”.

However, the Bank-supported gas master plan for Nigeria has so far failed to achieve many of its main objectives, including the elimination of harmful gas flaring by 2008. Despite reductions, Nigeria is still rated as the world’s biggest gas flarer . Most of the gas in the Delta is produced during the process of oil extraction, otherwise known as associated gas. It is one of the most difficult and expensive gas sources to harness and therefore there is no incentive for oil companies not to flare it. The practice has been carried out for over 40 years, exposing Niger Delta communities to catastrophic livelihood damage. Conservative assumptions using World Bank information suggests that gas flaring from just one part of the Niger Delta (Bayelsa State) would likely cause annually 49 premature deaths, 4,960 respiratory illnesses among children and 120, asthma attacks. The estimated annual financial loss to Nigeria from gas flaring is about US $2.5 billion. Despite various rulings by the Nigerian authorities since 1984 all the major multinational oil companies who operate in Nigeria flare gas6. The Nigerian government has instructed all oil producers to phase out gas flaring by 2008 and enlisted the help of the Bank help achieve this. Despite this imminent deadline, none of the companies have demonstrated their readiness to meet the latest deadline for phase-out by end 2008.

The World Bank is providing a total of $125 million in risk guarantees to the West Africa Gas Pipeline (WAGP) project, which involves a 680 kilometer transport system designed to carry natural gas from Nigeria to markets in Benin, Togo and Ghana (see Update 57). A claim to the Bank’s Inspection Panel by affected communities from the area argues that project violates Bank policies, including those on environmental impact assessment and public consultation. Communities say the Bank has failed to demonstrate how the project will reduce gas flaring or bring benefits to them. The Bank counters that 60 per cent of the gas to supply the WAGP would be associated gas that would be otherwise flared. Nigerian NGO Environmental Rights Action points out that there is no evidence of the construction of an associated gas gathering facility that would make it feasible for WAGP to utilise associated gas that is currently flared.

Energy poor

The Nigerian Electricity Regulatory Commission (NERC) has the legal power to put in place life line tariffs and to discriminate in favour of essential services such as hospitals. Yet questions remain over its political strength. In August 2007 the commission called on the government to provide subsidies, without which electricity would be unaffordable for millions of Nigerians. However the Bank stated that in order to achieve full cost recovery with an adequate profit margin, the “reasonable average tariff” should be about 30 per cent higher than the one currently in operation 7. This contradicts the Bank’s own Joint Staff Advisory Note on the progress report for NEEDS, of June 2007 which states “it will be important to establish electricity tariffs which allow cost recovery, while introducing adequate measures to protect vulnerable groups”8.

The minority of Nigerians connected to the electric grid suffer from frequent and unpredictable black outs. Many parts of the country go for days without access. Power is often rationed, meaning that communities receive electricity only on alternate days, and rarely for the full day when they do. Bills are generally issued on the basis of arbitrary estimates, often charging consumers for much more than they have consumed. Mass disconnections of entire communities are common, on the grounds that some households in the area have been facilitating illegal tapping or refusing to pay their bill. This obliges all those affected to either pay a hefty bribe and/or reconnection fee. Often out of desperation to access a supply of energy that many simply can not afford, illegal tapping, vandalisation of power lines and non-payment of bills is common. Power outages across the country have had a dire impact on essential services such as hospitals and schools as well as small businesses. Those who can afford to rely on generators, which are cumbersome and extremely expensive to run.

Rural electricity access in Nigeria is less than 20 per cent9. Most rural populations are off-grid and almost wholly reliant on wood fuel for domestic needs. Wood is usually collected by women who walk up to eight hours per day to find it. Nearly two-thirds of Nigeria’s energy consumption is from traditional burning of fuel wood and agricultural wastes. Any rural electrification that does exist tends to be thanks to diesel generators10. However diesel fuel must often be carried over long distances, through unpaved roads, which is difficult during the rainy season.

According to the Bank, in a country with over 130 million people, Nigeria’s electricity utility company has only 4.6 million customers 11. One connection is shared by numerous customers. In 2005 technical losses in the transmission and distribution system were as high as 40 per cent. A large part of the transmission system suffers from extensive vandalism and inadequate maintenance. Power generation facilities are in poor shape whilst distribution networks are poorly maintained and inefficiently operated, hence the difficulty in moving power from generation to consumption points. Statistics on electricity access, and grid capacity and output vary 12 but the second NEEDS report cites installed generation capacity at 6,000 MW, but with available energy output at only 3,000 MW, less than 30 per cent of the demand, currently estimated to be at 10,000 MW.13

Fuel price hikes

The IMF has consistently advised the Nigerian government to remove domestic subsidies on petroleum products (and other essential goods and services), to bring costs in line with ‘international levels’. The proposed 10 Naira increase per litre of petroleum products was a key factor in the three day national strike that took place in June 2007. A study by the Nigerian Labour Congress shows that petroleum products’ prices are by far the highest in Nigeria, in some cases by as much as fifteen times when compared to its fellow OPEC member countries. By the time Obasanjo left office, the pump price of fuel had increased fivefold since 1999.

The rise in the cost of domestic fuel has an almost immediate knock on effect on the cost of food, transport and other essential services. Coupled with massive devaluations of the Naira against the dollar and rising oil prices, increases in the cost of petroleum products (kerosene, diesel and PMS) has raised the cost of living beyond the reach of many average families. In direct correlation, the majority of poor people, particularly in rural areas who were dependent on kerosene for their livelihoods have increasingly turned to wood fuel, or coal. This is having serious implications both for deforestation, and poverty. In urban areas wood fuel or coal is often impracticable, and the poor are forced to spend the majority of their earnings on kerosene. By the time Obasanjo left office, the pump price of fuel had increased fivefold since 1999, from 20 to 75 Naira.

Since 2000 Nigeria has been losing an average of 11 percent of its primary forests per year—double the rate of the 1990s. Between 1990 and 2005, the country lost a staggering 79 percent of its old-growth forests. These figures give Nigeria the dubious distinction of having the highest deforestation rate of natural forest on the planet. A statement by the Nigerian Labour Congress in June 2007 corroborated, “a higher kerosene price will result in continuing deforestation and the attendant negative impact on the environment”. In 2000, the Ministry of Environment published a a National action programme to combat desertification, in which it identified the dependence on wood for fuel as a key factor in the country’s deforestation.

Renewables and rural electrification

At a policy level significant developments have been made in renewable energy and rural electrification. However in practise progress appears to have been virtually non-existent. The current contribution of renewable energy is about 0.6 per cent of total electricity generation capacity.14

Positive developments are largely based on the recent Renewable energy master plan (2006). The 2005 Electric Power Sector Reform act which was central to the NEDP also emphasised the role of renewable electricity, especially for remote and rural areas. The third component of the NEDP provides support for the expansion of renewable energy, though financially it constitutes a small part of the total budget when compared to the transmission component. A 2005 Global Environment Facility project grant is co-financing technical assistance for this renewable energy component.15

To date renewable electricity has not been part of the national power planning process, and any plans that did exist were based exclusively on grid extension16. By 2005 there were 1,500 incomplete rural electrification projects, which would need an estimated $300 million to complete them all.

The potential of small hydro in Nigeria is vastly under utilised. The country could be operating at a total capacity of 964.2 MW, in a total of 277 sites in 12 states. However, currently small hydro schemes are operating in only three states in the country, Plateau, Sokoto and Kano. Of the total 30 MW installed capacity, 21 MW (or 70 per cent) is generated from 6 sites in Plateau state owned by the Nigerian Electricity Supply Corporation Limited (NESCO).

The NEDP states that the project “will begin to address barriers to the expanded use of renewable energy technologies, by creating an enabling environment for grid-connected and off-grid renewable energy sources”. However, the renewable electricity guidelines identify a number of barriers for renewable energy in Nigeria, including: perceived risk by bankers who still prefer high-reward large-scale conventional electricity investments; absence of Nigerian manufacturing capacity for components of renewable energy technologies such as turbines; and supply chain constraints such as high import tariffs.

The IFIs have been criticised for their willingness to ignore the embezzlement of public funds by Nigerian authorities; their disregard for due process in the projects and policies that they support; their failure to meaningfully engage with civil society; and for their facilitating role in perpetuating the conditions that enable companies operating in the Niger Delta to maintain a monopoly over the country’s natural resources. The Nigerian case adds weight to critical analyses of World Bank and IMF energy sector reform programmes. The IFIs have pushed centralised, grid-based models, and a framework based on utility privatisation and private public partnerships, which so far have failed to effectively provide pro-poor energy.

Footnotes

1. See National energy develoment project, World Bank (2005:7).

2. Okonjo-Iweala, Ezekwesili Face Reps TodayLeadership, (27 March 2008).

3. See Independent report on the review of petroleum products supply and distribution in Nigeria, Nigeria Labour Congress, (2000).

4. Controversy trails handover of eleme complex, Vanguard, Lagos (7 August 2006).

5. Nigeria strategic gas plan, Joint UNDP/World Bank Energy Sector Management Assistance Programme, (2004:3).

6. See http://www.climatelaw.org/cases.

7. Public financing of a power sector in transformation, World Bank, (2007:151), from Nigeria, a fiscal agenda for change. Public Expenditure Management and Financial Accountability Review (PEMFAR), Poverty Reduction and Economic Management 3 Country Department 12, Africa Region, 2007.

8. Joint staff advisory note on the progress report for NEEDS, (2007:7).

9. Renewable electricity policy guidelines, Federal Ministry of Power and Steel, written by International Centre for Energy, Environment and Development, (2006).

10. Renewable energy for rural industrialisation and development in Nigeria, UNIDO / Energy Commission of Nigeria, (2003).

11. Nigeria, a fiscal agenda for change, (PEMFAR), World Bank, (2007).

12. "Electricity supply: long, nauseating wait for improvement", the Nigerian Guardian, 6 August 2007.

13. NEEDS-2 Chapter 17 Physical Infrastructure: Energy (2007:210).

14. Renewable electricity policy guidelines, Federal Ministry of Power and Steel, written by ICEED (2006:6).

15. NEDP World Bank (2005:50).

16. Renewable Electricity Policy Guidelines, Federal Ministry of Power and Steel, written by ICEED, (2006:3).