This guy and your industrialization…how do you want to industrialize without power??

I eventually had to come to this topic. There was no avoiding it. Everyone knows that steady, affordable power will be a crucial input to any serious industrialization effort. But what might not be well known is a fact I stumbled on recently as to why our efforts to attract Foreign Direct Investment (FDI) to our power sector has failed in recent years. Turns out the foreign investors (local ones too) have passed on the opportunity to invest in our power sector because in their estimates there is little demand for power in the country [1]. I can hear you screaming, “what do they mean that there is no demand for power?..over 200 million people frustrated with incessant power outages every day, how can they say there is no demand?” Hold your horses and I will explain.

Generally, the world over, domestic demand is only a small fraction of total power demand, the bulk of it comes from industrial demand. With our industrial sector in a near comatose state (No doubt partly brought on by the lack of power. Poor or absent industrial policies will be another major factor), the scenario is perceived as one that would lead to poor Returns On Investment (ROI), should they, the investors, invest in the sector. You might argue that but if the investments were made, industries would spring up and investors would be able to recoup investments. It is at this point that the issue of pricing of electricity comes in. The table below shows the pricing of electricity in Nigeria, in both naira and dollars and for both household and business consumers, as of June 2022. The prices are from the site, globalpetrolprices.com:

The site also points out that the global average is about 0.161 USD per kWh for households and 0.167 USD for businesses. That is, the global average is about 3 times the Nigerian price for households and about 2 times the Nigerian price for businesses.

These figures tally with what I heard an investment banker express sometime between 2014 and 2017, when I used to attend an annual conference on power that I think was organized by a Dubai-based outfit. I remember him saying that consumers were being charged 36 Naira per kWh, though I don’t remember him specifying whether he was talking about households or businesses. He also went on to say that the generating companies were generating power at a cost of 72 Naira per kWh, that is a cost twice than what they are charging consumers. So they are not even covering their operating costs.  

This situation tends to be common in developing countries, largely because power utilities in developing countries have tended to be publicly owned and so through them, governments in developing countries are trying to achieve social, as well as economic goals. In this case, social goals would include universal access to energy in general and to electricity in particular because access to energy is critical for development and improving living standards. As noble as these intentions are, the harsh reality is that because of the generally low purchasing power of the citizens of developing countries, power utilities in those countries are often forced into the circumstances described above. This brings on many problems; they can’t keep the inventory levels they ought to keep; they can’t do essential regular maintenance; they are forced to request government subsidies, this of course takes resources away from other critical areas of the economy; they often compelled to take to borrowing which imposes a heavy debt service burden in later years [2].

Funding infrastructure is not cheap and this is especially so for power. I happened to have been involved some years back (2014-2015) with the Centre for Petroleum, Energy Economics and Law (CPEEL), which is a MacArthur Foundation Regional Centre of Excellence based at the University of Ibadan. While there they conducted a study on universal electricity access (Disclaimer: I was not involved in the study). In the study, they estimated that for Nigeria to achieve universal electricity access, the power sector would have to receive investments of about $300 billion over a period of 30 years [3]. That tallies with another estimate I came across at roughly the same time from a report by PriceWaterhouseCoopers that mentioned needing investments on the order of about $10 billion every year. Other infrastructure finance material I have come across suggest that in the US, spending on power is on the order of $100 billion every year [4]. This makes the $16 billion that Obasanjo allegedly spent during his tenure look like mere pittance. Moreover, Obasanjo’s Senior Special Adviser on Power, Foluseke Somolu claims that for those 8 years, the monies disbursed for power investment cumulatively add up to just $5.1 billion [5]. At this point, I would like to give a word of advice if I may. Please note that in economic affairs, a single number, no matter how big it seems, is almost meaningless. You need at least a 2^nd number or some sort of benchmark to make sense of the 1^st number.

So what to do? We seem to be between the devil and the deep blue sea. Industry needs power to thrive, and in our case, we need industrial activity to attract investment to the power sector. A really frustrating catch-22 situation. As bleak as it sounds, there is reason to hope. Abhijit Banerjee and Esther Duflo are a Nobel Prize winning husband and wife team in the economics department of the Massachusetts Institute of Technology (MIT), which is reputed to have the best economics department in the world. They specialize in developing country issues. In their book Good Economics for Hard Times, they cite studies which show that while developing countries generally lack resources, their GDP per capita is even lower than what this lack of resources would predict. In other words, poor countries are poor in substantial part because they make less good use of the resources they do have [6]. My guess as to why this is so will be a combination of knowledge gaps, communication gaps, relative lack of organizational capability, lack of political will, corruption and absent or uninformed public policies. Making progress in these areas though hard, is clearly possible. As for the catch-22 situation between power and industry, it seems the two will have to co-evolve.

Co-evolution is an established concept in evolutionary biology. Perhaps its most recognizable form is the symbiotic relationship between flowers and the insects that pollinate them, where both co-evolve with and co-adapt to one another for their mutual benefit. Specific examples of this include flowers baiting insects with pollen and nectar. The insects while feasting on these, in return pollinate the flowers. Some flowers go as far as mimicking female members of the insect species. This attracts and deceives the males into carrying out pseudo-copulation. In the process, the flowers are pollinated [7]. Another well-known instance of co-evolution are predator-prey relationships. Predators and prey interact and coevolve: the predator to catch the prey more effectively, the prey to escape. Yet another example of co-evolution would be host-parasite relationships. One particular example of this that should resonate in this part of the world is the relationship between man and the malaria parasite. There is an evolutionary arms race between us and the malaria parasite similar to the nuclear arms race between the now defunct USSR and the USA during the Cold War. In this arms race, there is an ongoing struggle between competing sets (here, man and plasmodium) of co-evolving genes and behavioral traits that develop escalating adaptations and counter-adaptations against each other [8]. This arms race goes a long way to explain why chloroquine is no longer an effective remedy against malaria [9]. Also, the SS genotype was a genetic adaptation on our part long ago to provide protection against malaria, though as we all know, with grave consequences [10].

Co-evolution has made its way as a concept from biology into economics (among other disciplines) in the sub-discipline known as evolutionary economics. Coevolution in economic systems plays a key role in the dynamics of contemporary societies. Coevolution operates when, considering several evolving realms within a socioeconomic system, these realms mutually shape each other’s development [11]. For our case, a starting point could be aggressive policies that unlock low hanging fruits in some industrial sectors. I gave the example of the paper industry in one of my previous posts. This is by no means the only example. If such policies are backed up by political will, they should create formal employment opportunities. This helps reduce the size of the informal economy. I had discussed the problems of the informal economy in another previous post. Reducing the informal economy will broaden the tax base, meaning more revenue for government. More importantly, it would mean greater purchasing power among the populace and a heightened ability to afford market-friendly electricity tariffs. Market-friendly tariffs will serve as an inducement to potential investors to set up the public private partnerships so desperately needed in the power sector because completely publicly funded infrastructure in this day and age is simply unsustainable.  The process, it should be obvious is a slow and iterative one but then, at some point in adult life, one should learn to accept that economic development is not magic.

BEFORE YOU GO: Please share this article with as many people as possible and check out my book, Why Africa is not rich like America and Europe. Thank you.

References

1. Capt Samuel Akinyele Caulcrick. August 2017 ‘Nigeria, Warehouse of imported goods’, punchng.com: https://punchng.com/nigeria-warehouse-of-imported-goods
2. A. Heron. Winter 1985 IAEA Bulletin ‘Financing electric power in developing countries’
3. Iwayemi, Akin et al. 2014 Towards Sustainable Universal Electricity Access in Nigeria. Ibadan Patrick Edobor and Associates
4. Grigg, Neil S. 2010 Infrastructure Finance: The Business of Infrastructure for a Sustainable Future. New Jersey John Wiley & Sons
5. Obasanjo, Olusegun 2014 My Watch: Political and Public Affairs. Yaba, Lagos. Prestige
6. Banerjee, Abhijit Duflo, Esther 2019 Good Economics for Hard Times: Better Answers to Our Biggest Problems. UK Penguin Random House
7. Wikipedia article on Co-Evolution https://en.wikipedia.org/wiki/Coevolution
8. Wikipedia article on Evolutionary Arms Race https://en.wikipedia.org/wiki/Evolutionary_arms_race
9. Apr 2014 ‘The evolution of chloroquine’ www.labonline.com.au  https://www.labonline.com.au/content/life-scientist/news/the-evolution-of-chloroquine-115238518
10. Mia Rozenbaum June 2019 ‘How sickle cell protects against Malaria’ understandinganimalresearch.org.uk https://www.understandinganimalresearch.org.uk/news/how-sickle-cell-protects-against-malaria-a-sticky-connection
11. Almudi, Isabel Fatas-Villafranca, Francisco 2021 Co-Evolution in Economic Systems. UK Cambridge University Press