Why we are campaigning on energy privatisation, and other questions

August 2015

Despite the UK’s long and unsuccessful experience with energy privatisation, our government continues to support it elsewhere – most recently in Nigeria. The UK continues to pour aid money into a privatisation programme that seems doomed to failure, neglecting policy options that could address Nigeria’s serious energy supply problems.

Here are some commonly asked questions about our campaign on energy privatisation.

Why are you campaigning on energy privatisation?

Global Justice Now has a vision of a world where our resources and decisions about how they’re used lie in the hands of the many not the few, and are available to all, not just those who can afford them.

One resource we all need is energy: to cook, keep warm or cool, light our homes and communicate. But in many places corporate control of energy resources means that many people are unable to access or afford the energy they need. One way that companies get control of energy is through the privatisation of our energy systems.

Why the focus on Nigeria?

The UK was one of the first countries in the world to privatise its energy system – and for the last 25 years it has been exporting this policy around the world. One of the ways it does this is through the UK aid budget, which is currently being used to support private energy schemes in countries like India and Sierra Leone. But at the moment, the most money is going to support a privatisation scheme in Nigeria. We estimate that, by the time the project finishes in 2016, around £50m of UK aid will have been spent on privatising the Nigerian energy system. [1]

What’s the problem been in Nigeria?

There have been multiple problems:

  • Price rises – tariffs have increased [2] and people are required to pay increasing standing charges which have to be paid even if no power is available (a frequent problem) or they only use a very small amount. It is very difficult to get a meter from the energy companies and often they don’t get read anyway, so in many cases bills are based on inflated estimates, rather than how much power people have actually used. [3]
  • More blackouts – since privatisation, people have reported that the power supply has become more unreliable and there are more power cuts.
  • Job losses – over 10,000 workers have been made redundant and many have not received the compensation they are entitled to.

Isn’t the problem just that the energy privatisation process has been managed badly?

No. Time and again energy privatisation has led to higher prices, poorer service and failed to deliver energy access for the poor, as our briefing documents.  In the case of Nigeria, price increases began before privatisation in an attempt to attract outside investment. [4]

Reviews by the UK’s Department for International Development (DfID) claim that the project, which it describes as “far more ambitious than anything ever attempted in Africa”, has “exceeded expectations” in terms of how it has been implemented. Despite this, the newly privatised companies had to be bailed out by the Nigerian Central Bank in November 2014 after investment dried up. [5]

But if the Nigerian government wanted to privatise its energy system, surely it’s good for the UK to support it?

The privatisation of the Nigerian energy sector started almost 20 years ago under pressure from the World Bank and IMF, and there have been problems ever since. For example, contracts with private power stations caused huge losses for the state power company which had agreements to purchase their power at a higher prices than it could generate itself. [6]

Global Justice Now believes that if DfID had made an impartial review of the evidence of energy reforms around the world, privatisation would not have been chosen as an approach to improve the sector because of its track record of failure, particularly for the poor. We have asked DfID what evidence was used as a basis for the decision to support privatisation, but so far we have had no response.

Annual reviews of the project by DfID show that the UK’s support has been instrumental in the privatisation process, stating that it has added credibility and confidence, leading to faster privatisation and greater probability that the privatisation process will succeed.

Don’t you think the energy sector in Nigeria needs reform?

While it’s clear that major improvements are needed to the Nigerian energy system, it appears that privatisation has made the problems worse. Millions of pounds of aid money that could have been used to pay for new connections or improve the power supply has instead been wasted on expensive consultants to advise on implementing the privatisation process.

Given that energy privatisation has a track record of failure, Global Justice Now believes that other, more democratic approaches to improving the power sector should have been explored. For example, in places like Germany, the energy grid is being taken into municipal control which means people can have a say in how their energy is produced and prices are set.

If investment is needed and the government can’t afford it, surely it has to come from the private sector?

The private sector has failed time and again to provide the investment needed to deliver public services like water and electricity to everyone, particularly in rural areas and poor neighbourhoods, because there is little profit to be made. In Africa, the private sector has provided only 11 per cent of investment in energy infrastructure, and most of this has been in power stations which may supply big business rather than new connections for the poor.

In countries that have managed to deliver universal (or near universal) access to electricity, public investment has been necessary. This is often done by governments’ issuing bonds which are purchased by private investors, meaning that ultimately the money does come from the private sector. But the difference is that control of the energy system remains in public hands.

In the case of Nigeria, it has been calculated that the total cost of universal electricity access could have been met with public investment equivalent to 0.6 per cent of Nigeria’s oil revenues over 10 years.

Doesn’t government corruption mean that privatisation is a better option?

Privatisation is not an effective way to deal with corruption. For example, the privatised Ugandan energy company has been rated one of the most corrupt institutions in the country by Transparency International.

In Nigeria, the state-owned companies were sold off at very low prices and President Goodluck Jonathan who oversaw the privatisation process had a commercial interest in one of the companies that benefited.

Isn’t competition the best way to bring down prices so that even the poor can afford electricity?

This is often used as an argument given for privatisation – but it’s failed to work in practice, both in terms of the companies that produce the power and those that distribute it to consumers.

Before full privatisation in Nigeria, there were a number of private power stations that had contracts to supply electricity to the state electricity company. But these caused huge losses for the state power company because it ended up locked into agreements to purchase power from the private generators at a higher prices than it could generate itself.

Following the latest wave of privatisation, the electricity distribution companies have also been sold off. But only one company operates in each area, so there is no way users can switch suppliers to get a cheaper price or better service.

Even in the UK where people do have a choice between private suppliers, the market is dominated by the ‘Big Six’ energy suppliers which are currently being investigated by the Competition and Markets Authority. A recent report as part of the inquiry found that these companies were collectively charging households £1.2bn a year more than they could have been in a competitive market.

Shouldn’t we be calling for higher prices for energy to discourage people from using it and help keep global carbon emissions down?

Everyone should have access to enough energy to meet their basic needs. While we certainly need to use energy as efficiently as possible, and those who use more than they need should cut down, in most places (including Nigeria and the UK) the pricing system actually favours high energy users with electricity costing less per unit if you use more.

It is possible to have fairer energy pricing though: in Cuba, the government provides enough energy for people’s basic needs at a very low price, with prices increasing steeply above this level, and the cost of power to run luxuries like air conditioning costing over 50 times that of the basic allocation.

We can’t keep building the big national, fossil-fuelled energy systems like we have in the UK – shouldn’t we be encouraging people in countries like Nigeria to live off-grid?

While it’s true that the development of renewable energy generation from sources such as wind and solar lends itself to much more decentralised energy systems than we have in the UK, most people will still need and want to be connected to a grid of some sort to ensure that they have a reliable power supply that can meet their basic needs. More democratic control of energy would enable this to happen.

For more information, see our energy resources:

References

  1. Calculation by Global Justice Now based on DfID (2015) Response to Freedom of Information request, 19 June 2015
  2. DfID (2015) Response to Freedom of Information request, 21 August 2015
  3. Global Justice Now communication with electricity users in Nigeria, 2015
  4. Rice, X. (2012) Nigeria power rates to rise up to 88%. FT, 12 February 2012
  5. DfID (2014) NIAF2 annual review – summary sheet. Available: http://iati.dfid.gov.uk/iati_documents/4745841.docx
  6. PSIRU (2010) Public disaster and private gain - the proposed privatisation of electricity in Nigeria. London: PSIRU: http://www.psiru.org/reports/public-disaster-and-private-gain-proposed-privatisation-electricity-nigeria
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