Nigeria Sees the Light

Nigeria announced plans to privatize its power grid. This is great news for the country because currently blackouts are extremely common and more the rule rather than the exception. Private households and business get most of their power from running their own diesel generators which are noisy, dirty, smelly and expensive.

The privatizing of the power grid is a win on all fronts for Nigeria if it plays its cards right. It must be very accommodating and not let politics get in the way. Previous privatization attempts in the telecom industry have failed due to corruption and lack of necessary infrastructure that private firms need to operate successfully.

Foreign direct investment (FDI) is perhaps the greatest booster of economic growth for any developing nation. Nigeria is at a point where the marginal returns on investment could be exponential. There is a huge market for energy in Nigeria, so any company that is able to capitalize on that demand stands to see a huge return. This is good news because it means both the people of Nigeria and the power companies will win.

The people demand reliable energy and as such, will be willing to pay for it. Right now, since energy is heavily subsidized by the state, demand is way way up and people don’t value the power they use. People leave lights on all day simply because it’s so cheap. This puts added strain on an already feeble state-run grid.

By privatizing it, costs will likely go up, but this would be much more efficient as people would be forced to value the energy they use, thus conserving much more, which will keep pressure on prices to stay low.

Since Nigeria is ripe for investment, the competition to take over the power will be strong. There is already interest from companies from Cananda, Ireland and India. If the government commits to improving infrastructure, which could come easier with a reliable power grid and the increased revenue that results, the power companies could be even more successful.

It really only takes one industry to be successful with its investments in Nigeria before other industries seek to capitalize on the positive gains that come from reliable power and infrastructure. FDI begets FDI and growth has the potential to take off.

Business leaders in Nigeria say a lack of reliable power is one of the biggest obstacles they face, and if that problem can be solved, the business environment in Nigeria could explode.

The main lesson here is that state-run, command-and-control policies never work, and make much needed growth almost impossible in developing countries. Market forces are what are needed to create the proper incentives and send the signals that investors and customers need to operate effectively. We have seen this in China, as their growth can be directly attributed to market-based reforms, and if Nigeria proceeds smartly, we will likely see them rise to prominence and wealth in Africa, something that continent desperately needs.