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Power sector review: Anxiety as DisCos await FG’s hammer

There is palpable fear among Electricity Distribution Companies (Discos) operating in the country as the Federal Government begins the review of the five-year power privatisation agreement which elapsed on November 1, Business Hallmark can reveal.

It was gathered that though the power sector comprises of three major arms, generation, transmission and distribution, the distribution arm is the most prone to possible takeover, with the other arms largely immune to government’s adverse decision due to their ownership structure and capacity.

It would be recalled that major issues within the nation’s power sector, principally concerning power outages and unreliable service, had compelled the Federal Government to take radical action with the enactment of the Electric Power Sector Reform Act of 2005, which called for unbundling the national power utility company into a series of 18 successor companies: six generation companies, 12 distribution companies covering all 36 Nigerian states, and a national power transmission company.

The act stipulated that ownership of these companies be granted to the Bureau of Public Enterprises (the privatization arm of the federal government) and the Ministry of Finance Incorporated. This unbundling paved the way for an ambitious privatization program to be carried out by the Bureau of Public Enterprises in Nigeria.

In 2007, the Bureau of Public Enterprises hired CPCS Transcom Limited, an international consulting firm based in Ottawa, Ontario, Canada to provide advice about the best ways to move forward with the privatization of the country’s 11 distribution companies and the 6 generation companies. In 2010, CPCS was consulted again in order to provide advice on the Nigerian government’s privatization program.

On 30 September 2013, following the privatization process initiated by the Goodluck Jonathan regime, PHCN ceased to exist. In its stead, the Nigerian Electricity Regulatory Commission (NERC) was formed. The independent regulatory agency, as provided in the Electric Power Sector Reform Act of 2005 was tasked with monitoring and regulating the Nigerian electricity industry, with issuing licences to market participants, and with ensuring compliance with market rules and operating guidelines.

The 11 distribution companies include the Abuja Electricity Distribution Company Plc; Benin Electricity Distribution Company Plc; Eko Electricity Distribution Company Plc; Enugu Electricity Distribution Company Plc; Ibadan Electricity Distribution Company Plc; Ikeja Electricity Distribution Company Plc and the Jos Electricity Distribution Company Plc.

Others are the Kano Electricity Distribution Company Plc; Kaduna Electricity Distribution Company Plc; Port Harcourt Electricity Distribution Company Plc and the Yola Electricity Distribution Company Plc.

The six generation are Afam Power Plc; Egbin Power Plc; Kainji Hydro-Electric Plc;
Sapele Power Plc; Shiroro Hydro-Electric Plc and Ughelli Power Plc.

While the transmission end is retained by the Federal Government through the Transmission Company of Nigeria (TCN).

The Transmission Company of Nigeria, it was gathered, is immune to any government action due to the fact that it is wholly controlled by the government and any indictment on the company is also an indictment on the government, a source in the ministry of power told our correspondent. The government as at today, is also against the privatisation of the transmission infrastructure, insisting that giving out the whole power infrastructure to foreigners could open up the country to possible sabotage.
The TCN, it was gathered, had also been able to shift the blames in the power sector on distribution companies, who are the weeping boys in the power structure. On the other hand, power generating firms have done considerably well with the average generation of around 7,000MW electricity daily.

However, the actual power distributed hovered between 3,000MW and 3,900 in the last two years, data obtained by BH revealed. Twenty of the nation’s 27 power stations had been forced to shut down some of their units on the back of low demand by Discos, worsening the blackout being experienced by millions of customers across the country.

Among the many sins on the Discos is the rejection of power from the transmission company and their preference to give the little they accepted to companies and wealthy individuals who agreed pay millions every month, while millions of hapless Nigerians live in darkness.

BH learnt over the weekend that the Federal Government has reviewed the power sector despite the decision of discos to kick against the move and will come out with its decisions.
“We have reviewed the privatisation of the power sector and the discos have been declared technically insolvent. We must change the narrative by reworking the sector for optimum performance. Nigerians should wait for the Federal Government for the final decision,” said a director in the ministry of power who did not want his identity disclosed.

A document by the Ministry of Power tilled: ‘Power Sector Policy Directives and Timelines’, obtained by our correspondent indicate that the government, as part of its strategies, is considering recovering electricity power assets from core investors which were described as ‘failed investors’.

While advocating for an urgent need to recapitalise the Discos, the report described the inability of the Discos to improve customer service and meet operational costs as a direct consequence of their inability to raise capital.
The ministry said the Discos’ accumulated debts to the Nigeria Bulk Electricity Trading Plc and the Market Operator had made them technically insolvent.

However, the takeover move has been mellowed down by two major factor, the opposition by TCN and the huge cost the government would bear in the event that it choose to toe that path. The power ministry document indicate that the Federal Government would require up to $2.4bn (N736bn) to repossess the privatised distribution assets from the core investors if it finally takes the decision.

“To do so within the provisions of the Share Sale Agreement will require a sum in the region of $2.4bn, some of which will be paid as compensation to the failed investors. This is not a desirable outcome. It is noteworthy that government is yet to pay the investor in Yola Disco for its negotiated return to government,” the report concluded on the option of repossessing the distribution assets,
While highlighting the reasons for the inability of the Discos to raise the capital required, the ministry said new lenders would require additional equity injection.

“But any new equity investor would require clarity about how the accumulated debts would be treated, and what support, possibly in the form of subsidy, regulatory assets and or higher tariff, would be available to manage new operating shortfalls during a transition period,” it added.

While opposing total cancellation, the Managing Director of TCN, Mr Usman Mohammed, who incidentally had been calling for the recapitalisation of the distribution companies, maintained that cancelling discos sale was not in the best interest of the it will come with contingent liability.

“Right things should not be implemented wrongly. We should right the wrong instead of cancelling it. Because when you cancel it, you get it wrong completely. What we need is to correct it, and recapitalisation can correct it.
If we cancel the privatisation, we are going to have a contingent liability and we will send a signal to the whole world that Nigeria is not private sector-friendly.

“Secondly, does government have sustainable money to invest in the power sector? No. When you cancel, you will return the money of the investors and you are going to pay them 20 per cent for five years.”

BH learnt during the week that the Federal Government might take the recapitalisation option as it is considering compelling the 11 distribution companies to recapitalise before considering the final option of a total takeover.
Reacting to the story, the Permanent Secretary, Federal Ministry of Power, Loius Edozien, though admitted that there is an ongoing review of the power sale agreement, denied being aware of any plan by the government to repossess the DisCos.

However, electricity distribution companies have decided not to go down without a fight. The discos which spoke to our correspondent through their umbrella body – the Association of Nigerian Electricity Distributors (ANED), said the Discos are committed to solving the challenges affecting retail electricity distribution in Nigeria and are opposed to plans to take them over.

The Executive Director, Research and Advocacy of ANED, Mr. Sunday Oduntan, said repossession as a ‘solution’ to resolving the power supply problem in the country was not desirable.
““This is not a desirable outcome. It is noteworthy that government is yet to pay the investor in Yola Disco for its negotiated return to government. The federal government and the Disco investors remain committed to working in partnership to address the current challenges of retail electricity distribution, as evidenced by the recent Siemens initiative and recent regulatory activities.”

He listed other efforts that prove the collaboration of Discos and the government to include the ongoing Meter Asset Providers (MAP) programme, the distribution franchise consultations, the present wrap-up of the minor electricity tariff reviews, among others to provide affordable and consistent power supply for electricity customers.

“It is the hope and expectation of the Disco investors and operators that, collectively, the aforementioned initiatives and activities, in tandem with respect for sanctity of contract, increased regulatory and policy certainty, will provide the enabling environment that will result in a Nigerian Electricity Supply Industry (NESI) that is commercially viable and sustainable, thereby attracting the desperately needed investment that continues to be elusive in the sector,” Oduntan stated.

Meanwhile, Nigerians have thrown their weight behind the decision of the federal government to intervene in the power sector.

The Coordinator Edo State Civil Society Organisation (ESCSO), Omobude Agho, who spoke to our correspondent in a phone interview, said the licenses of the Discos should not be renewed over poor performance.

“The license is a five years contract which expired on November 1, we are saying that it must not be renewed. The discos should be taken over by the Bureau for Public Enterprise (BPE) who should get capable investors willing to do business and follow the terms of agreement.

“The Discos have not met any of the conditions of the terms of the contract agreement. There was inadequate provision of transformers, electricity, replacement of poles, wires, among others,” he said.

Also speaking, the President, Electricity Consumers Association of Nigeria, Mr Chijioke James, said there was a need to revive the power sector.

“It is a welcome development that by December, there will be a review to know how the core investors who took over the power assets have performed. It is based on that feedback mechanism that the government can make an informed decision, which should not be political because the power sector is a very strategic sector for the economy of our country.

“Therefore, in taking any decision, they should have the overall national interest at heart, and not make the same mistakes made in the past. We will love to see a situation where things are done based on merit.

“The Discos that are doing well should be supported and encouraged to do more; those who have failed should be shown the way out.”
Speaking at the opening of the 23rd Nigeria Economic Summit in Abuja recently, the Chairman of Heirs Holding, Mr Tony Elemelu, had asked the government to dilute the shares of the private investors in the power companies.
Elumelu, a major shareholder in Transcorp Power Consortium, advised the government to invest more in the privatised power firms to wrest them from current operators.

He said, the government could give the Discos to investors who have the resource to run the distribution companies.

Also in March, the National Leader of the All Progressives Congress, Senator Bola Tinubu, called on the Federal Government to revisit the privatisation of the sector.

He accused the Peoples Democratic Party administration of sharing out the power assets to friends and cronies without very deep and thoughtful research and evaluation.

As the government keeps its decisions close to its heart, players in the electricity power sector, it was learnt are having sleepless night and have began serious lobbying to get favourable decision from the government.