NERC to impose corporate governance code on electricity sector

The Nigerian Electricity Regulation Commission (NERC) is set to impose a corporate governance code on the electricity sector as concerns over governance practices in the sector mount, sources at the regulatory agency tell BusinessDay.

“The commission is working on corporate governance for all acquirers of privatised power assets,” says the NERC source.

“Since the private owners took over operations of the Discos and Gencos 10 months ago, some have performed okay. In one or two, however, we have seen plain banditry,” he adds.

According to sources at NERC, one of the ways Discos mismanage their cash flows is through their employee allowance policy.

“Some have different personnel in multiple states receiving housing allowance of $15,000 monthly in addition to the Toyota Land Cruisers and drivers provided for the personnel in each state, even when the costs do not match living expenses in the area. This is in addition to their regular remuneration,” says another NERC source.

Even more troubling is the lack of independence at the boards. Sources further reveal that directors on most boards are family members with little to no expertise or experience that can be of benefit to the Discos or Gencos.

Some boards, according to the sources, have figurehead members with positions that are nothing more than vanity titles, implying that in reality, the board is just a one-man board – there are no independent directors on these boards. There are therefore no checks or balances to effectively monitor the actions of management.

Moreover, directors of generating and distribution firms use their offices for personal gains and self-aggrandisement, according to sources at NERC.

One of the fundament instruments of the corporate governance code is the audit committee, which is an internal audit mechanism that ensures financial regulatory and risk management compliance of public and private companies to laid-down financial laws and practices.

Unfortunately, the aforementioned rules are abused by managers of the country’s generating and distribution companies.

According the source within the regulatory agency, the chief executive officers of these companies pay frivolous and outrageous remunerations to themselves and also influence the appointment of members of the audit committee.

This regrettable anomaly is against the provisions of the Companies and Allied Matters Act (CAMA) as amended, which states that the members of the committee should be independent.

Some analysts who craved anonymity because of sensitivity of the matter say the directors may be receiving the jumbo pay without authorisation of the remuneration committee. They add that such transactions may not be recorded in the companies’ financial reports and accounts.

In Nigeria’s code of corporate governance, remuneration of executive directors should be set by the remuneration committee which comprises all, or most, of the non-executive directors.

But the boards of these companies politicise the appointment of the remuneration committee, which signifies bad corporate governance.

If these unscrupulous acts continue, it will be difficult for the audit committee to perform its primary responsibility, which is the detection of fraud.

The financial scandal of the 1990s that saw a lot of banks go bust combined with the 2009 financial crisis highlights the urgent need for a sustainable code that will prevent a repeat of the enigma in the power sector.

The problem with allowing corporate governance issues to fester in the power sector is the inevitable closure of these firms due to bankruptcy and funds mismanagement.

Discos and Gencos are in essence monopolies in the area they provide power. Regulators therefore cannot sit on the sidelines and allow banks to step in and foreclose on the assets of these firms as it would imply businesses and homes in the area would not have electricity until issues are resolved, which can be most times indefinite.

Added to that is the moral hazard issue of bailing out failed power companies after mismanagement of resources. This incentivises risk and encourages reckless behaviour from management because knowing the position they occupy in the economy – “too big to fail” – and the need for them not to remain operational, they would be less willing to tighten on reckless spending and would instead look to the government for quick money fixes, instead of cutting leaks and getting rid of their structural weaknesses.

BALA AUGIE & YINKA ABRAHAM