Banks take over shares of five indebted DisCos

Fidelity Bank and Afreximbank have activated the call on the collateralised shares of Kano, Benin and Kaduna electricity distribution companies (DisCos) in a bid to take over their boards over their inability to repay loans obtained to acquire assets during the 2013 privatisation.

Fidelity Bank has written to the Bureau of Public Enterprises (BPE), which oversees the government’s 40 percent stake in the DisCos, that it has replaced the board members of the affected DisCos.

The memo seen by BusinessDay shows that the new board members for Kano DisCo are Hasan Tukur (chairman), Nelson Ahaneku (member), and Rabiu Suleiman (member).

For Benin DisCo, the board members are KC Akuma (chairman), Adeola Ijose (member) and Charles Onwera (member).

While for Kaduna Disco, the new appointments are: Abbas Jega (chairman), Ameenu Abubakar (member) and Marlene Ngoyi (member).

Read also: Uncertainty over financial health of DisCos as CBN forbearance runs out

The BPE has nominated Bashir Gwandu (Kano), Yomi Adeyemi (Benin), and Umar Abdullahi (Kaduna) as independent directors to represent the government’s 40 percent interest in the three DisCos respectively, during this transition.

BusinessDay exclusively reported on Tuesday that the Central Bank of Nigeria is no longer willing to continue to allow Nigerian banks to carry their huge non-performing loans associated with the funding of the privatisation of the power sector without having to provide for them.

The apex bank, which has supported the beleaguered electricity sector with both cash injection as well as forbearance, is now contemplating a change in the rules in light of the poor performance of at least five of the DisCos.

The BPE is engaging with the CBN to ensure an orderly transition and to ensure that Fidelity Bank does not hold the DisCo shares in perpetuity, the memo said.

BusinessDay gathered that it is envisaged that the majority interest in the entities would be sold to capable private sector investors willing and able to re-capitalise and manage the entities efficiently.

The BPE has also received assurances that Fidelity Bank will participate fully in all the ongoing market initiatives aimed at improving the sector such as the National Mass Metering Programme.

In the interim, Fidelity bank has met with the Nigerian Electricity Regulatory Commission (NERC) on an emergency basis and activated the business continuity process, and has also appointed interim managing directors for the affected DisCos.

The managing directors are Ahmad Dangana, for Kano DisCo, Henry Ajagbawa for Benin DisCo and Yusuf Usman Yahaya for Kaduna DisCo.

Last year, the Asset Management Corporation of Nigeria (AMCON) began taking over the operations of Ibadan DisCo but in January, the DisCo said it had reached an agreement with AMCON for it to continue to run the firm.

It is not clear how long this arrangement will last as the BPE has obtained approval from NERC to appoint Kingsley Achife as the interim managing director of Ibadan DisCo.

BusinessDay gathered that, in a temporary capacity, the leadership of AMCON will be a placeholder board for the Ibadan franchise with Ahmed Kuru as chairman, and members of the board would be Eberechukwu Uneze and Aminu Ismail as members. Oluwaseyi Akinwale will represent the interest of the government on the board alongside the director-general of BPE.

The BPE is also restructuring the management and board of Port Harcourt DisCo to forestall the imminent insolvency of the entity and as a condition for support to the entity to meet its market obligations. Iboroma Akpana will take over as the chairman of the board.

Others who will form the interim board are Emmanuel Okotete, Eyo Ekpo, Ismaila Shuaibu and the DG of BPE. Benson Uwheru will take over as the managing director of Port Harcourt DisCo as part of the changes.

The government, according to the memo, will support the activation of emergency funds through the Nigerian Electricity Market Stabilisation Facility to support the entity while it goes through restructuring and repositioning to serve the citizens of the franchise area better.

“We are working with the Honourable Minister of Power and NERC to ensure no service disruptions during these transitions. BPE remains committed to supporting the Nigerian Electricity Supply Industry to serve Nigerians better,” the memo said.

BusinessDay could not reach NERC for confirmation.

Nigeria’s apex bank’s unwillingness to further allow lenders to carry DisCos’ huge non-performing loans collected on their books without making a provision for them may have precipitated this action.

These affected DisCos account for over 85 percent of the cash shortfall recorded by the industry so far, and all efforts to help them back to profitability including over N1.6 trillion in intervention funding for the sector have failed.

The appointment of receivership is based on the loan agreement DisCos entered with their bankers before they acquired the assets which provide for the appointment of a receiver upon default in payment of the loan.

Typically, the generating companies have to pay for gas and other input to generate power and the shortfall arises when the DisCos fail to pay for the power delivered to them via the national grid.

Some industry experts say that even if the banks successfully take over the indebted entities, there are no easy options as receivership could precipitate legal tussles, further entangling the system.

“The issues with the DisCos are cross-cutting and affect the entire sector. It, therefore, remains to be seen how receivership would somehow resolve deep-seated sectorial issues, which require a wholesale rethinking of the architecture of the entire sector,” said Wolemi Esan, deputy managing partner at Olaniwun Ajayi, a Lagos-based law firm.

According to Esan, precedents do not support the proposition that third-party interventions make the DisCos perform better, and this lends credence to the view that the main reasons for the non-performance of the facilities are structural and not local to the DisCos.

He said: “In any event, any enforcement by any bank now would crystalise the loss on the books of the banks and force the bank to make a provision for the loan,” he said.

“What I think the acquisition lenders should direct their efforts at is how to get the CBN to provide some prudential reprieve on the regulatory treatment of the acquisition facilities. There is also the need to have a conversation with the CBN on how to convert the facilities from USD to naira.”

On his part, Ayodele Oni, energy lawyer and partner at Bloomfield law firm, said the banks should not because under the agreements for the sale and the performance agreements, there is an obligation for the government to pay back lenders, especially in cases of the exercise of a put and or call option.

“Better for the owners of the assets to give the same up, so the government can pay lenders. Although, there is a one year lenders waiting period,” he said.