How to secure financing for your investment into a DisCo franchise area

Power distribution companies are cutting deals with third-party investors ceding parts of their unwieldy franchise areas for them to manage and financiers say the current electricity market favours such deals.

We have distilled insights provided by experts including investors, financiers, and analysts at the recently concluded BusinessDay Energy Conference into action steps for a would-be investor.

But why should anyone contemplate investing in Nigeria’s troubled power sector? For one thing, there seems to be a clear line of sight to an end to these troubles.

The biggest challenge facing the Nigerian Electricity Supply Industry is the absence of a viable market. This comes from tariffs that do not guarantee commercial returns and the inability to enforce market rules by the regulator.

Last year, NERC introduced the Service-Based Tariff which allows customers to pay according to the volume of power they receive.

This service plan has cut down subsidies into the sector by N20billion and the market is moving towards a full cost-reflective tariff.

Proper assessment

Some of the franchise areas ceded to DisCos are troubled with legacy debts and poor network infrastructure so analysts say an investor should conduct good due diligence to determine if the franchise would be viable.

This research will determine the number of people and the businesses that reside in the area. This research will also determine their capacity to pay and the most sustainable way to source and deliver power to them.

Read Also: Power potential: Investors tap into DisCos’ underserved franchise areas

“One thing the government did well is the franchising, it added a lot of flexibility into the system so investors can build different models depending on which customer segment they are focusing on – there are willing buyer/willing seller deals and customers that will pay at the NERC approved tariff,” said Obiora Okoye, CEO Blackaion Capital.

Obiora said that the franchising option offers the opportunity to have a cost-reflective tariff at the franchisee level which can help an investor make a case for financing.

The investor would need to carry out a viability assessment, understand the customer, ring-fence the financing, and show it does not depend on subsidy before it can raise capital for investments.

Commercial viability

A key hindrance to financing other power sector projects in Nigeria is the challenge the obtaining a facility in foreign currency can bring due to Naira devaluations.

Therefore, long-term local currency debt finance provides investors with the best option to get financing. InfraCredit which has facilitated access for various infrastructure clients to raise over N43 billion is suited to render help.

“Our intervention is bringing confidence to the debt capital market and institutional investors to be able to purchase the debt instruments issued by institutions including power companies,” said Daniel Mueller, head, Origination and Structuring at InfraCredit.

The distribution sub-sector is relatively difficult to finance and is often neglected while generation gets the bulk of investments. A key hindrance is that cash flow has to go through the DisCos whose accounts are monitored by the Central Bank and DisCos do not really have a track record of repaying borrowed funds.

So, an investor that shows that his cash flow can be insulated from these challenges is seeking long-term local currency funding and is backed by an institution with good credit ratings has a higher chance of securing financing.

InfraCredit has facilitated three power generation companies to access the debt capital market for long-term local currency debt issuance – the first 10 years corporate infrastructure bond, the first 15 years corporate infrastructure bond but not much has happened on the distribution side of the market.

The company is now poised to support investors keen on securing financing for the power distribution sub-sector.

“This franchising model is a tool we see that is going to enable investment into the distribution sub-sector. And the first time a company wants to access, a 10 year or 15-year financing to match the lifespan of the assets in the subsector, they may need to rely on upon a guarantor like InfraCredit,” said Mueller.

Mueller said that once the franchisee has satisfactorily paid their debt service for the agreed period, they start to build market confidence, and they’ll find that the second time they want to go to the debt capital market, they have developed their reputation through performing on that first debt issuance that they won’t need much support.