In their current situation, no investor will pay $1 for any of Nigeria’s 11 electricity distribution companies (DisCos). In fact, any serious investor would have to be paid to take them but even then, they probably would still not be attractive. Not with a balance sheet where contingent liabilities far exceed assets.
This situation has led to calls for a radical restructuring of DisCos who are now technically bankrupt, and maintain a semblance of existence only on account of government subsidies. This restructuring will require all stakeholders taking a haircut on their asset, instituting corporate governance and restoring best practice.
It starts with understanding that a loss of N713bn since privatisation has negative consequences for the sector and poses systemic risk to the economy as a whole and agreeing to return the sector to a sound commercial template. Furthermore, the Federal Government with a 40 percent stake in the DisCos that continues to bail out the sector needs to start taking requisite action to check the excesses of the investors.
The option is to either restructure or continue digging a hole in the form of subsidies which will eventually trigger a shutdown of the entire decrepit system.
The DisCos reported a combined loss of N446.85bn in 2017 which is 64 percent higher than the previous year. Their total combined operating cost of N655.16 billion in the same period outstripped cumulative sales of N563.10 billion. Interest expense surged by 129.51 percent to N155.64 billion, indicating a balance sheet that’s unsustainable.
Restructuring the DisCos’ balance sheet will entail writing off at least half of their over N2 trillion exposure to the Nigerian Bulk Electricity Trading Company (NBET) and the Central Bank of Nigeria (CBN). The Federal government through NBET can convert the rest to convertible long-term debt. This will give the balance sheet a new lease of life to present to new investors.
But the DisCos do not get a free pass. The CBN and other commercial banks of which the core investors have exposure of over N500 billion will treat the debt like any other commercial debt.
Banks can choose to convert their debt to stakes in the DisCos but the core investors will also be given the right to buy at the same share price. DisCos’ current shareholding will be diluted and in exchange for government’s acquisition of their debt, a special agency can be created to professionally represent the stake of all investors including the government.
Analysts say tariff must represent the true cost of production but tariffs higher than N45-50 per Kw/hr may derail the plan. Embedded generation plants with gas as feedstock are offering industries tariff around N40 and N50 per kWH/hr and solar energy tariff are now lower than 10 cents. Higher tariff will shift the market to cheaper alternatives.
The DisCos have consistently said that a lack of cost-reflective tariff is the key reason for their losses. This is worsened by electricity theft and debt by government ministries and departments.
“Electricity pricing must be reflective and NERC must step up action to check electricity theft,” said Ayodele Oni, energy lawyer and founder of Bloomfield law firm.
Oni also said that NERC must also enforce obligations in DisCos’ performance contracts and should maintain independence from the executive arm of government.
DisCos have to also raise collections as market information from NBET indicates that they currently only collect 30 percent of market invoice from customers.
Restructuring the DisCos will make way for new investors who will inject fresh capital into the business. A sound management should be put in place to run the transition to new investors.
Chuks Nwani, energy lawyer and vice president of consultancy firm, PowerHouse International, proposes that the Federal Government create a debt instrument to cover half of DisCos’ tariff.
Within the period, pressure on the DisCos’ balance sheet will ease off while they are compelled to make investments to improve their network, cut down on aggregate technical, collections and commercial losses (ATC&C) and if power distribution improves, they can then begin to recover through higher tariffs and at the same time repaying their debt.
“This is a better option instead of continuing to allow the Central Bank to continually provide intervention funding,” Nwani said.
Nwani said that within the five-year period, NBET will monitor investment plans the DisCos will submit while the Transmission Company of Nigeria (TCN) will also implement an improvement plan. NERC will monitor these plans for compliance while enforcing compliance with performance contracts.
However, Nigeria’s 11 DisCos distribute a paltry 4,000 MW, a capacity too little for efficient pricing to make the sector viable. Generation companies (GenCos) are burdened with so much debt that asking them to bring the total installed capacity of over 12,000MW on stream will require massive investments. Worse still, the TCN cannot effectively wheel half of the capacity without the grid collapsing.
Analysts say NERC should implement the DisCo franchising regulation which allows third-party investors to provide electricity within a franchise area earlier ceded to DisCos.
Other regulations, including the mini-grid which opens up investments into the off-grid sector, must be promoted as well as the eligible customer declaration, which allows GenCos to sell power directly to big consumers of power.