Nigeria’s DisCos blighted by high overheads, related party deals

With over 40 per cent of their revenue reported as expenses and huge related party transactions, Nigeria’s 11 electricity distribution companies (DisCos) may be turning a key rule of business – that you only make money after serving your customers – on its head.

For example, Ikeja Electric reported a financing cost of N20 billion, related party deals worth N23 billion, a loss of N90 billion, and overhead of N39 billion or 44 per cent of revenue in just one year. For any other business, this will trigger its collapse, but for the DisCos, government subsidy provides comfort.

But this situation poses a systemic risk for the economy because the government has prioritised bailing out purported private businesses with funds that could be used to equip health facilities and road infrastructure. Subsidy to the power sector cost the Federal Government N560 billion in 2019, higher than the federal budget for health.

The DisCos are now in a dire financial situation. Their total exposure to the Nigerian economy is about N3 trillion as of December last year made up of obligations to the Nigerian Bulk Electricity Trading Company (NBET)/Transmission Company of Nigeria (TCN)/Central Bank of Nigeria projected at N1.9 trillion and the exposure of the Special Purpose Vehicles (SPVs) (used in acquiring the DisCos) of N720bn.

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But DisCos lack the ability to fully settle NBET these obligations. The 60 per cent SPVs cannot repay loans to Nigerian banks estimated at N720 billion, making the business unattractive to new investors or new lenders.

Worse still, these debts are rising monthly because present electricity tariff still does not guarantee commercial returns and DisCos have yet to fully collect the full value of the power sent out monthly.

The average electricity tariff should be N51 per kWh, but customers pay on average about N31 per kWh because the Nigerian Electricity Regulatory Commission (NERC), the sector regulator, has not allowed a tariff increase for the past five years, though all the assumptions that fed into the Multi-Year Tariff Order had changed, until April this year.

To address this tariff shortfall, the regulator in August 2019 granted tariff shortfall credit of N1.75 trillion together with related accrued interest which came to around over N2 trillion, effectively a subsidy to the sector and captured in DisCos’ books.

NERC further approved a 50 per cent tariff review based on a Service Reflective Tariff (SRT) model agreed upon by operators and electricity users in different public hearings. The model allows wealthier Nigerians who use more power to pay a higher tariff while low users bear no increase.

But it placed on DisCos the obligation to ramp collections from the current 60 per cent to 90 per cent, raised their remittance thresholds to other market participants, and provided for stiff sanctions, including a possible loss of their license if they renege on the contract.

DisCos opposed the SRT, saying that their business could be impaired without adequate metering of all electricity users to improve collections, as well as their balance sheet encumbered by huge debts that could scare away potential investors.

In a letter to NERC, dated June 29, DisCos urged the Commission to postpone the planned implementation of Service Reflective Tariffs until January 2021.

“DisCos collect over 75 per cent of bills issued to metered customers and 25 per cent from unmetered customers. This is an indication that DisCos suffer more losses from estimated billing. Therefore, metering is the only means of revenue assurance. The financial impact of the Capping Order is an average loss of N13.9bn monthly, which will materially reduce the 25 per cent collection efficiency for unmetered customers,” they said.

READ ALSONERC says DisCos must meter customers before effecting new tariff

The DisCos said that their financial books remain encumbered with N1.7 trillion of tariff shortfalls (subsidies to customers), as well as the liabilities associated with the Nigerian Electricity Market Stabilisation Facility (NEMSF), advanced in 2015 to liquidate legacy gas debts and tariff shortfalls resulting from adjusting Aggregate Technical, Commercial and Collection (ATC&C) baseline losses.

If left unaddressed, these financial encumbrances will continue to inhibit their ability to access the financing that is critical to supporting the remittance and the contract-based, they said.

Another significant concern for the DisCos is the Minimum Remittance Order which they said used unrealistic parameters. These include lack of market rates for foreign exchange and selection of 2017 and 2018 as years of Mutual Non-Compliance as against 2015 and 2016 as requested by DisCos.

Yet, the suspension of SRT will only worsen a bad situation. Without a cost-reflective tariff, indebtedness to NBET will continue to rise at the rate of N10-N15 billion monthly and the exposure of DisCos’ SPVs to the Nigerian banking system could reach N800bn by December 2020.

The postponement of the SRT imperils Nigeria’s ability to secure the $750m World Bank loan that demands a tariff review as a precondition for the funds. Based on the loan, the Federal Government has set aside N380bn to provide subsidies in 2020 as part of the financing plan for the Power Sector Recovery Plan (PSRP).

Nigeria could also lose an additional $3billion in World Bank and African Development Bank (AfDB) funding for the country, which could lead to the collapse of the generation sub-sector who are owed billions.