Despite the perceived and actual challenges in the electric power sector in Nigeria, as a consultant to both the private and public sectors, the writer is of the view that the privatization of the sector had since become apposite. The anticipated sale of forty per cent (40%) equity currently held by the federal government of Nigeria will also appear to be a laudable idea, provided that the sale is properly effected and the equity, sold to the right buyers.
The Distribution Companies- Current Situation:
There are eleven (11) traditional electricity distribution companies (“Discos”) in Nigeria operating across the thirty-six (36) states and the Federal Capital Territory, Abuja. Apart from the Eko Distribution Company Plc. and the Ikeja Distribution Plc., about every Disco operates across three (3) to four (4) states. Each distribution network comprises of overhead lines, cables which are largely 11kV and 33kV, transformers, switchgears, service lines, meters, control equipment and other apparatus to support the distribution of electricity to industrial, commercial and domestic users.
The Discos are strategic because, characteristically, they serve as the mid-point between generators (who expect payment from the Discos) and final consumers who are supposed to make the payment expected from the Discos, by the generators. Where the Discos are unable to bill for electricity power received or indeed receive payment for the volume of electricity made available to final consumers, then, on-grid power generation will not be profitable. Added to the challenge of collection is the issue around tariffs which are not cost reflective.
The effect of this non-profitability is that there would be no private sector investment, because every investor wants to make profit and not engage in a business knowing that such business would be operating at a loss, no matter the effort put into it.
In other words, distribution companies play a tactical role because, through their ownership of the sector’s entire on-grid customer base, they are the sources of all the revenues that drive the Nigerian Electric Supply Industry’s value chain.
The Initial Disco Privatization Strategy:
When the Discos were first privatized in 2013, the privatisation strategy, involved a private sector operator acquiring controlling (60%) equity interest in any of the distribution companies with a view to rapidly improving its operational efficiency. So, unlike the traditional transaction approach where bidders merely bid on price for the equity shares, bidders bid on the basis of a trajectory of technical, commercial and collection loss improvements, usually during the first five years of post-privatisation operation.
To emerge as a core investor, a bidder was required to submit a proposal aimed at reducing the Aggregate Technical, Commercial & Collection (ATC & C) losses over a five (5) year period. The level of losses that a bidder proposes to reduce will be incorporated in the Multi Year Tariff Order (MYTO). MYTO will stipulate the annual investment requirement, allowable operational expenditure, approved rate of return on equity and other allowable expenses for each Disco.
The intent was to appoint an operator with the best technical, financial and managerial qualification for reducing ATC&C losses. Despite the privatization of the Discos and formerly government-owned electricity generation companies, not much improvement has been seen in the electric power sector. The Discos have not been able to make substantial improvements to the distribution networks they cover due to the paucity of funds caused by a number of issues, chief amongst which is inadequate tariffs.
Issues Worthy of Note Prior to Any Additional Sale of Equity
- Increase in Electricity Tariffs: A very pertinent step that many commentators and stakeholders in the electric power sector have continually suggested is the increase in electricity tariffs. The Regulator- Nigerian Electricity Regulatory Commission (“NERC”) recently effected this with its retrospective adjustment of the tariff regime, to account for changes in macroeconomic indices for the years 2016 to 2018. Furthermore, NERC has promised to continue to undertake periodic reviews of electricity tariffs in accordance with the existing tariff methodology.
The 2015 Multi Year Tariff Order provides for, inter alia, the biannual minor review of tariffs, taking into cognizance, 5% changes in foreign exchange rate, gas prices, consumer price index (inflationary trends) and available generation capacity.
This appears to be a step in the right direction, especially when one considers that Nigeria has, for a long time, adopted a sculpting tariffing system such that investors in the electric power sector under-recover for a period of time (tariffs not cost-reflective or as cost-reflective as they should be) and then subsequently over-recover. For the sale of such equity in the Discos to be successful with the right entities participating, it is pertinent that tariffs are right, i.e. cost-reflective.
- Regulatory Approvals: It is germane to consider some corporate legal and regulatory issues relating to the transfer of shares in public companies. This is particularly relevant as the Discos are public companies to which certain laws and regulations apply. Where the acquisition in the Disco is more than half of the issued share capital of the target Disco, or (i) the transaction documents grant the Genco the power to control the target Disco, the acquisition of such shares in the Disco will require the approval of the Federal Competition and Consumer Protection Commission.
There are other sundry legal cum regulatory matters to be considered at the relevant time and the help of experienced professionals will be required at the relevant time.
- The Menace of Electricity Theft: Electricity theft in this part of the world, includes by-passing of meters, removal or damage of meters and illegal adjustment of meters. Furthermore, actions such as unauthorized and illegal direct connections to power lines also constitute electricity theft. The effects of the foregoing include amongst others, an increase in the cost of electricity for legitimate users. Ultimately, these acts curtail investments in the sector and thus, inhibit the much-needed improvement in the sector.
Where proposed investors do not see sufficient government efforts at supporting the private sector investors in reducing electricity theft through good legislation, corresponding punitive actions for breach of such legislation, the effectiveness of the court system in sentencing culprits, amongst such other issues. One, therefore, understands the plight of Discos when it relates to the billing of customers and the several complaints around energy theft.
It is, thus, crucial that government continues to take steps to ensure an enabling environment for the use of smart metering, thereby allowing customers to “Pay as they Go” for electricity consumed and effectively scrap estimated billings by Discos. Of course, substantial actions and funds need to be put in place to deploy technology to reduce electricity theft as is the case, elsewhere in the world.
- Continuous Grid Improvements and Enhancements: A recurrent issue is the insufficiency of the capacity of the grid to wheel power in adequate quantities to the electricity distribution companies has also been a challenge which if not properly attended to, could still make the sale (in this sense, sale to right mix of investors) of equity in the electricity distribution companies unsuccessful.
Although, it is worthy of note that the erstwhile Minister of Power- Babatunde Raji Fashola, did put in a lot to ensuring that there were several national grid projects, to upgrade the grid and it is now often reported that the grid may be able to wheel up to 7,000mw of electric power.
Considering that the country, based on the rule of thumb, requires around 200,000mw electric power, it is germane that more is done to further enhance the national grid to be able to wheel more electricity. Although, there cannot and there should not be total reliance on grid power (as the writer even believes in electricity federalism), there is still an urgent need to continue to enhance the national grid.