Friday, August 10, 2018

Issues in Nigeria’s power sector

Issues in Nigeria’s power sector
August 10
10:55 2018
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BY IBRAHIM AMINU

At a symposium to mark 2012 Democracy Day, then  President Goodluck Jonathan pointed out that the federal government owed N185 billion as judgment debts due to aggrieved parties challenging in court decisions by government officials that were not thoroughly evaluated.

Well, your bet  is as good as mine as to the current sum for judgment debts given that  in May 2018, it was reported that two arbitration awards totaling $8.9 billion (about N2.7 trillion) have been made against Nigeria. The judgment obligations emanated from contractual actions of the Olusegun Obasanjo, Umaru Yar’Adua and Goodluck Jonathan administrations.

It does appear the present Nigerian government is not bothered by the burden of judgment debts. Or how does one explain the cavalier attitude of the Minister of Power, Works and Housing, Babatunde Fashola, to contracts the government entered into with core investors for electric power assets?

According to the Minister, “the Distribution companies (Discos) bought these (power) assets with their eyes opened and they must compete to deliver or exit.” At a press briefing held on July 9, 2018 on the state of the power sector, the Minister admitted that there is enough blame to go round the stakeholders in the power sector. But nowhere in his speech did he specifically admit that the Government has been derelict in its responsibility in the Nigerian Electric Power Supply Industry (NESI.) All the challenges in the industry are traceable to the belligerence and inefficiency of the Discos. However, on display was a minister in denial.

The Nigerian economy is already burdened and Fashola should not add to it with his disregard for the fine points of contracts. The core investors paid into the coffers of the Federal Government over $1.3 billion for 60% equity in each of the eleven Discos. The investments were not undertaken for a minister, no matter his erudition, to push the investors to exit their investments.  The investments are backed by contracts they entered into with the Federal Government which provides for arbitration and adjudication by the courts.

Over three years after the core investor for Yola Disco, Integrated Energy and Distribution Marketing Company, returned the company to the Federal Government, the latter is yet to pay the $87 million that has been agreed by both parties as recompense for the investment by the core investor.  Recall that the core investor for Yola Disco had paid $59 million for 60 percent equity in the company. Then imagine whether the federal government can meet the payment demands of ten Discos if arbitration and /or court adjudication goes in their favour.

Yet, the minister is cavalier in his fidelity to the contracts entered with the other core investors. Does the Minister believe that the investors will ext without adequate recompense? It is apt to remind him that the courts are there to protect the strong and the weak.

Hindsight is always 20/20. It is lost on the Nigerian authorities that when the prospective core investors were bidding for the enterprises, they were unable to undertake sufficient due diligence on the conditions of the distribution assets due to the restiveness and militancy of the labour unions in the power sector. Recall that the sale of the distribution power assets was predicated on cost-reflective tariff which would encourage the core investors to rehabilitate and improve the performance of the Discos. That understanding was met in breach.  It is important to state that if tariffs are not cost-reflective, it becomes demanding for the Discos to be able to raise the necessary funds to pay back the principal and the interest on the loans.

In March 2015, the industry regulator, the Nigeria Electricity Regulatory Commission (NERC), removed the collection losses component in the Multi-Year Tariff Order (MYTO). That reduction in electricity tariff was seen by industry operators and observers as politically influenced and was described by a former NERC Commissioner for Market Competition and Rates, Mr.  Eyo O. Ekpo, as “patently bad”. How do you explain that a sector whose tariffs were not initially cost-reflective could absorb a reduction in tariff? No wonder within months, some Discos had to declare force majeure.

As if that was not bad enough, the Nigerian Electricity Market has experienced at least six tariff review suspensions since November 2013 when the power assets were handed over to the investors.

Even the introduction of eligible customers’ regulation came too early and affected the premium class of customers that account for 60% of the revenue of the Discos. Section 28 of the Electric Power Sector Reform Act provides thus: “If the Minister determines, following consultation with the President that the directive given under section 27 will  result in decreasing electricity prices to such an extent that a trading licensee or distribution licensee would have inadequate revenue to enable payment  of its committed expenditures or is unable to earn permitted rates of return on its assets, despite its efficient management, the minister may issue further directives  to the commission (NERC) on the collection of competition transition charges from consumers and eligible customers, the distribution of the funds collected to the trading licensee described in section 25(a) and to the distribution licensees, and the duration of the competition transition charge.” The import of this provision is if the Minister makes the eligibility declaration, it is incumbent on the Minister to ensure that the declaration does not have negative financial impact on the Discos.

Fashola spoke glowingly of the N213 billion Central Bank of Nigeria Nigerian Electricity Market Stabilisation Fund (NEMSF) which the apex bank began disbursing to Discos and Gencos (generation companies) in 2015. He failed to inform that the soft loan was meant to cover the difference between the actual tariffs charged by the Discos and what ought to be charged if the actual Aggregate Technical Commercial and Collection (ATC&C)  losses of the Discos had been known at the time of handover in November 2013.

Moreover, the shortfall in revenue which was prompted by the absence of reliable data at the date of handover was made to appear as liabilities in the books of the Discos. This decision had significant impact on the balance sheet of the Discos, thereby inhibiting their ability to borrow additional money to fund their capital expenditure.

It is apt to point out that the major factor inhibiting massive inflow of funds from overseas to the power sector is the unresolved risks of the sector, particularly the shortfall in the revenue value chain.

Ibrahim Aminu, a policy analyst, writes from Lagos.

 

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