Tuesday, September 25, 2018

The challenges of the electric power sector needs no crowing

The challenges of the electric power sector needs no crowing
August 23
15:37 2018
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BY AKPAN ASUQUO

In these times of playing games with facts, an opinion piece titled “As Discos throw in the towel” by Mr. Sunday Onyemachi Eze which appeared in various media outlets deserves scrutiny. Nigeria deserves robust debate on how to address the challenges of the power sector. But the said article crows about the difficulties of the electricity distribution companies (Discos) — a stakeholder in the electricity value chain. It is also a diatribe against the privatisation of power assets and a weak effort to present the government, especially the Federal Ministry of Power, Works and Housing, as blameless in the problems of the power sector.

The author correctly asserts that at the point of sale of the power assets, the Discos were technically insolvent but argues that privatisation was a flawed solution to their malaise. Though muted, one suspects that Mr. Eze would have been comfortable if the Federal Government had continued spending endlessly on the drain pipe. That government has no business in business is a settled debate. That realisation has been premised on the failure of public enterprises worldwide to meet expectations. Their outcomes in Nigeria have been one of spectacular failure.Estimates of the Vision 2010 Committee indicate that Federal Government investments in State-owned Enterprises stood at over US $100 billion in 1996. The return on these investments averaged less than 0.5% per annum.

But one aspect of privatisation that has been largely ignored is its impact on the treasury. The privatization of public enterprises in Nigeria between 2000 till date has significantly reduced the financial burden on government because it is increasingly shouldered by the private sector. Since public enterprises prior to privatisation depended solely on government treasury for funding, their privatisation greatly reduced the dependence on the treasury funding. This, together with transfers to these enterprises which hitherto were inefficient, is channeled to enable the discharge of the social responsibility of the government.

One only needs to review the level of coverage of the National Electricity Power Authority (NEPA) and its successor, the Power Holding Company of Nigeria (PHCN) and its inefficiency in providing electricity balanced against what NEPA drew from the Federal Treasury for this point to be settled.Statistics from national budgets show that the Generating companies (Gencos) were allocated N35 billion in 2005; N13.8 billion in 2010; and in 2012, N51 billion was allocated to Gencos and Discos under the Ministry of Power prior to the sale of the successor companies created from PHCN in 2013. In 2015, the gross budgetary allocation to the entire Ministry was N9.6 billion with zero allocation to the sold power companies.

In July 2012, the Federal Government contracted the Canadian firm, Manitoba Hydro International (MHI), to run the affairs of Transmission Company of Nigeria (TCN), one of the 18 successor companies unbundled from PHCN. The management contact was for three years in the first instance. MHI made significant contributions towards improving the overall performance of TCN.One of them being the reduction of transmission losses from 12% to 6.45%, thereby making a savings of 5.5%.Given that the annual commercial value of 1% of the power wheeled by TCN amounts to about N5 billion, a savings of 5.5% provides the industry opportunity to earn an additional income of about N27 billion per annum.

Before MHI came on board (2009—July 2012), partial collapse of the national grid was 51 and total collapse was 61during the review period. After MHI commenced work (August 2012 to 2016), partial collapse was 13 and total collapse was 42. This fact shows that MHI reduced system collapses by over 50%.And the Canadian firm was driven away for Ministry Officials to run TCN. And the results are not good.

So, if the Discos and Gencos explain that they were not able to undertake proper physical due diligence, they should not be mocked by the Minister of Power, Babatunde Fashola, who always retorts that they bought the assets with their eyes wide open.

A recent editorial by a national publication joined in the mockery by labelling the contention by Tukur Modibbo, an investor in Jos Electricity Distribution Company, that he is willing to sell his company at a discount as “an open admission of failure”. The newspaper urged the Federal Government to accept the offer and reclaim the companies. It added: “The power firms have to be properly privatised, this time, to the right companies that have the technical competence and financial wherewithal to breathe a new life into them.”

Punditry is a nice occupation. It is over one year since the Nigerian government agreed to pay $87 million to Integrated Energy and Distribution Company, the core investor for Yola Disco, as recompense for the $59 million it paid for 60 percent equity in the power firm. The Government has met the agreement in breach.

It is also apt to point out that the core investors paid $1.4 billion for their equity and inoculated theirinvestments by signing contracts with the Nigerian government.And the courts are there to arbitrate. So, let nobody have the illusion that nationalisation of the power assets would not be challenged by the core investors in courts.

Moreover, we need to interrogate ourselves why Foreign Direct Investment (FDI) is going to Ghana, Rwanda and other climes in the developing world and eluding us. One is our disregard for contracts; another is that the investment climate in Nigeria is hostile. The so-called “right companies” will not patronise the re-privatisation exercise given the county’s antecedents.

Nigeria is ranked 145 among 190 economies in the ease of doing business, according to the latest World Bank annual ratings. A reality check is due here. According to the ratings, the rank of Nigeria improved to 145 in 2017 from 169 in 2016.

Mr. Eze points out that “distribution companies are now private ventures which must contend with the usual vagaries associated with businesses to survive. It is laughable that a business owner would want an official of government to ask him why he is not investing appropriately to boost his business”. It is safe to assume that Mr. Eze does not know that the Federal Government still owns 40 percent equity in each of the 10 Discos. So, for the past five years, what investments has it put in place to back its equity?

It was only recently that the Federal Government announced that it has appointed TCN to manage N72 billion investments it plans to invest in the 11 Discos in order to upgrade their distribution infrastructure and networks. May we ask: to what extent has the TCN been able to efficiently manage its mandate, talk less of managing distribution infrastructure?

Let us not forget that there has been no major transmission infrastructureinvestment in the past 40 years. TCN needs over $400 million investment to resolve transmission constraints. MHI identified what needed to be done between 2016 and 2018 to address initial constraints; yet the Ministry of Power is trading blames with the Discos. Are the Discos responsible for the lack of investment in the transmission infrastructure?

May we inform Mr. Eze that seeking incentives is not alien to business. That’s why Governments court investors with incentives like pioneer status (tax) holidays, repatriation of investors’ profits, fuel pricing incentives.

It is necessary to point out that in the Nigerian Electricity Supply Industry (NESI), it is not only the Discos that are illiquid. The Nigerian Bulk Electricity Trading (NBET) Plc, which secures payment across the electricity value chain, is also not liquid. In other words, it is not sufficiently capitalized to pay for the shortfall in the value chain.

We must understand that electric power is the key to the survival of Nigeria. The sector needs the desired political will to put a handle on its challenges. The way forward is to re-set the entire industry by faithfully implementing the Nigerian Power Sector Recovery Plan (PSRP) which was approved by the Federal Executive Council in March 2017 and the World Bank in April 2017.

PSRP addressed the key challenges facing the power sector reform programme. The majorcomponents of the plan include the elimination of market deficits of 2015 and 2016 that were created by non-cost reflective tariffs; estimate and commit by the Nigerian Government to fund future power sector deficits (2017 – 2021); ensure Disco performance and removal of operators who fail to perform in line with the Performance Agreements; establish data-driven process for decision making across the sector; implement an end-user tariff trajectory that ensures that cost reflective tariffs are achieved over five years and put measures in place to guarantee a minimum of 4000 MWH/H of average daily energy.

Others are develop and implement a robust Aggregate Technical, Commercial and Collection (ATC&C) loss reduction programme including a comprehensive metering programme; ensure that outstanding MDA bills are paid and implement payment mechanism for future bills; make all electricity market contracts active;develop and implement a communication strategy for the implementation programme; and restore sector corporate governance by putting all boards in place including the Nigerian Bulk Electricity Trading Plc (NBET), Transmission Company of Nigeria, the Nigeria Electricity Liability Management Limited,Niger Delta Power Holding Company Limited, Rural Electrification Agencyand Bureau of Public Enterprises.

The estimation of the plan is that about N500 billion will be required to settle market deficits for 2015 and 2016. It further projects that about US1.5 billion will be required to support the power sector in the next five years. The amount required to turn around the power sector is quite huge but it pales into insignificance when it is compared to the annual GDP loss of US$29 billion attributed to power shortage in Nigeria.

Another reality check: save for the constitution of National Council on Privatisation on June 22, 2017 and NBET Board on August 15, 2018, none of the Boards of the afore-mentioned agencies has been re-constituted over 18 months after FEC approved PSRP.

 Asuquo is a power sector expert based in Lagos

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