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How poor revenue collection impedes Discos’ performance

By Joseph Tsavsar

 The Electric Power Sector Reform Act 2005 that led to the unbundling of the vertically integrated National Electric Power Authority (NEPA) and subsequent privatization of the generation and distribution units, was to address the epileptic performance of the power sector in the country. This reform also established Nigeria Electricity Regulatory Commission (NERC) to regulate the operations of the privatized entities.

Two years after the privatization, the country is still battling with the same power supply problem. This calls for serious concern on why the situation has not changed even after privatization. Many are quick to question the integrity of the private operators and blame the Distribution Companies for not improving power supply. Some blame the generation companies while others blame the transmission agency which is still a government owned entity.

Before one can go deep into the problem, a brief overview of the privatization will give a useful insight into where the country is now in addressing the power supply issue.

First, the unbundling of the sector and subsequent privatization as provided in the EPSR Act 2005 was to improve performance and ensure transparency in the activities of the unbundled entities, the generation, transmission and distribution, and to attract  participation of the private sector in the provision of power in the country.

The unbundled entities, comprising of six generation companies, and 11 distribution companies were privatized while the Federal Government retained the Transmission Company as state-owned. Government also retained 40% interest in  the Distribution Companies,  while the private sector is holding 60%. Also in the privatization of generation companies, government retained 20%, leaving 80% for the private sector.

This shareholding structure shows that the private sector is not the sole owner of the power sector as the public assumed.  This shareholding structure imposed limitations on the operators of the sector. This is because the private operators who are the core investors are restricted in the utilization of the assets of the companies in raising  the needed finances to invest in improving the inherited dilapidated assets.

The EPSR Act also empowered the regulator, NERC, to regulate the activities of the operators including fixing of cost recovery tariff for the utilities. The regulator  by the Act is supposed to be independent, protecting the interest of both the public and the private operators. The independence of the regulators is also important such that any sign of compromise can affect the effective operations of the private operator as the electricity market is very sensitive to the regulations. Regulatory uncertainty will harm any company’s financial wellbeing by lowering credit rating, raising its cost of debt and reducing the incentive for new capital investment. Privatization normally has two major objectives, it is either output focus that is improving the quality of supply or additional investment in the sector.

In Nigeria, the focus was more on additional investment instead of quality of service; the Request for Proposal emphasized the financial worth of the bidders which resulted in selection of the highest bidders based on how much naira they bidded. Hundreds of billions of naira were realized from the deal. Unfortunately in the whole transaction , the participants were local companies which through the local commercial banks, were able to acquire the utilities.No foreign investor with proven technical experience participated due to lack of confidence in the privatization  process.

They could not risk their long term funds in uncertain environment, despite the road shows all over the world. The local companies were left to mobilize short term funds from local banks to finance the acquisition of these assets, over-stretching the capacity of the local banks who are now putting pressure on the core investors to service their obligations. This has actually put the investors in financial trouble between servicing the loans and providing the funds to effectively operate the facilities they acquired to provide quality supply of electricity to the public not to talk of any hope of getting returns yet for their investments.

The problem is particularly worse with the Distribution Companies which are most exposed to the public. The Discos are the ones to be blamed anytime there is power cut, anytime there is low voltage, anytime there is tariff increase, anytime there is problem with power supply like the recent national blackout on the 31st March, 2016 between the hours of (12.35) and 3pm, the country’s power system crashed to zero MW due to system collapse that was linked to the tripping of a transmission line and poor gas supply.  It is important to note that the Transmission Company which is government-owned  is the weakest link in the chain of power supply that need serious investment to enable it evacuate power generated by the Gencos to the Discos effectively.

However, in the course of the privatization, there were series of agreements that were signed between BPE (Bureau of Public Enterprises) representing government and the operators with specific obligations to the parties involved to guide effective performance of the agreements as Public-Private Partnership.

Unfortunately, the public will not take time to appraise the details of the transactions but only jump to the conclusion that since power has been privatized, there should be improved power supply, not knowing that non-performance on the part of government’s obligations in the partnership has negatively affected the operations of the private operators.

•Tsavsar, a certified PPP specialist and consultant on Public-Private Partnerships, writes from Abuja

 

This post was syndicated from The Sun News. Click here to read the full text on the original website.

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