Business & financial re-engineering of electricity distribution companies

TBackground he Nigerian Power sector has presented challenges to the socio-economic development of Nigeria despite persistent efforts by various government and regulatory agencies to improve the Power situation in the country.

While there are challenges across the value chain (Generation, Transmission and Distribution), the Distribution Companies (DISCOS) would appear today to constitute the major bottle neck in the Power value chain. The expected investment in distribution Infrastructure post Privatisation in 2013 did not materialise resulting in a situation where distribution capacity is currently below 4000MW and rejection of Power from the Grid by DISCOS has become prevalent.

Nigerian Electricity Regulatory Commission (NERC) in discharge of its responsibility has issued a number of Regulations and Orders to improve the situation. Particular mention must be made of two recent Orders:

granting Tariff Shortfall Credit of N1.75trillion to 11 Discos, effectively a Power Sector Subsidy spend.

new cost reflective tariffs to the DISCOS of which the Public Hearings are being concluded within the month of March, new tariffs to

The Tariff Shortfall Credit of N1.75trillion together with related accrued interest equates to over N2trillion subsidy spend by the Power Sector. It is expected that with this adjustments and the new tariff, there should be significant improvement in the business of the DISCOS. It is therefore important that the circumstances that led to earlier deterioration in the business of DISCOS should not recur.

For these measures to be effective there is the need for a comprehensive Business and Financial Re-engineering of the DISCOS. This will start with understanding the real problems and implementing a range of measures to address them.

The Distribution Companies’ total exposure to the Nigerian economy was close to N3trillion

amounts due to NBET/TCN/CBN

exposure of the SPV 60% Shareholder of DISCOS of N700 billion.

The recent Tariff Shortfall Credit

and remedied the finances of the DISCOS albeit at a great cost to the economy. This notwithstanding, it is very likely that new indebtedness and accumulation to NBET will continue at the rates of N10billion- N15billion monthly. This in turn, will create another need for subsidy recognition or Tariff Shortfall Credit.

The point must be made that the build up of debt to NBET/ TCN will continue until DISCO businesses are placed on sound operational and financing footing.. Were NBET/ TCN to stop increasing their credit/life support to the DISCOS, the entire Nigerian Power System will collapse.

The exposure of the SPVS (used in acquiring the 60% stake in the DISCOS) to the Nigerian Banking System is currently estimated at US$ 2billion( N720billion) and should be approaching N800billion by 31st December, 2020.

DISCOS lack the ability to fully pay NBET existing obligations. The 60% Shareholders (SPV) lack the ability to service its obligation to Nigerian banks. Systemically, we have major financial issues to resolve at the level of the DISCOS and related Major Shareholders.

This is at the core of the challenges facing the business of the DISCOS. There can be no third party Private Sector Investor or Lender in the DISCO segment until these are resolved.

must be taken concurrently and holistically. required to resolve the dilemma with the DISCOS:

The negative Shareholder funds and working capital deficit at December 31, 2018 have been substantially resolved by the

continue to make losses and accumulate new indebtedness to NBET/TCN/CBN. Major Business restructuring and equity injection must take place. These amounts are effectively undeclared or hidden Federal Government subsidy to the Power Sector currently close to N200billion per annum.

There have been clamour for changes in tariff. These have now been granted by NERC and should

for regular cost and market driven adjustment should be put in place to prevent accumulation of tariff shortfall. However, any further change in tariff must recognise:

Volume for Nigeria which should be close to about 8,000MW and below this volume, Nigerian consumers should not pay penalty for systemic incompetence. or Us12.5cents could lead gradually to exodus from National Grid Power Supply by some consumers. Increasingly, the costs of alternative power sources are declining, given advances in technology. For example, Gas generators can now

closeness and cost of Natural Gas to the consumer. Furthermore, advances in Solar Technology have now brought Power delivery

Solar Panels deploying High

It is therefore important to anticipate the potential rejection of Grid Power should customers be compelled to pay uncompetitive prices. We can draw parallel from what happened in the Telecom Sector with inception of Mobile

below 30 years old will not remember that there was an organization called NITEL that as of December 2001 had less than 500,000 landlines as the only communication option for Nigerians. With the advent of mobile telephones, we now have in excess of 140million mobile lines.

In order to strengthen the management of the DISCOS and institute more transparent and competent procurement system, there is an urgent need to ensure that all DISCOS put in place Independent Professional management that can manage the operations with sound corporate governance like most publicly listed companies. The major source of improving cost and operational efficiency is more transparent procurement system.

In 2013, Nigerian banks made loans in excess of Us$1.2billion for the purchase of DISCOS. These loans were not made to the DISCOS but rather to the SPVS holding companies that purchased 60% shares. In practical terms, none of these loans are performing despite efforts by some SPVS to make contributions towards interest payment. With both principal and accumulative interest, the current exposure is now close to Us$2billion (N700billion).

To improve the outlook of the DISCOS without resolving the indebtedness of the SPVS to the Banking System will be an incomplete solution. It is therefore recommended that joint action be taken by various Stakeholders to resolve the indebtedness. Possible solutions will include:

Offer Principal repayment option over a longer period (of e.g. 10 years with 2 years moratorium)

Write off part of accumulated Interests (e.g. 40-50%)

Capitalise balance of accrued Interest and restructure over say 10 years as in above.

Consider an interest free/ freeze period (say 2 - 3 years).

Consider change of Major Shareholder to create room for new investor.

It is possible that even with the restructuring a number of the SPVS would still be in default in which case all the legal conditions attached to the loan should be enforced by the banks or a special agency be established to do so. It is obvious that some SPVS (60% Shareholder) will exit or be acquired eventually.

The overall objective of the Business & Financial restructuring is to permit fresh cash to be injected into the DISCOS to support infrastructure expansion. It is estimated that a minimum of US$ 2.5billion across the 11 DISCOS is required to build up DISCO Infrastructure to handle distribution of up to 12,000MW. This requires a combination of Rights Issue, Private Placements and Long Term Debts issuance to

new Major Investor with technical and Financial resources will likely emerge in some of the DISCOS during this fund raising.

In addition to the issues listed above, there are obviously other Technical/ Commercial issues that must be addressed to create an efficient DISCO system. However, these can only be addressed when the challenges of Business/ Financial Re-engineering are adequately addressed.

It is recommended that as a matter of urgency, a Special Committee of Techno/commercial/ Financial Experts be set up to deliberate on the Business and Financial Restructuring of the DISCOS and make appropriate recommendations. Their work should engage all Stakeholders in the Industry.

The DISCOS’ exposure to the Nigerian economy is very substantial. This constitutes a major threat to the Nigerian economy.

Credits (Subsidy payment), new shortfalls continue to accumulate while investments in capacity

business and financial restructuring of the DISCOS is a National Strategic imperative to be addressed urgently.