Louis Achi

Ewitharly this year, the National Economic Council (NEC) rosefromitsmonthlymeeting a resolution ordering a forensic audit of electricity distribution companies (Discos) since the privatisation of the power sector in 2013. Briefing State House reporters in Abuja after the NEC meeting, Mr. Philip Shaibu, the Deputy Governor of Edo State, explained the resolution followed the submission of a report by the NEC Committee on Power, chaired by the Governor Nasir el-Rufai of Kaduna State.

According to him, the committee, saddled with the responsibility of ascertaining the status of the ownership structure of the Discos, came up with idea of forensic audit of their accounts, which was approved by the council and also alleged that the N1.7 trillion spent on the power sector in the last three years had yielded little tangible results.

It could be recalled that the Minister of Power Saleh Maman, speaking after a Federal Executive Council meeting, presided by President Muhammadu Buhari, in Abuja, way back in February, had stated that “Government will not continue to subside the sector. If they (DisCos) are not ready, they should tell us. We have a plan on willing seller, willing buyer.” The minister further said government was in talks with a German firm, Siemens, to be part of solutions it was seeking to address the challenges.

According to Maman, the nation had the capacity to generate 13,000 megawatts and could transmit 7,000MW and blamed DisCos saying they had the capacity to take between 3,000MW to 4,000MW only.

Significantly, access to energy remains low in Nigeria. With approximately 90 million citizens lacking access to grid electricity, Nigeria has the largest access-deficit in sub-Saharan Africa and second to India, globally. The switch from a publicly-owned to essentially privately-owned power sector has not yielded the expected outcomes, translating to extreme sectorial stress. High losses, low collections and lack of cost-effective recovery tariff regimes have spawned an annual financial deficit to the sector of approximately US$1 billion.

Regulatory Latitude

From THISDAY checks, Section 96 of the ElectricPowerSectorReformAct,2005(EPSRA)gives the regulator latitude for investigative action as necessary to balance the interests of consumers and operators in a monopolistic sector.

This requirement, naturally, engenders ready hostility in any context in which the operator is seeking to create an imbalance by precluding or objecting to any means by which the regulator seeks to maintain this balance. This is more so in an environment in which the customer believes that the operators are shortchanging them, under-delivering and underperforming and, essentially, “preying” on them.

Furthermore, the prevailing message that has been and is being painted by government agencies and other NESI stakeholders is that the DisCos are holding back remittances that should go up the value chain, on the back of sharp practices of estimated billing, resulting in the current market liquidity challenges. Additionally, DisCos have been labelled with bad governance that has resulted in poor procurement practices, improper financial transactions, nepotism, et cetera.

AsDiscoshaveoptedtochallengetheproposed forensic audit of their operations, the resultant perceptual reaction to the litigation will be that they are seeking to impede an activity that is expected to shed some light on their alleged malpractices and, more so, when the regulator is legitimately perceived to be seeking to meet its responsibility and conduct an exercise that seeks to protect the consumers from the Discos’ “sharp practices.”

An expectation associated with the implementation of the German Siemens project is a valuation of the Discos, as necessary to determine the basis of any potential share dilution that may result from the ability of the Disco investors to meet their counterpart funding or repay the resultant loan.

Of critical note is that the forensic audit has been identified as part of the process of determining the valuation of the DisCos, as indicated by Paragraph1.d.oftheStateHousecorrespondence datedMay21st,2020,“NationalEconomicCouncil (NEC) Ad Hoc Committee on Ownership Review and Analysis of Discos and Electricity Sector Review,” obtained by THISDAY. More, the International Finance Corporation (IFC) is expectedtoutilizetheinformation“indeveloping the commercial structure of the intervention under this Presidential Power Initiative (PPI) and in undertaking an independent company valuation of the Discos” (Fact Sheet)

On the surface, a repudiation of the forensic audit by Discos would and could be construed as an attempt to undermine Mr. President’s Siemen’s initiative. There is more. The World Bank has indicated that the forensic audit is a pre-condition to the $500 million loan that it is seeking to lend to the Discos for capital investment. It posits that the audit is nothing more than an assessment to determine the DisCos’ areas of deficiencies, a precursor to identifying the areas of need and investment. Accordingly, it is partly financing the forensic audit (via the Transmission Company of Nigeria [TCN]), in tandem with the U.K. funded NigerianAdvisory Infrastructure Facility III (NIAF).

DisCos’ Grouse

From THISDAY findings, in principle, DisCos are not opposed to forensic audits as they are required to provide audited financial reports to the regulator annually. The power distribution entities recognize the value of audits as a tool to maintain the balance in a monopolistic commercial environment and to establish a foundation for the correction of the liquidity challenges of NESI.

Nevertheless, they believe that the challenges of liquidity are not a “DisCo” only problem. As such, any sincere attempt directed at correcting the challenges of NESI must be one that is holistic and addresses all stakeholders along the value chain. Consequently, DisCos, TCN, GenCos, gas-to-power and the Nigerian Bulk Electricity Trader (NBET) should all be subjected to forensic audits, rather than a selective persecution of a sub-sector.

More, DisCos believe that if there is to be value associated with any forensic audits, a forensic and technical audit of the entire NESI value chain must occur, for identification and alignment of the critical elements that will remedy the current dysfunctional state of the electricity market versus the vilification of the DisCos as the sole villains.

What’s more, from its modus operandi, the independence of the regulator clearly continues to be undermined and is, currently almost nonexistent.Amajor factor in DisCo opposition to the forensic audit would appear to be the consistent third-party, seemingly, agenda-driven requests for forensic audits by the National Economic Council (NEC).

NEC’s multiple requests for the DisCos to be forensically audited and its related directives to NERC appear to be based on an interest to expand state government ownership into private investor interests, in violation of the terms of the privatization transaction terms. These compromise the sanctity of contract with a potential for negative outcomes, as associated with the recent cases of P&ID (Gas Supply) and Sunrise Power (Mambila).

It also undermines the DisCos ability to access urgently needed financing, due to the resultant uncertainty and further injects a disruptive political agenda into the business of the DisCos seeking to improve supply and service delivery to their customers.

Cuttothebone,itisthisuseoftheforensicaudit by NEC to illegally encroach upon the assets of the private investors that the DisCos are leery of and consequently oppose. Apotential back-door re-nationalization cannot be discounted here and this renders private sector investor subject to similar uncertainty and action.

Clearly, the sectorial challenges will not be corrected by completion of a forensic audit. Indeed, while the DisCos are not opposed to the principle of a forensic audit or any other audit, the DisCos are opposed to a distraction from the core issues that have resulted in the illiquid situation of NESI.

It can easily be recalled that from the onset of the privatization, the federal government’s failure to the meet the four critical commitments of a cost-reflective tariff, that would enable DisCos make the capital investments required for addressing decades of historical government underinvestment in the sector; injection of N100 billion of subsidy to defer the effects of any tariff increases on electricity customers.