The controversy between the federal government and the power investors over the obvious failure of both parties to meet the terms of the privatization agreement has deepened with the recent opposition of the distribution companies to the government’s plan to escrow their accounts. Now is the time to invest more in solar energy Ejiofor Alike reports
The 11 electricity distribution companies in the country recently kicked against an alleged attempt by the federal government to escrow their accounts as part of the measures to resolve the liquidity challenges that have crippled power supply in recent months. The Discos, under the aegis of the Association of Nigeria Electricity Distributors (ANED), accused the federal government of failing to fulfil the terms of the privatization agreement, including the provision of N100 billion subsidy. They argued that any attempt to escrow the Discos’ account would be tantamount to nationalization or expropriation of the Discos.
Since power supply worsened in recent months, the Discos have embarked on a spirited campaign to absolve themselves of any blame for the apparent collapse of the power sector, which had prompted Africa’s richest man and president of Dangote Group, Alhaji Aliko Dangote, to call on the federal government to cancel the power privatization. Dangote alleged that the private investors “went in without even understanding what they were doing.”
While the Discos blame the federal government and electricity consumers for the failure of the sector, the government has also accused the companies of frustrating its effort to activate their agreements in the Transitional Electricity Market (TEM), which should bind them to objective service delivery.
For instance, the Minister of Power, Works and Housing, Mr. Babatunde Raji Fashola, had challenged the Discos to also use the same campaign, which they have mounted in the form of advertorials, to tell Nigerians that they refused to submit their annual statement of accounts to the Nigerian Electricity Regulatory Commission (NERC) as required by the power reform law.
While the Discos are insisting that there is a huge revenue shortfall threatening the power sector, the government is of the view that the fact that the Discos are hiding their books from the regulator is a strong indication that they are not telling the government and Nigerians the whole truth about their financial state.
According to the Discos, the sector has a revenue shortfall of close to N90 billion as a result of the federal government’s inability to meet its commitments in the performance agreement with the investors who acquired the assets during the power privatization.
ANED’s Executive Director in charge of Research and Advocacy, Mr. Sunday Oduntan, had once argued that the performance agreement had stipulated that there would be cost reflective tariffs from November 1, 2013. But he said this never happened, as “R2 customer class was politically frozen and collection losses removed in 2015” by the previous administration for winning 2015 elections.
Oduntan added, “Sculpting or under-recovery of cost will result in N164 billion revenue shortfall, for the period of 2016 through 2018. Delay in reflecting costs means a growing increase in deficits.”
Oduntan also alleged that the federal government committed that tariffs should reflect reality but argued that tariffs had not changed, despite the devaluation of naira from N197 to N305, while inflation has also increased from nine per cent projected in the performance agreement to 17.9 per cent.
According to him, the performance agreement was hinged on projected generation of between 5,000 megawatts and 7,500 megawatts between 2014 and 2016 but generation, according to the companies, averaged between 2,000mw and 3,000mw during this period due to pipeline vandalism and transmission constraints, which they claimed were outside their commitments.
The distribution companies had also revealed that the generation companies were owed in excess of N184 billion, contrary to the performance agreement, which guaranteed the credit worthiness support of Power Purchase Agreements (PPAs) by the Nigerian Bulk Electricity Trading Plc (NBET), also known as the Bulk Trader.
The investors also hinted that the government made a commitment to guarantee them increased access to gas supply, but said there had been no improvement in gas supply.
They argued that the performance agreement also guaranteed them clean balance sheets to ensure that they have the ability to borrow funds to invest in power sector.
However, the reality, according to them, is that the sector is operating at a loss since two and a half years plus with no bank willing to lend money to them, as the banking sector is already exposed to oil, gas and power sectors by over N3 trillion.
Apart from the over 3,000MW lost to vandalism, the Discos noted that the MDAs were indebted to the sector to the tune of N100 billion.
While the generation and distribution companies have blamed the worsening power supply on gas shortages and grid instability caused by weak transmission infrastructure, the Transmission Company of Nigeria (TCN) say the Discos are to blame for rejecting power allocated to them.
However, gas suppliers have argued that there is enough gas to generate power but that the generation companies cannot pay for gas.
On their part, the Gencos have argued that they are not able to pay for gas because they are being owed by NBET for the power the Gencos generated into the National Grid.
NBET, on its part, has claimed that it has insufficient fund to pay the Gencos because the Discos make under-payment for the power they buy and distribute to their customers.
The excuse by the distribution companies is that the tariffs paid by customers are not cost-reflective enough for them to recover the actual cost of power and remit to NBET. They also blame their revenue shortfall on MDA debts and failure of customers to even pay at all.
Escrow Account Option
To resolve the liquidity challenge in the power sector, the government recently unveiled a N701 billion intervention fund to be spread over a period of three years. But the Discos say the package could worsen the funding situation.
The government was also said to have threatened to escrow the accounts of the Discos to ensure that money realized from the power sector is paid to all the members of the value chain – gas suppliers, generation companies, distribution companies, Transmission Company of Nigeria, and the regulators.
But the Discos opposed the move, saying that it would also send very wrong signals to investors that Nigeria is not fully open for private sector investment but is still partial to the old habits of nationalization, which prevents the injection of cheap and needed capital that is critical to the rehabilitation and improvement of electricity infrastructure.
Oduntan said, “You cannot have a supposedly private sector-owned and managed business in which the government now seizes control of its revenues. It is a contradiction in terms and practice. The same principle applies to any consideration of regulations or government action that intrudes into corporate responsibilities of procurement, financial management or personnel management.
“To date, the government has not met the privatization transaction foundational requirements of providing N100 billion in subsidy to the sector. Indeed, any attempt at escrowing our accounts runs counter to the objectives of the National Electricity Power Policy, 2001 (NEPP) and the Electric Power Sector Reform Act, 2005 (2005), of a private sector-owned and managed electricity sector.”
However, Fashola has accused the Discos of becoming a stumbling block to the smooth regulation of the power sector by NERC, saying there are instances where the Discos have by their actions impinged on NERC’s regulatory responsibilities. He had also alleged that the Discos were largely responsible for the delay in the settlement of debts owed them by the MDAs.
The minister specifically noted that the Discos had, irrespective of their excuses, failed to tell Nigerians that for three years, they did not submit their audited financial reports to NERC. He alleged that when NERC wanted to activate their contractual obligations as contained in the TEM, the Discos dragged the regulatory agency to court and frustrated its efforts.
“Advert should also have told the Nigerian public how many Discos have gone to court to frustrate the attempt by NERC to hold them to their contracts so that they can pay the Gencos who have been sacrificing, the gas producers who have not received payment and who have continued to act patriotic,” Fashola had said.
He added, “It is important to remind all of us that the privatization exercise that transferred the distribution companies was not held as a contract with an association. It was between Nigeria and the distribution company. So, while I respect the right of an association, the constitution guarantees the freedom of association, the federal government will not pay over N100 billion to anyone under the aegis of an association. That is not how to solve it.”
Fashola insisted that the government will treat the debt on individual company basis upon government’s honest verification of the claims and not with their association, adding that his request for them to submit records of their claims has been largely rebuffed by the Discos.
“We won’t pay estimate. The figure must remain clear in naira and kobo terms. And we will do our work. I think that the advert that the Discos issued should also have conveyed information to the Nigerian public about how many of them have supplied details of their audited accounts for the last three years. And we have been asking them to provide it.”
Indeed, since the power assets were handed over to the new investors on November 1, 2013, some of the Discos have demonstrated lack of capacity to run these assets. Rather than explore other funding options, some of these companies have resorted to extorting consumers through exorbitant estimated billings, concealment of their books from NERC, blackmailing government, and flouting market rules.
On several instances of breaches of the market rules, NERC has responded with appropriate sanctions against erring Discos.
But despite NERC’s sanctions, some of the Discos have continued to flout the market rules by extorting customers through exorbitant estimated bills. Ironically, while some Discos have embarked on massive rollout of free prepaid meters to their customers, others, which operate under the same market conditions, have suspended the provision of prepaid meters, citing high cost of forex difficulties.
Observers say, though the government shares part of the blame, there is indeed, a lack of sincerity on the part of most Discos, who have resorted to blackmailing the government and consumers.