How poor revenue impedes Discos’ performance part1
The Electric Power Sector Reform Act 2005 that led to the unbundling of the vertically integrated National Electric Power Authority (NEPA) and subsequent privatisation of the generation and distribution units, was to address the epileptic performance of electric sector in the country. This reform also established Nigeria Electric Regulatory Commission (NERC) to regulate the operations of the privatised entities.
Two years after the privatisation, the country is still battling with same power supply problem. This calls for serious concern on why the situation has not changed even after privatisation. 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 it on the transmission which is still a government owned entity.
The unbundling of the sector and subsequent privatisation 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 six generation companies, and 11 distribution companies were privatised while 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 privatisation of generation companies, government retained 20%, leaving 80% to the private sector.
This shareholding structure shows that the private sector is not the sole owners 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 utilisation of the assets of the companies in raising the needed finances to invest in improving the inherited dilapidated assets.
Regulatory uncertainty will harm any company’s financial well being by lowing credit rating, raising its cost of debt and reducing the incentive for new capital investment. Privatisation 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 emphasised 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 realised from the deal. Unfortunately in the whole transaction, the participants were local companies who 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 privatisation process.
They could not risk their long terms funds in uncertain environment, despite the road shows all over the world. The local companies were left to mobilise short-term funds from local banks to finance the acquisition of these assets, overstretching 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 a 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 its investment.
The problem is particularly worse with the distribution companies who are most exposed to the public in the chain of electric sector. 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 March 31, 2016 between the hours of 1235 and 3p.m., 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 which is government owned is the weakest link in the chain of power supply that needs serious investment to enable it evacuate power generated by the Gencos to the Discos effectively.
However, in the course of the privatisation, there were series of agreements that were signed between Bureau of Public Enterprises (BPE) representing government and the operators with specific obligations to the parties involved to guide effective performance of the agreements as public-private partnership. These obligations needed to address the effective operations of the private operators include the followings.
• Gas supply to Generation Companies (Gencos): There was no proper gas supply policy at the time of privatisation, this affected effective operations of Gencos.
• Lack of cost reflective tariff: For two years after privatisation, there was no cost reflective tariff to allow investors to operate optimally; the new tariff issued last February is still being contested by the public as Labour and the National Assembly have issued statements threatening court case.
• Lack of subsidy affects revenue collection; the general perception that power is a public commodity, it should be given free or subsidised as was the practice before privatisation. This makes revenue collection a huge problem for the Discos as the public don’t normally want to pay.
Reducing technical and non-technical losses in the power sectors is a major issue that many countries in the developing world are still battling with. Briefly, losses in electricity supply refer to the amount of electricity injected into the transmission and distribution grids that are not paid for by users. Total losses have two components, technical and non technical. Technical losses occur naturally and consist mainly of power dissipation in electricity system components such as transmission and distribution lines, transformers and measurement systems which should not be more than 10%. Non-technical losses are caused by actions external to the power system and consist primarily of electricity theft, non-payment by customers, and errors in accounting and records keeping.
Customers being billed for accurately measured consumption and regularly paying their bills are subsidising those users who do not pay for electricity consumption. Electricity theft is indirectly a subsidy provided to those stealing by customers who regularly pay bills according to their consumptions. So also is the case of tariff differences in classification, those paying low tariff are being subsidised by other categories of customers on higher tariff.
• To be continued tomorrow.
• Tsavsar, a certified PPP specialist and consultant on Public-Private Partnerships, writes from Abuja