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BusinessDay has learnt that the Federal Government is considering raising its stake in the electricity Distribution Companies (DisCos) to 60 percent from the current 40 percent as part of moves to improve the fortunes of the DisCos but analysts say hurdles against it are enormous.
A source with knowledge of the plans told BusinessDay that to pave the way for the eventual recapitalisation of the DisCos, the government in February tried unsuccessfully to inaugurate and appoint two non-executive directors for each of the 11 Discos.
DisCos had argued that the move was illegal as the volume of shares held on behalf of government by the BPE and the Ministry of Finance (MOFI) do not empower it to appoint new directors without recourse to shareholders.
The shareholders agreement also said that the number of directors in the Disco shall be no more than seven; the investor will nominate six directors, while BPE and MOFI shall nominate one.
The government shelved the plans to avoid needless litigation but according to the Power Sector Recovery Programme (PSRP), recapitalisation of the DisCos is a recommended measure to put the power sector on the path of financial viability.
The suggested options involve using the Central Bank to facilitate renegotiation of the shareholder loans outstanding and redenomination of the loans from dollars to naira in line with the discos revenue profile.
Another option is the potential dilution of both the Federal Government’s and privately held stakes, which will help bring some stability to DisCos balance sheet.
“The Federal Government may find it impossible to implement this in all the DisCos, due to status of their balance sheet,” says Chuks Nwani, energy lawyer.
DisCos like Abuja Electric, Port Harcout DisCo and Enugu DisCo are struggling to keep a healthy balance sheet. Yola has been relinquished to the government by the core investors.
BusinessDay’s examination of the financial statements of seven DisCos indicate that they are veering dangerously close to full blown bankruptcy with reported losses of over N196.23 billion to end the 2016 financial year.
Analysts say for the Federal Government to succeed with the plan, it has to buy out the DisCo debt as equity, ensure that electricity tariff are market-based, and help DisCos get return on investments on their assets.
The action would also need to be in line with the Put/Call agreement government signed with DisCos.
Experts have urged government to dilute the shares of the core investors in the DisCos using the funding clause in their performance agreement as a way of resolving the current shortfalls in the electricity market currently valued at about N1 trillion.
“The FG should rely on the funding clause in the Shareholders Agreement which allows the BPE as a 40 percent shareholder in the Disco to inject capital into the DisCos in the event that there is a requirement for further funding which the core investor is unable to provide. The clause allows the BPE to dilute Core Investors equity in the DisCo by such funding,” Wesley Omonfoman, CEO of New Hampshire Capital Investments Limited, an energy consulting firm told BusinessDay last year.
“The dilution mechanism leverages on the huge liabilities of the DisCos to the Nigerian Bulk Electricity Trader and the Market Operator. In simple terms, the mechanism for dilution is for the BPE, acting for the Federal Government to guarantee the Discos obligations to NBET (under the vesting contracts) and the CBN (under the 213billion NEMSF and the N701 billion power sector payment assurance guarantee).
“Where DisCos fail to meet their payment obligations to NBET and the CBN, NBET should call the BPE guarantee. Then the BPE should then converts the called portion of the guarantee to shareholders funding for DisCos and dilute the core investors.”
In 2013, the core investors in the Disco paid US$ 1.42billion to acquire 60 percent stake of the privatised power assets, and were allowed to borrow up to 70 percent of this amount, which the Government guaranteed through the Put-Call option in the Performance Agreement and Direct Agreement with lenders.
Exhibiting market indiscipline, the DisCos have been settling only about 30 percent of their market invoice though their collection rate was at 57 percent indicating they kept more for themselves than they should.
“Evidence seems to suggest that the Discos are focused on servicing their acquisition loans rather than investing in metering, transformers to enhance their operational efficiency and reducing system losses,” states the PSRP document.
The DisCos acquired their loans in dollars and unlike the electricity generation companies that have their tariff indexed in US Dollars, the Discos tariff is 100 percent in Naira, thus the devaluation of Naira massively extended the Discos balance sheets.
ISAAC ANYAOGU
