Power generating companies (GenCos) and states should have stakes in distribution companies (DisCos) to resolve the intractable electricity challenge in Nigeria, according to recommendations by a government panel.
The report of an ad-hoc committee by the National Economic Council (NEC) on reforming the power sector, exclusively obtained by BusinessDay, recommends altering the ownership structure of the DisCos.
The committee, headed by Nasir El-Rufai, Kaduna State governor, recommends that states play a leading role in the sector by allocating at least 27 percent shares out of the 40 percent government equity in the DisCos to the state and local government, while the Federal Government retains the rest.
It also recommends that GenCos be encouraged to invest in DisCos to aid their recapitalisation, players observe contract terms, and operators respect governance rules.
Sunday Odutan, executive secretary, Association of Nigerian Electricity Distributors (ANED), when contacted for comment, said he would need to see the full report before he could speak on the matter.
Apart from El-Rufai, other members of the committee that prepared the report include the governors of Edo, Anambra, Adamawa, Plateau and Lagos States with input from professional consultants, PwC Nigeria and KPMG Nigeria. It was submitted to NEC on March 19 and would be eventually sent to the Federal Executive Council for ratification.
The report recommends that the electricity market should be governed by contracts and players including GenCos/IPPs, Transmission Company of Nigeria (TCN), DisCos and gas suppliers, backed by payment and performance guarantees.
To resolve the electricity market shortfall estimated at over N2.4 trillion, which consists of market shortfall of N1.335 trillion caused by DisCos’ inability to collect adequately and fully remit their collections and tariff shortfall of N1.109 trillion caused by the regulator’s decision not to allow cost-reflective tariffs, the report recommended that market rules apply and players act based on Willing-Buyer-Willing-Seller (WB/WS) arrangements.
The report proposes the recapitalisation of the DisCos by encouraging GenCos to invest in them so that they can bring in their capital and management expertise.
Joy Ogaji, executive secretary, Association of Power Generation Companies (APGC), when contacted, said she could not speak to whether GenCos would be open to the arrangement until there were clear guidelines.
“GenCos are open to solutions provided they are not political prescriptions without benchmarkable plans on implementation,” Ogaji said.
On financing, the report recommends implementing and expanding existing infrastructure finance support programmes to augment distribution, transmission infrastructure and rural/off-grid programmes.
Some of the programmes already in the works include the $1.6 billion due to the TCN, the proposed Siemens deal which is yet to be determined, the World Bank funding of $1bn, and $550m funding support for the Rural Electrification Agency.
The report recommends that government “provide clear policy guidelines to regulators (NERC, CBN) and market participants regarding strategic objectives above, return market to regulatory norms with the Nigerian Electricity Regulatory Commission (NERC) acting to execute its statutory obligation to create and implement efficient market design to ensure quantitative/qualitative improvements”.
It further recommends that governance of DisCos be focused on adherence to regulations, rules and contracts and efficient investment in infrastructure and customer service delivery.
To resolve governance issues in the power sector, the board composition of DisCos would now include representation of states and local governments with 27.3 percent as just the core investors and the Bureau of Public Enterprise (BPE).
NERC would have to enforce a requirement for each DisCos to have independent directors and BPE would exercise its veto rights in supervising DisCos’ management.
A forensic audit on DisCos indicate that major governance issues across all DisCos including procurement failures, related party transactions and lack of value-for-money in technical agreements. The report emphasised the urgent need for technical, financial audits before interventions by the World Bank, Siemens and others.
Experts agree that the recommendations could help to dent some of the challenges in the sector.
“These recommendations will go a long way,” said Desmond Ogba, an energy lawyer at Templars Law firm. “A market that is effectively governed and that is contract-based would help and issues around cost-reflective tariffs and ways of addressing the overall liquidity challenges.”
Chuks Nwani, lawyer and a vice president at a Lagos-based energy consultancy, PowerHouse International, agreed that the recommendations are reasonable.
He, however, said for them to work, there must be no political interference with the market, allowing the realistic market indices to be a basis for setting tariffs.
“We need to have a functional market before we can talk about recapitalisation,” Nwani said.
He wondered whether the government would now agree to accept all the financial losses that may arise as a result of the regulator’s unwillingness to allow market parameters govern the market, including tariff and recovery of investment by the core investors.
It is now the role of the Ministry of Power to implement these recommendations and drive this initiative which has since been approved by NEC and awaiting approval of the Federal Executive Council before the outbreak of the coronavirus pandemic in the country.
ISAAC ANYAOGU
