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Federal Government is planning to inject N871 billion into the power sector next year according to its 2018 to 2020 medium term expenditure frameThework and fiscal strategy paper, but analysts are sceptical that it will resolve the challenges faced by the power sector without tariff review.
A breakdown of the figure indicates that Central Bank of Nigeria (CBN) Financing facility will account for N310 billion and will go into stabilisation of the Nigerian Electricity market by providing loans for Electricity Distribution Companies (DisCos) and Electricity Generation Companies (GenCos).
The sum of N61 billion would be contributed through the World Bank’s Program-for-Results, a financing scheme that links disbursement of funds to programme results. Part of these funds will go towards a performance based loan to enable the Nigeria Bulk Electricity Trader pay 100 percent of its wholesale invoices in full and on time.
The loan is also to be used to reduce technical losses and strengthen the distribution networks of the various Discos as well as to promote corporate governance, especially if it is lacking in the operations of the companies.
The Federal Government will make available budgetary provision in the sum of N194 billion, which will go into funding of transmission lines and the national grid undertaken by the Transmission Company of Nigeria (TCN).
A sum of N315 billion will go towards power assets ownership restructuring and settlement of DisCos debts which were created on account of FG’s refusal to allow cost reflective tariff regime. But players in the industry have told BusinessDay that unless a tariff reform is effected, new investments in the sector will not achieve the desired objectives of improving power supply.
“The prevailing Disco tariff today was modelled against variables that have been overtaken by time and events, and therefore does not reflect the true pricing of electricity. MYTO 2015 for Discos were built on 196/$1, 8.3% inflation rate, certain available capacity and therefore the final tariff was a product of these variables.”
“You recall that from late 2015, there were changes in these variables, which would require reciprocal adjustment of the tariff but the government did not allow NERC to increase the tariff to meet up with the current realities. The shortfall that the Discos could not account for becomes a debt for the market, which the government is under obligation to pay since it is at their instance that the tariff was not increased,” Chuks Nwani, an energy lawyer, said.
But even this will not totally resolve market shortfall of over N500 billion attributed partly to Discos inability to pay for all the power it take and keeping more for itself than it pay others in the value chain.
The Federal Government says it is negotiating with the Discos to cede some of their shares to new investors, so that the investors with financial and technical capacity can acquire some of them in settlement of their debts.
“We have now come to the point where investors in the power sector must come together and decide to cede some of their holdings to enable new investors with expertise come in to enable us grow the power sector at the pace that can impact on economy growth,” Zainab Mohammed, minister of state for budget and national planning, said at the last Nigerian Economic Summit in Abuja.
“It involves negotiating with existing owners and also government,” she said.
But legal experts note that the first point of call in determining the legality or otherwise of divestment of shares by the shareholders to the Discos would be a combined review of Shareholders’ Agreement, Performance Agreement and the relevant Discos Articles, according to Ayodele Oni, an energy lawyer and partner at Bloomfield Law Practice.
Following the privatisation of the power sector, the Federal Government of Nigeria retained 40 percent in the privatised power companies.
During this process, the Bureau of Public Enterprises (the BPE) (on behalf of the government) executed requisite agreements to formalise the acquisition of equity, by the private sector, in the electricity distribution companies (the Discos).
Hence, the Shareholders’ and Performance Agreement came into force to detail ownership rights and set the standards for operation and management of the Discos.
While the Performance Agreement addresses restrictions and conditions for the transfer of shares by the new private sector core investor, the Shareholders’ Agreement sets the requirement for the transfer of shares of both the FGN (represented by the BPE) and the requisite private sector core investor.
Specifically, the template Shareholders’ Agreement stipulates that “each Shareholder undertakes to the other Shareholder(s) and to the Company (the Disco) that it shall not at any time transfer or otherwise dispose of any Shares or of any interest in or option over any Shares in any case otherwise than in accordance with the Articles and this Agreement and unless and until the proposed transferee, issuee or allottee executes and becomes bound by a Deed of Accession”.
The Agreement contains further provisions for a Pre-emptive Right / Right of first refusal by the private sector core investor in any purported sale / transfer of shares by BPE (on behalf of the FGN).
“Thus, the BPE (on behalf of the FGN) first has to offer the shares to the private sector core investors before they can sell to third parties where these core investors refuse to buy the shares,” Oni of Bloomfield Law Practice, said.
“On the face of it, it would seem that the rationale behind the intended sale would be to, in addition to raising funds for a sector over haul, introduce new investors with stronger financial and technical capabilities to rescue the Discos from its present challenges and under performance.”
“It is therefore unlikely that the BPE would be satisfied with extending additional shares to the present shareholders of the Discos. Notwithstanding, the BPE is still bound by the restrictions contained in the requisite Agreements and would be required to comply with same.”
On March 22, the Federal Executive Council approved the Power Sector Recovery Programme (PSRP) to restore the sector’s financial viability and establish a contract-based electricity market.
The PSRP are a series of policy actions, operational, governance and financial interventions to be implemented by Federal Government of Nigeria (FGN) over the next five years. The key objective is to reset the Nigerian Electricity Supply Industry (NESI) for future growth.
“Some key issues to be addressed through the PRSP include: eliminating accumulated cash deficits in the sector; develop and implement an appropriate and sustainable electricity tariff that supports liquidity over time; enforce discipline and accountability by electricity distribution companies (DISCOs); ensure grid stability; promote sector transparency and an effective communication strategy; and, promote electricity access and renewable energy,” said the document.
OLUSOLA BELLO & ISAAC ANYAOGU
