BEHIND THE FIGURES BY IJEOMA NWOGWUGWU, Email: Ijeoma.email@example.com
Before the day runs out, the federal government’s attempt to sell 10 electricity distribution assets (also know as discos) carved up from the unbundling of the Power Holding Company of Nigeria, would enter the final stretch. But unlike past privatisation transactions where the bidder with the highest offer walked away with the company being sold, the privatisation of the ten discos – save for Kaduna Electricity Distribution Company Limited, for which no bidder was prequalified to move to the next stage – will follow a different path.
In recognition of the fact that no power transmission or distribution grid in any part of the world is immune to technical and non-technical losses arising from the transmission and distribution of electricity to end users, the Bureau of Public Enterprises (BPE) will today determine which of the bidders will acquire the assets based on their commercial proposals, not financial proposals. This means that the 21 companies, which passed the technical bid stage, have already been informed of the value of the distribution assets they will be seeking to acquire. However, the winners will not be determined on the basis of the highest offers made for the assets, but on the highest aggregate technical, commercial and collection (ATC&C) loss reduction projections over the first five years of operations.
The rational behind selecting the winners on the basis of loss reduction projections stems from the fact that in environments where grids are efficiently run, and in which operators invest sufficiently in upgrading, modernising and reinforcing the distribution infrastructure, technical and non-technical losses can be kept at 5 per cent - 10 per cent per annum. In Nigeria, however, technical and non-technical losses are as high as 40 per cent, thus reducing the amount of electricity that reaches consumers. High losses also negatively impact on the revenue an operator makes, which in turn inhibits its ability to maintain and upgrade its network infrastructure.
But even before the BPE and the National Council on Privatisation (NCP) have a chance to evaluate the commercial bids/proposals today, some of the bidders are already up in arms over the criteria that will be used in determining the preferred bidders for the distribution assets. Some like the Ekiti State Government, which is a member of a consortium – Southern Electricity Distribution Company – bidding for the Benin Electricity Distribution Company are grumbling over the arrangement to determine the preferred bidders using the average technical, commercial and collection loss reduction target criteria. The state government told the Punch Newspaper that though the Southern Electricity Distribution Company came first in the technical evaluation conducted by the NCP to pre-qualify bidders for the Benin Disco, the best company might be edged out if the average technical and commercial loss reduction proposal is used.
But whilst Ekiti State Government has absolutely no case, as it was informed from the outset what criteria would be used to evaluate the commercial proposals and still went ahead to participate in the process, one or two other bidders are concerned that the BPE and NCP are shifting the goal post mid-stream. Those who spoke to me last week are underpinning their position on the Request for Proposals (RFP) for the discos issued by the BPE to the bidders. The RFP for all privatisation transactions spells out the transaction timelines, due diligence and data room process, as well as the rules for the bid process.
Specifically, the RFP for the discos prescribed that bids would be submitted in 2 parts: technical and commercial. The technical proposals included detailed business plans, financing plans, investment plans and loss reduction plans for the disco that is the subject of the bid. The commercial proposals consist only of the percentage reduction in losses that the bidder expects to achieve during the first five years of operation. The technical proposals were evaluated first and those that passed a threshold mark would have their commercial proposals evaluated today.
However, these bidders have raised issues with the decision by BPE, in conjunction with the Nigerian Electricity Regulatory Commission (NERC), to introduce “new” evaluation rules that would apply to the commercial offers. This, according to them, entails revisiting the business and financing plans already evaluated as part of the technical evaluation with new requirements on the financing ratios, loan ratios and requirements for positive net present values (NPVs) for the businesses.
To justify their argument, such bidders are contending that the BPE, NCP and NERC are relying on Section 121 of the RFP, which states: “All commercial offers must be materially consistent with the business plan set out in the technical proposals. Commercial offers of a bidder must be feasible based on the technical proposal submitted.”
Yet Section 118 of that same RFP states: “The commercial evaluation will be carried out solely on the basis of the ATC&C (aggregate technical, commercial and collection) loss reduction targets committed by bidders. All bidders who have successfully passed the technical evaluation will be considered equally strong and eligible contenders, and their results of the technical evaluation will not be considered in establishing the final ranking of the bidders for each distribution company.”
According to them, this in itself is enough to ensure that BPE’s new rule is a potential breach of its own RFP and legal challenges could arise from bidders who have spent millions of dollars in preparing their submissions. They are contending that BPE’s suggested additions are new and retrospective. Their introduction so late in the process, after the RFP has been in circulation for months, does not reflect well on the overall process and makes it subjective, these bidders have added. The point the bidders are trying to make is that there is a conflict between Sections 118 and 121 of the RFP.
On this issue, I beg to disagree, as any bidder committed to acquiring any of the discos must know that its business and financing plans have a relationship with its ability to supply electricity to consumers in an efficient manner. In other words, a bidders ability to reduce technical and non-technical losses is directly related to it capital and operating expenditure (capex and opex). How it manages its capex, opex and its collections (revenue stream from paying customers) will determine its ability to reduce losses and the quantum of electricity that reaches end users.
Also, in its defence, NERC explained to this writer that as the approving and licensing authority, it had made it clear during the due diligence stage that it will conduct its own evaluation of the bidders, because the commission wants to ensure that the federal government does not hand over an inefficient public monopoly to predatory private sector monopolies.
In this regard, NERC is taking into consideration the fact that unlike the generation assets, the discos will literarily operate as monopolies in their areas of jurisdiction. For example, the Ikeja Disco shall be solely responsible for making electricity available to consumers in the Lagos Mainland, while Eko Disco will supply electricity to consumers on the Lagos Island, Eti-Osa, Ibeju Lekki and Epe Local Government Areas. Ibadan Disco (which is the largest of the discos), on the other hand, will be responsible for consumers in Oyo, Ogun, Osun and Kwara States, while Benin Disco will have a monopoly on consumers resident in Ekiti, Ondo, Edo, parts of Delta and Kogi States.
NERC and NCP sources further explained that it would be disingenuous for bidders to claim that they did not know that Section 121 of the RFP would be applied in assessing their commercial bids. Moreover, owing to the finality that comes with the carving up of the distribution grid, the privatisation of the discos cannot be based on a lottery, as prospective distribution operators that will be responsible for the distribution and marketing of electricity, will have a direct interface with consumers.
Of greater significance, a NCP member added that the application of Section 121 of the RFP is of critical importance to test the viability of the commercial proposals submitted by bidders for consistency and feasibility using the Multi-year Tariff Order (MYTO) model. This is being done to ensure that bidders do not simply pluck ATC&C loss projections from the air and that their commercial proposals are consistent with the business, financing and investment plans that they submitted with their technical proposals.
To achieve this, NERC will use a matrix to test their commercial bids by calculating the net present value to determine if the businesses will be cashflow positive or commercially viable over the foreseeable future. In addition, another test will be conducted to assess the financial strength of the bidders, that is, by determining their ability to meet planned expenditure and withstands shocks without going bankrupt.
Clearly, what is uppermost on the minds of the BPE, NCP and NERC is to ensure that the bidders’ commercial proposals are viable. It is also aimed at forestalling indiscriminate demands for tariff reviews, in the near future, by the operators who did not do their homework well.
As already indicated, getting the privatisation of the discos right is a make-or-break process for the federal government and is extremely critical to the overall success of the power sector reform programme. A few privatisation transactions have gone belly up in the past because bidders submitted proposals that lacked credibility and were more interested in stripping the enterprises of their assets than anything else. This is a mistake we can ill-afford with the electricity assets.
Fortunately, having brought the methodology that would be applied to the attention of President Goodluck Jonathan, he has given his wholesale endorsement to the NCP, BPE and NERC to ensure that whoever emerges preferred bidder today is technically (not politically) the best and the most credible of the bidders. As such, NCP, BPE and NERC need all the support and cooperation they can get to see the process through.