Mr. Lai Omotola is the Group Managing Director/Chief Executive Officer of CFL Group of Companies, one of Nigeria’s foremost infrastructure development companies. In this interview with Gboyega Akinsanmi, Omotola discusses diverse challenges undermining Nigeria’s power sector and federal government’s decision to spoon-feed indigenous power companies at the expense of the masses
Can the recent increase in electricity tariff guarantee stable supply of power in the country?
The new tariff regime will not produce desired result the way the Minister of Power, Mr. Babatunde Fashola, has painted it. The reasons are not too far-fetched. The reasons really border on two main factors. One is the technical capacity of our indigenous companies as it were today. Two is the financial capacity of the indigenous companies to bring together necessary infrastructure that can guarantee steady supply of electricity in the country.
Does that suggest that the power assets were sold to the investors without established expertise and capacities in the electricity industry?
A bidding process was actually put in place. The government will also look at two factors, which I just explained. But indigenous investors are only required to bring a technical partners. The government looks at the kind of partnership the technical partner has with the indigenous investor without much emphasis on equities. At inception, we said it was not enough for indigenous companies to just bring technical partners.
It would have been better for indigenous companies to bring the technical partners that would also bring equities into that partnership. That is lacking today. If the technical partners bring equity, it means they are not contractors. They are also investors. Now, the indigenous companies will now be able to leverage their technical competence and financial wherewithal. As far as this sector is today, we do not have a dominant foreign equity player.
If the foreign technical partners did not bring equity, how then did the indigenous investors managed to acquire the power assets?
Power infrastructure development is probably the most financial intensive project in Nigeria today. So, we need people with deep pocket. In 2013, the federal government and Bureau of Private Enterprises raked in about $2.6 billion. Nigerian banks provided about 80 percent of the fund. Ordinarily, it should not be that way because foreign investors are supposed to bring their own equities. But most of the funds were sourced from the banks. It is now creating pressure on our financial system.
The Nigerian banks are the major, if not the sole, financiers of the acquisition of the power assets. There are two factors that determine lending in Nigerian banks. One is the high interest rate. Two is the tenure of their funds. These two factors cannot successfully help power sector. They can only act as working capital incentive. Already, interest rate has gone on the high side. Even, the value of dollar to naira had doubled over the space of two years.
The effect is that the accounts of our indigenous companies are not doing well in the banks. If their accounts are not doing well with the banks, the ability of the companies will be stalled. The ability of the indigenous companies to pay loans will be stalled. Finally, the ability of the indigenous companies to generate additional funding will be stalled.
Does it mean the federal government does not really understand the financial status or capacities of these indigenous companies before increasing tariff?
The federal government perfectly understands that there is a financial problem. It understands that the problem was created by the inability of these indigenous investors to generate adequate funds that the industry really requires. Aside, the federal government and investors under-estimated the sector. Instead of coming out clean, the federal government decided to use another strategy. The strategy is to help the indigenous companies through the increase of electricity tariff.
The strategy will only help the indigenous companies service the loans at the expense of the consumers. When the loans are serviced, there will be a little opportunity for the banks to raise adequate capital for expansion. But that is neither here nor there because even our banks are also in serious trouble.
Beyond their financial challenges, can you provide more insight into the technical challenges these indigenous companies are facing?
There are a lot of leakages in terms of revenue collection. The ability to collect revenue is not there at all. To collect revenues, the indigenous must deploy technology. On technical competence, the indigenous companies are lagging behind. Aside, a lot of people are using illegal electricity. Some are tapping from underground armour cables. Many are bypassing the pre-paid metres. The revenues that the distribution companies are supposed to generate are not coming due to these acts of sabotage. The indigenous companies can only solve the challenges with the use of technology.
Again, technology will cost good money. Another issue is estimated billing. It is the cash cow of power business. Now, the federal government directed the indigenous companies to meter everybody in two years. It should be other way round. The companies should have provided stable electricity supply first before increasing tariff? What we find now is that we are giving you two years to meter all consumers. If the sweetener is the estimated billing and the billing will rise by 45 percent, then the cash flow will increase from estimated billing. It is a simple arithmetic.
The proposal of the National Electricity Regulatory Commission (NERC) on disputed bills cannot work. NERC has proposed that once bills are disputed, the consumers should not pay the disputed bills. Rather, they should pay what they paid last. Subsequently, the consumers can write a letter and a body of people will look into their complaints. Ikeja Distribution Company, now Ikeja Electric, has over 450,000 customers. How many complaints will they attend to? Do they have capacity? You can see that it is not going to work.
With the picture you have painted, it appears we have real challenges ahead for this industry. Can these companies really weather through?
This industry needs financial muscles. Two things run with the players in power sector. First, the indigenous companies are not known names in the electricity industry. What is their antecedent? These are just entrepreneurs that saw opportunity and took advantage of it. There is nothing wrong with it.
But as an entrepreneur, you must know when to take your business to the next level. The people that started Coca Cola are not the ones running Coca Cola today. But when you hold on to the assets and do not look at how you will take the business to the next level, there is a problem. Second, the challenge is in the business model. The real challenge is not in the Electricity Sector Reforms Act. It is in the business model? I will give an example. Dangote is known for cement.
That is why it is easy for Dangote to set up cement factories in different African countries. Do you know the reason? It is simply because the template is already made. He goes to every country with the same template and the same team because that is what he has been doing for the past 30 years. Is it not amazing that the same Dangote is building $15 billion dollar refinery? Is it not amazing that the same Dangote is not a player in the electricity industry in Nigeria?
What should the federal government do in this kind of situation now that electricity tariff has been increased at the expense of the masses?
The federal government is trying to spoon-feed the indigenous companies. These are private companies, but the federal government gave them subvention. They have received the first subvention from the Central Bank of Nigeria (CBN). It is just a drop in the ocean. It has not worked.
Another one is coming. If the minister is sure of himself, let him sign an indemnity to or guarantee Nigeria that if the power is not stable in two years, he would resign because we have had enough talk. Nothing will change tremendously in two years, even with electricity tariff hike. Also, a proper business model should be deployed and original players with established expertise should be allowed in the electricity industry. An enabling environment should equally be created in a way that Nigerians will begin to see the future.
On what basis should the federal government provide the indigenous companies subvention since the power assets are now fully in their hands?
It is not about intervention, but a real re-appraisal of business model. Investors must understand profitability will not come in five years. Our banks can only finance for two or three years. Between two and three years, our banks want to see their funds coming back. So, our banks are not suited to fund power sector.
The minister said no bank would want to fund the industry because the price is not bankable. Can Fashola tell us, which of the banks he is referring to? If Fashola is referring to Nigerian banks, the business model of the indigenous companies will not work? The interest rate and fund tenor will not make it work. Instead, the federal government should set up a finance development bank to fund this kind of strategic projects. If our local banks will play any role, it will be in the area of working capital provision.
This is a complete shift from what we have today. For those companies to survive, they need very low interest rate with very long-term loan. Also, they need a robust capacity to handle these projects. If you walk around the streets anywhere in Nigeria, you will see dilapidated transformers, overhead cables still running and former NEPA vehicles just repainted among others. These are signs that finances are very weak. But you can only see our people unhappy and indigenous companies in crisis. Electricity tariff hike is not the solution.