A Fragmented Partnership

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Chineme Okafor writes on the brickbat between the federal government and investors in the electricity distribution companies

The federal government and investors in the 10 electricity distribution companies (Discos) in Nigeria’s electricity market have not particularly enjoyed a good relationship even though they are both shareholders in the Discos.

Best described as mutual suspicious, their relationship has in the last five years taken a nosedive when the government of President Muhammadu Buhari came on board. The current government spent the better part of its first year in office picking up quarrels with the Discos’ operators over alleged poor service delivery.

With the exception of Yobe Disco, which was returned to it after the 2013 privatisation exercise, the federal government has kept a 40 per cent shareholding in Kaduna, Kano, Enugu, Ibadan, Abuja, Ikeja, Eko, Port Harcourt, Benin and Jos Discos. It has however repeatedly complained about the performance levels of the Discos.

Overtime, the government has claimed that the Discos have failed to live by the terms of their acquisition plans and agreements with the Bureau of Public Enterprises (BPE).
It has equally resorted to subtle and open threats of license revocation or amendment of the business terms because according to it, the Discos have not been able to satisfactorily distribute electricity to Nigerians.

According to records obtained from the BPE, the government sold its 60 per cent stakes in the 10 Discos (the sale of Kaduna Disco was concluded later) for $1.256 billion to the investors and retained its 40 per cent.

Besides the payments made for the shares acquisition, the Discos’ investors also paid $75,000 and N1 million to the Nigerian Electricity Regulatory Commission (NERC) for the franchises to the distribution networks as well as application fees for the franchises. This however has not translated into a cordial relationship between the two partners.

A fragmented partnership
From quarrels to threats, both parties have frequently used these tactics to their advantages, clearly showing that they have been divided and may not realise the objectives of the Electric Power Sector Reform Act 2005 (EPSRA) if they continue on this path.

While the Discos’ complaints have most of the time centered on claims of the government failing to provide the right business conditions which it agreed with them in 2013 through the BPE, the government on the other hand has repeatedly branded the Discos as dishonest partners in operation, and often raise public opinions against them for alleged poor service delivery.

Between the periods that the privatisation exercise was concluded and now, both parties have quarreled and made threats to either hand back acquired distribution assets or revoke operational permits and kick out the operators, all to the disadvantage of the market and electricity consumers.

Following repeated interests and request for a review of the performance agreements of the Discos, the BPE in late 2018 disclosed that it would undertake the review by December 31, 2019.
“Pursuant to the successful conclusion of the privatisation transaction for 10 of the Discos, the utility companies were handed over to the core-investors on the 1st of November 2013. The associated performance agreements signed in August 2013 provided, amongst other performance indices, that the core investors covenanted to achieve agreed reduction targets of aggregate technical, commercial and collection losses.

“That due to lack of adequate technical information relating to the state of the infrastructure at the time of concluding the transaction, the base level of losses in the utilities imputed in the performance agreements were based on provisional estimates.
“That the terms of the performance agreements provide for a 5-year tenor during which the core investors in the Discos were required to fully achieve far-reaching efficiency improvement targets,” said the BPE in an official notice of its intentions on the review.

It added that: “The performance agreement further provides that a study to establish the baseline level of aggregate technical, commercial and collection losses for the performance measurement would be carried out by the Discos within one year after takeover and the outcome presented to the Nigerian Electricity Regulatory Commission (NERC) for approval. The approved loss level shall form the basis of determining the performance of the core investors by BPE and subsequent tariff computation by NERC.

“That NERC subsequently approved the outcome of the baseline loss study and issued a tariff order with an effective date of 1st January 2015 thus automatically commencing the 5-year tenor of the performance agreements executed between the core investors and the BPE.

“In this regard, we wish to clarify that the 5-year performance agreement for all the electricity distribution companies, with the exception of Kaduna Disco, became effective on 1st January 2015 and the fifth-year anniversary for final performance review would therefore be 31st December 2019.”

With regards to the performance agreement, it is claimed that parties agreed to raise the power stock on the national grid by 5,000 megawatts (MW) after five years, as well as ensure that electricity users are comprehensively metered to drastically reduce the Aggregate Technical Commercial and Collection (ATC&C) losses recorded by the Discos. Records however show that these are yet to be achieved.

Metering according to the NERC is still abysmal, while financial debts in the books of the Discos – the government ministries, departments and agencies (MDAs) owe heavily – are equally high and threatening the sustainability of the market.

Siemens, as new source of quarrel
Following the failure of the government and Discos’ operators to cordially operate the power sector in line with the objectives of the EPSRA, a third-party – Siemens, has taken interest in the sector through a new deal that is unclear but which the government is wholly happy to have.

Before the Siemens entry in 2019, the BPE had summoned a meeting of the shareholders of the Discos on June 26, 2019 and disclosed its addition of members to the board of the companies in line with the government’s 40 per cent stakes. It argued that the move was made to engender transparency and improve efficiency in the Discos.

After that move, the government in July 2019 signed a six-year roadmap agreement for developing the power sector with Siemens AG. The agreement which commercial details are yet to be disclosed will see Siemens raise Nigeria’s power production to 7,000MW next year – 2021, and 11,000MW in 2023. Its third phase will entail the delivery of 25,000MW over a six-year timeline.

Buhari and the global Chief Executive Officer of Siemens AG, Joe Kaeser signed the agreement which would see the latter push to enhance the quality of the distribution networks through measures which include swift supply of equipment needed for replacement and immediate expansion, including upgrade of some substations of the Discos.

Providing an update on the Siemens proposal, the Minister of Power, Mr. Mamman Saleh recently told journalists at the State House that the government was considering handing over the distribution networks to the firm because it has concluded that their current operators have failed.

“What I want to say is that most of the problems we are facing in this country is that we cannot get electricity supplied adequately and efficiently and this is because we have a problem in distribution,” Saleh said.

He added that: “On generation, there is no more problem. We can generate up to 13,000 megawatts but the transmission, those who are taking the electricity supply can only take 7,000 megawatts; even at that, they are not taking the whole 7,000 megawatts but only 4,500 megawatts and then send for distribution. The distribution (Discos) in turn receives only 3,000 megawatts. Because of technical and commercial reasons, they cannot contain the whole power that has been generated.”

“So, we have to correct the infrastructure. That is why I said that today, I submitted my observation to council, and I believe the government is on it. One of the things I will tell you is that government has signed a memorandum of understanding with the German company, Siemens.

“They are to align between distribution and transmission and also generation, so that at the end of the day, if we generate 13,000 megawatts, transmission will take the whole 13,000 and will distribute same. That way, Nigerians will be happy, and everyone will have 24/7 electricity supply,” he explained.

According to Saleh: “Government cannot continue to subsidise because what they are doing is that they collect 3,000 megawatts and pay for only 1,000 megawatts. That is 15 per cent of what they are collecting. So, government is the one completing the payment.

“So, we cannot continue like that. If they are ready to continue, fine but if they are not ready to continue, maybe they should give way to whoever that is ready to come and invest. So, we are asking the government to review and see if they are capable, fine; but if they are not capable, they should give way.”

Responding to this, the Discos through their umbrella trade union, the Association of Nigerian Electricity Distributors (ANED) explained that they were unhappy with such news from the government.
ANED’s Director of Research and Advocacy, Mr. Sunday Oduntan said the proposal would be dishonest and not a solution to the problems of the country’s power sector.

Oduntan explained that: “The Disco investors have executed agreements with the BPE, the federal government’s representative agency under the privatization. These agreements specify the terms and conditions under which both parties shall accomplish the objectives of the privatisation, as well as a framework of commitments necessary for the Discos to achieve their performance targets. Unfortunately, the commitments of the government remain unmet.”

“The solutions to the problems of NESI are found in a collaborative and partnering framework and environment. Pronouncements that are misleading or misrepresentative of the complicated challenges of the power sector will not lead to increased power supply,” he stated.

What should be done
Proffering a way out of the situation, a former chairman of the NERC, Dr. Sam Amadi said he believed both parties could work together with mutual commitment to efficiency.
Amadi, explained that while the government is pushing for improved efficiency in the sector, it would not “stay and watch the sector collapse, so it will push the system to more efficiency even as it tries to offer financial bailout.”

Asked if the government could get frustrated enough to force a hostile takeover of the Discos with regards to the Siemens development, he said: “I don’t think the federal government intends a hostile takeover of the Discos. I think there are efforts to move them (Discos) to higher levels of performance and commitment.”

He, however, warned that: “Some of the Discos may lose their licenses but it will come through a regulated action. And if they refuse to perform or improve significantly.”
“The challenge of the sector calls for prudence and courage but not recklessness. There’s no need for hostile takeover at this time. There could be regulated exit for non-performing investors,” he offered.

Further on ways both parties could work collaboratively for the sector to transition to efficiency, he stated: “I support the government to stop further bailout. I think may be government should allow the regulator to give the Discos the right tariff but subject them to high level of loss reduction and service quality.

“Government can provide meters as a form of social responsibility if it can afford it and then put the Discos’ feet on fire. We need to rescue the sector with bold, intelligent and cautious actions.”