Anxiety in electricity market over $5bn bank loan to DisCos

By ADEWALE SANYAOLU

There appears to be palpable fear among the 10 electricity distribution companies (Discos) over what becomes their fate in the weeks ahead.

The development may not be unconnected with last week’s takeover of Abuja Electricity Distribution Company (AEDC) over failure to meet its loan obligation to its lender, United Bank for Africa (UBA), leading to the utility’s firm take-over by the latter.

Sources close to the operations of the Discos told Daily Sun in confidence that the action of UBA has already created panic in the power sector as the management of majority of underperforming discos are now at crossroads.

Electricity distribution companies in 2020 are expected to repay N35.06 billion of the loan disbursed under the Central Bank of Nigeria(CBN)-Nigeria Electricity Market Stabilisation Facility programme but could not meet up a quarter of the repayment.

The privatisation of the power assets fetched about $3.2billion for the Federal Government, with the Gencos and Discos sold for $1.7billion and $1.5billion, respectively.

The assets were purchased with significant leverage, estimated to be 70 per cent debt and 30 per cent equity, with most of the debt provided by the local banks.

Less than a year after the privatisation, analysts at CSL Stockbrokers Limited, a subsidiary of FCMB Group Plc, had said there had been general concerns over what impact the stresses in the sector would have on the Nigerian banking industry, as local banks had invested over N750billion ($5bn) in it. They stated in an August 5, 2014 report that the sector was not running as expected, resulting in significant variations in the cash flows and profit forecasts of the successor companies’ business plans as well as the financial model of the Bureau of Public Enterprises(BPE), which conducted the privatisation.

“Many banks would have taken secondary (or primary) non-power related collateral. But even with recourse, in the event of a default, banks will record a non-performing loan and there are costs involved in enforcing the claim against the assets,” they added.

For its part, the Central Bank of Nigeria (CBN) said it had in the past seven years spent over N1.5 trillion to keep the nation’s power sector from collapse.

The interventions include Power and Aviation Intervention Fund (PAIF), hovering at about N300 billion, Nigerian Electricity Market Stabilisation Facility (NEMSF) at about N213 billion, N140 billion Solar Connection Intervention Facility, over N600 billion tariff shortfall intervention as well as a recent N120 billion intervention designed for mass metering among others.

The CBN had, in its Fourth Quarter Economic Report (Q4 2020), detailed the interventions, which showed dismal repayment. The primary aims of the intervention were to fast-track electric power projects, especially across industrial clusters in the country, thereby improving power supply, employment generation, and enhancing the living standard as well as providing leverage for additional private sector investments.

The interventions, in the face of the financial crisis, was also necessitated by the inability of the sector to finance itself as tariff shortfall, regulatory lapses and acute infrastructure impede the growth of the industry.

Former Chairman of Nigerian Electricity Regulatory Commission (NERC), Sam Amadi, who said the intervention remained critical, noted that the commission remained critical to the success of the financial intervention.

“We are not hearing about all the monies from the regulator and that is worrisome. It is regulator who should be speaking about funding for the sector because it has the capacity to regulate expenditure and ensure it goes to what is relevant and prudent,” Amadi said.

Speaking specifically on the intervention for metering, Amadi said: “I support the funding for meters but I doubt if it will solve the problem because the Discos will use the fund to largely replace bad meters and control revenue loss. But the rebate of unmetered customers will remain high and undermine any movement to the cost-reflective tariff.”

President, Nigeria Consumer Protection Network, Kunle Olubiyo, had noted that given the level of financial liquidity in the sector, support, in terms of soft loans, would provide leeway for the sector.

The BPE and NERC had last week in a joint statement explained that there has been an ongoing dispute among competing factions of the majority shareholder/core investor in AEDC, Kann Utility Company Limited, which eventually spilled over to a dispute with the lender (UBA) that provided the acquisition loan to KANN for the acquisition of majority shares during the privatization exercise in 2013, over KANN’S inability to service its debt to the bank.

NERC and BPE explained that, during the course of the intractable crisis, AEDC not only struggled to meet its obligations to the market under the terms and conditions of its licence but was also unable to meet its obligations to key stakeholders in the organisation including staff, culminating in the industrial action by members of the Nigerian Union of Electricity Employees (NUEE). (Adopted from Daily Sun)