NIAF, Experts Propose Bailout as Chronic Illiquidity Threatens Power Sector


Fears that the Nigerian privatised electricity market may be heading for an unanticipated halt and requires a quick bailout to guarantee a successful launch have been expressed by industry experts including the Nigeria Infrastructure Advisory Facility (NIAF).
In addition to a recent analysis and report of activities in the market by NIAF, experts who spoke to THISDAY on the status of Nigeria’s electricity market yesterday in Abuja said on the condition of anonymity that their fears were hinged on the growing financial illiquidity of the market.
They noted that the development was occasioned by revenue remittance defaults, misapplication of market funds, amongst other issues, by participants, notably distribution companies whose financial responsibility is critical to the survival of the market.
NIAF, which is a technical advisory facility funded by the UK Department for International Development (DFID), had prepared the report for the Operator of the Nigeria Electricity Market (ONEM), otherwise known as the Market Operator (MO).
Designed to implement projects in power, transport and major infrastructure, NIAF aims to increase access to improved, reliable and affordable infrastructure services.
It participated actively in Nigeria’s power sector reform programme and hopes to enhance government’s capacity to better plan, finance and operate infrastructure delivery at the federal and state levels.
Its report which was captioned: “Dealing with the financial shortfall in Nigeria’s electricity market,” was obtained from sources in ONEM by THISDAY; it warned that there are real risks of payment defaults and precipitous loss of confidence, all which could lead to an unexpected collapse of the electricity market.
These risks, it added, were real and proximate, while recommending possible support options that could help buoy the market into the Transitional Electricity Market (TEM) which it expects help to achieve growth and sustainability within a contract-based regime.
As expressed by other experts, the NIAF report also stated that there are attendant serious risks to banks that had financed purchase of power assets in the concluded liberalisation programme, and as such chronic illiquidity now appears to be the central challenge of the sector.
From its analysis, NIAF equally explained that only about half of power generated in the sector was paid for, thus leading to chronic monthly shortfalls between generators’ bills for wholesale energy to distribution companies and actual payments.
It said: “Monthly receipts are only about half of monthly total billings for bulk power supply which is approximately N24 billion. Improving payment performance is crucially important to the viability and commercial sustainability of the privatised market.”
The MO had on Tuesday said at the inauguration of its unified market resettlement system for the industry that it disbursed just about N11 billion in payment to market participants for the month of April; this confirms NIAF report that the market’s financial performance was slow and could take up to five years to eradicate recurring monthly shortfall.
“At present rates, it could take up to five years to eradicate the recurring monthly shortfall. Cumulative payment arrears would amount to approximately $4 billion,” it said.
“It is far from clear that all companies in the sector can continue to self-fund a significant proportion of their operations over such an extended period.
Significant losses are being registered by the many banks funding the power sector. Without action, this trend seems likely to worsen,” NIAF added.
While considering the broader effects of the development on the sector, NIAF explained that delay in start of a contract-based market beyond 2014 could lead to the market’s loss of gained momentum considering the imminent general elections of 2015 and subsequent re-establishment of government.
In addition, NIAF said that while the Nigerian Electricity Regulatory Commission (NERC), Central Bank of Nigeria (CBN) and Ministry of Power sit to develop a plan to re-finance such distressed companies, it should also agree with NERC how full review of distribution companies’ finances can be undertaken.
Meanwhile, it was discovered that NERC’s recent audit of operations of distribution companies in the sector indicted some distribution companies of engaging in misapplication of market revenue collected by them.
Sources at NERC told THISDAY that the audit which it did before reviewing the tariff revealed that the indicted distribution companies had upon collection of market revenue, initiated massive procurement of non-operational and irrelevant goods like office furniture, laptops and computer sets, thus affecting their revenue remittance threshold to the market.

The NERC’s discovery also confirmed experts’ claims of anecdotal evidence that suggests that while several distribution companies were underfunded, their operators or owners may have resorted to misapplication of market funds; they thus advocated for closer scrutiny of the finances of the companies which NERC said it has done with its recent benchmarking of remittances.


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