“Nigerian Army and MDAs owe Electricity Distribution Companies N60 Billion – DISCOs”, “Fashola warns DISCOs against blackmailing FG over MDA electricity debt”, “Total blackout imminent as GENCOs, DISCOs battle N400bn debt” and “Nigeria electricity companies to lose N809 billion by December”. These are some of the headlines that have dominated the Nigeria Electricity Market in the last few months. The escalating frequency of these messages is further evidence of the deepening problems in this Market. It also suggests that a lack of change in course could well mean the post-privatised Electricity Market is heading into financial abyss.
In the face of this imminent disaster, I do not believe that the failure of the Nigeria Electricity Market, herein referred to as the Electricity Market (EM), can be regarded as anything but a disaster. The only point of near universal agreement among the private and public players in the power sector is the need for immediate governmental financial intervention in the EM. Governmental financial interventions are nothing new in the Nigeria Power Sector. This is right from the pre-privatisation days when NEPA and later PHCN, both loss-making businesses, constantly needed government support in order to meet their operational and maintenance cost liabilities.
The conception of the Nigeria Electricity Market Stabilisation Fund (NEMSF)
Even the post-privatised EM has not been independent of governmental support. Right after privatisation, the Nigeria Electricity Market Stabilisation Fund (NEMSF) was launched. NEMSF is a N213 billion Central Bank of Nigeria (CBN) loan facility at 10 percent interest rate, which is repayable over an extended 10-year tariff period. NEMSF was primarily necessitated by the under cost-reflectiveness of the Multi-Year Tariff Order (MYTO) 2. It is worth highlighting that cost-reflective tariffs were one of the main preconditions on the part of the DISCOs during the privatisation negotiations. Cost-reflective tariffs are the electricity charges which wholly cover the various costs incurred during the numerous aspects of electricity supply – from generation, to transmission, distribution and supply services.
The agreed N213 billion was to be used to cover the revenue shortfall that DISCOs had endured during the “Interim Rules Period” (IRP) lasting from October 2013 till December 2014. The shortfall was primarily caused by the non-reflectivity of the tariffs which were too low as a result of erroneous assumptions regarding the Aggregate Technical, Commercial, and Collection (ATCC) Losses (a measure of overall system inefficiency). A relatively small part of this money was also to be used to settle legacy gas debts that were incurred during the preceding NEPA/PHCN regime. These legacy debts were transferred to the Nigeria Electricity Liability Management Company (NEMLCO) as a part of the PHCN unbundling process.
By providing for the shortfall during the IRP, NEMSF essentially covered some of the liabilities of DISCOs to other players along the value chain, as well as granting extra revenue to DISCOs to cover their operational and anticipated capital costs for the said period. For example, the revenues received by DISCOs were being shared among the different players as follows: DISCO: 20 to 25 percent; TCN: 11 percent; NBET and NERC, et al.: four percent; and GENCO: 60 to 65 percent. In addition to the differential between the actual cost reflective tariffs and those in MYTO 2 (non-reflective), the net revenue shortfall for each market player to be covered by NEMSF I was calculated on the basis of the revenue split formula above. Since DISCOs are the only revenue collecting arm in the Nigeria Electricity Supply Industry (NESI) supply chain, they were tasked with recouping and repaying the NEMSF loan, whose proceeds went to players at all levels of the supply chain.
Inherently, it was hoped that the presence of NEMSF would simultaneously cover losses caused by non-reflectivity of the tariff regime, as well as increase investor confidence in the EM. It also appears that implicitly, there was an assumption that by taking the debt burden off DISCOs through NEMSF, the investors in the DISCOs would be able to invest in infrastructure, metering and network equipment, both of which should reduce the collection losses thereby making the EM financially sustainable.
By trusting DISCOs to invest all available funds in infrastructure that would make the market more sustainable, the design of NEMSF did not bother to regularly subject DISCOs to the level of financial scrutiny that one might readily expect to come with such a loan facilitY
How Well Has NEMSF Done?
The removal of Collection Losses under MYTO 2.1a and the associated submission of notices of Force Majeure by the DISCOs resulted in the suspension of the disbursement of the NEMSF funds. Also, the CBN stated that the failure of the prospective recipients of the NEMSF funds to meet the pre-agreed “Conditions Precedent (CPs)” needed for the disbursal of the funds. However, according to some CBN insiders, the 2013 oil crisis and the resultant forex crisis meant the CBN was unable to provide the NEMSF money immediately. As at May 2016, only ~N120 billion (DISCOs – 49.6, GENCO – 53.3, GASCO – 15.5, other service providers – 0.5) of the N213 billion had been disbursed by the CBN.
It is difficult to believe that the NEMSF I was designed and developed with anything but the best intentions for all involved. Unfortunately, in the real world of the EM, where judgement can only be passed on the results observed rather than the intentions behind the actions, so far, NEMSF can be seen as nothing but a failure. Many pundits will attribute this failure to the fact that nearly half of the money is yet to be disbursed more than three years after its launch. However, I do not subscribe to this theory. I am of the opinion that even if all the money had been disbursed NEMSF (in its current form) will still have failed to address the fundamental market sustainability problems it should have fixed i.e. the provision of an enabling environment in the early post-privatisation years that would have allowed DISCOs to make the required infrastructure investments (metering and grid development) to ensure they had developed robust tariff collection and anti-electricity theft systems.
My theory is based on the fact that so far, in spite of claims to the contrary by the CBN, no credible correlation has been drawn showing that making NEMSF available to a DISCO has led to an improvement in infrastructure development within that DISCO. It would appear that NEMSF’s biggest undoing has been the aforementioned implicit assumption that it was developed under, and the trust that government had placed in the privately owned PHCN successor DISCOs. By trusting DISCOs to invest all available funds in infrastructure that would make the market more sustainable, the design of NEMSF did not bother to regularly subject DISCOs to the level of financial scrutiny that one might readily expect to come with such a loan facility.
To this effect, some employees of the regulator have suggested that DISCOs are currently under-declaring their revenues and have called for an increase in NERC’s mandate to include regular audits of DISCOs. Also, there are cases in which it was reported that DISCOs had simply overdrawn their share of their monthly revenue (disregarding the aforementioned formula), thereby leaving the other players in the value chain that they owe money (especially the GENCOs) to scrape the bottom of the barrel for the left-overs. That is pretty radical because, realistically, one would expect that the debtor will be the last to take its share of any received monies – you settle your debt first and then you take the left-overs.
Note (1): The CBN declared that over 170,000 meters had been procured by DISCOs as a result of funds from NEMSF. However, it is not possible to confirm if these investments were wholly funded by NEMSF and if indeed the number of meters procured was commensurate to funds received by the DISCOs under NEMSF.
…future government support in the EM must be directed in a way that provides absolute clarity about how the money provided is to be spent and matrices against which success (or failure) can be objectively determined. In the current EM, DISCOs primarily have three problems.Note (2): Some industry experts have argued that NERC already has this mandate but has only failed in its fulfilment.
In addition to the current NEMSF, additional revenue shortage interventions, NEMSF II and III (if you like) to the tune of N600 billion are being negotiated to cover the expected losses due to the non-reflectivity of tariffs for the years 2015 and 2016. Considering that the tariffs contained in MYTO 2015, which was only implemented in February 2016, are said to be “under-reflective for the first few years”, one can only imagine that more interventional funds will be needed in the near-future i.e. 2017 to 2018/19.
Note: for future NEMSFs (any other intervention fund), it is expected that there could be a slight change in methodology. DISCOs will be mandated to pay a fixed share of their liability for any energy procured from GENCOs, with NEMSF covering the balance. For example, if DISCOs are mandated to pay for only 60 percent of the electricity they receive, the remaining 40 percent will be paid on their behalf by the NEMSF in the form of a loan to be repaid by the DISCOs later.
Where Should We Go With Governmental Intervention In the EM?
Now, back to the main question: Do I believe the government should provide fiscal support to the EM as most industry experts have called for? The answer is a resounding YES! I am quite sure that without any serious governmental intervention, the EM is destined for disaster – one that Nigeria as a whole can ill-afford at this juncture in our economic development. The next question is: should the government intervene using a NEMSF-like programme? Here, I am forced to say NO for the reasons I have highlighted above.
In my humble opinion, future government support in the EM must be directed in a way that provides absolute clarity about how the money provided is to be spent and matrices against which success (or failure) can be objectively determined. In the current EM, DISCOs primarily have three problems: first, there is a revenue shortage problem, which is caused by the non-reflectivity of the tariffs. This is further exacerbated by the fact that DISCOs only receive payments on approximately 50 percent of the electricity that is sold. This revenue shortage is due to electricity theft at various levels and the outright non-payment of bills by various customers. As a result, DISCOs do not have enough receivables to cover their debt to the NBET, which in turn cannot afford to pay GENCOs who consequentially cannot pay their gas suppliers.
Third, DISCOs need money to invest in infrastructure. The required infrastructure includes meters, which are needed to reduce/eliminate estimated billing thereby reducing non-payments by customers. DISCOs also have to invest in actual network infrastructure in order to make their distribution grids more robust thereby reducing potential positions for outright electricity theft. With operational experience, the DISCOs know the payment patterns of their consumers and so can use the improved networks to actually transport electricity to the consumers who are most willing to for pay it.
With the crash in oil prices and the associated recession potentially lying at our door for quite a while, the failure of the Electricity Market is not something Nigeria can even contemplate if we are serious about achieving economic development. For the EM to survive the looming financial disaster, governmental financial support is critical.
Based on these issues, the government’s financial intervention must be split along two lines; a revenue shortage coverage fund and the infrastructure development fund. The former is essentially a continuation of the NEMSF programme. However, under the new approach, there would be a totally transparent accounting system and monthly reconciliation arrangement that still allows the government to provide the required funds to the DISCOs. However, unlike the current/proposed NEMSFs, in theory, DISCOs will be expected to pay the NBET and other service providers wholly. At the end of the month, the debt liability of each DISCO to other players in the value chain is sent to the agency in charge of providing the loan facility to the DISCOs. The agency will also have the mandate to forensically audit the DISCO’s revenues and internal operational costs.
This agency undertakes an audit between the DISCO and its creditors further up along the value chain (NBET, GENCO and TCN) in order to ascertain the DISCO’s net monthly debt – the net difference between the DISCO’s total revenue and DISCO’s costs (the DISCO’s debt to the other players in the value chain and the DISCO’s internal operational expenses). After this, the required payments are approved by all parties and the money is disbursed to NBET and co. In turn, NBET will settle the debts further up the NESI chain.
Note (3): Whole payment in this case means that there will be no inherent coverage of DISCO liability by any outside party (to any fixed tune as was or is to be done in current NEMSFs). Monthly, DISCOs will have to open their books up to the authorities in order to justify any debts that they would like to seek a loan to settle.
Second, The Infrastructure Development Fund (TIDF) should be in the form of a letter of credit (LC). Its sole aim is to fund infrastructure investments by DISCOs. For a DISCO to qualify for this fund, they need to present a clear investment plan and show their commitment to the project by revealing evidence of any upfront deposit payment they have made with regards to the project for which the loan is being sought. Under this sort of arrangement, the lending agent will have supervisory powers that will allow it to mandate DISCOs to spend the money on the infrastructure they promised. With this supervisory oversight, the regulatory authorities would be in a better position to monitor the progress DISCOs are making with respect to electricity theft mitigation and customer payments, due to improved metering. The ability of the agencies involved to totally monitor the infrastructural investments of DISCOs should, in turn, make the forensic audit of the revenue of the DISCOs, described above, easier.
With the crash in oil prices and the associated recession potentially lying at our door for quite a while, the failure of the Electricity Market is not something Nigeria can even contemplate if we are serious about achieving economic development. For the EM to survive the looming financial disaster, governmental financial support is critical. However, we must recognise that indiscriminately throwing money at the problem is not going to take us anywhere significantly beyond where NEMSF has taken us in the last three years; which is evidently, not very far. Instead, it is time for the government to develop a comprehensive and wholly accountable funding programme that will guarantee that the government’s intervention funds are used not only to avert the looming financial disaster but, for a change, to also bring about a financially self-sufficient Electriciy Market in the not too distant future.