Monday , 23 October 2017

FG accuses DisCos of under remitting revenue

Record 57% collection rate, paid only 29%

… PH, Kano, Kaduna, Yola, Jos worst culprits

 

THE Federal Government has accused Electricity Distribution Companies (DISCOs) of inability to collect and remit revenue in the power sector, currently threatened by huge revenue losses.

In its ‘Nigeria Power Programme, NPP’ obtained by Vanguard, weekend, the government stated that the long-term sustainability of the country’s power sector would depend on the capacity of DisCos to remit revenue.

Specifically, the Federal Government, which noted that DISCOs were partly responsible for the current high Aggregate Technical, Commercial and Collection (ATC&C) losses in the sector, also added that the financial condition of the power sector’s value chain depends on DISCOs ability to sell energy and collect revenue from customers.

It stated that the revenue collected by DISCOs should cover approved costs, generation costs, transmission costs, regulatory charges, the bulk trader charges, and the cost of ancillary services.

A review of 2015- 2016 data on cash remittances from DISCOs to NBET shows that: (i) DISCOs have not made full payment for energy received since the transfer of management in 2013; and (ii) DISCOs have retained a lot more of collected revenues than allowed under MYTO.

DISCOs have increasingly retained more of collected revenues in 2016 compared to 2015. In 2016, DisCos achieved a collection rate of 57% from their customers, and, on average, settled only 29% of invoices issued by NBET.’’

The government disclosed that DISCOs have not shown any significant reductions in ATC&C losses. It stated that reported weighted average ATC&C losses for 2016 are 54.3% versus 32.1per cent MYTO projections.

It is critical that DISCOs are held accountable to the baseline performance benchmarks in line with the Performance Agreements targets agreed in order not to reward inefficient operators.

However, it is also noted that the government and regulator’s actions have materially impacted the performance of some of the more efficient DISCOs, especially in relation to the tariff review.

Analysis indicates that DISCOs have significant funding requirements to support their respective business plans as well as attain the contractual targets in the Performance Agreements. The most notable driver of this funding requirement is network improvements and expansion.

Network improvement is important to ensure and maintain the integrity of the existing infrastructure and improve distribution efficiency while network expansion is required to support both the on-going and proposed investments in the transmission and generation segments of the value chain.

The average annual capital expenditure for all DISCOs over three years (2014-16) amounted to US$104 million compared with US$301 million MYTO allowance, an underspending of US$ 198 million each year.

DISCOs and problems

The programme also stated that the DISCOs face several challenges, especially low funding, reluctance (and in some cases, inability) of local commercial banks to extend further credit to the power sector.

The privatized assets were purchased with significant leverage assumed to be 70% Debt/30% Equity. Most of the debt was provided by local commercial banks with limited experience and understanding of the power sector.

‘’This debt sits at the DisCos holding companies level as it was intended that the operating companies could borrow to fund their capex plans. Some investors further leveraged their investment by also raising debt to fund the 30% equity requirement.

This further limits the appetite of local commercial banks as some DISCOs and GENCOs leverage could be in excess of 90 per cent. We note that some of the acquisition lenders also hold rights of first refusal on any additional debt at the operating companies, and, hold liens on the sponsors shares in the operating companies.

Lack of confidence in the Nigerian power sector by local and international lenders and investors who see the sector as nascent, lacking the requisite mitigation arrangements required to meet their risk acceptance criteria.

The financial performance of the DISCOs has been poor. Most of Nigeria’s power companies are technically insolvent, and continue to operate using creative working capital management.

‘’In the event that the Market Operator or NBET were to call for full payment of their unpaid invoices, most DisCos would be forced to declare bankruptcy unless significant cash injections are made by their shareholders. Consolidating the acquisition debt to the operating company level results in most DisCos having negative equity.

Most of the DISCOs sponsors had little or no experience in owning or running electric utilities before their Nigerian experience because a privatized electricity sector did not exist in Nigeria before privatization and as such relied on technical partners to provide the expertise.

Given the Sponsors’ inexperience running utilities and NERC’s inexperience regulating privately owned electric utilities, having technical partners was a condition of privatization that all sponsors signed up to.

This was BPE’s way of ensuring that the new companies had the technical capacity to run the companies, and, improve service delivery in the sector.

This system is currently broken – a lot of the ‘technical partners had/have no equity in the DisCos and only maintain skeletal staff in Nigeria due to the ongoing cash crunch.’’

BPE and NERC

It called for urgent intervention of the Bureau of Public Enterprises (BPE) and Nigerian Electricity Regulatory Commission (NERC).

‘’BPE and NERC will need to review the technical capacity of the DisCos and the feasibility of the DisCos loss reduction capex programs before any of the DisCos are given access to funding under the PSRP. This will significantly increase the probability of success of the Program, overall.

‘’BPE and NERC have been tasked to review the technical ability of the DisCos. To this end, BPE and NERC will conduct a detailed review of the distribution companies’ state of affairs and review their business plans to provide comfort on design, implementation and funding for ATC&C loss reduction plans for each DisCo. These business plans will be negotiated and finalised and will reflect the performance loss targets as per the Performance Agreement.

The DISCOs would be contractually obliged to deliver these performance targets failure of which triggers the business continuity measures. DISCOS financial restructuring – rationale and core principles: Most DISCOs will need to be restructured/refinanced, depending on the extent of their financial and operational non-performance.

“DISCOs primary business going forward should be reducing ATC&C losses, not financial engineering. The Government will prepare plans to further detail how DISCO financial restructuring will be undertaken.

One consequence of the restructuring proposed above is that some DISCOs sponsors will opt to exit their investments, or simply not inject needed equity. NERC is drafting a business continuity regulation to ensure the continuity of the business and operational functions of a DISCO (or GENCO) if the company fails or become insolvent or a private investor decides to leave.’’

Reaction

However, Association of Nigeria Electricity Distribution Companies, ANEDC, stated that there has to be cost reflective tariff in order to enhance investment and provide adequate power supply in Nigeria.

– Udeme Akpan, Vanguard

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