I’m very skeptical of single narratives, i.e. arguments that view an issue from just one angle so in writing this I’d like to state that I’m considerably aware of the constraints with gas prices, gas infrastructure, transmission capacity, distribution and transmission losses etc among various other issues that have kept the electricity sector from living up to expectations. Thus, my aim is not to suggest that solving the disco issue automatically resolves all our power sector challenges. However, I firmly believe that resolving the disco challenges could catalyze the entire industry into a state where these other issues can be resolved relatively faster.
First a bit of context
The DISCOs are currently afflicted by a myriad of issues when it comes to collection of revenues. These issues include poor metering of customers, sabotaging of distribution infrastructure, high levels of debts owed by government agencies and certain consumer groups, technical losses due to poor quality of distribution infrastructure and uneconomic tariffs. Debts owed by government ministries, departments and agencies alone as at end of December 2015 stood at N45 billion. The practice of estimated billing also ensured that the DISCOs have significant debtors in the residential user segments but those debts are more difficult to collect due to the estimated nature. Unfortunately due to these issues, the discos are unable to meet their revenue and profit projections, even after running for two years since the assets were handed over and nearly four years since the companies were created to bid for the various assets.
Can’t service loans
Furthermore, the investing companies are unable to service loans taken to acquire the assets. This is really due to the structure of the loans the DISCOs took for the privatization. The loans to the power industry were given as loans to acquire equity. Thus, the investors do not have claims on assets beyond those of the investing companies, most of which were companies created for the purpose of the acquisition. Although the loans were secured with various other collaterals, they really do not give the banks much comfort if things go awry. Thus the revenue collection troubles faced by the DISCOs have made servicing loans a major challenge to these investors. This has limited their ability to access new lending and since most of these loans were borrowed in dollars, there are significant concerns regarding the impact of an imminent devaluation of the official exchange rate on the ability of the industry to pay.
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No incentive to take in more power
But that’s less of my worry. As a result of these issues, the DISCOs occasionally have to reduce the amount of power they take from the national grid. This is to reduce the amount of debt they owe to the National Bulk Electricity Trader. Why take power you cannot pay for? Thus, even when power generation capacity hit a high of 4800MW in the second half of 2015, the discos had to manage the distribution of power to only areas where they could extract the most payments. But even that model still creates a challenge because payments to NBET often exceed the total revenues collected for the month. Thus, as at end of August 2015, the DISCOs were said to owe nearly 3 months of payment to the NBET. Some of those debts remain as at time of writing hence the call by most discos for the Central Bank to release the power sector intervention fund of N213billion to enable them payoff some of these debts and service their loans.
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Zero returns, zero investments
We have discos that don’t generate enough revenue to pay for the power they get, let alone pay dividends to allow their investors service debts to commercial banks while retaining enough cash for investment in needed equipment and infrastructure. We have investor companies (in the discos) that borrowed in dollars when the exchange rate was N155 per dollar and are battling a 22% devaluation since 2015. But more importantly, could be facing another devaluation which could create repayment issues. There is therefore no way, these set of discos will be able to support the power sector with enough revenues to invest in new transmission capacity, upgrading of the transmission network from the current 330kV lines to the super-grid 770kV lines. Higher up the value chain, providing the right prices to encourage gas producer produce more gas, which will in turn, enable more power generation, is also dependent on the value chain been able to pass the gas prices through down to the end-user. Based on the current structure, this is also not possible. Hence without resolving the issues at the DISCO end of things, the idea of a well-run profitable power industry may remain a mirage, as it continues to depend on government funding.
Saving the DISCOs
These are the major steps in my opinion that need to be taken.
- Government must show a good example of a customer and pay its debts to the discos. The fact is there is a budget every year for electricity bills for the ministries. For instance in the current 2016 budget, the ministry of power, works and housing has been granted a budget of N20.6bn for electricity for its corporate headquarters. The government must ensure it pays its own bills and outstanding debt. These cannot be written off and must be paid, even if restructured into repayment over a year or two.
- The discos need to engage their customer base more. The larger majority of their customer bases do not understand the changes that have happened in the industry and only expect to get better service. They need orientation on what power theft is, why they need to be properly metered and how to report cases of power theft. They need to know the part they play in getting good power supply.
- Criminalize power theft. The companies need to carry out periodic power theft audits. Regularly inspect connections in certain areas and makes arrests for illegal connections and tampering with meters or sabotaging of distribution infrastructure. The typical disconnection of power is not enough as most are able to get some electrician to connect their power back for them or just resort to use of generators, especially offices or organizations.
- CBN should release the intervention fund for the power companies to enable them invest in their operations. The funds should be deployed to upgrading equipment to ensure the companies can push out more power; proper enumeration of their customers and deployment of meters; creating of convenient payment channels for users including mobile money payment channels.
- Increase tariffs. This is not negotiable. To accommodate the level of investments we need in the power sector top to bottom, the tariffs at the bottom end of the chain need to increase significantly. In my opinion, we might need as much as a 55-60% increases in tariffs. However, these increases need to be automated and not legislated. They must kick in at specific periods and should not be subject to policy considerations or debates so that investors can take long term decisions on investment. The current environment is too uncertain for investors to invest with tariff changes based on debates and often reversed or delayed.
Some would say these tariff increases amount to taxing the paying customers for the inefficiencies in the system. While partly true, it doesn’t apply in all cases because if the steps suggested above are taken into account, the system will be better positioned to address some of the issues that warrant the high tariffs. A fully-functioning market with free entry and exit would enable competitive pricing of tariffs in the long run. Think of it in the same light as telecommunications. We couldn’t have set prices for sim cards at N300 and expected the telecoms companies to invest in base stations across the country.
So we start from the discos and then we work our way up.
This article first featured on Nairametrics January 26, 2016