ELECTRICITY DISTRIBUTION: Assessing investors’ competence
Eight days and the National Council on Privatisation, NCP, will again superintend the opening of the financial bids for distribution companies unbundled from the Power Holding Company of Nigeria, PHCN, like it did weeks ago with the generation companies. Clara Nwachukwu wonders if the capacities of the investors can be vouched for.
Notwithstanding the rigorous process for prequalification, the Bureau of Public Entreprises, BPE, needs to ensure that not only do the prospective bidders have the financial muscles to take over the firms, they must also be equipped with the relevant experience, and sustainable business model that will make for successful and efficient transition.
To avoid the mistakes of past privatisation, where the performance agreements were flagrantly abused, the investors’ competence must be established. In view of the importance of power in nation building, competence driven by knowledge more than political sentiments should drive reinvigoration of Nigeria’s comatose electricity sector.
The NCP approved the technical bid evaluation of 31 firms prospecting for the 11 distribution companies, DISCOs, put up on offer by the BPE for private ownership, but the challenge before it is in finding those that understand the complexities of the sub-sect to do the job.
Industry experts argue that there is a vital need to appropriately choose companies with the technical capacities to add value to the sector in line with current reforms aimed at delivering quality services to consumers. Such companies with hands- on experience can the focus appropriately on integrating the various aspects of the electricity distribution in an efficient manner through network expansion, proper metering, revenue management and asset optimisation.
Although the investment outlay to achieve these is huge, but Federal Government has agreed to open the commercial space for quality private sector-led intervention. This, it plans to do by giving up 60 percent controlling shares to private investors, while keeping the remaining 40 percent shares. With the new investments, it is anticipated that protracted problems such as high technical voltage losses, line breaks, obsolete substations and other aging key assets will be replaced to reduce maintenance costs and improve supply reliability.
It is equally imperative that the local authorities are fully involved especially with regard to distribution companies located in controversial areas such as the Niger Delta region, Lagos, Kaduna and Kano, Port Harcourt and Benin. The support of state is vital for seamless synergistic if expansion projects are to be executed successfully, and especially with regard to the right of way issues. While there should also be legislations against electricity theft and equipment/facilities vandalism to protect private investments.
Furthermore, it is important for the authorities to examine the implementation plans by the technical partners in terms of the size of companies they have operated in the past as against their five year loss reduction ratios. This is to ascertain that optimisation of losses, as technical losses in electricity transmission and distribution is an engineering issue which requires huge capital outlay, and logistics in terms of proper tooling of power systems planning and modeling.
Analysts maintain that it is pertinent for the industry regulators to monitor the ratio of technical losses against the loss proposals by prospective bid winners nor do they know the current state of the losses, and open up the issue for negotiations and frequent adjustments.
There are global examples of bad choices that have truncated programmes for the electricity sector. India is currently battling to stave off crisis in the sector despite investment made over the last two decades. Recent power outages underscore the fact that the country may be heading to crisis situation if this issue is not properly addressed.
Similarly, Nigeria’s rural electricity distribution network ranks as the most neglected infrastructure in Sub-Saharan Africa, as well as one with the highest inefficiencies, where the World Bank estimated that the PHCN can only capture about 25 percent of revenues owed.
Given the lack of equipment maintenance, the new owners are acquiring high risk assets. As such there is the need to expand the country’s distribution infrastructure as well as install new distribution infrastructure to meet the population and demand growth, which also require continued investments.
Specifically, there has to be continued investments in voltage distribution networks, particularly in theft-prone areas as well as in the replacement of old meters with accurate electronic meters.
The same also goes for substations and lines configuration to improve reliability and narrow the increasing customer expectations as well as narrow the gap between urban and rural expectations. There has to be investment also in newer and better technology to facilitate efficiency and demand management.
Also, the new owners will need to invest in personnel and change management, while also setting up direct and open contact with communities and their leaders, and the authorities involved. This will create awareness about the commercial nature of electricity as a ‘good’ with a price as well as well as educate consumers on the culture of regular payment of electricity bills and preservation of electricity infrastructure.
As the companies investment in new infrastructure, they will focus on new technologies, advanced metering infrastructure, AMI; automatic meter reading, AMR; communications networks and database systems that will modernise the grids.
Analysts estimated that the new companies will need to spend in excess of N200billion to re-build and strengthen distribution systems over the next five years, in order to maintain reliable supply. Against this backdrop, only financially and technically viable companies with relevant experience can address this huge investment expectation to meet at least 50 percent electrification target within the same period.
As it were, the Ministry of Power is saddled with dealing with over $32billion debt owed by some of the DISCOs who can’t pay generation companies for electricity supplied to them for their consumers. The development is rubbing-off negatively on the GENCOs with negative consequence also on the financial sector.
The Central Bank of Nigeria, CBN’s directive last week on credit freeze to some debtor companies underscores the need for careful scrutiny of the financial sustainability of the companies shortlisted for the upcoming financial bid opening. In all, the CBN barred banks in the country from extending loans to 113 companies and 419 directors and shareholders of the companies listed.
Ironically, five power companies were included in the list as shown below, while some directors and shareholders also listed have substantial interests in some of the shortlisted distribution companies as well.
However, the Asset Management Corporation of Nigeria, AMCON, has clarified that some like Sir Johnson Arumemi-Ikhide and Prof. Bart Nnaji, were not supposed to be on the list.
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