Sep 9, 2016

Efficiency, Liquidity and Profitability in the Nigerian Power Sector; The Challenges Faced - Chukwudi Ofili

Nigeria, Africa’s biggest oil producer, continues to experience challenges within the power sector despite the huge outlay of funds and unprecedented reforms in the power sector. The bottleneck in the power sector adds to already existing issues such as the slump in oil prices and the foreign exchange issues that are currently threatening Nigeria’s role as a destination for investors. The challenges in the power sector are largely attributed to a lack of funds on the part of the generating companies (GenCos) and the distributing companies (DisCos). 

It is incontrovertible that another major challenge is the shortage of gas supply to power plants as a result of the impact of pipeline vandalism in the Niger-Delta region of the country. The power sector reform is anchored on the use of gas-to-power systems in order to meet the power needs of the country. The availability of gas to ensure consistency in power supply has been a great challenge. This challenge is a result of inadequate infrastructure needed for gas gathering, processing and transportation. The negative effects of saboteurs and vandals in gas production affect the availability of gas. This presents a major challenge to power generation growth projections.

On the one hand, sabotage is a plague that continues to hamper the growth of the Nigerian power sector. On the other hand, there is an ever-increasing need for the DisCos to generate funds to improve infrastructure – i.e. their distribution and transmission equipment. Therefore, in addition to raising funds there are security challenges faced by the GenCos and DisCos.

The challenge of adequate funding for the GenCos is best illustrated with the challenges currently being faced by the Nigerian Bulk Electricity Trader (NBET). NBET has recently entered into about 14 Power Purchase Agreements (PPAs) with the GenCos. The NBET is indeed over-stretched as evidenced by the huge debt portfolio it has with the GenCos. 

Against the backdrop of the many challenges facing the Nigerian power sector, it has become imperative for the GenCos to significantly improve power generation while the need to ensure supply of sufficient gas to bolster power generation cannot be over-emphasised. Similarly, for the DisCos, there is a need to improve liquidity to utilize improved technology for power distribution. To achieve these objectives, it is pertinent that the stakeholders in the value chain reach a consensus on probable solutions to the conundrum facing the sector. The writer has attempted, in the following paragraphs, to provide some options that may be adopted as a panacea to the many issues hampering the projected growth of the sector.

Internal Corporate Governance
The Power sector is made up of three mutually exclusive, but necessary parts – generation, transmission, and distribution. In Nigeria, the GenCos and DisCos have been privatized, while transmission of power is still managed by the government. There is an increasing need to ensure that the GenCos and DisCos are efficiently and effectively managed. It will, therefore, be helpful if the management board of the GenCos and DisCos consists of at least one representative of some of the key multinational oil companies – the end buyers of power or gas. To the extent that they are a vital part of the value chain as the users of power and gas, it is in their best interest to ensure that the GenCos and DisCos are efficiently managed to achieve the set targets for the GenCos and DisCos in the value chain.

Infrastructure Improvement
To efficiently and effectively generate electricity, the GenCos and DisCos need to improve the quality and capacity of existing infrastructure. It is also imperative for the DisCos to identify key equipment required to generate and distribute power to meet capacity and demand. A proper metering system with improved standard of meters needs to be utilised. To adequately reach the capacity of the power plants and meet the distribution needs of end users, it is germane that the generation, transmission and distribution equipment are updated to meet international industry standards. There is no doubt that achieving this requires adequate funding as the GenCos and DisCos are already financially stretched after having to use a larger portion of initial funds received from financial institutions to acquire assets and licenses from the regulatory agencies.

Funding and Liquidity Improvement
A key challenge in the power sector is inadequate funds for the GenCos and, to a larger extent, the DisCos to effectively meet generation and distribution targets. It has become apparent that there is a pressing need for the GenCos and DisCos to seek alternative sources of funding. Notwithstanding, the fact that the N300 Billion intervention fund of the CBN has as its objective, fast-tracking the development of electric power projects, especially in the identified industrial clusters in the country; and serving as a credit enhancement instrument to improve the financial position of the Deposit Money Banks (DMBs), the DNBs are unable to provide adequate funding to service the investment needs of the power sector. This is largely attributable to the fact that the bulk of funding received from the DMBs was used for the acquisition of different power assets with little or no funds left for operations and infrastructure improvement. With the benefit of hindsight, perhaps a better strategy to have been adopted by the Nigerian government would have been to conduct a financial due diligence exercise on the GenCos and DisCos with a view to ensuring that they had sufficient funds to: (i) purchase the relevant assets; and (ii) adequately fund their operations. As security to ensure that the funds are not utilised for purposes other than declared, the funds could have been housed in an escrow account with the mechanics for disbursement from such account agreed upon issuance of the relevant licenses.
Going forward, the DisCos will have to do the following where they intend to put forward proposals to international and domestic financial institutions to provide facilities:

·  Ascertain the load within their distribution network;
· Ascertain the amount of power required to be generated and distributed to meet the power demands within their distribution network;
·  Ascertain the source of power to be distributed;
These help to develop a good project model to attract both equity and debt investment in the GenCos and DisCos.

There is no doubt that the attempts by successive Nigerian governments to reform the power sector are bold steps towards the rapid development of the economy. However, the challenges and issues examined in the foregoing paragraphs will no doubt significantly affect the aims and objectives of the reform. It is, therefore, imperative that the government tackles these issues and challenges. The challenges and the proposed solutions mentioned here are by no means exhaustive, however, implementing the few options mentioned above will create a peaceful environment for new investors to operate.

Chukwudi Ofili is a Senior Associate in the corporate and commercial, banking and corporate finance; and energy and natural resources practice groups of Bloomfield Law Practice. He advises on matters such as local and foreign currency syndicated lending, leases transaction/structured/project finance, structured trade finance, energy and natural resources, due diligence issues and advisory services, foreign investment advisory services, taxation and real estate.

 Ed's Note - This article was originally published here.