LIQUIDITY CRISIS: DISCO FOR SALE?

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Despite an approved ₦72 billion investment by the Federal Government, some private investors who bought into the eleven DisCos have offered to hand over their assets to the government or any buyer within 24 hours of payment or compensation. The investors do not mind selling their assets at a discount.

This throws the power sector into deeper turmoil. With the continuous blame game and “who did (or did not do) what” accusations that have been going on for as long as we can remember, investors have realized their mistake and are heading for the exit as fast as they can. Surely, this was not foreseen at the time of privatization.

 

How Did We Get Here?

In privatizing the Nigerian power sector, the Federal Government (FG) aimed at improving power for its citizens. Using the banking and telecommunication sectors as case studies, the FG believed the power sector could be transformed too. It was never going to get better overnight, but with proper planning, meeting milestone targets and continuous investments, the future looked bright. The FG and the new investors never got past planning.

Plans were carefully drawn out, agreements were made and contracts were signed but that was the end of it. These plans were not properly implemented, the lackadaisical attitude the government had shown with NEPA and PHCN showed itself in the privatization too. Now there are so many interconnected challenges in the sector.

 

 The Liquidity Crisis

During the privatization process, agreements were made between the FG and the other players in the value chain. Agreements like having a cost-reflective tariff, paying off MDA debts, etc. were necessary steps the FG had to take to ensure funding liquidity for the DisCos. However, these steps haven’t been taken. The DisCos are not without blame, they were to reduce ATC & C losses and meter their customers but they too have not been able to deliver. It’s easy to look at face value and point fingers.

The average Nigerian believes the DisCos are inefficient and more interested in billing than providing power, although there’s some truth to their inefficiency, it’s not solely their own doing. Efficiency can be improved by proper metering, investing in the system to reduce losses, improving collection and being able to cut off non-payers. Interestingly, in an interview, Mr Matthew Edevbie, the Managing Director of PHED, said that even if all customers of PHED paid their bills, the company would be in the red. Also, the chairman of Jos Electricity Distribution Company PLC, Mr Tukur Modibbo, recently declared the DisCo for sale due to poor returns on investment.

DisCos are currently unprofitable. Government regulated tariffs mean they have to sell at a loss, this has created a huge funding gap.

Read: What Does the Nigerian Power Sector Need?

A Benevolent Government

This brings us to a crucial point: tariffs. An improvement in the power situation in Nigeria cannot happen without an increase in the tariffs. The Nigerian power sector is heavily regulated, these regulations are to ensure affordability but they do more harm than good. The distribution companies are not able to maintain their service levels, the losses increase, leading to poorer services and even more losses.

These tariffs were meant to be reviewed at various timelines but this has never happened. The price for power generation keeps going up but the price of power supplied stays the same. These losses mean there are no funds to expand the network, to provide more people with power, or to increase generating capacity for customers, whose electricity consumption have increased with time,

Perhaps the FG can fund the deficit from their budgets? Well, this is another broken promise by the FG. With an increase in tariffs, the government was to subsidize power generation to support customers but this too never happened. Maybe they saw that it would be unsustainable as power consumption grew. The end result is a huge funding gap in the sector which causes the continuous decline of services and millions of Nigerians in darkness.

 

What Can Be Done?

The World Bank suggests focusing on increasing efficiency, this will lead to improved service quality. This means a necessary tariff increase. It may be an unpopular choice but promising a service improvement will make a tariff increase more palatable to the public. Such tariff increase would best be implemented in small increments over time, rather than all at once. This makes them more digestible

The government and its regulators need to bite the bullet, make some bold, hard and potentially unpopular choices if they want to increase the long-term welfare of their citizens.

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