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Power sector’s commercial framework not working – Obiaya

Power sector’s commercial framework not working – Obiaya

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The Chief Executive Officer, Association of Nigerian Electricity Distributors, Mr Azu Obiaya, in this interview with ’FEMI ASU says there is a need to address the tariff gap in the nation’s power sector

The liquidity challenge in the power sector still persists, and it is unlikely that the government is going to increase the tariff anytime soon. What else can be done to solve the challenge?

It’s a difficult question because again, as you rightly indicated, it is balancing affordability and commercial viability. To the extent that there is a gap that exists, without looking to address that gap, it means that the market shortfall just continues to grow.

Unfortunately, it continues to grow at a future risk for future generations of electricity consumers as well as the tax payers because that gap must be addressed. Energy that has been delivered must be paid for; the services and obligations in the market must be paid for. So, it is a challenge that we cannot run away from and that must be tackled.

Is there any way all the stakeholders in the sector are working together to solve this problem?

Yes, the Federal Government has come up with a power sector reform programme, and substantially, we believe that the PSRP is the way forward.

The PSRP, as was approved by the Federal Executive Council in its originality, holds the key to going forward in terms of ensuring that good governance is injected into the sector and that a certain level of energy is available; Also, putting in place the transparency that is necessary to make sure that all the market players do the activation of contracts which is fundamental to the commercial viability and future growth of the power sector.

So, if the PSRP, as originally envisioned, is implemented, then we will see the light at the end of the tunnel.

It does not appear that there will be significant capital expenditure by the core investors in the distribution and generation companies. They said that banks were not willing to lend to them because some of them have not paid up the acquisition loans they got. So, what becomes of the sector almost five years after the privatisation?

Indeed, the operators, and rightfully so, are concerned that right now within the context of what the market is, there is no line of sight to the recovery of their investments, not to talk of any return on their investments. That is because, again, the nature of the market – the financial crisis – precludes that possibility.

Indeed, if you have the amount of debt that the Discos have, which is in excess of N1.3tn, and you are not able to show the banks how you intend to address that debt (the market shortfall) as well as how you intend to sell your product at a price that will allow for you to pay the loan that you took from them, certainly no bank will touch you.

And if no bank is prepared to lend you money to make investment, then you cannot inject the efficiency that the market requires for improved service delivery. One thing certainly leads to another; there is a strong inter-relationship with all of these factors.

So the starting point must be our ability to look at how we can address the tariff gap that currently exists in the market so that ultimately the Discos are able to perform the way that they need to perform.

Furthermore, if you are an investor, you are certainly not going to want to put in additional money if indeed you are in the negative. No rational investor operates like that. The ability to get your investment back as well as the return is why you are an investor.

So, it is irrational for people to keep asking why the Disco investors are not putting in more money when they cannot even recover the $1.4bn that they already put into the acquisition.

Considering the need for further capital expenditure in the sector, do you think the core investors in the Discos and Gencos would be willing to sell some of their stakes in those assets to enable the injection of more capital?

Just as the banks are not prepared to lend money to the Discos for their capital investment, it is also illogical for any future investor to look at buying equity in Discos that have negative equity.

You cannot buy a share that is negatively determined. In other words, why would you want to go and buy a share that is not worth the money that you are paying for it? It doesn’t make sense.

Before investors buy, they want to be able to see your cash flow projection; they want to be able to see the profit potential of the assets that they are purchasing.

Again, it is irrational for any investor to look at your balance sheet that is heavily laden with debt and want to make any investment, particularly within the context of the issues of the sector.

So, any future investor will be looking to see how you can address the tariff gap; how you can ensure that there is policy and regulatory certainty; how you can also ensure that you have access to debt that will allow you to invest in capex that ultimately will provide the efficiency that will allow for a greater return on your investment.

There is a linkage of all of these factors. So, when you hear people talking about diluting Discos’ shares or investors waiting to come in and buy shares in the Discos, from my perspective, it is essentially just looking at an apple in the sky or painting a picture that is not there.

Given your position as the head of the umbrella body for the Discos, do you think any of the core investors will be willing to sell if there is an investor who is bullish and comes forward to say, “I want to buy five per cent stake”?

I think that you may recall that at an investors’ press briefing, the chairman of Aura Energy, the investors in Jos Disco, indicated that he was prepared to sell Jos Disco at a discount, given the current environment.

You can essentially project that sentiment for all of the Disco investors; that indeed the environment that would have made their investments worthwhile is not there. So, to the extent that it is not there, most of the Disco investors would happily sell the assets to any interested parties to get back their money.

The problem is that there is a commercial framework that is not working, and this commercial framework that is not working is not sustainable in terms of viability of the Discos as well as the larger Nigerian electricity supply industry.

Sooner is better than later in terms of resolution of this tariff gap. The Gencos right now are only being supported by the prepayment assurance guarantee, which is supposed to end at the end of this year. Without that buffer, we are back to a much more challenging situation in which the Discos are unable to remit the kind of money that is necessary to make the market whole because again, the tariff gap exists. So, there is an urgent need for us to put our heads together in the sector and come up with a solution to this market shortfall situation.

Do you think the consumers will be willing to stomach any tariff increase? What justification could be given to let them know it is important?

The government is right to be sensitive to the affordability issues for the consumers, and this is more so in the sense that there is insufficient power supply.

Also, we still have a long way to go in terms of addressing the inefficiency of a 62-year neglect of the sector. So, the government is right, just as we recognise the sensitivity to all these issues.

However, we cannot also ignore the fact that for successful reforms worldwide, governments have acknowledged that in the near- to mid-term at least, there is a need for them to take responsibility for the difference between the tariff that the consumers can afford and what the cost of electricity should be.

This is in recognition of the fact that it takes time for efficiency to be injected into the sector and that the operators need to have a positive cash flow as necessary to attract the kind of capital investment that is critical to turn the sector around.

So, the government still has a major role to play and that role is to recognise that indeed operators are in the business to make money; they are not charitable institutions or entities. They cannot sell their product for less than what it costs, and so if they are compelled to sell that product for less than the cost, then somebody somewhere has to fill that gap, and typically, in this scenario, it is usually the government.

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