OMOTOLA: Power Sector Needs Dominant Foreign Equity Players

• Mere Tariff Hike Cannot Produce Desired Results

Can the recent increase in electricity tariff guarantee stable supply of power in the country?

THE new tariff regime will not produce desired result the way the Minister of Power; Mr. Babatunde Fashola has painted it. The reasons are not too far-fetched, as they border on two main factors. One is the technical capacity of our indigenous companies as it were today. Two is the financial capacity of the indigenous companies to bring together necessary infrastructure that can guarantee steady supply of electricity in the country.
Does that suggest the power assets were sold to the investors without established expertise and capacities in the electricity industry?

A bidding process was actually put in place at the pre-handover of these legacy assets. A bid was called, and on that basis, there are two factors the government will also look at. The technical and financial capacities are the basis for which every company will be rated or scored. But what we have in appraising the technical part is a situation, whereby an indigenous investor brings a technical partner. And then the government looks at the kind of partnership the technical partner has with the indigenous investor without much emphasis on financial wherewithal. From the beginning, we said it was not enough for indigenous companies to just bring technical partners. It would have been better for indigenous companies to bring the technical partners that would also bring equity into that partnership, which is lacking.

If the man brings equity, it means he is not just a contractor to the indigenous company, but also an investor. The indigenous company will now be able to leverage on two things: its technical competence and financial coverage. That was missing in this bid and now, we are where we are today. As far as this sector is concerned, we do not have a dominant foreign equity player.

If the foreign technical partners did not bring equity, how then did the indigenous investors manage to acquire the power assets?

We know power infrastructure development is probably the most financial intensive project in Nigeria. So, we need people with the deep pocket to handle it. In 2013, the Federal Government and Bureau of Private Enterprise (BPE) raked in a sum of $2.6b. I can say about 80 percent of the fund was provided by Nigerian banks. Ordinarily, it should not be that way because foreign investors are primarily supposed to bring majority of their own equities in terms of the capital mix, where you find investors bring at least 60 percent equity. In this situation, however, most of the funds were sourced from the banks. It is debt, which is now creating a little bit of pressure on our financial system.

We find a situation whereby the Nigerian banks are the major, if not the sole, financiers of the acquisition of the power assets. There are two factors with the Nigerian banks. One is the high-interest rate. Two is the tenure of their funds. These two factors cannot successfully finance the electricity industry. They can only act as working capital incentive. What we find today is that the Nigerian banks are financed in dollars-dominated terms. Already, interest rate has gone on the high side. Even, the value of dollar to naira has doubled over the space of two years. The resultant effect is that the accounts of our indigenous companies are not doing well in the banks, which means the companies’ ability will be stalled. Also, the ability of the indigenous companies to pay loans will be stalled. Finally, the ability of the indigenous companies to generate additional funding will be stalled.

Does it mean the Federal Government was not aware of the financial status or capacities of these indigenous?

The Federal Government indeed understands the situation and that there is a financial problem. The Federal Government also understands that the problem was actually created by the inability of these indigenous investors to generate adequate funding that the electricity industry really requires. The Federal Government and investors under-estimated the sector. But rather than acknowledge that there is a financial problem, government decided to use another strategy, by helping the indigenous companies through hike in electricity tariff. What will the tariff do? It will only achieve one objective: helping the indigenous companies services the loans at consumers’ expense. With this, there could be a little opportunity for the banks to now raise adequate capital for expansion. But that is neither here nor there, because even the banks are also into serious trouble. What we are saying is that there are two problems confronting these indigenous companies, namely the technical and financial challenges.

Beyond the financial challenges, can you provide more insight into the technical challenges the indigenous companies are facing?

On the average, there are a lot of leakages in terms of revenue collection. The ability to collect revenue is not there at all. For these indigenous companies to successfully collect revenues, they must deploy technology. Also in the area of technical competence, the indigenous companies are lagging far behind. These are the technical challenges that they have. Aside this, there are a lot of people using electricity illegally. Some are tapping from underground armour cables. Many are bypassing the pre-paid metres. The revenues that the power distribution companies are supposed to generate are not coming due to all these acts of sabotage. How can these be solved? It is only through the use of technology, which will cost a lot of money.

Another issue is that estimated billing is the cash cow of the business. The Federal Government comes up with a plan that the indigenous companies must metre everybody in two years, but it should be other way round. The indigenous investors should have provided stable electricity supply first before increasing tariff. With this two-year grace and the sweetener being estimated billing, which is to increase by 45 percent, then the cash flow will also increase tremendously. It is simple arithmetic.

The proposal of the National Electricity Regulatory Commission (NERC) on disputed bills cannot work. NERC has proposed that once bills are disputed, consumers should not pay. Rather, they should pay what was paid last. Subsequently, the consumer should write a letter and there is a body of people that will look into their complaints. Ikeja Distribution Company, now Ikeja Electric, has over 450,000 customers. How many people will they be able to adjudicate on issues arising from estimated bills? Do they have capacity? You can see that it is not going to work.

With this picture, it appears the industry has serious challenges ahead. Can they sail through?

We must understand that this is an industry that needs financial muscles. Two things run with the players in the industry. First, the indigenous companies that bought the legacy assets are not known in the industry. What is their antecedent? Have they been doing electricity business for 10, 20 or 50 years before buying the legacy assets? These are just entrepreneurs that saw opportunity and believed that they could profit greatly from it. There is absolutely nothing wrong about it. It is good, but as an entrepreneur, you must know when to take your business to the next level.

For instance, the people that started Coca Cola are not the ones running the company today. But when you hold on to the assets and do not consider how to take that business to the next level, there is a problem. Secondly, the challenge we have presently is in the business model. Really, the business model is not in the Electricity Sector Reforms Act. It is the business model of these indigenous companies. What are the brands of these companies? How much can the brands attract globally in terms of investors?

For instance, Dangote is known for cement, which is why it is easy for Dangote to set up cement factories in different African countries. The simple reason is that the template is already there. The man goes to every country with the same template and the same team because that is what he has been doing for the past 30 years. Is it not amazing that the same Dangote is building $15b refinery? But why was Dangote not a player in the electricity industry in Nigeria until recently?

So, what now should be done to redress the situation?

What is emerging now is that the Federal Government is trying to spoon-feed the indigenous companies. These are private companies, but the Federal Government gave them subvention, through the Central Bank of Nigeria (CBN), which is just a drop in the ocean. We remember the subvention the CBN provided to pay for gas, which has not worked. Another one is coming. If the minister is sure of himself, let him sign an indemnity or guarantee Nigeria that if power is not stable in two years, he would resign because we have had enough of talking. We have started counting again. There will be no drastic change in two years, even with the tariff hike. Our stake in this matter is that of transparency and logic. Also, a proper business should be deployed into the electricity industry and original players with established expertise and capacities in the electricity industry should be allowed in. The experts that have been in the electricity business for generations should be allowed to come in.

An enabling environment should also be created in a way that Nigerians will begin to see the future. Nigeria’s electricity markets cannot be compared to that of Ghana and South Africa. It is ridiculous to make that kind of comparison because our populations are different. The electricity market is enormous and attracts huge profits. But the investors are not there.

It is not about government intervention, but a real reappraisal of business model, whereby people must understand that profitability will not come in five years. There must be a reappraisal of business model. Our banks can only offer financial assistance between two and three years, because they would want their funds back within that period. So, the banks are not suited to fund electricity industry.

The minister said no bank would want to fund the industry because the price is not bankable. But can Fashola tell us which banks he was referring to? If he meant Nigerian banks, the business model of the indigenous companies will not work. The interest rate and fund tenure will not make it work. What we are suggesting is that Federal Government should urgently set up a finance development bank that is strictly towards development projects such as this. If our local banks will play any role at all, it should be in the area of providing working capital.

This is a complete shift from what we have today because for those companies to survive, they need very low-interest rate and very long-term loan. Also, they need a robust capacity to handle these projects. Without being technical and ingenious, just walk around streets anywhere in Nigeria and what you will see are dilapidated transformers, old overhead cables still running and former NEPA vehicles just repainted among others. These are signs that finances are very weak. Because when the new company steps in, it begins to pull down the old things and starts setting up new ones. We should have been seeing new transformers everywhere and changed overhead cables among others. In fact, every person will feel the impact. But all you see is unhappy Nigerians and indigenous companies that are in crisis. With all this, electricity tariff hike is not the solution.

But Nigeria already has the Infrastructure Bank of Nigeria. Is there need for another development bank?

The ownership of the Infrastructure Bank of Nigeria is more of private than government. So, that sets a limit to the volume of finance the bank can leverage on. Recently, the bank said it was not the one financing the Lagos-Ibadan expressway. It is just a broker or facilitator. That tells us the status of the bank.

Nobody is saying the Federal Government should use funds from Federation Accounts to pursue an industry that has been deregulated. The Electricity Sector Reforms Act has defined the roles of all players. The Federal Government is just like a regulator. The power industry can be likened to the telecommunication industry. As a regulator, what the Federal Government can do is to create an enabling environment in a way that these operators can move to the next level. How to go about this?

First, we know power can be generated from the dam, the wind, as well as the gas. We can also generate from coal. So, we assemble all these things together and say these are the sources of our power generation, after which we now begin to zone it. This area will concentrate on coal. The other will concentrate on wind and another area on gas. After zoning, we begin to peg the megawatt each area will generate. By the time we do all these things, we have the aggregate of what these areas can generate.

Even the renewable that we are talking about is just lips service. We should be able to state how we are going to start the renewable energy and how we are going to graduate from there. We have to go about it in such a way that it becomes a master plan that all stakeholders sign into.

There are estates in Lagos today that enjoy 24-hour electricity. What that tells us is that Lagos is a good place for embedded power and captive generation. If someone sets up Independent Power Plants (IPPs) on the Mainland in four places, that venture will be profitable.