It would therefore be more practical to consider a different approach and re-design of the privatisation model for Yola DisCo to achieve a successful re-privatisation. Breaking up Yola DisCo into several DisCos along state boundaries, and also adopting the concession model are strategies that would ensure success of its re-privatisation.
The Bureau of Public Enterprises (BPE) recently confirmed plans to re-privatise the Yola Electricity Distribution Company (Yola DisCo). In a press release, the BPE stated that the next stage of the privatisation is for shortlisted bidders, from the Expression of Interest (EOI) stage, to submit their technical and financial proposals for the acquisition of sixty (60) per cent equity shareholding in Yola DisCo. It is assumed that Yola DisCo will be privatised using the previous privatisation methodology – the core investor share-sale model – adopted for the PHCN Successor DisCos in 2013.
Background to Yola DisCo
Yola DisCo was privatised and handed over to Integrated Energy Distribution & Marketing Company Limited (IEDM) in 2013. The company is also the core investor for the Ibadan DisCo. IEDM paid a bid price of $59 million for Yola DisCo in 2013. As at November 1, 2013 when the company paid for and took over the management of Yola DisCo, the Boko Haram insurgency in the North-East was already full blown. By 2015, after two years of operating Yola DisCo, IEDM declared political force majeure due to the worsening insurgency in the North-East region, affecting its franchise network areas.
The performance agreements signed by core investors with the BPE made generous provisions for force majeure events. It allowed core investors to charge the federal government an equity return on their initial investment over a five (5) year period, in addition to the refund of their initial equity paid to the BPE, in the event of a force majeure. In declaring force majeure, IEDM activated this clause and requested government to pay it US$185 million (according to several public sources), covering its initial investment and a five-year equity return. This amount was approved by the National Council on Privatisation (NCP) in April 2015, at the twilight of the last administration.
From public information, in 2016, the BPE, federal government and IEDM reached a negotiated settlement of $80.6 million (down from the US$185million earlier approved under the Jonathan government) to be paid to IEDM. The 60 per cent shareholding held by IEDM reverted back to the BPE/Ministry of Finance Incorporated (MOFI), while the Ministry of Power, Works and Housing took over the operations of Yola DisCo and have been operating it since then.
As at the time of writing this article, we are not aware that the Nigerian government has made any payment to IEDM. We believe that the primary utilisation of any sale proceed from the re-privatisation of Yola DisCo would be used to pay IEDM the settlement amount.
State of the Power Sector Today
Five years after privatisation, the power sector has really not fared well. DisCos, in particular, are regarded as the weakest link in the entire power sector value chain. In a recent interview, the executive secretary of the Association of Power Generation Companies, Dr. Joy Ogaji, blamed the continued abysmal performance of DisCos as being responsible for the poor state of the Nigerian Electricity Supply Industry (NESI). However, it would be most unfair to attribute the challenges of the power sector to DisCos alone.
Besides the poor state of the power sector, DisCos have also not been able to effectively provide efficient services within their franchise areas. On this count, almost all DisCos are engaged in some form of running battle with their host state governments and/or communities over the poor state of power supply and poor services. This is despite huge improvements in available power generation. Many of the state governors seem very helpless in their quest to provide reliable electricity to their citizens, even with massive state investments in providing distribution transformers, and other electrical materials within their states, at no cost to the DisCos.
Why BPE Must Suspend the Re-Privatisation of Yola DisCo… For Now
We advance some reasons why the BPE should immediately suspend the re-privatisation of Yola DisCo:
1. Geographical Size of Yola DisCo Network
Yola DisCo covers four States of the North-East – Taraba, Adamawa, Borno and Yobe. This is a geographical landmass covering over 207,000 square kilometres; a landmass that is 22 per cent of Nigeria’s total landmass and almost the size of the Republic of Ghana. The headquarters of the DisCo is in Yola, the capital of Adamawa State. The distance from Yola to Maiduguri, the capital of Borno State is more than 500 kilometres. While Yola DisCo has several business areas serving the four states, the states and towns outside of Yola are poorly served by the DisCo, as effective mobilisation of resources is done from Yola.
2. Continued Insurgency and Conflicts in the North-East
The Boko Haram insurgency has not abated, creeping into almost a decade of conflict, with potentials for further escalation of the conflict, following the allegiance of the group to the Islamic State (ISIS).
Between 2014 and 2015, the war against the Boko Haram insurgency was at its peak, with the insurgents in control of large swathes of the four states making up Yola DisCo. While the situation is much different now as the Nigerian military under President M. Buhari, have pushed back the insurgents to the fringes of Lake Chad and surrounding areas, the insurgency is far from over, given the renewed attacks in Borno and Yobe by members of the Boko Haram and Islamic State of West Africa Province (ISWAP), an affiliate of ISIS. It may take a long period for peace and stability to return to the region.
In Taraba, the farmer/herder conflict situation is a potential threat to the provision of electricity.
The conflict situation in the North-East may result in the same declaration of political force majeure by the new investor(s) post-privatisation.
Given the quantum of investments needed to improve electricity access within the North-East, we are of the opinion that a re-privatisation of Yola DisCo to a core investor will worsen electricity access in the North-East and disenfranchise many of the towns and communities badly in need of electricity in these four states.
3. It Will Worsen An Already Low Electricity Access In the Region
North-East Nigeria has one of the lowest access to electricity and a high rate of poverty. Many of the towns and villages are not connected to the national grid, neither do they have any electricity, despite abundant solar and wind resources.
Amongst all the DisCos, Yola DisCo lags behind in network distribution infrastructure, connectivity and customer population. To buttress this, the BPE states that Yola DisCo, as at December 31, 2017, supplies electricity to over 181,000 customers across four states, and has 3,454 sub-stations; nine transmission stations, 33 numbers of 33KV circuits covering 6,590 kilometres and 112 nos 11KV circuits, covering 1,385 kilometers. Average daily energy allocation to Yola under the Multi Year Tariff Order (MYTO) is less than 140MW, the lowest amongst all DisCos.
With the continued insurgency, the poor electricity access in the region has been made worse as many of the electricity infrastructure (transmission stations, distribution transformers, feeders, etc.) have been severely damaged, with towns and communities without electricity since the start of the insurgency. In recent times, the Transmission Company of Nigeria (TCN) and the management of Yola DisCo under the Federal Ministry of Power, Works and Housing have been actively repairing, replacing and re-energising damaged sub-stations and feeders to ensure electricity supply is restored to these towns and communities. In addition to what the Ministry of PWH is doing, the state governments are equally carrying out the restoration of electricity to these towns and communities. We hope that the BPE valuation of the Yola DisCo will include these massive investments made by the federal and state governments since 2015.
Given the quantum of investments needed to improve electricity access within the North-East, we are of the opinion that a re-privatisation of Yola DisCo to a core investor will worsen electricity access in the North-East and disenfranchise many of the towns and communities badly in need of electricity in these four states.
4. Poor Privatisation Outcomes
We opine that privatising Yola DisCo as it is will not attract sufficient investor interest. In the last press release by the BPE, it stated that only three investors were shortlisted for the Request for Proposal (RfP) stage, as against the eleven investors shortlisted for the re-sale of Afam Power Generation Company. Given that the same issues that led to the earlier declaration of force majeure by the former core investor in Yola DisCo are still subsisting, and market issues have become much worse; with DisCos saddled with market debts, it is doubtful if any of the three investor groups would be able to commit and meet any reasonable financial bid price that would ensure the BPE is able to pay IEDM the force majeure payment.
Our Recommendations for the Successful Re-Privatisation of Yola DisCo
We recommend the following actions to ensure a successful re-privatisation of Yola DisCo:
a) Break up Yola DisCo into smaller DisCos to enhance its sale and operational value
Due to huge geographical size and large swathes of areas affected by the continued insurgency, it is important that the NERC considers breaking up Yola DisCo into several smaller DisCos. In our opinion, Yola DisCo is much more viable when broken as such, preferably along state boundaries. In effect, we believe that the sum of the parts of Yola DisCo are much greater than the whole of Yola DisCo as a single entity.
There are obvious benefits to breaking Yola DisCo into four new (state based) DisCos. Some of these benefits are as follows:
● It would enhance the valuation, sale proceeds and eventual operations of the entire network;
● It would allow the respective state governments and local investors to become core investors in the new DisCos, particularly those states affected by the insurgency, should they desire to. For instance, one investor in a potential Borno DisCo network affected by the insurgency, would most likely be the Borno State government and indigenous investors from Borno, seeking to improve electricity access in the State;
● It would bring the provision of electricity services closer to more customers who do not reside in the main towns and state capitals in the North-East. Any rational core investor in Yola DisCo would likely focus more on the Adamawa/Yola business areas, ignoring the larger areas of the network which the core investor deems unprofitable, either due to the preponderance of low income customers or conflict;
● Improved privatisation outcomes in terms of more interest in the privatisation from investors, including state governments and indigenous investors, better service delivery by the core investors in the variously carved out DisCos, faster customer enumeration, metering and loss reduction investments, network expansion, etc.
Given the challenges of the core investor share sale privatisation model, our recommendation is for the BPE to adopt a concession model for the re-privatisation of Yola DisCo. The concession model, which only transfers management and operational rights to the core investor, while retaining government’s ownership rights of the DisCo, has proven to be much more successful…
One argument that may be advanced against the break-up of Yola DisCo into several State DisCos is the need for cross subsidisation of retail tariffs. However, in our opinion, it is arguable if there is really any significant and actual cross subsidisation in retail electricity tariffs. In reality, existing cross subsidy assumptions in the MYTO tariffs have only served to build up further tariff shortfalls and is partly a reason for the non-cost reflectiveness of retail electricity tariffs. We opine that a break up of Yola DisCo (and DisCos in general) would make the retail tariff methodology much more cost reflective and transparent.
By the way, there is an argument that DisCos are too big in terms of the extensive geographical areas they cover. For instance, only one DisCo (Enugu) serves the five states of the South-Eastern region. We understand that the Nigerian Electricity Regulatory Commission (NERC) is working on a franchising regulation for DisCos to franchise their operations within certain areas of their network to independent third party operators. The franchising regulation is a tacit acknowledgment by NERC that the size of DisCos may be hampering their abilities to make appropriate investments and provide efficient service delivery to their customers within the extensive geographical areas they cover. Breaking up Yola DisCo into its parts would serve as a pilot model to assess the efficacy and efficiency of the franchising regulation, and eventual break-up of the ten DisCos along State boundaries.
b) Change the Privatisation Model from a Core Investor Share Sale Model to A Concession Model
DisCos are licensed, regulated monopolies. The share sale model for privatising DisCos has really not worked and has only led to the creation of super inefficient monopolies. Core investors in DisCos simply have monopoly rights in perpetuity to procure, distribute and retail electricity to customers within the monopoly areas.
While DisCo licenses are renewable by the regulator, it is most unlikely that there would be a situation where NERC will not renew the licenses when they fall due. So long as the core investor remains the shareholder of the DisCo, they will have monopoly rights associated with the terms of the license.
While the DisCos are regulated entities, as stated, unfortunately the power sector regulators lack strong legal backing, and the financial and technical resources, to effectively and efficiently monitor compliance and enforce its regulations, as well as sanctions. In addition, the ability of the BPE to enforce the buy-back clause in the privatisation agreements, and buy the DisCos’ shares for one dollar from core investors who do not meet their performance commitments at the end of the five–year performance period which ends by December 2019, is most unlikely to be enforced.
Given the challenges of the core investor share sale privatisation model, our recommendation is for the BPE to adopt a concession model for the re-privatisation of Yola DisCo. The concession model, which only transfers management and operational rights to the core investor, while retaining government’s ownership rights of the DisCo, has proven to be much more successful and effective than the share sale model in other countries that have adopted it.
c) ATC & C loss reduction commitments should be matched by firm investment commitments
A major drawback of the privatisation of DisCos is that while core investors contracted to reduce ATC&C losses, there were no firm commitment on the minimum value of annual investments they would make to ensure the losses are reduced in line with their ATC&C contracts.
Given the poor state of the power sector, and the muted interest in the privatisation of Yola DisCo, it is arguable if potential bidders would be able to secure any reasonable financial commitment to match their proposed ATC&C loss reduction plans. This is why the concession model is perhaps much more suitable, as the inability and/or failure of the core investor to make the investments, can lead to the termination of the concession agreement between the investor and BPE.
Case Study on the Concession Model: The Ugandan Electricity Distribution Company Ltd.
The Ugandan government privatisation of its electricity distribution network is a good example of how effective the concession model is over the share sale model.
In 2005, the Ugandan government privatised and concessioned the distribution and supply of electricity in Uganda to a private investor group called UMEME Limited, under a concession agreement for a period of 20 years, commencing in 2005.
We would urge the leadership of the NERC, BPE, the Federal Ministry of Power, Works and Housing, members of the National Council on Privatisation (NCP) headed by the vice president, as well as core investors of DisCos, to read UMEME’s 2017 audited financial report, particularly the chairman’s report, to get a sense of how things perhaps, need to change in Nigeria.
Under the concession, UMEME is required to repair, upgrade, and expand the distribution network system within Uganda, which is owned by the Uganda Electricity Distribution Company Limited (UEDCL), a government company.
The Ugandan concession agreements with UMEME provided for:
● A transaction fee of $1.4 million, which was paid to the government on the signing of the concession.
● Monthly lease payments by UMEME to UEDCL. The monthly lease payments were initially at $1.3 million and are now at $1.6 million as at 2017.
● UMEME to invest a further $60 million over a five-year period on network reliability improvements, with the obligation to start spending at the end of the 18 months after the completion of the privatisation.
● Minimum of 60,000 annual new connections in the first five years of the concession.
Since the concession, UMEME has achieved 100 per cent revenue collection, driven by improved efficiency in the revenue cycle process, increased penetration of prepaid metering, improved debt collection initiatives, use of data analytics to identify and focus the loss reduction initiatives and many other innovations that have enhanced the value of its operations.
In terms of investments, UMEME has invested over $565 million since takeover in 2005. In 2017 alone, it invested US$65 million in its network. US$35 million of that amount was invested in new connections. UMEME’s latest estimates indicate that distribution losses reduced to 17.2 per cent in 2017, in comparison to 19.0 per cent in 2016.
UMEME attained a gross profit of 8.3 per cent and EBITDA of 5.3 per cent. It’s profits is driven by increased consumption of electricity by its industrial and domestic customers. As well as improving distribution efficiencies. UMEME has significantly improved rural access to electricity — achieving close to 400,000 new connections since
UMEME Limited is listed on the Uganda Securities Exchange and on the Nairobi Securities Exchange. Recently, it was reported that Chinese investors made an unsolicited offer of US$3 billion dollars to the Ugandan government to take over Uganda’s electricity transmission and distribution business. That is how much value UMEME’s concession agreement has improved the distribution network.
We would urge the leadership of the NERC, BPE, the Federal Ministry of Power, Works and Housing, members of the National Council on Privatisation (NCP) headed by the vice president, as well as core investors of DisCos, to read UMEME’s 2017 audited financial report, particularly the chairman’s report, to get a sense of how things perhaps, need to change in Nigeria. It can be downloaded from this LINK.
Conclusion
Albert Einstein is credited as defining insanity as doing the same thing over and over again, but expecting different results.
The choice of BPE to re-privatise Yola DisCo using the PHCN Successor DisCo privatisation model is certainly not insane, but may be considered as impractical. Besides, the issues that led to the declaration of political force majeure by the former core investor, have still not abated. To make worse a bad situation, the power sector is in a far worse situation than it was in 2013, when the first round of privatisation was concluded.
It would therefore be more practical to consider a different approach and re-design of the privatisation model for Yola DisCo to achieve a successful re-privatisation. Breaking up Yola DisCo into several DisCos along state boundaries, and also adopting the concession model are strategies that would ensure success of its re-privatisation.
Odion Omonfoman, an energy consultant and CEO of New Hampshire Capital Ltd, can be reached on orionomon@outlook.com
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