Restructuring in Power Sector as Banks Turn Heat on Discos

The wind of restructuring exercise blowing across some of the electricity distribution companies over their exposure to bank loans and their attendant lack of capacity to settle their obligations may bode well for the power sector, which is currently performing below expectations, writes Festus Akanbi

Last week, Nigerian electricity users got a peep into the underbellies of the electricity distribution companies in Nigeria, with a strong indication of the dire financial position of some of the operators. It was a week when the federal government announced the commencement of a restructuring programme for some of the Discos with the takeover of Kano, Benin, and Kaduna electricity distribution companies by Fidelity Bank Plc, Afrexim Bank, Keystone Bank, and Ecobank Plc, which initiated actions to take over the boards of the three Discos. 

However, the management of Benin Disco have threatened to resist the takeover, saying Fidelity Bank erred by its latest action on the distribution company.

 At the same time, the Bureau of Public Enterprises made public the takeover of another troubled distribution company, Ibadan Disco by the Asset Management Corporation of Nigeria, explaining that it (BPE) had obtained approval from the Nigerian Electricity Regulatory Commission to appoint an interim managing director for the distressed power firm. 

Similarly, the federal government, in a notice signed by the Director-General of BPE, Alex Okoh, and Executive Chairman, NERC, Sanusi Garba disclosed it has begun restructuring the management and board of Port Harcourt Disco to forestall the imminent insolvency of the utility.

Intervention  

Despite the huge investment in the sector amid the incessant collapse of the power grid, stakeholders are currently at loggerheads over the poor performance of the 11 distribution companies (DisCos) operating in the country and the defence of the Nigerian Electricity Regulatory Commission (NERC).

With electricity generation wobbling despite the introduction of Service Based Tariff pegged on improved service, NERC had decried that rising insecurity, inflation and harsh operating environment were bedevilling the performance of DisCos. Meanwhile, the DisCos have attributed the persistent poor supply to the load shedding by the Transmission as a result of power generation.

However, insider sources disclosed that the exercise was purely an intervention by the federal government through the BPE which is working with some of the creditors of the ailing companies for a way out of their crisis. For instance, a source disclosed that Fidelity Bank took the action along with other creditors, namely, Keystone Bank, Ecobank, and Afreximbank by activating the call on the collateralised shares of Kano, Benin, and Kaduna electricity distribution companies (DisCos) in a bid to take over their boards over their inability to repay loans obtained to acquire assets during the 2013 privatisation.

BPE is said to be engaging with the CBN to ensure an orderly transition and to ensure that Fidelity Bank does not hold the DisCo shares in perpetuity.

The resolution by the CBN not to allow lenders to carry DisCos’ huge non-performing loans collected on their books without making a provision for them any longer may have precipitated this action.

The affected DisCos are said to have accounted for over 85 per cent of the cash shortfall recorded by the industry so far, and all efforts to help them back to profitability including over N1.6 trillion in intervention funding for the sector have failed.

New Boards

The new board members for Kano DisCo are Hasan Tukur (chairman), Nelson Ahaneku (member), and Rabiu Suleiman (member).

For Benin DisCo, the board members are KC Akuma (chairman), Adeola Ijose (member), and Charles Onwera (member).

While for Kaduna Disco, the new appointments are: Abbas Jega (chairman), Ameenu Abubakar (member), and Marlene Ngoyi (member).

The BPE has nominated Bashir Gwandu (Kano), Yomi Adeyemi (Benin), and Umar Abdullahi (Kaduna) as independent directors to represent the government’s 40 per cent interest in the three DisCos respectively, during this transition. 

According to BPE, Fidelity Bank will participate fully in all the ongoing market initiatives aimed at improving the sector such as the National Mass Metering Programme.

In the interim, Fidelity Bank has met with the Nigerian Electricity Regulatory Commission (NERC) on an emergency basis and activated the business continuity process, and has also appointed interim managing directors for the affected DisCos.

Benin Disco Kicks

In a press statement issued last week, the management of Benin Electricity Distribution Company (BEDC) Plc said there is no legal basis for the takeover of the company following the purported activation of the call on its collateralised shares by Fidelity Bank.

The management stated unequivocally, “There is no contractual, statutory or regulatory basis for such.” The statement added, “For the avoidance of doubt, the shares of BEDC have not been given as security to Fidelity Bank or any other party.”

According to the statement, “As we understand it, Vigeo Holdings Limited (VHL – a non-shareholder of BEDC) obtained credit facilities from Stanbic IBTC Bank Limited, Fidelity Bank Plc, and Keystone Bank Plc (the VHL Lenders).

“We further understand that the said credit facilities (and any enforcement action in relation thereto) have in the meantime become subject of litigation in a court action instituted by VHL and other plaintiffs (the VHL Action) with Suit No: FHC/L/CS/239/22 – Vigeo Holdings Limited and 4 Ors v. Stanbic IBTC Bank Limited, and therefore, subjudiced.”

The management of BEDC Electricity Plc warned that “Any attempt by Fidelity Bank and/or BPE to intervene in BEDC in the manner being reported will be illegal, unlawful and will be resisted.”

Heavy Burden

However, industry sources doubt the ability of the current rescue template to turn around the fortunes of 

these ailing companies. According to them, the issue remains to be seen how receivership would somehow resolve deep-seated sectorial issues, which require a wholesale rethinking of the architecture of the entire sector. 

They argued that the myriad of problems besetting these firms cannot be solved overnight, citing such problems to include non-payment of staff salary and poor revenue generation, among others. They also raised the fear that given the kind of legal tussles which usually trail receivership issues in Nigeria, the restructured entities may be plunged into a prolonged court case. 

The 11 existing distribution companies in Nigeria are the Abuja Electricity Distribution Company, Benin Electricity Distribution Company, Enugu Electricity Distribution Company, Ibadan Electricity Distribution Company, Jos Electricity Distribution Company, Kaduna Electricity Distribution Company, Kano Electricity Distribution Company, Ikeja Electricity Distribution Company, Eko Electricity Distribution Company, Kaduna Electricity Distribution Company, Port Harcourt Electricity Distribution Company, and Yola Electricity Distribution Company.

These companies are saddled with the responsibility of distributing electricity to certain areas. Popularly referred to as Discos, Nigerian distribution companies each cover one or more states.

The Privatisation

In November 2013, the nation’s distribution and generation companies were privatised, fetching about $3.2billion for the federal government, as the Discos and Gencos were sold for $1.7billion and $1.5billion, respectively. 

The acquisitions by the core investors were financed mostly by debts, a chunk of which was provided by local banks.

According to a report by the Nigerian Bureau of Statistics (NBS), in 2020, the Non-Performing Loans (NPL) in the power sector was N33.22billion out of N1.23 trillion NPLs that banks had recorded.

 Accepting their default status, investors in the DisCos had in 2020 recommended that the acquisition debt should be refinanced by the Bank of Industry (BoI) and extended for 10 years on a single-digit interest rate and two years moratorium. That was, however, not accepted by the financial sector regulator, the CBN.

The loans keep growing and would cause more issues for the power sector if they are not addressed.

The debt owed to Nigerian banks by operators in the power sector rose by 11.85 per cent in one year to N819.97billion in August 2021 amid the lingering problems plaguing the sector. 

According to a report by analysts at CSL Stockbrokers, “Several banks made loans to the power sector during the power sector privatisation in 2013. If power sector loans become impaired, this leads to an increase in the cost of risk for these banks. These loans include significant sums lent to purchase power generation and distribution assets.” 

This perhaps explained, why the United Bank of Africa Plc, which provided the loan used for the acquisition of majority shares in Abuja Electricity Distribution Company, had taken over the majority stake in the Disco in 2021. 

Huge Investment, Low Performance

An indication that the federal government may be regretting its investment in the power sector was given by frustration exhibited by the Minister of Finance, Budget and Planning, Zainab Ahmed, who in April disclosed that the N1.3 trillion intervention fund the federal government provided for the power sector has not yielded any significant result.

On March 1, 2017, the federal government approved the sum of N701 billion as a power assurance guarantee fund for the Nigerian Bulk Electricity Trader (NBET) to pay for the electricity produced by the generation companies (GenCos) to the national grid for two years.

The minister also stated how Nigeria paid $137 million in two years for gas and electricity that was never used in the “take or pay deal” the country entered into with some investors in the power sector.

To help the companies to get on their feet the Central Bank of Nigeria early 2015 launched an N213billion (US$1.1billion) Nigeria Electricity Market Stabilisation Facility to provide operators with soft loans. The government has also raised prices paid by electricity consumers under the Multi-Year Tariff Order (MYTO), introduced in June 2012 to gradually make tariffs more cost-reflective to encourage private investment. The latest adjustment in the current MYTO (2015 2024), which took effect on February 1st, raised prices by an average of 45 per cent. 

Industry analysts, therefore, hope that the ongoing restructuring exercise will bode well for electricity distribution companies and reposition them to deliver quality service to Nigerians. It is also hoped that the decision of banks to tighten the noose on debtor companies will send the necessary signals to other operators to enter into fruitful discussions with their creditors on how to meet their obligations.