Power: Why DisCos are defaulting in loan servicing – Expert

The recent failures of the Abuja Electricity Distribution Company (AEDC) and the Ibadan electricity distribution company (IBEDC), are raising questions on the impact of power privatization in Nigeria and if the companies that bought the assets were fit and proper for owning the companies.

In December, the Bureau of Public Enterprises (BPE) announced a 5-member interim management team for AEDC following the crisis rocking the distribution company. The BPE added that the Nigerian Electricity Regulatory Commission (NERC), also approved the appointment of the interim management team.

Chairman of NERC, Sanusi Garba, said the development is in pursuance of the earlier fit and proper review of BPE’s pool of nominees and in the context of the business continuity framework of the Nigerian Electricity Supply Industry (NESI).

Last week, the Ibadan Electricity Distribution Company (IBEDC) announced the takeover of the power firm by the Asset Management Corporation of Nigeria (AMCON) with the appointment of Mr Kunle Ogunba SAN, to act as the Receiver/Manager Nominee in the receivership action, following a judgement by a Federal High Court on September 8, 2021, which granted orders in favour of AMCON as Receiver/Manager of Integrated Energy Distribution and Marketing (IEDM) Limited, IBEDC’s core investor, over default in Loan Service Agreement.

The issues surrounding the defaults of both DisCos is down to debt as the owners of the DisCos engage in leveraged buyouts for the assets but obviously can’t continue to pay.

What the expert is saying

Wale Okunrinboye, Head Investment Research at Sigma Pensions and regular guest on Nairametrics’ “On the Money” show on Clubhouse said that during the power privatization, most of the companies were thinly capitalised entities who used leverage to fund these purchases. He said that issues related to naira devaluation (as the assets were sold in US dollars), and slow implementation of tariffs has heavily affected the financial operations of the DisCos.

“In 2014, when we privatized the power sector, many of the winners were thinly capitalised entities who used leverage to fund these purchases,” Okunrinboye said.

He added that in many cases the entities were no more than financial SPVs put together to win the bid in the hope of selling on to strategic players in the medium term.

“The financing arrangements modelled fairly stable exchange rates on the USD debt, cost-reflective electricity tariffs and relatively conservative collection losses (in hindsight),” he added.

He said subsequent events exposed the folly of these assumptions as Naira devaluation, greater than expected collection losses and delays in adjusting tariffs resulted in many of these players being saddled with large losses, adding that many of these players failed to meet metering targets and collections were large.

“Interestingly despite the prospect of bankruptcy from missed bank loan payments, many chose to hold on rather than selling equity to stronger players. These larger and more capitalised entities could have assumed these obligations staving bankruptcies,” he said.

On the government policy side, Okunrinboye notes that the delay in ensuring cost-reflective tariffs and limited pressure on DisCos to take steps to reduce collection losses such as mandating prepaid metering, ensuring government agencies cleared their electricity bills and improving alternative revenues streams, contributed to the issues. He added that even the BPE, which was a minority investor in all the DisCos could have used this position to drive greater improvements in the DisCos.

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