The Power Sector Intervention Fund and Matters Arising
Proem
To guarantee effective gas supply to power generation companies and find a sustainable resolution to electric power sector challenges in Nigeria, the Nigerian government announced a N213 billon power intervention fund to cater to the legacy gas debts and address the revenue shortfall in the power sector. Whilst outlining the scope of the issues that the N213 billion facility is designed to address, the current minister of petroleum resources stated that the fund would be used to (a) settle the legacy gas debts which stands at N36 billion, (b) execute agreed metering programs and (c) procure transformers by distribution companies and execution of maintenance programs and procurement of equipment by generation companies.
Use of Funds
Settlement of Legacy Gas Debts
From transactional experience, the writer is aware that the legacy debt owed to, particularly, international oil corporations (“IOCs”) is a major problem in the subsector as many of these IOCs are unwilling to negotiate gas sale arrangements with or make gas available for off-take (by the successor power generation companies) as they claim that they are owed several sums (estimated at over N200 billion), particularly by the Power Holding Company of Nigeria (“PHCN”) (now in liquidation)..
It is not unusual during negotiation of gas purchase arrangements between the now privatized PHCN successor generation companies, for the counterparty IOCs to express very clearly their reluctance to sell gas to such successor companies (as alluded to, above) because they are owed several millions of dollars by the PHCN business units which had now become hived-off from the PHCN as a successor generation company. Hence, the importance of the settlement of legacy gas debts owed these IOCs.
Execution of Agreed Metering Program
One clear way the successor electricity distribution companies can generate more revenue, is to properly meter consumers for electricity consumed; hence, the issuance of an Order by the Nigerian Electricity Regulatory Commission directing electricity distribution companies (“Discos”) to commence the implementation of the Credited Advance Payment Metering Implementation Scheme (CAPMI), so that more electricity consumers could be charged for actual electricity consumption. However, finances have been a hindrance. Hence, the ‘bail-out’ of the sector by the federal government becomes very pertinent.
According to a committee on metering set up by Nigerian Electricity Regulatory Commission (“NERC”), the metering gap in the Nigerian electricity market is very huge, with about fifty (50%) per cent of consumers being without functional meters. There is also a high demand for prepaid meters by consumers, with the Discos having not done much, to make prepaid meters available to the many consumers who are willing and ready to buy as it takes between of ninety (90) and one hundred and eighty (180) days to get one, where one is lucky to so do, in the first place.
A point worth noting is that the proposals submitted by the core investors in the Discos estimate that over six (6) million new meters would be installed over the course of the next five years, such that more than one million would be installed yearly.
While it seems that the financial challenge facing most of the Discos is impeding their drive to make prepaid meters available to consumers, it cannot be ruled out that there is some reluctance to install prepaid meters because the estimated billing system is ensuring that they can shore up their revenue base for the time being. Even though, there are stringent rules on estimated billing, no one seems to be in compliance and NERC appears to be turning a blind eye.
The foregoing further highlights the importance of the federal government’s financial assistance.
Maintenance Programs
Maintenance programs particularly where provided by the major Original Equipment Manufacturers (“OEMs”) is not by any means cheap. Hence, any financial assistance from any entity would be grabbed with both hands. The rehabilitation of many of these plants and the upgrade of the distribution network is no trivial issue. These plants have run for tens of thousands of equivalent operating hours (“EoHs”) without proper maintenance in the form of adherence to minor and major maintenance schedules. The networks too are decrepit.
Many of the OEMs are interested in providing rehabilitation and maintenance services to many of the successor generation or distribution companies but also want to do same profitably. In some cases, the volume and value of services required or work to be done surpass the previous expectations of these new investors.
Issues Arising
The beneficiary successor generation and distribution companies are expected to repay the loan over a period of 10 years from their revenues. Although, this step is commendable, there are interesting issues and questions that require clarification such as the intention that the beneficiary companies will repay the loan within 10 years by having a first line charge on their revenues; yet, such companies whilst also enjoying a moratorium on repayment on the facilities ‘extended until such time that power supply improves across the country’.
The phrase, ‘extended until such time that power supply improves across the country’ does lend itself to multiple interpretations and arbitrariness. In this respect, there are several questions, such as who determines that same has improved? What are the parameters to be used? Is it a 5% or 50% or even 75% improvement that is being considered in this respect? These are several questions worth thinking through and clarification, provided.
Further, given the challenges that have become endemic in our power industry for several years, and more importantly since there are several communities in Nigeria who do not even have power because they are not connected to the national grid (or indeed the new independent distribution networks) or no power infrastructure exists in those parts, it does appear like the distribution companies will be enjoying free monies with no clear trigger for repayment for several years, since repayment is tied to the entire country enjoying power.
Another issue is how to align the current debts owed by these companies to banks and multilateral lending agencies and the additional burden of indebtedness introduced by the federal government of Nigeria through this seemingly generous assistance. For Discos that have taken working capital facilities and charged/ created security over their revenue streams, there are serious issues to contend with, especially as it would appear to be the intention of the government to take a first line charge on the revenues of these companies.
Conclusion
Although, it is obviously the case the President Goodluck Jonathan administration means well, it is important to think through these issues rigorously and provide a clear roadmap or strategy for dealing with the challenges arising therefrom.
For more on the electric power sector, read the text “The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business” by Ayodele Oni.
Ayodele Oni {ayodeleoni@outlook.com} a solicitor, specializes in international energy (oil, gas and electricity) investment law and policy. He holds a mini-MBA in power & electricity. Follow me @ayodelegoni.
Ayodele Oni