Friday, August 16, 2019 /11:16AM / By CSL Research / Header Image Credit: 1stNews
Yesterday, Punch newspaper reported plans by the government repossess 10 electricity distribution firms as one of the options to rescue the nation's troubled electricity industry. According to the report, the Federal Government would require up to US$2.4bn (N736bn) to repossess the privatised distribution assets from the core investors if it finally decides to do so during a final performance review expected to take place in December.
The 11 Discos have been described by the ministry of Power as being ëtechnically insolventî with an urgent need for recapitalisation. According to the ministry, the inability of the Discos to improve customer service and meet operational costs is a direct consequence of their inability to raise capital.
Though challenges in the sector run across the entire electricity value chain, distribution remains the weakest link. Five and a half years post privatisation, the discos are still struggling with enormous operational challenges, such as insufficient energy supply; old and obsolete networks; lack of maintenance of network equipment; poor customer data; low meter penetration; and little or no investments due to poor revenues, low tariffs, lack of external funding. Of all of these issues, liquidity appears to be the most prominent.
We do not believe the government has any plans to run the discos if they are repossessed, so they will most likely be offered to a new set of investors. The core investors paid over US$1.3bn for 60% equity in each of the 11 Discos. We struggle to see the possibility of attracting new investors to the electricity distribution sector with the current structure and non-cost reflective tariffs.
That said, the Yola disco that was returned to the government in 2015 has seen a few bids from interested investors. Whatever be the case, we retain our view that there cannot be any meaningful progress in the supply of electricity unless government takes the silver bullet- allow tariffs to be cost reflective. If not, it then becomes for any new investor, a chicken and egg situation. Should investments be made to improve electricity supply first and then recouped from consumers via tariff hike or should tariffs be made cost reflective first. Either way, we do not think the average Nigerian wants to pay more for electricity especially under current economic conditions.