Still more hurdles to cross

[Mirror]

The prospect of an early completion of the privatization of the power sector is increasingly becoming dim. The Federal Government dithers in meeting the conditions precedent in the privatization agreement just as the preferred bidders for the generating and distribution companies threaten to hold back their funds until all outstanding liabilities are settled. Will the exercise coast to a save end or will it remained jinxed?

The ten preferred bidders for the Electricity Distribution Companies, DISCOs and the fi ve generation companies, GENCOs are expected to pay the outstanding 75 per cent of the bid price by Wednesday, August 21, in an exercise that is meant to wrap up the privatization of the troubled power sector. However, there are strong indications that the end to the long battle to free the sector from government and its attendant ineffi ciency and corruption may not come soon.

Last week, the DISCOs, ten of them, sounded it loud and clear that they would not pay the outstanding balance of 75 per cent of the bid price unless and until the Federal Government settles all liabilities due to the employees of Power Holding Company of Nigeria, PHCN and fulfi ll all other conditions precedent in the privatization agreement.

The preferred bidders for the Discos as approved by the National Council on Privatisation, NCP, include Kann Consortium for the Abuja Successor Company at $164 million, Vigeo Power Consortium for Benin at $129 million, West Power &Gas for Eko at $135 million, Interstate Electrics Ltd for Enugu at $126 million, Integrated Energy for Ibadan at $169 million, NEDC/ KEPCO for Ikeja at $131 million, Aura Energy Ltd for Jos at $82 million, Sahelian Power SPV Ltd for Kano at $137 million, 4Power Consortium for Port Harcourt at $124 million and Integrated Energy Distribution & marketing for Yola at $59 million.

The generation companies, Gencos, fi ve of them are Amperion for Geregu Plant at $132 million, Mainstream for Kainji Plant at $50.76 million plus commencement fee of $237,870,000, North-South for Shiroro Plant at $23.60 million plus commencement fee of $111 million, Transcorp/ Woodrolck for Ughelli Plant at $300 million and CMEC/ Eurafric for Sapele Plant at $201 million.

Under the privatization agreement, the preferred bidders had paid 25 per cent of the share purchase price within 15 business working days after signing the Sale and Purchase Agreements, as well as payment of the outstanding 75 per cent within 90 working days after the signing.

The former Chairman of the Nigerian Electricity Regulatory Commission (NERC), Dr. Ransome Owan, who spoke on behalf of the distribution companies during a roundtable with the Minister of Power, Prof. Chinedu Nebo, stressed that one of the conditions precedent for the conclusion of the privatisation was that the DISCOs would be handed over free from all legacy liabilities.

"Our lenders are mindful of this and are reluctant to approve loans and condition drawdown. Therefore, it is vital for full payment obligations to the current PHCN employees be fi nalised by the long stop date of 21 August, 2013. Lenders expect evidence of these payments before we can draw down on funds to complete our payments," he said.

Owan asked the government to conclude all labour issues and meet all conditions before August 21; release subsidy fund contained in the Multi-Year Tariff Order (MYTO) model for each of the distribution companies under new owners; fund the Transmission Company of Nigeria (TCN) adequately; issue an extended fi ve to 10 years special tax holiday for electricity distribution akin to the telecoms start-up assistance to mitigate tariff increase and high cost; and extend the longstop date to September 21, 2013 to allow for the full satisfaction of all conditions by government.

"It is a condition precedent (CP) that the Discos would be handed over free from all legacy liabilities. Our lenders are mindful of this and are reluctant to approve loans and condition drawdown. Therefore, it is vital for full payment obligations to the current PHCN employees to be fi nalised by the longstop date of August 21, 2013. Lenders expect evidence of these payments before we can draw down on funds to complete our payments.

"The Transition Electricity Market (TEM) will herald the start of contractual arrangements in the power sector and the automation of billing and metering operations of the market operator in line with the market rules. Three CPs remain thus: metering of the grid interface points; testing of the market operators' settlement systems and process, and constitution of a Dispute Resolution Panel (DRP). Without the completion of the CPs, NERC cannot advise the Minister of Power to declare the start of TEM. In essence, the industry agreements (power purchase agreements, vesting contracts, and transmission network agreements), which underpin industry revenue, would be deemed illegal and a nullity until the minister makes the declaration. This government policy risk makes it very challenging for the capital markets inside and outside of Nigeria to support our efforts fi nancially," he said.

On inadequate revenue to meet industry payments, he noted: "As of now, the Discos operate at a loss and buyers would quickly deploy their respective turn-business around plans. However... tariff, which guarantees a regulated return and covers all industry payments, is not yet producing the desired results due to systematic and structural problems. If distribution companies are unable to cover the cost of the energy delivered, then the bulk trader, transmission company and generation companies, will be adversely affected."

The bidders are also asking government to subsidise the operations and grant them tax holidays to help cover anticipated losses due to certain "structural problems" that will prevent them from operating profi tably during the initial post-privatisation period.

Most analysts who spoke with Business Courage last week doubted if all the conditions truly set out in the Share Purchase Agreement would be met beore Wednesday when the bidders are expected to make the 75 per cent payment.

As at the weekend, the Ministry of Power has so far paid PHCN staff, starting with the N118bn to workers of the generating companies and PHCN headquarters, leaving out those in the DISCOs.

However, it appears that it is only Professor Nebo that is optimistic that the conditions would be met. He stated that though some of the conditions precedent were outstanding, government, he said, was working assiduously to make the sure that the conditions were fully met before the declaration of the TEM.

"I would like to share with you that the Federal Ministry of Power is fully aligned with your dream to light up Nigeria. We are not unaware of the challenges that are on the way. These issues raised we have been mulling for the past several weeks, especially with the issue of the Transmission Company of Nigeria.

"We understand the challenges that you have raised and we realised we are all learning in this process. And because it is still in the infancy stage, we need to nurse the infancy to maturity and one of the things we need to do is to ensure that we present an enabling environment and where necessary, to inject the adrenaline needed by the preferred bidders to ensure that they realise their dream, which we are all hopeful with the reform agenda.

"We understand that you are supposed to inherit companies that are indeed free from all legacies liabilities and we are working on that. We also want to assure you that at the rate that these payments are being made to staff of the various PHCN successor companies that you are acquiring, by the end of this week almost all the GENCOs would have been paid, and then, we begin with the DISCOs.

Nebo said that there are obvious reasons why the government chose to settle the GENCOs and the PHCN headquarters and then move on the distribution companies. "With regard to the transition electricity market, three conditions precedent that you mentioned, metering of the grid, constitution of a dispute resolution panel receiving attention, be rest assured that we not oblivious of these things," he said.

He said that government was already considering the need to call for a stakeholders' meeting because of the nearness of the deadlines.

The minister said that approval had been given that part of the proceeds from the sale of the 10 National Integrated Power Project (NIPP) plants, about $1.6 billion, would be used to revamp the TCN and the transmission network and system.

He said the request for a new deadline date and tax holiday were issues that could only be considered by the National Council on Privatisation (NCP) headed by the Vice President, as he however ruled out the release of subsidy funds to the new owners even before their take-off.

"With regard to adequate funding for TCN, from the very fi rst day I took over as Minister of Power, I started harping on the weak link of the entire sector being transmission. The President, the Vice President and the entire cabinet are deeply committed to ensuring that TCN is well funded.

"I want to assure you that TCN should not be a signifi cant worry to you. We are doing everything possible. As we know, part of the proceeds of the 10 NIPP Plants as much as $1.6 billion is being dedicated to improvements in funding of TCN to give us a very good, well-deserved transmission network in the country. That is being addressed already.

"I cannot address the issue of 5-10 years holiday. We are going to support you as you make demands for that. But I am not a taxman. We can only make our appeal based on the merit. We will do what we can. I can't declare that I can extend August 21. The NCP will have to deliberate on that. What I can do is to play advocacy to ensure that you have at least the support of the ministry. But it is beyond my mandate. It will be communicated to the Vice President," the minister said.

However, how far the issue will be addressed still remains a matter of conjecture. An industry expert who spoke on the issue at the weekend said that the government may not have a choice than to extend the August 21 deadline for the payment of the 75 per cent fi nal payment. "It's obvious that the date can't work. The DISCOs are already saying the banks would not be willing to make funds available for the transaction until they are convinced that all the conditions have been met and here we are, barely three days to the deadline, a large portion of the conditions are yet to be met," he said.

The current process which started eight years ago, with the vision of reforming the power sector was legally backed with the enactment of the Electricity Power Sector Reform Act that provided for the unbundling of the PHCN successor companies.

In 2011, when the privatisation exercise began, the Bureau of Public Enterprises (BPE) had received 301 Expression of Interests (EOIs) and later short listed 207 fi rms that met the minimum qualifi cation standards set. Out of this number only 163 fi rms purchased bid documents from which the current preferred bidders emerged.

However, the exercise has been bedeviled with several glitches, most of which is labour related. At a time, when the organized labour grudgingly agreed to PHCN's privatization, the debate shifted to the severance benefi ts for those whose services would be dispensed off with by the new owners.

The Labour had alleged that there was a shortfall in the computation of PHCN workers' entitlements, shortly after the Federal Government announced the approval of N384 billion to offset the entitlements of employees of Power Holding Company of Nigeria (PHCN).

The two unions in the sector had engaged government in a protracted negotiation over the ongoing reforms in the power sector and had resisted the handover of the subsidiary companies to private investors only after all labour issues have been resolved.

General Secretary, National Union of Electricity Employees (NUEE), Comrade Joe Ajaero, had in a statement said Alexander Forbes and the BPE had discovered and accepted fundamental errors in the data used for their computation in the course of the Committee's discussion and had agreed to reconvene at a later date to address the errors. "It is amazing that fi gures can be conjured to calculate the exit benefi ts without reference to the technical Committee. The N384 billion is laughable because government is aware that one third of the staff population is excluded, and majority of those captured had their entitlements calculated based on two grades lower than their actual grades," he said.

National Mirror

[Folami David]

The power sector needs total repackaging for things to get better in this country. Nigeria is too big for that. Too bad!