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Power Sector Needs Dominant Foreign Equity Players

THE brand new tariff regime will not produce desirable
consequence the way the Minister of Power; Mr.
Babatunde Fashola has painted it. The reasons aren't too far fetched, as they border on two main factors.
As it were today, one is the technical capability
of our firms that are native. Two is the financial capacity of the native firms to bring necessary infrastructure that may ensure continuous supply
of electricity in the country together.

Does it mean the Federal Government was unaware of
abilities of those indigenous or the financial status?

The situation is really understood by the Government and that there exists an issue that is
fiscal. The Federal Government also realizes that the inability of these
investors that are native truly produced the problem to generate sufficient funding the electricity industry really requires.
The Government and investors under-estimated the sector.
By helping the indigenous businesses through increase in electricity tariff,
but rather than acknowledge that there is a fiscal difficulty, government chose
to use another strategy. What will the tariff do?
It will only achieve one aim: helping the businesses that are indigenous services the loans at consumers' expense.
With this, there may be a little chance for the banks to raise adequate capital for growth.
But that is neither here nor there, because even the
banks may also be into serious problem. What we are saying is that there are
two difficulties facing these indigenous companies, specifically the technical and financial challenges.

Does that indicate the power assets were sold without
capacities and established expertise to the investors in the electricity industry?

A bidding procedure was truly set in place in the
pre-handover of those legacy assets. A bid was called, and on that basis, there are two factors the authorities will
also look at. The financial and technical capabilities would be the basis that every firm will be rated or scored.
But in appraising the technical section, what we have is a scenario, whereby a technical
partner is brought by a native investor. And the government examines the kind
of partnership the technical partner has with the indigenous investor without a lot
of emphasis on fiscal wherewithal. Right from the start, we said it
wasn't enough for businesses that were native to simply bring technical partners.

It would have been better for native companies to bring the technical partners that will also bring equity
into that partnership, which can be lacking.

When equity is brought by
the guy, it means he is not only an investor, but also
a contractor to the native business. The native company will
now have the ability to leverage on two things: its technical competence and financial coverage.

That was missing in this bid and now, we're where we're
today. As far as this sector is concerned, we do not have a dominant foreign equity player.

If the foreign technical partners failed to bring equity,
how then did the indigenous investors have the ability to acquire the power assets?

We all know power infrastructure development may be the most fiscal intensive job in Nigeria.
So, we want individuals with the deep pocket to handle it.
In 2013, the Federal Government and Bureau of Private Enterprise (BPE) raked in a sum of $2.6b.
I could say about 80 percent of the fund was provided by banks that are Nigerian.
Usually, it shouldn't be that way because foreign investors are mostly designed to
bring bulk of their very own equities with regard to the capital mix, where you
locate investors bring at least 60 percent equity.
In this case, yet, all of the funds were sourced from the banks.
It's debt, which is now creating a little bit of
pressure on our financial system.

We locate a scenario whereby the Nigerian banks are the major, if not the sole,
financiers of the acquisition of the power assets. You'll find two factors using the
Nigerian Papers banks.

One is the high-interest rate. Two is the tenure of
these funds. These two factors cannot successfully
finance the electricity sector. They can merely act as working capital bonus.

What we find now is the Nigerian banks are funded in dollars-dominated
durations. Already, interest rate has gone on the
high side. The worth of dollar to naira has doubled within the space of two years.
The resultant effect is that the accounts
of our indigenous firms are not doing well in the banks, this means
the companies' ability is going to be stalled. In addition,
the ability of the native firms to pay loans will likely be delayed.
Finally, the ability of the native businesses to
build additional funding will probably be delayed.

Past the financial challenges, can you provide more insight into the technical challenges the firms that
are indigenous are facing?

There really are lots of leakages when it comes to revenue group.
The ability to collect sales isn't there at all. For these indigenous companies to successfully collect
revenues, they have to deploy technology. Additionally in the area of
technical competence, the indigenous businesses are lagging far behind.
All these will be the technical challenges that they have.
There certainly are a lot of people using electricity aside this.
Some are harnessing from armour cables that are subterranean. Many are bypassing the pre
paid metres. The earnings that the power distribution companies are supposed to produce are not
coming due to every one of these actions of sabotage.
How can these be solved? It is just through the usage of technology, that may cost lots of cash.

Another problem is that estimated billing
is the cash cow of the company. The Government comes up using a plan that everybody must be metred by the indigenous firms in a couple of years,
but nevertheless, it should be a few other way round.
The native investors should have supplied steady electricity supply before increasing tariff.
With this two-year grace and the sweetener
being estimated billing, which is to increase by 45 percent, then the cash flow
will even increase tremendously. It is easy arithmetic.

The proposition of the National Electricity Regulatory
Commission (NERC) on disputed bills cannot work. NERC has proposed that once bills are
challenged, consumers must not pay. Instead,
they should pay what was paid last. Later, the buyer should
write a letter and there's a body of people that
will look to their complaints. Ikeja Distribution Company Ikeja Electric, has over 450,
000 customers. How many individuals will they have the
ability to adjudicate on problems arising from estimated bills?
Do they've ability? You'll be able to view it is not going to work.

With this graphic, it appears the business has serious
challenges ahead. Can they sail through?

We should realize that that is an industry that needs financial strengths.
Two things run with the players in the business.
The native businesses that purchased the legacy assets aren't known in the market.
What is their antecedent? Have they been doing electricity company for 50 or 10, 20 years before
buying the legacy assets? These are just entrepreneurs that
saw chance and considered that they could profit considerably from it.
There's completely nothing wrong about it. As an entrepreneur, you have
to understand when to take your organization to
the next degree, although it is good.

For instance, the folks that began Coca Cola aren't the ones running
the company now. But while you hold on to the
assets , nor contemplate the way to take that business to another level, there is a problem.
Second, the challenge we have now is in the business model.
Actually, the business model is just not in the Electricity Sector Reforms Act.
It is the business model of the firms that are indigenous.
What are the brands of the businesses? How much can the brands
attract internationally in terms of investors?

For example, Dangote is famous for cement, and that's the reason why it is easy for Dangote to set up cement factories in different African nations.
The straightforward reason is the template is there. The man would go to every nation with all exactly
the same template and also the exact same team because that's what he has been doing for the past 30 years.
Is it not astonishing that $15b refinery is being built by the same Dangote?
But was Dangote not a player in the electricity industry in Nigeria until lately?

So, what ought
to be done to redress the specific situation?

What's emerging is the Us Government is attempting to spoonfeed the firms that are indigenous.
These are private companies, but the Government gave them subvention, through the Central Bank of Nigeria (CBN),
which will be simply a drop in the ocean. We recall the subvention the CBN provided to buy petrol, which has
not worked. Another one is coming. If the minister is sure of himself, let him sign an indemnity or guarantee Nigeria because we've had enough of talking that if
power is unstable in two years, he would step down. We've started
counting. There'll be no drastic change in two years, despite the tariff hike.

Our stake in this issue is the fact that of logic and foil.
Also, a suitable company needs to be deployed
into first players and the electricity sector with recognized expertise
and abilities in the electricity sector needs to be
allowed in. The specialists which have been for generations in the electricity business must be allowed
to come in.

An enabling environment also needs to be created in ways that Nigerians will start to view the future.
Nigeria's electricity marketplaces are unable to be compared to that
of Ghana and South Africa. It's ridiculous to make that type of comparison because our populations are different.

The electricity marketplace is tremendous and attracts tremendous gains.
But the investors aren't there.

An actual reappraisal of business model, whereby individuals must realize that profitability is not going to come
in five years, although it's not about government intervention. There should be a reappraisal of business model.
Our banks can only offer financial assistance between three
and two years, simply because they'd want their funds back within that period.
The banks aren't satisfied to fund electricity industry.

The minister said because the cost is just not bankable, no bank
would want to finance the business. But can Fashola tell
us which banks he was referring to? The business model of the native businesses don't work, if he meant Nigerian banks.
Fund tenure and the interest rate isn't going to make it work.
What we're suggesting is that a financing development bank that is solely towards
development endeavors such as this should be urgently set up by Federal Government.

It must take the area of providing working capital, if our
local banks will play any role at all.