What To Do With Our Electricity Distribution Companies (DISCOS)

By Victor Ogiemwonyi

At the end of 2013, the power sector in Nigeria was privatised. The Power Holding Company of Nigeria ( PHCN )was broken up into 6 power Generating companies, 12 Distribution Companies and a Transmission company, that the Government continues to hold.

This unbundling of the Electricity sector, was with the hope, that it will help ensure reliable power, for Nigerians. Unfortunately, it has not worked out, as planned.

While the Power generating companies are growing relatively well, with daily incremental additions to its capacity, we cannot say the same for the Distribution Companies, that have not added much value. The Transmission Company of Nigeria has performed, even worse.

I am not in the camp of those who say, the privatisation of the Electricity sector, was all bad, or simply an allocation to friends and politicians.

The work involved, is far more complex for the average person to understand- the process of privatization of these DISCOs was extensive.

I am not saying it was done perfectly, I also cannot claim to know everything about what took place. But I can say, only what I know about the process. Luckily, I was a financial advisor, in one of the Transactions in this particular privatisation process, that lead to the sale of these DISCOS.

On our part, in preparing a bid, for our client, we brought in our Partners, IC Securities Limited, a top Investment Bank in Ghana, with people, who have Wall Street experience, and have done similar work before, to partner with us, to help prepare our bid. We also brought in Gujarat Electricity of India, as Technical Adviser.
We won the technical bid but failed on the commercial bid. So, BEDC ( Benin Edo Delta Electricity company ) went to another bidder.

I am upfront with this disclosure, to know the extent of my involvement and also know that my views and recommendations, here, are on how to move these DISCOs forward.

The work to privatize these DISCOs had a lot more to it, than many understand. First, there was fear that, if the privatization did not happen when it did, the entire electricity system would have collapsed. So, there was the urgency to get this done.

This urgency, also meant some processes were abbreviated. Investors who participated, had no time to properly evaluate, what they were buying. Because, doing this evaluation, would have taken a lot of time and may not necessarily add much value, the Government, was selling “as is.” You get what you choose. Like in an auction,
Investors, had to make approximate valuation for what they bought. There were reports, that immediately, privatization was announced, some of the PHCN Assets were vandalised, making the eventual Assets, bought by these investors, less than what they paid for. The Investors who bought, needed to do a lot of remedial work before they could even take off.

There was also the complexity, that arose, with people who worked for PHCN, more than 10 years earlier, suddenly showing up, to claim past salaries and compensation, once privatization was announced.

They organised, into a union and became a problem and a road block. I remember, Mr Atedo Peterside, who guided the privatization of these DISCOs, explained, at a workshop, on the DISCOs privatisation, that he advised Government, at some point, to just payoff the N500 million or so, the workers were claiming, because it was easier and Government should consider it, a necessary sacrifice, to make sure, this gets done. There were other obstacles that were not anticipated that showed up to stop the exercise.

Usually, when Governments, do Privatisation like this, it attracts, interest from foreign investors, because they can see a lot of value, as was seen in Nigeria’s GSM licensing.

This time, no foreign investor was interested and to the best of my knowledge, no foreign investor bided. Those, we approached, on behalf of our client, declined, saying they did not want to be entangled with the corruption usually associated with these kind of activities in Nigeria. They said, when you win your bid, we will come in as partners.

At this point, the foreign corrupt practices Act, of the US government, was now better known, after the widely published prosecution of some foreign companies who worked in Nigeria’s Oil and Gas Sector. So, there was also this complexity, to attract the best possible investors for the program.

Those who participated were all local investors, and most borrowed to invest. This is why from day one, the issue for the DISCOs, was financing their operations.
The under investment in the sector, all along, started from day one.

I must however, add that there were some of the Investors, who had unrealistic expectations, especially those who viewed it, as a cash collection center only, because they thought it was a monopoly, and an essential service, people cannot do without.

No matter what side of the discussion you are on, the most important question, is what do we do, with them, now?

The fact that these DISCOs have stayed these years, patching up the poor infrastructure they inherited, means we have a starting point and there is something to build on. As has been stated earlier, the major problem for the DISCOs, is finance. They have no money to invest in the Assets and these are aging Assets.

Make Them Public Companies:

One of the best ways, to raise finance for them, will be for the Government to sell their remaining 40% shares in the companies, to the investing public, and make them public companies .

This option, will attract more finance, by way of Long term Bonds , that can come from institutions like Pensions and Insurance companies, who can be incentivised, with Tax breaks, to initially underwrite the Bonds. The Government can do this, with a view to de-risking these investments.

The fact that, the Bonds, will be listed and traded, means that, Institutions holding them, can get out, when they like. Raising equity, first, will make them attractive to raise more money, by way of issuing these Bonds.

The institutional investors like Pensions and Insurance companies, who invest in these Electricity Distribution companies know that supporting , …”lighting up Nigeria”….works, for their interest too, an energy sufficient Nigeria, that is productive, will also mean more people employed, who will contribute to pensions and take up insurance policies.

Then, there is the proper corporate governance, that will come with becoming a public company and listing these companies, means they have a perpetual source, to always raise money.

The Weak Link, Is The Transmission .

The weak link in the system, is the transmission, the Government’s decision to hold on to the Transmission Company, is a mistake. The Transmission company of Nigeria, (TCN ) is suffering from the same affliction as Nigeria, as a state, with its federal structure— over centralising everything, with no value addition.
The current National transmission company’s Assets, will need to be distributed to the DISCOs , in their various Areas of operation, in a move to decentralised, and regionally managed, Grid system.

Let the States, in each DISCO area, find private sector partners to take those regional Transmission companies over, and jointly rebuild and manage them. Because of the significant investment that will be needed, those states should jointly, float “SPECIAL STATE ELECTRICITY BONDs ” that they will guarantee, as a way of de- risking them, to attract investors.
These Bonds will be bought by local populations in those States, if well marketed, and sold as the people’s contribution to electricity development. We can see the example of the Federal savings Bonds, that are now sold monthly.

The inefficient grid capacity, is responsible for most of the trouble in the transmission of electricity today. The inability to transmit electricity, often disrupted by system collapse, forced outages, has greatly impacted power delivery, even the little electricity generated, cannot be transmitted.
The system is outdated and will need significant investments, to modernise the grid, and reduce the transmission losses, we currently experience.

The current move to push regulation of DISCOs to the States, is a move in the right direction.

As a final solution, we will need a mix of power sources, generating power from all the sources, that include gas, hydro and solar. We must invest in smart Grid technologies, especially in the underserved, rural areas.
Electricity is far too critical to development, to remain neglected. Government therefore, must prioritize and accelerate efforts to expand and modernize the power sector now.

Victor Ogiemwonyi is a retired Investment Banker, and writes from Ikoyi, Lagos.