Power Sector Wants Dominant Foreign Equity Players
THE new tariff regime will not generate desired effect the way the Minister of Power; Mr. Babatunde Fashola has painted it. The reasons aren't too farfetched, as they border on two main factors. As it were today, one is the technical capability of our businesses that are native. Two is the financial capacity of the businesses that are indigenous to bring necessary infrastructure that will ensure constant supply of electricity in the state together.
Does that suggest the power assets were sold without established expertise and abilities in the electricity sector?
A bid procedure was really set in place at the pre-handover of the legacy assets. A bid was called, and there are two variables the authorities will also look at. The financial and technical abilities are the basis for which every business will undoubtedly be rated or scored. But in appraising the technical section what we've is a situation, whereby an indigenous investor brings a technical associate. And the government examines the kind of partnership the technical associate has with the indigenous investor without much emphasis on fiscal wherewithal. From the beginning, we said it wasn't enough for businesses that were native to only bring technical associates. It could have been better for businesses that were indigenous to bring the technical partners that could also bring equity into that partnership, which will be lacking.
When equity is brought by the guy, it means he isn't just an investor, but in addition a contractor to the indigenous 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 we are where we are today. As far as this sector is concerned, we do not have a dominant foreign equity player.
How then did the indigenous investors have the ability to get the power assets, if the foreign technical associates did not bring equity?
We all know power infrastructure development is probably the most monetary intensive endeavor in Nigeria. Thus, we need people with the deep pocket to manage it. In 2013, the Federal Government and Bureau of Private Enterprise (BPE) raked in an amount of $2.6b. I can say banks that are Nigerian provided about 80 percent of the fund. Usually, it shouldn't be that way because foreign investors are mainly designed to bring majority in their own equities with regard to the capital mixture, where you locate investors bring at least 60 percent equity. In this situation, nevertheless, the majority of the funds were sourced from your banks. It is debt, which can be creating a little bit of pressure on our monetary system.
We find a scenario the Nigerian banks will be the important, or even the lone, financiers of the acquisition of the power assets. You can find two factors together with the Nigerian banks. One is the high-interest rate. Two is the tenure of these funds. Both of these factors cannot finance the electricity industry. They are able to just act as working capital bonus. What we find today is the Nigerian banks are financed in dollars-dominated periods. Interest rate has gone on the high side. The worth of dollar to naira has doubled over the space of two years. The resultant effect is that the accounts of our native companies aren't doing well in the banks, which suggests the firms' ability will likely be delayed. Also, the capability of the native firms to pay loans will likely be delayed. Finally, the power of the native companies to create additional funds will probably be stalled.
Does it mean the Federal Government was not alert to capacities of the indigenous or the financial status?
The situation is indeed understood by the Government and that there's a problem that is monetary. The Government also recognizes the difficulty was truly created by the inability of the investors that are native to build backing that is acceptable that the electricity industry really needs. The Government and investors under-estimated the sector. By helping the native companies through increase in electricity tariff, but rather than acknowledge that there is a financial issue, government decided to use another strategy. What'll the tariff do? It will only reach one goal: helping the indigenous companies services the loans at consumers' expense. With this, there might be a little opportunity for the banks to raise sufficient capital for growth. Because even the banks may also be into serious trouble but that's neither here nor there. What we're saying is that there are just two issues facing these native businesses, specifically the technical and financial challenges.
Beyond the financial challenges, are you able to provide more insight to the technical challenges the indigenous companies are facing?
On the average, there really are lots of leakages with regard to revenue collection. The capacity to collect revenue is not there at all. For these native companies to collect revenues, they have to deploy technology. Additionally in the area of practical competence, the native companies are lagging far behind. These are the technical challenges that they have. Aside this, there really are lots of people using electricity illegally. Some are exploiting from subterranean armour cables. Many are bypassing the prepaid metres. The earnings that the power distribution companies should generate are not coming due to all these acts of sabotage. How can these be solved? It is just through the use of technology, that may cost lots of money.
Another problem is that charge that is estimated 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 will be a few other way round. The indigenous investors should have provided steady electricity supply first before raising tariff. With this two-year grace as well as the sweetener being estimated billing, which will be to rise by 45 percent, then the cash flow will even increase tremendously. It is simple arithmetic.
The proposition of the National Electricity Regulatory Commission (NERC) on disputed bills cannot work. NERC has proposed that once bills are questioned, consumers must not pay. Instead, they should pay what was paid. Subsequently, the consumer should write a letter and there is a body of people who will look to their complaints. Ikeja Distribution Company Ikeja Electric, has over 450,000 customers. Just how many individuals will they have the ability to adjudicate on issues arising from estimated statements? http://grupopcon.com.br/ Do they have capability? It's possible for you to note that it is not likely to work.
With this particular picture, it appears the business has serious challenges ahead. Can they sail through?
We must recognize that that is a business that needs fiscal muscles. Two things run using the players in the industry. First, the native businesses that bought the legacy assets usually are not understood in the market. What's their antecedent? Prior to purchasing the heritage assets, have they been doing electricity business for 10, 20 or 50 years? These are just entrepreneurs that saw opportunity and believed that they could profit considerably from it. There is absolutely nothing wrong about it. As an entrepreneur, you should know when to take your company to another level, although it is good.
For instance, the folks that started Coca Cola are not the ones running the business now. However, when you do not contemplate just how to take that company to another level and hold to the assets, there's an issue. Second, the challenge we have at present is in the business model. Really, the business model is not in the Electricity Sector Reforms Act. It is the business model of these indigenous businesses. What are the brands of these companies? How much can the brands bring internationally with regards to investors?
For cement, which explains the reason why it is not difficult for Dangote to set up cement factories in different African countries, Dangote is well known for example. The easy reason is that the template is there. Because that's what he is doing for the past 30 years, the man visits every state using the same template as well as precisely the same team. Is it not astonishing the same Dangote is building $15b refinery? But was Dangote not a player in the electricity sector in Nigeria until recently?
So, what should be carried out to redress the problem?
What exactly is emerging is that the Government is trying to spoon feed the companies that are native. All 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 supplied to pay for gas, which has not worked. Another one is coming. In the event the minister is sure of himself, let him sign an indemnity or guarantee Nigeria because we have had enough of talking that if power is just not secure in two years, he'd step down. We now have started counting. There'll be no radical change in two years, despite the tariff increase. Our stake in this issue is the fact that of transparency and sense. Additionally, an effective company should be deployed to players that were initial and the electricity industry with established expertise and capacities in the electricity industry needs to be permitted in. The experts which were in the electricity business for generations needs to be allowed to come in.
An enabling environment should likewise be produced in a sense that Nigerians will begin to see the future. Nigeria's electricity markets cannot be compared to that of Ghana and South Africa. It really is silly to make that type of comparison because our inhabitants are not same. The electricity market is tremendous and brings tremendous profits. But the investors are not there.
A real reappraisal of business model folks must recognize 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 would need back their funds within that interval. The banks are not satisfied to finance electricity sector.
The minister said as the cost is not bankable, no bank would wish to finance the business. But can Fashola tell us which banks he was referring to? The business model of the indigenous companies WOn't work, if he meant Nigerian banks. Fund tenure and the rate of interest is not going to make it work. That which we're suggesting is that Federal Government should urgently set up a finance development bank that is solely towards development endeavors such as this. If our local banks will play any part whatsoever, it must take your community of providing working capital.
Does that suggest the power assets were sold without established expertise and abilities in the electricity sector?A bid procedure was really set in place at the pre-handover of the legacy assets. A bid was called, and there are two variables the authorities will also look at. The financial and technical abilities are the basis for which every business will undoubtedly be rated or scored. But in appraising the technical section what we've is a situation, whereby an indigenous investor brings a technical associate. And the government examines the kind of partnership the technical associate has with the indigenous investor without much emphasis on fiscal wherewithal. From the beginning, we said it wasn't enough for businesses that were native to only bring technical associates. It could have been better for businesses that were indigenous to bring the technical partners that could also bring equity into that partnership, which will be lacking.
When equity is brought by the guy, it means he isn't just an investor, but in addition a contractor to the indigenous 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 we are where we are today. As far as this sector is concerned, we do not have a dominant foreign equity player.
How then did the indigenous investors have the ability to get the power assets, if the foreign technical associates did not bring equity?
We all know power infrastructure development is probably the most monetary intensive endeavor in Nigeria. Thus, we need people with the deep pocket to manage it. In 2013, the Federal Government and Bureau of Private Enterprise (BPE) raked in an amount of $2.6b. I can say banks that are Nigerian provided about 80 percent of the fund. Usually, it shouldn't be that way because foreign investors are mainly designed to bring majority in their own equities with regard to the capital mixture, where you locate investors bring at least 60 percent equity. In this situation, nevertheless, the majority of the funds were sourced from your banks. It is debt, which can be creating a little bit of pressure on our monetary system.
We find a scenario the Nigerian banks will be the important, or even the lone, financiers of the acquisition of the power assets. You can find two factors together with the Nigerian banks. One is the high-interest rate. Two is the tenure of these funds. Both of these factors cannot finance the electricity industry. They are able to just act as working capital bonus. What we find today is the Nigerian banks are financed in dollars-dominated periods. Interest rate has gone on the high side. The worth of dollar to naira has doubled over the space of two years. The resultant effect is that the accounts of our native companies aren't doing well in the banks, which suggests the firms' ability will likely be delayed. Also, the capability of the native firms to pay loans will likely be delayed. Finally, the power of the native companies to create additional funds will probably be stalled.
Does it mean the Federal Government was not alert to capacities of the indigenous or the financial status?
The situation is indeed understood by the Government and that there's a problem that is monetary. The Government also recognizes the difficulty was truly created by the inability of the investors that are native to build backing that is acceptable that the electricity industry really needs. The Government and investors under-estimated the sector. By helping the native companies through increase in electricity tariff, but rather than acknowledge that there is a financial issue, government decided to use another strategy. What'll the tariff do? It will only reach one goal: helping the indigenous companies services the loans at consumers' expense. With this, there might be a little opportunity for the banks to raise sufficient capital for growth. Because even the banks may also be into serious trouble but that's neither here nor there. What we're saying is that there are just two issues facing these native businesses, specifically the technical and financial challenges.
Beyond the financial challenges, are you able to provide more insight to the technical challenges the indigenous companies are facing?
On the average, there really are lots of leakages with regard to revenue collection. The capacity to collect revenue is not there at all. For these native companies to collect revenues, they have to deploy technology. Additionally in the area of practical competence, the native companies are lagging far behind. These are the technical challenges that they have. Aside this, there really are lots of people using electricity illegally. Some are exploiting from subterranean armour cables. Many are bypassing the prepaid metres. The earnings that the power distribution companies should generate are not coming due to all these acts of sabotage. How can these be solved? It is just through the use of technology, that may cost lots of money.
Another problem is that charge that is estimated 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 will be a few other way round. The indigenous investors should have provided steady electricity supply first before raising tariff. With this two-year grace as well as the sweetener being estimated billing, which will be to rise by 45 percent, then the cash flow will even increase tremendously. It is simple arithmetic.
The proposition of the National Electricity Regulatory Commission (NERC) on disputed bills cannot work. NERC has proposed that once bills are questioned, consumers must not pay. Instead, they should pay what was paid. Subsequently, the consumer should write a letter and there is a body of people who will look to their complaints. Ikeja Distribution Company Ikeja Electric, has over 450,000 customers. Just how many individuals will they have the ability to adjudicate on issues arising from estimated statements? http://grupopcon.com.br/ Do they have capability? It's possible for you to note that it is not likely to work.
With this particular picture, it appears the business has serious challenges ahead. Can they sail through?
We must recognize that that is a business that needs fiscal muscles. Two things run using the players in the industry. First, the native businesses that bought the legacy assets usually are not understood in the market. What's their antecedent? Prior to purchasing the heritage assets, have they been doing electricity business for 10, 20 or 50 years? These are just entrepreneurs that saw opportunity and believed that they could profit considerably from it. There is absolutely nothing wrong about it. As an entrepreneur, you should know when to take your company to another level, although it is good.
For instance, the folks that started Coca Cola are not the ones running the business now. However, when you do not contemplate just how to take that company to another level and hold to the assets, there's an issue. Second, the challenge we have at present is in the business model. Really, the business model is not in the Electricity Sector Reforms Act. It is the business model of these indigenous businesses. What are the brands of these companies? How much can the brands bring internationally with regards to investors?
For cement, which explains the reason why it is not difficult for Dangote to set up cement factories in different African countries, Dangote is well known for example. The easy reason is that the template is there. Because that's what he is doing for the past 30 years, the man visits every state using the same template as well as precisely the same team. Is it not astonishing the same Dangote is building $15b refinery? But was Dangote not a player in the electricity sector in Nigeria until recently?
So, what should be carried out to redress the problem?
What exactly is emerging is that the Government is trying to spoon feed the companies that are native. All 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 supplied to pay for gas, which has not worked. Another one is coming. In the event the minister is sure of himself, let him sign an indemnity or guarantee Nigeria because we have had enough of talking that if power is just not secure in two years, he'd step down. We now have started counting. There'll be no radical change in two years, despite the tariff increase. Our stake in this issue is the fact that of transparency and sense. Additionally, an effective company should be deployed to players that were initial and the electricity industry with established expertise and capacities in the electricity industry needs to be permitted in. The experts which were in the electricity business for generations needs to be allowed to come in.
An enabling environment should likewise be produced in a sense that Nigerians will begin to see the future. Nigeria's electricity markets cannot be compared to that of Ghana and South Africa. It really is silly to make that type of comparison because our inhabitants are not same. The electricity market is tremendous and brings tremendous profits. But the investors are not there.
A real reappraisal of business model folks must recognize 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 would need back their funds within that interval. The banks are not satisfied to finance electricity sector.
The minister said as the cost is not bankable, no bank would wish to finance the business. But can Fashola tell us which banks he was referring to? The business model of the indigenous companies WOn't work, if he meant Nigerian banks. Fund tenure and the rate of interest is not going to make it work. That which we're suggesting is that Federal Government should urgently set up a finance development bank that is solely towards development endeavors such as this. If our local banks will play any part whatsoever, it must take your community of providing working capital.