Poor Revenue Collections an impediment to performance of Electricity Distribution Companies In Nigeria

OrijoReporter.com, Poor Revenue Collections an impediment to performance of Electricity Distribution Companies In Nigeria

The Electric Power Sector Reform Act 2005 that led to the unbundling of the vertically integrated National Electric Power Authority (NEPA) and subsequent privatization of the generation and distribution units, was to address the epileptic performance of Electric sector in the country. This reform also established Nigeria Electric Regulatory Commission (NERC) to regulate the operations of the privatized entities.

Two years after the privatization, the country is still battling with same power supply problem. This calls for serious concern on why the situation has not changed even after privatization. Many are quick to question the integrity of the private operators and blame the Distribution Companies for not improving power supply, some blame the generation companies while others blame it on the transmission which is still a government owned entity.

Before one can go deep into the problem, a brief overview of the privatization will give a useful insight to where the country is now in addressing the power supply issue.

First the unbundling of the sector and subsequent privatization as provided in the EPSR Act 2005 was to improve performance and ensure transparency in the activities of the unbundled entities, the generation, transmission and distribution, and to attract participation of the private sector in the provision of power in the country.

The unbundled entities, comprising of 6 generation companies, and 11 distribution companies were privatized while Federal Government retained the Transmission Company as State owned. Government also retained 40% interest in the Distribution Company, while the private sector is holding60%. Also in the privatization of generation companies government retained 20%, leaving 80% to the private sector.

This shareholding structure shows that the private sector is not the sole owners of the power sector as the public assumed. This shareholding structure imposed limitations on the operators of the sector. This is because the private operators who are the core investors are restricted in the utilization of the assets of the companies in raising the needed finances to invest in improving the inherited dilapidated assets.

The EPSR Act also empowered the regulator NERC to regulate the activities of the operators including fixing of cost recovery tariff for the utilities. The regulator by the Act is supposed to be independent protecting the interest of both the public and the private operators. The independence of the regulators is also important such that any sign of compromise can affect the effective operations of the private operator as the electricity market is very sensitive to the regulations.

Regulatory uncertainty will harm any company’s financial well being by lowing credit rating, raising its cost of debt and reducing the incentive for new capital investment.

Privatization normally has two major objectives, it is either output focus that is improving the quality of supply or additional investment in the sector.

In Nigeria, the focus was more on additional investment instead of quality of service; the Request for Proposal emphasized the financial worth of the bidders which resulted in selection of the highest bidders based on how much naira they bidded. Hundreds of billions of naira were realized from the deal.

Unfortunately in the whole transaction , the participants were local companies who through the local commercial banks were able to acquire the utilities, no foreign investor with proven technical experience participated due to lack of confidence in privatization process.

They could not risk their long terms funds in uncertain environment, despite the road shows all over the world. The local companies were left to mobilize short term funds from local banks to finance the acquisition of these assets, overstretching the capacity of the local banks who are now putting pressure on the core investors to service their obligations. This has actually put the investors in a financial trouble between servicing the loans and providing the funds to effectively operate the facilities they acquire to provide quality supply of electricity to the public not to talk of any hope of getting returns yet for its investment.

The problem is particularly worse with the Distribution Companies who are most exposed to the public in the chain of electric sector. The Discos are the ones to be blamed anytime there is power cut, anytime there is low voltage, anytime there is tariff increase, anytime there is problem with power supply like the recent national blackout on the 31st March,2016 between the hours of 1235 and 3pm, the country’s power system crashed to zero MW due to system collapse that was linked to the tripping of a transmission line and poor gas supply.

It is important to note that the Transmission which is government owned is the weakest link in the chain of power supply that need serious investment to enable it evacuate power generated by the Gencos to the Discos effectively.

However,in the course of the privatization, there were series of agreements that were signed between BPE (Bureau of Public Enterprises ) representing government and the operators with specific obligations to the parties involved to guide effective performance of the agreements as Public-private partnership.

Unfortunately the public will not take time to appraise the details of the transactions but only jump to the conclusion that, power has been privatized, there should be improved power supply, not knowing that non -performance on the part of government’s obligations in the partnership has negatively affected the operations of the private operators.

These obligations needed to address the effective operations of the private operators includes the followings,

(1) Gas supply to Generation Companies( Gencos), there was no proper gas supply policy at the time of privatization, this affected effective operations of Gencos.

(2) Lack of cost reflective tariff, for two years after privatization, there was no cost reflective tariff to allow investors to operate optimally; the new tariff issued last February is still been contested by the public as Labor and the National Assembly has issued statement threatening court case.

(3) Lack of subsidy affects revenue collection ; the general perception that power is a public commodity, it should be given free or subsidized as was the practice before privatization. This makes revenue collection a huge problem for the Discos as the public don’t normally want to pay, same practically steal the power making it difficult for Discos to collect up to 25% of energy consumed by the public leaving more than 75% as commercial and collection losses in the country.

All these problems require the collaboration of government and the private investor as partners to address it, not singling only one to be blamed.

In the history of privatization in both developed and developing countries both government and the private operators are seeing to be collaborating seriously in addressing these problems, , especially the losses which affect the delivery of energy to the final consumers.

Reducing technical and non technical losses in the power sectors is a major issue that many countries in the developing world are still battling with.

Briefly, losses in electricity supply refers to the amount of electricity injected into the transmission and distribution grids that are not paid for by users. Total losses have two components, technical and non technical. Technical losses occur naturally and consist mainly of power dissipation in electricity system components such as transmission and distribution lines, transformers and measurement systemswhich should not be more than 10%. Non – technical losses are caused by actions external to the power system and consist primarily of electricity theft, nonpayment by customers, and errors in accounting and records keeping. Technical losses represent an economic loss for the country.

Optimization of technical losses in electricity transmission and distribution grid should be performed from a country perspective, regardless of the institutional organisation of the sector and ownership of operating electricity utilities.

Non-Technical losses represent an avoidable financial loss for the utility in the sense that it should be paid for by the consumers. Non- technical losses have several perverse effects in the society. Customers being billed for accurately measured consumption and regularly paying their bills are subsidizing those users who do not pay for electricity consumption; this include case of electricity theft through an illegal connection to the grid or tempering of a consumption meter, also include unmetered consumption by utility customers who are not accurately metered for a variety of reasons, which in most cases is due to inefficiency of the operators to managed its operations.

Electricity theft is indirectly a subsidy provided to those stealing by customers who regularly pay bills according to their consumption. So also is the case of tariff differences in classification, those paying low tariff are being subsidized by other categories of customers on higher tariff.

The savings from reductions in non – technical losses could be useful in a variety of ways viz:

(a) Reduce tax payer’s subsidies or tariff paid by customers.
(b) Achieve an average tariff allowing recovery of costs reflecting efficient sustainable performance (critical to assure service quality)
(c) Subsidize consumption of selected categories of socially sensitive existing uses, like agriculture or street lights or.
(d) To extend access to electricity supply to currently un-serviced population (in general the poorest and socially unprotected).

Non Technical Losses Situation in Developing Countries

Non – technical losses in the power sector are almost non – existent or negligibly small in developed countries, as most of the population can afford or willing to pay tariffs reflecting costs of supply (even if they are higher than those reflecting optimized performance of the service providers).

In contrast, the situation tends to be significantly different in some developing countries. Many utilities in developing countries succeeded in reducing non – technical losses in a sustainable manner but other still continue to show high losses.

The existence of high non technical losses jeopardize the financial sustainability of the power sector and harms well – behaving electricity consumers, tax payers, socially disadvantaged segments and the country as a whole, elimination of those losses should be a matter of high national priority for every country irrespective of ownership of the utilities.

Example of few selected countries would help guide in addressing the case in Nigeria as well. From Latin America, East Asia, South Asia, Soviet Union, all addressed these problems with well defined policy reforms in the sector that have overtime significantly reduced the non-technical losses that led to improve power supply in their countries.

In sub-Saharan Africa, the World Bank report of 2008 present the utilities in the region as huge in efficiencies. Only 50% of the electricity generated is paid for, due to a combination of low percentage of amounts of electricity injected in distribution networks being billed and low rates of collection of the billed amounts. According to the report, inefficiency is highest in Nigeria where the utility is only capturing 25% of the revenues owed.

The case of Distribution Companies in India on whose model Nigeria’s privatization is based on will be relevant in addressing the non technical losses or revenue collections by the Discos in Nigeria.

In 1998the state government of Andhra Pradesh initiated a comprehensive phased reform program in the power sector to establish a new legal, regulatory, and institutional framework; develop a new industry and market structure, and privatized distribution. It also established an independent regulatory commission responsible for licensing, setting tariffs and promoting efficiency and competition.

The new distribution companies inherited a weak system of accounting for electricity dispatched and consumed and rampant electricity theft that, together with revenue leaks and other factors, undermined their financial performance where only 42% of the electricity flowing into the distribution system was metered and billed. The balance was accounted as transmission and distribution losses and consumption by unmetered consumers .

The first step government did was to acknowledge theft of electricity as a major issue affecting revenue collection of the utilities, and lunch a comprehensive plan of controlling it and improving accountability based on four measures.
(1) Enacting a new law to address electricity theft.
(2) Strengthening enforcement mechanism
(3) Reorganizing the anti corruption function of the utilities.
(4) And re-engineering business processes to improve management control and customer service.

In 2000, the Indian Electricity Act 1910 was amended to make electricity theft serious offence with stringent penalties. A separate law, unprecedented in India provided for mandatory imprisonment and penalties for offenders, allowed constitution of special courts and tribunals for speedy trial and recognized collusion by utility staff as a criminal offense.

The successful implementation of the reform produced impressive results, transmission and distribution losses were reduced from about 38% in1999 – 26% in 2003. In large part through theft control, with the utilities regularizing over 2.25 million unauthorized connections. More importantly the reduction in losses continued in the following year, improving performance of the utilities to the benefit of the public and the country at large.

This also applied to North Delhi Power Limited (NDPL) founded in 2002 through Public-private partnership framework on 51:49 between Tata Power and Government of Delhi. Within six years of inceptions NDPL reduced its total losses from 53% upon takeover in 2002 to 18.5% in 2008 and 15% in 2009. All these were achieved through a combination of government policies on electricity theft and the utilities operational measures like
(1) Deployment of advance metering infrastructure, (AMI)
(2) Installation of medium voltage distribution (MVD) network in theft prone areas, with direct connection of each consumer to the low voltage terminal of the supply transformer.
(3) Energy Audits up to distribution transformers
(4) A public participation in controlling theft through the concept of “Social Audit”.
(5) Collaboration with non-governmental organizations for creating awareness in slums.

Distribution Companies in Nigeria since takeover have been struggling with these problems as private operators, without government support despite the fact of its shareholding in the utilities, even the regulator has not favourably supported the Discos in its regulations. Frequent statements of the past leadership of the commission urging consumers not pay for fixed charge if power outages is recorded for more than 15 days in a month, removal of collection losses from tariff though subsequently restored did not show consistency on the part of the regulator, the recent uproar over the new tariff is another issue of concern for the market, and government continued silence on the matter does not give confidence to the investors on the sustainability of the new tariff.

As it was the case in other countries especially India where Nigeria copied its privatization, government should be actively involved in supporting the utilities in improving collections. Here government can introduce such measures practiced in India to address revenue collections problem faced by the Discos , particularly to recover the huge accumulated bills owed by the MDAs which is over N60 billion, some of these MDAs and security formations that cannot easily be discounted from services are owing huge bills.

The recognition of these debts and electricity theft by government and enacting a Law to try offenders through a tribunal will ensure speedy trial of defaulters including utility staff who collude with the public to perfect this criminal act. This will help the Discos in reducing collection losses.

The Discos have some many cases of meter bypass,vandalization of electric cables in regular courts which usually takes time to prosecute, a special tribunal will speedly prosecute and punish offenders to deter others from perpetrating in the act. This will result inincreased revenue for the Discos who will investin metering to stop estimated billing and equipment to improve power supply even at reduced rate.

In conclusion, for Nigeria to achieve the benefits of privatization of the power sector, both government and the private operators have to collaborate as partners, government will provide enabling environment by coming up with policies that will support the private sector who has already invested in the sector.
The Government support in the revenue collections will reduce that effect of increased tariff on the public in addition to increase revenue that will be used to improve service provision by the private operators.

As the huge debt owed the Discos by MDAs is being paid by the public who are accurately paying their monthly bills, the same for those stealing power their bills are been paid by the public too.

Joseph Tsavsar, Certified PPP specialist
Consultant on Public-Private Partnerships.

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