Re-capitalisation Of Electricity Distribution Companies

Musaddiq Mustapha

Nigeria has the largest economy in Sub-Saharan Africa (GDP of $405 billion), yet almost 50% of the population have limited or no access to electricity due to constraints in the Power sector. The Grid system in Nigeria is made of Generation, Transmission and Distribution. Generation capacity is put at 7,500MW, Transmission capacity is put at 8,100MW, while Distribution capacity is around 5,500MW.

 

“Power sector is a value chain, if one end is not doing well, it will affect the others.”

 

Upon privatization of the 11 Distribution Companies of the Nigeria Electricity Supply Industry (NESI) in 2013, the Federal Government retained 40 percent of the equity in the companies and divested 60 percent to private investors. Between 2013 to date the Federal Government has supported the power sector with N213bn CBN Power Sector Intervention Fund, N701bn CBN payment Assurance Fund with little or no result. The Distribution Companies attribute this to lack of cost reflective tariff and the government’s refusal to activate its stake in the companies. But the truth is, we sold the distribution companies to investors that lack the capacity to operate and maintain these companies, hence the only viable option left for the Government (Federal Ministry of Power) is to make a policy directive that will lead to the “Recapitalization” of the Distribution Companies. This will enable the Federal government and the DisCos to sell part of their shares to new investors with requisite technical expertise and financial muzzle to efficiently run the DisCos.

 

What is Recapitalization? Recapitalization is a type of corporate restructuring that aims to change a company’s capital structure. Usually, companies perform recapitalization to make their capital structure more stable. Recapitalization essentially involves exchanging one type of financing for another – debt for equity, or equity for debt.

 

The recent simulation exercise carried out by the Transmission Company of Nigeria TCN, to examine the investment requirement of the Distribution companies, was pegged at $4.7billion. So going by this the Federal Government is expected to bring its 40 percent of the $4.7billion which is about $1.7billion, while the private investors are expected to pay up the balance that is proportional to their 60 percent equity in the companies which is $3billion. Once the money is raised it should be used to rehabilitate and upgrade the existing poor distribution network and build new injection substations. The next step is to ensure transparency and accountability, the Nigerian Electricity Regulatory Commission NERC should set up regulatory mechanisms, through open and competitive procurement processes in line with ECOWAS directive that all procurement of Distribution and Transmission Companies should be done competitively. Lastly, Nigerians should expect increase in electricity tariff following the recapitalization process because there is going to be repayment of capital and also payment of interest by the investors.