*First published in June 2016
by Odion Omonfoman
Current Challenges in the Power Sector
More than two years after the conclusion of the power sector privatisation process, the sector seems to have gotten much worse. Generation is at an abysmal low level; system collapses are now more frequent, and the much-touted investments and efficiency in the power sector are yet to materialise. Even worse, the sector is faced with huge liabilities that require urgent government intervention to avert a financial collapse of the sector. Under the CBN-Nigeria Electricity Market Stabilisation Facility (CBN-NEMSF), the CBN has injected over $1billion (N197/$) just to cover liabilities in the power sector from November 2013 to December 2014, as well as legacy liabilities to the gas sector. The CBN is looking at an additional injection of over $600 million to cover further liabilities from January 2015 to February 2016. The CBN-NEMSF financing to the power sector is at an interest rate of 10 percent per annum and will cost electricity consumers over N124 billion in interest payments alone, over the next 10 years. In addition, the Nigerian Bulk Electricity Trader (NBET) seeks to raise a minimum of $1.5 billion debt financing in long-term bonds to finance future liabilities in the power sector.
Without any significant improvement in power supply in the near horizon, electricity customers have to pay back these huge loans that have already been factored into their electricity tariffs!
The irony of the privatisation exercise is that the power sector has received far more funding from government post-privatisation than when the power sector was wholly owned and controlled by the government. It is a big irony not lost on members of the House of Representatives, who are opposed to further government bailout of the power sector.
To be fair to the Buhari government, it is worth stating that prior to February 2016, power generation had peaked to a new level of 5,070MW never before attained. The unexpected resurgence of militancy resulting in large-scale sabotage of oil and gas facilities in the Ijaw areas of the Niger Delta is largely responsible for the low generation levels experienced from February 2016 till date. Clearly the issue of militancy and pipeline sabotage may not be addressed any time soon except the militant groups responsible for the bombings toe the path of peace and halt further sabotage to oil and gas facilities in the Niger Delta.
On the other hand, efforts to add the much needed generation capacity have been constrained by the poor financial condition of the DISCOs to service such investments. DISCOs are faced with huge challenges, which are clearly visible in their operations and service delivery. Some of these challenges include a lack of sufficient energy supply from grid, high technical and non-technical losses, obsolete networks, lack of maintenance of network equipment, poorly trained manpower, poor customer data, low metre penetration, health, safety and environmental issues and a near absence of investments due to poor revenues, inadequate tariffs, huge liabilities, particularly from MDAs and external funding constraints.
It is important to state that these challenges were precisely the reason why the privatisation of the power sector was done in the first place. It was believed that the privatisation of DISCOs would solve these challenges. Two years after, DISCOs are yet to deliver the supposed gains/benefits of the privatisation. Notwithstanding, we must emphatically state that this is not a rush to judgment about the power sector privatisation. The privatisation process was legally carried out, even though the outcomes have been disappointing so far.
DISCOs need to do more to improve their operational efficiencies in order to improve their revenue profile. Indeed, beyond the inherited challenges enumerated above, DISCOs are faced with self-inflicted problems as well. A few of these include the rapid reduction and downsizing of experienced workforce, such that the remaining workforce is insufficient and relatively unskilled. Other self-inflicted challenges were the reluctance to commence their metering programmes early enough and perhaps, more difficult to understand, their inability to properly enumerate their customers so far within the first two years of operations.
Geographical Coverage Areas of DISCOs
A factor not usually considered in the poor service delivery of DISCOs is their geographical coverage areas. There were two schools of thought at the onset of the unbundling and privatisation of PHCN Successor Distribution Companies. One school believed that DISCOs should be unbundled according to geographical states. The other school of thought preferred their unbundling in line with existing PHCN regional centres. In the end, we’ve ended up with privatised DISCOs whose geographical coverage areas are quite extensive for efficient management. All DISCOs, with the exception of Eko and Ikeja DISCOs, cover a minimum of four states. Lagos State has the unique advantage of having two DISCOs. Enugu DISCO operations cover the five states of the South-East.
In our view, the current geographical coverage of DISCOs is unsustainable to allow for efficient operations and customer service delivery. Had the companies been unbundled along geographical state coverage i.e. one DISCO per state, we would have had at least 36 DISCOs, with the resources of each DISCOs serving a state dedicatedly as opposed to being spread too thinly across four states to provide efficient customer services. We also would have had the opportunity of individual state governments to actually partner with the DISCOs to improve electricity access to its people. For instance, the current structure of DISCOs hinders a state like Akwa Ibom State from partnering with Port Harcourt DISCO in providing electricity to rural communities in the State.
In addition, while not readily admitted, business districts of DISCOs that are located outside of the city or state wherein their headquarters are located, struggle to receive funding and materials to efficiently carry out their operations. They often have to escalate and wait for decisions and even minor issues to be resolved at headquarter levels.
The Concept of Electricity Distribution Franchise
Electricity Distribution Franchise is an emerging PPP model pioneered in the Indian electricity distribution sector. Under the electricity distribution franchisee arrangement, specific functions for a demarcated area within the total licensed area of distribution is franchised out by the distribution utility to a private sector entity, while the Distribution Company retains the ownership of assets.
The appointed Distribution Franchisee provides certain services to consumers in the service area on behalf of a Distribution Company, including the corrective and preventive maintenance of network, breakdown rectification and other routine operation and maintenance of the distribution system, attending complaints, metre reading and bills distribution, as well as attending to the commercial complaints of the consumers within the service area as set out by the main agency. The Distribution Franchisee is responsible for the collection of money in the service area and commits to reduce the collection and distribution losses as per terms and conditions of franchise agreement between both parties.
Initially, such an arrangement was restricted to the outsourcing of basic functions such as billing, collection and repair and maintenance (R&M) of transformers. Over time, it evolved into incentive-based arrangements for the private sector to invest in the distribution network and be responsible for all functions after receiving energy from the utility right up to collection of revenues from consumers.
In India, Distribution Franchise is a middle ground between government ownership and full privatisation of electricity distribution networks (please see “The Bhiwandi Electricity Distribution Franchisee Model: A Resolute Step in Distribution Reforms”, IDFC Policy Group Quarterly, 2009).
How to Structure a Distribution Franchising Opportunity
The distribution-franchise model was first tried in December 2006, when Maharashtra State Electricity Distribution Company Ltd (MSEDCL) gave Torrent Power, a private entity, the rights for the Bhiwandi circle. Bhiwandi circle is a textile hub, where 60 percent of the demand comes from the textile factories and has a customer base of about 200,000, spread over 721 square kms.
The Maharashtra example provides a template for franchising DISCO operations in Nigeria. We expect any franchising structure would be based on service improvement, aggregate loss reduction, customer complaints satisfaction and improved revenue collection services. It cannot and must not only be about revenue collection alone, which seems to be the focus of DISCO operators.
The advantages of well-structured DISCO franchise operations are numerous: first, it improves the operational efficiency of DISCOs. Save for major faults at certain voltage levels (possibly at 33kV), customer complaints are quickly attended to and resolved as the franchisee is on ground and remuneration is incentive based. Service improvement and customer satisfaction, in our view, should be the primary driver of any DISCO franchisee structure. Resolving customer complaints in a timely manner actually increases DISCO revenues.
Also, franchisees can take upon themselves to secure operational/working capital to finance their operations in their areas of operations. Lenders are able to better assess their operations and provide working capital to the DISCO franchisee being that the cash flow from the franchisee area of operation may be ring-fenced. At the moment, most DISCO are unable to secure significant working capital to finance their operations. DISCO have very few operation field vehicles, which are insufficient to service even one business unit.
Lastly, franchisees are better able to carry customer enumeration exercises, as well as metering services, on behalf of DISCOs. Proper customer enumeration and metering are key success factors in DISCO operations. In addition, franchisees are able to address the issue of electricity theft via metre bypasses or unauthorised connections within their areas of operations without deploying much capital in doing so.
The concept of franchise model in electricity distribution was introduced to reduce the financial losses incurred by Indian state utilities due to huge Aggregate Technical & Commercial (AT&C) losses. The input and investment based franchise model is the most prominent franchise model for distribution of electricity in India.
The Distribution Franchise model has been implemented in various Indian cities for supplying electricity to the consumers, and it was able to bring down the AT&C losses by more than 20 percent during its period of operation. Over the years, the government of India has continuously been voicing the intentions of implementing distribution franchise model in 200 cities based on the success of distribution franchisees in the cities of Maharashtra, Uttar Pradesh and Odisha. In Varanasi district, AT&C losses were over 30 percent in 2014, resulting in inadequate power supply, thereby calling for the implementation of a distribution franchise model in the district.
According to TechSci Research report “Varanasi Power Distribution Franchise Model, 2015”, Varanasi district faced huge distribution losses of over 20 percent in 2014, which led to the financial distress of the Varanasi Utility Company. The losses in Varanasi district occur due to electricity theft, low metering efficiency, improper metre reading, faulty metres, inefficient billing and low collection efficiency. Under the Distribution Franchise model, the franchisee is responsible for the supply of power, metering, billing and the collection of revenues, as well as for up gradation and expansion of the distribution infrastructure.
Currently there are several prominent Indian companies that are operating as power distribution franchisees in India such as Torrent Power, SPML Infra, Essel Utilities, Feedback Energy Distribution Company and CESC Limited.
Franchising DISCO Operations in Nigeria
To address the service delivery challenges currently facing DISCOs, we suggest NERC and the DISCOs look at the Distribution Franchise model and the possibility of franchising specific areas of their network geographical coverage areas to third party DISCO Franchisees. DISCO franchising operations, if well structured, should allow third party operators provide revenue collection and protection services, fault clearance, network operations and maintenance services, metre reading and inspection services and customer services to electricity customers on behalf of the DISCOs.
At the moment, a number of DISCOs seem to be operating some form of franchising or rather outsourcing in the area of revenue collection, whereby revenue collection services have been outsourced to third-party revenue collectors. Beyond outsourcing revenue collections, DISCOs need to start looking at broader franchising opportunities in rural areas and in areas with high losses.
DISCO Franchisees can be the state or local government, private third party utility companies, estate associations and even community unions with the financial and technical means. However, DISCO Franchisees must emerge from a competitive bidding process with clearly defined bid parameters, operational outputs and standard operating procedures during the contract period.
Odion Omonfoman is an energy consultant and the CEO of New Hampshire Capital Ltd. He can be reached on email@example.com.
Views expressed by guest writers are not necessarily the views of Sawubona Advisory Services Limited.