Obstacles preventing Government take-over of the DisCos
The recent news of the Federal Governments’ (FG) intention to open up the market to allow the entrance of new investors in the power sector is coming at a time when the entire power sector is on a steady decline in its operations. The upcoming review of the performance of Distribution Companies (DisCos) and Generation Companies (GenCos) post-privatization scheduled for December 2019 has industry watchers quite keen on its outcome. The FG has stated its willingness to consider the option of repossessing these companies as the core investors have failed in carrying out the provisions of their Performance Agreements (PA). The question on the lips of most Nigerians is if the Federal Government can indeed take over these companies and allow the entrance of new investors in their stead. In order for this to happen, there is a need to consider the provisions of the Performance Agreement (PA) between the DisCos/GenCos and the Federal Government.
The PA has provided specific clauses for the situations under which the federal government can take-over the operations of a DisCo/GenCo; One of such conditions is when a Force Majeure (FM) event occurs. A Force Majeure event, according to the PA, “shall mean any event or circumstance or combination of events or circumstances beyond the reasonable control of the Party affected by it.” It goes further to describe two types of Force Majeure events: A Natural or Political FM. Also, for a FM to be declared, the event must be “… without fault or negligence of the Affected Party.” In the long run, if the DisCo/GenCo cannot or has not remedied the situation that brought about the said declaration of a Force Majeure, the DisCo would be taken over by the Government so long as the event leading to the declaration was not a fault of the DisCo/GenCo. This situation was the case with Yola DisCo back in 2015, where the Federal Government took over the DisCo/GenCo after the Core Investor declared a Force Majeure due to the rising insecurity in the North East.
It also provides for situations where an event of default on the provisions of the Performance Agreement can occur. In the current situation, the Federal Government has stated that its decision to open up the market to new investors is due to the failure of the DisCo/GenCo to live up to the expectations of privatization. In order to do so, the FG has to prove that the default was as a result of the actions of the DisCos/GenCos and they have failed to remedy it. The PA, however, states that “ no such event shall become a Purchaser Event of Default if it results substantially from (i) an FGN Event of Default, (ii) the occurrence of a Force Majeure Event, or (iii) any combination thereof.” From the foregoing, can the FG categorically prove that the default of the DisCos on the provisions of the PA was not due to a default of the PA by the FG?
Going further, the PA provides for an FGN event of default. An FGN event of default can occur where “the occurrence of any material breach by BPE of any material covenant or agreement in this Agreement that is not remedied within sixty (60) days after notice from the Purchaser giving reasonable details of the breach and demanding remedy thereof was not”
One such breach by the FG is the failure to approve a Cost Reflective Tariff which was one of the Conditions Precedent (CPs) agreed upon by the FGN during the privatization process. One of the minimum performance targets of the DisCo is the reduction of Baseline Aggregate Technical Commercial and Collection (ATC&C) Loss figures. A key component of the Tariff modeling for the DisCos is the ATC&C Loss figures. There have been disputes between the Nigerian Electricity Regulatory Commission (NERC) and the DisCos on the validity of figures submitted from the latter during the Tariff Consultations. The consequence of this disputation is a final Tariff that does not reflect the actual cost of electricity. For the GenCos, one of the minimum performance targets includes an increase in Available Capacity. This has been hindered by poor Gas to Power infrastructure and also a continuous shortfall in invoice payments from the DisCos (a result of the Tariff inadequacy) which has made the running and maintenance of the power plants almost impracticable.
The Performance Agreement goes further to provide for the consequences of such an event of default by the GenCos/DisCos. In the event of a Purchaser default, the FG can exercise the Purchasers default Call Option. If the FG decides to step in and handle the issue, the FG pays the DisCo/Genco investor the sum of $1USD while settling the issue of debt with the Lenders. However, in the case where there is a Seller (FG) event of default, the Purchaser (DisCo/GenCo) can exercise the Seller default Put Option. Exercising the put option means that the FG “shall pay to the Purchaser an amount equal to the Option Equity as at the Option Notice Date multiplied by (1+R)^t where R= twenty percent (20%) and t= 5 years (the "FGN Default Put Option Consideration"). In today’s calculation, this amount is currently to the tune of not less than $5bn. It is also worthy to note that the investors opted to have any disputes arbitrated in London, the current decision of a UK court to grant judgement against the FG in the P&ID case is an indication of how the proposed takeover action by the FG can go.
From the above discussions, particularly as per the PA, it is pertinent to note that the DisCos/GenCos have not caused an event of default due to the very fact that the FG has reneged on the fulfillment of CPs. The consequence of the FG default is the lackluster performance by the DisCos post-privatization which has continued to be below par and has resulted in huge amounts of debt. No matter the approach, this proposed action of the federal government will set Nigeria back by no less than one trillion naira. Is Nigeria truly ready to deal with the consequences of taking over the DisCos/GenCos? Is a takeover the only way to deal with the present underperformance issues?