Ehis Nzewuji July 5, 2019

Response by The Bureau of Public Enterprises (BPE), to Allegations of Impropriety in The Power Sector Reform and Privatisation Programme, Leveled Against it by Dr. Sam Amadi, Former Chairman Of Nigeria Electricity Regulatory Commission (NERC)

1. One of the key objectives of the power sector reform was to open the sector to public debate and discussions to engender greater participation by citizens in resolving the national electricity challenge.
2. Consequently, it has never been the policy of the Bureau to respond to all criticisms and stifle genuine dissenting or divergent views on the power sector reform.
3. However, as they say in journalism, “facts are sacred while opinion is free”.
4. It is in the light of the above that we wish to respond to the falsehood emanating from Dr. Sam Amadi in the last few weeks using various media platforms. Given that he was the Chairman of NERC between 2010 and 2015, a critical period during the transition from public-owned and managed power sector to private ownership and control, nobody would be blamed for taking his comments seriously as the nation continues to grapple with finding solutions to the challenges facing the power sector.
5. We present below some of the wild allegations made by Dr. Amadi and BPE’s response:

1.“That the privatisation process was designed to fail because the power assets were sold to investors who lacked the financial and technical capacity”.

BPE’s Response: On a general note we wish to state without any fear of contradiction that the Bureau worked closely with NERC in delivering the power sector transaction. The design of the reform framework was never the exclusive work of the Bureau given that the power sector policy, the Act that replaced the old NEPA Act and the eventual sector structure were subjected to stakeholder reviews through intensive workshops. The experiences of other nations and the opinion of critical stakeholders were incorporated into the eventual designs which were well received. It is also pertinent to note that all the transaction documents such as request for proposal (RFP), draft contracts, evaluation criteria etc. were all endorsed by NERC before they were issued to bidders. The evaluation of the technical bids received from bidders was carried out by a panel which included representatives from Nigerian Electricity Regulatory Commission, Federal Ministry of Power, NEXANT (funded by USAID), NIAF (funded by DFID), Presidential Task Force on Power (PTFP), CPCS (Transaction Advisers) and the Bureau. The evaluation was observed by operatives from EFCC, ICPC and DSS. The members of the evaluation team had a combined experience of over 300 years in the relevant subject matter. It therefore beggar’s belief that somebody who was appointed Chairman of NERC with zero years of experience in the power sector should seat in judgment over the outcome of PHCN successor company’s evaluation.

2. That BPE failed to corporatize and commercialise before privatisation.

BPE’s Response: We will start by defining what we understand corporatization to mean: “It is the act of reorganizing the structure of a government-owned entity into legal entity with corporate structure found in publicly-traded companies. These companies tend to have a board, management and shareholders” (Source: Investopedia).Power Holding Company of Nigeria (PHCN) was unbundled in 2005 into 18 successor companies. The successor companies consisted of 11 distribution companies, one transmission company and six generation companies. All the companies were incorporated on July 1, 2006 as public limited liability companies. Assets and liabilities were transferred to them and separate managements were also set up for them. These companies operated as State Owned Enterprises (SOEs) between 2006 and November 1, 2013 when they were handed over to the successful preferred bidders.  What does Dr. Amadi understand corporatization to mean?

3.“We discovered that BPE amended the TOR to reduce the threshold for financial and technical capabilities”

BPE’s Response: The amendments made to the RFP were not done to reduce the threshold for qualification; rather they were done to provide more clarity and transparency to the transaction. The first issue NERC raised was the issue of Technical Service Agreement (TSA). BPE made it clear that TSA was mandatory for all bidding entities where the technical partner is not a shareholder or holds less than 5% of the equity shares. Where a technical partner had taken the major step of also holding 5% or more of the equity shares, the TSA becomes redundant for the purpose of bid evaluation but mandatory for financial close and handover. The second issue raised by NERC was the decision that audited accounts for years 2008, 2009, 2010 were to be used for financial evaluation where 2011 accounts had not been fully audited. The Committee looked at the rationale for these clarifications and found them to be reasonable. For Dr. Amadi to now believe that all the companies were not qualified because 2011 accounts were not used is quite laughable.

4.That the removal of collection losses from tariff did not contribute to the challenges facing the power sector.

BPE’s Response: We make bold to say that the removal of collection loss component of the Aggregate Technical, Commercial and Collection (ATC&C) losses was the single most devastating decision so far taken in the power sector. The bidders had competed on the basis of aggressive reduction  of ATC&C losses within a period of five  years and preferred bidders were those who had scored 75% and above on technical evaluation and had the highest ATC&C loss reduction  offer. The challenge to implementing this structure was that in the Multi-Year Tariff Order that NERC had released ahead of the transaction, it had estimated the ATC&C to average around 25%. BPE informed NERC that based on its own assessment the losses were between 40% and 50%. It  is was then agreed between BPE, NERC and the investors that the transaction would go ahead with NERC’s assumed loss level of 25% but that after the handover to the preferred bidders, the new core investors in the distribution companies would work with NERC and within a maximum of one year come up with the actual loss levels. It was also agreed that once the actual losses were determined MYTO 2 would be adjusted to reflect reality. It was on this understanding that the Bureau proceeded with the transaction.

After the handover to the core investors on November 1, 2013, a NERC supervised study was conducted and the actual losses were determined to be 49%, which vindicated the earlier position of the Bureau. In line with the agreement, NERC in December 2014 released a new MYTO that took effect on February 1^st 2015.

The impact of this new tariff on the revenues of the distribution companies was immediately felt as the distribution companies were able to pay up to 75% of their power invoices which collapsed to 25% when the effect of the collection loss removal hit the market.

When the Bureau was informed of Dr. Amadi’s impending decision to remove collection losses from ATC&C in March 2015, we requested for a meeting with Dr. Amadi and his commissioners to address the issue. In that meeting, the Bureau pointed out three key dangers that Dr. Amadi’s proposal posed to the Nigerian Electricity Supply Industry (NESI.), viz: {i} It would breach the contract signed with core investors when they acquired the successor companies; {ii} It would reduce the revenues in the power sector, thereby worsening the liquidity situation; and {iii) That lenders would lose confidence in NERC and would refuse to fund the investment programme of the distribution companies.

Dr. Amadi responded that he had made up his mind on the issue and that he was going to take the gamble and face the consequences. The Bureau made it clear to him that it would never support such a reckless decision from a regulator. The announcement of the removal of collection losses was immediately followed by a declaration of force majeure by the distribution companies and the power sector is yet to recover from that decision.

The graph below released by Nigeria Bulk Electricity Trading (NBET) Plc shows clearly the tragedy of Dr. Amadi’s action unleashed on the market:

From the graph, it could be seen that the market was growing up to May 2015 period when performance was at its peak. However, following the callous intervention by DR. Amadi, the market started a downward spiral and it has never recovered.

5.That the Aggregate Technical, Commercial and Collection (ATC&C) model that was used in privatizing the distribution companies was wrong

BPE’s Response: The choice of using the reduction of ATC&C losses as one of the major criteria for the selection of preferred bidders in the distribution segment of NESI was well debated and approved by all critical stakeholders. When the Bureau came up with the idea of using the ATC&C model, the first agency it shared the idea with was NERC. NERC gave its nod to the idea, before it was presented to the Presidential Taskforce on Power (PTFP). It was after receiving the endorsement of critical stakeholders that it was presented to the Technical Committee of NCP and finally to NCP for approval.

The concept of ATC&C is very straight forward and easy to comprehend. The major problem with the power sector in Nigeria is that over years only 50% of the power wheeled to distribution segment of NESI is accounted for in financial terms. This is clearly at variance with other developed markets where such losses are below 10%. Between 2008 and 2012 when the first MYTO was revised, it became clear that the losses in the system were not reducing despite the presence of NERC in the market. It was also obvious to everybody that with losses of 50% magnitude NESI would never be commercially viable unless it was urgently addressed. It was against this background that investors were tasked to aggressively reduce the losses and return NESI to commercial viability within five years.

Nigeria is not the first country to use this approach in privatizing its distribution segment. The highly acclaimed New Delhi distribution privatisation which had losses of about 50% just as that of Nigeria adopted similar approach. So the lack of progress in our distribution segment, post privatization cannot be blamed on ATC&C model but on the inability to honour agreements as epitomized by the withdrawal of collection losses 18 months after contracts had been signed with core investors.

6.Way Forward for NESI: Having stated the above, it is important to restate that all hope is not lost in bringing the implementation of the reform back on track. It would be recalled that the Federal Government of Nigeria and the World Bank had in December 2016 set up a joint committee to examine the challenges facing the privatized power sector and proffer solutions. After four months of intensive work, the Committee submitted its report. The report was approved by the Federal Executive Council in March 2017 and the Board of the World Bank in April, 2017. The implementation of the recommendations is on-going, even if slow. However, it is cheering to note that in recent months the implementation has picked up pace. The BPE is of the firm belief that the faithful implementation of the Power Sector Recovery Plan will return the power sector reform back on track which it lost when Dr. Amadi carried out his ill-advised removal of collection losses from the contract with investors.

7.Conclusion: Amadi has forgotten that the same process which was used in selecting the distribution core investors was also used for selecting the core investors in generation segment. Today, out of the eight privatised generation companies, seven are doing very well and have completely transformed their companies to first class power generation companies despite the challenges in the market. It is obvious that the problem with the distribution segment of the market is systemic and requires a collective solution as articulated in the power sector recovery plan.