Our Reporter
Industry experts have faulted the Central Bank of Nigeria’s (CBN) Framework for Financing of the National Mass Metering Programme (NMMP). They noted that there is a need for an urgent amendment.
In their analysis of the CBN Framework for Financing of National Mass Metering Programme contained in a document obtained by The Nation, an energy analyst, Oluwatosin Owoeye, and energy lawyer, Osawese Esamah, both with a background in capital markets respectively, analyzed relevant clauses of the framework against existing regulations and the realities in the Nigerian Electricity Supply Industry (NESI). Their analyses were meant to provide guidance to the CBN and market participants in the NESI, who may be impacted by the CBN Framework.
Classification of upstream, downstream
To Owoeye and Esamah who faulted the classification of the electricity distribution companies (DisCos) and Local Meter Manufacturers and Meter Assemblers (LMMA), as downstream and upstream operators, stated: “We understand that the classification was adapted from the N250billion CBN Framework on solar financing, which classifies local solar equipment manufacturers as “upstream participants” and solar project developers as “downstream participants.” In our opinion, while the classification of the LMMA as the upstream participant is right, the Meter Asset Providers (MAP), should be the correct downstream participant and not DisCos, based on the extant MAP Regulations.
“However, the contractual relationship between the upstream participants and downstream participants is not defined in the CBN Framework. We propose that the CBN Framework should define the contractual relationship between the upstream participant and downstream participant in the form of a firm meter purchase agreement (or meter off-take agreement) between the LMMA and the MAP.
“Section 9 of the MAP Regulations stipulates, MAPs shall source a minimum of 30 percent of their contracted metering volumes from local meter manufacturing companies in Nigeria. Thus, the contractual relationship between the LMMA and MAP under the CBN Framework as proposed herein will be in consonance with the MAP Regulations if so adopted. There are immense economic benefits to the federal government if the above contractual relationship between the LMMA and MAP is adopted. For example, MAPs are tax-paying entities, thus, the government would earn more tax revenues under this contractual relationship.”
Eligible activities
On eligible activities, the experts stated: “In Clause 4.1 of the CBN Framework, the “CBN facility will support the procurement, installation, and deployment of meters and metering infrastructure by DisCos. In our opinion, this provision is in conflict with the extant MAP Regulations. We observe that the CBN Framework does not refer to the MAP Regulations, which are the extant regulations on metering in the power sector. The MAP Regulations provide that all DisCos shall engage the services of Meter Asset Providers who would be responsible for procurement, installation, and deployment of prepaid meters to electricity customers. It should be noted that all DisCos have entered into long term metering services agreements (MSA), with their respective MAPs to meet their metering requirements.”
Prohibited activities
They stated: “In clause 4.2, the CBN Framework explicitly prohibits the use of the CBN facility to procure fully assembled meters from overseas “except meters imported by Meter Asset Providers (MAP), already in the country as of September 30, 2020.” In our opinion, this provision of the CBN Framework is in conflict with the MAP Regulations, which allows for 70 percent of the meters to be imported from overseas, while 30 percent is to be procured from local meter manufacturers. Nonetheless, we concede that the CBN is entirely within its rights to decide on the use of any intervention provided by the CBN. However, the objective of the NMMP is to fast track the mass metering of electricity customers, close the metering gap. Competent industry sources confirm that the existing capacity for local meter manufacturing and assembly of meter components are not sufficient to close the metering gap within the projected timeframe anticipated by the NMMP.
“Thus, to achieve the objectives of the NMMP and the MAP Regulations, it would require a combination of importation of fully assembled prepaid meters to bridge the deficit in local meter assembly capacity, and massive investments in brownfield and greenfield local meter assembly lines. In this regard, we suggest that the CBN Framework should allow the importation of fully assembled prepaid meters by MAPs within a specified period. The power sector cannot afford to continue to bleed revenues while waiting for one hundred percent local content in the metering implementation.”
Collateral requirement
On collateral requirement, they stated: “The provisions of clause 5.1 of the CBN Framework indicate that the CBN intervention will be a regulated debt obligation to DisCos, which would be repaid from retail electricity tariffs paid by electricity customers. As collateral for providing the loan to DisCos, the CBN intends to take a second line charge overall energy collections by DisCos. It should be noted that the CBN already has the first-line charge over DisCos energy collections under the N213 billion Nigeria Electricity Market Stabilisation Facility (NEMSF). In our view, the provisions of Clause 5.1 are perhaps the most contentious aspects of the CBN Framework and throw up several pertinent issues, which require further clarification by NERC and the CBN.
“Firstly, adding more regulated debt obligations on DisCos’ balance sheets is counter-intuitive. In fact, the DisCos are technically insolvent. DisCos’ balance sheets are already leveraged and severely impaired with over N1.5 trillion unpaid obligations to the NESI and to the CBN arising from tariff shortfalls and under remittance by DisCos (market debt). In addition, several sovereign loans by the Federal Government in the power sector such as the $1.2 billion Siemens power deal and the $1.5 billion World Bank loan to the power sector are envisaged to be put on DisCos’ balance sheets as well and would be paid by electricity customers. Former President Olusegun Obasanjo is consistently accused of spending $16 billion in the power sector with nothing to show for it. Unfortunately, President Muhammadu Buhari may be unwittingly enacting a similar legacy of creating unsustainable debt in the power sector.
“Secondly, the provision of Clause 5.1 of the CBN Framework conflicts with the MAP Regulations which specifically excludes metering as a regulated cost to be recovered by DisCos from electricity tariffs. The core objective of the MAP Regulations inter alia is to provide bankable, off-balance-sheet financing solutions to DisCos to enable them roll-out prepaid meters to electricity customers on a sustainable basis. To achieve this, the MAP Regulations made the efficient cost of metering transparent and excluded from energy tariffs. Due to the bankability provisions of the MAP Regulations, a number of innovative financing solutions are being developed to finance meter roll-outs. As an example, Bloomberg recently reported plans by FBNQuest Merchant Bank and other co-sponsors for a national meter asset finance and management SPV that would issue bonds and other financial securities backed by prepaid meter assets to investors in both the Nigerian and international capital markets. In this regard, the CBN Framework negates the current and long term gains of the MAP Regulation in providing a bankable framework for financing mass meter rollout by DisCos.
“Furthermore, implementing the provisions of Clause 5.1 of the CBN Framework will require the Nigerian Electricity Regulatory Commission (NERC) and DisCos to revise the Multi Year Tariff Order (MYTO) electricity tariffs to now include the true cost of metering. Specifically, Clause 10.4 (iv) of the CBN Framework directs the NERC to “approve the repayment of loans through NESI collections with the requisite seniority as detailed above.” In our opinion, rolling the cost of metering back into the MYTO electricity tariffs is both a policy and regulatory somersault and will be catastrophic to the NESI. Without a doubt, it would lead to further increases in retail electricity tariffs. Customers are already complaining of high electricity tariffs, which necessitated a three-month freeze of the service reflective tariffs (SRT), three weeks after it was introduced. It is doubtful that DisCos would be able to meet scheduled loan repayments to Participating Financial Institutions (PFI) and ultimately the CBN if repayment of the CBN facility is from energy tariffs. Moreover, the CBN Framework would subject all electricity customers in NESI to an interest charge of 9per cent per annum for the next ten years, in addition to the 10per cent per annum interest that they are already paying for the N213 billion NEMSF. This is most unfair and unacceptable to electricity customers, who already have prepaid meters, or are willing to pay for their prepaid meters under the MAP scheme.
“The NESI suffers from high ATC&C losses. Thus, CBN’s decision to take a second charge of overall energy collections will worsen the liquidity situation in the NESI. It would also put the CBN ahead of other market participants in the NESI. The Electric Power Sector Reform Act (EPSRA), did not envisage that the CBN would take first and second charges over the entire revenues of the NESI to the detriment of upstream market participants, particularly to the Transmission Company of Nigeria (TCN), the Nigerian Bulk Electricity Trading Plc (NBET), and Generation Companies (GenCos). Given the dire impact on their revenues, we believe that DisCos and other market participants would make a strong push-back against this provision of the CBN Framework as it conflicts with the existing NERC order on the baseline remittance targets by DisCos to NESI.
“Nonetheless, in the unlikely event that the NERC is aligned with the provisions of the CBN framework, it would necessitate either an amendment or a wholesale repeal of the extant MAP Regulations and the likely termination of the long term metering service agreements (MSA) between MAPs and DisCos. Since the MSA is underpinned by the MAP Regulations, a repeal of the MAP Regulations by the NERC would be both contentious and possibly ultra vires. However, beyond the repeal of the MAP Regulations and adjustments to the MYTO, the unintended consequences of regulatory flip flops by NERC are significant, and would further validate the widely held perception that the NERC is not independent in its regulatory functions.”
Application procedure
According to them, “Clause 6.1 details the application procedure for DisCos to access the CBN facility. DisCos are required to apply for the CBN facility through their Guarantee Bank (GB). In our opinion, the application process is quite cumbersome and needs to be made simpler. Notwithstanding, we do not see DisCos applying for the CBN facility until the regulatory and tariff issues highlighted above are suitably addressed by NERC. In addition, given the parlous state of the power sector and non-performing loans to the power sector, the risk appetite by commercial banks for the power sector is very low. Consequently, many banks may shy away from providing their bank guarantees to DisCos to access the CBN facility.”
Exclusion of MAPs from the CBN Framework
They stated: “The CBN intervention facility is targeted at only DisCos and LMMAs. MAPs are excluded from accessing the facility. However, several LMMA are MAPs, thus, the wholesale exclusion of MAPs from participating in the CBN Framework is anti-competitive and would confer a significant market advantage on these LMMAs who are MAPs. Since the implementation of the MAP scheme in 2019, MAPs have deployed significant investments and resources under their respective long term contracts with DisCos. In our opinion, the exclusion of MAPs from the CBN Framework would be a huge set-back to the successful implementation of the national mass metering programme.
Directives to NERC
Furthermore, they stated: “Clause 10.4 of the CBN Framework gives several directives to the NERC. From a regulatory perspective, the CBN Framework can be deemed a policy directive by the CBN to the NERC on how prepaid meters should be financed by DisCos and also what NERC should allow as regulated debt on DisCos’ balance sheet. In section 33 of the Electric Power Sector Recovery Act (EPSRA) 2005, only the minister of power can issue general policy directives to the NERC. The CBN is not under the minister of power and cannot issue policy directives to the NERC. As a regulatory organization, the CBN is also not superior to the NERC. In general, recent policy announcements by the government on the power sector indicate a deliberate and gradual usurpation of the powers of NERC by policy makers not recognized by the EPSRA. NERC is the apex regulator in the power sector, and needs to act as such.”
Conclusion
However, they noted that “while there is no clarity on the NMMP, the CBN intervention to provide financing for the NMMP is a step in the right direction. In concluding, we affirm CBN’s right to develop financial interventions for specific sectors of the economy wishes to support it. However, the power sector is unique and is regulated by the NERC as the apex independent regulator in the sector. Thus, the CBN Framework for the national mass metering programme (NMMP), should be aligned with extant regulatory orders and regulatory instruments issued by NERC, especially in view of the fact that long term contractual arrangements have been consummated under such regulations. Lastly, the NMMP policy document should be subjected to public scrutiny to ensure it does not turn out to be another failure like past national mass metering programmes.”
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