December 10, 2021/CSL Research
Based on news reports, the United Bank for Africa Plc has taken over the majority stake in the Abuja Electricity Distribution Company (AEDC). The Minister of Power, Abubakar Aliyu, announced that the Federal Government supports the decision. According to Abubakar Aliyu, the Deposit Money Bank had to take over the power firm due to the inability of the AEDC’s major investor (Kann Consortium) to effectively service the loans obtained from UBA when it acquired the Disco in 2013. UBA was the mandated lead arranger, underwriting $122m for Kann Consortium’s acquisition of the AEDC. The AEDC has recently been facing significant operational challenges, in which the situation has currently deteriorated due to a lack of access to intervention finances, leading to the inability to pay staff and service disruptions.
Several banks made loans to the power sector during the power sector privatization in 2013. If power sector loans become impaired, this leads to an increase in cost of risk for these banks. These loans include significant sums lent to purchase power generation and distribution assets. UBA had in 2016 confirmed exposure to Ughelli Power Plant, Ikeja distribution company and Abuja distribution company. As of H1 2021, UBA reported 9% of its gross loans to the power and energy sector, which comes roughly to c.N245.4bn.
Since the conclusion of the privatization process that took place in 2013, Discos have remained the weakest link in the electricity value chain, as they have been grappling with enormous operational challenges. The most obvious has been the perennial issue of the absence of cost-reflective tariffs, a condition that has hindered their ability in fulfilling their financial obligations to the Nigeria Bulk Electricity Trading (NBET) company, leading NBET to default in its contractual obligation to the Generating Companies (Gencos). The overall impact is that the power sector has continually suffered a cash crunch, forcing the government to inject funds to avert a total collapse. Despite a series of government interventions, the problems in the power sector prevail.
Although we acknowledge that the challenges in the nation’s power sector run across the entire value chain, we believe the distribution companies are the most troubled. In 2019, there were reports of plans by the government to repossess 10 electricity distribution firms as one of the options to rescue the nation’s troubled electricity industry. This was expected to cost US$2.4bn. The core investors paid over US$1.3bn for 60% equity in each of the 11 Discos. We believe the advent of covid-19 and the fiscal challenges that came with it stalled such plans.
