Bank loans

Concern over continued rise in bank lending to power sector

According to a report based on recent data from the Central Bank of Nigeria, power generation and distribution companies owed Nigerian banks N836.09 billion in June 2022. While power generation companies and independent power producers owed banks 562.19 billion naira, electricity transmission and distribution companies were indebted to the tune of 273.89 billion naira.

Last month, it was reported that the federal government, alongside Fidelity Bank and AMCON, was finalizing the process of repossessing five electricity distribution companies (Discos) on debts owed to Fidelity Bank. United Bank for Africa Plc took control of the majority stake in Abuja Electricity Distribution Company (AEDC) in December 2021.

Several banks provided loans to the electricity sector during the privatization of the electricity sector in 2013. These loans included large sums lent to purchase electricity generation and distribution assets. In 2016, UBA confirmed its exposure to Ughelli Power Station, Ikeja Distribution Company and Abuja Distribution Company.

Fidelity Bank confirmed exposure to Ikeja Disco, Benin Disco, Kano disco, Ughelli Power Station and Egbin Power Station while Zenith Bank confirmed exposure to Ikeja Disco, Eko Disco, Geregu Power Station, Shiroro Hydro and Egbin Power Station. If electricity sector loans become impaired, there will be an increase in the cost of risk for these banks. As of FY21, power and energy accounted for 9.0% of UBA’s gross loan portfolio of 2.8 trillion naira, 1.9% of Zenith’s gross loan portfolio of 3, 5 trillion naira and 8.6% of Fidelity’s gross loan portfolio of 1.7 trillion naira.

Since the conclusion of the electricity sector privatization process in 2013, Discos have remained the weakest link in the electricity value chain, as they face enormous operational challenges. Most evident is the continuing problem of the lack of cost-reflective tariffs, a condition which has hampered their ability to meet their financial obligations to the Nigeria Bulk Electricity Trading Company (NBET), leading NBET to default on its contractual obligation to the production company. Companies (Gencos).

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The overall impact is that the electricity sector has continuously suffered from a shortage of liquidity, forcing the government to inject funds to avoid a total collapse. Despite a series of government interventions, problems in the electricity sector prevail.

While we recognize that the challenges in the country’s power sector span the entire value chain, we believe the distribution companies are struggling the most. In 2019, there were reports of government plans to take over 10 electricity distribution companies as one of the options to rescue the country’s ailing electricity industry. It was supposed to cost $2.4 billion. The main investors paid more than US$1.3 billion for 60% of the shares of each of the 11 Discos. We believe the advent of covid-19 and accompanying fiscal challenges have stalled plans.

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