Privatisation exercise: Irregularities mar banks’ lending to power firms

Egbin03 December 2014, Lagos – Several months after the privatisation exercise in the power sector, a disturbing issue has emerged which raises a number of questions over the roles played by Nigerian banks in the sale of the assets.

In particular, sources in the banking sector, told Sweetcrude that a number of the banks are currently having non performing loans due to the stark reality that majority of the power firms may find it difficult to repay the huge loans borrowed from the banks.

Sweetcrude learnt that, there are concerns over the fact that a number of the loans breached corporate governance codes, while due process was not followed in the granting of the loans.

Specifically, some of the banks, it was discovered, were pressured by their Board of Directors to grant loans to power firms where some of their directors have interests.

These banks’ directors, it was learnt, had stakes in the firms that acquired some of the power assets, a development that raises questions on the banks’ adherence to the codes of corporate governance and if due process was followed in the granting of the loans.

Sources disclosed that some of the loan processes breached some segments of the Nigerian banking rules, while some of the banks, as well as some officials of the regulatory authorities can be said to be culpable of connivance.

In particular, majority of the banks surveyed by Sweetcrude, recorded significant growth in their loans portfolio to power firms in their 2013 financial statement.

Specifically, United Bank for Africa Plc, (UBA) said it advanced over $700 million, about N112 billion, to the power sector in 2013. However, its financial statement shows that its loans to the power and energy sector stood at N67.7 billion, appreciating by 340.8 per cent from a loan of N15.36 billion advanced to the sector in 2012.

On its own part, Fidelity Bank Plc gave out N48.15 billion as loans to power firms in 2013, compared to N6.05 billion in 2012. Of the total amount, Fidelity Bank said it advanced N3.212 billion to Transcorp Ughelli Power Limited.

To partly cushion the effect of the loans to the power sector, Fidelity Bank issued a N47.84 billion bond, stating that the purpose of the loan was to finance foreign currency lending to the power and oil & gas sectors of the economy.

Stanbic IBTC Bank Plc loaned N10.67 billion to the electricity sector, compared to N7.223 billion in 2012, while Zenith Bank Plc gave out N49.7 billion loans to power firms, compared to N4.11 million loans advanced in 2012.

Union Bank Nigeria Plc extended N13.657 billion loans to the power sector, up from nothing in 2012, while Access Bank Plc gave out N13.55 billion as loans to the power and energy sector, up from N1.09 billion in 2012.

Skye Bank Plc, on the other hand, advanced N3.787 billion loans to the sector, compared to N3.168 billion in 2012.

First Bank of Nigeria, on the other hand, participated directly in the privatisation exercise, partnering CMEC/Eurafric Energy Joint Venture, in the acquisition of Sapele Power Plc for about $201 million (N32.16 billion).

Signs that all may not be well with the private sector privatization emerged when Aigboje Aig-Imoukhuede, former Managing Director of Access Bank Plc, warned that a number of banks’ officials will lose their virtue over their involvement in arranging the facility for the investors in the power sector.

Aig-Imoukhuede who expressed concern over the viability of the privatised power sector, said, “Things will get rough for the banks and the power sector; but it will certainly be a profitable sector, and I must state that it will take the virtue of some people.”

He also warned that a number of the banks that financed the acquisition of the privatised assets of the Power Holding Company of Nigeria, PHCN, risk losing their funds. He specifically noted that the banks that will be affected are those that served as equity loans providers.

According to him, the banks failed to take into cognizance, the apparent problems in the power sector, while a number of them chose to ignore the issues that appear to be stifling growth in the sector.

“There are two things that are very critical to the success, growth and development of the power sector; one of them is the issue of gas and the other is transmission,” he said.

Continuing, he added that the fact that issues of gas and transmission did not feature at any point in the privatisation process, helped put the banks in a dangerous situation.

“In my opinion, there is going to be trouble for the banks, because these things were there for these financiers to know, yet it was ignored,” he added.

In view of all these, Sweetcrude discovered that the banks’ bad debts are beginning to rise once again, as majority of the power firms have found it difficult to service their loans owed the banks.

Corroborating this, the Central Bank of Nigeria, CBN, had in its Financial Stability Report for 2013 released in 2014, disclosed that power and energy firms owe banks in Nigeria N193.98 billion, representing 1.93 per cent of the total loans advanced in the period.

According to the CBN, total bank loans and advances to the various sectors of the economy stood at N10.043 trillion, rising by 13.9 per cent from N8.814 trillion recorded at the end of June 2013.

The CBN, however, warned that “The continued dominance of short-term deposits constrained the ability of banks to lend long term loans and especially to the real sector, which typically has a preference for longer loan maturities. Thus, the observed mismatch portends refinancing and re-pricing risks for the system.”

In view of the loans given out by the banks, the CBN stated that Non-Performing Loans, NPL, decreased to 3.23 per cent, compared with 3.65 per cent at end-June 2013, reflecting an improvement in the quality of banks’ assets, remaining within the regulatory threshold of five per cent.

According to the CBN, total NPLs increased by 0.72 per cent to N324.13 billion at end-December 2013, from N321.80 billion at end-June 2013.

Stakeholders are however, divided over the assumption that a number of the banks and by extension, the power firms will run into problems over the issue of financing, especially in the area of funds used in acquiring the assets of the former PHCN assets.

This was in spite of the fact that the CBN launched the N213 billion power intervention funds, which was mainly aimed towards settling debts owed oil and gas companies, for gas supplied to power firms.

According to some of the stakeholders, the fact that nothing was mentioned about the debts owed the banks by the power firms has raised a number of questions about the privatisation exercise, which might negatively affect both the power and banking sectors.

In a presentation made available to Sweetcrude, Alhaji Remi Bello, President, Lagos Chamber of Commerce and Industry, LCCI, disclosed that investors in the power sector are grappling with a lot of issues, many of which are outside their control.

These issues, he said, have heightened the risk of investing in the sector, adding that the risk profile in the Nigerian power sector is clearly different from what obtains in the telecoms sector.

According to him, there are concerns about whether the successor companies did their due diligence before buying over the companies, adding that some of the investors had lamented the state of the assets which they bought and this reduced the level of their knowledge of the investment in the first place.

He said, “There are also funding issues. Clearly the structure of funds in the Nigerian financial system cannot support long term infrastructure projects such as power projects. The tenure of funds are very short, in most cases less than one year.”

Bello further stated that the costs of funds are also very high, generally over 20 per cent, noting that with such rates, it is difficult to fund infrastructure investment.

“There are also issues with legacy debts owed to the gas companies which the succession companies were not able to off-set. It took the intervention of the Federal Government to resolve this challenge,” he noted.

However, in an interview with Sweetcrude, Mr. Patrick Okigbo, Principal Partner, Nextier Limited, warned that the Federal Government should resist the urge to intervene in bailing out any bank that may be at risk of defaulting from their exposure to the power sector.

According to him, the banks should, rather, explore other means of cleaning up their acts, including getting the owners of the power assets to sell-down their positions and invite new capital from other investors.

Continuing, he said, “The risk of bank default, if indeed it materialises, would not be driven solely by the exposure of the banks to the power sector; rather, it would be driven mainly by the effect of the drop in oil revenue.

“Nigeria lost its opportunity to diversify its economic base despite one of the longest periods of oil boom. We are entering a period of penance for our sins. I hope we survive.

“Vandalism continues to be a threat to reliable and cost reflective electricity in Nigeria. Nigeria loses millions every time a gas pipeline is blown up and it takes years for repairs to be completed.

“Furthermore, the fact that market activities are still not driven by market rules and contracts, continue to distort the market. The Regulator has to declare the commencement of the Transitional Electricity Market to address these concerns.”

Speaking in the same vein, Mr. Ike Chioke, Managing Director/Chief Executive Officer, Afrinvest Plc, warned that there is a growing pile of troubling power assets in the banking industry. This, according to him, is in view of the fact that the capacity of the CBN to pursue another bailout in the event of a banking crisis is doubtful.

He said, “If there is a problem in the power sector and they are not able to service these loans, there is essentially going to be a problem in the banking sector. And if there is a problem, the balance sheet of CBN may not be able to accommodate another bailout.”

He further stated that the highly applauded power sector privatisation programme of the Federal Government in 2013, may begin to reveal structural and financial challenges in the near term if not well managed.

It remains to be seen what actions the CBN, the Nigerian Electricity Regulatory Commission,NERC, and other regulatory authorities are taking to correct the anomalies recorded during the privatisation exercise.

These actions, it is believed will help restore sanity to the lending processes in the banking sector, forestall crisis in the power sector and also in the Nigerian financial sector.
*Michael Eboh – Vanguard

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