N1.72trn after, Nigeria bids farewell to electricity subsidy

Nigeria is set to quit the expensive habit of subsidising electricity consumption for its people which has cost the country a staggering N1.72 trillion in five years, BusinessDay has learnt.

In 2020 alone, the Federal Government is committing N380bn and the three months delay in the implementation of the service-reflective tariff for the electricity sector means that amount may not fully cover the exposure for this year.

A major part of this N1.72trn has come via central bank (CBN) support for the power sector part of which the Federal Government will now be repaying with the $750m credit coming from the World Bank at the bearable interest rate of 3 percent and with a 20-year tenor.

Nigeria’s apex bank financed the N701 billion payment guarantee to power generation companies (GenCos) in 2017 and the N600 billion NBET payment assurance facility expansion loan of 2019. In 2015, the CBN provided N213 billion for Nigeria Electricity Market Stabilisation Facility (NEMSF). The rest of the subsidy has come from government coffers but, according to one senior government official, only N60bn will be voted for subsidy next year and this is meant only for supporting supply to Nigeria’s rural poor.

Data available to government suggest that a significant part of the N1.72trn, 60 percent to be precise, has actually gone to subsidising well-endowed industrial consumers as well as the rich and mighty who, by reason of living in wealthy neighbourhoods in major cities such as Maitama in Abuja and Ikoyi and Victoria Island in Lagos, tend to have more power supply than others.

“There is something basically wrong with such a high proportion of the subsidy outlay going to the rich and now that the government no longer has the resources to fund this subsidy, it is time for those who get power the most to pay a fair tariff,” said the government official who would rather not be named.

This is a reference to the latest attempt by Nigeria to enthrone a service-reflective tariff regime which will kick off on July 1, under an arrangement whereby electricity consumers will face tariff increases largely determined by how many hours of power supply they get daily.

Whereas Nigeria remains beset by dilapidated physical infrastructure in its electricity sector, the illiquidity of the market has long been identified as the greatest obstacle.

“The erosion of capital in the power sector due to the absence of a credible market and poor tariffs are some of its biggest challenges,” said Eyo Ekpo, CEO of Excerdite Consulting Limited, at the BusinessDay digital dialogue on June 17.

The government is hoping that the new tariff regime will address this illiquidity problem by ensuring that the DisCos remit up to 90 percent of their monthly commitment to the market so the bulk trader, the Nigerian Bulk Electricity Trading (NBET) company, will then be in a position to pay GenCos and their gas suppliers.

“We are strongly of the view that the so-called gas to power problem is more of a question of lack of guarantee of payment. If the market can guarantee that gas suppliers will get their invoice paid as and when due, the suppliers will send out the gas even at today’s prices,” said the senior government official earlier quoted.

He said this view is supported by facts suggesting that while the government-owned power plants at Olorunshogo and Papalanto never get adequate gas supply, large private consumers along the same axes get gas supplies for 90 percent of their need and the difference is just because one pays for the gas it gets and the other does not.

Analysts have long said this pattern of bailouts poses system risk to the economy because it excludes other critical sectors where funds can be better deployed to achieve measurable impact.

“Giving out these bailouts without evaluating the impact they are having is like pouring water into a bottomless pit,” Chinwendu Enechi, senior manager, oil, gas and power at Anderson Tax, told BusinessDay.

While these bailouts have often been described as loans, there is no clear sight to repayment by these cash-strapped power companies with current market shortfalls and huge debts. The 11 DisCos cumulatively recorded over N787 billion in retained earnings last year.

Now the government is boxed to a corner, staring down at a fiscal crisis on account of declining oil prices and the coronavirus pandemic which has blunted the global economy. It has no option but to stop playing charity.

The International Monetary Fund (IMF) on Wednesday said the Nigerian economy will contract by 5.4 percent in 2020. The new projection, the IMF said, is lower than the 3.4 percent negative growth it had estimated for the country in April.