Proposed electricity subsidy will negatively impact businesses

Yinka Oladele

Barring last minutes change of mind, come January next year, the federal government will stop payment of subsidy on electricity currently put at N30 billion monthly.

The move no doubt, sound as bad news to small and medium scale enterprises (SMEs) in Nigeria, which, according to Pwc, “is the backbone of major economies, as well as important contributors to employment, economic and export growth.

“In South Africa, SMEs account for 91% of businesses, 60% of employment and contribute 52% of total GDP. In Nigeria, SMEs contribute 48% of national GDP, account for 96% of businesses and 84% of employment.

“Despite the significant contribution of SMEs to the Nigerian economy, challenges still persist that hinder the growth and development of the sector”, says PwC

According to the Nigeria Bureau of Statistics, SMEs in Nigeria contributed about 48% of the national GDP in the last five years. With a total number of about 17.4 million, they account for about 50% of industrial jobs and nearly 90% of the manufacturing sector, in terms of number of enterprises.

Ruefully, in spite of the significant gains of small businesses, the announcement by the federal government to exit subsidy regime in power sector totalling N30 billion monthly may be an unsettling drawback to the growth of these enterprises, coming at a time when the government is also tilting towards full deregulation of the downstream sector of the nation’s petroleum industry.

The news of subsidy removal filtered into public domain in July this year, and reaffirmed last week at a function in Lagos.

As from January 2022, the federal government will no longer pay the N30 billion electricity subsidy, meaning that Nigerians will have to pay more to get electricity.

This was disclosed by the Special Adviser to the President on infrastructure, Mr Ahmed Zakari, at a stakeholders engagement meeting organised by the Nigerian Electricity Commission (NERC) in Lagos.

According to him, exiting its intervention in the power sector
will allow the electricity market to run on its own, leaving demand and supply, and market participants to determine prices.

This is coming at a time when the country’s power sector is facing a revenue shortfall due to a tariff regime that is not cost-reflective as data from the Nigerian Bulk Electricity Trading Plc (NBET) showed that the tariff being collected by distribution companies is below 50 per cent of their invoices.

Speaking during the stakeholders’ engagement meeting, Mr Zakari, said: “We must move to a market where a person that buys power, pays for power. A Disco that buys power, pays for that power from the Genco that gives power.”

“It is very simple. It’s called commerce. Having middle structures in a way that promotes a lack of accountability does not work. And this administration is committed to making this a level playing field,” he further said.

Prior to the announcement government and labour unions had gone into extensive discussions on the implementation of the Service-Based Tariff in November 2020, where the NERC had promised improvement in service delivery to Nigerians.

Unfortunately, there are indications that federal government pays for roughly 11 per cent of electricity consumption in the country despite other form of interventions by government in the power sector.

According to Mr Zakari, Nigeria has one of the poorest supplies of electricity despite the power sector contributing 78 per cent to GDP growth for the second quarter of 2021.

According to the government, the subsidy on electricity which now amount to N30 billion is a N20 billion (40%) drop from N50 billion spent in February this year.

Sale Mamman, Minister of Power, said the funds were provided to augment the shortfall by the distribution companies (DisCos) who have failed to pay for the electricity supply sent to them.

He also attributed the decline in the subsidy to a minor increase in the tariff regime, which he said to it’s decreased by almost half, but still constitutes a serious drain on the nation’s economy.

According to a document on the progress and overview of Nigeria’s power sector by the ministry, the reduction (N20 billion) was achieved as a result of improvements in the collection of power tariffs by distribution companies (Discos), which has increased by about 60 percent.

“Tariffs rose by 36 per cent from September 2020. Collections have grown by 60 per cent plus,” the document read.

“Government subsidy has been reduced by N20bn per month. Record collections of N65bn hit in December 2020 cycle (from an average of N39bn).”

The World Bank, in its recent Nigeria development update report, said regressive and opaque subsidies for fuel and electricity create economic distortions and reduce the fiscal space for development spending.

The bank further said reducing both fuel and electricity subsidies are necessary to generate the fiscal space needed to continue supporting the COVID-19 response.

Experts view

However, analyst and stakeholders seems to see the government’s decision from different perspectives.

Speaking with EnergyDay, professor Adeagbo Moritiwon, a development economist said, “the issue of subsidy removal on electriticity is not a bad idea in itself, but every policy decision must not be taken in isolation but within a context. In the case of electriticity, removing the subsidy at this time, and allowing the dictate of demand and supply will lead to unintended consequences. It will kill small businesses, impose further hardship on households, whose incomes have been affected by pandemic and economic meltdown.”

In a chat with this medium, professor Muhammed Ohiare of the department of Economics, Kogi State University said ” when you remove subsidy on electriticity at this time, you are sounding a death kneel of small businesses, because it will impose much drain on the profit of these businesses, such removal can only make sense when the economic situation in the country has improved, and the DISCOS have stepped up their game with quality service delivery.”

Ambrose Omokordion, chief research officer at Investa told EnergyDay that ” it would amount to ill-advice at this period to remove the subsidy, it doesn’t make sense because of the economic situation. It will further worsen the woes of small businesses and households who will be forced to pay more.”
But not everyone that sees the timing as inauspicious, or the proposal as bad.

Some analysts have supported the government’s proposal, as they urged the federal government to stop spending N30 billion monthly on electricity subsidy.

The former executive secretary of the Chartered Institute of Bankers of Nigeria (CIBN), Uju Ogubunka, urged the government to remove the subsidy and check excess tariffs by the operators.

“Removal of electricity subsidy will breed competition and reduce inefficiency in the system. The regulator should be concerned with managing tariffs abuse,” Mr Ogubunka said.

In the same vein, Titus Okurounmu, a former director of Central Bank of Nigeria said the government could remove the subsidy but should not create another monopoly.

He noted that the government should do more in harnessing other sources of energy in the country.

“Government should invest more in other energy sources so as to augment the inadequate electricity grid.

“Having these alternative sources are most times environmentally friendly and will reduce reliance on the existing electricity network,” he said.

Dr Olufemi Omoyele, director of Entrepreneurship at the Redeemers University told EnergyDay that ” government should tread softly because of the social and economic implications of sudden removal, given the poverty in the land. Though, I support the removal but not at this period. You can only do that when the economy improves, and the material conditions of Nigerians are better. Remember there’s pandemic that has affected businesses and incomes of households.”

He further stated that the idea of the Federal Government paying an estimated N30 billion every month as electricity subsidy nothing but a pointer to an inherent dysfunction with the country’s public electricity supply system, given that the sector has been privatised about eight years ago; and that services emanating from it is nothing but a huge deceit of the ordinary Nigerians.

Government’s plan to end subsidy payments to the sector according to him, will probably aggravate the power crisis.

” My advice for government is to remove the subsidy on petrol and allow the one on electriticity to stay for now”, Omoyele said

Achieving efficient generation and distribution of electricity in Nigeria has over the years remained a sore point and a major threat to growth of the economy. Poor electricity supply has serious consequences for the businesses in the country, with several existing companies struggling to maintain profitability and new players shying away from entering the market.

“The government has undertaken several measures, including transferring majority of the power infrastructure from government to private hands, however, it has not managed to improve the situation. Ambitious policies and agreements with multinational energy companies might just be the key to solve Nigeria’s energy problems”, submitted professor Moritiwon in his chat with EnergyDay.

EnergyDay findings revealed that the business of electricity generation and distribution is highly capital intensive. It is nevertheless dismaying that while the services of the distribution companies have been abysmal from the onset, their charges have been progressively prohibitive and starkly incommensurate with the services.

This government and its predecessors have been unwilling to liberalise the power sector for, among others security reason; but it does not appear that respite will come to that sector until it is liberalised such that the states can take charge of their needs in terms of electricity. It is safe to hold, from government’s financial involvement in the sector since 1999, including the $16 billion allegedly spent during the administration of Olusegun Obasanjo, that the sector would likely consume just about any amount government throws into it without producing proportionate result.

Many Nigerians who spoke with EnergyDay said the huge subsidy has not translated to better service delivery on the part of DISCOS.

Adeola Ayayi, a banker told this medium that “So such huge subsidy is expended to subsidise power supply and yet there is no improvement even as millions of hapless electricity consumers are slammed with outrageous estimated electricity bills for power not supplied. I’m ashamed of this country.”

This view is shared by Martin Anyanwu, a clothes dealer,who said “This country is a scam, imagine paying 30 billion monthly subsidy without quality service delivery. Removing subsidy, will cripple our business, as DISCOs will jerk up their rate.”

Nigeria is considered most abundant in natural reserves and is the largest economy in Sub-Saharan Africa. The country has the potential to generate about 11,000-12,000 MW of electric power from existing plants. Despite this, Nigeria is only able to generate about 4,000 MW on most days, which is less than one-third of what is required to provide for its more than 190 million citizens.

According to a 2014 World Bank survey, about 27% of Nigerian businesses identified electricity as the main hurdle in doing business.