One of the reasons the government provides electricity subsidies, according to the World Bank, is that numerous federal, state, and local government ministries, departments, and agencies (MDAs) fail to pay their electricity bills.
This information was included in the Nigeria Public Finance Review report by the World Bank.
According to the report, the Nigerian Federal Government has been subsidising electricity prices ever since the industry was privatised. The subsidy, it continued, is one of the factors contributing to the weak performance of the power sector.
The World Bank report also stated that the switch from a large publicly owned to a large privately owned power sector has not resulted in the performance and service quality outcomes that were anticipated. In the report, it was stated:
“As the power sector has been private since 2013, the federal government has financed below-cost electricity prices through a public subsidy. At the root of the problem was the poor performance of the power sector. The power sector’s aggregate technical, commercial, and collection (ATC&C) losses are extremely high, with distribution companies (DisCos) reporting an average loss of 50% in 2020, versus 26% allowed by the Nigerian Electricity Regulatory Commission (NERC)’s tariff policy.
“These high losses are exacerbated by inadequate metering of end-use customers and the failure of many ministries, departments, and agencies (MDAs) of federal, state, and local governments to pay their electricity bills. High losses, coupled with a lack of payment discipline by DISCOs and inadequate contractual enforcement of those payments by the Nigerian Bulk Electricity Trading (NBET) and the NERC, result in low remittances to NBET by the DisCos.”
According to a report from January 2022, the federal government could spend up to N40 billion to pay off unpaid electricity bills for its departments, ministries, and agencies (MDAs).
The lack of cost-reflective tariffs between 2012 and 2021, which resulted in a significant fiscal burden, was blamed for the power sector’s underperformance in the report. Cost-reflective tariffs fully account for all consumers’ share of the cost of power generation, transmission, and sale to the end user.
The report claims that Nigeria’s power sector faces financial sustainability challenges due to lax tariff regulation, significant technical losses, and low collections.
Multi-year tariff orders (MYTO) have always been issued by the Nigerian Electricity Regulatory Commission (NERC), but external factors like political interference and litigation have prevented them from being actively enforced. And as a result, tariff policies have been poorly implemented.
Due to the weakening financial position of power sector companies, particularly DisCos, as a result of the lack of implementation, NERC is unable to enforce the contractual obligations of privately owned generation companies (GenCos) and DisCos.
Electricity subsidies: To cover small tariff shortfalls, the federal government provides electricity subsidies. The federal government intervenes, in accordance with the World Bank report, to make up the tariff shortfall—the difference between allowed and cost-reflective tariffs.
The report emphasises that the tariff shortfall widened between 2015 and 2020. And the reason for this is that while “cost-reflective tariffs” increased due to domestic inflation and currency depreciation, “allowed tariffs” remained unchanged. From the report:
“The cumulative shortfall for 2015–20 was an estimated ₦2,168 billion (roughly $7 billion). In 2019 total federal government support reached ₦524 billion ($1.7 billion), or 0.4 % of GDP— higher than the ₦428 billion budget for health and just 20% less than the ₦650 billion budgeted for education.
“To ensure that GenCos and gas suppliers received sufficient payments to continue generating electricity, the federal government has borrowed from the CBN a total of ₦1,301 billion ($3.6 billion) since 2017 under the Payment Assurance Facility (PAF). Debt service obligations for the CBN PAF have become a significant fiscal burden on the federal government, at ₦198 billion ($550 million) per year from 2020 to 2027 as per the original term sheet.”
Who benefits from subsidies
According to a World Bank report, the richest 40% of the population benefit from 80% of the significant public resources used to cover tariff shortfalls, while the bottom 40% receive only 8% of the benefits, and the poorest 20% receive less than 2%.
The World Bank report claims that the current system of government funding for the power sector is highly regressive and that every Nigerian who receives electricity from a DISCO pays less for it than the cost of providing it.
