One of the justifications for electricity subsidies provided by the government, as stated by the World Bank, is the failure of numerous federal, state, and local government ministries, departments, and agencies (MDAs) to settle their electricity bills.
This detail was included in the Nigeria Public Finance Review report published by the World Bank.
As outlined in the report, the Nigerian Federal Government has been funding electricity costs ever since the sector was privatised. The report further indicated that this subsidy is among the elements leading to the underwhelming performance of the power industry.
The World Bank report also highlighted that the transition from a predominantly publicly owned to a predominantly privately owned power sector has not yielded the expected service quality and performance outcomes. It noted in the report:
“Since the power sector has been privately managed since 2013, the federal government has subsidised electricity prices below actual costs. The underlying issue was the unsatisfactory performance of the power sector. Aggregate technical, commercial, and collection (ATC&C) losses in the power sector are alarmingly high, with distribution companies (DisCos) reporting an average loss of 50% in 2020, compared to 26% permitted by the Nigerian Electricity Regulatory Commission (NERC)’s tariff policy.
“These substantial losses are aggravated by insufficient metering of end-users and the inability of many federal, state, and local government ministries, departments, and agencies (MDAs) to pay their electricity bills. High losses, combined with a lack of payment discipline among DISCOs and inadequate enforcement of those payments by the Nigerian Bulk Electricity Trading (NBET) and NERC, lead to low remittances to NBET from the DisCos.”
A report from January 2022 indicated that the federal government could allocate up to N40 billion to settle unpaid electricity bills for its ministries, departments, and agencies (MDAs).
The absence of cost-reflective tariffs from 2012 to 2021, which resulted in a considerable fiscal burden, was cited as a reason for the power sector’s subpar performance in the report. Cost-reflective tariffs comprehensively cover all consumers’ proportion of the costs associated with power generation, transmission, and sale to end-users.
The report asserts that Nigeria’s power sector is grappling with financial sustainability issues due to lenient tariff regulation, considerable technical losses, and inadequate collections.
Multi-year tariff orders (MYTO) have consistently been issued by the Nigerian Electricity Regulatory Commission (NERC), but external factors such as political interference and legal disputes have hindered their active enforcement. Consequently, tariff policies have been poorly executed.
Due to the declining financial condition of power sector companies, notably DisCos, stemming from the lack of enforcement, NERC is unable to uphold the contractual commitments of privately owned generation companies (GenCos) and DisCos.
Electricity subsidies: The federal government offers electricity subsidies to fill minor tariff gaps. In accordance with the World Bank report, the federal government intervenes to bridge the tariff gap—the disparity between permissible and cost-reflective tariffs.
The report underscores that the tariff gap expanded between 2015 and 2020. The reason for this is that while “cost-reflective tariffs” increased due to domestic inflation and currency devaluation, “allowed tariffs” remained static. From the report:
“The cumulative shortfall for 2015–20 was an estimated ₦2,168 billion (approximately $7 billion). In 2019, total federal government assistance reached ₦524 billion ($1.7 billion), or 0.4% of GDP— exceeding the ₦428 billion allocation for health and just 20% less than the ₦650 billion allocated for education.
“To ensure that GenCos and gas suppliers received adequate payments to maintain electricity generation, the federal government has borrowed a total of ₦1,301 billion ($3.6 billion) from the CBN since 2017 under the Payment Assurance Facility (PAF). Debt obligations for the CBN PAF have become a significant fiscal strain on the federal government, amounting to ₦198 billion ($550 million) annually from 2020 to 2027, according to the original term sheet.”
Who benefits from subsidies
According to a World Bank report, the wealthiest 40% of the population benefit from 80% of the substantial public resources allocated to cover tariff shortfalls, while the lowest 40% receive merely 8% of the advantages, and the poorest 20% obtain less than 2%.
The World Bank report asserts that the current framework of government financing in the power sector is deeply regressive and that every Nigerian receiving electricity from a DISCO pays less than the actual cost of providing that electricity.
