Tariff reform and power sector funding in Nigeria

Oscarline Onwuemenyi

Power sector development requires coordinated progress on all four legs of the development process, namely political, macro-economic, sector and financial. The failures in reform and private investment mobilization in the nation’s power industry highlight the fact that electric power, as a social good and key input to economic development, is inextricably tied to the larger political, macro-economic, and financial considerations that need to develop in parallel to enhance the potential for reform.

Even as the debate over the appropriate financing methods for the Nigerian power sector still rages, experts have advocated an all-inclusive system that recognizes the different levels of involvement, with particular emphasis on the socio-economic impact of electricity tariff increase on the very poor in society, who have been at the receiving end of an inefficient and unreliable power system.

At a recent workshop on Major Review of the Multi-Year Tariff Order (MYTO) in Abuja, the Chairman of NERC, Dr. Sam Amadi noted that Commission was in the process of consulting with stakeholders over the need or otherwise to increase electricity tariff in the country.

Amadi urged stakeholders to be objective over the review process, noting that, “Public power supply in the country is still a standby in most homes and offices, as it was in 2005 when the reform in the sector began. The state of electricity generation in this country is so terrible that one patriotic duty of every Nigerian is to speak strongly and critically about what needs to be done to review the situation.

“To us at the Commission, there cannot be a better time than now to put issues plaguing the sector back on the front burner. It comes as the Federal government is on the verge of divesting sole ownership and control of successor PHCN companies to allow private equity and management in line with the spirit of the Electric Power Sector reform Act, 2005.”

According to Amadi, the general belief in the electricity sector is that current MYTO prices cannot support investments therein as they are much lower than in most developing countries, noting that market imperfections as low generation capacity, low private sector participation, high and unprecedented operating costs and overheads still abound in the industry.

He added that, “As daunting as these challenges seem, we cannot give in to these frustrations if we must succeed. We must confront the pricing challenge while taking into consideration the prevailing economic situation of our country folk. For the avoidance of doubt, there is no guarantee whether the tariff will go up or down. It is the outcome of this consultation that will determine where the electricity tariff goes.”

Amadi noted that all over the world, prices have played a dual role in achieving efficiencies in the distribution of goods and services to consumers and in driving private investment into the economy. “Therefore, if we must achieve the goal of giving every citizen access to stable, reliable and fairly-priced electric power, a reliable and sustainable framework must be put in place to ensure the robust interaction of market forces with social policy to attain equilibrium. This we can do by establishing a pricing regime that will sustain massive private sector investment and guarantee a positive return on investment, while also being fair to underprivileged consumers,” Amadi stated.

The NERC boss observed that prior to the introduction of MYTO, the industry was characterized by lack of a transparent price determination process and abysmally low tariffs, adding that the PHCN-fixed government-determined tariffs mostly based on the political whims and considerations as opposed to the economic principle of full cost recovery. “This promoted inefficient pricing of electricity and constrained the ability of government itself to recoup costs of investment. This ultimately undermined the growth potentials of the sector because it totally distorted the economics of the electricity and deferred private sector participation until now,” he stated.

Amadi pointed out that despite the attributes of MYTO, “the market is yet to become robust. The market has failed to achieve optimum efficiency and milestones as envisaged by the Commission. The much needed private sector investment especially in the distribution sector has not materialized.”

The source and terms of funding of electricity projects will eventually reflect as tariffs and user fees to be paid by electricity consumers. Plans are underway by government, through the instrument of the NERC, to increase the electricity tariff.

According to NERC, the Multi-Year Tariff Order (MYTO) sanctions this increase. The MYTO has an inbuilt methodology for a cost pass through scheme that ensures that existing subsidies are removed, consumers eventually pay the market price of electricity which will in turn lead to full cost recovery and profits for operators in generation, transmission and distribution. The idea is to remove barriers that impede private sector investment in the power sector and to reflect actual market prices for electricity consumed.

The Federal Government has made available the sum of N177 billion for subsidies under the MYTO to ensure an orderly transition from subsidy to market determined prices of electricity. Out of this provision, a total of N43.9 billion has been released for onward disbursement to beneficiaries.

However, the proposed increases are in violation of the Power Holding Company of Nigeria (PHCN) Service Charter. Though one of government’s obligations in the Service Charter is the approval of an economic tariff structure required for PHCN’s sustainability, this is not automatic and is to be done on the fulfillment by PHCN of certain conditions. One of the conditions is PHCN’s obligation to its customers. PHCN is to drastically reduce the level of losses (technical and non-technical) and raise collection efficiencies to world benchmark levels as a pre-requisite for putting cost effective tariffs for electricity in place. PHCN has not attained the pre-requisites and conditions precedent for such a hike. Furthermore, electricity output is deteriorating and consumers are getting less service for the current tariffs.

Indeed, labour and civil society groups have come out strongly against this upward reviewof tariffs arguing that increase in price must be preceded by improvements in service delivery considering that it makes no sense to increase the price of a service that is not available.

Beyond the disputations, civil society and other pressure groups believe that in accordance with the established tradition in the pricing of hitherto government provided services that electricity tariffs will eventually go up.

What is required, they say, is the establishment of a lifeline tariff, a subsidized tariff for the poor, through a threshold agreed to by stakeholders where the first 1-100 kilowatts of electricity (or any agreed threshold) consumed on a monthly basis by persons earning below a fixed sum will attract lower tariffs and after this threshold, the normal commercial rate applies. The subsidy, they stress, will come from a fund appropriated by the legislature or raised through government regulations.

According to Mr. Eze Onyekpere, Lead Director at Centre for Social Justice, a civil society group, for tariff reforms to work, the cultivation of community support will be necessary. He points out that it will also be necessary to link tariff increases to better performance adding that expanding electricity access to rural settings should attract other financing implications.

He said, “For financing of power sector reforms to achieve its objectives, the initial strategies for reform have to be the product of wide ranging societal consensus which can then attract the support of government, the communities and investors. Imposed reform options can only succeed by ensuring structural violence on the society and its financing will be vulnerable to a number of social and political risks.”

Oyekpere notes that five years after the enactment of the Electric Power Reform Act, the government is yet to devise a financing mechanism and framework for the funding of the electricity industry. “In terms of domestic financing of power sector reforms, the establishment of pension funds which has accumulated over trillions of naira and the revitalization of the insurance industry through increased capital base, consolidation and enhanced corporate governance will lead to effective national mechanism for pooling long term funds that can be channeled to the long term gestation power project.”

In a country like Nigeria, the challenge of financing should respond to the need for full coverage of the entire population, development of indigenous capacity in the sector, full cost recovery while subsidizing vulnerable groups, and meeting sustainable development concerns. Private sector participation and investments should not be recognized as an end in itself but as a means to an end, to achieving an efficient power system and therefore economic and social development.