Barring last-minute change of mind, come January next year, the federal government will stop the payment of subsidy on electricity currently put at N30 billion monthly.
The decision is also to affect all forms of subsidies hitherto extended to operators in the power sector value chain.
The move no doubt sounds 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 the 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.
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 its decreased by almost half, but still constitutes a serious drain on the nation’s economy.
Recall that vice President Yemi Osinbajo, had last July said the government expected the electricity sector to generate its revenue from the power sector market.
The VP noted that government would be investing over N43 billion in the coming years to improve transmission and distribution infrastructure across the country.
The power industry in Nigeria has reportedly been bogged down by claims of revenue shortfall allegedly due to a tariff regime that is “not cost reflective.” Data from the Nigerian Bulk Electricity Trading Plc (NBET) shows that the tariff being collected by DisCos is below 50 per cent of their invoices.
The Association of Nigerian Electricity Distributors (ANED) had consistently lamented that the absence of of a cost reflective remained one of the major setbacks confronting the sector.
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).”