World Bank Report: Nigeria Records $1.4bn Power Tariff Deficits in Two Years

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By Chineme Okafor in Abuja

A report by the World Bank has disclosed that the financial deficit that Nigeria’s electricity market has recorded between 2015 and 2016 when the country’s electricity regulator – the Nigerian Electricity Regulatory Commission (NERC) failed to allow the market to charge cost-reflective tariff was $1.4 billion.

It also stated that on the average, the country’s electricity market recorded $1 billion annually in financial deficit for operating with tariffs that are not reflective of market realities.

Obtained on Sunday in Abuja by THISDAY from the secretariat of the Power Sector Recovery Programme (PSRP) which the World Bank is running with the federal government to revive the country’s electricity market, the draft report also noted that the government has committed to provide financial subsidy to the electricity market from 2017 to 2021, to bridge shortfalls in its revenue for that period.

It was labelled the Environment and Social Systems Assessment (ESSA) report and tied to the World Bank Program-For-Results Financing (PfRF) of the PSRP.

According to it, “The transition from a publicly-owned to largely privately-owned power market, which began in 2013, has put the sector under severe stress. High losses, low collections and lack of cost recovery tariffs have resulted in an annual financial deficit to the sector of approximately US$1 billion.”

It added: “For the years 2015 and 2016 combined, the tariff shortfall alone amounted to US$1.4 billion.  The poor financial viability of the eleven Discos has resulted in their low remittances to NBET (averaging 29 per cent in 2016) with resulting lack of timely and full payments to Gencos that, in turn, accumulate arrears to gas suppliers.”

The report further explained that: “The causes for the crisis are interlinked and self-reinforcing. The inconsistent application of the tariff policy (the Multi-Year Tariff Order or MYTO) resulted in the deterioration of the financial situation of sector companies, especially Discos.”

“In particular, lack of tariff adjustment to account for depreciation of the naira in 2016 severely impacted the power sector, as approximately 65 per cent of the sector costs are denominated in FX (foreign exchange). Declining revenues further constrained access to commercial financing by Discos, whose balance sheets were already weak.

“Without access to financing, Discos have not progressed with much-needed investments in metering and rehabilitation of distribution networks that would improve service delivered to customers.

“Poor service delivery, in turn, has constrained the government’s ability to raise tariffs and enforce key contracts (including Discos’ vesting contracts) with resulting non-payment across the supply chain and to the gas suppliers,” the report added.

It noted that payment arrears to the gas suppliers and the occasional sabotage of the gas infrastructure have also led to erratic gas supply and further deterioration of electricity service delivery.

In addition, the report highlighted that the operational and financial troubles of the sector have been aggravated by weak governance and inadequate enforcement of contracts.

These factors, it explained: “have exacerbated the flaws of privatisation that resulted in new owners without a strong track record in the management of electricity utilities who purchased Discos’ shares with high leverage.”

The World Bank report also stated that the power market now functions on a ‘best effort’ basis with a resulting lack of accountability and poor service delivery.

It said the government was however committed to subsidising power consumption in the country for four years, starting from 2017 to 2021.

“The receipt of revenue requirements by the power sector companies is essential to breaking the vicious cycle of poor sector financial performance, which prevents the enforcement of contractual and regulatory obligations and results in poor service delivery.

“The sector is projected to reach self-sustainability by 2021, when a number of PSRP measures – operational efficiency improvement; management of investment costs; enforcement of payment discipline and tariff adjustment – are expected to lead to the convergence of the sector revenue requirement and tariff revenue.

“In the interim (2017-21), the government has committed to fund the difference between the revenue requirement and tariff revenue and ensure that the sector operates without a financial deficit. This will allow sector companies to meet their contractual obligations and start building trust and confidence in the sector, including among private investors and financiers. To that end, the government has developed a financing plan to cover the recurrent tariff shortfall of the sector (2017-21) and to clear the historical tariff shortfall (2015-16),” the report explained.