By Chineme Okafor
The World Bank has disclosed that about 80 per cent of subsidy the federal government provides in the electricity sector benefits mostly the country’s wealthy citizens with only two per cent of such getting to the poorest population.
The bank also stated that since 2017, the government has borrowed about N1.3 trillion from the Central Bank of Nigeria (CBN) to sustain the subsidy payment in the form of covering tariff shortfalls.
It disclosed this in a program appraisal document on a proposed credit worth $750 million which it intends to extend to Nigeria under the Power Sector Recovery Programme (PSRP) jointly developed to revamp the country’s power sector.
In the document obtained by THISDAY, the bank explained that the country cannot continue to fund electricity tariff shortfalls which is rising annually and would have to allow for a cost-reflective tariff in the sector.
The Bank stated: “The significant fiscal resources spent on funding tariff shortfalls disproportionately benefit the (relatively) rich Nigerians.”
It noted that the power sector’s revenue shortfalls have been on the rise and could reach N4.3 trillion by 2023.
“While access to grid electricity of the poorest 40 per cent, ranked by per capita household expenditures, is 37 per cent, 68 per cent of the richest 60 per cent reported access to the grid. Living in more affluent neighbourhoods, the top 60 per cent also experienced fewer outages, and spent almost twice as much on electricity as the bottom 40 per cent.
“As a result, the fiscal expenditure on tariff shortfalls largely benefits the rich. Eighty per cent of the fiscal expenditure on tariff shortfalls benefits the richest 40 per cent of the population, while only eight per cent benefits the bottom 40 per cent, and less than 2 per cent benefits the poorest 20 per cent,” said the Bank in the document which outlined how the proposed loan would be administered.
It further stated that, “the FGN cannot afford inaction. If the issues discussed are not addressed, the fiscal burden of the sector will continue to rise, and the sector will continue to seriously hinder economic growth.
“For 2020-2023 under an inaction scenario; annual tariff shortfalls will total N3,082 billion (US$7,937 million) with aggregate tariff shortfalls for 2017-2023 reaching over N4.3 trillion (US$12.0 billion). COVID-19, decline in oil prices and the economic downturn projected for Nigeria will likely further aggravate the precarious financial situation of the power sector, making the need for action even more urgent.”
To ensure that power generation companies (Gencos) and gas suppliers received sufficient payments to continue generating electricity, the bank explained that the government has borrowed from the CBN a total of N1.301 trillion since 2017.
“The debt service obligations for the CBN PAF is a significant fiscal burden on FGN, at N198 billion (US$550 million) per year from 2020 to 2027 per the original agreed term-sheet. The original PAF was unconditional and was used by NBET to supplement the remittances of Discos and ensure at least 80 per cent payment to Gencos.”
“The PAF expansion (approved by the FGN in May 2019) is conditional and underpinned by an accountability framework. Power sector shortfalls are rising and are fiscally unsustainable. From 2015 to 2019, the tariff shortfalls – the difference between allowed tariffs and cost-reflective tariffs, which the FGN is responsible for funding, increased significantly as allowed tariffs stayed flat while the cost-reflective tariff increased due to FX depreciation and inflation.
“In 2019, with tariffs at only 56 per cent of cost-reflective levels, the annual tariff shortfall was estimated at N524 billion (US$1,718 million). Tariff shortfalls between 2017- 2019 totalled N1,249 billion (N1.2 trillion). This situation is not fiscally sustainable and takes away resources for human and physical capital investment – in 2019 the FGN budget was only N428 billion (US$1,403 million) for health and N650 billion (US$2,131 million) for education,” it added.
The Bank equally stated that it has identified risks that could derail the implementation of the PSRP, and which include political and governance, macroeconomic, sector strategies and policies, institutional capacity for implementation and sustainability, as well as stakeholders and operational risks associated with distribution constraints.
According to it: “Macroeconomic risk is rated high, as a result of the significant uncertainty over key macro-fiscal parameters and the heightened macro risks related to COVID-19. In 2020, COVID-19, decline in oil prices and the projected economic downturn for Nigeria will likely further aggravate the precarious financial situation of the power sector making it challenging to implement the PSRP financing plan.
“Operational risk linked to distribution constraints is rated high. The program’s objectives will not be achieved if the existing constraints in the distribution segment are not addressed. The program thus has a strong focus to incentivize improved performance by Discos and to strengthen regulatory oversight and accountability.”
