Band A tariff: Can Nigeria’s economy absorb another shock?

2 weeks ago 23

One of our issues as a country is our inability to leverage our successful past developmental strategies. For example, privatizing our telecommunications sector, driven largely by a sweeping denationalisation effort, reshaped the industry. Before the privatisation, Nigeria’s telecommunications sector was dominated by the state-run Nigerian Telecommunications Limited. Established in 1985, NITEL struggled with inefficiency, outdated technology, and limited service coverage. By the late 1990s, the sector was in dire need of reform. The government recognised that state ownership was stifling growth and failing to meet the burgeoning demand for telecommunications services. The National Telecommunication Policy (2000) was a pivotal moment, setting the stage for the privatisation of NITEL and the opening up of the telecommunications market. The NCC conducted a landmark auction for the Global System for Mobile Communications licenses in 2001, which revolutionised the sector.

The privatisation spurred rapid expansion of telecommunications infrastructure and mobile phone penetration soared from a mere 0.4% in 2000 to over 80% by 2020, creating a world record.

Instead of learning from this exemplary model while privatising our power sector in 2013, we fumbled and have been tumbling since then. Rather than attracting credible investors, we ended up with speculators, who lack the requisite technical expertise and financial muzzle to transform the power sector. Despite the lavish power assets the Distribution Companies inherited from the Power Holding Company of Nigeria and trillions of Naira in government intervention funds, the nation continues to fail in the provision of regular power supply. All the 12 DISCOs are struggling financially while banks or Asset Management Corporation of Nigeria have taken over five DISCOs.

The Central Bank of Nigeria alone has pumped more than N2 trillion into the sector to boost generation and distribution. Yet, capacity remains less than 5000 megawatts for a more than 200 million population. The DISCOs ineffectiveness, exemplified by their inability to meter 8 million out of their 13.2 million customers in ten years, would seem to be the major contributor to their financial woes.

The Nigeria Electricity Regulatory Commission introduced the Service Based Tariff regime in the year 2020 to promote a cost-reflective tariff. The SBT groups electricity customers into various bands based on willingness to pay and usage levels with higher consumption attracting higher tariffs. The SBT eliminated the previous flat tariff structure and categorizes consumers into five bands (A – E) based on the number of hours of electricity supply they receive daily. Band A customers are assured of a minimum of 20 hours of power and pay the highest tariff. Band B customers are to enjoy 16 hours, Band C, 12 hours, and Band E 4 hours daily. This attempt at market segmentation defies all economic and marketing strategy logic.

The underlying objectives of economic management are cost minimisation and profit maximisation.

Adopting a cost-recovery model compromises the incentive to minimise cost and entrenches opacity in pricing. This leaves customers at the mercy of a monopolist for a service with mostly inelastic demand. According to the Manufacturers Association of Nigeria, more than 500 companies have closed shop since the recent upward review of tariffs for Band A customers. This is quite understandable because the tariff regime ignores the conventional marketing strategy of discounting for more quantity demanded, but instead imposes a premium for mass usage. With this unorthodox demand curve, the higher the quantity demanded, the higher the price. This is why most manufacturers cannot break even with this tariff regime after borrowing money at more than a 30% interest rate.

According to the Association of Power Generation Companies, the liquidity crisis in the system, estimated at N3.7 trillion is a major threat to the Generating Companies’ ability to supply electricity. The objective of the constant upward review of the tariff was to introduce liquidity into the value chain and improve service delivery. Meanwhile, the revenue collection efficiency of the DISCOs is dismal. In the past four years, they raised a bill totalling N3.96 trillion for consumed power but collected N2.86 trillion, losing almost 30% within the system. In the first quarter of 2024, international customers, mainly neighbouring, countries, made zero remittances out of the $14.39 million invoices issued by the market operator. According to NERC, the DISCOs lost N28.97bn, representing almost 18 % of their revenue in July 2024 to unpaid bills. These systemic inefficiencies, reminiscent of the predecessor legacy public corporation, are passed on to hapless customers as exorbitant tariffs.

The SBT initially chose soft targets of elite residential estates and commercial concerns for the Band A segment but has cascaded to vast areas of differing socioeconomic ranks. While the elites have been able to mitigate the impact of the exploitative tariff with hybrid power alternatives, the poor and lowly within the areas are left helpless. Most companies that could afford it are resorting to their captive power plant. Recently, Just Rite Superstores, a fast-growing supermarket chain spent a whooping amount of US$6.5 million to go off-grid because of what the owners described as outrageous tariffs and poor quality service. Given the high current borrowing rate, how many organizations can afford this? This fund could easily have expanded the business and created further jobs and livelihoods.

According to MAN, energy costs account for between 35 to 40% of total production costs. With bank interest rates at about 30%, the real sector shall continue to be in the current subdued state. We need to take a cue from countries like Kenya where manufacturers and businesses enjoy reduced tariffs to encourage industrial growth. In the same environment where the privatised telecommunication companies are wooing customers with promotions to load N1,000 and get credited worth N8,000 the pseudo-privatised DISCOs are permanently agitating for an upward review of tariffs, which is harming the real sector. Most experts believe that for us to get out of this quagmire, we need to press the reset button for this botched privatisation effort to get more serious, technically savvy, and financially capable players.