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

Nigeria’s challenge lies in failing to harness the successes of past reforms. One prime example is the transformation of the telecommunications sector through privatisation, marked by the denationalisation efforts that reshaped the industry. Prior to these changes, Nigerian Telecommunications Limited (NITEL), a state-run entity founded in 1985, struggled with inefficiencies, obsolete infrastructure, and limited service. By the late 1990s, it was clear that state control hindered growth and couldn’t keep up with rising demand. The pivotal National Telecommunication Policy of 2000 paved the way for the privatisation of NITEL and the sector’s deregulation. The auction of GSM licenses by the Nigerian Communications Commission (NCC) in 2001 revolutionised the industry, leading to unprecedented expansion. By 2020, mobile phone usage had surged from a mere 0.4% in 2000 to over 80%.

However, when Nigeria attempted a similar approach with the power sector in 2013, the outcome was vastly different. Rather than attracting competent investors, the process drew speculators lacking technical skills and financial strength. Despite inheriting significant assets from the Power Holding Company of Nigeria (PHCN) and receiving trillions in government support, the Distribution Companies (DISCOs) have been unable to ensure reliable power. Financial troubles plague all 12 DISCOs, with five taken over by banks or the Asset Management Corporation of Nigeria.

The Central Bank of Nigeria has injected over N2 trillion to enhance power generation and distribution, yet the capacity remains below 5,000 megawatts for a population exceeding 200 million. A telling sign of DISCOs’ shortcomings is their failure to meter 8 million of their 13.2 million customers over a decade, contributing to their financial difficulties.

In 2020, the Nigeria Electricity Regulatory Commission (NERC) launched the Service-Based Tariff (SBT) system, segmenting customers into bands (A to E) based on their electricity supply hours and usage, with higher tariffs for higher consumption. For instance, Band A users, receiving a minimum of 20 hours of power daily, pay the most. While this system aimed to reflect cost and ensure payment proportionality, it defies typical economic principles. Unlike volume discounts, SBT penalises higher usage with higher costs, pressuring manufacturers who already struggle under a 30% borrowing interest rate. The Manufacturers Association of Nigeria (MAN) has highlighted that over 500 companies have shut down due to these burdens.

The liquidity crisis in the power sector, estimated at N3.7 trillion, threatens electricity generation. Although the rationale behind tariff hikes was to infuse liquidity and improve services, DISCOs’ collection efficiency remains poor. Between 2020 and 2024, they billed N3.96 trillion but collected only N2.86 trillion, losing 30% of potential revenue. Unpaid bills in July 2024 alone amounted to N28.97 billion, representing nearly 18% of their revenue. Additionally, neighboring countries made no remittances on $14.39 million in invoices, highlighting inefficiencies passed onto consumers as high tariffs.

Initially targeting affluent estates and commercial areas, SBT’s high tariffs have spread to diverse socioeconomic communities. While elites offset costs through alternative energy sources, lower-income groups face hardships. Companies with the means, like Just Rite Superstores, have opted for off-grid solutions—spending $6.5 million due to high tariffs and poor service. However, not many businesses can afford such measures, limiting growth and job creation.

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With energy expenses comprising 35-40% of production costs, and bank interest rates at about 30%, the industrial sector continues to suffer. Lessons could be taken from countries like Kenya, where reduced energy tariffs stimulate industrial growth. While telecom firms in Nigeria attract customers with incentives, pseudo-privatised DISCOs push for continuous tariff hikes, harming the economy. Experts argue that revamping the flawed power sector privatisation by involving more competent, technically adept, and financially solid investors is essential to revitalise the sector.