THE POSITION OF THE MANUFACTURERS ASSOCIATION OF NIGERIA (MAN) ON THE PROPOSED INCREASE IN ELECTRICITY TARIFF BY THE NIGERIAN ELECTRICITY REGULATORY COMMISSION (NERC)
1.1 The leadership of the Manufacturers Association of Nigeria (MAN) appreciates the long-standing relationship between the Association and the Nigerian Electricity Regulatory Commission (NERC). The Association commends NERC for the sustained efforts at driving electricity supply to the benefit of the country as a whole and the industrial sector, in particular. These efforts will always be justified considering that no nation will experience appreciable development and inclusive industrial growth without adequate electricity supply.
1.2 MAN represents the interests of about 2,800 manufacturers (small; medium; large and multinational industries) spread across 10 sectors and 14 industrial zones who are the heavy users of electricity for manufacturing production in Nigeria. Consequently, the Association follows with keen interest all developments relating to issues of electricity supply, particularly electricity tariff. Poor electricity has been a major challenge of manufacturing, constituting about 40% of total cost of production in the sector. Therefore, improvement in electricity supply in terms of tariff, quantity, quality, dependency, and efficiency in service delivery is critical to the growth and development of the sector.
1.3 The manufacturing sector employs over 5 million workers, directly and indirect with about 10% contribution to Gross Domestic Product annually. The sector also dominated export trade in the West African regions which accounts for huge foreign exchange inflow into the country. Therefore, it is important to continue to sustain and improve the performances of the afore-mention economic indicators through a pro-manufacturing policy that will encourage scale and lower unit cost of production in the sector.
2.0 General Observations
2.1 We observed with great concern the recent newspapers’ reports affirming that NERC has approved an enormous increase in electricity tariff to be implemented by the 11 Distribution companies in differing magnitudes effective April 2020. Even though the content of a recent press statement issued by NERC attempted to allay fears of an impending increase, the direct import of the statement alluded to the fact that there would still be an increase in electricity tariff this January, in line with the mandate and bi-annual approval of MYTO Minor Review after consultation with the stakeholders. Two obvious questions that readily come to mind are- should any increase in electricity tariff be approved before consultations with stakeholders? are the prevailing macroeconomic fundamentals congenial to an increase at this time?
2.2 Consequently, MAN considers it expedient to draw the attention of Government to the concerns of manufacturers about the negative implications of the proposed tariff increase on the Nigerian economy. The proposed increase in electricity is not industry friendly, will have a catastrophic impact on the real sector, spell doom for the small and medium companies, it would further inflict misery on the citizenry and should therefore be suspended in the best interest of the Nigerian economy. In fact, the impact will be more felt by manufacturers, who by default are in the Heavy Users’ category ‘D’ where electricity tariff is the highest.
2.3 Truth be told, the proposed increase is coming at a time that manufacturing is groaning by reason of deep injuries already inflicted on the sector by the prevailing harsh operating environment, the increasing burden of taxes, the enormous spending on self-generated electricity up to the tune of N70billion (excluding hundreds of billions Naira spent on settling monthly electricity bills) and the state of readiness in terms of competitiveness for AfCFTA is at the lowest ebb.
2.4 More worrisome is the fact that the proposed increase in electricity tariff is coming also at a time that the Nigerian Electricity Supply Industry (NESI) is pervaded with high level of inefficiency; inadequate electricity supply; low investment in strategic electricity infrastructure; majority of consumers are not metered and the billing system is still largely estimated. For how long will regulator continue to pally with those to be regulated to milk Nigerians only to spoon feed those to be regulated with the same milk.
3.0 Manufacturers’ Concerns
3.1 Technically, the Minor reviews of electricity tariff since MYTO 2015 has produced escalation in tariff between 2015 and 2020 across the ‘D’ electricity tariff categories. For instance, with IKEDC, D1 category tariff increased by over 44% from 2015 to 2020; D2 and D3 by over 50% for the same period respectively. The increase and burden of cost of electricity for the same period are even more in the other electricity distribution companies where tariffs are quite higher.
3.2 However, a bigger concern is the expected ‘high jump’ based on NERC proposed increase in tariff from 2020 up to 2024. For instance, in IKEDC, which currently provides the least tariff among other Distribution companies, tariff would increase by 57% for the D1, D2 and D3 categories apiece from 2020 to 2021 and even higher 2022, 2023 and 2024. By this metrics therefore, the impact of the proposed tariff increase on the manufacturing sector will be enormous.
3.3 Most of MAN-member companies are classified in the ‘D’ categorization (D1, D2 and D3) where tariff is the highest. An increase of 57% in tariff at this time will trigger reverse-multiplier effect as cost of production will escalate which will destroy the headways already made in the sector. No doubt, manufacturing sub-sectoral groups with higher energy consumption which includes: Basic Metal, Iron and Steel and Fabricated Metal Products; Domestic & Industrial, Rubber and Foam; Non-Metallic Mineral Product; and Chemical & Pharmaceuticals sectoral groups would worse-off as capacity utilization will further diminish; contribution to GDP will decline; employment in the sector will drop; foreign exchange earnings from the sector (as high cost production feeds into export commodity prices) will dip.
3.4 The Association is also concerned on the impact of the tariff increase on the macroeconomy such as:
- On Gross National Product (GNP); Gross Domestic Product (GDP), disposable income, consumption, consumer price index, employment, government revenue from cooperate taxation etc.
- Long-term impact on the efficiency of the production of goods and services and standard of living
- Uneven development in certain parts of Nigeria as the percentage increase in tariff differs across DISCOs to mention but a few.
4.0 Manufacturers’ Expectations
4.1 A component assumption of the MYTO methodology is that electricity generation, transmission and distribution will improve in the process, leading to improved supply of electricity to customers. For that reason, various projections for generation capacities for different years were made. For instance, 5,500MW was projected for 2012; 7,500MW for 2013; 9,061MW for 2014; 10,071MW for 2015 and 10,571MW for 2016. Also, energy to be sent out to grid was projected at 30,715 GW for 2012; 41,884GM for 2013; 50,601 GW for 2014; 56,242 GW for 2015; and 59,034 GW for 2016.
4.2 The pertinent questions are therefore; Wouldn’t they have been accomplished? Wouldn’t it better to think more on how to improve generation capacity hence transmission and distribution rather than squeezing the mere 4000MW to meet all revenue needs of key sharing stakeholders. MAN believes that fixing the sector is not rocket science, basic requirements are pragmatic processes; pro-electricity policies; and significant investments to improve transmission and distribution infrastructure, increase the generation capacity and other capacities that will usher in scale production in the sector.
5.0 Our Position
- The proposed increase in electricity is not industry friendly, will have a catastrophic impact of the real sector; spell doom for the small and medium companies; and further inflict misery on the citizenry. Therefore, the proposed tariff increase should be suspended in the best interest of the Nigerian economy.
- Electricity tariff even if it cannot be reduced should be not be increased; any increase on the tariff will reinforce the already high cost manufacturing environment and further depress productivity in the sector.
- Government need to ensure adequate and appropriate consultations with stakeholders in the private sector on such decisions with far-reaching implications.
- Government being a major stakeholder in the electricity industry should concentrate on developing processes and polices to attract significant investment to encourage scale generation with improved transmission and distribution infrastructure in the industry.
- Evolution of a more realistic tariff structure that will support the growth of the sector is very critical at the moment.
The manufacturing sector is already plague by high cost operating environment emanating from poor regulatory environment, macroeconomic asymmetries and high cost of energy. This poor condition is responsible for the oscillatory performance of the sector in the past few years. It is therefore important that any policy that will add up to the already bloated cost of production in the sector should be avoided. One would believe that before embarking on this outrageous increase in electricity tariff, its impact on the manufacturing sector and the economy at large would have been properly evaluated to mitigate a crowding out effect on the economy. MAN and DISCOs share a latent bilateral dependency considering the fact that DISCOs need MAN members to survive and manufacturing businesses need DISCOs to survive. In fact, our members have consistently been the revenue mainstay of the DisCos. Therefore, it is ideal that MAN is always properly consulted in any discourse that pertains to electricity tariff adjustment or related issues.