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Electricity tariff and Nigeria’s manufacturing sector

The Manufacturers Association of Nigeria (MAN) represents the interests of over 3,000 manufacturers (small; medium; large and multinational industries) spread across 10 sectors, 76 sub-sectors and 16 industrial zones.

 

Manufacturers are heavy users of electricity in Nigeria and this necessitated the Association’s keen interest in all electricity related discourse and development, particularly electricity supply and tariff.

 

The manufacturing sector employs over five million workers, directly and indirectly with 8.93% contribution to Gross Domestic Product (GDP). The sector also dominates export trade in the West African region, generate foreign exchange, contributes substantially to revenue of government and human capital development in Nigeria.

 

It is, therefore, imperative that the performance of the sector is enhanced through a pro-manufacturing policy that will encourage scale and lower unit cost of production rather than throwing fiery darts that will worsen its performance.

Top on the list of challenges confronting the sector is the issue of inadequate electricity supply and this has been largely responsible for the lacklustre performance of the sector for some decades now. In fact, electricity related expenses of a manufacturing concern constitute about 40% of the production overhead in some sub-sectors. This is not growth friendly and is antithetical to competitiveness.

 

The MAN is greatly concerned about the revised Multi Year Tariff Order (MYTO) for January to June 2021 signed by the new Chairman of NERC, Engr. Sanusi Garba, on December 30, 2020, with the adjustment of N2.00 to N4.00 per kilowatt per hour of electricity, effective January 1, 2021.

 

Two obvious questions that come to mind are: should any increase in electricity tariff be approved before consultations with stakeholders and are the prevailing macroeconomic fundamentals congenial for an increase? Obviously, this increase in tariff, which is coming at the commencement of the African Continental Free Trade Agreement (AfCFTA) and barely three months after the huge increment was imposed on electricity users in October 2020, is not manufacturing friendly.

 

It appears to be insensitive to the prevailing precarious situation of the sector. The increase is coming at a wrong time and would clearly reverse the little gains in the recent past.

 

This is against the background of prevailing harsh operating environment, the increasing burden of taxes, the enormous spending on self-generated electricity up to the tune of N70 billion (excluding hundreds of billions Naira spent on settling monthly electricity bills) and the ailing state of a sector that is just recovering from a lockdown occasioned by the ravaging COVID-19 pandemic.

 

We are worried that the recent increase in price of electricity will have overwhelming negative impact on the Nigerian economy, especially the man  facturing sector. The trickle-down effects of this increase are as stated below.

 

It will lead to:

  • Substantial increase in electricity bill payable by electricity consumers including manufacturers, especially for the unmetered customers and significant increase in the energy cost to manufacturers as the usual hours of electricity outages will still prevail and manufacturers spend billions of naira on alternate energy to meet electricity requirements;
  • Decrease in foreign exchange earnings from the sector as high cost of production feeds into export commodity prices;
  • Reduction in government tax revenue occasioned by drop in sales, as a lesser quantum of disposable income will be available to purchase manufactured goods;
  •  Reduction in capacity utilization, further decline in GDP, large scale unemployment across the 76 manufacturing sub-sectors and possible increase in crime rate;
  • Trigger reverse-multiplier effect as cost of production escalates and the headways already made in the sector is eroded. This is because most of MANmember companies are classified in the  D’ categorization (D1, D2 and D3) where tariff is the highest.
  • Manufacturing sub-sectoral groups with higher energy consumption which include Basic Metal, Iron and Steel and Fabricated Metal Products; Domestic and Industrial, Rubber and Foam; Non- Metallic Mineral Product; and Chemical & Pharmaceuticals sectoral groups would be worse-off.

 

The manufacturing sector is already plague with a high cost operating environment emanating principally from high cost of energy poor regulation. This poor condition is responsible for the oscillatory performance of the sector. It is, therefore, important that any policy that will add to the already bloated cost of production in the sector should be avoided.

 

One would normally expect 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 in general and the productive sector in particular.

 

The manufacturing sector, which is the engine of sustainable growth, is still struggling with the debilitating impact of the pandemic and is yet to recuperate. The expectation of operators is that government will continue to provide stimulus packages that will aid the recovery of the sector and avert the shutdown of factories nationwide with multiplier effect on the employment of about five million workers.

 

We expect that NERC as the regulator will ensure improved electricity generation, transmission and distribution that will lead to adequate and reliable electricity supply in the country rather than squeezing the mere 4,000MW to meet all revenue needs of key sharing stakeholders.

 

We equally expect NERC to make regulations that will ensure that 80% of consumers are metered to ensure consumption reflective payment; aid inflow of investment in the energy industry in order to increase generation capacities and usher in large scale production of electricity.

 

The recent absurd increase does not support these desirable propositions. In consideration of the above, we opine as follows:

  • The recent increase in electricity tariff is not manufacturing friendly and ill-timed because it will exacerbate the already high manufacturing cost environment, worsen competitiveness, further depress productivity in the sector and May exclude Nigeria from the list of beneficiaries of AfCFTA.
  • The recent increase, which is following a major review three months ago, is not in the best interest of the Nigerian economy, judging from the prevailing economic ambience of the nation and its impact on vital manufacturing, economic, social and development indicators.
  • The use of inflation, foreign exchange and gas price as justifications for the increase in tariff is weak and debatable. Gas is produced locally to curb flaring and there is no transparent framework in place to ensure that electricity consumers enjoy reduction in tariff when these indices decline.
  • Government should, as a matter of urgency and national interest, suspend the recent increase in electricity tariff until the economy improves or certain mutually agreed economic attainment thresholds are met.
  • NERC is implored to fully perform its role as an unbiased umpire and always convene stakeholders’ meeting for extensive consultations before decisions with far-reaching implications on the private sector are taken.
  • 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.
  • There is an urgent need to evolve a more realistic tariff structure that will support the growth of the energy sector and the productive sector simultaneously.

 

Ajayi-Kadir is the Director General of the Manufacturers Association of Nigeria (MAN

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