50% Electricity Tariff Slash, Fiscal Gap Widens - Politically Wise but Business Fuzzy

Proshare

Friday, March 20, 2015 5:12 PM / FDC


Surprisingly this week, the Multi year Tariff Order (MYTO) was slashed by 50%. This occurs at a time when the GENCOs and DISCOs are cash strapped and complaining that the tariffs are too low.

Power supply from the national grid has dropped below 3500MW. The Federal Government is struggling to bridge a widening fiscal gap following the sharp decline in oil prices and revenues.

The government had initially set up the MYTO as part of the deregulation and privatization process. It was also predicated on ensuring an efficient pricing system, which was the reason the tariffs were increased in January 2015. Two months later, the MYTO has now been slashed in a man-ner that is both disruptive and destructive to business and investment decisions.

This type of action is not restricted to the power sector but cuts across many others. For example, the recent cut in the pump price of petrol (PMS) without considering outstanding inventory. This led to substantial losses by retailers and downstream operators.

To balance the scale, the reduction in the MYTO is beneficial to the end user (consumers, corporates and business owners) as this reduces the pressure on their disposable income.

Tough Time for Power Sector Investors
Investors in this sector will bear the brunt of the tariff reduction. A significant number of the Discos and GENCOs are cash strapped and access-ing bank credit is a herculean task. The approved Power and Airline Intervention Fund (PAIF) of N288bn by the federal government is a drop in the ocean. Therefore the jury is out on the implications of these policies on the efficiency and sustainability of the Nigerian power sector.

Wider Implications
The knee jerk reaction of policymakers under political pressure will negatively affect the attitude of potential investors in other projects. Once elections are approaching, the decisions usually made are politically wise but business foolish.
 

Related News:
1.
Oil Prices and 2015 Budget 

2. Naira Devaluation Vs. Import and Export

 

Disclaimer/Advice to Readers:
While the website is checked for accuracy, we are not liable for any incorrect information included. The details of this publication should not be construed as an investment advice by the author/analyst or the publishers/Proshare. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All opinions on this page/site constitute the authors best estimate judgement as of this date and are subject to change without notice. Investors should see the content of this page as one of the factors to consider in making their investment decision. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This article is published with the consent of the author(s) for circulation to the online investment community in accordance with the terms of usage. Further enquiries should be directed to the author whose e-mail is Financial Derivatives Company Limited [E-mail: financialderivatives@fdc-ng.com

READ MORE:
Related News
SCROLL TO TOP