June 4, 2019
Power, regardless of its source, remains a critical factor for economic and industrial development in any country. Unfortunately, the Nigerian power sector is yet to deliver on its mandate of supplying uninterrupted power to Nigerians and Nigerian businesses despite government’s investments in the sector over the years. In its efforts to improve service delivery in the sector, the Federal Government of Nigeria decided to unbundle and privatize the Power Holding Company of Nigeria (PHCN). This process was completed in November 2013.
The objectives of the exercise were to foster competition, increase power supply efficiency and boost the amount of investments coming into the sector. Nonetheless, there remains significant roadblocks in the path to uninterrupted power supply despite government efforts to push the sector forward.
However, the fundamental problems of the sector are not insurmountable; neither do they lack pragmatic and sustainable solutions. While some of the issues within the sector are regulatory in nature, some of the critical issues faced by companies within the sector stem from faulty due diligence and feasibility studies carried out during the acquisition. In addition, tax which was not necessarily an issue for the government-owned entity turned out to be part of the quagmires to resolve post-privatization.
Indeed, there are arguments for using tax to change the narrative by creating tax perks to spur investments in the sector. Thus, this article highlights some of the key tax issues, possible resolutions and potential tax considerations that could facilitate rapid growth of the sector.
Distribution companies in the power sector have not been relieved of challenges such as energy theft, dilapidated distribution infrastructure, collection losses, and huge debts which was further exacerbated by the devaluation of the Naira in 2016 and has led to an astronomical increase in the balance of foreign currency denominated loans.
Although the Transmission Company (TransCo) was strategically left in the hands of the government, it has been reported that it has limited capacity to transmit power supplied by the generation companies (GenCos) who are sometimes able to produce beyond the TransCo’s capacity. The GenCos are not left out of the challenges as their performances are also closely hinged on the success of the distribution segment of the sector.
Unfortunately, tax which could have been a veritable fiscal tool for engineering the success of the sector creates additional problems for companies operating in the sector. Whereas, the country has clear roadmaps with specific tax provisions for critical sectors such as mining, gas production and utilization, etc., there are currently no specific fiscal guidelines that could help clear the doubts of power companies or exempt them from general tax provisions that negatively impact their businesses. Thus, the subsisting tax issues in the power sector may not be unconnected to the fact that such specific fiscal policies are not available to guide operations within the sector.