FG Should Rethink 5% Host Community Fund In New Electricity Act
Olufemi Idowu is a Partner at Kreston Pedabo. In this interview with KINGSLEY JEREMIAH, he speaks on the bottlenecks in Nigeria’s oil and gas and electricity industry, especially the new electricity act, divestment by international oil companies; Nigeria’s declining oil production alongside the fate of the 2024 budget. Idowu also discusses the proposed African Energy Bank and barriers to renewable energy in Nigeria.
What is your take on the new electricity act and the options available to states to become major players in electricity generation and distribution?
THE passage of the Electricity Act 2023, followed by its amendment via the 2024 Amendment Bill, signifies significant progress in the Nigerian Electricity Supply Industry ( NESI). This progress is fundamental in tackling the underlying causes of previous reform setbacks, which have been hampered by diverse economic, institutional, technical, financial, and sociopolitical challenges. It is anticipated that this new legislation will stimulate increased private investment, promote a balanced energy portfolio comprising both renewable and fossil fuels as well as foster overall economic advancement for our nation.
Nevertheless, there are certain areas of concern that demand governmental attention. For instance, the requirement for power generation Companies ( GENCOS) to allocate 5 per cent of their yearly operational expenses to the Host Community Development Fund should be reconsidered. The NESI already grapples with liquidity constraints, which persistently impedes its smooth operations. Imposing an additional 5 per cent financial burden on the GENCOS will further jeopardize their fiscal viability. Given the ongoing advocacy for a cost- reflective tariff, any additional expenses imposed on GENCOS are likely to be transferred to end consumers, rendering energy costs unaffordable. Hence, it is recommended that the contribution percentage to the Host Community Fund should be reassessed, with a possible downward revision to approximately 3 per cent.
Regarding the increased involvement of states in the electricity value chain, this development represents an intriguing departure not only due to the expected enhancement in service provision to Nigerians but also because it signifies the longstanding call for the country's restructuring. The potential for growth, employment generation, economic amelioration, and more is genuinely promising. For instance, the commissioning of the Geometric Power Plant in Abia State has resulted in improved electricity provision for its populace and created employment opportunities for the people of the State. We expect more of this from other states as they consider valuable partnerships with potential investors.
As the sector undergoes rapid evolution, I suggest that government should consider establishing a fiscal framework to address taxation issues within the sector. This fiscal regime should encompass matters such as the tax treatment of energy losses, minimum tax regulations, interest accruing on invoices issued to the Nigerian Bulk Electricity Trading ( NBET) PLC by GENCOS, among other pertinent considerations.
What can we do as a country to improve renewable energy penetration?
I believe the government deserves praise for its ongoing endeavors to promote investment in renewable energy. The Federal Government of Nigeria has undertaken significant initiatives to incentivise businesses to venture into clean energy. These efforts include granting tax holidays, offering favorable financing opportunities, and providing regulatory backing for the advancement of the renewable energy sector. To improve the penetration of renewable energy in the nation, the government could enhance its efforts by establishing renewable energy generation facilities like solar parks, wind farms, and hydroelectric plants. Furthermore, expanding transmission and distribution networks, enhancing energy storage capabilities to
accommodate intermittent renewable energy sources as well as addressing the current security challenges in the country would be instrumental in furthering this cause.
Currently and in the near future, what role will Kreston Pedabo play in strengthening energy security in Nigeria and other Africa
countries?
Kreston Pedabo ranks among the top five accounting and business advisory firms in Nigeria. As part of the esteemed global network ‘ Kreston’, we offer a comprehensive array of professional services, from audit and tax to advisory and consulting, tailored to meet the diverse needs of our clients. It is important that I provide this brief background to underscore the significant role we can play in bolstering energy security not only within Nigeria but also across the African continent. While our direct influence on energy security policies and projects may be limited, our support can serve as a vital force in enhancing energy security outcomes.
For instance, we specialise in providing strategic advisory services to energy companies, governmental bodies, and other stakeholders in the sector. These services involve a wide range of areas, including financial management, risk assessment, regulatory compliance, and strategic planning, all aimed at optimizing operational efficiency and maximizing investment returns in the energy sector.
Moreover, we have a proven track record of conducting thorough due diligence assessments for investors and lenders interested in financing energy projects. Over our distinguished 25year history, we have consistently assisted numerous reputable organisations in navigating complex regulatory landscapes and achieving their strategic objectives. We remain committed to contributing to capacity- building initiatives aimed at empowering professionals within the energy sector. Through tailored training programs, workshops, and knowledge- sharing initiatives, we strive to enhance skills and capabilities in critical areas such as financial management, regulatory compliance, and sustainable business practices.
At Kreston Pedabo, we are dedicated to making a meaningful impact on energy security initiatives, leveraging our expertise and experience to support the sustainable growth and development of the energy sector in Nigeria and beyond.
Nigeria’s oil production is currently in the region of 1.4 million barrels per day while the benchmark for the 2024 budget is about 1.78 million bpd. Knowing well that the budget is dominantly built around improved oil production, what is your take on the oil production and the revenue outlook from the oil sector alongside the 2024 budget?
The 2024 Appropriation Act estimates aggregate revenue of approximately N18.32 trillion. Given this projection, oil revenue is anticipated to reach N7.94 trillion, while non- oil and independent & other sources are expected to contribute N3.52 trillion and N6.86 trillion respectively. Interestingly, the forecast for oil revenue is contingent upon achieving a daily oil production of 1.78 million barrels per day. Therefore, the current reality of our oil production, which currently stands at 1.4 million barrels per day, falls short of the 2024 benchmark, and as such presents significant concerns for all stakeholders. I am, therefore, of the opinion that there may be difficulties in achieving the revenue goals set for the oil sector as outlined in the national budget.
Again, it is important to recognize the various external and internal factors that can influence our nation's ability to achieve its oil revenue target of N7.94 trillion. While external factors like geopolitical dynamics, market demand fluctuations, and global oil price volatility are beyond our sphere of influence, I firmly believe that the government can address the internal challenges such as infrastructure deficits, security issues, and regulatory frameworks. However, if we fail to address these internal factors, which are within our control, then attaining the oil production target may be a mirage and potentially result in revenue shortfalls. These shortfalls could, consequently, impact government spending plans and fiscal stability. Therefore, my recommendation to the government is to comprehensively address the internal factors to safeguard our revenue projections in order to ensure overall economic stability.
I also believe it would be prudent for the government to address the risks associated with excessive dependence on oil revenue by actively pursuing diversification of the economy. This could involve substantial investment in sectors such as agriculture, manufacturing, technology, and renewable energy. Diversification efforts would not only diminish the nation's reliance on oil but also foster long- term economic resilience and sustainability. While previous administrations have made endeavors to diversify the economy, the tangible outcomes of these efforts have not been universally evident. Therefore, there is a need for more visible and effective diversification strategies to be implemented.
What is your opinion on the divestment by Shell, Exxonmobil, and Eni and the many issues emanating from the process, especially the divestment guidelines of the Nigerian Upstream Petroleum Regulatory Commission and the clamour in the Niger Delta against the divestment?
The divestment by Shell, Exxonmobil, and Eni in Nigeria's oil and gas industry has indeed raised concerns, especially regarding the delays in government approvals and the impact on production capacity. While the government has promised to address these issues to stimulate sustainable growth in the sector, the process has been slow, leading to setbacks in development.
Nevertheless, the government has reiterated its commitment towards creating an enabling environment for investment, particularly in gas commercialization. Various initiatives aimed at promoting gas- based industrialization and reducing carbon emissions are being considered by the government. Despite these initiatives, there are still concerns, particularly in the Niger Delta region, where communities rely heavily on the oil and gas industry for their livelihoods.
Therefore, I want to encourage the government to engage in transparent and collaborative discussions with all stakeholders to address these concerns effectively. It is important to ensure that the divestment process benefits all parties involved while stimulating sustainable growth in the industry.
What is your take on the capacity of Nigeria’s independent oil Companies to deliver the country’s oil and gas projection as the multinationals reduce their operations in Nigeria?
In as much as the divestment by multinational companies in recent months has sparked controversy, I am of the opinion that it still presents opportunities for Nigeria's independent oil companies to play a pivotal role in the country's oil and gas sector. Many Nigerian independent companies have cultivated significant expertise and experience in exploration, production, and asset management. Over time, they have demonstrated a profound understanding of local geology, regulatory frameworks, and operational challenges, providing them with a competitive advantage in navigating the complexities of the Nigerian oil and gas industry.
Moreover, in terms of technology and innovation, some of these IOCS have increased their investments to boost production efficiency, optimise reservoir management, and reduce operational costs. While they may encounter financial constraints compared to multinational companies, they have avenues to access capital through partnerships, financing arrangements, and investment opportunities.
While I am confident in the ability of these companies to contribute to the country's oil and gas sector, I believe the government must address challenges such as infrastructure deficits, security concerns, and regulatory uncertainties to enable them to unlock their full potential. This can be achieved through the implementation of favorable policies, infrastructure development projects, and capacity- building initiatives. By creating an enabling environment, the government can empower the IOCS to thrive and make significant contributions to Nigeria's oil and gas industry.