World Bank’s $730m Loan Refocused To Boost Power Distribution Sector Recovery

The federal government has said it is re-channelling a $730 million World Bank loan to finance a recovery programme in the distribution sector of the power industry.

The loan, originally deployed under the Power Sector Recovery Programme (PSRP), will now be re-purposed toward distribution sector recovery with metering expansion and the reinforcement of distribution infrastructure as its primary focus. 

The re-purposing follows the cancellation of the original PSRP objectives after Nigeria was unable to meet the conditions required to access an additional $750 million tranche.

Contrary to reports of outright cancellation, the loan has not been withdrawn from Nigeria but redirected to a different area of the power industry. “Nigeria is still the beneficiary of that loan, but it is now re-focused to another area of the power sector,” a power ministry source confirmed to LEADERSHIP.

The source confirmed that Nigeria had forwarded a proposal to World Bank requesting the loan be re-focused because the market situation has changed and it won’t serve the original PSRP purpose.

He said at the moment it is only ministry of finance would confirm if the request has been granted. 

But reports says both parties have agreed on the new direction. The revised programme targets an expansion of the revenue base of distribution companies by metering more customers and bringing them into the billing net. It also covers the reinforcement of distribution infrastructure including substations and distribution transformers with the ultimate aim of improving electricity supply to consumers across the country.

The government believes this strategy will drive recovery in the distribution sub-sector. Since the players are predominantly private sector operators, they will be required to comply fully with the conditions attached to the loan.

“The loan has not been taken away from us. Nigeria still has access to it for the power sector, but this time to finance recovery in the distribution segment of the industry,” sources said.

Two principal factors are said to have driven the failure of the original PSRP objectives. The first was the inability of the administration at the time to eliminate the sector’s tariff shortfall entirely. 

In 2019, that shortfall stood at approximately N580 billion. By 2022 it had been reduced to N143 billion, and the target was to bring it down further to around N100 billion by 2023, with full elimination projected by 2024.

That trajectory was disrupted in June 2023 when the incoming administration unified the foreign exchange rate. Because gas supply contracts and much of the sector’s cost base were denominated in or indexed to the dollar, the sharp depreciation of the naira from around N350 to the dollar to over N1,500 caused a dramatic increase in generation costs. 

The tariff shortfall, which had been on a downward path, surged to an estimated N2 trillion by 2025, making the original PSRP conditions unachievable.

The second factor was political. 

The government was unable to remove the tariff subsidy in its entirety as required by the World Bank, creating a persistent liquidity gap that could not be bridged under the existing programme framework.

These two developments together the FX shock and the incomplete subsidy removal led to the agreement between both parties to cancel the original programme objectives and redirect the loan toward distribution recovery.

It was also gathered that approximately $20 million of the loan, earmarked for technical assistance to agencies including the Nigerian Electricity Regulatory Commission (NERC), the Nigeria Bulk Electricity Trading Plc (NBET), and the Federal Ministry of Power, remained largely undrawn at the time the original objectives were cancelled. 

That portion is understood to remain available under the revised programme.