Energy Subsidy Removal: Implications and Navigational Strategies for MSMEs

Key Takeaways

• Subsidies are introduced with good intentions.
• Ill-managed subsidies benefit the rich more than the poor.
• Increase in operational cost and price review are critical implications of subsidy removal.
• Governments and businesses must embrace numerous sustainability and innovative strategies to navigate the subsidy removal challenges.

 

Governments across the world devise numerous strategies to make services and certain products accessible to different sections of their country on a need basis. From fertilizer subsidies to rail transportation, fuel and electricity subsidies as well as social services like education subsidies, different forms abound.

Subsidies are often introduced with good intentions like providing affordable energy to the poor as a means of alleviating poverty. However, ill-managed subsidies in developing economies such as Nigeria are found to benefit the rich more than the poor, as a result of higher consumption among the rich. Evidence shows that the top income quintile accounts for not less than 75 percent of total petroleum consumption in Nigeria. In comparison, the bottom income quintile accounts for only a percent of petrol consumption.

 

Until May 2023, the Nigerian government subsidized the Premium Motor Spirit (PMS) also known as petrol. However, the fiscal constraint (declining public revenue and increasing cost of subsidy) pointed to the unsustainability of the regime as the government had spent about N14 trillion on fuel subsidy between 2005 and 2021 according to the Nigeria Extractive Industries Transparency Initiative (NEITI), while N8 trillion had been expended on same from 2022 to date. In comparison, electricity subsidy has gulped about a trillion Naira between 2019 and 2021, as the government continues to cover the gap between the Cost Reflective Tariff (CRT) and the Allowed Tariff (AT).

 

The removal of energy subsidies carries diverse implications for various stakeholders. To the government, it represents an opportunity to curtail financial losses and attract private investment in the downstream sector. Conversely, for the public, it translates to a financial burden, as the removal of subsidies, particularly in the case of petrol, leads to higher transportation costs, resulting in elevated prices for goods and services. Consequently, this drives up production costs for businesses. This article focuses on analyzing the energy subsidy framework in Nigeria, specifically addressing the consequences of eliminating petrol subsidies on Micro, Small, and Medium-scale Enterprises (MSMEs). Additionally, it discusses strategies that stakeholders can employ to mitigate the associated challenges.

 

Subsidy Removal Implications for MSMEs

MSMEs are a crucial player in the Nigerian economy as they account for about 84 percent of employment and 50 percent of the country’s Gross Domestic Product and energy pricing reforms impact their operations directly and indirectly.

 

• Increased operational cost: The headline impact of energy subsidy removal is the cost of operation. According to Mr Taiwo Adepoju, a Managing Partner at Strengths Africa, the elimination of subsidies will result in elevated energy bills impacting the operational expenditures of MSMEs directly. This view is corroborated by the reports that show that manufacturers have seen energy cost jump by 87 percent within a year. An increase in operating costs will squeeze the profit margins and may necessitate review through an operational audit. An operational audit may lead to measures aimed at resource efficiency which may encompass staff layoff and reduction in production size among others.

 

• Pricing strategy review: MSMEs are faced with the dilemma of pricing, while maintaining quality in the bid to retain their customers and acquire new ones. Ensuring that the right pricing strategy is adopted to reflect market reality without sacrificing quality is critical to ensure their businesses remain afloat.

 

 

Strategies to Navigate Energy Subsidy Removal Challenges

Relevant stakeholders in the business space have numerous roles to play in mitigating the challenges enthroned by energy subsidy removal. The government, MSME-supporting agencies, partners, and the MSME operators have numerous strategies to adopt.

 

For Government and Supporting Agencies

• Financial support: Understandably realizing and acknowledging the shocks created by the energy subsidy removal, the Federal Government in a recent address announced plans to provide financial support of N125 billion to MSMEs across the country at a single-digit interest rate as practiced by the Lagos State Employment Trust Fund.

 

• Tax break: Granting tax breaks which can be in the form of tax credits, tax reduction, or tax exemption. This could be adopted for a period of three to six months to ease the transition to the post-subsidy era.

 

• Business support services: Financial support is one thing, however, knowledge about thriving in a dynamic and volatile environment is crucial to enable MSMEs to channel the resources accordingly, while exploring the maximum benefits obtainable. Moreover, training related to employee management and handling financials during volatile periods is key. These are among the offerings of the LSETF for businesses domiciled in Lagos State.

 

• Boost local production and import substitution: Efforts should be directed at reducing dependence on importation to ensure more local consumption of locally made products and opportunities for export through the empowerment of MSMEs in key import-prone sectors while increasing tariffs on imported items under the affected sector.

 

• Co-working space: State Governments can create spaces and hubs for businesses to facilitate cost and resource sharing to reduce energy and infrastructure cost. This would further help businesses scale and raise their margins as they transition to the post-subsidy era.

 

• Partnering with MSMEs: Governments should partner with MSMEs in key areas related to palliative provisions in terms of product procurement, packaging and others. This would open MSMEs to more avenue to increase their revenue in the short term as they navigate adapting to the subsidy removal reality.

 

For Business Owners

• Price/Quantity Review: MSMEs may need to consider increasing the price of their offerings to balance the books because of the spiralling operational cost. This is usually a last resort and mostly an unavoidable implication of inflated energy cost on MSMEs. MSMEs may also consider product bundling so as to retain and attract new customers regardless of price increase.

 

• Revenue buffer: Businesses may need to leverage single-digit loans or grants to buffer revenue in the transition period to maintain liquidity and support business operation amidst soaring energy bills.

 

• Cost sharing initiatives: Businesses with functional areas of alignment can collaborate to share the cost burden of a specific operational area in their business as a means of cutting operational cost. For instance, the cost of last mile delivery as a functional area of some businesses can be borne by numerous businesses that require such service.

 

• Sustainability: The adoption of alternative and cleaner sources of energy will be accelerated by subsidy removal, which will help businesses reduce consumption of fossil fuels that increase greenhouse gas emissions. This creates a pathway for environmental responsibility on the part of the MSMEs, while opening MSMEs in the renewable energy sector to increased patronage. Similarly, businesses with high waste production needs to consider recycling and avenue to turn their waste to wealth. Embracing energy-saving approaches such as ensuring lights are turned on only when needed and digitalising some paper-oriented activities will also help in this regard.

 

• Diversification and innovation: rising cost of inputs is a big concern for business owners. As noted by Henry Ofurune, the Sustainability Manager at Laserblue Consulting “Subsidy elimination necessitates innovation and diversification as SMEs look for alternative ways to optimise their operations. Embracing technology developments, process improvements, and product diversification can boost competitiveness and allow SMEs to survive market changes. Transitioning to renewable energy will reduce their dependency on grid electricity and petrol or diesel generators, resulting in significant cost savings and increased profitability. This would allow them to reinvest in their businesses and create more jobs which contributes to the reduction of unemployment amidst the subsidy removal and their adaptability to it.”

 

• Hybrid Work Model: MSMEs may also need to consider adopting flexible work structure that minimises transportation cost for their employees, and the attendant cost of running their business premises.

 

Concluding Thoughts

Energy subsidy removal has crucial implications on the operations of MSMEs and stakeholders across levels must rise to support this critical sector that is vital to the country’s economic growth. As the market becomes volatile due to energy subsidy removal, business owners must embrace the appropriate strategies and explore the attendant opportunities to navigate the challenges stemming from this change. Lagos residents can always leverage LSETF programmes amid current market realities.