13th April, 2016
By Femi Pedro
After inheriting a colossal mess from all the previous administrations combined, it is fair to say that this 10-month old administration is facing enormous challenges under mitigating circumstances. I do not envy the burden it continues to bear because for decades, we have grappled with challenges in virtually all the critical segments of our economy. Everything from education to healthcare provision and infrastructure development has been a grapple. Perhaps, the mother of all challenges has been the persistent fuel scarcity and erratic power supply currently plighting the nation.
Nigerians have simply grown tired of having to queue for long hours to fuel their cars because it is counter-intuitive and counter-productive. In developed countries, the provision of this simple amenity has evolved into business ventures that governments and private entities jointly handle with minimum fuss and little controversy. This is certainly not the case in Nigeria, and the time has come for a holistic change in this regard.
Broadly speaking, our petroleum problems began decades ago, when government became involved in the production, importation, pricing and selling of petroleum products through a government monopoly – the NNPC. The refineries built and run by the NNPC were neither properly managed nor efficiently maintained. In the years that followed, there was very little interest in building new refineries or in seriously encouraging the private sector to enter the industry. As a result, the current administration has inherited a number of broken-down, money-guzzling and obsolete refineries that are simply unable to service the nation’s needs. These refineries are not performing optimally because far too many people have benefited from their shortcomings. Our downstream sector is not fairing any better, because the Petroleum Products Pricing Regulatory Agency (PPPRA) determines the open market price based on an agreed template.
Until this administration’s recent intervention, the marketers who imported petroleum products received subsidy payments for the differentials in the cost of their importation and distribution, as the pump price has always been fixed by government. This is obviously a recipe for disaster, and we can reasonably conclude that the challenges we have faced for many years is because of government direct involvement in the sector.
Similarly, our electricity problems began decades ago when government-owned power plants and transmission lines started becoming obsolete and mismanaged. We produced, transmitted, priced and sold power under an inefficiently run government monopoly called NEPA (and eventually PHCN), which has not been able to keep its production at pace with population and economic growth. We started with about 75 Megawatts (MW) in 1951, and today we are struggling to produce about 3,000 MW. The government hopes to produce 10,000MW by 2019, but a lot will need to be put in place to make this a reality.
The common denominator in these two case-studies is the government, so I believe it has become imperative for us to implement a holistic deregulation policy in these two sectors. This administration is in a unique position to alter the fuel and power dynamics, because we simply cannot continue to expect our government to produce, price and sell products efficiently. Deregulation by definition is the reduction or elimination of government influence within a particular industry by creating more competition. Deregulation is not rocket science. It is a well-utilized policy worldwide, and generally produces positive results.
Prior to 2001, the Nigerian government produced and sold telecom services directly through a government-owned and inefficiently run monopoly called NITEL. For many years, NITEL customers experienced frustration until the government decided to deregulate the telecoms sector by issuing licenses to profit-oriented private companies. This has led to better quality under a more competitive environment. Of course, it has not been perfect, but it is certainly a marked improvement from the NITEL days. The industry has opened up, new players have emerged, better services are being provided, more people have been employed, and by extension, more wealth has been created.
The government still plays an active role as a regulator (NCC), but does not play any role as an operator. Likewise, the federal government once owned a majority stake in banks like First Bank, Union Bank, UBA, National Bank, Bank of the North, Afribank and Continental Merchant Bank as recently as 25 years ago. During this time, our banking infrastructure was expensive to maintain and generally ineffective. The deregulation of the sector in the 80s and 90s paved way for the relative stability we enjoy today. Ditto the aviation sector, which was also under the control of government for a long time. Although its safety standards were fairly satisfactory at the time, Nigerian Airways operated as a monopoly for many years, and this left the sector susceptible to manipulation and mismanagement. Nigerian Airways eventually became defunct, and the aviation sector has become liberalised, with the airline operators performing a bit more optimally than in the past.
In all the cases mentioned above, the biggest loser was always Nigerians, because consumers will always suffer under the yoke of government-owned monopolies. There was a massive resistance by entrenched interests to the idea of dismantling these monopolies, because they benefited from the chaos at the expense of the people. There is no doubt that these sectors are now performing much better than they ever did in the past because the government’s role has been drastically reduced, and I see no reason why this administration should not consider rolling out a more holistic deregulation strategy for the petroleum and power sectors.
The true problem with petrol and power supply is that these products have always been treated by government as social goods. In economics, social goods are products that are considered so critical and socially-sensitive that its production and pricing mechanism cannot be left to private enterprises and market forces to determine. With social goods, the government believes that in order to protect its citizens from exploitation, its responsibility is to be heavily involved along the entire value chain. The concept of treating electricity and petrol as social goods is a fundamental misnomer and an economic blunder.
The essence of the social goods theory was initially to highlight the importance of government’s role in the provision of education and health care infrastructure, but even these sectors are largely privatised in many developed countries around the world. Petroleum products are essential commodities for our day-to-day living, but are certainly not social goods. Similarly, power (another essential product) is the bedrock of industrialisation and the catalyst for the technological advances that would ordinarily and invariably translate to a higher quality and standard of living. If it is to be produced in abundance, it has to be produced efficiently and priced appropriately.
So what can this government do to solve the problem of power and petrol scarcity? Adopting full deregulation in both sectors (by immediately opening up the sectors to full private enterprise participation) will be a good starting point. Existing refineries in Port Harcourt, Warri and Kaduna should either be sold to private operators or abandoned outrightly, because the financial (and economic) cost of managing these dilapidated refineries under the current conditions, juxtaposed with the refineries’ current productivity levels, make it neither practical nor viable to continue to do so. More licenses should be issued by attracting more investors to build and operate private refineries. Investors respond well to incentives (tax breaks, etc), so it should not be too difficult for this government to attract investment into this industry.
If this policy is pursued vigorously, we could have new privately-owned and managed refineries springing up within the next five years. If we really want to get to the point where we never have to experience fuel shortages and long queues again, then the NNPC has to liberate the importation process further by issuing more licenses to marketers interested in importing petroleum products. Ideally, the NNPC should play no role in the importation, distribution, storage, pricing and sale of petroleum products. The Department of Petroleum Resources’ role should simply be to ensure that imported petroleum products meet the required quality standards, just like NAFDAC continues to do in the context of the importation of food and drugs.
This policy directive may not be popular initially, because once price control mechanisms are removed, marketers would be allowed to distribute and sell their products at petrol stations at their own prices. This also means that the cost of fuel may vary slightly across different locations. First, this already is the case, because the pump price of fuel is not N86.50 in every petrol station in Nigeria.
But perhaps the more relevant point from an economic perspective is that most products already have price variations occasioned by location differences (for example, the prices of tomato, yam and pepper aren’t fixed across the entire country). Some of these players will lose money, others will survive. But in a matter of weeks, the market will be flooded with an abundance of petroleum products. A cartel cannot function optimally in a liberalised market, so the knock-off effect will be an immediate elimination of supply shortages and an eventual drop in pump prices once there is market equilibrium.
The same can also be said in the context of power generation, transmission and distribution. The power sector has had its fair share of false dawns. Previous administrations have invested substantial funds to rehabilitate the sector but to no avail. Like the petroleum sector, there are deeply-entrenched interests operating from within and outside who have been profiting from the sustained instability for many years. It is no surprise, for example, that the generator importation business is a booming and thriving venture today. The passing of the Electricity Sector Reform Act in 2015 should serve as a good springboard for power reform.
Indeed, the power sector is already on the pathway towards full deregulation, but these reforms have not been far-reaching enough and the implementation process has been questionable. For example, despite the previous administration issuing out 6 generating and 11 distribution licenses to private investors, it still insisted on playing an active role in transmission and generation. The private investors essentially inherited government’s dilapidated infrastructure at substantial premiums, and have been struggling to pump the additional funds required to give power generation and distribution the shot in the arm it truly needs. The end result is that consumers have had to suffer with an unreliable and unavailable metering system, illegal connections and numerous cases of fraudulent billings.
The easy way out is for government to impose higher tariffs on customers, but the truth is that a lot of energy has been wasted on the pricing of electricity and gas. By law, the Nigerian Electricity Regulatory Commission (NERC) is responsible for setting tariff structure. There are people who would argue that government should be regulating tariffs, but this line of thinking is slightly outdated. Like the petroleum pump price, the government should navigate away fiddling with tariffs. The government may argue that its continued involvement in the sector is justified because it is too strategic to be left solely in private investors’ hands.
However, power is simply another capital-intensive segment of our economy that would benefit from a more substantial reliance on the private sector’s sound technical expertise and managerial know-how. Problems like inadequate gas supply, pipeline vandilization and repeated breakdown of power plants only highlight the poor planning, management and execution of a holistic roadmap of past administrations.
Previous governments were too involved along the entire value chain, too incompetent to optimally execute its own responsibilities and too stubborn to admit its own shortcomings. This is where this administration has an opportunity to break from the past. The most critical step it can take is to implement a holistic deregulation of the power generation process. Government should direct its focus towards attracting serious multi-national investors to build and operate coal-fired plants, solar-powered plants, gas-powered, hydro-powered and possibly nuclear-powered plants. Like refineries, the building of these different power plants require the attraction of high-tech companies with the technical competence and huge capital resources.
If properly marshalled, it can be a profitable venture for serious-minded investors, so the government simply needs to provide the enabling environment to make this a reality. In addition to this, a full deregulation of the transmission process, perhaps on a geographical basis, would certainly ensure an increase in transmission lines and power stations nationwide. If the government is eager to get its feet wet, it can limit its direct involvement to the generation and transmission of power in rural and riverine communities, because investors may find it unprofitable to service those areas for the time being. People simply want electricity, and tariffs would become affordable when supply is in abundance, because the increased economic wealth (as a result of increased power supply) would compensate for the burden of higher tariffs. Operators may initially price electricity high, but competition and increased power supply will eventually force tariffs down.
There is a fundamental and ideological issue at play in Nigeria today. This ideological issue speaks to the very core of what the government’s role should be in creating a better enabling environment for its citizens to thrive. In a metaphorical sense, should our government be the driver, the passenger, the road, the speed-bumps, the car or the road signs? The answer to this rhetorical question may not be immediately clear to us, as our concept and understanding of government and governance continues to evolve in this unique environment that is Nigeria. But one thing is certain: The government cannot and should not take on all responsibilities, because this metaphorical car is bound to crash if it insists on doing so.
Deregulation ensures that the government does not bite more than it can chew, and this article has focused on what government needs to do to become more efficient in its service delivery. No matter the segment of our economy, government involvement in production, distribution and pricing will always lead to market failure. The only way to attract good investment in any capital-intensive sector is to allow the market to determine price. The free market should be allowed to determine pump prices and electricity tariffs, just like the free market determines the price of tomatoes, yam and sugar. We do not grapple with tomato challenges, so it is not difficult to envisage a scenario where the petroleum and power grapples come to an end, once and for all.
Otunba Femi Pedro is an economist, former Deputy Governor of Lagos State, and former Managing Director of First Atlantic Bank (FinBank) Plc.
He can connect with him via Twitter: @femipedro