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Femi Pedro: Fuel Scarcity & Power Crisis – Deregulation & the Social Goods Theory

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fuel-scarcity-612x300After 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 many 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 and endure persistent power cuts because it is counter-intuitive and counter-productive. In developed countries, the provision of these simple essential products have 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 NNPC is actively involve in importation, distribution and sales while 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’s direct involvement in the sector.

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 liberalized, 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 privatized 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 industrialization 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 liberalized 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 madministration 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 knowhow. Problems like inadequate gas supply, pipeline vandalisation 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 required the attraction of high-tech companies with the the technical competence and huge capital resources.

If properly marshaled, 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.

Conclusion
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.

17 Comments

  1. Nnamdi

    April 8, 2016 at 5:01 pm

    99% of nigeria problem is in how nigerians think which include both politicians and everyone. Fuel scarcity have being happening every 3 months in Nigeria and no one want to find the root of the problem and solve it ones and for all. From Jonathan administration to Buhari the both blame piplines vandalism as the major reason for lack of electricity but the cant use the might of a what hte have to solve the problem ones and for all giving the fact that almost all nigeria depenc on this product for electricity and etc and also Nigeria does not have any maintenance culture wd think it’s only reserved for western countries this is a big problem thst will nigeria never move forward for good.

    • Damilola

      April 8, 2016 at 7:37 pm

      This article is very enlightening. I love it. I believe, one of the most difficult challenges is implementing some of these ideas. We have solution but who is going to take the action and execute with genuine interests, benefits on both sides. Unfortunately, this government officials seem to not take their job serious that’s if they even know what to do. And if one person is trying to make a difference, there’s hundreds blocking him because they are only there for their own interest. And citizens are handicapped, clueless on how to make a difference in solving problems facing the country.

  2. memyselfandi

    April 8, 2016 at 5:05 pm

    BN you people are in the credits of this BBC documentary at min 56.33 onwards:)
    youtube.com/watch?v=hA3LVgIKoFY&nohtml5=False

  3. Ba

    April 8, 2016 at 5:25 pm

    Fabulous article, deregulation policy will bring a viable solution just like the telecoms industry.

  4. Oluchi

    April 8, 2016 at 5:37 pm

    I completely agree that deregulation is the way forward. In Nigeria, we are never short of progressive ideas. Big question is: who will bell the cat?

  5. Rayva

    April 8, 2016 at 5:57 pm

    Thanks for simplifying the solution to the fuel and electricity issues at hand.

  6. X-Factor

    April 8, 2016 at 6:14 pm

    Very Profound and Insightful piece

  7. Ajala & Foodie

    April 8, 2016 at 7:07 pm

    @ Nnamdi, AMEN!!! What we have been doing both with electricity and the oil situation is spraying air freshener on the fruits of a tree with rotten roots. A time is coming and if it is not here already, when the stench of the fruits will become resistant to the air fresheners and we all are forced to go back to the root and either deal with the issues at the root or completely uproot the trees with the bad/faulty roots and plant new ones. Either way it is not going to be easy, we are going to suffer the consequences of the temporary patch of jobs that has been done in the past. Unfortunately, oil price is down so no more $$$ to feed the patching we have enjoyed in the past. It is now we truly see if we Nigerians will sink or swim and how the current government handles the cards they’ve been dealt them will go a long way in deciding how things are going to shape up moving forward but let’s know that if they are to take care of this the right way then we should be ready to suffer for awhile. Temporary discomfort for long term pleasures and comfort. The saying “Nothing good comes easy” comes to mind. All I have to say is, it is time for us to hunker down and get to work .

  8. E ma pa ketekete

    April 8, 2016 at 7:20 pm

    Great write up and very informational too!

  9. Tosin

    April 8, 2016 at 7:28 pm

    Been so biased against this Uncle that I was like let me not read his 1940 college economics essay before it will turn my belle again. But I just browsed the essay quickly and it seems he’s been working on it.
    He has a lot to offer I’m sure in many fields but he’s very far from cutting edge in econ or in theory.

  10. S

    April 8, 2016 at 10:42 pm

    Actually, there are many things wrong with this suggestion. If we privatize all these very important sectors, we won’t be able to hold the private sector accountable. The private sector (capitalism as a whole) is mainly driven by profits and not social responsibilities. Imagine what will happen if they weren’t making profits anymore.
    Privatizing and deregulating these sectors isn’t necessarily the answer. BTW, owners of big corporations in naija have contributed to ruining the public sector and then invested their money in their private businesses e.g. oga common sense and the NTA vs Silverbird saga). So, if these same people (who have no responsibility to the Nigerian people) mismanage the private sector, who will we expect to bail them out? Think about how the Global Financial Crisis started in the US and who ended up paying. We are better off with a big government than a big private sector o. Especially since the people actually know who to direct their anger to if they fail.
    We are not looking to get the rich richer. Let’s clean our public sector and hold them responsible enough to take care of us. The tiny percentage of profit seeking people we are about to give all these licences to will only get stronger enough to sabotage any government we put to have our interest at heart.

    • 'Deola

      April 9, 2016 at 12:49 am

      I get your point. Unfortunately our government is hampered in delivering quality goods and services because of national representation. One way to step aside from this for tem to focus more on regulation and occasional market intervention when market is not working perfectly like in the case when Obama had to step in and bail some companies out. We know they were financed under an arrangement they would pay back as soon as they were making profit again. And my understanding is that they have all paid back and they have also shored up the industry and kept employment growing.

      The Nigerian problem has a structural problem inherited from our colonialists. The struggle amongst ethnicities to control the commanding heights of the economy. It is through this that political patronage is dispensed and the quality of goods and services diluted. One section of the country covets power as a natural right. Another section as retired to commerce as its source of survival, and one more section sees herself as the balancing act providing professionals and few industrialists. The unfairness and injustice has translated into people acting unconsciously to wreck the system.

      If we must survive as a country together then we must embark on restructuring our political institutions to take care of the injustices perceived in the system. Invest our energies in making our mostly informal economy a formal economy so government can increase its tax base and revenue stream and also provide basic programs for businesses to modernise, grow and have access to financing. We should also develop our national values in terms of what we stand for and the rights we are willing to defend such a justice, equity and fairness.

    • S

      April 10, 2016 at 6:38 am

      Actually Obama would not have had to step in to bail them if they did’t have that much power in the first place. Countries that chose to bail their citizens instead of corporations are doing better now.
      A call for deregulation and increased competition cause of privatization is a step backwards to make the rich richer and the poor poorer. e.g. The neoliberal era of Thatcher and Reagan in the 1970s and how that killed the Golden era before it. We have seen that since then the GINI coefficient used to measure income inequality increased. The world has still not recovered.This is the basic economic reality. There are empirical studies of countries that have made this mistake in the past. We should be asking for more government spending with a more accountable public sector.

  11. S

    April 8, 2016 at 10:44 pm

    Lest I forget, a government can’t bite more than it chews if it is working for the citizens. If the government fails, you can vote it out but if people like Dangote and Adenuga or even the few oil marketers fail, who will we hold responsible?

    • 'Deola

      April 10, 2016 at 8:51 am

      @S

      Obama sold the shares government owned in companies bailed out. And every money owed government or tax payers was paid back. Unemployment was managed and employment rate has since see some growth. And millions of jobs have been created. This is sort of management takes place in a formal economy where government has records of companies that need help and those that don’t. If a government has account of what goes on, it is easier to attempt a fix.

      Nigeria is majorly a non-productive economy. No electricity, no power and no well integrated transport network system. And the burden of providing all these is heavy on a government that has no major alternative sources of revenue besides oil. Any freebies to the citizens is going to go into a basket. More like pouring water into a basket.

      I think it makes sense to work from the visibiles to the unvisibles. From the knowns to the unknowns. The knowns are the formal businesses duly registered and who pay and can be made to pay some form of taxes such as payroll and corporate taxes. And in turn the frmal businesses can make government accountable. The people are too poor and ignorant to male government accountable.

      The issue is not making the rich richer, but making the rich accountable. The way the economy is structured it is hard to make people accountable. Is it the civil servant that goes to work late and sells clothes at work you want to make accountable? Is it the CBN worker that is hired based on family connections and not on merit that you want to make accountable? And it goes on and on.

      Government can focus on what it can do best for now. And that is the production of public goods like education, security/ defence and health. When you give people quality education, you can help release their latent potentials. And when you give them security, you can be sure they will go about their economic activities without disruption by terrorists and criminals. Finally, if you give them quality health care, you can be sure they will be strong enough to pursue activities like building the economy without loss of man hours.

  12. Tincan

    April 9, 2016 at 4:18 pm

    This is quite the insightful article Mr. Pedro. I wonder, is there not a middle way? From a lay point of view, I share the fears of S. Would public-private partnerships not be an option in our situation? Also, somewhere in the recesses of my mind, I remember, if my memory serves me right, that one of the SE States wanted to start generating electricity for it’s state (was it Donald Duke?) but was directed to feed any electricity generated to the national pot, so to speak. Would management at State level not be a better idea. That way, the States that can produce power efficiently become more attractive to investors and reap the dividends that comes with an investor-rich environment. I would like to know your thoughts. I also hope someone in government is listening….

  13. Oluwaseun

    April 9, 2016 at 5:59 pm

    I can understand that it may take us a little while to fix our electricity issue but we should not be having problems with tavailability of petrol/fuel. Most importantly, we need more jobs because with more jobs the private sector will grow vast and large that it will systematically reinvent the status quo of our electricity. To get more jobs we need to continue taking education seriously and I’m proud we are a nation of Education believers. It may take us a little longer but we’ll definitely get there- we already are, gradually. We need to investing in New and reasonable technologies that can sustain us both temporarily and when we start having constant electricity. Things like solar energy and massive rechargeable capacity technologies (e.g for tv’s, fridges, bulbs and fan) should be invested in because they are commodities consumers will still want to own even when there’s constant electricity to offset a supposed high electricity cost. Rechargeable batteries are already taking center stages in cars in some of the advanced nations because it reduces dependency on Petrol, contributes to cleaner air, and most importantly, saves consumers lots of money. Tablets are the new “it” tools bcuz they are even way more comfortable than laptops, and they make computing possible no matter where you are. Solar power systems need to replace generators asap and we need to start manufacturing affordablw high end electronics that can self recharge themselves to make ouroffices and homes seem like there is electricity at periods when there are none. God has given us an abundance of Sun. It’s time to start putting that into good use.

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