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PIB: Striving for a robust industry regulation (2)

By Felix Ayanruoh

Part one of this article reviewed the regulatory framework of the PIB, noting the need for a robust industry regulation as a catalyst for success.

However, you may want to define effective petroleum industry regulation – in the Nigerian context, there is not much of it that’s left. Whichever criterion you choose to use – independence, transparency, and discretionary, you’ll see an industry in a bad shape. Oil and gas developments and infrastructures are declining, and investors’ confidence is at an all time low.

The country is in denial about the extent of the rot in the sector, and the effort that would be required to turn things around. It will likely take more than the PIB passage, perhaps a robust regulatory regime, to get the industry back to a level at which one could fairly say the industry is thriving.

Hydrocarbon governance through regulation – whether of private companies or state owned companies with commercial intent is beneficial especially in industry such as the oil and gas industry. This is an industry with very long asset life-spans that demands predictability and long-term guarantees in relationships, whilst sustaining some flexibility to deal with changes in external circumstance.

A long-term focus is sometimes difficult to reconcile with the short term requirements of political patronage. When the petroleum industry is regulated, the transparency created by a fully independent regulator is beyond calculation.

Given the purpose of regulation is the promotion of fair and efficient market and containment of opportunistic behavior, it therefore follows that independence is crucial to effective regulation. There is no such thing as effective dependent regulation. What is at stake is not so much the need for regulation, but how far precisely does the mandate of regulation go.

Suffice it to state that independent regulation should not be seen as a ubiquitous default governance arrangement, but as an opportunity to improve performance significantly in the industry by learning from precedence of successful regulatory regimes around the world.

Regulatory independence is necessary for credibility and non-opportunistic behavior in the industry. Often, regulators are faced with the dichotomous dilemma of formulating policies to encourage competition on the one hand, and protecting government’s interest on the other. Consequently, a captive free regulator is sacrosanct, especially when the government is a shareholder or joint partner in one or more of the regulated enterprises.

In a nutshell, the most crucial feature of an independent regulatory regime is to safeguard market interventions from political and bureaucratic interference (capture), this capture mechanism are equipoise, based on quid pro quo.

Section 8 of the PIB, gave the Minister of Petroleum Resources the overall supervisory role over regulatory matters affecting the industry. The question, then, is whether this power will affect the independence of these regulatory agencies. Experience has shown that regulators are always subject to government interference and political pressure, because regulatory decisions are usually political in nature.

The minister’s power to make regulations on the advice of both the Inspectorate and the Agency – as provided for by Section 8 of the PIB’ should not be used as a stratagem of depriving the regulators the means to participate in the policy process to the extent it is needed for proper regulatory oversight.

Heuristic analysis by experts in the field concludes that independent regulatory regimes give rise to incentives for opportunism, and has the following attributes:

Consistency: reducing the risk that returns on sunk investments might be expropriated through lower than optimal profits or charges for their use by third parties;

Stability and predictability: reducing the risk that plans for infrastructure maintenance and development will be changed to reflect short term political pressures (rather than staying with long term political objectives), raising costs or confiscating value;

Neutrality in decision-making: mitigating the risk that the wrong projects are chosen, reflecting short term political advantage rather than long term policy goals. This can be particularly important in international projects where there are strong short term incentives to favor bids on the basis of nationality rather than quality;

Non-discrimination: mitigating the risk that condition for access to critical infrastructure may be biased towards incumbents.


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