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Myth of deregulation

THE Nigeria Labour Congress (NLC) was in the streets across Nigeria recently protesting and picketing offices of electricity distribution companies (DISCOS). NLC was fighting against February 1 approved  increase of over 45% by electricity regulator, Nigeria Electricity Regulatory Commission (NERC).

The policy to increased electricity price arose from the decision by NERC and indeed the federal government to create what is termed bankable price regime for cost recovery by the investors who bought assets of defunct National Electricity Power Authority (NEPA). It is also argued by the proponents of price increase that to ensure the distribution companies and others in the electricity value chain break even, Nigerians have to pay more.

Mr. Babatunde Fashola, Minister of Power, has been a strong advocate of this new price regime insisting, that Nigerians must bear the cost if only for the survival and growth of the electricity sub-sector. He also claims that under the new price regime, a willing buyer and seller structure will emerge. If I understand this point at all, it means those who can afford to pay for 24 hours electricity can do so and should not enjoy the subsidy that would otherwise happen if price is kept low. It is further argued by Fashola that in satisfying demand of those who can pay and should pay more, the electricity companies would have recovered their cost and will invest more and thus have the spare electricity to give to other Nigerians, who it is assumed might not pay as much.

The other argument is that there has been massive leakage and fraud arising from inadequate metering system in Nigeria leading to a lot of commercial losses by the distribution companies. Because of these losses, the distribution companies have not been able to make more investments and many if not most are in the loss column. This is despite the fixed charge (now abolished) which was put in place by the distribution companies to mitigate their losses.

In a way, the labour protest is reminiscent of fuel subsidy debate and protests in Nigeria, which has often been led by NLC.  And this has been the case since Nigeria under President Ibrahim Babaginda adopted the free market, liberalised economic policies under the Structural Adjustment Programme (SAP) in 1985. SAP may be dead but its legacy is still with us. As government withdraws from the commanding heights of the economy (supposedly becoming smaller) and replaces it with private sector led, price spike has become the natural corollary.

It has been the case with fuel. It has been the case with the banking sector. It has been case with transportation. It is now with electricity and it is going to be the case with any economic activity that is going to be private sector led, especially in Nigeria. As a matter of fact, telephone may be abundant and affordable in terms of prices but many Nigerians are not satisfied that the telephone companies are offering the quality of service expected of it considering the huge return it makes. Thus, the telecommunication companies are making a kill at the expense of Nigerians. The telecommunication companies’ broadband penetration and the sophistication of their technologies are open to serious scrutiny. Deregulation policy has not been able to solve these problems. And if we bother to look closer at these sectors, there is likely to be all sorts of hidden subsidies that Nigerians might not be aware of. For instance, when a Dangote or any big corporate player gets a waiver on imports, is the benefit of these transferred to end users and consumers in the general public? The answer is no.

Now the question is why, why is the process of deregulation such a problematic thing in Nigeria?  The reason is a fairly straightforward one. The policy of deregulation is a simple concept but extremely difficult to implement. And most times it does not yield the benefits its strongest devotee’s paint of it. Deregulators talk about competition, free entry and exit, cheaper prices and better quality products. In theory this may be true but in the real world, this is not often the case.

For one thing a deregulated market is the easiest market to manipulate. It needs either one behemoth or collusion of business interests to dominate the market and a monopolistic or oligopolistic market is created as the case may be. This is the case because governments in Nigeria do not quite have the grasps or interest or are in bed with private interests in supporting deregulation no matter how it is structured. Look at the cable television in Nigeria. It is a monopoly with Multi-Choice Nigeria enjoying monopoly profits.  The aviation industry is a disaster even after it has been deregulated. Not a single airline in Nigeria is a commercial success. The aviation industry has been deregulated, yet it is not growing.

Those who crow about virtues of deregulation do not point to its pitfalls, perhaps because they are more interested in capturing the market than competing in the market. Why not, if you can get the first mover advantage, you have already locked-in the market. You then drive out the competition and enjoy monopoly profits. With your firm dominating the market it does not take long before the quality of products begins to decline. This has been case study across board.

In this context, there is very little to expect from the unbundled electricity sector. As a matter of fact, electric companies tend to become monopolies because of the nature of the sector, which is perhaps why many Nigerians wonder at any difference, if at all between now and when defunct NEPA was in operation. This is the real danger.

Another thing, while in economic definition, market competition should lead to zero economic profits— a situation which enables companies to break even and no more, what has happened in the deregulated market in Nigeria is that big businesses has continued to earn stupendous profits in contrast to what should have happened in a competitive market. This fact is often obscured by those who trumpet deregulation as the cure-all idea. Actually, why should they if Nigerians are not asking the hard and tough questions.

As labour struggles to roll back the price increases of electricity, it should be noted that deregulation is not by itself a bad concept. However, beyond its theoretical construct, for deregulation to really work, it must be properly designed, it must be backed by the right laws that should be subjected to constant review as technology and business practices evolves. Moreover, a deregulated market must have strong institutional structure to ensure the protection of the interest of the general public. The electricity price increases might be warranted—if you run the numbers—but is there a justification in asking consumers to pay more for poor services by the distribution companies? On the other hand, with massive loss of revenue due to poor metering, etc, as well as other legacy issues, the distribution companies and others in the value chain cannot possible survive as a business. To avoid market failure with its catastrophic consequences, something has to be done. This is the dialogue that should now take place.



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