‘Why govt, investors must revisit power privatisation contract’
Prof Adeola Adenikinju is the Director, Centre for Petroleum, Energy Economics and Law (CPEEL) at the University of Ibadan. Adenikinju has consulted for such organisations as the European Union, United Nations, the Nigeria LNG Limited, The African Economic Research Consortium, the World Bank, and the National Data Bank, among others. In this interview with Roseline Okere, he reiterated that undue interference crippled national resources and emphasised the need for Government to review the privatisation contracts with investors in the quest for regular electricity supply in the country.
Nigeria is currently experiencing economic recession and this underscores the need to diversify to other areas. Which areas of the economy do you think government should focus on for revenue generation?
The continuous contraction of the economy will continue to impact negatively on the revenue generation capacity of the economy. Government must reflate the economy. Most states’ economies are technically insolvent, crippling the economies of such states and affecting the revenue generating capacities of those states. We must develop the rural and the informal sectors. There is a latent potential in these sectors that we can harvest to boost the revenue of the country. However, we must first invest, develop and provide enablers for the sectors.
The fight against corruption is a good way to reposition the economy. Also, we need to guarantee the safety of lives and property in order to have a robust economy. I would give good marks to President Mohammadu Buhari in the area of security.
Yet, there are certain things I think the President needs to do to fast-track economic recovery. He needs to encourage local production. The economy also needs to be diversified and our infrastructures need to be fixed. So far, we have not seen much effort in this regards.
The country has been battling with providing regular electricity without tangible success. What is your advice to the Federal Government in respect of this?
The poor state of electricity supply remains a major concern to every well meaning Nigerian including the government. The expectation from privatisation was that electricity supply would be more stable. However, Nigerians have witnessed more supply volatility and increase in electricity tariffs relative to any sustained improvement in electricity supply.
There is a need to actually do a critical review of the electricity supply industry in the light of current challenges faced by the sector.
There is a need to also ensure that the privatised companies and the government complied with the privatisation contract. We need to explore alternative electricity generation sources in addition to gas. The high dependence on gas for power generation is a major source of electricity supply insecurity. This is complicated by the fact that the gas is concentrated in a highly politically volatile geopolitical zone and that the country has no visible gas storage system to mitigate the effects of supply disruption.
Moreover, the high technical and commercial losses are yet to come down. Also, there is inadequate investment across the electricity supply value chain. The possibility of mergers and acquisition of some of the privatised companies with foreign companies, who would possibly bring in technical and additional investment should be explored and encouraged by the government.
There is no doubt that improved electricity supply will reduce the cost of electricity and improved competitiveness of the productive sectors of the economy. It will lower costs of production, lower costs of products, and boost demand and improve profits of firms. This will have a virtuous effect on employment and economic welfare of the citizens.
Nigeria still depends on fuel importation due to the inability of the refineries to meet local demand of petroleum products. How do we come out of spending billions on imports?
I do not think the government can waive any magic wand to make the refineries to work at internationally acceptable capacity utilisation level. My preference is that the refineries should be privatised and the private sector should be encouraged to take over both the risk and returns associated with the market economy.
Continuous interference of the government in the commercial aspects of the downstream sector is still a major factor hindering the efficiency of the sector. If we promote local refineries, it will be a lot cheaper to produce and sell refined products in Nigeria, and who knows, with the right incentives we can again become a major exporter of refined products.
A sustained economic growth will reduce the pressure, especially if is inclusive and broad based. A seven per cent average economic growth rate will lead to a doubling of the size of the economy every decade. A balanced growth strategy that utilises all our resources and abilities is very important. We must better utilise the benefits of the extractive industry as they can serve as facilitator of growth. They are not mutually exclusive with the appropriate institutions and strategies.
However, as a wasteful asset, petroleum should be integrated with other sectors mainly in terms of forward linkages. Over 6,000 products are derivable from petroleum products. These can form the basis for developing petrochemical industry, fertilizer and ammonia industry, support the power sector.
We must get our other sectors to continue to play their own roles in revenue generation and employment creation. However, the paradox is that while these sectors are contributing to value addition, they are not making proportionate contribution to government revenue and foreign exchange earnings.
With the oil sector, the new sectors have made Nigeria as the country with the highest number of billionaires and private jets in Africa. However, why is this not translated into more privately generated tax revenue? Until this is done, the fortunes of the Nigerian state will continue to fluctuate with the vagaries of the oil sector.
We need a strong, credible, efficient but lean state. We must create an economy that is just and fair to all.
New militant groups have continued to destroy oil and gas installations in the Niger Delta. How do we solve the regional militancy crisis?
We need to address the fundamental cause of the crisis in the Niger Delta. There are short, medium and long-term strategies to address the Niger Delta crisis. The other parts of the country must realise that there must be a collective resolve to address the problems in the region. Current institutional arrangements and structure are not working. There is a need for a new approach that will benefit every resident of the Niger Delta and transform the condition of living in the region.
What is your advice to government on the development of the country’s agricultural sector?
The revival of the agricultural sector is very important. The sector must be diversified to make it more attractive to more people and investors, the sector needs increased access to credit, modern technology, improved seedlings, extension services, less dependence on rainfall, and the opening up of the rural areas through improved rural roads and infrastructure.
Government must do more than lip service to the development of agricultural sector.
Nigeria has suffered under the affliction from oil. The years of plenty is regularly and predictably followed by years of famine. We are currently experiencing one. Hence, every successive government had seen and proclaimed the diversification of the economy away from oil as the Messiah that can deliver Nigeria. The urgency has become more fervent with the recent global oil climate evidenced by nearly 75 per cent decline in the world oil price.
The unfavourable development in the demand and supply factors have created panic mode in oil dependent countries like Nigeria.
With the rebasing of the Nigerian economy, the share of petroleum to the Gross Domestic Product (GDP) has declined to less than 16 per cent compared to 37 per cent at its peak in 1981.
Agriculture and Services account for 20 and 59 per cent of the GDP respectively. However, in spite of the GDP figures, the fiscal significance of oil continues to be very important. Oil accounts for between 70 to 80 per cent of government revenue and between 95 to 97 per cent of foreign exchange earned in the economy.
The solution is not diversification away from oil as most people conceived it, but we need vertical and horizontal restructuring of the Nigerian economy. In the short to medium term, petroleum will continue to be important to our economy and therefore, our first concern is how do we maximise the blessings from oil? The lessons from abroad will be quite useful. Trinidad & Tobago, a small island country with a population of less than 10 million, and much smaller gas reserve has been a major international player in the world gas market. She has invested to develop her gas resources so well to the benefit of her people.
People have been agitating for the disintegration of the country. Do you think this will help to solve the current security issues in the country?
I do not believe in the disintegration of the country. This will not solve the security challenges we face. Rather there should be restructuring of the country. The first Republic provides us with good examples of healthy, competitive and strong regions that were delivering services to the people.
Nigeria’s crude oil production and revenue have been slashed by more than half. Is it a wise decision for the country to resort to borrowing to fund the country’s budget?
It is not a crime to borrow, especially when the budget is seriously underperforming as we currently have. There is a need to reflate the economy. However, borrowing is not a sufficient policy to dig the economy out of the current crisis. There is a need for a set of coherent economic policies, programme and reputable technocrats that understand the development and macroeconomic challenges confronting the country and understand further the mix of policies that the economy needs at this critical moment.
It should not be a long-term solution option. It should be seen as a short-term option to address the current economy challenges confronting the country presently. It could lead to crowding out effects to the detriment of the private sector; it also means that the future generation will eventually be left of carry the can. Finally, we need to diversify the economy, make the economy more vibrant by providing incentives for the private sector to operate, make regulations clearer and more predictable and fixing the infrastructure decay across the country.
What do you think this administration has done right since assuming office and what has it not done right?
The administration has scored pass mark in two key areas – fight against terrorism, especially the onslaught against Boko Haram and the war against corruption. There are attempts to ensure that the easy looting of the treasury as was in the past is no longer the vogue. It is also commendable that some of the looted funds have been recovered. However there is still a long way to go.
On the flip side, the economy remains the major challenge. The macroeconomic indicators such as inflation rate, unemployment rate, exchange rate, and fiscal balance, among others are not encouraging. The economy is contrasting very rapidly. There is gloom and uncertainty among the poor.
Some experts blame the economic recession in Nigeria on the fall of crude oil prices. Oil and gas is now being seen as a curse rather than blessing. Why is this so?
Petroleum ought to be a blessing. It is a good gift from God. It is a facilitator of development. Oil provides so much economic rent that it basically transformed the countries that found it. At its height of $140 per barrel, the difference between export price and costs of production was 14 times. This is partly why Nigeria could impose a profit tax of 85 per cent and yet investors are still flocking into the oil business.
However, oil has its rules in order to derive the maximum benefit from it. Just like God handed the 10 Commandments to the Israelites, with consequences for disobedience and blessings for obedience; it is possible to discern the laws of the use of oil from economic theory and practical examples from countries that have used oil successfully and optimize the benefits – Norway, UAE, Malaysia, Canada, Kuwait, Saudi Arabia and Trinidad & Tobago.
What must the country do to benefit maximally from crude oil resources?
The country is experiencing weak institutions of restraints on corruption, and the capacity of state institutions to ensure that sanctions and incentives played the role of shaping economic agents behaviours.
The weak corporate and state governance led to rent seeking as worthwhile pursuit inhibiting genuine wealth creation activities by individuals and even the corporate sector.
Policy stance up till the mid-1986, favoured fixed nominal exchange rate. However, in the face of rising domestic inflation, real exchange rate appreciated significantly. This made import cheaper than local products. The inability of local products to compete with cheaper imports affected the demand for the former. The outcome was that agriculture and manufacturing sectors contracted, output and employment from the two sectors declined, further narrowing the export and revenue base of the Nigerian economy.
The law of economic development states that as you deplete a wasting asset (natural capital, such as petroleum), you use its proceeds to develop human capital, physical capital (infrastructure – road, rail, electricity) and financial capital (through the acquisition of financial assets like sovereign wealth fund, bonds, equity, shares and sovereign debts). Nigeria violated this law. The depletion of our human capital went in tandem with the degradation of our human, physical and financial capital. Perhaps, to be more generous, the rate at which our natural capital was being depleted was significantly higher than the rate at which physical capital like roads, hospitals, were being developed or the rate at which our schools were being equipped and human capital necessary for economic development were built. Electricity per capita in Nigeria in 2010 was 135 kilowatt hour (kWh) compared to South Africa 4580kWh, South Korea, 9744kWh, Saudi Arabia, 7784kWh and even Algeria, 1015kWh.
The country also neglected and violated the petroleum communities. We destroyed their culture and we reaped the attendant whirlwind in the form of kidnapping, pipeline vandalism, political thuggery and killing.
This led to the creation of an enclave economy – an oil economy that exists in parallel with the non-oil economy. While the former was characterised by high income, and high standard of living, the latter experienced much lower income and standard of living.
Of course only very insignificant proportion of the population benefitted directly from the oil economy – thus widening income inequality. But perhaps more ironic was that we did not allow the oil economy to reproduce the extensive economic and financial linkages with the rest of the economy through the development of the downstream sector such as refineries, pipelines, depots, fertilizers, petrochemicals, glass, aluminium, paint, pharmaceuticals and similar other sectors that utilise the by-products of petroleum.