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Regulated businesses can’t set tariffs without asset valuation, says Igberase

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Igbarese

Mr. Humphrey Igberase is an estate surveyor and valuer. He spoke to CHINEDUM UWAEGBULAM on why regulated sectors should embark on the valuation of assets before tariff setting and ways to resolve compensation issues in the sector.

In Nigeria, companies, especially service providers that operate within the regulated sectors have failed to take cognisance of the need to value their assets prior to tariff setting. How has this impacted the pricing of their services?
It is imperative that we rightly contextualize service providers under reference. These are undertakings, which due to their collective social importance require government regulation, especially with respect to the pricing of their services. The reason is to ensure societal harmony, and that the overall wellbeing of the generality of the citizenry who are consumers is not compromised through exploitative pricing regime.

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One key regulatory function of government is setting affordable tariffs or prices, especially for essential services. This might also entail some forms of subsidies to ensure that the critical mass of society is able to enjoy the benefits of these services at affordable prices. Subsidy is an incentive that bridges the gap between affordable and unaffordable price regime, which is necessary for recovering costs and also providing reasonable returns that will motivate operators to continue in business.

Tariff and subsidy fixed by regulators should be benchmarked with the value of assets deployed to generate revenue. Since tariffs establish a price cap regime, volume and optimisation remain the major drivers of revenue. A return, which motivates operators to stay in business, is tied to revenue. Revenue is tied to price if the volume is known and fixed under an optimised system. In effect, the pricing of such services should be at a level that recovers costs, and at the same time offers enough incentives to stay in business.

The reality in Nigeria is that companies that operate under-regulated environment have not taken advantage of the benefits of valuing their assets and the critical role it plays in determining the most realistic price chargeable for their services. This has negatively impacted their pricing regime because their prices are viewed with suspicion. Valuation of their assets will entrench openness, as prices would be based on the value of assets deployed to be provided.

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What has been the challenge in the valuation of assets of such companies? What’s the role of Estate surveyors in the valuation of assets of the regulated business?
Estate surveyors and valuers are ever ready to perform and discharge this unique role and function which their training and competencies have equipped them to do. The challenge remains the willingness of the regulators and operators to do the right thing by adopting the best practices in fixing tariffs, and applicable subsidies where necessary.

To appropriately determine the most reasonable and equitable price cap, the value of assets deployed to generate or provide such services should be known. So there exists an inseparable linkage between the pricing of such services and the value of assets deployed. The estate surveyor comes in as the professional trained, equipped, and recognised by law to determine the value of assets and properties, including those deployed by undertakings that provide regulated services. It is also imperative that we understand the dynamics of tariff setting, which essentially is tied to the value of assets, revenue, returns, and cost recovery thresholds.

The major challenge militating against estate surveyors from fulfilling their roles in the valuation of these assets remains, firmness by government and commitment to following best practices. Government should be at the forefront of ensuring that estate surveyors, who are recognised by law as those who should determine the value of assets of regulated undertakings.

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What are the best global practices for regulatory asset- valuation? Do Nigerian laws provide for practitioners to engage service providers on regulated assets? What aspect of the laws should be reviewed?
The global best practice remains that before tariffs are set, the value of the assets that are deployed to provide services in businesses of such undertakings should be ascertained. The reason is simple, assets generate and sustain revenue. The underlining objective of the investment returns. So when you know the value of your investments expressed by the value of your assets and the associated risk, then the reasonable return can be determined. Return should be at a level that sustains and motivates investors to stay in such a business.

An ideal or acceptable tariff, be it under an incentive-based or cost-reflective regime remains, one that ensures that the cost of rendering the services by the business is covered while at the same time providing enough or reasonable returns that motivate owners and investors alike to stay in business. All is, however, tied to revenue. Revenue is determined by price, volume, and the degree of optimisation, which impacts cost and returns.

The essence of subsidy is to ensure that services discontinuance or disruption due to poor revenue performance is eliminated. Again, we can see the link between the value of assets, tariff, volume, efficiency, revenue, and subsidy. In view of this linkage, it is recognised the world over which in fact is appropriate, that before, the tariff is set, values of assets deployed for regulated businesses should be determined through one of such basis as optimised depreciated replacement cost.

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The justification being that tariff should be based on an optimized system or assets deployment. Tariffs that incorporate sunk costs under an inefficient system are exploitative and unfair to the paying public. The technicalities of determining the value of assets deployed in regulated undertakings through optimised depreciated cost basis or other bases as recognised by the International Valuation Council rest squarely with estate surveyors and valuers in Nigeria.

The way it works is quite simple: the value of assets deployed in the operations of an undertaking or a regulated business, under an efficient and optimised system is first determined. This value reveals the value of the investment on which expected returns should be tied or determined. The expected return and cost recovering revenue determine the most reasonable tariff under the existing volume or capacity. The affordability of the tariff in turn determines whether a subsidy regime will be required. It equally ensures that consumers are not being subjected to the excessive or exploitative tariffs at the ascertained optimised value of assets deployed in the undertaking.

On the engagement of the operators, what is required of estate surveyors is pure advocacy for the overall good of the society. Where the operators fail to do the needful, the Estate Surveyors and Valuers Registration Board of Nigeria (ESVARBON) can institute legal proceedings or engage the National Assembly with a view to ensuring valuation of assets of regulated businesses before tariffs are fixed.

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We have robust laws that should compel the regulators to do the right thing. The laws setting them up empower them to initiate such valuations. Other laws such as the Public Procurement Act, and the law setting up the Federal Competition and Consumers Protection Commission equally come handy. The problems remain the will to do the right thing, instead of compromises and shorts cuts.

There have been hues and cries over poor compensation for property owners, whose government seized their land for public purpose. What have been the key issues? How can this problem be solved?

Governments can expropriate any land or property for overriding public purpose. In all well-organised societies, public good outweighs individual well, so the power of eminent domain confers on government the power to acquire any property for the public good. The constitution of the Federal Republic of Nigeria and the Land Use Act (LUA) recognise this power.

The hues and cries stem from compensations paid, which are considered inadequate by claimants or Project Affected Persons (PAPs). It must be recognizsed that the LUA provisions compensation payable to PAPs leans towards the English Common Law position, which provides that compensation need not to be adequate but must be real.

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Compensation, as provided under the LUA, is basically for the unexhausted value of improvements on land and structures only. The LUA does not provide compensation for the value of land so acquired, which sometimes is higher than the value of improvements thereon. I must also point out that the law confers enormous power on the Schedule Officers of the acquiring authority, thus putting claimants and PAPs at their mercy.

It is a known fact that with the exception for compensation under the Oil Mineral Pipeline Licensing and Prospecting Act, compensation under the enabling law in Nigeria- the LUC, if not amended will remain inadequate. We should align our law with international best practices as exemplified by World Bank’s OD 4.30, which remains the measuring rod for international best practice on compensation and Relocation Action Plan (RAP) for PAPs.

If your property is expropriated, the most sensible thing to do is to consult a professional in that field. The Estate Surveyor knows and understands the dynamics of what is involved and is better placed to achieve reasonable compensation even in the midst of the inadequate provisions in the law. Like I normally tell those that have engaged us for their compensation claims, when it comes to compensation claims for PAPs, the estate surveyors knows how to bend the law without breaking it which ensures that we maximise claims for our clients.

Claimants should engage estate surveyors and valuers on compensation assessment and management. It is the most reasonable course of action because the law does not favor PAPs.

Governments are yet to put in place tribunals that should adjudicate on the objections of compensations recommended by acquiring authorities. Claimants and PAPs are left at the mercy of Schedule Officers. The officer knows that the estate surveyor and valuer is very well informed on the subject, so most time threads softly when they see an Estate Surveyors and Valuers representing PAPs as attorneys.

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