Metropole Magazine

 
 
Today's Weather: Abuja NG: Partly Cloudy, Day 360|Night 260

            
15 Feb

Last Monday, organised labour made good on the threat to ground the country in protests against the latest hike in electricity tariff. If anyone was in doubt about the capacity of the labour unions to pull out their members en mass, to make common cause with natural and unnatural allies, to appropriate the mandate to speak for the "masses" or the entire populace, and to fancy having a veto power of sorts, such a person should have a rethink by now. The country wasn't  exactly grounded by this first wave of protests. But judged by the sheer number of participants and their success in eliciting a pandering to the gallery from the Senate, it was a good outing for the unions and their civil society allies. But nothing could be more wrong-headed.

The unions and their supporters gave a number of reasons for their protests. One, the hike was done without proper consultation. Two, the hike will negatively impact individuals and businesses in the country.  Three, emphasis should be put on improving electricity supply first before any price hike. Four, electricity consumers should be billed for actual, not estimated, consumption. Five, the buyers of the electricity generation companies (GENCOs) and the distribution companies (DISCOs) are incompetent, exploitative and over-pampered by the sector regulator, the Nigerian Electricity Regulatory Commission (NERC), and the government. And six, the privatisation of the electricity sector should be reversed.

While some of these claims might be valid and legitimate, the overall approach is neither. More importantly, the rhetoric of the unions is problematic and potentially counter-productive and dangerous. Two quotes from the protests will illustrate this possibility. Comrade Boboye Kaigama, President of the Trade Union Congress (TUC), said: "If NERC cannot do its work, organised labour will. It is our collective wealth. If they (NERC) are conniving with the DISCOs and the GENCOs to deprive Nigerians of electricity, it is a right not a privilege. If the tariff is not reversed, we are prepared to take over the DISCOs."

On his part, Dr. Dipo Fashina, a former President of the Academic Staff Union of Universities (ASUU), was quoted as saying the 2013 privatisation of electricity companies was a violation of the Nigerian Constitution! "We want the Senate to reverse the tariff immediately," he said. But he wasn't done: "apart from that, the Senate must protect the poor. Majority of Nigerians cannot afford the evil that is going on. Stand out and reverse all the privatisation of all our roads, airlines, Ajaokuta Steel..."

In a short pace, protests about tariff hike have mutated into a platform for resolving all grouses, whether legitimate or not. There is a real and present danger that the unions and their present and future supporters might be emboldened to further force the issue beyond threatening to prevent others from undertaking their legitimate businesses, take over private entities, usurp the functions of a statutory agency, and advocate the reversal of all forms of privatisation in the country. Where will they stop? The unions are about railroading the country into slippery slope that can only lead to anarchy and retrogression. And this is why it is very important not only to interrogate the protests but also to checkmate this dangerous slide.

To start with, it must be clearly stated that the right to protest is a democratic right. But having that right does not necessarily make its exercise or the cause of protest right. Democracy, at its core, is about processes. There is an established process for making inputs into tariff-setting and seeking redress about tariff increase. According to the business rules of NERC, tariff-setting is done in consultation with the operators and the consumers. When the GENCOs and DISCOs submitted applications for tariff hike in June 2015, NERC asked them to engage with their consumers. NERC still went ahead to do its own consultations before approving the new tariff on 19 December 2015.


Those opposed to the tariff hike had the opportunity to engage with the process and contest the various components of the tariff and how they were calculated. They did not. It is possible that the consultations were not widely communicated or that they were held at a time not convenient for most. But it is more useful to insist on the right to be consulted while the process was on than to insist on holding everyone else to ransom after the fact. Also, NERC has a provision for those unhappy with change in tariff to seek redress within 60 days. The unions have not explored this provision to make a fact-based, rather than an emotional case for why they think the tariffs should be reduced or reversed. To be sure, protests could be a negotiating tool. But given how disruptive and costly protests can be, they should be used as a last resort, not as the first.

The second issue is the hypocrisy of the unions in calling for reversal of the privatisation of the GENCOs and the DISCOs on account of tariff hike or non-improvement in power supply. Privatisation of the electricity companies is actually one of the best things done by the last administration. This doesn't mean the exercise was perfect or that questions cannot be asked or that the privatisation has yielded outcomes comparable to the telecoms' privatisation. Far from it. But the thing to do is to seek ways for constant improvement rather than call for a return to government ownership. If government had been such an efficient provider of utilities and manager of businesses, there wouldn't have been the need for privatisation in the first place.

Equally important is the not-so-small fact that while the privatisation was going on, labour unions were more interested in getting hefty compensations for their members. It is said the bulk of the about $4 billion the government made from the sale of GENCOs and DISCOs went into compensating 47,000 electricity workers under the aegis of the National Union of Electricity Employees (NUEE). You cannot support privatisation, cash out handsomely at our collective expense and then turn around one day to canvass that it should be upturned. Talk about the tyranny of a vocal minority and an abuse of veto power.

The third issue is the constant reference to our "collective wealth" and "rights" when talking about the electricity companies and the unfortunate resort to trade union tactics to prevent price change. It is true that the government still has some interests in those companies. But the majority stakes now belong to the private owners. So the argument about collective wealth is outdated by at least two years. I am yet to see where it is written that it the right of citizens to have electricity supplied to them at a particular price. Yes, electricity has serious implication for the welfare and productivity of the individual, the survival of businesses, and progress of our country as a whole. But electricity has always been a private good (even though it has strong externalities) and, with privatisation, it has been privately produced since November 2013.
Dissatisfaction over the price of a private good, no matter how strategic and important such a good is, does not by any stretch constitute a trade or industrial dispute. Food and raw materials are as important to individuals and businesses as electricity is, if not more important. When the prices of those go up, are the unions going to call for street protests too and who are they going to threaten this time? Clearly, the unions and their supporters need to cure themselves of both their unhelpful sense of entitlement and the hangover of a period when electricity was solely provided and subsidised by the government. 


The fourth issue is how the increase will negatively impact the masses and businesses. On the surface, this is a sound argument. Let's face it, an increase of between 45% to 65% in electricity charges will increase inflation, reduce the standards of living of those on fixed incomes, and increase the cost of doing business. But as sound as this argument is, it misses or understates certain points. The first is that electricity from the grid, even at the new tariff, is still about 50% cheaper than the self-generated one, which everyone (including the poor) has been forced to adopt due to the mutually reinforcing incidence of unsustainably low tariffs and low investments in the sector. Apart from the costs of hardware and maintenance and implication for health and safety, electricity generated from diesel costs N47.7/kwh and the one from petrol costs N46.3/kwh, according to a 2012 study by H.U. Ugwu et al., published in the Nigerian Journal of Technology (Vol. 31, No 2). More recent studies put the cost of self-generation much higher.


If asked to choose between electricity from the grid at the new rate and self-generated power, most Nigerians, including the poor on behalf of whom the unions claim to be protesting, will not hesitate to choose the convenience, the safety and the cheaper cost of the former. It is possible that the union has that contradicts this assertion but my sense is that their data is the assumed mandate to choose and speak for the rest of us. The freedom to protest and the freedom to choose are both rights, one is not higher than the other, and no one has the right to choose for others without their consent. Also, the camouflage of protesting because of the poor is punctured by the fact that there is lifeline tariff and it remains unchanged at N4/kwh across distribution areas for those classified as R1 customers.


It is also important to bear in mind that like other goods, electricity has a cost of production and according to the model used by NERC, the tariff is regulated because the sector is given to natural monopoly and the tariff is periodically adjusted to changes in exchange rate, inflation rate and cost of gas. If the cost of production changes, the price must change, except government is prepared to subsidise. It is possible to query the costs and the necessity of the expenses claimed by the companies. But that must be done on the basis of facts and knowledge, not just from a we-no-go-gree or aluta mindset.


The argument that tariff hike should be preceded by improved supply goes back to the chicken-and-egg issue. Yes, operators should have enough to invest for service improvement, but the fact is that electricity supply can only improve when there is more investment and investment (even from soft loan from the central bank) can only happen when there is a good chance of cost recovery. If electricity consumers want regular and ultimately cheaper supply from the grid, they must be ready to pay for it. The story of telecoms has shown us that overtime cost will come down and this is borne out by NERC's Multi-Year-Tariff-Order (MYTO 2), which indicates that tariff for R2 customers in the Abuja distribution area, for example, will decrease from N24.30/kwh in 2016 to N20.40 in 2019 and then to N19.25 by 2024.


I think the only solid argument made by the protesters is that consumers should pay only for what they consume, not what the DISCOs think they should get from them. The way out of this is to ensure that all electricity consumers are metered. And when consumers are metered, they can adjust to price hike by controlling their consumption and adopting energy-saving practices. But the DISCOs prefer estimated billing, which allows them to recover as much as possible of what they call Aggregate Technical, Commercial and Collection (ATC&C) losses. What this translates to is that consumers get fixed bills every month, irrespective of their consumption level and irrespective of whether they have electricity or not. That is grossly unfair.

As part of measures to correct this, NERC once came up with the Credited Advance Payment Metering Implementation (CAPMI), which allows customers who can afford it to give a loan to their DISCOs to provide meters to them within a timeframe and get reimbursed overtime and with interests. Despite that, many customers subscribed to this scheme, the DISCOs have not metered them. Instead of resisting a price that is still cheaper than its alternatives, it is more productive to fight institutionalised exploitation in the form of estimated billings and insist that NERC should enforce its own rules. And even those can be achieved only by going through the established process and working the system from a position of facts and knowledge, not through street protests or wrong-headed threats. 

Comments:

blog comments powered by Disqus

Read more...

01 Feb

The debate about the appropriate value of the Naira featured prominently in the public domain last week. This prominence was driven by three developments: the refusal of the Monetary Policy Committee of the Central Bank of Nigeria (CBN) to further devalue the Naira, despite loud clamour and expectations from many financial analysts and business players; the statement made by President Muhammadu Buhari in Kenya that he remains unconvinced that devaluation will help Nigeria, his third public pronouncement on the issue within eight months of being in charge; and an editorial and a report in the Economist magazine urging Nigeria to devalue its currency, remove foreign exchange restrictions, and learn from (instead of repeating) the mistake the president reportedly made 30 years ago.

The devaluation debate, if can be called one, has calcified into two extremes: devaluation will kill the Naira, and by extension, the economy; not devaluing the Naira will kill the economy. Given that two extremes are now projected as capable of achieving the same result, it is clear that this debate needs some nuance. I think it is important to take the discussion on the Naira beyond this atomised version, for us to move beyond seeing devaluation as a cure-all or a kill-all, for the two sides and the rest of us to engage in a more deliberative way about the options available to us and the trade-offs necessary to survive the present slump, and for the government to not just encourage and harvest all of these but also to use the opportunity to fashion, implement and communicate a clear, holistic, and coordinated economic recovery agenda for the country.    

Before going into the competing positions, it is important to state a few things. One, our problem is not the value of the Naira. Our problem is the economy, which is in a bad place partly on account of the plunge in oil prices and mostly because of our bad decisions/behaviours in the remote and immediate past. These bad decisions/behaviours have left us badly exposed at a time we need serious cover. The exchange rate problem is thus only a symptom, not our underlining condition. Attending to the symptom appropriately will help, but it won't cure what ails us.

Two, the contending positions on devaluation have ideological/interest bases, which is not necessarily bad but the attendant fixations and distrusts could get in the way of reasoned deliberation. Three, while it is inconceivable that an elected president will be disinterested in the value of the national currency under his watch and while not making a fetish of the independence of the CBN, I think it is unhelpful for the president to continue to venture opinion publicly on monetary policy. And four, it is important to realise that there are no quick fixes, magic bullets or painless prescriptions: no matter what option we take, there will be real costs and important trade-offs; and the ride to recovery will be bumpy and long.

Now to the two positions. The pro-devaluation camp believes that the Naira is over-valued, that the value of the Naira should reflect the change in the purchasing power of the country and be determined by the forces of supply and demand, that the N100 or 50% difference between official exchange and black market rates has created opportunity for arbitrage and corruption, that the foreign exchange control is a barrier to trade and is hurting local production, leading to closures and job losses, that not devaluing amounts to robbing the three tiers of government of needed extra income while wastefully dashing away N100 subsidy on each dollar to those who can access Forex officially, that the wide disparity in the rates is further constraining supply of foreign exchange from other sources and putting more pressure on the Naira, and that the uncertainty created by the Forex regime is denying the country of much needed foreign investments, as current investors are pulling out and prospective ones are holding off, etc.

These are sound arguments and concerns. To be sure, the exchange rate, like the price of any other product, should be determined by the interaction of demand and supply. What has happened in Nigeria, due to the fall in oil prices and huge appetite for imports, is that the demand for dollar is significantly higher than its supply. With this, the dollar should cost more Naira than before, not same. Pegging the Naira at N199 to the dollar thus amounts to setting the exchange rate below the market price. And when the price of a product is fixed below the equilibrium price, what results is not just scarcity because demand will outstrip supply but inevitably a price higher than the actual market price, causing distortion and imposing a higher burden on the people and the economy.

Forex supply from autonomous sources will dry up as it will be plain stupidity for economic agents to sell dollars at 50% discount. And economic agents are not stupid. In addition, rationing Forex will create a perverse incentive for round-tripping (which is difficult to police) from those lucky to get it officially, will drive up demand both because dollar is sold cheaper than it should be and the natural inclination to game the system by inflating demand, and will not be a guarantee against the dreaded inflation as everyone, including those lucky to get Forex at official rate, is most likely to price their products at the black market rate, a tendency that is difficult to check except government wants to start fixing the prices of goods too, which in itself is a futile endeavour. Also, a combination of lower production (because companies cannot import intermediate goods), reduced investments, job losses, higher prices, reduced purchasing power etc., will slow down growth and put the economy at the risk of recession.

All these valid points notwithstanding, I see four problems with the pro-devaluation argument. One is that devaluation will impose a certain pain on the poor and the middle class because it will certainly lead to higher prices, reduction in the standard of living of those with fixed incomes, fall in purchasing power which combined with higher production costs could also lead to job losses. Two is that the arbitrage claim while real is overstated: if those getting dollars at official rates are diverting to black market in huge numbers that would have increased supply and lowered price in the black market. Three is the validity of the assumption that those pulling out or holding on to their investments will return or now invest because of devaluation. This is not necessarily so, as portfolio investors are very fickle and they and foreign direct investors are more motivated by the best returns they can get and not who has devalued. So why take a certain pain for an uncertain gain? And four is that while devaluation might increase Forex supply, it will not resolve what is essentially a major mismatch between Forex supply and demand because CBN is still responsible for the bulk of Forex in the country.

According to information from CBN, the fall in the price of oil has reduced monthly earnings of the Bank from $3.2 billion to about $1 billion. At the same time, request for Forex jumped from N148 billion in 2005 to N917 billion (or $4.6 billion monthly) in 2015, a whopping increase of 519%. A projection has it that our foreign reserves, which have plummeted by 25% in 18 months, will not only be wiped out in the next nine months but will also be in the negative if CBN decides to meet all requests for Forex. This is because the monthly possible rate of depletion ($4.6 billion) is higher than the actual rate of addition ($1billion) by almost a ratio of five to one. Given that most of our Forex is from oil and the outlook for oil price looks grim for the rest of the year, what is the guarantee that the black market rate will not adjust upward with official devaluation and how will devaluation of the Naira solve Forex inadequacy? The fact is that whether we devalue or not, we still have a supply and demand problem and some form of rationing might be unavoidable until oil price and our reserves go up.  

The anti-devaluation vanguard is led by the president himself. According to this camp, devaluation will hurt the poor, compound our economic woes, and it holds little value for us as an import-dependent country. As stated above, the pain of devaluation is real, a pain that will be compounded by increase in energy cost. If we devalue, the official price of petrol is likely to go up by 50% or so. The benefit that should accrue due to fall in price of crude oil will transform to higher prices for refined products because we import them and because of the fall in value of the Naira. And because we have not fully deregulated, government will either subsidise the increase or pass on the hike to consumers.

When the president says that devaluation only benefits countries that export goods and services, there is a tendency among some to sneer or to put it down to a suspected statist or dirigisme impulse. But there is an economic theory behind this position. It is called the Marshall-Lerner Condition. Named after two renowned economists, Sir Alfred Marshall and Abba  Lerner, this theory states that for currency devaluation to have positive impact on a country's balance of trade, the demand for import and export must be elastic, meaning a slight change in price will significantly affect demand, leading to significant fall in expenditure on imports and significant rise in income from exports. But Nigeria will not benefit from devaluation because the Marshall-Lerner Condition does not exist here: we are import-dependent (or our demand for import is inelastic and that won't change overnight) and because devaluation will not make our major export (oil), which is priced in dollar, cheaper or more competitive.

However, the anti-devaluation argument is also not faultless. There is a difference between devaluation as a deliberate policy for improving balance of trade terms and devaluation forced on you by a decline in your economic fortunes or the mismanagement of your fortunes. With changes in our oil-fuelled fortunes and resultant mismatch between supply and demand for dollar, the price of dollar against the Naira cannot remain unaffected. The only way we can successfully and sustainably keep the rate the same is if we had built up massive foreign reserves in the time of plenty. We did not. So something has to give. Though we don't have any excuse for not providing enough cover for the rainy day, it is important to also note that this is not  peculiar to us. Most of the so-called petrol-currencies have taken a hit: the Canadian dollar fell to an 11-year low last year; the Norwegian Krone has fallen by 26% since 2014; the Colombian Peso, by 38%; the Brazilian Real, by 42%; and the Russian Rouble, by 49%. Fall in the value of the Naira is almost inevitable. If it bothers us so much, we have the option of re-denomination.

Holding on to your Forex rate in the face of almost 80% fall in the price of 95% of your export is akin to insisting on protecting yourself from a massive rainstorm with a torn umbrella: it is a lost battle. While noting that the inflationary impact of devaluation is real, its real effect may be a bit exaggerated. In November 2014, CBN devalued the Naira from N155 to N168 to a dollar; then again to N199 to a dollar in February 2015. Combined, that's 28% devaluation. It impacted inflation but not in the same proportion. Inflation was 7.9% in November 2014 and is just 9.6% now. Besides, there will always be trade-offs. With such a plunge in revenue, it will be difficult to keep external reserves, exchange rate and inflation rate same. Something must give.   

In sum, the two sides have their points but they lack the religious certainty they are invested with. It is good for us to recast the debate from the narrow mould of one option is painful and the other is pain-free. Nothing can be farther from the truth. No matter what option we take, there will be serious costs. Rather than the ideological righteousness and haughtiness displayed by both sides, what we need is a very practical approach, one that acknowledges the costs, puts an empirical value on them, chooses the less costly option to our people and the economy, and acts before the costs are further compounded.

Comments:

blog comments powered by Disqus

 

 

Read more...

Page 1 of 160

Dog