Continued from Thursday
As shown in table 2, there is no link between the country’s energy resource endowments and exploitation and Nigeria’s global ranking on key economic, social and institutional indicators.
While Nigeria ranks fairly highly in natural energy endowments, sadly, on economic factors like per capita income, it ranks 180th; in population living below poverty line, it ranks 180th; and 112th in investment-GDP ratio. On social factors, Nigeria’s global rankings are equally abysmal. With respect to infant mortality rate, Nigeria has the 10th poorest record; physician density, 130th; hospital bed density, 176th; life expectancy at birth 210th. On governance and institutional indicators, the country is 124th on competition index, 136th in corruption perception index, and 115th on index of economic freedom. These rankings show that although Nigeria is well endowed in energy resources, the wealth from the resources has not been translated into actual economic developments that will benefit the citizens of the country.
However, the country’s comparative woeful performance extends beyond the above. Figures 10 and 11 show Nigeria’s comparison of electricity consumption (kWh/yr/cap) for 2003 and 2013 respectively. Nigeria has not only appeared to have slipped back relative to a group of comparator countries, her per capita electricity consumption is below the UN prescribed minimum for reasonable quality of life (500kWh/capita/year) and the minimum for industrial development takeoff (1000kWh/capita/year).
Another dimension of the troubled marriage is in the area of energy shortages. It is a paradox that despite vast amounts of energy resources, Nigeria has consistently witnessed sporadic shortages in energy supply. This clearly reflects in the case of fuel supply between 1991 and 2014. Some of my studies have examined the causes, implications and solutions to these problems at the micro- and macro-economic levels (see Adenikinju and Falobi 2005a; Adenikinju 2010; Iwayemi and Adenikinju 1996; Ibitoye and Adenikinju 2007; Iwayemi, Adenikinju and Babatunde 2010; Adenikinju 2003). Table 3 shows the severity of infrastructural problems in Nigeria as ranked by manufacturing firms. Energy, represented by electricity and petroleum shortages are ranked as the most significant infrastructural challenges confronting the Nigerian manufacturing sector. More recent surveys, including those conducted by the World Bank have basically confirmed that electricity remains one of the three most inhibiting business constraints in Nigeria (FGN 2017).
In a survey carried out in Ibadan to evaluate the impact of fuel scarcity on informal sector operators in the city, Adenikinju and Falobi (2005a), found that producers and business operators reported substantial impacts of fuel scarcity on their operations, including, higher cost of operations (74%); fall in capacity utilization (61%); decline in sales (74%); fall in profits (82%) and lateness of workers (32%).
Other important findings from the study are; first, many economic agents on the demand side were willing to pay higher prices if that will guarantee stable fuel supply—this is particularly true of commercial and private car owners, producers and businesses; second, only few players in the market—petrol attendants, petrol hawkers, commercial drivers,4 benefit from the supply disruptions, leading to significant deadweight losses; third, some economic agents have been able to shift or share the burden of the adjustment costs; and finally, it is the consumers and the poor that bear the main burden of these supply shocks. A vast majority of the respondents laid the blame for the scarcity on the inter-ventionist role of the government. Repair of the refineries is the number one solution canvassed by all categories of respondents, followed by privatization of NNPC and increase in the price of fuel, respectively.
At the macroeconomic level, Adenikinju and Falobi (2005b) using a CGE model, find that a 10% reduction in local refinery capacity, a form of supply shock, reduces real GDP by 0.47%; increases the general price level by 0.20%; and causes a decrease in balance of trade growth. Similarly, private consumption, government revenue, and real incomes of both the rich and poor households decrease; while unemployment rises. Omorogbe and Adenikinju (2014) show that there are 4 As some of them simply turn themselves into operators in the black market. They buy fuel from the pump and sell same in the black market and make decent profits.
significant differences in prices across various markets during fuel shortages. The incidence of the illegal gains from market imbalance varies across states and products. Figures 12 and 13 show that kerosene (DPK) provides more opportunity for arbitrage than petrol (PMS) to the disadvantage of the poor, who consume more of the former product. Shadow market operators in Enugu State made the most gains from fuel market disruptions.
The case of electricity failure is even more serious. Adenikinju (1999a, b, 2003) investigated the costs of power outages in the Nigerian manufacturing sector. The study found that the low quality and reliability of power supply has forced firms to invest in costly alternative private provision. The Marginal costs (MC) estimates indicated that the costs of unserved electricity in Nigeria are very high. Firms spend between 20-30% of their initial investment on the acquisition of facilities to enhance electricity supply reliability. This extra but avoidable cost has a significant impact on the international competitiveness of the manufacturing sector. The hope that privatization of electricity supply industry (ESI) will increase electricity reliability, as was expected, is yet to be realized, more than three years after PHCN assets were sold. However, in spite of the high costs of acquisition and maintenance of private generators, the presence of a back-up minimizes the expected outage costs to firms. The mitigated outage cost often outweighs the unmitigated costs. In fact, we found that the presence of a back-up, and sometimes, back-up to a back-up generator mitigated over 87% of potential losses from power outages (Adenikinju 1999a).
Figure 14 shows that the dominant cost types incurred by firms due to power shortages are loss of output (83.5%) and destruction of raw materials already in production process (8.4%). Other types of losses are damage to equipment and restart costs.
Further evidences of the troubled marriage are reflected in figure 15a & b, and figure 16 for power sector, oil and gas subsector, and for the host communities in the oil producing areas.
The Canon Rules of Effective Energy-Economy Marriage and Consequences of Disobedience
Oil has its rules in order to derive the maximum benefit from it. Just like God handed the Ten Commandments to the Israelites, with consequences for disobedience and blessings for obedience, it is possible to discern the rules of the use of oil from economic theory and practical examples from countries like Norway, UAE, Malaysia, Canada, Kuwait, Saudi Arabia and Trinidad & Tobago that have used oil successfully and optimized the benefits. I have categorised these commandments into ten (10) that must not be violated to avoid a troubled marriage between economic development and energy and thus derive the maximum blessings from oil resource:
(1) Thou shall adopt and implement right public policy choice. Utilization of oil revenue matters to development outcomes. Earnings from energy resources, a wasting asset, must be used to develop infrastructure and create savings for the future.
(2) Thou shall integrate your oil sector with the rest of the economy by ensuring that energy resources must be used to meet local domestic demand first before transporting the gas as LNG or via pipeline to provide electricity for other countries. Also, petroleum must be processed locally and vertically diversified to meet local demand first before export of crude oil. The oil sector is not just a revenue earner but more importantly an enabler of development.
(3) Thou shall apply economic principles for efficient management of the energy sector and for pricing policy.
(4) Thou shall take care of the sector through adequate investment and providing conducive environment for public investment.
(5) Thou shall develop strong institutions and governance structure as important agents of restraint to contain the excesses of oil sector operators. The principles of transparency, accountability, openness and efficiency in the management of oil revenues are not negotiable.
(6) Thou shall protect your economy against opportunistic ‘infections’ like the Dutch-disease and the ‘resource curse’ syndrome.
(7) Thou shall ensure that the host communities where oil is found, explored and produced become partakers of the oil profit.
(8) Thou shall not allow foreigners to dominate your oil sector, because of divergence of economic interests.
(9) Thou shall protect the environment in which oil is produced
(10) Thou shall not ignore your first love, the sectors that begat your development process.
The indigenization of the oil sector has been at the fore front of government policy since 1970s but the implementation has been weak (Asiodu 1979).
Even when the economy goes through structural changes, while the relative sizes of sectors may differ, there is overall expansion in the size of key sectors like agriculture and industry. In developed countries, even when agriculture accounts for less than 5% of the GDP, its output is sufficient to guarantee food security for their citizens.
Violations of the Laws and their Consequences Mr. Vice-Chancellor, in over 27 years of my working in the energy sector, I have called attention to the wrong policy choices we made as a nation with regards to the energy sector and their consequences not just on the sector but the entire economy. I will now discuss the consequences of the violations of the above commandments. These consequences are quite obvious and are evident in the massive decay we see all around us.
(1) Violation of appropriate public choice rule
One of the critical choices that the government has to make is how to spend the booming but transitory income from oil. Oil income can be spent on either investment or consumption.
Investment prioritizes the future ahead of the present and involves trading present comfort for future returns. Consumption focuses primarily on the present alone. Figure 17 shows the various policy options that are available to the government based on every decision and eventual implications.
Iwayemi (2001) comprehensively discusses these options and their respective consequences.
However, the optimal choice is to prioritize investment over consumption given the transitory and volatile nature of oil revenue. As a country, we have not done this successfully. The revealed preference function of successive governments has always assigned far higher weights to the present rather than the future.
Moreover, the norm is that to develop 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, etc.) 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 natural 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, etc. were being developed or the rate at which our schools were being equipped and human capital necessary for economic development was being built (Adenikinju 2012a).
Creation of an enclave economy that is export dependent The violation of the second commandment led to the creation of an enclave economy—an oil economy that exists in parallel with the non-oil economy. While the former was characterized by high income, and high standard of living, the latter experienced much lower income and lower standard of living. Of course only a 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 a viable and well managed downstream sector which includes refineries, pipelines, depots, fertilizers, petrochemicals, glass, aluminium, paint, pharmaceuticals, and similar other sectors that utilize the by-products of petroleum.
and then