West Africa’s Energy Sustainability Anchored on Market Driven Economy

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Poor governance and weak fiscal systems that have reduced value to West African countries from the natural resources in their domain can be corrected with a focus on market driven economy experts have said. Also the command and control regulatory regimes adopted by some governments in Sub-Saharan Africa has not delivered the best value for their people despite the fact that they reside in a land rich in commercially viable mineral resources.

However the fall in global oil prices and the rising tide of investments in both fossil fuels and renewable energy power sources in the region demands a shift to market driven economy

Role of a market driven economy

Tim Okon, chairman, International Institute of Petroleum Energy and Policy, said that markets play three crucial roles in an economy: encourage investments leading to economic efficiency, guarantee economic freedom and economic growth.

“We need to rely on markets not on government intervention. It is important that the role of the state is not to bring commerce but to regulate it.

“Markets are sensitive to social needs, so the government should distinguish between social programs and market realities. We fail woefully in Nigeria because there is no allocative efficiency mechanism that is why markets will deliver the best value not the government,” Okon said in his presentation at a panel session at the 40th edition of the Society of Petroleum Engineers, Nigeria Annual International Conference & Exhibition (NAICE 2016), held in Lagos recently.

The cost of bureaucracy, criminality and hostile environment for business is measured in shrinking market share of businesses in the region and analysts say reducing government participation in the economy will improve performance.

Government’s role in a market driven economy

“Government should focus on being competitive in the global market by improving fiscal and regulatory framework to encourage investments and capital flow. Attention should be paid to improving security, industry efficiency and transparency,” said Jude Amaefule, vice chairman/CEO, Emerald Energy Resources Limited.

Private capital always seek the most value it can get, hence it requires no sloganeering, radio jingles and television or billboard adverts to attract investments. All too often governments in the region embark on fruitless foreign trips trying to woo investors while economic indicators in these countries repel them.

When government ventures into business, especially energy related business that requires high capital outlay, experts warn against treating it like a social intervention.

“The shareholders responsibility is to maximise profit and when the government is part of a business, profits should not be sacrificed on for social intervention,” said Okon.

He further said, “The role of the state as a social provider is outside of its role as a shareholder, once that is understood, state involvement will no longer inhibit investment.”

Nigeria’s government has over 30 percent stake in the electricity distribution companies that won some privatised assets in the 2013 exercise. These companies are struggling because among other things, government ministries and departments have failed to pay for power consumed.

The Association of Nigerian Electricity Distributors (ANED) recently said it would not disconnect power supply to government MDAs following close to $290m debt owing from pressure from the government to rescind an earlier decision to disconnect them.

Investors in Ghana are also seeking clarity in the role of the national government as the country’s economy is buffeted by challenges such as currency depreciation, deepening energy crises, deteriorating macroeconomic imbalance and rising inflation and interest rates.

“Even though, the electricity sector would have been very attractive to investors because of the current demand of electricity in Ghana, foreign and local investors (IPPs) are unwilling to invest in this sector because of their lack of confidence in Electricity Company of Ghana, the distribution company which is finding it very difficult to collect even on current tariffs for electricity consumed,” said Beverly Asamoah, an associate of Aelex law firm in Accra, Ghana.

Industry operators say one of the problems Ghana has faced is as it relates to offtaker buying power. People were looking for government guarantees, but the government’s ability to provide these guarantees is limited because of the economic challenges it is facing.

A market driven economy has little place for subsidies on consumption. Economists say that subsidies while aimed at promoting economic and social policies, causes distortions in the economy especially when it is on consumption.

In West Africa, subsidies on fossil fuels are introduced by governments on the basis of rapid population growth, poverty levels and energy access for everyone. Where energy is available, it is often not affordable.

The cost of subsidies and the inherent waste and abuse reported in the system has forced countries like Nigeria and Ghana to rethink the policy. There are Sub-Saharan Africa countries where entitlement programmes have long been justified by unequal access to energy and low standard of living.

But fuel subsidies encourage rent-seeking behaviours. Prior to the May 11 price change announcement in Nigeria, fuel prices were over 200 percent in other West African countries in comparison with Nigeria and this provided a strong incentive for marketers to smuggle petroleum products across borders.

Consumption subsidies in an oil exporting country like Nigeria discouraged private sector investment in refinery infrastructure because it is relatively cheaper to import finished oil products than to refine domestically, especially when the cost of refining is higher than landed import tariffs. Nigeria’s four refineries lie moribund because there is no incentive to fix them when the cost of fuel imports is cheaper than local refining.

To achieve a sustainable energy future for Africa, governments should rethink participation in the economy by ensuring that it is market driven. Markets tend bring economic freedom and the state should realise that its role is not to bring about commerce but to regulate it.

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