Storm Towards Privatization of Nigerian Railway Corporation (NRC): Seventy-five Years Journey In the Wildness (PART I  and II)

By

Sulmann ElMammann Esq.

elsulmann@sbcglobal.net  

Commerce in any economy is shaped by the ability of the economy to move it natural resources, goods and services between places: villages to villages, hamlets to cities, cities to capitals, regions to regions in today’s global economies mobility. This invariably is also predicated on the ability of such economy to guarantee security, within a rule of law frame, that ensure the delivery of natural and human resources, goods and services with ease without restriction to place, time and means. Even though the global economy heavily depends on excellent communication system aided greatly by the Internet explosion, the transportation industry continued to play the most significant role in the mobilization of natural and human  resources and goods.

Transportation whether by air, land or sea is a vehicle that makes a market economy functionally sound through the making of human resources and services accessible and least regulatory interference by government or its bodies. Natural  resources, goods and services mobility in the Federal Republic of Nigeria (FRN) is carried out through an ineffective arrays of means: antiquated railway system, trucks, loaders, buses, boats, ferry freights and by air and air freights. The most effective means by which the government in partnership with other government and private corporation could play a role that will lift this nation from its perpetual underdeveloped and crumbling of its interstate and interregional commerce is in its rail system. The FRN has about 194,394 kilometers of highways: 134,326 kilometers is unpaved and estimated 60,068 of which are paved. An estimated 1,194 kilometers of expressway. An estimated 5,000 kilometers of rail system 90% of which is not even a standard gauge system is very disheartening and clearly is indicative of the neglect that the rail system had endured for over forty years.

Between 1960 to 2000 the FRN government had involved Indian and Chinese companies to undertake the revitalization and upgrade of its railways. These efforts failed partly because the respective government decided to cut corners by inviting companies from countries whose rail systems technologies are still in developing phase compare to Britain and Japan. The cost of bringing in companies from Britain and Japan will fizzle compare to the enormous waste that resulted from the services it received to date from India and China. In all fairness to the Chinese and India they provided locomotive engines (even though obsolete) that the government was willing to pay for. They provided the technologies that the government was interested in.

The time has come when the FRN must take the needs of its railway system seriously. The time has come for the FRN government to stop the implementation of inconsistent policies on the running of the affairs of the railway.

The time has come to implement a policy of privatization that bode meaning to what a concessionaire program (that the FRN government is advocating) should represent. The government will be required to work on the cogent legal frame by revisiting the Nigerian Railway Act, which vest a total monopoly of the railway to itself. Laws structure that enumerate the base for a viable market economy structure need to be in place before all the nuts and bolts of privatization could be brought to the mix. The government then needs to embark on a systematic revitalization and improvement of the railway system overall by putting that on its agenda of agencies that needed to be made economically viable in prospect prior to privatization. For example the government can participate in the overall construction of the prospective railway tracts nation-wide, as the taking of land where tract will go through by private individual will take forever compare to a government taking and compensation through eminent domain The articulation of the theme here is the importance of the rail system ushering a newly found democracy that is striving to catch up with the rest of it peers (and non-peers alike). Nigeria has no any dependable transportation system, outside private vehicles. Those are not subject of this address because only about 20% of the population have access to private motor vehicles in Nigeria. No industrial nation in world history has been able to successfully converged it resources and successfully promoted inter state commerce by means of private vehicles ownership. No country had been able to translate it democratic institutions into a viable strong economy without a very strong transportation industry. And no country can boast of a strong industrial structure, a buoyant and striving economy without a working railway system The engine behind the industrial revolution of the 19^th century were the railways and an efficient railway systems. It was not democracy. Democracy was already in place in most of the industrializing nations of the time. There is argument for and against the notion that in order to develop a nation infrastructure it has to have democratic institutions in place in order for the nation to have a chance.

England had one in place, but Japan did not. These two are the most dynamic countries that will feature in this material because they played the most important roles in validating the significant of the rail system as an engine predicating growth of any economy regardless of the mode of governance.  What is the FRN plan for the NRC? How can it turn around this monstrous albatross for perpetual waste into an entity that could play an overdue role in turning the sluggish response of the Nigerian economy to the 21^st century global mobile economy. Why is the NRC incapable of competitive organization? There are no adequate and reliable means of moving goods within the federation because of the inability of various government since independence to introduce the basic tenets of laissez-faire into the monolithic NRC. With the present state of the roads and freeways nationwide it is becoming almost an economic suicide for the FGN not to look at the way the NRC operates, differently. It potential now than before must be assessed, funded and more especially expounded to become a part and parcel of what move the economy in the direction of free market and enterprise. The government had concentrated in privatization of entities such as NITEL, NEPA, NPA, etc which in essence makes the NRC a more cogent project to complete the beginning of the turn around. Unlike the others where prospective investors are available locally; with the rail system even if partial denationalization is part of the solution, it must be properly looked at, assessed and possibly be fully considered.  As George Hilton in his Economic Notes Number 24 observed that the fact that monopoly is technologically based does not exempt it from the general principle that monopoly is a short-lived and self-destructive institution. Introducing privatization however possible into the realm of the NRC in fact may become the force that prompt the entire economy to find alternative means of transportation in the rail system. Privatization of the rail system as exemplified by the economies of Japan and Britain had produced a desire result that brought competitive organization. The process enabled the market forces determined in no small measure the central role that a viable rail system plays in moving human and natural resources, goods and services. In these economies it has competed and raised the bar of the standard by which the transportation industry measure efficiency, productivity, and profits. Both economies without their respective rail system without doubt will be set back 150 years. If either of their rail system ceased to exist these two world economies will cease to exist as we know them today; incapacitated to compete at the level they are accustomed to even with developing economies. The same cannot be said of the FRN and the NRC. The NRC had played that same role of importance during the colonial period than it is today. With every passing administration the NRC became less relevant. With every oil well discovery the NRC continued to become a non-factor in the transportation industry. The NRC was established as an entity in 1912. The present tracks as they are today were constructed since 1898. 1927 completed most of the construction. This was around the same time railways were being established in Britain and Japan. As a colony, the British government made sure that it did not miss the essence of railways in its most important colonies, which included South Africa, and India, key players in the rail transportation sector. Even though after the advents of colonialism FRN became richer, self-ruled and an abundant human and natural resources, successive administration neglected the railways. There was no parity between the amount and time invested in road construction and maintenance with what the government invested in railways. As a government controlled entity all the services provided by NRC from passenger services, freight services, workshop services to ancillary services are not profiting ventures. There was no realization of the potential of the respective services due to neglect, under funding, waste, mismanagement and inability to be a competitive organization. system in the FRN has about 4332 track kilometers rail in a country of 130million people and -----land that is unheard of. Especially a country with this abundant natural and human resources. In Reconsidering Classical Objections to laissez-faire in Railways the three forms of non-competitive organization were discussed as follows: “A Regulated Cartel, a Protected State Monopoly and a Subsidized State Monopoly. Public policy, however, had been based on the doctrine of inherent non-competitiveness of the railways. As a consequence, every major nation suffers from one of the three non-competitive organizations stated above of its transportation industry. A Regulated Cartel: the united states which alone of major nations maintained a privately-owned railroad system of a large number of companies, has an incomplete cartel of common carriers administered by the Interstate Commerce Commission. This euphemistically named body administers a cartel of the entire railroad industry, about a third of inter-city motor trucking, and somewhat fewer than 10 percent of water transport. It administers the cartel with a nebulous body of statutory authority, a purely verbal set of directives implemented with a legal procedure in the nature of a set of lawsuits. The commission endeavors to maintain a traditional discriminatory pricing of old railroad tariffs in the face of rising competitive pressures. When confronted with rivalry for traffic between the three major classes of carrier, it typically set rates at level at which the carriers can all compete for the traffic, with the rate differential approximately compensating for the difference in quality of service between the three. To perpetuate the discriminatory rate structure, it rigorously prohibits filling up empty backhauls with rates, which cover only the marginal cost of movement The consequence of this organization of the industry is exactly what such a policy would produce in any industry. Rates are in excess of marginal cost, traffic often moves by means other than that which is best suited to it and redundant facilities and empty movements characterize carriers of all sorts. In particular, the Commission efforts to elevate rates of firm subject to its regulation stimulate the various exempt, semi-legal, and outrightly illegal carriers, which abound, and so produce a relative decline of common carriers. In short, America, a country, which has distinguished itself for statutory and judicial hostility to cartelization, has in its transportation industry and ordinary example of an incomplete cartel, with all the costs and disadvantages a cartel, entails. No one has endeavor rigorously to quantify the costs to the economy of this cartel, but they are almost certainly greater than the welfare losses from all pure enterprise monopoly in the country. A Protected Monopoly: South Africa, New Zealand and several other nations have pursued a policy of restriction of non-rail transportation to protect their state railways. This policy is essentially establishing a monopoly to prevent the forces for decline of railways to take effect. South Africa restricts road haulage to local service or to a delivery function, prohibits pipelines, and incorporate domestic air service into the Railway Administration. The country has no navigable stream, and the principal center of population and economic activity, Johannesburg, is an inland city. The SA railways and Harbors Administration behaves as one would expect partly through the ordinary incentives to maximize net receipts, and partly through political pressures for depression of rates on bulk agricultural commodities, the Administration uses an extremely discriminatory rate structure analogous to the structure of postal rates in most countries. It tariffs are in the nature of a tax on final products for the benefits of the producers of primary agricultural products. Both the nature of the tariff structure and the limitation of motor transport to specified radii from the center of the cities in which the trucks are based tend to centralize economic activities in Johannesburg. That is to say in two fashions, the policy gives an incentive to maximize the number of consumers within a short radius of their plants.

The fact that the state railway is publicly owned gives it a degree of insulation from the market forces that a private monopoly would not have. As the largest employer in the nation, the railway inevitably generates its own political support for the policy of protecting it. The policy is open to all the usual objections to monopoly although, as with American experience, no one had yet quantified its costs. A Subsidized State Monopoly: Britain, (successfully embarked on privatization after 125 years of state control and monopoly) Italy and many countries operate state railways as non-maximizing enterprises. The two countries mentioned do not protect their state railways from road competition and thus have declining railways in usual fashion. FRN, on the other hand the railways are subject to political pressure for maintenance of uneconomic services-notably unprofitable passenger operations and deteriorated branch lines-which results in chronic deficits. Similar pressure exist when the railway is operated under cartel or monopoly. But whatever may be said against the cartel organization, the fact that ownership is private restricts the ability of political group to require uneconomic services to be perpetuated “(by George Hilton published by Libertarian Alliance, Economic Notes No. 24). The NRC as it is today requires the attention of the government especially in putting the needs of Nigerians and the importance of transportation in the forefront. This is apparently needed to truly proceed with its privatization plans.

The push must be to establish a new culture in the NRC. A culture of efficiency, punctuality, reliability, maintenance and discipline. This culture will need stability in order to prosper and persevere. State ownership can never guarantee stability.

Due to the importance and the crucial role the rail system is capable of playing in Nigeria, it become paramount that the NRC is not set up to fail entirely after privatization. The Seven Billion Naira approved by the government for the NRC in 2003 to complete abandoned railway workshop, purchase more locomotive engines, rehabilitate grounded engines, purchase spare parts is grossly inadequate. $50million dollars is insufficient to fund these critical components of NRC.

PART II

When you take the freedom out of privatization what you get is the government sitting in the middle of a heap trying to be hip by controlling the market forces and in the process stifle the agents of enterprise, muffle market liberalization and discourage individual ownership. This will condemn the privatization process before it even began. Therefore in the truest sense of the word the NRC is not capable of embarking on privatization at the moment.

How feasible will it be for the FGN to actually privatize the NRC? In other word, is it feasible to privatize the NRC? The Bureau of Public Enterprises in it answer to how the FGN will privatize the NRC answered as follows:” after necessary reforms of the NRC have been conducted, it is proposed that the government will grant concessions to private operators to operate the NRC. At the end of the concession period, the management of the NRC will revert back to the FGN.”

Now think. Where has this concept work and succeed? Who are the prospective concessionaires? They will take over an unprofitable venture like the NRC, a capital intensive venture, turn it around, make it viable and turn it back to the same forces that made it unprofitable in the first place so that the beautiful circle will run another seventy five years? If the concessionaires will fix it and return it…why isn’t the FGN doing the same through a different process, for example, reinvestment, restructure or reform. The FGN may commercialize the whole process of running the NRC, run it state-owned like a free enterprise, jettison all the counter reactivity that may hinder any true privatization implementation. When all is clear, the government must be able to let go of the operation of the NRC, to private enterprise. The interference may not be more than it interferes with the running of private banks, schools or hospital. Set the rules and regulations, enforce the law and provide security and safety guidelines. Will that work? The FGN may need to re examine the dispositions of the NRC non-core assets and how the sell and privatization affect it role, if any left in that regard. Can it truly say it did work and the returns were worth the enterprise?

Privatization requires complete hands off. Is the government privatizing NEPA, NITEL and NPA by granting rights to concessionaires for a stipulated period of time with a reversion clause? I do believe that the NRC can be privatized but should it be privatize now, no, not in the true sense of the word and process.

The Nigerian Bureau of Public Enterprises (BPE) and the National Council on Privatization which established Transport Sector Reform Implementation Committee (TSRIC) proposals for reform are sound as far as policy review and formulation, review of legal and regulatory framework, sector restructuring and divestiture of NRC non-core assets are concerned. I do not subscribe to their last proposal hinging on privatization.

The concept of ‘private enterprise’ validity lies with the absence of government involvement. The free market in rail works. It works in Japan. It is functional to some extent in Britain and it may work in Nigeria. But that will require a strong foundation set, and the FGN ability to raise huge capital, enough to see it take off and sufficient to attract private investors. There are investors in the country with high stake in a successful implementation of the revitalization and restructure of the Nigerian railways.

It is important to study how the overall restructuring will affect the role of the FGN. The greater the freedom accorded this process the better. The question is will the NRC have greater freedom state-owned or state-controlled? As it is today state-owned or with the advent of concessionaires state-controlled, meaning it will controls the prices that operators charge customers, prices that the rail tract charge operators, it will provide subsidy, control the length of contract between operators and rail tract. It may effectively prevent operators from owning tract and track owners from operating trains. It may split the train owner from operator, operator from track owner, track ownership from track maintenance. Unlike the airports, for example, the railway can’t take fragmentation. Or the railway seemed to falter when fragmented. For example if you want to operate a faster service, in the air you buy a faster plane. On rail, you have to get the signaling and the track to go with the faster train. Or to increase capacity, buy a bigger plane. But for railway you run a longer train only if the platforms are long enough.

The Japanese railway is entirely in the private sector. Its punctuality (about 99%) and cleanliness are legendary. To understand this is to experience it, first hand. It is the most dependable, most efficient and luxurious means of transportation in Japan. To live without it is almost like living without air in Japan. Japan is the second largest economy after USA and yet railway and train are second to none in the transportation realm. Including airplanes and automobiles. It is also a very profitable venture. Their bullet trains (shinkansen) are amongst the fastest in the world. Between 1990 and 2000 only two passengers died as a result of collision. A third of the entire world’s rail passenger journeys take place in Japan.

Japan’s network is divided into three sectors: private railways, the Japanese Railways (JR), and the Regional Railways. The private railway is usually used to describe those railways, which have never at any point been part of the state system. They tend to be concentrated in the main urban areas and their main

business tends to be commuting. Private railways tend to own extensive property interests, such as shopping centers, housing developments and tourist resorts. Private railways do not receive subsidy. Their fares are controlled.

The JR’s are the result of the 1987 privatization of the Japanese National Railways. There are six of them: three of them on the main Island (Honshu) and three on each of the smaller islands. In the 1960’s, shortly after the launch of the first shinkansen, the JNR started to make losses. In the 1970;s and the early 1980’s these losses became truly gargantuan. At one point the JNR was losing about $20 billion a year. Politician started to look around for a solution.  Fortunately they only have to look as far as the profit making private railways for the model. JNR was duly privatized and it continues to do well till date. The islands JR’s in common with the regional railways not only in Japan but all over the world, have not done so well. Regional railways simply cannot compete with cheap, efficient and flexible motor and often air transport. In Japan as in elsewhere, the public continue to demand their preservation. As a consequence the government continue to subsidize these services. This breeds waste as a result of the absence of private enterprise. The market forces determine the outcome of any open enterprise. (Part of commentary on the Japanese rail system, Patrick Crozier).

May be the FGN need to start streamlining the on going restructuring of the NRC to include partnering with the hired players, unwilling clientele, and potential business ventures. The China Civil Engineering Construction Corporation (CCECC) which signed a memorandum of understanding for the rehabilitation and equipping 180 signal houses should be allowed a vested stake in the undertaking in order to protect Nigerian investment in the process. The communication equipment being provided by Messrs. NAIRDA Nig. Limited should have given the company a long-term stake in the outcome of the project and it intended benefits. Imagine the CCECC to date has provided the NRC over 50 locomotives, 400 wagons, 20 rail buses and 150 coaches. CCECC is best equipped, maybe with a stake in the outcome to put these into the best possible use under the circumstance. This could be tied to performance, results and profit in the memorandum of understanding with incentive ofcourse.

In the traffic operation sector, stake holders such as PZ Industries, West African Portland Cement, Dangote Group, Julius Berger must be encourage to partner through a commercialization process to participate in the on going restructuring and rehabilitation of the NRC. No amount of capital could overwhelm the Nigerian rail system, but under-capitalization and under- representation definitely will. The privatization process will be much easier and worthwhile when there are indigenous businesses that are already stakeholders and well vested. This may come through public offerings of stocks or shares of the NRC with a government majority. The government gives up its majority holdings after an established role has been completed. Until the FGN set goal and establish long term and executable strategies for the accomplishment of an overhaul of the NRC, the NRC will continue to stumble, suffers administration after administration neglects. That may ensure that the paths for another seventy-five years journey in the wildness remain open. The need to weather the storm today is more urgent than lamenting on the impending storm towards privatization. There are hosts of other viable options available. Privatization may not be the only solution for each and every state owned agency.