Reflections on the cost of service provision

Following a meeting with key stakeholders in the power sector, the National Assembly has announced the suspension of planned tariff hikes which were previously scheduled to kick-in on the 1st of July to Q1 2021. The intervention of the National Assembly and the subsequent 'resolution' from the meeting was premised on 'bad timing' in view of the socio-economic impacts of the COVID-19 pandemic , and not so much a disagreement with the principle of adjusting tariffs to better align with operating costs and by so doing attract required levels of investment.

The development set me thinking around an issue which has been topical of late. From the recent public debates around the pricing of cable TV through the clamour for reduced retail rates for data, the increasingly prevalent stream of thought appears to be that (these) services are inordinately priced and required government intervention to mandate providers to make prices more 'affordable'. I'm neither Milton Friedman nor John Keynes - I make no pretensions to being an economist of any sort. Nevertheless, I am fairly certain that the starting point for any conversation around a 'reasonable' price for selling goods or services should be the cost of producing the good or service. If - taken together and considering all the input elements required, it costs N1000 to produce 'X', a 'reasonable' selling price conversation must proceed from that point. What however tends to happen is that the 'reasonable' selling price conversation typically is approached from the standpoint of the buyer, such that where N1000 is a lot of money to the buyer, then 'X' at N1000 is 'expensive'.

The same principle also sometimes runs through conversations around making 'X' more 'affordable'; whereby policy interventions are approached from a standpoint of how can we bring the cost of 'X' closer to the 'economic reality of the buyer', rather than how can we reduce the cost of the input elements such that the N1000 cost price can be reduced. A case in point are conversations around the cost of housing and making it more affordable. Rather than looking to predetermine what is 'reasonable or affordable' , why are our energies not being spent on reducing the cost of input elements such as cement and other building materials , land acquisition and title registration or mortgage/lending rates? Why do we embark on conversations around the 'excessive' pricing of cable TV without a parallel understanding and conversation around the cost of acquiring content, distribution licences or hardware? Even within the power sector (where by the way I am not a big fan of the approach we have adopted to deregulation/privatisation) can we honestly expect or demand improved /steady supply of power from the DISCOS without parallel discussions around what is happening on the transmission and generation end of the conversation? Why would I as a investor optimally ramp up my financial commitment to distribution of power , where investment progress in terms of key dependencies such as transmission and generation are not advancing in similar fashion? Should conversations around the retail pricing of data focus more on the cost of inputs such as spectrum, equipment, access to forex , cost of power and licences rather than random references to the price of data in Kalamazoo (without parallel consideration of the cost of data provision in Kalamazoo)?

An additional consideration is that for a lot of these 'heavy duty' services, key input elements are typically imported and dollar-denominated. Knowing the trajectory for the exchange rate and how the Naira has fared (and continues to fare) in that regard , shouldn't conversations around pricing also factor in that that cold reality?

My considered view is that we need to work towards a greater appreciation of the cost of service provision. Understanding why 'X' costs what it does - from the perspective of input cost elements, will help refocus the mind and conversations in the more worthwhile direction of examining how the input costs can be brought down . This - again in my considered view, should result in a more sustainable retail pricing regime which addresses in parallel the 'affordability' challenge of the buyer, as well as the 'returns' consideration of a willing investor.