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Nigeria: The Price of Fuel at the Pumps
Why Deregulation is the
Wrong Way to go
By Obi. O. Akwani
MGV Editor
Posted December 12, 2009
The Federal Government of Nigeria is very likely to deregulate
the price of fuels as sold at gas stations before the end of the year or just after
2010. This means the Government will stop paying subsidies to refined fuel oil
importers. The subsidies are not a give-away to the importers, instead they are
paid to offset the cost of importing expensive refined fuels that are sold to the
consumer at a price that is lower than the overall cost of the imported oil. The
ultimate benefactor here is the Nigerian consumer and, of course, the economy as a
whole.
Nigerians currently pay N65 per liter (about US43 cents) for the
petrol they use to run their cars and power their generators. The cost of importing
the petrol and delivering it to the petrol stations has been put at over N90 or
$0.60 per liter. The subsidy is meant to cover the difference, keep prices down for
the consumers and still keep the business of fuel importation profitable for the
importers.
Fuel price subsidies are unique in the Nigerian experience. They
were introduced during the military era. Never before has the government acted
positively in a sustained manner to support an industry and help it retain regional
comparative advantage as an oil producing state in a region of non-producers, and to
remain globally competitive. The subsidies were used to lessen the economic and social
impact of a weakening refining sector. Even though the government was having to pay
almost as much as other regional governments for the fuel used locally, the Nigerian
consumer did not have to feel the impact of those additional costs and so had an
advantage over his counterpart in other West African countries. This helped the
country retain its position as the economic engine of the Economic Community of West
African States (ECOWAS) region. But the
accumulating effects of government inefficiencies and untrammeled systemic corruption
began to set in even as some other regional countries were beginning to get their act
together and over-take Nigeria in several important respects. Since about 2006 Ghana,
with better policy environment and steady power supply, has become the destination of
choice for foreign direct investment in the region. Many multinationals and Nigerian
entrepreneurs now choose Ghana as the place to relocate their business headquarters
from Nigeria.
Others have
closed shop in Nigeria altogether and relocated to South Africa.
The plan to deregulate fuel prices and stop paying the oil subsidy
is part of the Petroleum Industry Bill, a reform package for the whole petroleum
industry now being debated in the National Assembly. The objective of the PIB is to
put Nigeria back in contention for economic leadership of the region. The bill is
meant to improve the way the industry runs by improving oil exploration and crude
extraction and bringing more private investment into the industry, especially in the
downstream sector where Nigeria needs to effectively revive existing refineries and
build new ones capable of meeting all domestic demand for refined products.
Public attention has been focused on one aspect of the reform bill
- the government's intent to remove fuel oil subsidies. Consumer advocates, especially
the trade unions, have come out strongly against removing the fuel products subsidy.
Most of them support the PIB, but say the subsidy should not be part of it. If the
price deregulation goes through, the price Nigerians must pay for petrol,
kerosene and diesel is expected to rise by at least 54 percent. The US$0.43 per liter
or $1.97 per gallon, which it costs now to buy gas at the pumps will end up costing
between $3.04 and $4.54 per gallon. The unions fear that these price increases will
hurt the consumer badly and bring about greater inflation. And they are not wrong.
The Nigerian oil industry - in fact the whole economy - is in bad
shape, dragged down by corruption, inefficiency and militant insurgencies. Minister for
Petroleum, Odien Ajumogobia, admits the oil and gas industry is in bad shape and that it
suffers from aging infrastructure and diminished production. The government wants to fix
these problems now with reforms based on the PIB. But critics argue that at
least one of the measures proposed - fuel price deregulation, which invariably
will bring about price increases - will worsen the economic situation for the
foreseeable future, unless certain other measures are taken first. The most
important of these measures - getting the refineries working again is not
something that can be achieved immediately. No one believes government promises
that the refineries will be revived after the reforms are implemented because
previous attempts by government to revive the refineries have failed despite
billions of dollars spent in the process. And there is nothing in the reform
package that suggest government will be able to revive the refineries this time
around. Therefore consumer advocates want the fuel price increases kept off the
reform package until government has been able to get at least all four existing
refineries working properly again.
However, supporters of the proposed reforms inside government
appear in a hurry to revive a "sleeping" industry. They argue that
only implementing the whole PIB reform package would do it. According to
Ajumogobia, the proposed reforms will revive the sleeping industry by encouraging
investments and increased competition. Private importers of refined petroleum
products and domestic marketers are also enthusiastic about the planned
deregulation for a different reason. Under the current subsidy regime, the
marketers have been complaining about government tardiness in making payments.
The resulting bottleneck they faced in meeting business obligations came to
public attention when Central Bank of Nigeria audit of commercial banks, in 2009,
revealed many of the marketers as defaulting borrowers from the banks. The oil
vendors, in turn, blamed their loan defaults on government failure to make subsidy
payments on time. The marketers complain that the Petroleum Products Pricing
Regulatory Agency (PPPRA) often takes years to effect payment and most of the time
not in full. Deregulation will allow the marketers to recoup their investments and
profits directly and as quickly as possible. By extension, therefore, the lending
banks should also be pleased by the deregulation.
As far as the Nigerian consumer is concerned, however, price
deregulation is an easy way out for an inefficient, corruption-ridden government that
is increasingly reluctant to continue paying out over N400 billion* annually in
subsidies to the oil marketers. It is apparent to consumer groups consumers also
that deregulation means that, for the foreseeable future, every Nigerian will be
paying the price for government and industry failures -- corruption and inefficiency
in government processes that result in failing public enterprises. For instance, the
Nigerian National Petroleum Company (NNPC) was, for a long time, the country's sole
importer of refined petroleum products. The resulting supply and distribution
bottlenecks from that system led to the admittance of licensed private importers into
the business. But private operators handle only about 30 percent of petroleum products
imports. The bulk of the subsidies, 70 percent of it, goes to the NNPC.
Earlier in the year, in February 2009, Senator Ahmed Lawan,
Chair of the Senate Committee on Public Accounts, decried a reported "discovery" by
his Committee that the reason Nigerian refineries were not working was because the
"NNPC is getting paid for not refining" and the corporation is collaborating
with "others" to make sure the refineries are not working." Such
allegations are rife in the country, and there is strong circumstantial evidence to
support them. Just before he left office, former president, Olusegun Obasanjo sold a
44% controlling interest in some the state-owned refineries to a private consortium,
the Blue Star Group. When his successor, Umaru Musa Yar Adua, took office as the new
president of Nigeria in May 2007, there was a strong campaign to rescind the sale of
the refineries. The new president's appointee as Group Managing Director of NNPC,
Abubakar Yar Adua (no relation to the president), seemed to lend support to the
rescind campaign by promising to revive the ailing refineries within six months. He
never got the chance; he was replaced as NNPC GMD within the year. On October 24,
2009, ThisDay newspaper reported that a cartel within the NNPC was receiving
kickback of US$500,000 from three international commodity trading firms - Glencore,
Trafigura and Vitol - to help them retain their petroleum products import contracts
for Nigeria. No one has effectively refuted this claim. President Umaru Musa Yar Adua
himself is quoted describing the threat of this cartel as, the "greatest
institutional corruption in the history of the nation." The President of Nigeria
blames the frequent fuel shortages in the country on this cartel. He believes his
reforms will effectively break the cartel. At the end of October a previously unheard
of group calling itself "Concerned Oil Industry Professionals" bought
several pages of newspaper space to defend the NNPC against the "cartel" allegations.
The government clearly needs to do something to retrieve the
country from highly placed economic pirates. The proposed petroleum industry
reforms need to address this issue. The government needs to be able to properly
police its own systems in order to uphold its own laws. Clearly this is not
happening in areas where the elites have their interests - in cash-cow
businesses, like the oil industry, prone to rent-taking and in the electoral
system. Already the government appears to have left out any immediate plans to
revive the refineries. Instead It seems in too much of a hurry to maximize returns
from the oil industry. Petroleum minister, Ajumogobia, recently met a Senegalese
delegation to look at processing crude for Nigerian in that country's refineries.
The government is also considering commissioning refineries in Easter Europe
(Hungary and Romania) to produce for Nigeria. That is unfortunate, because what the
Nigerian leaders are doing, in this case, is dancing to the tune of the so-called
cartel.
Proponents of the petroleum industry deregulation are
comparing it to the decade-old successful deregulation of the telecom industry.
But such comparisons are deceptive. Conditions in the two industries are not the
same. Deregulation of the Nigerian telecom industry began in 1992 with decree 75
establishing the Nigerian Communications Commission. But the industry did not
begin to grow until a decade later. By 1999, the telecommunications industry in
Nigeria had bottomed out. It had become insignificant in the economy. NITEL, the
sluggish state-owned monopoly that controlled the barely 500,000 fixed phone
lines serving a population of about 140 million people had somehow managed to
kill the cash cow of the telecom industry. With telecom dead the vested interests
that milked the system dry lost interest. It took a new policy environment
under the Obasanjo administration to bring the industry around. Obasanjo, with
his policies, created room for unfettered new developments in telecom. Attempts
by NITEL workers to prevent take-over of the company by private interests did not
succeed. Instead it made the company harder to sell to investors. The relatively
new wireless telephone technology helped drive in the last nail that sealed the fate
of lumbering NITEL. Government had no choice than to legislate the independence of
the new telecom investors in the Nigerian industry.
The Nigerian Petroleum industry, on the other hand,
is still a veritable cash cow and highly lucrative market for industry
insiders - a small number of powerful private and government players,
whose actions impact greatly and immediately on the Nigeria economy. This is the
"cartel" that the President was quoted as referring to. Their hold on
the industry remains strong and keen. The
prospect that this group, under the present government, will allow
itself to be sidelined in the industry is remote indeed. The people
holding on to the oil blocks are still going to want to hold onto them;
the people with the licenses to import refined oil are not likely to
give that up; the NNPC is not likely to change its ways. Any prospects
for real change depends on the will of the government, but Nigeria's is a
government run on patronage.
This is why critics believe the reforms as currently
envisaged for the downstream oil sector are not likely to affect the status quo.
Whatever will change the way business is currently being done is being stoutly
resisted. And this is what worries the labor movement and other consumer advocates.
There is no indication that the planned deregulation is coming as a
result of a change in the mind-set in the industry. Deregulating the
pump price for refined fuels, without first ensuring that underlying
problems in the industry - rebuilding domestic
refining capacity to take care of 40 percent or more of domestic needs,
for one - are taken care of, will deepen the problems and disrupt the
lives of Nigerians.
The proposed reforms will dump all the consequences of years
of corruption and mismanagement, not on the government or on industry players,
but on the Nigerian public. The most likely impact of deregulation will be a
more than 100 percent jump in the pump price for fuels. Petrol, which under the
current regulatory regime sells for N65 ($0.43) per liter, will jump in price to
N135 ($0.90) or more per liter within one year. The government and operators in
the oil and gas industry will go scot-free and continue to reap profits while
the consumer and the economy suffers. Inflation will set in and the price
of basic commodities and consumer goods will go up, as merchants and service
providers pass on their added costs to the consumer. The marketers' may be the only ones to find lasting
enjoyment of their profits. The government's windfall from subsidy removal can only
be brief. With the Nigerian government relieved of the pressure of subsidy
payments, there will be no compelling reasons to rebuild the refineries,
especially as its plan to source products under arrangement from foreign
refineries comes on stream. Its hope of seeing the refineries rebuilt and new
ones constructed may not work because the government has no plans to spear-head
the rebuilding effort. Instead, under its reform plan it is counting on the
magic of deregulation to attract the private investors who will build or rebuild
the refineries. It is a plan that leaves too many things to chance and,
therefore, may not work. Nigeria is thus likely to remain a
refined fuel importer because it is the easiest thing for government and imports are highly profitable for the people
controlling the industry. The devastation to the economy will put enormous pressure on society that
the resulting social restiveness may not be easily containable nor is it likely to be
attractive to investors. Thus, it is unlikely, from the point of view of the consumer,
that subsidy removal will stimulate economic revival and development in the industry.
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