Towards Dismantling of Petroleum Subsidy Regime
“Government Subsidy systems promote inefficiency in production and efficiency in coercion and subservience while penalizing efficiency in production and inefficiency in predation” Murray Rothbard (1926-1995)
“You either get free stuff or you get freedom. You cannot have both and you need to make a choice.” - Sarah Palin
Sometime ago, the former Managing Director of the Nigeria National Petroleum Corporation (NNPC), the Late Mr. Maikanti Baru, (may his soul rest in peace), revealed to Nigerians that a detailed study conducted by the NNPC established a strong correlation between the presence of fuel stations located around Nigeria’s borders and the activities of fuel smuggling syndicates. Providing a detailed presentation of the findings, the then NNPC boss had disclosed that 16 states, having among them 61 local government areas with border communities, account for 2,201 of the nation’s registered fuel stations. He then noted that based on the number of all stations registered in the country, the fuel tank of the petrol stations, had a combined capacity of 144.998 million litres of petrol, representing about four times Nigeria’s average daily fuel consumption of 35 million litres!
The Late Mr. Baru had explained that because of the obvious differential in petrol prices between Nigeria and other neighbouring countries, it had become lucrative for the smugglers to use the frontier stations as a veritable conduit for the smuggling of products across the border, adding that this had resulted in a thriving market for Nigerian petrol in all the neighbouring countries of Niger Republic, Benin Republic, Cameroun, Chad and Togo and even down to Ghana, which has no direct borders with Nigeria.
This now brings us to the first quote above, which incidentally, was used in the concluding part of our column on this same subject of subsidies on September 24, 2018. That piece was titled “Subsidies: Working the Monkey and Feeding the Baboon”. We had argued then that there was everything wrong about sustaining the subsidy on petroleum products and that it should therefore be removed immediately and permanently. We noted that the feeble attempt to remove it by not providing for it in the previous year’s budget met with colossal failure because the NNPC, at that time, decided to retain it by taking the funds from source, christening the expenditure, “Under Recovery”. It was thus expensed directly from NNPC’s books before remitting what was left to the Federation Account. We maintained in our article then, that the common man, who was supposed to be the greatest beneficiary of any such subsidy, was in fact the greatest loser.
It is sad that literally almost overnight, Nigerians saw their ‘daily consumption’ of premium motor spirit, PMS, double from about 30m to 35m litres then to 60 million litres. Like we stated in the column under reference, the Late Mr. Maikanti Baru had raised an alarm on the proliferation of fuel stations in communities with international land and coastal borders across the country, insisting that the development had energised unprecedented cross-border smuggling of petrol to neighbouring countries, thus making it difficult to sanitise the fuel supply and distribution matrix in the country.
One would have expected that with the announced closure of our land borders last year, the daily consumption would have returned to normal levels, but that is yet to be. Even as we write, we have not been able to push the number down as the official daily consumption figure as at last week, was still put at about 56m litres. It is therefore clear that there must be some other factors involved that have not been addressed.
With the advent of the Coronavirus pandemic, oil prices dramatically hit rock bottom levels. The Federal Government used the opportunity to announce the complete removal of oil subsidy. According to Mallam Mele Kyari, the current Group Managing Director of NNPC, Nigeria would no longer be paying for “Under Recovery” or subsidy on petroleum products. According to him “there is no subsidy and it is zero forever, going forward, there will be no resort to either subsidy or under recovery of any nature”. NNPC, he went on, will play in the marketplace, it will just be another marketer in the space. But we will be there for the country to sustain the security of supply at the marketplace. To give effect to the removal of subsidy, the 2020 budget, which had earlier made a provision of N457b for subsidy in the reviewed version, had this figure completely removed. Effectively this meant that there is no budget for the payment of subsidy in 2020. So far, all the signals appear that the government is serious about removing petroleum subsidy.
In reality however, there is a whole lot more that needs to be done to ensure that this policy is successfully implemented. Like we noted earlier, this is not the first time that the government had threatened or attempted to remove petroleum subsidy. An attempt to do so in 2012 was greeted with stiff resistance from civil society, in a coordinated protest that almost brought down the government of the day. The current administration had also attempted to do so by not budgeting for it in 2017, but eventually found an ingenious way of not implementing it through the sleight of hand of the NNPC. Now that we have NNPC’s commitment that it is no longer going to fund this subsidy, there are some institutional changes that must be made to ensure that we never go back again to the era of petroleum subsidy.
This column is of the opinion that the only way to ensure that this new stance on petroleum subsidy is successful is to dismantle the various institutions that have been established to implement it. For instance, there is this body called the Petroleum Products Pricing Regulatory Agency (PPPRA) founded in 2003 whose job is, among other responsibilities, to monitor and regulate the supply and distribution, and determine the prices of petroleum products.
The PPPRA basically sets prices of petroleum products using a template designed by the agency to determine maximum prices of products. One would have expected that in a deregulated market, the PPPRA would no longer have any role to play or at the minimum, would have no hand in the determination of the prices of petroleum products. However, this is not yet the case as this body remains fully functional and continues to actively influence prices of petroleum products. Even if it is no longer publicly announcing its presence, it still remains active in the background, fixing prices. According to the most recent template sighted by us, the PPPRA sets the cost of crude in dollars. Freight Rate, Lightering Expenses, Insurance, NPA and NIMASA charges, (which are also set in dollars), Jetty Throughput, Storage Charges, Financing Cost, all amounting to a total landing cost. In addition to these is a plethora of other costs ,which to all intents and purposes, are avoidable and unjustifiably lead to higher cost of products as they are eventually passed on to final consumers. The PPPRA calls these costs, Distribution margins and they are as follows: 1. Admin Charge N1.23 2. National Transporters Allowance (NTA).
N3.89 3. Bridging Fund N7.51 4. Marine Transport Allowance. N0.15 5. Retailer. N6.19
The exchange rate is fixed by PPPRA at N387.63 A cursory look at the above pricing model immediately shows that there is something fundamentally wrong with the system.
First, we are benchmarking crude prices in dollars because the refined products are imported. However, the crude is locally produced and if locally refined, the prices would obviously have been different and more sensitive to the naira economy we operate locally. Again, what is the justification for NPA and NIMASA levies to be charged and collected in dollars? At what rate do the marketers source the dollars used for the payment?
Secondly, what is the justification for the distribution margins itemised 1 to 4 above? More particularly, what is the reason for having No 3 - bridging fund? We are aware that the bridging fund has its basis from a strange invention called the Petroleum Equalisation Fund, (PEF). The logic, from the framers of the concept, is that it is intended to maintain the same price for petroleum products across the entire country. Time has shown that this is neither desirable nor feasible. There has never been a time where petroleum products sold for the same price in different parts of the country. Therefore, why maintain such an obsolete policy and add an unjustifiable extra N7.51 per litre to the price of PMS, which is also borne by the final consumer? How come we do not also have an equalisation fund for other products like yam, rice tomatoes, or even coke? What is so special about petrol that we insist that it must sell at the same price in every part of the country? When you add up the administrative charges, the transport allowances and the Bridge fund, you would realise that the PPPRA, as a bureaucracy, is hiking the price of petrol by a whopping N12.78 per litre. This translates to a humongous N716 billion a day for the 56 million barrels we are meant to be consuming. Another question also then, is this; what are PPPRA and PEF doing with this money?
Furthermore, there is the issue of foreign exchange management and conservation. While we want to believe that petroleum subsidy has been removed, there seems to be another policy reintroducing the subsidy from the angle of the foreign exchange market. One may ask how this is done and it is as follows: From the number posted above, the pricing is benchmarked against an exchange rate of N387.63 per dollar. Does that rate exist in the market? Of course, we all know that this is the official rate enjoyed by NNPC and it is easy to understand as the company is the one that funds a chunk of the foreign exchange market. The net result of all these is that no one imports PMS except the Pipeline and Product Marketing Company, PPMC, which itself is a subsidiary of the NNPC. Independent marketers cannot access the N387 dollar and if they went ahead to import with dollars from the free market, they would not be able to compete with PPMC. In effect every petroleum products marketer is forced to buy from the government. This clearly is not a sustainable way to deregulate. In fact, this is a clear case of the government introducing monopoly from the black door!
We all agree that local refinery would take off the cost of freight and some of the logistic costs highlighted above. We also know that the four refineries we have in the country have since become moribund, producing at less than one fifth of their capacity. We are also aware of the Dangote refinery, which when completed, will dwarf the combined 445,000 barrels per day capacity of our 4 refineries. Dangote’s greenfield refinery will have an installed capacity of 650,000 barrels per day. How would the untidy arrangement in place now affect that massive investment? We hear government is trying to invest in refurbishing the four refineries. Does anyone need to be told that that is not the most efficient way to spend our har earned money? We read reports recently that one of the refineries generated zero revenue in 2018 but incurred an operating loss of N64.5b and a wage bill of N23b for the year. The case is not any different with the other three refineries, which individually also posted losses.
In view of the foregoing, our recommendation is that the government should dispose of the four refineries, even as scrap without further delay. It should also dismantle the PPPRA and PEF with immediate effect. PPPMC should stop importing PMS just like it had stopped importing Automotive Gas Oil. It should cede that role to the private sector immediately. The determination of prices should be left to the normal market forces of demand and supply. Importers should source their funds from the foreign exchange market just like other importers. They must bring in their products and sell in the open market without these artificial hurdles and obstacles. The relevant arm of the NNPC should play its role as a regulator in the market enforcing quality and interplay of market forces.
Maximum encouragement should be given to entrepreneurs like Dangote and others to invest in the sector and get them to start refining in country in the shortest time possible. This is to reduce all the distortions that we presently face because of importation and all artificial constraints that have been built into it. On no account should we accept the ludicrous argument that there is a product that we can legislate a uniform price across the country. There is no such thing and whenever we do, we only help make undeserved money for some people while the purpose would not be achieved. We must begin to accept the well tested principle that the best mechanism to allocate resources is the market forces. Intervention from time to time would ensure that the market continues to work for the greater majority of the populace. It is in this light that we may need to take a second look at this behemoth called the Nigerian National Petroleum Corporation. Well, that is a story for another day.