Friday, September 11, 2015

All the rumpus over deregulation

The first point to note about the downstream sector
of the oil and gas industry is that it is heavily
deregulated and just lightly regulated. Over the years
the NNPC got wise to the fact that it could not refine,
warehouse, wholesale and retail petroleum products
all by itself.

The deregulation by legislation of the downstream
sector produced new generation operators such as
Addax Oil, Oando Plc, Capital Oil, Masters Energy,
Zenon, Sahara Oil, etc, all multi-million dollar

The Nigerian government and her sympathisers
would have us believe that the regulation ONLY of the
pump prices of Premium Motor Spirit, referred to on
the streets as 'petrol' and Kerosene is bringing down
the Nigerian economy. This argument is as
mathematically inaccurate as it is fraudulent. The
pump prices of diesel and LPG are deregulated and
we have neither seen nor enjoyed the benefits of
their deregulation.

What the Nigerian government seeks to achieve is
not deregulation but the removal of the ugly tic in the
industry that is petroleum price subsidies by the
insensate surgical means of immediate legislation
instead of a gradual phasing process that would take
into account the all important factor of the
purchasing power of the consumer.

Petrol and kerosene are currently pegged by
government at N65.00 and N50.00 per litre; according
to an International Monetary Fund Staff Position Note
published on February 25, 2010 that advances the
reduction of subsidies,
"a price subsidy is the difference between the price
facing consumers and a specified "optimal"
benchmark price."

The optimal benchmark price is of course different
from the marginal supply cost which is computed
from the bare cost of production and handling. The
specified optimal benchmark cost is computed from
production, handling, plus nice imponderables such
as natural disasters, speculative buying, wars,
reduced production by a competitor, etc.

Don't be fooled, all the rumpus over deregulation in
Nigeria is not about the inability of the operators in
the downstream sector to access the specified
optimal benchmark prices of petrol and kerosene
because they do thanks to the nice facility called
subsidy differential which gets paid to them through
the facilitation of the Petroleum Products Pricing and
Regulation Agency, the trustee and administrator of
Nigeria's Petroleum Support [Stabilisation] Fund.

Thanks to this price balancing mechanism Nigerian
companies make as much profits as their
counterparts in other climes. The snag and the
reason for all the furore over deregulation is that
government feels unduly burdened by the cost of the
subsidy, something it claims amounted to about
N1.3trillion in the last fiscal year.

The government argues that this sum which
accounted for about 30% of its budget could have
been put into some other productive ventures like
education, road construction, the refurbishment of
the refineries, etc. Pray, what did government do with
the monies it did not defray as subsidy payment
before the coming into being of this regime of
subsidy payments?

Nigerians stood by and watched members of the
National Assembly who constitute less than 0.5% of
the country's population appropriate 25% of our
national budget to cater for their welfare and all hell
is about being let loose because 80% of the people
will continue to enjoy the relatively stable pricing of
two very basic and yes, already very expensive

The IMF, that meddling predator and the motley of
confused local economists have argued on the side
of government that subsidies have slowed our
economic growth, specifically the rapid development
of the downstream sector.

They argue that though Nigerian authorities have
approved about 18 licences to private companies to
establish and operate refineries, none has
commenced because of the subsidy regime; the idea
is that with the removal of subsidies, private
investors would have the incentive to commence
private refinery operations, employing young school
leavers, creating sub-sector investments, promote
further diversification of the sector for the overall
benefit of the Nigerian economy.

First of all, oil subsidies are not a Nigerian
peculiarity; if anything we came late into the game we
are trying to exit before getting a proper hang of it.
According to the IMF Staff Position Note quoted
earlier in this piece, "G-2O countries account for 70%
of tax inclusive [oil] subsidies."

In April 2002, India, a country that sources 75% of its
crude requirements externally, abolished its
Administered Price Mechanism and its Oil Pool Fund,
the counterparts of our PPPRA and the PSF. India has
since reversed the policy and provides heavy oil
subsidies for its citizens, the same as China, Mexico
and Indonesia. The United States provides heavy oil
subsidies to its citizens by giving tax breaks to every
level of oil production.

It is elementary economics that a tax that is below its
optimal level generates tax subsidies. Russia,
Trinidad and Tobago, Venezuela and many other
countries subsidise oil. The Canadian government
paid between $3b and $8b to the forest industry in
2000, $6b to mining, $700m to fishing and $2b to the
nuclear industry, among many other subsidy

It was only in 2004 that Libya removed about $5b of
subsidies from electricity, fuel and basic food, leaving
more than three times that amount on the same
items. Qatar subsidises nearly the whole existence of
her citizens including local telephone calls made via
private GSM carriers like Etisalat!

Nigeria subsidises nothing except the pump prices of
kerosene and petrol; having mismanaged this facility
through corruption and cronyism, we seek the first
point of exit in the face of our first set of challenges
and it is on record that the government has extended
direct subsidy payments to private operators for only
two years through the PPPRA. Instead of investigating
the abuse that brought the situation to such a
desperate level, we seek to abandon this first attempt
at reducing the suffering of our people, forgetting
that about 80% of our population live on less than $2
per day.

Let me also opine with the boldness that the statistics
accord me that the removal of oil subsidies in Nigeria
would not add a single refinery to the Nigerian
industry and economy. Anybody who invests in a
refinery, a long term project, in the present energy
situation would truly require a psychiatric evaluation
because with the current pace of research efforts in
the industry, that party may be left with a facility that
refines nothing.

And it is simply not true that banks will not invest in a
business that is dependent on government subsidy
payments. After all, banks are financing the
importation of products for the promise of subsidy
payments because of short term returns. Subsidies
are paid for products not for the manner in which the
products hit the market.

The Nigerian government should be equally
hysterical about the beautiful volumes of sales
recorded as excess crude sales. Should we not know
what tiny percentage of the upstream earnings
account for the subsidy payments? If Nigerians
enjoyed a government shelter of N1.3trillion over
petrol and kerosene usage what did the country
make in the sale of crude in the last fiscal year or in
the taxation of LPG, diesel, bitumen, high and low
pour fuels, lubricants, etc?

Instead of undermining our economy, subsidies have
defined the potential of the downstream sector,
stabilised supply and promoted credit security in the
sector. And government acts as though the money
paid to marketing companies and importers as
subsidy differential is lost to the economy.

Were the monies dumped in the Atlantic or in a real
serviceable sector of the economy? Wouldn't some of
that money go back to government as tax? Haven't
the banks been boosted with deposits, commissions,
interest payments, foreign exchange earnings and
new jobs by virtue of the injection of these funds into
the economy? What is the level of the sale of the
subsidised products compared to the former
situation? We forget too quickly that government, the
economy, political activities and power is about the
welfare and security of the people.

One is very mindful that in canvassing the opinions
articulated in this piece, one may have unwittingly
given support to the rabble in PENGASSAN, NUPENG
and the other trade unions that enter into any and
every fray for vocational reasons. I would like to
dissociate myself from that crowd; I have found over
the years that within these unions are the most
unpatriotic set of Nigerians who care nothing about
driving us off a cliff in so far as their allowances and
salaries are in issue.

They would not accept pay cuts or sacrifice their
luxuries for corporate survival. They are like the
unions that gave corporate America the need for and
lexicon of outsourcing, turning round to envy the
Asians their good fortune in inheriting American
manufacturing lines.

They use the masses both as weapon and as shield,
as it suits their needs. Our views may have found a
point of convergence on this issue but they are no
friends of mine or of the Nigerians whose interest
they pretend to serve.

AbleMoJah® Nigeria.

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