Appearing finally to bow to sweet reason, the government has said it will no longer continue the fraud-ridden petroleum subsidy scheme that has for decades, drained the treasury and made the country a laughing stock. Instead, Mele Kyari, the Nigerian National Petroleum Corporation Group Managing Director, declared that costs and prices would henceforth be determined by “market forces,” while the state-owned corporation would rehabilitate its four dilapidated and loss-making refineries. Collective relief that should greet this cheering news is, however, dampened. The scepticism is borne out of serial disappointments and by the tenacious sustenance of state ownership of the refineries.
First, the good news could end the capricious and venal fuel subsidy regime, if genuinely sustained. This is welcome and bound to considerably reduce pressure on public funds, especially in the midst of a tumultuous global meltdown. It is doubly reassuring in that unlike previous government reductions in subsidy commitments, it has not translated into instant pump head price increases and its concomitant spike in headline inflation. On the contrary, in line with its new-found romance with “market forces,” the Petroleum Products Pricing and Regulatory Agency effected price reductions in March and again in April, to reflect the slide in crude oil prices in the international market.
When crude oil prices collapse, the benefits should naturally be passed on to consumers. “Subsidy and under-recovery are zero today; and it is zero forever,” Kyari said. But the silver lining is smudged by subsequent pronouncements that instead of privatisation, the four NNPC-run refineries would be rehabilitated and thereafter handed over to a private firm to run on a Manage-Operate-and Maintain format. This is wrong and ominous as it could derail the expected benefits of a market-determined fuel pricing system.
In fact, crooked subsidy, the dilapidated, loss-making refineries and continued government participation in the downstream are interrelated and together, deserve surgical, holistic reforms. Nigerians have paid a high price for the conflation of these factors and the avarice of officials. Apart from the scandalous payout of N2.53 trillion in 2011, of which N1.7 trillion was found by a parliamentary probe to be bogus, subsidy drained $8 billion from the treasury in a year, said the Brookings Institution, and estimates of its $5 billion cost in 2019 worried analysts at UK-based consultancy, Bargate Advisory Ltd, who compared it to total government revenues in 2017 of $7.2 billion. Brookings said subsidy payment was 30 per cent of total government expenditure, four per cent of GDP and 118 per cent of total capital budget, “thereby crowding out development spending on health, education and roads.” It was that bad.
Navigating out of the mess requires more than a bland declaration of subsidy removal: market forces should play a dominant role in how much customers pay. First, the present price control arrangement through the PPPRA should be dismantled. The sad reality is that the price range of N123.50 to N125 announced by the PPPRA is not a true reflection of market forces.
A major distortion is the unjust Petroleum Equalisation Fund, the special intervention put in place by the government with the mandate of ensuring that petroleum products are sold at the same prices across the country. This has no place in a deregulated market and should be removed. The agencies, PPPRA and its Board, driving it too must be abolished. The final price for a litre of fuel should be determined solely by tax and duty, the cost of the product and transport and retail costs. In a deregulated downstream oil market, crude oil and wholesale prices account for nearly one-third of the price of a litre of petrol or diesel. The rest goes towards taxes, the costs of running service stations and the profits which retailers need in order to stay in business.
Indeed, it is precisely the government’s involvement in the downstream that drives away investors from a country with average crude production capacity of 2.2 million bpd that outlandishly depends almost entirely on imports of refined petroleum products. About N2.95 trillion was spent importing petrol alone in 2018, said the National Bureau of Statistics.
And the refineries, too, should go. Run corruptly and inefficiently, the four refineries have never operated at their optimal template capacity refining of 445,000 bpd for three decades, and in recent years, never above 25 per cent and often not at all. By NNPC’s own figures, they posted combined losses of N376.56 billion in the three years to November 2019.
Yet, large sums are officially appropriated for their maintenance, including a $396 million outlay currently being probed by the Senate. In January 2019, the then GMD, Maikanti Baru, admitted that in reality, no Turnaround Maintenance had been undertaken in 42 years, raising as yet unanswered questions on what happened to the huge sums voted for TAM over time.
Years of crisis in the subsidy regime soon led to private sector marketers exiting the import business, leaving the NNPC as sole importer. Its self-payment of “under-recoveries” – which is subsidy in a new garb since the taxpayer still picks up the tab in unremitted remittances to the treasury – that amounted to N461 billion January to September 2019, is no less scandalous.
There is no rational alternative to selling the refineries now as they are. Two past petroleum resources ministers, Diezani Alison-Madueke and Ibe Kachikwu, publicly acknowledged that they are dilapidated, needing complete overhaul and replacement, not repairs. Kyari should demonstrate professional and personal integrity by impressing strongly on the President, Major General Muhammadu Buhari (retd.), the imperative of the NNPC exiting as a major player completely to make way for the much-needed private investment in the downstream oil and gas sector. Dangote Oil Refinery Company is brazing a trail.
Some of the world’s most successful refining hubs are private sector-driven. South Africa for instance, with no crude oil reserves, has four big refineries mostly via private investment by multinationals. According to the United States Energy Information Administration, major global oil companies laid out new investment in new refineries and upgrades topping $67 billion from 2015 onwards from which by liberalisation, Nigeria can still benefit.
Buhari should shoot down the rehabilitation plan immediately; it is another drain pipe as according to the experts, only a private investor with a mutually beneficial MoU can turn the refineries around for profit. The choice of the Dangote refinery in the Lekki Free Trade Zone allows it to sell its products to the most profitable market in the globe; it is not obliged to sell in a market distorted by state meddling. This makes it imperative to quickly liberalise the environment for competitors in the hinterland to meet domestic demand and better facilitate the interplay of supply and demand for pricing outcomes that is maximally beneficial to the economy.
