Diezani Alison Madueke, Honourable Minister of Petroleum Resources
President Goodluck Ebele Jonathan
There have been two huge developments in Nigeria’s petroleum sector over the last couple of days. First was the (still not officially confirmed) news that filtered into various international media that oil trading giant Trafigura had ended the Nigerian oil swap deal. The second was the announcement by the Petroleum Minister that the pump price for petrol has been reduced from N97 per litre to N87 per litre.
This short write-up will focus on the reduction of petrol (PMS) prices, and hopefully I’ll come up with an analysis of the oil swap deal as details emerge over the next few days. I’ll also leave the political analysts to debate on the significance of the timing of price reduction and just focus on the economic and fiscal impact of these moves.
Reduction of the Pump price of Petrol:
I made an appeal to the Presidency a few weeks ago on the need to urgently and immediately remove all the subsidies on petroleum products in Nigeria. Given the multifaceted damage caused by subsidies, the purported lower price to the public has never been a good enough justification for a government-determined central subsidised price for petroleum products.
Without a doubt, any reduction in the price of a product as important as petrol is a welcome development, as it leaves more money in the pockets of Nigerians. The multiplier effects on other costs are also very positive. What is deeply troubling is what was not included in the Minister’s statement. The serious unresolved issues going on behind the scenes that have destroyed the downstream sector in Nigeria and put the country in a perilous fiscal situation.
At current global crude oil prices, petrol should sell for between N71 and N75 per litre without taxes imposed. The PPPRA and its heavily criticized template currently have a landing cost of N82.41 and an open market price of N97.90 on its website. So using the PPPRA template as a guide, a subsidy of N10.90 per litre of petrol will be paid at the new prices.
There are however a number of very serious problems with this scenario:
The PPPRA template is based on the inefficient highest cost importer of petrol and guarantees risk-free oligopolistic profit level for operators. While the pursuit of profit is a major objective of all business concerns, the profit seeker should bear the inherent risks. Riskless profit is called arbitrage and is illegal in all countries and industries except the Nigerian downstream petroleum sector. It is important to note that NNPC is reportedly the largest importer of PMS into the country and definitely the largest recipient of subsidy payment from the government. However, all the focus on purported abuse of the subsidy scheme is on members of MOMAN (major oil marketers) and IPMAN (smaller independent marketers).
Based on the reported national daily consumption of 41 million litres of petrol per day, the implied PPPRA calculated subsidy of N10.90 on the N87 price means that the country will pay N447 million per day or N163 billion per year in unnecessary subsidies derived through disputed calculations. While this is only a tiny fraction of what was paid in recent years, it is simply crazy to bear this burden given the diminished revenue situation and the struggles the government is currently facing in meeting its obligations.
The dwindling government revenues means that the government will struggle to finance its 2015 budget, and the meagre revenues received must be challenged to the most productive use and not spent servicing unnecessary debts and sovereign debt notes (SDN). SDNs were introduced in 2009 to clear the backlog of payments owed to oil importers who had stopped importing products, causing massive shortages in the country. It was only meant to be a short term measure pending the removal of subsidies and full deregulation of the downstream sector. While SDNs have been successful in preventing shortages, the deregulation was unfortunately and inexplicably stalled, resulting in increased domestic debt for the government, and continuing inefficiencies and distortion in the downstream sector.
• Beyond a nominal reduction in prices, what is urgently needed is an immediate removal of all consumption subsidies on petroleum products in the country. Under current global conditions, and with competition, this will result in even much lower prices than the state mandated N87 per litre.
• NNPC must be stopped from further involvement in the importation of refined products, as its participation in schemes like the crude oil swaps have discouraged transparency on several fronts and have been used as a basis for all sorts of actions including the withholding of revenue from the federation account.
• The removal of all subsidies will end the current market distortion, which encourages and rewards fraud and corruption. Instead, an environment which attracts and encourages investments (and not rent seeking), and rewards innovation will be created. With the removal of subsidies, there will be the natural incentive for local refining of petroleum products.
• All forms of central price setting by the government through the PPPRA must be ended immediately. The PPPRA’s regulatory activities should be limited to licensing, quality control and consumer protection. There is no evidence that there will be significant price differentials in various parts of the country. If beverage bottlers and noodle sellers can distribute products and consumers pay similar prices, oil marketers will be able to the same. Moreover, Nigeria has a sophisticated pipeline system spread all over the country. This should be concessioned or privatised since NNPC/PPMC has proved incapable of running it successfully.
• Subsidy removal will attract investment and create hundreds of thousands of new technical and management cadre jobs in the country. It will be the most significant and positive reform in the country since the telecoms reform.
As previously mentioned, the price reduction is a tiny token as it puts more money in Nigerian pockets, and reduces costs. However unless accompanied by an immediate and complete removal of all forms of consumption subsidies, it is a band-aid solution that does nothing to solve the significant problems in Nigeria’s downstream petroleum sector. It could actually worsen the nation’s corruption problem and the government’s fiscal challenges.
Jide Olateju coordinated the activities of the Presidential Committee on the reform of the downstream sector in 2009. He is currently working on a book ‘Fixing Nigeria’, which will be published in 2015.