Being a presentation of President of Trade Union Congress of Nigeria (TUC), Comrade Peter Esele, at a public hearing organised by the House of Reps on the fuel subsidy removal policy on Monday, Jan. 23. Introduction THE government is implementing a policy to remove the subsidy on Petroleum Motor Spirit (PMS) because it argues that the level of subsidy being paid by government is not sustainable particularly as subsidy payment now exceeds the annual capital budget of the Federal government. Government also makes the case that it is important to deregulate the downstream sector of the petroleum industry and by implication allow market forces to determine the pump price. This will enable government to completely get out of the sector so that it can be fully market driven. It is easily agreed that the subsidy that government declares as paid annually is extremely high and not sustainable without it busting the budget. It is also not indisputable that deregulation of the downstream sector will encourage the investment on new refineries and product reception and Distribution infrastructure with all the attendant benefits. However, deregulation and or subsidy removal have to be planned and executed very carefully so that the desired objective is attained. A shoddy implementation will mean a deplorable setback for all the stakeholders in the industry. This is why my humble self, the TUC that I lead and the NLC continue to stand firm that government must have a definitive agenda for this programme in order to guarantee its complete success which will consequently establish a solid foundation for economic growth of the nation. It should be established from the onset some of the imperatives that are ignored or swept under the carpet by those who are less informed that blur the debate on this issue. Establishing clarity on these issues will make it easy for government to craft the road map towards the efficient delivery of the programme and to earn the people’s trust through a transparent compact that delivers positive dividends to the people. These imperatives are: Subsidy on petroleum products is removed by a price increase. It is therefore imperative that the level of subsidy is transparently established otherwise the people will see the policy as efforts by the government to under change them; Price increase does not necessarily equate with deregulation. Deregulation at a point where there is no subsidy on PMS, for example, will need to be underpinned by competition which is the only way to achieve cost control and efficiency in the sector; Deregulation that jerks up the price a product but is not underpinned as discussed above amounts to a punitive price increase that transfers the burden of paying the subsidy from government’s pocket to the private pockets of the citizens; A Price increase that happens outside a truly deregulated environment means that the head of the snake is scourged; the snake is alive and will strike another day. This means that a price increase not backed by deregulation will cause another subsidy debate and skirmish further down the road. And this is not in the interest of all the stakeholders. If the subsidy is not a real cost that is efficiently incurred but represented by inefficiency and or corruption, the people still end up paying for it in the long run as it becomes a direct opportunity cost of capital formation and a discount of the quality and level of services that the government delivers to the citizens: and If the people end up paying, in the final analysis, directly from their private pockets at the pump station or by the budget deficiency that it creates if the government pays, it become important that the people should reject the inefficiency and corruption that is necessarily embedded in the price irrespective of who is paying The people therefore have an inalienable right that the government cleans up the mess before the policy of subsidy removal or deregulation is implemented. The conclusion to be drawn from the above is that deregulation of the downstream sector is the answer. If such deregulation is properly handled in an atmosphere where the inefficiency and corruption are expunged and a competitive environment is created, the result could be a price reduction and not a price increase. It is this upside potential to have a ‘Win Win’ deregulation which a properly planned and efficiently implemented deregulation engenders by delivering a price reduction rather than a price increase that is the focus of this paper. Establishing the level of subsidy The Petroleum Product Pricing Regulatory Agency (PPPRA) was set up by Act No 8 of May 2003 with the primary mission to eliminate the effect of volatility in international crude oil and products and stabilize domestic prices. It also aimed to guarantee effective products availability and distribution nationwide. The Petroleum Support Fund (PSF) Scheme was set up in 2006 to support the PPPRA mission and the PPPRA had the objective to entrench transparency and accountability in the administration of the Fund on petroleum products subsidy. In administering the Fund, PPPRA instituted a pricing principle which in its own website is a principle “that engenders healthy competition among industry operators, encourages investment and the maintenance of international standards and practice “. In support of this principle, PPPRA created a template to determine the Landing cost of products. This Landing cost is applied against the Government fixed ex-depot price of the petroleum product. The difference between the landing cost and the ex-depot price of imported petroleum products is the Subsidy. By all accounts, the PPPRA has completely failed in its stated objective in the sense that
- The template is compiled with bloated costs that discourage competition, the pursuit of efficiency and cost control. Rather it is based on total cost recovery and opaque operations thereby encouraging massive corruption and padded economic rent both of which continuously increase subsidy;
- PPPRA has been unable to incontrovertibly establish the quantity of products consumed upon which subsidy is paid. Quantity consumed is a fundamental item of the subsidy equation. Failure on this is a confirmation of PPPRA’s failure on its stated mission; and
- To the extent that PPPRA does not insist that subsidy is claimed on confirmed consumed products, PPPRA is thereby, perhaps by collusion with the importers, paying subsidy on products that were never delivered, stolen and lost products and products that are round tripped.
- It is because of the above that we believe that the PPPRA template is deceptive, anti competition and anti-people. This is why we call its Landing cost template ‘a weapon of mass destruction’.
- In a regulated environment, the first step towards the injection of efficiency into operations is to have a robust template that encourages operators to compete. The present template does not do this.
- Direct NNPC to dedicate all the crude that it cannot refine to offshore processing. This will ensure that NNPC is not selling this crude for its own account. Most importantly, it will ensure that refinery gate prices based on ‘net back’ pricing is obtained
- Eliminate guaranteed margins across the product importation and distribution chain - Government should, as a first step towards deregulating the downstream sector, scrap all guaranteed margins in the template including financing cost.