DEREGULATION IS NOT EVIL, SAYS PPPRA BOSS
The Executive Secretary of the Petroleum Products Pricing Regulatory Agency (PPPRA), Mr Abiodun Ibikunle is insisting that deregulation of the down stream sector of the oil industry was the only way the nation could derive full benefits from its natural resource.
According to him, subsidy cannot be regarded as evil, rather, he said it should be looked at as effort on the part of government to ensure that not too much of pain or discomfort is passed on to consumers and the generality of Nigerians because of the high price of PMS. 'To me, subsidy is supposed to give some comfort to Nigerians at the end of the day.
Government has said that it was going to deregulate the down stream sector. What it means is that the level of subsidy that we are witnessing today will probably not be there at the end of the day. The essence of deregulation is for government to be able to create that environment for many other players to come in so that we can have the benefit of a viral and vibrant down stream sector that would be passed on to Nigerians,' Ibikunle said. In this interview with Daily Sun, he spoke on the vexed issue of subsidy and other related matters. He also spoke on other issues as they affect the country's oil industry. Excerpts.
Functions of PPPRA
Price regulation is just one of the functions of PPPRA. We are also involved in assuring that we have adequate supply of petroleum products within the system. We monitor activities in the down stream sector. We also ensure that marketers operate within the rules and that there were no monopolistic tendencies within the down stream sector. We also review the market situation from time to time so that we have a firm grip within the fundamentals within the down stream of the industry.
As part of our functions, we regulate the supply and distribution of petroleum products; maintain constant surveillance over key indices relevant to pricing policy and periodically approve benchmark prices for all products; moderate volatility in petroleum products prices, while ensuring reasonable returns to the operators and establish parameters of conduct for all operators in the downstream sector of the petroleum industry.
We also prevent collusion restrictive trade practices harmful to the sector, exercise mediatory role as necessary for all the stakeholders in the sector and establish an information data bank through liaison with all relevant agencies to facilitate the making of informed and realistic decisions on pricing policies necessary for all the stakeholders in the sector. Since 2006, the PPPRA has successfully managed the administration of the fund in line with its mandate of regulating the supply and distribution of petroleum products.
Issues at stake in the subsidy matter
Well, subsidy is the initiative of government to ensure that products are sold at uniform price within the country.
The scheme was announced by the Federal Government in the 2005 Independence Day speech. The administration of the Scheme started in the year 2006. The guidelines for the implementation of the Petroleum Support Fund (PSF), that is the official term, was prepared by the PPPRA in consultation with the industry operators and stakeholders and were approved by the Federal Government. The PSF mode of payment is based on either under or over recovery of product costs.
Under recovery is when the landing cost of products is more than the approved ex-depot price. During the period of under recovery, marketers are paid the difference between the landing cost of products and the government approved ex-depot price. Over recovery on products occurs when the landing cost of products is less than the approved ex-depot price. Marketers are then expected to pay back into the Fund the difference between landing cost and ex-depot price during period of over recovery.
We all know that the landing cost of products generally especially Premium Motor Spirit (PMS) is higher than the regulated price at which the product is being sold. So, somebody, in this instance, the government is the one that is paying for the difference. And that is why we have the government subsidizing PMS consumption in the country. The issue of subsidy will be interesting to everybody in the country in the sense that ordinarily the money should have gone into the government treasury and it would have been used to pursue other government commitments by providing roads, making sure that our hospitals are well funded, the educational institutions are well funded. But some of the money that would have been used for that purpose is now being used to fund subsidy.
Role of PPPRA in the implementation of the scheme
As a background, prior to the introduction of the deregulation policy, Nigerians have had to contend with intermittent products shortages that gave rise to perennial queues at the petrol stations nationwide. The year 2005 and 2006 witnessed an unprecedented upward movement in the international prices of crude and products which resulted in continuous upward pressure on the prices of domestic petroleum products, thereby making it difficult for marketers to supplement supply by the Nigerian National Petroleum Corporation (NNPC).
In recognition of the Agency's mandate of regulating the supply and distribution of petroleum products, the Federal Government deemed it appropriate to give the responsibility of overseeing the implementation of the scheme to the Agency. It was against this backdrop that the PPPRA proposed a Petroleum Support Fund (PSF) to the Federal Government to allow for the allocation of funds for the moderation of petroleum products prices. The Federal Government in October 2005 accepted the proposal and directed the PPPRA to liaise with stakeholders to work out the modalities for the fund. The PSF therefore is a pool of funds made available by Government to stabilize the domestic prices of petroleum products against volatility in international crude and products prices.
The PSF is financed from two sources, namely: the Government and accruals realized during the period of over recovery (over recovery here refers to the period when the PPPRA recommended price is higher than the market determined price). A budget of one hundred and fifty billion naira (N150billion) was planned in the 2006 Appropriation for this purpose. In order to ensure transparency, accountability and a level playing field, all the various stakeholders/operators play active part in its implementation just as was done during the planning stages.
The methodology and guidelines for the smooth administration of the Petroleum Support Fund subscribed to by all the relevant Stakeholders address issues such as: eligibility for oil marketing companies drawing from the fund; responsibilities of stakeholders/operators; role of the Regulatory Authority, that is, PPPRA, institutional linkages as well as relevant guidelines from other organizations and agencies concerning products procurement, storage and distribution.
The methodology for the Fund is such that subsidy applies when the landing cost of product based on import parity principle is in excess of the approved PPPRA ex-depot price for the product. Payment by the Marketers on over recovery into the Fund applies when the landing cost of products based on import parity principle is below the approved PPPRA ex-depot benchmark. As I said earlier, the Central Bank of Nigeria (CBN) is the custodian of the Fund, while the PPPRA is vested with the responsibility to administer it as spelt out in the guidelines. Claims from/payment into the Fund is based on the duly verified volume of products lifted out of the depots belonging to NNPC/PPMC, DAPPMA, major marketers and IPMAN by the PPPRA to approved retail outlets and sold in line with approved ceiling prices.
The PPPRA together with operators/stakeholders determine the volume required for imports based on national demand/supply gap, taking cognizance of local production. The Agency constantly liaises with the oil marketing companies and other relevant stakeholders for the purpose of verification, certification and updating of the downstream information data bank. All payments relating to over/under recovery is made through the Fund's account with the Central Bank of Nigeria. All claims from and payments into the Fund must conform to the objectives of the PSF. The ex-depot prices are applicable to all bulk purchase operators (NNPC, OMC's and DAPPMA). Furthermore, to grasp the role of the PPPRA in the supply and distribution of petroleum products in the country, an understanding of the functions and mandate of the Agency as discussed above is very pertinent.
Who gets subsidy
Subsidy goes to the consumers, those consuming PMS.
Complaints about the high price of petroleum products
Let us look at it this way, government has decided that for now PMS will be sold at N65 per litre. And that is what should obtain throughout the length and breadth of this country. But we found out that along the line people want to cut corners, go above this regulated price, there are agencies of government that monitor it and try to keep everybody under check.
During the period of scarcity, it is always very difficult to monitor prices and to ensure that products are sold at the regulated prices. From our experiences in the last one or two months when we had adequate supply of PMS within the country, we found out that marketers and retailers have been forced to sell products at regulated price because they cannot afford to hoard the products or not to sell because the competition is very keen and I have reports from several of the locations in the country where the prices used to be above the regulated price that, with the availability of product, marketers and retailers are being forced to sell their products at regulated prices.
Without subsidy, what goes?
Well, government has indicated that it wants to deregulate the downstream sector. Which means, to a large extent, once we have deregulation, subsidy will disappear.
Are you involved in the deregulation policy and to what extent?
We are involved. Infact, PPPRA is supposed to be at the centre of deregulation because the agency is supposed to monitor activities in the downstream sector and what we deregulating is the downstream sector. We are at the centre of it and we are expected to midwife the process. And we are doing that.
What exactly is happening at the downstream sector?
We are yet to have a final pronouncement on deregulation. But what we have decided to do on our part is to monitor activities in that sector. We try to see what areas in the sector need improvement. For instance, sometime last year, we recommended to government that the port charges on product discharge should be reduced and this was reduced by about 50 percent. Then we also know that we need to improve on the efficiency of discharge through ensuring that the ports are properly maintained. We also recommended that there should be continuous sweeping of the port to ensure that navigation of vessels is not impeded in any way. We continuously review our template to ensure that we don't create room for any unwanted parameter or somebody optimizing whatever we are supposed to monitor in the template for the benefit of consumers.
What would be the impact of the withdrawal of subsidy on the consumer?
Maybe we should look at it this way, what are we supposed to achieve through deregulation? With deregulation, we expect that more players will come into the downstream sector. And as players come in, they will try and invest in the development of infrastructure, and if you develop infrastructure, you have more jetties, and if you have more jetties, the waiting time for the discharge of products will be reduced, we will have less of demurrage.
We also know that once the infrastructure improves, we will not need to be moving products from mother vessels to daughter vessels for ultimate discharge at our jetties. So, this our process involves additional costs and we believe that will be removed with deregulation. Also, we know that if we deregulate, our people who have been shying away from investing in refining will now come in and invest in refining.
Once we have more refineries in the country, we will be able to produce more of the products locally. If you produce more of the products locally, then all the costs that you incur such as freighting crude oil to refineries outside and bringing it back will be removed. All these things will go along way to drive down the price of products at the end of the day.
If deregulation entails these positive things, then what is delaying us?
It's just this fear of the unknown. The fear of change which is inherent in all human activities. People are always reluctant to admit change. If you look at some of our neighbouring countries, they have deregulated and they have been better off. So, I don't see why we should not go through that road and reap the benefit that we expect. Because we all know what has happened in other areas that we have deregulated- the telecommunication industry, the aviation industry and the banking industry. These are examples that we can see as a veritable means that, look, deregulation on its own is not bad at the end of the day and that it is something that we need to pursue.
Some think that the oil sector may not react to deregulation as fast as the telecommunication sector, for instance, considering its strategic importance to the average Nigerian. Do you share this opinion?
Investment in the oil industry is not a one day affair. For instance, if you want to build a refinery, you probably would spend about two years. If you want to develop infrastructure, like building new jetties, it is something that would take months. If you want to build additional depots, it's going to take some time. Regardless, what we are saying is that these are things that we need to do for a better tomorrow in the downstream sector and we cannot run away from it. We must achieve our desired objectives for the downstream and for the dividends of deregulation that we are all expecting.
Assuming government decides to deregulate today, are you ready for it?
Yes, we are. Because we are learning from the experience from other parts of the world where they have deregulated. And we know that if we deregulate, it does not mean that we will not have a control on the price. We have what we call our indicative price above which we do not expect any marketer to go. So, we will monitor this to ensure that people comply.
We also know that we need to review the fundamentals from time to time to ensure that we take care of the interest of all the stakeholders in the sector so that we don't have a situation where some people because they believe their interest is not well protected can either frustrate the process or abandon their role within the sector. These are things we need to do. We are already working seriously on it. We are in constant touch with all the stakeholders, discussing issues with them and trying to carry them along as we go.
What feelers are you getting from the stakeholders, say the marketers and the oil majors, who are likely to be the key players in the whole arrangement?
Because many of these key players have operated in many other areas, they know the benefit of deregulation. They know that it allows them to take investment decisions freely and they know that if they invest they will be able to make some profit. And if a business man or an investor knows that if he puts his money there he will recover it and make some profit, he will be very willing to cooperate and do what he is supposed to do within the sector.
We also know that the group that has been antagonistic to this deregulation policy is the labour unions. But I think labour will also help the system by realizing that if we deregulate, more jobs will be created, people who have been jobless for a while will have something to do and will be able to add their quota to the development of the country. Why do we have to start frustrating such a noble process that we know that will bring good rewards at the end of the day.
How much do we spend on subsidy, say, per annum?
Well, I will take you down memory lane. When we started the subsidy regime in 2006, I think government spent about N260 billion. In 2007, it was about N270 billion. In 2008, N640billion. And then last year 2009, I think it came back to about N250 billion. So, that gives you an idea of what government has spent on subsidy to date.
Some suspect that all this money didn't go into subsidy, that a good part of it went into private pockets. How true?
To a large extent, it is not true, not correct. It is not possible.
The process of subsidy is not just PPPRA sitting down in its office and calculating figures. What happens is that the marketer who has been approved to participate in the scheme brings in his product through the port. And at the point of discharge, we have an official of the agency to witness the discharge process not only to witness it but he will also be checking people that will take measurement. It is not just PPPRA that is there, we have so many other government agencies, some other private people.
We also have an external auditor appointed by the Federal Minister of Finance that is part of that discharge process that takes the record of what is brought into the country. So, PPPRA is involved , Nigerian Customs Service is involved, the Nigerian Ports Authority is involved, Department of Petroleum Resources(DPR) is involved. Sometimes you have security agencies like the Immigrations also being witnesses to some of these activities. Then on top of it, we have an external auditor appointed by Ministry of Finance. Then we also have people we refer to as Inspection Agents who are professionals in measuring these things who have been certified to carry out this assignment that are part of the process.
So, you can see that at the point of reception of the product itself, there are so many agencies, institutions and organizations that are involved and it is very difficult for these people to be compromised at that stage. Once the product is brought and records are taken, the marketer that brought in the product will go and do his computation and file his claims to PPPRA. So what PPPRA does is to evaluate the claim and then cross check against our own records, do our own calculations to arrive at what we think should be the level of subsidy for the product that has been brought in.
After we've finished our own computation, it is sent to the Federal Ministry of Finance which will in turn hand it over to the external auditors as I mentioned earlier who would now authenticate what PPPRA has done and agree, yes, this product that was brought in is worth the claims that were made. Once that is done, the auditor sends it back to the Ministry of Finance, which in turn gets in touch with the Accountant-General's Office to source for the funds to back up the claims. Once that is done, the Central Bank Of Nigeria is advised to release such funds. At the same time, we are also notified that such fund is with the CBN and then we will in turn notify the marketer of his claim. So, that is how the process works.
It is not as if PPPRA sits in one corner, decides what the claim is as the be all and end all in the process. There are so many other agencies of government that are involved. The money does not pass through PPPRA. Ours is to do paper work and pass it on. Infact the money resides with the Central Bank of Nigeria and the marketers are advised on what has been approved by the Federal Ministry of Finance.
PPPRA does not keep any money for petroleum subsidy, the agency only oversees the administrative processes in conjunction with other government institutions such as Federal Ministry of Finance, Office of the Account-General of the Federation, & Central Bank of Nigeria.
In other words you are saying that you vouch for the transparency of the process?
We do all that is humanly possible to ensure that it is transparent and we don't make room for any abuses in the process.
You had a brush with your staff recently, what was the issue in contention?
The staff through their union, that is, Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), protested some few weeks back concerning issues of promotion, increment, medicals and pension. As management with a handful of staff working under it, there are bound to be issues from time to time. In this instance, we were taken by surprise because we were never given any notice.
They just decided that they wanted to protest. When that happened, we called them the same day and we resolved whatever differences there were. As I speak with you, we have carried out some of the things they complained about, we have implemented them and those that require further discussions, we are engaging them constructively with the hope of having something tangible at the end of the day for which the staff will be very happy about
What is your relationship with NNPC?
The relationship is very cordial. We have very smooth and cordial relationship with all our stakeholders.
If this is the case, why is PPPRA perceived among the public as a kill joy?
That's far from it . You should realise that PPPRA is a government agency that is supposed to protect the interest of government. And in protecting the interest of government it is also protecting the interest of the public. We are working for them and we must protect everybody's interest at all times so that our people can be better for it.
Is you agency involved in the distribution of petroleum products part?
We do monitor because our personnel are on ground at all the depots in the country. So what comes in and goes out of the depot our people are also involved in it. But we don't follow the trucks about.
How do you assuage the feelings of Nigerians on the perceived high cost of petroleum products?
Subsidy cannot be regarded as evil. Actually we should look at subsidy as effort on the part of government to ensure that not too much of pain or discomfort is passed on to consumers and the generality of consumers because of the high price of PMS. To me, subsidy is supposed to give some comfort to Nigerians at the end of the day. Government has said that it was going to deregulate the down stream sector.
What it means is that the level of subsidy that we are witnessing today will probably not be there at the end of the day. The essence of deregulation is for government to be able to create that environment for many other players to come in so that we can have the benefit of a viral and vibrant down stream sector that would be passed on to Nigerians.
What PPPRA is trying to do is to diversify the energy supply base within the country. In other words, we want to have a good energy mix by encouraging the use of gas. There is Liquefied Petroleum Gas (LPG) improvement programme initiated by the ministry. There is also the Compressed Natural Gas (CNG) for which a pilot programme is already in place in Benin where one of the companies has set up a filling plant and a number of stations for which one can go and refill their gas.
Government is also trying to look into areas of dual use of both PMS and LPG so that we can carry some pressure off PMS. In other words, a vehicle can use both gas and petrol. So, if you have the necessary adaptor, installed in your car, if you have PMS and use it up to a point, you can then switch on to CNG once you make adequate conversion in your vehicle. That is what I mean by dual use of PMS and CNG.
Also in the post passage of the bill, we are supposed to be involved in alternative energy like the development of bio fuel or bio diesel and there have been some preliminary work done on this. We believe that once we have the legal backing, we will go full blast in putting certain things in place to ensure the use of bio fuel in our energy consumption.