What Happened To Deregulation?
Deregulation was touted as a process that would encourage oil marketers to import fuel on their own account for sale rather than their almost total dependence on NNPC funded imports. The resultant freer market would encourage competition and petrol prices would presumably come down. In addition, private participation in the refining of crude oil locally would be stimulated and petrol shortages would be a thing of the past. Indeed, the excess from the output of the new refineries could be exported to boost our foreign earnings.
The above positive objectives notwithstanding, what, may we ask, is the result sheet of the government on this project? The failure of deregulation is defined in the front page news item captioned 'NNPC Imports N201bn Fuel, Votes N100bn for Subsidy in 2007” of the Daily Independent of Friday, 1/12/06. In that report, the 7.976bn litres of fuel imports by the NNPC amounted to N201.02bn between January and October this year. All other marketers together brought 1.936bn litres; i.e. less than 20% of the total imports. In addition, the Executive Secretary of the Petroleum Pricing Regulatory Agency (PPPRA), Mr. Oluwole Oluleye confirmed that in place of the subsidy of about N270bn in the 2006 budget that a mere N100bn subsidy would be given to the Petroleum Support Fund (PSF) as per President Obasanjo's 2007 budget proposal.
This is a clear message that deregulation as it pertains to the downstream sector is dead! It would be interesting to observe how our government's spin doctors will struggle to put a shine on this failure and make hapless Nigerians believe otherwise! It is undeniable that government's expectation that the burden of fuel importation will be evenly spread between NNPC and the other marketers has been unrealized in view of the current revelation of the PPPRA scribe! Furthermore, government's declared intention of raising a petroleum sales tax of N1.50/litre on the 30 million (N45m/day) of fuel consumed in Nigeria daily has also become a pipe dream; in place of the projected petrol sale tax revenue of over N16bn per annum, we have subsidized consumption of fuel by over N700m per day with the provision of a subsidy element of N270bn in this years (2006) budget!
In anticipation of the revenue from the N1.50/litre sales tax and in a noble attempt to prevent double taxation, the federal government pulled down all the tollgates on the federal highways at great cost, inspite of the protests by socially minded Nigerians that the tollgate levy was a more equitable form of taxation as you only incurred the expense if you used the roads, but a petrol sales tax increased the general cost of transportation and affects the general price level much more adversely than tollgate revenue!
Nigeria has consequently lost from both ends, on this ill-conceived deregulation exercise; we have lost the modest erstwhile income from tollgates, and instead of expected revenue, we are spending almost N300bn on subsidy! The expectation of sharp competition by marketers and the resulting efficient market dynamics, which would bring succour to Nigerians in form of cheaper products and better service has remained just that, even after over three years' trial run of the deregulation process. If anything, the price structure of fuel products has been turned on its head! For example, diesel which serves the power needs of the real sector, which provides employment, income, government taxes, etc, costs 30% more than petrol (pms), which has greater patronage for personal car usage, notwithstanding that, pms is a finer and more expensive grade of fuel in the refinery process!
On the other hand, kerosene which is the main fuel adopted by the poor urban masses for cooking is currently about 100% higher than the price of petrol! Nigerians will recall that Mr. President was alarmed at this inequitable anomaly when he belatedly noticed that kerosene was about 20% more expensive than petrol; to his credit, he commanded that the inequity be redressed. It is a paradox that Mr. President has chosen to keep mum now that the price of kerosene is over N120/litre where it is available!
The big excuse is that deregulation failed because of the increasing price of crude oil in the international market! It would probably have been more honourable to admit that the government refused to listen to those of us who cried from the sidelines at the time that deregulation of the downstream sector cannot exist side by side with our Central Bank's monopoly of the supply side of the foreign exchange market!
So long as the CBN continues to seize our nation's crude oil dollar revenue and insists on changing the dollars into naira before sharing to the three-tiers of government, so long will deregulation's universally acclaimed social and economic virtues and potential opportunities remain a mirage. The authorities do not have to listen once again to our humble advice, but there is no doubt that they would not know genuine peace and can never satisfactorily explain why our nation has fallen to the lowest rungs of the world's poorest at a time that we are earning our best ever export revenue.
In the event that the government reduces it's subsidy to NNPC in 2007, we will once more be faced with a hike in domestic fuel prices with all its attendant adverse dislocations to the society and the economy; the country will revert to the status quo ante and the NNPC will once more become the sole importer of fuels as other marketers will be guided by their business sense to wait and buy from NNPC imports! Deregulation would then have become not only dead, but fully embalmed and buried!!
In the D/Independent news report referred to above, the PPPRA Secretary confirmed that the combined capacity of our four refineries is 18 million litres/day; i.e. 12 million litres short of the total 30m litres daily demand. Inspite of this huge commercial opportunity for promoters of refineries project, not one single refinery out of the over 20 already licensed has made any significant commitment on ground to raise our expectations. The reason for this is quite simple, deregulation is anathema to subsidy, and is also a contradiction to exercise overt control on fuel prices in a free market.
Nigerians with a limited comprehension of market dynamics and macroeconomic principles would defend continuing government subsidies and allude to the agricultural subsidies of the USA and major European countries! But the truth is that agriculture and petroleum dynamics are totally different. In any event, why pay subsidy of N270bn from our people's hard-earned money, when in fact, a simple change in the CBN's handling of our export dollar revenue would not only bring down petrol prices, but also make subsidy unnecessary, (i.e. the N270bn paid out in 2006 could be used for improvement in the health, transport, power infrastructure) and would also make possible, a sales tax of up to 10% or more, on the 30 million litres of petrol (or N2bn) consumed daily. In other words, we can save the N270bn subsidy and still rake in at least N200m from petrol taxes daily, once the CBN stops changing the dollar component of federal revenue and adopts the issuance of registered dollar certificates for this purpose.
“The above is the text of an article which was first published in this column on 4/12/2006! It does not give me any joy to observe that our predictions are bang on target with the related failure of our economy and pain to our people without an end in sight of a possible turn around. Subsidy now exceeds N600bn per year, and Government reports that the value may approach N1000bn in the next year or so, (i.e. 25% of total projected revenue of about N4000bn in 2010)! if crude oil prices exceed $100/barrel from its current level of $80/barrel, as economies in Europe, America and Asia emerge from recession.
“This huge subsidy is further compounded by government's inability to collect the projected petrol tax of N1.50/litre for the estimated 30 million litres of pms we consume daily (i.e. another monthly loss of N1.3bn).
“The issue of adequate power provision and suicidal petrol subsidies will remain the major challenges for Mr. President (whoever that maybe in the foreseeable future). I note that Ag. President Jonathan has been engaged in consultations with critical stakeholders to chart a smoother way forward. Jonathan has been confronted with the same spurious arguments and proposals that will ensure that deregulation and its beneficent impact will never become a reality! For example, it is unrealistic to expect that government could provide adequate infrastructural supports like functional power service, better roads, better schools, more refineries, etc, etc before deregulation! It is impractical to expect the realization of all the above in the next five or even ten years with subsisting monetary framework, economic policies and our revenue profile.
“We note that former President Obasanjo's expenditure of over $12bn did not succeed in raising our power output significantly; so, it should be obvious that the meager $8bn set aside for capital expenditure in the 2010 budget will not be adequate to improve infrastructure, improve roads, build railways, provide water, increase power generation and build more refineries as demanded by some stakeholders before deregulation can take off! In other words, Deregulation may remain just a subject for discussion for some more years to come, and this will continue to motivate the smuggling of possibly up to 33% of our petrol across our borders because of a low valued naira! Thus, while we are called on to make sacrifices, our neighbours will continue to have a free and easy ride on our backs!
“A government sponsored agency by the name of 'Movement for Economic Emancipation' MEE, may have spent over N100m of public funds lately in paid adverts in both prints and electronic media to canvass convoluted propaganda to support deregulation. In the process, MEE i.e. (a government agency) indicts government of criminality and illegality as subsidies are neither budgeted nor appropriated!! It is surprising that MEE kept mute for over ten years and has not called for the prosecution of those violators of our constitution and laws! Other MEE adverts are equally provocative and in some cases even socially divisive!
“But both MEE and the government know that deregulation will fire inflation and bring untold hardship on our people, unless the foreign exchange market is also simultaneously deregulated, so that Central Bank's monopoly of our petrodollar revenue is dismantled. It is evident that no amount of persuasion, advertisement, propaganda or outright lies will make deregulation practical and beneficent until the naira value increases in consonance with increasing crude oil prices and our dollar reserves rather than the reverse!!”
SAVE THE NAIRA, SAVE NIGERIANS! BY: LES LEBA