UNIFORM PRICING, IMPORTS AND FUEL SUBSIDY
By Joseph J. Akpieye
Before 1973, prices of petroleum products varied from one place to another in Nigeria to the extent of transportation costs incurred in delivering products from the major sources of supply. However, with effect from October 1973, that ceased to be, with the introduction of uniform pricing regime in the country.
A Petroleum Equalization Fund (Management) Board was set up by the Federal Military Government via a Decree promulgated on 17th February 1975 but with retroactive effect from 15th October 1973 to administer the uniform pricing system throughout the country. The law setting up the PEF is still in our statute.
The primary purpose of the PEF was, and still is, to determine the net surplus revenue recoverable from or payable to oil marketing companies from sale by them of petroleum products at such uniform prices as may be fixed by the Petroleum Minister (then the Commissioner for Mines' and Power).
The uniform pricing regime led to a remarkable shift in the consumption patterns throughout the country, which would have necessitated cash grant of N23 million in 1981by the Federal Government to subsidize the system as the amount was the difference of claims over contributions by the oil marketing companies.
However, from 1973 to 1978 the Federal Government was not called upon to provide such cash grants for reasons we need not go into here. But it was obvious, even at that time that the NNPC ( the Nigerian National Petroleum Corporation) would, sooner than later, have to make resort to the Federal Government to provide cash grants to sustain this novel uniform pricing scheme that did not, and does not, exist anywhere' else in the world.
Before the advent of Warri and Kaduna refineries and the countrywide network of pipelines and associated depots between 1978 and 1980, there were suffocating and crippling shortages of petroleum products because available local refining capacity was well below national demands for petroleum products and infrastructural facilities for distribution were grossly inadequate. The huge shortfalls were amply provided for from imports without any cash grants from the Federal Government. The novel scheme that was introduced then by the NNPC was the Offshore Processing Scheme:
By 2011, available information confirms that compensating oil marketing companies for sale of products at uniform prices throughout the country and the importation of petroleum products to make for the shortfalls arising from the poor state of local refineries is costing the Federal, State Governments and Nigerians the whopping, mind boggling sum of N1.3 trillion per annum! It is claimed that tile amount is almost the
National budget for capital expenditure.
The Federal and State Governments have now raised alarms that they can no longer continue to subsidize the sale of petroleum products at this dizzy and daunting level and now seek to be relieved altogether of this Herculean subsidy burden on the sale of petroleum products. It is stressed by Government officials that unless subsidy is removed the nation could collapse under the subsidy albatross.
Opponents of the intended new policy of Government, on the other hand, have argued that there is nothing inherently wrong with subsidy, and government should plug all the loopholes of corruption that riddle the importation scheme to bring down drastically the amount of subsidy needed for petroleum products. The Nigerian Labour Congress (NLC), TUC (Trade Union Congress), the Nigerian Bar Association and activists are threatening fire and brimstones over subsidy removal. Clerics have advised the President to suspend the planned removal of fuel subsidy. So, what is the way out of the quagmire?
Let us first examine the importation system which the PPMC( The Pipelines and Products Marketing Company) of NNPC has devised and which is the major culprit inflicting such scandalous, financial burden on the nation. The cash calls on the Federal and State Governments can be reduced to nil if NNPC (PPMC) embarks on proper offshore processing. If it does, the importing roles of the oil marketing companies and the hordes of other importers can be eradicated. NNPC did it in the 70s. It can do so and ought to do so again to save the nation and its citizenry from such horrendous, financial burden. NNPC should be courageous and patriotic enough to bring this about.
The total refining capacity in the country is 445,000 barrels per stream day if all the refineries are operating at 100 percent capacity. With the refineries reported to be operating at 35 percent capacity, this means the total crude oil shortfall NNPC cannot process in the local refineries is some 290,000 barrels per stream day. Let NNPC take this quantity of crude oil which it would have processed locally if all the refineries were operating at optimal levels to an efficient offshore refinery, process it and take ownership of the products as it does for all petroleum products processed in local refineries.
NNPC would incur processing fees and marine transportation costs in bringing the products to its depot at Atlas Cove, piping the products to its massive Mosimi depot from where it can dispense the products to the oil marketers. If NNPC does this, the improper cost components in PPPRA's template will literally disappear. This will be elaborated upon later.
Processing the crude oil adds significant value as NNPC can sell finished products surplus to the nation's needs in the international market while importing the finished products required for consumption in our country. In the 70s, it was possible to pay for the processing fees and transportation cost from proceeds of selling the surplus products in the international market. Selling crude oil (raw material) and using the proceeds to buy finished products (value added products) as is reportedly the case now is patently illogical and indefensible practice.
Accountability is assured in offshore processing because any refiner knows from crude assays the quantities of the different products that it can expect from a given quantity of crude oil. Processing fees and marine transportation costs are negotiable and can be established in the respective agreements reached with the
processor and the transporter. The cost of crude oil to NNPC is also known just as the prices of products in the international markets are known from Platts Oilgram's daily publications.
Therefore, it is possible to produce a quarterly financial statement to account for the transactions under the scheme.
Until NNPC is able to put a proper offshore processing scheme in place, say in the next three months, we ought to examine the PPPRA template which the National Coordinator of the Initiative For Peace and Industrial Harmony, Dr. Timiebi Koripamo-Agary, was courageous and sensible enough to publish in the Friday, November 18, 2011 edition of Thisday.
It is scandalous for the PPPRA to accept the jetty depot throughput and depot storage charges as legitimate cost charges which the Nigerian citizens are called upon to bear for every litre of petroleum products imported into the country. Throughput charges are the charges oil marketers charge each other for storing petroleum products on each other's behalf.
Any licensed oil marketer is expected to have storage facilities and, therefore, if a marketer does not have adequate storage facility owing to its poor planning or unwillingness to invest in storage facilities, an important infrastructure for its business, the hapless Nigerian citizen cannot be called upon to pay for such crass inefficiency or negligence of the importer. Besides, storage charge is a duplication of throughput charge. They mean the same thing!
The Financing (SVH) charge in the PPPRA template is another cost that is inappropriate and indefensible. Surely, it is incredible that Nigerians would be called upon to pay for the financial charges an importer incurs by borrowing from banks to import products!
Lightering expenses are incurred because an importer brings in large parcel of products that cannot be discharged at a port owing to draught limitations. The importer's action is deliberate to achieve economies of scale and so reduce its marine transportation expenses. So, why should Nigerians bear lightering charges? The importer cannot and should not gain twice. It cannot eat its cake and have it!
The new Executive Secretary of PPPRA, Reginald Stanley, should move decisively to eliminate all the above improper charges totaling'N10.33 per litre from the PPPRA template in approving the subsidy payable to legitimate importers. Importers who are not licensed to be petroleum marketers by the Department of Petroleum Resources should be immediately delisted from the list of importers. No wonder PPPRA correctly refers to them as 'traders' in its template.
Now, let us examine the uniform pricing scheme. This scheme requires oil marketing companies to sell petroleum products at uniform price irrespective of the distance of the sale points from sources of supply. This means the uniform pricing scheme deliberately keeps down the real price at which petroleum products would have been sold in the market place if uniform price did not exist.
Subsidy by definition is 'government funds used to keep down the price of any commodity.' Hence, the uniform pricing system which only Nigeria operates in the whole wide world is inherently a subsidy system. It is, therefore, fallacious to say that there-is no subsidy in the sale of petroleum products in Nigeria when the uniform pricing regime still exists in the country.
The message by the Campaign against Waste contained in Thisday of Monday, 17 October 2011, asserts that a litre of petrol is sold in Enugu and Awka at N120; in Ugborodo, Agge Ikubie, both locations in Niger Delta, at N180; N95 in Gusau and Damaturu, and Lagos and Abuja at the uniform controlled price of N65.00.
Evidently, the oil marketers are deliberately breaching the Petroleum Equalization Fund Management Act by selling products at different prices in different locations so as to recover from the market place their distribution costs. No marketer has so far controverted the assertions of this group. This current marketing environment is objective evidence that the uniform pricing regime has broken down.
It is trite knowledge that successive governments have sought to remove subsidy from the sale of petroleum products without success even though after much imbroglio, the governments ultimately succeeded in raising the price of petroleum products. Why?
None of those governments solved the problem by eliminating the root cause, which is the uniform pricing regime that exists in the country.
For subsidy to be removed once and for all the Act setting up the Petroleum Equalization Fund (Management) Board needs to be abrogated and the uniform pricing regime discontinued because of the intolerable and unbearable expense that the scheme has come to impose on the nation. Until and unless this is done, the 'palaver' of subsidy on petroleum products shall continue to fester and heat up the polity.
The proposals for dealing decisively with fuel subsidy without rancor and disquiet in the nation are:
•Until new refineries being proposed for Bayelsa, Lagos and Kogi States are built and functioning within three years, NNPC should embark on proper offshore processing of crude oil to eliminate the hordes of importers and the scandalous expense the Federal State Governments and ipso facto the Nigerian citizens are being called upon to bear;
•Abrogate the uniform pricing scheme an~ allow oil marketers to recover their transportation costs from the market place since the uniform pricing scheme has evidently broken down;
•Abrogate the Petroleum Equalization Fund (Management) Board Act;
•Until the uniform pricing policy is cancelled, and the PEF Act abrogated, any oil marketer that sells above the uniform prices for products not yet deregulated, should be disqualified from making claims on the PEF.
•The PPPRA should be more painstaking and contemplative in designing its templates to establish fair product prices that do not permit the transfer of marketers' inefficiencies to the consumer;
The PPPRA should also expunge all improper import charges from its template; and
•PPPRA should delist all importers not licensed as oil marketers by the DPR.
• Joseph J. Akpieye is the Executive Chairman of Trithel International Company Ltd. and former MD, NNPC, Warri Refinery