Date Published: 09/29/09
Deregulation of the Petroleum Downstream By Christopher Ebhote
May 3o 2009
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DEREGULATION OF THE PETROLEUM DOWNSTREAM
Mr President and Distinguished Members of the Senate:
It has come to public knowledge that N640 billion was spent in just one year to subsidise regulated petroleum products, namely, petrol fuel for running vehicles (both private and commercial).
The position of the Government is clear: the rationale for subsidy has been and remains misplaced. Subsidy has resulted in inefficiency, fraud and racketeering. Emphasis must also be placed on the very fact that the whopping N640 billion went into subsidising 30 people and not the 140million people of Nigeria. I would not have bothered to comment on the subsidy controversy had the opposition led by Nigerian Labour Congress, and a section of the media, not completely ignored the pertinent issues namely: subsidy has resulted in inefficiency, fraud, racketeering and pockets lining of 30 people only out of 140 million people. I will, therefore, address these very issues.
I will, with all due respect, submit that opposition to deregulation is misplaced. Opposition says deregulation will increase pump prices and further impoverish the people. The next question is: which people? We have been told by government, and rightly so, that the notion that the people are being subsidised is misplaced. The fact of the matter is this: only 30 people are being subsidised. Why should opposition choose to ignore this completely and continue to argue on behalf of 140 million people? Opposition has not shown, by means of facts and figures, how 140 million people benefit from a scheme that is responsible for one of the most corrupt scandals in the world. I would have expected opposition to ask government for a proof that subsidy goes to 30 people only. Once government provides that proof, and then if opposition is not satisfied, opposition must then argue for a contrary position. It is not sufficient to assert contrary to government’s position without an argument in support. In other words, opposition must be able to prove with facts and figures that deregulation will hurt the people and not the 30 people and fraudsters. In other words again, that there is no fraud, no inefficiency, no 30 cabal and no scarcity of the product as result of the subsidy regime.
A section of the opposition has asked, “where is the guarantee that government is well meaning?” I am not a member of government and I do not pretend to be one. However, the answer is a simple one. Take a look at the deregulated telecoms industry. The same opposition argued against deregulation in the telecoms industry. Had opposition prevailed, the very clear gains (albeit that there is room for improvement) would have been denied the people, the same people that opposition has sworn to defend their interests. One issue is clear: opposition has not got the mandate to speak on behalf of the people. The self arrogation of a mandate is in itself undemocratic. The telecoms industry before deregulation was characterised with inefficiency, fraud and racketeering. Few hundreds of workers, in the then solely charged body to provide telephone, threatened fire and earthquake should any attempts be made to deregulate the sector. So long as opposition held sway, Nigeria could only boast of 500,000.00 lines after 45 years of independence. The telephones did not work and yet were very expensive. It was not possible to telephone within or without Nigeria. The repercussions for the industries and the general economy were immeasurable. Even with the modest gains in the telecoms industry employment is now a thousand fold. Notwithstanding these clear gains, opposition continues to argue that deregulation will result in loss of jobs. However, we are witnesses to the modest gains in the telecoms industry, which have resulted in very serious entrepreneurs making billions in profits, paying taxes on those profits, employing thousands of workers. With the workers in turn paying income taxes, the treasury is richer. And if the treasury is richer (in the absence of any corruption on the part of government officials) the people could be said to be richer.
With the modest gains, communication has increased a thousand fold and the increased communication has trickled down to the industry and the general economy at large. It is a strange economic thought on the part of opposition to continue to argue that the same result in the deregulated telecoms industry will not be repeated in the petroleum downstream. For us to take opposition strongly, opposition must present a persuasive argument as to why the gains in the telecoms sector will not apply in the petroleum downstream.
Furthermore, had opposition had its way in the telecoms industry, there would have been no mobile phone in Nigeria. What is the fate of the mobile phone service that was set up by NITEL? It could not compete. It could not compete because it was inefficient; it was inefficient because it was not being run by those who have taken risk with the capital inputted. The telecoms industry has told us that entrepreneurs who have risked capital will work hard to ensure a return on capital. In the face of competition NITEL withered away. Its withering away saved the treasury probably another N640 billion in one year that would have been used to subsidise NITEL had the regulated regime continued (hence it is worrisome that NITEL is being reconstituted under a technical board) Rather for the treasury to subside NITEL with N640 billion the treasury gained by way of corporate tax receipts and income tax receipts, and yet opposition says otherwise in the petroleum downstream.
Government says that “the magnitude of existing subsidy is unfair and unsustainable”. There are two issues:
Opposition has failed to address these two issues or refute government’s position. Where opposition has failed to do so, I will address these two issues below one after the other.
No doubt the use of subsidy is probably unfair. First, it is unfair that in a country of 140 million people a cabal of 30 people only line their pockets with N640 billion in 365 days. This amounts to nearly N2billion every day! Does it surprise anyone why the vast majority of the people live below the poverty line? It also means each of the 30 people went with N21.33 billion in one year! A subsidy regimes that lines the pockets of a single individual with as much as N21.33 billion in one single year with the hope that it will trickle down to the rest 140 million people is completely misplaced and it is hopeless in its objectives. Such a system could only breed inefficiency, fraud and racketeering.
A further breakdown shows that each of the 30 people got N58, 447,488.58 everyday! Government must be right to insist that there is no justification to continue with this regime. Does it surprise anyone as to why the system is corrupt? Does it surprise anyone as to why the average person lives below $1 (N140) a day. How a system that benefits one person to the tune of N58.4 million a day could be said to benefit the masses is beyond me. Where opposition continues to contend otherwise, then it must argue for its position. The regulated regime is responsible for the enrichment of one man in the name of assisting the masses. Such a system, if continued, has one and only one destination: a fraudulent practice that will in turn result in bankruptcy. A bankrupt system cannot provide petroleum products at affordable prices. It could only be responsible for scarcity. And, once scarcity is the result, the same masses would have no choice but to buy the product at prices 3 times higher than the market price, a market price that was rejected by the apostles of subsidy.
The Use of Petrol Fuel
Who uses petrol fuel? Both private and commercial users. I will address these two issues as sub sections of Section (a) above.
(a)(1) Private users of petrol fuel.
How many Nigerians use petrol fuel? If we know how many own a car then we may have an answer. The percentage of car users is only about 5% of the population. Of the 5%, 1% constitutes the super rich. These are the fraudsters, embezzlers and robbers that our society continues to celebrate and reward with chieftaincy titles. A pump price that is subsidised to the tune of 640 billion a year goes to the very few in the society. Such a regime cannot be said to be fair. What happens to the rest 95% of the population who are not petrol fuel consumers? Where is their subsidy? A similar opinion is held by Elaine ANG: “a high subsidy level is not efficient from a welfare perspective because those who can afford to pay for higher fuel prices are also benefiting from the subsidy that is aimed at alleviating the burden faced by the low-income group.”
(a)(2) Commercial Users of Petrol Fuel
Amongst this group are the commercial Okadas, the taxis, intra city bus service providers, commercial buses and trucks that convey agricultural goods from places of production to the market, intercity transport buses and company uses. I believe this is the thrust of opposition’s fear. It is feared that complete deregulation may push the pump price to N150 with a resultant inflationary pressure on goods and services generated by the high transport costs. These fears are not necessarily misplaced save that they are anchored on narrow construction. Fuel is not the only factor that determines transportation cost. Fuel is only one of the factors and may only constitute 20%. Take Lagos for example - a commercial bus’ ability to make several return trips is greatly hampered or constrained by the terrible high volume of traffic at any point in time and worse during peak hours. The delays and the attendant less revenue is factored into the transportation costs. The same applies to the high cost of maintenance. It is submitted that the incidence of a higher pump price is minimal.
That said, I do not subscribe to the notion that a deregulated downstream petroleum industry will necessarily result in higher pump price. If anything a deregulated regime will bring down the pump price. The pump price will go down because of increased supply and competition. It is my very strong position that a regulated regime is responsible for high pump price. Proof that this must be so:
- There is no incentive to have a competitive price. Why would a supplier elect to bring down the price where the price has been fixed?
- In the absence of deregulation, there is no incentive to put the pump price at the point where marginal cost equals marginal revenue and, therefore, consumers cannot reap the economy of scale
Summary as to whether or not the present regime is unfair
It is not fair. Period. Opposition should analyse the system as it works and will discover that the present regime is grossly unfair. It is unfair for the following reasons:
- The subsidy goes to 30 people and not Nigerians. Opposition should rather demand that the sum of money that goes into subsidy should be used to subsidise Nigerians directly. This should be in the form of welfare payments to Nigerians to ameliorate any harsh effects of inflation generally and not just pump price in particular. If this is the agitation of the opposition, then it will receive popular support. Allow deregulation so that market forces should efficiently allocate the scarce resources and, therefore, eliminate scarcity and black market prices. Then, the N640 billion that would have been used to subsidise 30 people should be paid DIRECTLY to Nigerians as welfare benefits as it is the practice in the top 20 economies, a club we seek to join in 2020. The top 20 economies allow the market to work without distortions and then cushion harsh realities of life by paying unemployment benefits to those who are out of work, child care benefits to those with dependent children, housing benefits to those who cannot afford the open market rate and pension benefit to the elderly. Where this is done, then the subsidy will go round the majority of Nigerians who fall below poverty line and not necessarily workers who manage to live above poverty line. The test for dishing out any benefits should be means tested. Labour should call for the use of the N640 billion as welfare payments to all Nigerians who meet the means test and not just workers who constitute 5% of the population. N640 billion will pay average benefits of N40, 000.00 a year to 16million Nigerians. The effect of paying N40,000.00 on the average to 16 million Nigerians would be a thousand times better than given the same amount of money just to 30 people in the name of subsidy. If opposition still disagrees, then it must provide effective counter argument.
- Subsidy displaces the incentive to attract private capital to generate the petroleum downstream. Please, if in doubt, see the modest gains in the telecoms industry.
- Aside the subsidy, government continues to pour billions into refurbishing of refineries without any corresponding returns either by way of refined petroleum or returns to the treasury of net profit. What is difficult to understand is that the operators of the refineries, from the directors to the workers and labourers, continue to argue that the only solution to scarcity of petroleum products is a continued pouring of government and tax payers’ monies into refurbishment of obsolete refineries. Yet, each time they receive in the funds, the refineries continue to perform less and yet insist each time successfully that they and they only have the solution. They are the problem and not the solution. They know they are the problem but labour does not know they are the problem or pretends not to know. The problem cannot be the solution. The solution to a problem is to try a different mechanism, different from the present system. The present system is the fuel subsidy and the solution must be something different and that something different is the market characterised by free entry and free exit. Therefore, government plan to licence people en mass to bring in the product and/or to produce the product is laudable and must be pursued vigorously and without fear of labour. Government must lead and not surrender to special interest group supported by labour, albeit in ignorance. It is submitted that the same solution has been tried over and over again with same result. No fuel! With the support of Labour organisation and a section of the media, they (the operators of the subsidy regime) win the argument with the result that no progress is made and no locally produced refined petroleum. Yet, all the groups continue to insist that the present regime is the best for Nigeria. Yet, the rest of Nigeria continues to swallow this position sink line and hooker.
- No fuel - because with the support of Labour the refineries produce nothing. Result: massive importation of refined petroleum with our hard earned currency. Our hard earned currency pumped into other economies where the refined petroleum is obtained. Those economies continue to get richer at the expense of Nigerians. Yet Labour would have us believe that this is the best way to help the masses. It is a strange way to help Nigerians by funding other refineries where that in turn employ their own people in those refineries while Nigerians have no refineries to work because none is functioning as result of the subsidy regime. Yet, the organised labour and a section of the media continue to say that it is the best way to help the “masses” Yet we continue to swallow this line sink and hooker.
- The countries that export refined petroleum to Nigeria continue to expand their refining capacity with private capital, which is forbidden in Nigeria. Yet, we go cap in hand to countries that export to us (who are able to so because of private capital) to give us refined petroleum.
“With the end of cheap oil many experts see Malaysia’s current oil and gas subsidies as unsustainable and inefficient.” - As per Elaine Ang, The Star Online, Jan 14, 2008.
“The amount the government had spent on petroleum subsidy over the years was becoming equal to if not more than the capital budget.” - As per Lukman, at a dinner in honour of Nigerian Guild of Editors.
This is where I too will begin my contribution as to whether or not subsidy is unsustainable. Aside the Elaine Ang’s position on the Malaysian experience, it is clear from the statistics provided by Lukman that subsidy has not only become a drain on resources but is beginning to defeat a meaningful attempts by government to develop Nigeria by the provision of capital projects. Where subsidy is equal or more than capital project, it means only 40% of the resources that would have been available to put into capital projects is not being put into such projects so that enough could go to petroleum subsidy. I can see a contradiction here. I wonder why opposition cannot see the apparent contradiction in calling on government to invest in infrastructures such as refineries etc and simultaneously insist on government continued subsidy, which would gulp the monies meant for such infrastructures. To the degree that such huge sum of monies goes into subsidy to that degree will lack of infrastructures remain the bane of Nigeria, and to that very extent is the provision of subsidy unsustainable.
CONCLUSION
For too long labour has been able to arm twist government to implement its policies. Not just this present government but also preceding governments. The notion of a listening government is misleading. Listen to what? I fail to subscribe to the notion that a responsible government is one that listens to opposition’s criticism whether or not such criticism is constructive or whether or not such criticism is pure politics or sound economic thought. Government cannot simply be run on the basis of threats from opposition. A labour movement that successfully imposes its policies on government is the de facto government. To the degree that government ends up operating labour’s policies to that degree is labour the de facto government in Nigeria. But such government would be illegal because it lacks the mandate to make policies for Nigeria. The government with the mandate is the legitimate government of the people. The issue of who has the mandate to rule Nigeria and, therefore, make policies for Nigeria has been settled by the people and the courts where there had been disputes. A labour movement that fails to recognise democratic institutions’ role to settle disputes has no place in a democratic dispensation. Where labour is so interested and believes so strongly that it has a better philosophy to the problems of Nigeria, then labour must have the courage to directly seek the mandate of the people. In the absence of such mandate, labour has no right to speak for me and I believe millions of Nigerians who are not registered members of labour union.
A regulated regime lacks the capacity to generate economic activity which is primary to poverty alleviation and not the subscription to a socialist policy that has failed where it has been practiced. A country without sufficient economic activity is a non-industrialised economy and a non-industrialised economy can only afford poor standards for the people. A regulated regime is responsible for black market and black market in turn generates scarcity and scarcity in turn generates higher than market pump prices. The notion that government is the be all and end all of economic panacea is simply misplaced. A system that allows government to pour the entire resources of the nation into refineries that do not produce refined petroleum is simply fraudulent or at best self deceptive. The central ownership, production and distribution of petroleum products to 140 million people have not worked and will not work. To pretend otherwise is a disservice to the people. I have no respect for a system that places the entire resources of the nation in the hands of one man in the name of federal government controlled NNPC to dispense at will. We must get out of the box and learn to do things differently. Now that government has taken the initiative in the correct direction that should be supported. This is the only rational direction in the circumstance.
Our objective and target must be to run an economy that is so robust that the entire crude oil production will not be sufficient for local consumption. A very buoyant economy will gulp 6 million barrels of oil a day. We only produce about 2 million barrels a day. Therefore, without private capital, the capacity to refine 6 million barrels of oil a day will be hopelessly nonexistent. A nation that produces 2 million barrels of oil a day and exports all cannot be said to be sophisticated. Such economy falls in the brackets of bottom 20 economies of the world. The very large economies and successful economies where we all love to keep our children, families and looted public funds are driven by private capital. They are not run by one NNPC manager who keeps the monies for 140 million people under his pillow to dispense according his whim and caprice. With all due respect, such a system is very unsophisticated. The notion of asking government to name the cartel responsible for scarcity, fraud and racket is beside the point. To defeat the cartel is to allow free entry and free exit and empower ordinary citizens into business with private capital. Therefore, Nigeria must come up with the correct legal framework to give confidence to potential investors so that they could invest in the system and recoup the cost and make profit. Without the profit incentive, no business man will expend energy and time to run the petroleum downstream. Therefore, the question we should ask is: have we given the potential investors the enabling environment backed up by the correct legal framework to do business and not to continue to lament the inability of those with licences to operate refineries. Under a regulated regime, they will never take off. Therefore, Mr President and distinguished members of the Senate, the ball is in your court to lift Nigeria out of the woods. The constitution has charged the institution you lead with the primary responsibility to pass a bill into law that will create the necessary legal frame work to industrialise Nigeria. I fail to subscribe to the notion that the President of Nigeria has the solution to everything. Such notion is a hangover from the military era. Power lies in parliament. The function of the president is to implement the basic law of the land.
The writer is a London based lawyer with Carter Devile Solicitors.
Elaine Ang, commenting on the Malaysia experience on The Star Online, Jan 14, 2008.
