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Fuel subsidy removal ‘ll boost the economy- Stakeholders

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… insist deregulation is the only way out, as government act as market maker.

The Federal government’s removal of fuel subsidy has set a stage for the final deregulation of the downstream sector, serve as an incentive to private refiners, boost capacity utilisation, as well as employment generation in the sector. Stakeholders believe the move is long overdue and will go a long way to releasing enormous resources into infrastructure development, UGO AMADI, Business Editor/ Head Energy Desk reports.

The Federal Government has finally bowed to long-standing pressure to reform the downstream segment of the Nigerian oil industry through the removal of fuel subsidy.

According to the Group Managing Director,  GMD of the Nigerian National Petroleum Corporation (NNPC), Malam Mele Kyari, Nigeria would no longer be paying for under-recovery or subsidy on petrol, especially due to the current development in the global oil sector.

This belated action is however coming when the global oil industry continues to grapple with the low demand and the crude oil price that has hit the bottom level, with corresponding drop in the price of refined products caused by the Coronavirus pandemic.

Nonetheless, for the high cost of foreign exchange, which has led to the high cost of the product, the drop in the crude oil would have made a mockery of the subsidy removal as there would have been nothing to subsidise.

Subsidy removal would have made more economic sense when the crude oil price was high to save the trillions of naira hitherto wasted on payment of subsidy.

When former President Goodluck Jonathan attempted to remove subsidy on January 1, 2012, the then opposition Action Congress of Nigeria, ACN now APC used the organized labour and other civil society groups to ambush and exasperate him, compelling the former administration to reverse it.

Even  when the APC led government claimed it has removed subsidy and ushered in a regime of partial deregulation in the downstream sector of Nigeria’s oil and gas industry, NNPC for many months has been the sole importer of the petroleum refined products and has been subsiding it.

Apart from the trillions of naira expended over the years in the disbursement of subsidy and its attendant corruption, recurrent crisis in the downstream sector occasioned by government’s interference in the market through the management of subsidy regime has also fueled the need for full deregulation

As a matter of urgency, stakeholders in many fora had noted that the nation’s downstream oil industry is “in serious trouble.”, stressing that majority of the oil marketing companies doing business in Nigeria are running at a loss and called on government and the appropriate authorities to look at reforms that will change the future of the oil industry in Nigeria.

However, the Federal Government had on April 1, 2020, pronounced a new petrol price band of N123.50k  per liter, a move that was described as partial deregulation as it signaled the end of fuel subsidy.

Many stakeholders have, therefore, canversed for a total deregulation of the downstream sector of the petroleum industry as it would unlock the huge private investment potentials in the sector and also stimulates sustainable growth.

They also expressed worries over the huge amount of money spent by Federal Government annually on subsidy payment, which they said could be used to develop other sectors of the economy.

Speaking to our correspondent, The Director General, Lagos Chambers of Commerce and Industry (LCCI ), Dr. Muda Yusuf said that perhaps the biggest burden on the economy today is the petroleum subsidy regime.

Yusuf said the government should encourage private sector players to take over the downstream sector of the petroleum business.

He said, “When this is done, most of the challenges we see as regards subsidy, refineries and others will be adequately addressed. The government should only play a regulatory and not an operational role.

He  said this became imperative for the government to embark on total deregulation of the downstream sector to attract investors and to also save the country from the huge amount spent on subsidy.

A former Executive Secretary, Petroleum Products Pricing Regulatory Agency (PPPRA), Mr. Reginald Stanley said it was crucial that the private sector would drive the downstream subsector, while the government would make policies and provide the enabling environment.

He added that there was an urgent need for the restructuring of the downstream sector.

According to oil pundits, market reflective price will also ensure market stability and improves fuel supply situation through private sector participation, It will also reduce hoarding, smuggling and diversion substantially and stabilise the price at the actual product price.

Most importantly, it will create labour market stability, potentially creating new jobs through new investments in private refineries and retails and at the same time prevent the potential loss of jobs in existing investments, which were threatened in recent years.

Reacting to the statement by the NNPC GMD on subsidy removal, The Chairman, Major Oil Marketers Association of Nigeria (MOMAN), and Managing Director/Chief Executive Officer, 11Plc, Tunji Oyebanji  in an exclusive interview with Daily Champion said ‘that the issues are multi-faceted, but  noted that now is the time for government to  decide as a country where to be, whether the nation wants to continue struggling with the burden of subsidy or allow market forces to determine prices and pay  actual cost of products.

‘’ I think the thing is multi-faceted but we have to start from the fact that the announcement came from the GMD of NNPC, it neither came from the Minister of Petroleum or the Petroleum Products Pricing Regulatory Agency (PPPRA}, so what has happened in recent time is that rather than companies going back to the government for subsidy payment after they import product, NNPC has been the one bearing all the burden by itself.   In actual fact any  product imported  at a price that is higher than the pump price, NNPC  has been the one absorbing that subsidy difference.

‘’So what they are saying is that they will not do that anymore. So if tomorrow prices start going up, that they are going to be reflecting that price as the market dictates, as what they bought abroad.  But Why, I said it is good to note that the announcement came from the GMD is that it is PPPRA that makes an announcement on pricing.  ‘’ he stated

He affirmed that normally if prices are going to change, it is PPPRA that will announce the price change. ‘’So from what GMD of NNPC has said, it is likely assumed that PPPRA will be setting price reflective of what the market is saying. That is based on the cost of importation. That is what I see for the future.

‘’But until that happens, now we do not know until prices start changing and we see PPPRA doing this on a regular basis. Then we will know if the change has really come to stay”.

Oyebanji noted that “the essence of all this is that we are moving towards total deregulation of the downstream sector and there are laws that set up institutions like PPPRA, PEF and all other entities. So what is going to happen to them?  So, if the government is heading towards that direction of full deregulation, that means there might be a need for some sort of legislation to back it up.’’

‘’We believe that this recent move is gearing towards full deregulation of the downstream sector, in particular, is the PMS, because other products like AGO and Kerosine have already been deregulated. Also we believe that deregulating the downstream will surely free a lot of resources up for government, especially these trying times of Covid-19 pandemic.

“Now that the nation’s revenue is dwindling, it is abnormal to be spending much money on subsidy; in fact, it is a disservice to the country.  If crude oil prices remain the way they are for a long time, you will see that most states cannot pay salaries. he noted

‘’As, I  have said earlier ,if  we are heading towards full deregulation, the laws must change , there must be  structures and competition laws that will  ensure operators don’t cheat customers. There will be a need for a single regulator for the downstream industry and other things that need to be put in place for the good running of the downstream sector.  In summary, this is the beginning of the deregulation process”, he noted.

On Forex, MOMAN Chairman said that is the biggest challenge. ‘’Even though it is the desire of government for operators to start importing petroleum products to reduce the stress on NNPC but players can do that if they have access to forex. As of now, forex is very scarce.  it may be the biggest challenge that might undermine the whole process.

“If private investors do not get forex, the government may be forced to go back to do sole importation, and if the government is importing they might be pressured to subsidize. It is better a situation is created where all will get forex. But all this will go away, once Dangote refinery start working. Because most operators will start buying their product locally.

Also, in a telephone interview with a financial expert and Managing Director of Cowry Asset Management Limited, Mr.Johnson Chukwu   said that  the removal of subsidy could mean two things, one it could mean that the Petroleum Products Pricing Regulatory Agency (PPPRA)  would continue to set price for petroleum products and that price could be adjusted  as landing cost of fuel changes, in that case the market has not been fully deregulated, and if that is the case,even if the NNPC remains the sole importer of petroleum refined products, as long as the prices are set by the government or its agency, one cannot talk of full deregulation.

He also said, that because the prices are set at uniform level, there is need to be an equalizer which means that those who should have bought at lower cost are subsidizing for those who should have bought at a higher cost. In effect the subsidy moves from government to individual.

‘’What we are saying is that if we are talking about full deregulation, the price of petroleum products will not be fixed by the government. If the price is still fixed by the government the product is not still deregulated. And if the product is not deregulated, you cannot achieve or be able to lurk in on the full benefits of a deregulated market.

‘’So what we are doing is that we would still have a market that is basically controlled by a government agency. I think what NNPC is doing is very commendable to remove the subsidy, which eliminated the burden on the national treasury, but, I think they need to go further to ensure we have full deregulation, to enable domestication of refining products in- country. ‘’ he stated

He said the key advice is that having gone this far to set a stage for deregulation of the sector by taking out the subsidy, the government should muster the courage to change the structure of the downstream sector and allow market forces to determine the prices. And government would act as market maker. The market maker will imply that they would intervene where there is supply shortfall to stabilize supply and the prices in the market.

On forex availability, he noted that Operator has been  importing and  accessing fund from the CBN from the I and E window, if there is forex they will access it but the key thing is that, if the price of petroleum product  is fixed, that means we would have an unfair competing environment , and it would be difficult for the private sector to invest.

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