Emmanuel Ihenacho
8 November 2009
analysis
A major controversy continues to rage in the media concerning the current proposal by government to deregulate the market for the supply of Petroleum Motor Spirit (PMS) into the country.
The deregulation proposal is premised on the assumption that in freeing the PMS market from its current quantity and pricing restraints, the market forces of supply and demand would invariably operate to regulate the delivered quantity and price which would prevail in the domestic consumer market.
A further extension of this logic holds that the operation of market forces, particularly the dynamic interaction which would be engendered between competitors, buyers and sellers, all operating in a free market environment devoid of any artificially imposed barriers to entry and exit, would ultimately intervene to ensure that the right quantity of products demanded would be supplied at the cheapest (read equilibrium) market price.
Significantly, under the liberalized market regime proposed, the anti deregulation lobby would be at liberty to prove their mettle by exercising the right to bring petroleum product cargoes into the Nigerian market which they could then be at liberty to offer to the consuming public at any price of their choice.
The government, and indeed a large school of informed public and petroleum industry opinion, generally subscribe to the belief that the proposed market liberalization policy envisaged would upon implementation, lead to the recovery by government of significant economic benefits including the opportunity of divesting the rather onerous burden of subsidy payments which it currently shoulders in respect of PMS and Kerosene imports trade.
As of date, it is estimated that the projection for the level of subsidy commitments which the government would be constrained to underwrite for fiscal 2009 amounts to a whopping N675 billion or roughly about a quarter of the entire national budget for the year.
The sum of N675 billion recoverable by way of subsidy cost savings from the proposed deregulation of the petroleum products market is, by any stretch of imagination, a princely fortune which can buy a tremendous amount of goodwill, social security and welfare if properly utilized in the development of infrastructure and facilities which benefit the Nigerian working class/struggling class.
Apart from the potentials which exist for the elimination of the government's current subsidy burden, there are also other significant economic benefits which are expected to accrue from the implementation of the market liberalization policy envisaged by way of PMS market deregulation. The onset of deregulation would allow artificially pegged petroleum product prices to rise to a parity level with the market determined prices at which petroleum products have been historically sold in neighboring West African countries.
The resultant upwards adjustments in retail prices of petroleum products would logically remove the economic imperatives which currently underpin the lucrative cross border products smuggling operations which is currently undertaken by some unscrupulous businessmen portending severe losses to the national treasury in subsidy leakages and in revenue potentials appropriated elsewhere.
However, logical as the proposal for the downstream petroleum products market reform might seem, the attempt to deregulate the Nigerian PMS market has surprisingly run into a major and sustained headwind of resistance, championed in the main by the National Labour Unions and supported by a smattering of left of centre civic society groups.
It is pertinent to note that however altruistic the intervention of the anti deregulation lobby might seem, their current action in mounting an opposition to the deregulation proposals is clearly constrained by the factor of poor or inadequate information and their overall efforts could therefore be said to be driven by a completely misplaced sense of patriotism.
It could as well be said that if the full range of the logical arguments which exist in support of the deregulation proposals were made available to the anti deregulation lobby, then a large proportion of those currently voicing opposition to the government's petroleum market deregulation agenda could conceivably turn full circle to become enthusiastic supporters of the proposed market reform proposals. To a certain extent, the requirement to provide this alternative argument constitutes a major raison d'etre for this piece.
In articulating its opposition to the government's petroleum products market reform proposals, a major argument which is frequently heard is the contention that deregulation and the proposed divestment of the subsidy provision by government is likely to lead to a certain hardship on the part of the common man in the street.
As the reasoning goes, the onset of this hardship is predicted to arise from the anticipated increase in petroleum product prices post PMS deregulation together with the associated higher transport costs which is expected to follow the higher PMS prices.
As the argument goes, higher transport costs occurring nationally are expected to translate within a very short time interval to a multiplier of cost increases in the various consumer markets, right across the entire economy. We do not believe that the available evidence supports this hypothesis of an infinitely upwards ratcheting of prices within the economy arising as a result of anticipated increases in PMS prices.
It is our belief and expectation that any cost increase would be moderate and in line with the historical requirement to adjust our pricing in line with the pricing levels which has been established in the neighboring economies of countries in the West Africa sub region. We shall very shortly have the opportunity of examining the accuracy of these claims in the context of this article.
Over the past few days, emboldened by the government's apparently less than fully confident approach to the issue, the opponents of deregulation have become more daring, vociferous and aggressive in their strategies, currently mounting and pursuing a fully throated campaign of threats and intimidation and promising to unleash pure and undiluted 'hell and brimstone' within the polity if the government were to proceed with the planned programme of PMS market deregulation.
It would be recalled that in its bid to facilitate the purpose of the PMS market reform agenda through deregulation, Government commenced what can best be described as a less than fully robust campaign of consultations and public enlightenment campaign on the issue, subsequent to which it set the date of 1st of November 2009 as the planned take off date of the proposed market reforms.
Only a few days to the planned take off date however, discordant information originating from sources at the Federal Executive Council and casting doubts on the wisdom of the timing of the deregulation exercise, intervened to scuttle any hope which may have been entertained for a quick and easy transition from the regulated to the liberalized market regime for the petroleum products trade.
Due to this diffident approach to the implementation of the deregulation issue, the whole programme seems right now to have been thrown into jeopardy whilst the camp of the opponents of deregulation seems to be buoyant and enjoying a new and uncommon lease of life. As at today, confusion and disorder continue to trail the process of the planned deregulation exercise.
Matters have also not been helped by the rather strange and inexplicable decision, taken by the Petroleum Ministry and NNPC authorities, to facilitate the ordering by the NNPC, of a virtual armada of about 127 cargoes of various grades of petroleum product cargoes for local supply and distribution.
Coming on the heels of the long running attrition which major and independent marketers have recently had to endure; of huge debts in subsidy refunds owed to marketers but not paid by the PPPRA, of financing for imports which have become strangely interdicted by the banks following the CBN's intervention in the financial sector, of applications for import approvals which have not been processed to approval by the PPPRA, the massive market intervention by the NNPC into the business domain of the private sector marketers has understandably provoked widespread anxiety and disaffection within the industry.
Speculation has been rife within the downstream petroleum marketing sector regarding the real motivation behind the NNPC's recent market incursion. Some have suggested that the PPMC/NNPC might be attempting to wrest control of the Nigerian petroleum products market wherein it may now be aspiring to become the dominant monopolist.
It has further been stated by others that the corporation's current market control strategies is being made at the expense of the private sector operators who have invested billions of naira in shareholders funds in developing oil trading, storage and distribution infrastructure only to have the NNPC maneuver (without warning) to take over the import market opportunity for a whole quarter by sheer fiat rather than on the basis of any competitive advantage which it has demonstrated in the pricing of its deliveries or the superiority of its overall service offering.
What is not entirely clear at the time of this writing is whether the NNPC's market intervention was done purely as a legitimate competitive maneuver or as a strategy based on its corporate mandate, to guarantee product stock levels at a critical period in the nation's consumption calendar or, if the corporation additionally wanted to play the role of a catalyst in jumpstarting the imminent deregulation process.
If the last conjecture is true, it would certainly be of great interest to the independent marketers and to the general public, to observe how the NNPC would deal with the market pricing challenges which will be posed for the sale of its stock on the high seas, in the light of the continuing controversy concerning the precise timing of the commencement of the deregulation process.
Going back to the issue of deregulation and the merits of this market reform strategy, a useful re-entry point to this discussion would lie in the review of the central plank of the stock argument, generally favoured by the ranks of the opponents of the deregulation proposals. This argument holds that the proposed petroleum market deregulation would result in the imposition of a certain hardship on the Nigerian masses due to the imminent loss of the subsidy element in the pricing of PMS in the downstream petroleum product market.
The opponents of deregulation also frequently argue that deregulation would facilitate the formation of oligopolistic price fixing cartels which would conspire to artificially keep PMS prices high in the Nigerian market. To test the accuracy of these assumptions, we need to take a closer and more critical look at the empirical issues in this controversy.
First let us look at the issue of subsidies and who actually benefits from the huge amount which the government has put out annually on this account. Is it the Nigerian masses or is it someone else. In the answer to this question lies the indication of who stands to lose if deregulation is successfully established as the preferred market reform policy in the downstream petroleum market.
We note that the subsidy provision is ostensibly targeted at the Nigerian masses rather than the 'middle class' car owners or the 'business class' transport operators. If the delivery of the government's subsidy provisions can be made both efficient and equitable so that it is more fairly distributed and more accurately targets those who should receive it, then significant welfare benefits can be claimed on account of the existence of these provisions in the economy. Herein then lies the problem as we state as follows:
Subsidy benefits delivered in the support of discounted pricing of petroleum products in the Nigerian downstream market does not significantly impact the lives and welfare of the common masses because the common masses do not have significant and direct access to refined petroleum products except for domestic kerosene HHK which they use for cooking. Subsidy provision in the Nigerian petroleum market is ultimately appropriated by a plethora of unintended beneficiaries, the large majority of who cannot be accurately described as the proverbial Nigerian Common Man or the suffering masses.
The greater proportion of the 675 billion naira (2009 estimates) subsidy payments in the Nigerian petroleum products market invariably leaks to unintended and undeserving consumer beneficiaries including wealthy and middle class car owners, well-off transport business operators, unscrupulous Nigerian businessmen who are not averse to the smuggling of cheap subsidized Nigerian products across the borders to consumers in neighboring countries, consumers in neighboring countries who are not averse to buying the discounted products supplied across the border from Nigeria.
Regarding the fears which have been expressed about the possible formation of oligopolistic price fixing cartels who would conspire to keep market prices for PMS artificially high post deregulation, we doubt that such a development would likely come to pass given the intensity of competition in the downstream petroleum market where several market players, operating thousands of filling station outlets are continuously jostling for a share of the national market for petroleum products.
We need only to observe the developments in the deregulated AGO market where no single player has quite managed to achieve market dominance. Selling price in this market oscillates within a narrow pricing band and spot prices are dictated by daily movements in the international market. Moreover, a cartel cannot form within a market environment which does not have any artificial market entry and exit barriers. The only barriers to entry into the Nigerian products are the natural barriers of capital intensity, business acumen, technological capacity.
Cartels have not formed in the Nigerian foodstuff market which remains a very good example of a free market and prices in this market, except for minor seasonal variations has remained stable over time.
Every time we have had the opportunity of participating in a discussion or debate on the issue of deregulation, the question invariable arises as to whether or not the country would not be much better off if the installed refineries were in working order so that we wouldn't have to spend so much time arguing about the rationale for the continued importation of petroleum products and also about the correct pricing for the products so imported.
The need for viable local refineries is a positive argument for the earliest onset of deregulation. In answer to the question about the state of our local refineries, everyone knows that every man's business is frequently no man's business. With this understanding in mind, it might well be the case that the only way we can have viable refining capacity in the country would involve a requirement for the conception and implementation of the refinery development proposals to be contemplated strictly under private sector initiative and ownership.
We all know that refinery plants are very expensive facilities with the scale of finance required for development running into the billions of dollars. Such huge financial investments could only be attracted into the country if the operating environment were such that the selling of refining output and the amortization of the investments can be carried out under a free market environment, free from extra market intervention by the local authorities in the determination of output quantities or prices at which output could be sold.
If we continue to talk about restricting product prices through extra market mechanisms, we cannot logically expect any serious investor to bring their money into an environment wherein they could not easily amortize those investments within a reasonable time frame. Certainly no sane investor would opt to commit billions of dollars of their hard earned investment in the refining of petroleum products, wherein the basic crude feedstock is subjected to a very rigorous and sustained chemical production processing only to be required by local exceptions to sell at regulated prices.
In the light of the of the foregoing, it is entirely clear that in regard to the issue of the proposed deregulation of the PMS market, the government has no other option but to proceed to full deregulation of the PMS market as quickly as possible. There is nothing further to be gained by continued consultations or procrastination on the issue.
The common man or the Nigerian masses stand to gain the most from a policy decision to deregulate the PMS market which will logically lead to the discontinuation of the payment of subsidies on account of PMS or Kerosene imports.
Deregulation would make it possible to recover the full amount of the projected subsidy per annum which would now be spent on life improvement projects for the Nigerian masses. Deregulation would also remove the current incentive which exists for people to smuggle our oil elsewhere. Removal of the smuggling incentive would greatly improve local product availability and this would in turn, exert a downwards pressure on product prices within the economy.
All champions of the interests of the Nigerian masses and the 'common man' would have demonstrated superior patriotism if in the light of this revelation, they consented to a strategic requirement to shift the focus of their advocacy intervention to how the anticipated subsidy savings is to be spent rather than on continuing to clamor for theoretical allocations of cheap subsidized oil to the common man, a commodity which he is not likely to have direct access to, has little need for or derive any significant direct benefit from.
Captain Ihenacho is the Chairman/CEO of Integrated Oil and Gas Limited and Vice Chairman of the Depot and Petroleum Products Marketing Association (DAPPMA)
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