Emmanuel Ihenacho
9 November 2009
analysis
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 N675 billion (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 have 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 invariably 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 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 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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Right on! This withdrawal symptom is the best approach to wean Nigeria from its over dependence on imports of what should have been produced locally. Let the face off between the Feds & the gasoline hoarders continue - in six months or less, we will begin to see a return to nomalcy, depending on who blinks first. It will take a tough love approach like this to break the back of economic saboteurs. Albeit the public may suffer in the short run, they will reap the benefit, eventually, if they can just hang in there.
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