16 January 2016

Nigeria: Fuel Subsidy, Refineries Privatisation - the Way Forward

Group Managing Director, Arco Group Plc, Alfred Okoigun, posits that the way forward for the privatisation of refineries and subsidy removal is to initiate a conversation between government and organised labour with all the cards that assure workers' welfare will be of paramount consideration, placed on the table

The dominant subject of discussion in most economic and political fora these days is the collapse of crude oil price and the attendant consequences on the world economy. The latest information from the New York Mercantile Exchange (NYMEX) is that world premium grade, the North Sea Brent is trading at less than US$34 per barrel surpassing an 11 years abysmal record!

The oil price collapse has defied all predictions. It was thought in the past that since the bulk of crude oil reserves is found in less developed countries (LCD) while developed countries possess the technology to commercially exploit the oil and are in fact, the major consuming nations (expenditures on energy totaled about US$6 trillion in 2011 or about 10% of the world gross domestic product (GDP) with Europe spending about 25% of the world energy expenditures, Americans spent close to 20%, and Japan 6%), the "bilateral monopoly" inadvertently created would make both parties ensure crude oil price would be "right" for the continuous investment and benefits of both parties.

Several factors have been adduced for the collapse of world oil price depending on the analyst and his political leaning. The massive development of shale oil in USA and Canada arising from the then attractive oil price of US$105 per barrel resulted in massive investment in oil production and the attendant oil glut. Another factor fingered for the glut is the increasing share of Non-OPEC producers in total world oil production rising to almost 60% of daily global oil production of 93 million barrels. Furthermore, the landmark nuclear deal between G5+1 and Iran that has now permitted Iran's oil to enter the international commodity market has also been mentioned as a factor. Some other analysts will attribute the plummeted oil price to geo-political factors arising from NATO member nations' faceoff with Russia over Ukraine given that oil and gas constitute the mainstay of the Russian economy.

For Nigeria, the effect of every drop in the international oil market is bound to permeate the entire sector of the economy and worsen government finances. Unfortunately, we have not sufficiently invested in functional refineries and petrochemical industries, electricity, roads and other infrastructure as well as local capability. We have also not sufficiently accumulated savings in foreign reserves, which plunged to about US$29billion by the end of December, 2015! And a Sovereign Wealth Fund of about US$1billion!

The fall in oil price means that Nigeria which depends virtually on sale of crude oil for over 80 per cent of foreign exchange earnings must come up with policies that can diversify the economy, given that global economic fundamentals are not giving industry watchers the confidence that oil price will rise to pre-June 2014 levels in the foreseeable future.

Unlike other OPEC member countries, Nigeria imports petroleum products for domestic consumption after her four decaying refineries could not meet supplies despite huge allocations of millions of US Dollars in Turn-Around Maintenance (TAM) between 1999 and 2011. This situation led to increased focus on import licences to fuel importers to bring in petroleum products as local refining capacity could not meet local demands anymore.

Meanwhile the issue of subsidy removal or retention has polarised the polity. One school of thought advocates complete removal of fuel subsidy. The other group led by organised labour has insisted on the removal of fuel subsidy after the revamping and operation of existing refineries.

It is therefore an attestation to present economic reality that the government of President Buhari has taken a position which is that petroleum products subsidy can no longer be sustained. A formula is in the offing in which domestic petroleum products costing will be in response to developments in the world oil market as obtainable in many countries. The case for subsidy removal is strengthened the more by the current audit report of the Nigerian Extractive Industries Transparency Initiative (NEITI) that shows that Nigeria spent about N5 trillion on petroleum products subsidies between 2006 and 2013 excluding the actual costs of the products!

The current low price of crude oil has thus presented the government with a convenient take off point of subsidy removal. It has made it possible for the administration to peg the pump price of petrol at a maximum of N86.50k per litre. Going by this policy, future adjustments will be dictated by what is happening in the international oil market. And the phased removal of intermediaries and middlemen in the business of importation of petroleum products can help the government apply the 'slide rule' efficiently.

This bold initiative on petroleum products prices determination will be incomplete without a complementary policy on domestic refineries. Successive governments at the national level have tried time and again to revamp our refineries. Funds were allocated in previous national budgets for this purpose and the results were all the time a far cry from desired expectations. The fact was that funds allocated were not getting to the management of these organisations because of corruption. A typical scenario was when the Managing Director of a refinery was once reported to have spent a huge chunk of his time at the Federal Ministry of Finance, Abuja, soliciting for the release of funds for his corporation without any appreciable level of success.

I share the view that the Nigerian government has to get out of the business of operating refineries. Even with all the recent efforts, the statistics from the NNPC is nothing to cheer. The four refineries with combined capacity to refine 445,000 barrels of crude oil per day can now boast of only the Port Harcourt Refinery as the operating refinery. Even at that, the Port Harcourt Refinery with a refining capacity of 210,000 barrels per day is currently operating at 4.2% of its installed capacity. A projected expenditure of US$500 million on TAM for these refineries in 2016 budget is frowned at by a number of people who see the move as a ruse because we have passed through this route several times with minimum impact.

Since the previous approach has been fraught with failure, there has to be a paradigm shift. The option is to privatise these refineries. Previous attempts to privatise the refineries have yielded negative results due to strong resistance from organized labour unions and some political leaders who feel that they be left so that the "boys can be settled". We thank God that the current political environment is no longer conducive for such political settlements. What is therefore a "show-stopper" is how to navigate the delicate relationship with organised labour such that they buy into the refineries privatisation plan.

Therefore, it is a matter of urgent necessity that government and labour begin discussions on the subject of the privatisation of the four refineries. The government should place its objectives on the table and explicitly provide guarantees to the workers that their interests would be taken into account. Labour should also present a comprehensive report with a list of all potential job losses by the refinery workforce following privatisation. It should include ways of protecting the interest of all the staff such as a comprehensive compilation of the entitlements of all the workers.

This is important because workers' entitlements and severance packages form a large percentage of the costs arising from privatisation. Determining who bears what cost has always been a bone of contention and a cause for prolonged agitation. As a matter of fact, privatization proceeds are not always sufficient to meet the demands of staff entitlements, welfare and severance packages; hence the protests that set the workforce against the government, which oftentimes led the government to embark on sourcing for extra funds to calm the situation. The privatization of the Power Holding Company of Nigeria, PHCN is a case in point. The fire in that instance might have largely been put out; however, the burners still smoulder. Interested investors, from experience in times past, distanced themselves from the burden of these costs and shift same to the government.

Labour leaders representing the workforce of the soon-to-be-privatised refineries as well as the Federal Government and the potential investors should negotiate the conversion of some elements of these staff costs to equity in these refineries making them shareholders of the privatised refineries. This shouldn't be too difficult to achieve since government maintains shareholding in privatised companies. If the process is properly managed, the shares of the refineries can be listed in the Stock Exchange and the staff/shareholders will have the opportunity of monetising such shares.

With this approach, the government can actually set a deadline of 24 months to solve the debacle of incessant fuel shortage, the shameful practice of petroleum products importation by a major oil producing nation, the arbitrary and controversial pricing of petroleum products. This is an opportunity for the Buhari government to deal with a complex situation that has been dragging our nation's economy behind. It should seize this opportunity with both hands, not minding the amount of efforts that will be required to write a success story of it in the next two years.

Once the privatisation is on course, the government should take its rightful position as the regulator of the business of crude oil refining in the country. Let the refinery business be driven by the private sector. It is inconceivable that the people in charge of establishing and or managing privately owned refineries will raise funds from lenders or investors and practically "share" such money as booty to the detriment of their refinery business.

The article offers a paradigm shift from the norm and rather than relying on other nations' peculiar solutions tailored to their needs, we can look inwards and find answers to challenges beleaguering us as a people; we must develop Nigerian solutions that meet international best practices, and like we did during the Ebola crisis, once more offer the rest of the world a shining example from our success story.

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