Friday, 25 November 2011




                     WHY WE OPPOSE GOVERNMENT’S PLANNED DEREGULATION

                                       BY COMRADE KIRI MOHAMMED
                                       ACTING PRESIDENT, NLC

Distinguished Chairperson of this initiative and fellow stakeholders let me commend you for inviting us to this forum.  The opposition of the Labour Movement to the so-called removal of oil subsidy is historical.

We have waged this struggle together with the Nigerian people since 1987.  The result is there for us to see. The arguments of the government since then have not changed.  The reasons adduced for the recent attempt to remove fuel subsidy are as usual to increase fuel prices and make more revenue for the Federal Government without recourse to the negative and traumatic social and economic consequences on the Nigerian people.

Our Position                   

The debate on the deregulation of the downstream sector of the petroleum industry has been a long drawn one. In the course of this debate the Nigeria Labour Congress has remained consistent in its contributions. Mr Chairman, let me briefly review the history of this contribution.

Following the agreement reached between the Federal Government and Labour to end the general strike called in June 2000 to protest increases in the prices of petroleum products, a 34 member committee was set up to review “all aspects of petroleum products supply and distribution sector of the Nigerian economy”. At the end of the work of the committee two reports were submitted to government.

These were the Majority Report acceded to by mainly government representatives and representatives of vested interests in the oil industry and the Independent Report submitted by the representatives of labour. One of the major points of departure between the two reports was the differential appreciation and acceptance of the economy-wide effects of petroleum products price increases. We argued then and we continue to argue that because petroleum products are, first and foremost, inputs in the production process of virtually all sectors of the national economy, the impact of increases in their prices needs to be evaluated on the basis of the overall economy and not just the narrow sector of the downstream and government revenues. Unfortunately, the main consideration for the present push for subsidy withdrawal is hinged on the need to bolster government revenues at both the state and federal levels. Our position is that we need to look at existing evidence in evaluating this policy.

Mr. Chairman we are aware of the existence of only two empirical general equilibrium investigation of the impact of petroleum products’ prices on the Nigerian economy. The first, “Macroeconomic Implications of Higher Energy Prices in Nigeria” by Iwayemi A and A. Adenikinju appeared in the Pacific and Asian Journal of Energy in 1996. The more recent was a study conducted by NISER in 2000, in which model simulation was employed to investigate the differential sectoral impacts of an increase in petroleum products’ prices.

These two studies, particularly the latter, show the contractionary impact of increased petroleum products’ prices on the productive sectors of the economy. The sum total of the sectoral effects clearly demonstrates that there is an overall negative impact, at least in the short run.

These results are further corroborated by direct evidence publicly canvassed by the Manufacturers Association and other operators in the productive sectors of the national economy showing the deleterious impact of increasing energy costs for their operations. These impacts are particularly severe due to the high dependence of industry on privately generated power.

The case of Emanoye Investment Limited, reported in the Vanguard of 6 May 2004 adequately illustrates the problem. The CEO of the company was reported as lamenting the high cost of energy to his company operations, disclosing that the company had spent ₦85.5 million on energy alone in four years.

Other later surveys show that most manufacturing establishments traced their difficulties to rising energy costs which on average accounted for over 30 percent of total operating costs. The nexus between the prices of petroleum products and the energy cost of economic operators is straightforward. Given the crisis in the power sector, virtually all domestic  economic operators depend on generators for their operations. The deregulation of the prices of diesel, in our view, which has resulted in manipulated prices of the product, is largely responsible for the escalation of the costs of large businesses which has led to closures and shut downs of many manufacturing firms, with some relocating to other West African countries.

We need to realise that while diesel is the energy source of the large firms, PMS constitutes the main base of the energy requirements of the small scale firms and the huge informal sector. The image of the hair dresser with a small petrol driven generator is familiar to us all. That same image is replicated for the business centre operator, the small shop operator and so on. The proposed policy will unleash chaos in the informal economy which is today the mainstay of the poor, the vulnerable and all those who cannot find gainful employment in the formal sector. Certainly, the potential social dislocation is not worth the penchant for more money to spend by our governments. The real challenge is how to reduce the excessively high cost of governance.

As we have submitted several times before, we need to resolve on a long-term institutionalised mechanism for managing petroleum products prices in our country. As an OPEC nation, we need to use domestic pricing of petroleum products to create comparative advantage for energy utilizing sectors. Again to resort to evidence, in the published statistics for OPEC members in 2010, 8 of the 12 members had domestic prices for PMS which were significantly lower than the domestic price in Nigeria. Why can they sell products at these lower prices while we are insisting on import parity prices? They are able to do this largely because they have correctly insulated their domestic petroleum market from the global market. They refine crude for domestic use and even for export. It is a crime against the Nigerian nation and people that today, domestic products consumption continues to be almost completely import dependent.

It is worth emphasizing that a reform policy based on importation of refined products is inherently destabilizing for the domestic economy. Importation necessarily puts pressure on the exchange rate of the naira. Since the exchange rate is one of the two major determinants of the domestic price of petroleum products in an import based reform regime, a destabilizing mechanism becomes automatically a feature of the system.

Published data on the users of foreign exchange clearly shows that a substantial bulk of foreign exchange demand is for the importation of petroleum products. The pressure on the value of the naira is thus obvious.

From the above analysis, it should be obvious that the present situation of the downstream sector is not sustainable. Although claims are made by the government and the PPPRA to the effect that total deregulation has been implemented for diesel, it is clear that NNPC remains the major supplier of the product. We agree with government that the volume of resources currently being expended on subsidy is excessive. But as government itself admits much of this is due to corruption. It is the duty of government to purge the process of corruption and bring to book those involved in its perpetration.

There is need to admit that the existing reforms are not working and that a more comprehensive programme of reform needs to be agreed among all stakeholders. We recommend a reform agenda that will seek to revive domestic refining and reduce dependence on imports. It is also our contention, that domestic products pricing must not be based on import price parity so as to confer on the domestic economy a competitive advantage based on the resource in which the country is richly endowed.

In this regard, we propose as a starting point in fashioning out an enduring scheme a revisit of the recommendations of the Mantu Report, which proposed a price modulating mechanism along with a process of building up the necessary support fund. Another proposal which is likely to endure is a pamphlet written by Dr. Chukwuemeka Ezeife titled : The Strategy For Supply of Petroleum Product to The Domestic Market. The ideas there coincide largely with those contained in the Nigeria Labour Congress Memorandum to the Mantu Committee.

Finally Mr. Chairman, let me conclude by thanking you and your organisation for this initiative. Let us through sustained consultation and dialogue and some measure of patience fashion out a reform programme for the downstream that will endure and help to advance the course of economic growth and eradication of poverty in our nation.

Let us not do anything that could unleash social upheaval the end of which we cannot predict.

Thank you.



















 






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