A PRESENTATION OF THE PRESIDENT OF THE TRADE UNION
CONGRESS OF NIGERIA (TUC), COMRADE PETER ESELE AT A PUBLIC HEARING ORGANISED BY
THE FEDERAL HOUSE OF REPRESENTATIVES ON THE FUEL SUBSIDY REMOVAL SAGA IN
NIGERIA MONDAY, 23RD JANUARY 2012.
Protocols!
Introduction
The
government is implementing a policy to remove the subsidy on Petroleum Motor
Spirit (PMS) because it argues that the level of subsidy being paid by
government is not sustainable particularly as subsidy payment now exceeds the
annual capital budget of the Federal government. Government also makes the case
that it is important to deregulate the downstream sector of the petroleum
industry and by implication allow market forces to determine the pump price.
This will enable government to completely get out of the sector so that it can
be fully market driven. It is easily agreed that the subsidy that government
declares as paid annually is extremely high and not sustainable without it
busting the budget. It is also not indisputable that deregulation of the
downstream sector will encourage the investment on new refineries and product
reception and Distribution infrastructure with all the attendant benefits.
However, deregulation and or subsidy removal have to be planned and executed
very carefully so that the desired objective is attained. A shoddy implementation
will mean a deplorable setback for all the stakeholders in the industry. This is
why my humble self, the TUC that I lead
and the NLC continue to stand firm that government must have a definitive
agenda for this programme in order to guarantee its complete success which will consequently
establish a solid foundation for economic growth of the nation.
It
should be established from the onset some of the imperatives that are ignored
or swept under the carpet by those who are less informed that blur the debate
on this issue. Establishing clarity on these issues will make it easy for government
to craft the road map towards the efficient delivery of the programme and to
earn the people’s trust through a transparent compact that delivers positive
dividends to the people. These imperatives are:
a)
Subsidy on petroleum
products is removed by a price increase. It is therefore imperative that the
level of subsidy is transparently established otherwise the people will see the
policy as efforts by the government to under change them;
b)
Price increase does
not necessarily equate with deregulation. Deregulation at a point where there
is no subsidy on PMS, for example, will need to be underpinned by competition
which is the only way to achieve cost control and efficiency in the sector;
c)
Deregulation that
jerks up the price a product but is not underpinned as discussed above amounts
to a punitive price increase that transfers the burden of paying the subsidy
from government’s pocket to the private pockets of the citizens;
d)
A Price increase that
happens outside a truly deregulated environment means that the head of the
snake is scourged; the snake is alive and will strike another day. This means
that a price increase not backed by deregulation will cause another subsidy
debate and skirmish further down the road. And this is not in the interest of
all the stakeholders.
e)
If the subsidy is not
a real cost that is efficiently incurred but represented by inefficiency and or
corruption, the people still end up paying for it in the long run as it becomes
a direct opportunity cost of capital formation and a discount of the quality
and level of services that the government delivers to the citizens: and
a. If
the people end up paying, in the final analysis, directly from their private
pockets at the pump station or by the budget deficiency that it creates if the
government pays, it become important that the people should reject the
inefficiency and corruption that is necessarily embedded in the price
irrespective of who is paying
The
people therefore have an inalienable right that the government cleans up the
mess before the policy of subsidy removal or deregulation is implemented.
The
conclusion to be drawn from the above is that deregulation of the downstream
sector is the answer. If such deregulation is properly handled in an atmosphere
where the inefficiency and corruption are expunged and a competitive
environment is created, the result could be a price reduction and not a price
increase. It is this upside potential to have a ‘Win Win’ deregulation which a
properly planned and efficiently implemented deregulation engenders by delivering a price
reduction rather than a price increase that is the focus of this paper.
Establishing the level of subsidy
The Petroleum Product Pricing
Regulatory Agency (PPPRA) was set up by Act No 8 of May 2003 with the primary
mission to
eliminate the effect of volatility in international crude oil and products and
stabilize domestic prices. It also aimed to guarantee effective products availability
and distribution nationwide. The Petroleum Support Fund (PSF) Scheme was
set up in 2006 to support the PPPRA mission and the PPPRA had the objective to entrench
transparency and accountability in the administration of the Fund on petroleum
products subsidy.
In
administering the Fund, PPPRA instituted a pricing principle which in its own
website is a principle “that engenders healthy competition among industry
operators, encourages investment and the maintenance of international standards
and practice “. In support of this principle, PPPRA created a template to
determine the Landing cost of products. This Landing cost is applied against the
Government fixed ex-depot
price of the petroleum product. The difference between the landing cost and the
ex-depot price of imported petroleum products is the Subsidy.
By
all accounts, the PPPRA has completely failed in its stated objective in the
sense that
a) The
template is compiled with bloated costs that discourage competition, the
pursuit of efficiency and cost control. Rather it is based on total cost
recovery and opaque operations thereby encouraging massive corruption and
padded economic rent both of which continuously increase subsidy;
b) PPPRA
has been unable to incontrovertibly establish the quantity of products consumed
upon which subsidy is paid. Quantity consumed is a fundamental item of the
subsidy equation. Failure on this is a confirmation of PPPRA’s failure on its
stated mission; and
c) To
the extent that PPPRA does not insist that subsidy is claimed on confirmed
consumed products, PPPRA is thereby, perhaps by collusion with the importers, paying subsidy on products that were never
delivered, stolen and lost products and products that are round tripped.
It is
because of the above that we believe that the PPPRA template is deceptive, anti
competition and anti-people. This is why we call its Landing cost template ‘a
weapon of mass destruction’. In a regulated environment, the first step towards
the injection of efficiency into operations is to have a robust template that
encourages operators to compete. The present template does not do this.
The adverse impact of PPPRA template.
In a
rentier environment which the PPPRA template entrenches the price that is paid
for petroleum products is represented in the following equation:
Actual market price = Market
driven cost + inefficiency + corruption + guaranteed profit
It
should be borne in mind that the Actual market price is the PPPRA Landing Cost
which in itself is represented in this equation:
Actual market price (Landing
cost) = Pump price + subsidy
The
above equation clarifies,
a) The impact of inefficiency and
corruption on price;
b) It is needless waste of
resources for either government or the people to pay a corruption or
inefficiency laden price for petroleum products ;
c) It behoves on the government to
eliminate inefficiency and corruption from Landing cost of petroleum product
d) A removal of subsidy or deregulation
without first addressing the inefficiency and corruption will only transfer the
burden to the people and embolden the rent seekers to escalate their activities
since the people do not possess the force that government has; and
e) Deregulation that does not
entrench competition will amount to an oligopolistic environment where only the
rentiers profit.
Creating a competition oriented
template
The PPPRA template was crafted from the NNPC point of view and was
therefore based on the following faulty parameters
a)
That all costs should be recovered with a
guaranteed margin. Of course, NNPC operates an inefficient downstream sector.
This accounts for the over padded costs in the template. There is therefore no
incentive for operators to be efficient. Those who strive to be efficient are
awarded excess profit. This assumption which forms the foundation of the
template must be reversed.
b)
NNPC operates across the entire downstream
sector. Consequently, the template views costs holistically from a single
source point of view. This is absolutely wrong and does not represent the
activities in the downstream value chain. We consider this to be a wrong
approach. The various segments of the business do get outsourced and should be
considered as such. For example, NNPC outsources the importation process whilst
marketing companies outsource the transportation and retail (dealership)
element of product marketing.
In an outsourced basis, the most
efficient parameters viz volume throughput, costs or rates should be used as
standards and not the worst parameters as currently represented by a template
that struggles unnecessarily to make NNPC whole. The standards should shut out
the worst performers instead of their inefficient standard being applied as the
standard for all.
c)
Following from b above, the PPPRA
template applies extensive standard costs in its input. A standard is a norm
and whatever is considered normal can be used as a standard. The assumed
standard level has a salutary effect on costs and their relationship to unit
cost in a cost template like is applied by PPPRA because the theoretical
standard set for a level of operations regarded as the ideal or maximum level
of efficiency can have a distorting effect if the standard is not set at the
correct level. Such a standard will not help to control costs, adequately
measure or enhance efficiency and above all, will not promote cost reductions
when it is absolutely necessary to do so.
An inadequately determined standard which turns out to be incorrect will
not only distort unit cost but lead to inefficiencies.
One of the key issues that ought to have been
discussed as a prelude to subsidy removal is therefore the appropriateness or
otherwise of the standards that have been applied all through the template. It
is still of considerable importance that this
should
be carefully and extensively reviewed.
An empirical review of actual costs in
the template should be carried out in order to reduce the landed cost of
products. The actual cost of each element should be properly determined,
empirically, in order to ensure that the allowance that is given is adequate
and not unnecessarily excessive to the detriment of the government and the
consumer.
Eliminating inefficiency and
corruption from product importation mechanism
It is
imperative that the government set out a transition period of not more than six
months when it will take concrete actions to considerably reduce the inefficiencies
embedded in the importation mechanism as a prelude to complete deregulation of
the downstream sector. The steps towards achieving this are set out below:
a) Direct
NNPC to dedicate all the crude that it cannot refine to offshore processing
This will ensure
that NNPC is not selling this crude for its own account. Most importantly, it
will ensure that refinery gate prices based on ‘net back’ pricing is obtained
b) Eliminate
guaranteed margins across the product importation and distribution chain
Government should,
as a first step towards deregulating the downstream sector, scrap all
guaranteed margins in the template including financing cost. The different
segments of the business that comprise the value chain should be clearly identified
and the operators in each segment be made to negotiate their margins. The most
efficient or standard cost of the item, empirically verified by PPPRA should be
used as template input until the sector is fully deregulated by which time
margins will become transaction based and built into market determined pump
price. This will drive efficiency in the sector.
The import jetties have draft limitations which
restrict the size of vessel that can be moored alongside the pier. The draughts
of the jetties that are used for the importation and marine product movement
are: Atlas Cove (11.0m); Apapa (6.4m), Warri (7.4m); Okrika (9.4m); and Calabar
(6.4m).
Consequently
larger vessels, typically of average size 45,000 Metric tonnes berths at the
Single Point Mooring Buoy (SPM, draught limitation 16m) or Fairway buoy in
Lagos, Bonny or offshore Escravos for transhipment. The products are
transferred into smaller vessels of between 5,000MT and 20,000 MT for onward
delivery in ‘daughter’, ‘grand daughter’ and ‘great great grand daughter’ etc
vessels to Atlas Cove, Apapa, Warri, Okrika or Calabar, and even direct sales
to customers on the high seas.
The
above operational system has the following significant negative consequence
i)
It is more economical to use larger vessels to import
products
ii)
Heavy lightering costs are incurred which are built
into the landed cost
iii)
Products are easily round tripped through transhipment
and ocean sales thus creating systemic corruption.
Government should invest on the sweeping
and/or the dredging of the above listed ports. It should be noted that PPPRA
uses 5000MT as a base to license importers and 30000MT for Landed cost
calculation. This is considered scandalous.
The
use of 45000 – 50000MT will lead to a significant reduction in landing cost and
eliminate the menace of product round tripping. This project can be achieved in
less than six months and the pay back is less than a year.
d) Building Additional more Single Point Mooring (SPM)
Presently,
only NNPC SPM and Atlas Cove can take heavy vessels (above 50,000MT) as
explained above. In order to improve the product reception infrastructure in
support of the swept or dredged jetties, government should build more SPM. These
jetties have pipeline throughput availability, thus negating any need to
lighter products. This will also reduce if not completely eliminate lightering
costs and support the elimination of product round tripping
The
government should as a matter of urgency invest in more SPMs. This capital
expenditure also has a less than one year pay back.
e) Removing
administrative bottlenecks that delay vessel discharge and causing demurrage
Apart
from the vessel discharge bottlenecks whose remedies have been discussed above,
the following administrative limitations also cause demurrage.
i)
Delays in obtaining clearances from DPR, Customs and
the Navy.
ii) Security
problems from the Niger Delta militancy activities or from youth restiveness
iii) Difficulty
in settling the ship and shore differences promptly after loading and
offloading operations.
iv) Power
outage causing discharge delays
It is imperative that these bottlenecks are removed.
This can be done by government directive in less than one week, and should be
speedily addressed.
f)
Unbundling of the Pipeline System
and creating open access of the pipelines
Some of PPMC’s extensive (5,000
km. pipeline network and 23 depots) product distribution system is currently
not in use. Some sections have been
vandalized, and others have just not been adequately maintained, and have
doubtful integrity. PPMC should consider
opening the entire network to third party importers and marketers for a
throughput fee. The revenue from such open
access should be ploughed into maintaining the system and ensuring, as much as
possible, its integrity.
Unbundling
will enable marketers to have access from the Jetty head to the storage tank at
a fee which will enable them to compare and control their product storage and
transmission costs. This will enhance pipeline utilization, reduce bridging and
earn PPMC much needed income.
g)
Ensuring
Pipeline & Depot Integrity:
Using PPMC’s installed pipeline
and depot network would normally be the most efficient way to move products
around the country. However, pipeline vandalism and stealing of products are
present day realities in our country.
Distribution by road tankers is inefficient and not a viable alternative
on the long run. Government should speedily address this issue before unbunding
the pipeline system. This too can be squarely addressed in less than six
months.
h) Demurrage
PPPRA template currently
apply 14 day demurrage at $28000 day. This is absolutely unreasonable. When the
reasons given above for discharge delay are addressed, efficiency will be injected into the process
and considerably reduce demurrage .The
demurrage rate is a quoted spot rate (AFRA). The rate by day therefore is
verifiable. This rate should be applied on an allowable three (3) day demurrage
period for both mother and shuttle vessel discharges.
i)
National Strategic Reserve
NNPC has the
responsibility to guarantee product security for the nation. The pipeline
network and its 26 depots made this task a relatively easy one in the 80s and
90s. The MT TUMA was also in active service in support of this goal. However,
the vessel lost her certificate to operate as a result of not being dry-docked.
Consequently TUMA has not been actively engaged since May 2002. .
Consequent on
the above, NNPC now relies on vessels in the high seas to provide the strategic
reserve. The holding of these vessels on the high seas accounts for a
significant portion of the 14 day demurrage that is built into product landed
cost. This is wrong as it gives undue advantage to importers who do not have
this strategic reserve responsibility.
The M.V. Tuma, a vessel capable of
holding 120,000 – 140,000 metric tons of products was, until 2002 anchored
offshore Lagos and used as strategic storage for products. The vessel apparently lost its sea worthiness
certification and departed in 2002, (ostensibly for dry-docking) . The Tuma
should as a matter of urgency re-enter the system as a PMS storage facility to
further reduce demurrage and storage cost.
j)
Paying
Subsidy on Products delivered to retail outlets
PPPRA established the following
basis of determining the volumes on which subsidy is paid
i)
Between 2006 and June 2009, the guidelines provided
that Claims will be based on the duly verified volume of products lifted out of
the depots (Depots belonging to NNPC/PPMC, DAPPMA, Major Marketers and IPMAN)
by the PPPRA to approved retail outlets.
ii)
Similarly, the PSF Guidelines, issued by PPPRA
and effective from June 2009
provided that Claims shall be
based on the duly verified shore tank volume ie the volume of product that was
actually discharged in Nigeria.
The method used from 2006 to 2009
meant that subsidy could be paid on products not delivered into retail outlets
but smuggled out of the country, the method applied from July 2009 is even
criminal as it meant that subsidy could be paid on products that are round
tripped, products lost or stolen after delivery and products that are not delivered
to retail outlet and therefore never consumed in Nigeria.
Firstly, it is imperative on
government to carry out an audit of the products actually consumed in 2006 –
2011 on which the Federation paid subsidy. This is the only way to expose the
massive fraud that has been perpetrated against Nigeria.
Secondly, government should
legislate that subsidy can only be paid on products delivered to retail outlets
and thus consumed in Nigeria.
The issues listed in a – i above are imperative steps that
must be taken before deregulation. They can all be carried out in six months
and will have the following impact
1)
Taken together, they will lead to a drastic
reduction in product Landed Cost. It is the firm belief that PMS would have a
Landed Cost of less than N60 per litre after the measures are implemented
2)
Individually and collectively, the measures have
a payback of less than one year.
The
second issue is the “disconnect” between the government and the people. This disconnect is epitomized by the
following question: who is best able to carry the load occasioned by the
garbage of corruption and inefficiency represented in the bloated subsidy? Is it the government that is currently
carrying it on the peoples behalf or the downtrodden, recession stricken
masses?
We
posit that it is the government for the simple fact that the masses cannot
influence or change anything in the system. And the fact that government’s long
years of monopoly in the industry created the garbage and so, it must clean it
first. If government abandons the people
to the wolves in the sector, it will not take time before they devour the
people and tear their bones to shreds.
We are sure that this is not the objective of government. It is
government’s responsibility to challenge the institutional and structural
imperfections in the system, take them on, fight them, defeat them and have a
lean and fit system to bequeath to the people.
If for nothing else, the structures, institutions, corruption and
inefficiencies that threaten to swallow all of us like roaring lions in the
sector are all the creation of government.
Government
must therefore not cowardly shy away from taking them on and defeating them as
a prerequisite to withdrawing from the sector.
We also recognize that government will always have a presence in the
sector as an umpire or a regulator but not in the dictation of prices.
Government must therefore
implement these measures given the highlighted benefits.
CONCLUSION:
The
following must guide the action of the federal government if we are serious as
a nation to bury this “subsidy monster” permanently. These are:
1.
Revamped regulation to back subsidy removal
Government
should pass a robust law to underpin deregulation such that;
·
Some of the issues discussed above that need to
be made permanent are underlined by the law of the land
·
The use of import licenses is outlawed;
·
Competition in the downstream sector is
entrenched; and
·
PPPRA is given teeth as an effective regulator
and ombudsman.
2.
Government should immediately embark on the
programme to raise the capacity utilization of our refineries to international
levels. This is why we would like to see the immediate publication of the TAM
agreement signed between the government and the foreign contractors said to
have constructed the refineries who are now supposed to handle their repairs.
We want to see the timelines and deliverables as this is key to removing the
present burden of over – priced petroleum products from the back of the already
impoverished Nigerian masses.
3. We do
not understand the logic behind the phased TAM programme by the NNPC
for the existing refineries in an emergency situation like ours. It shows that
as far as government is concerned, the current distorted petroleum products
market that has given rise to the last protests nation-wide and the lives that
were lost does not ring bell in their conscience. Was it the same organization
that constructed all the existing refineries? Why not take on the TAM of the
four refineries simultaneously to bring all of them on stream this year rather
than having to wait till 2014 as being pursued by the NNPC? Does it not show
that somebody or a group is interested in seeing the present fraud in the
sector continue?
4. As a
follow up to the above, we call for the immediate commencement of work on the
three Greenfield refineries proposed by the government in order to expand
existing capacities making it possible for us to lay to rest finally the
monster called “fuel subsidy”.
5. Government
should, as a matter of urgency, ensure that a robust Petroleum
Industry Bill (PIB) that will solve the problems of both the downstream
and the upstream sectors of the petroleum industry is passed into law, thereby
optimizing the benefit to the people of the oil and gas sector which is a
finite resource. We therefore welcome the Committee that has been set up to
actualize this objective and urge that its membership be enlarged to include
more Labour representatives so that its various components would be thoroughly
examined and brought in line with current and future realities.
6. In
any event, it is imperative that Government should make it clear to the
people what the funds generated from subsidy withdrawal will be spent on. There
is no doubt that our decaying infrastructure can do with part of the
money. Without transparency regarding
the use, the funds could easily disappear into the pocket of political fat
cats! This is why we believe that a further restructuring of the Belgore
Committee to make it more inclusive and efficient has become highly imperative.
7. Moreover,
the urgent need for an immediate audit of the Downstream sector of the
Petroleum Industry becomes imperative. It is important that we know what is the
actual quantity of PMS consumed daily, the total subsidy on it, those who
received the said subsidy, who paid them, if N240b (two hundred and forty
billion Naira) was budgeted for subsidy this current term, how did it become
N1.3tr and where did the extra funds come from and who appropriated them?
8. It has
also become imperative that government immediately constitutes and inaugurates
the board of the National Council on Public Procurement in line with the Public
procurement Act 2007. The refusal of the federal government to do this
5 years after its enactment calls into question the seriousness of the
government in pursuing transparency and due process in all matters covered by
the Act which includes such transactions as involved in the subsidy management.
It is our position that doing this would immediately inject transparency in the
sector and ensure that Nigerians and Nigeria are no longer made to carry
burdens of corruption and failure of government to govern.
Palliative measures
It is only after the above are
carried out that the actual level of subsidy (if any) can be established. The
subsidy level needs to be known before the related palliatives are discussed.
Has
the government done what it ought to do before taking the action of January 1st
2012? The answer is an emphatic NO.
Deregulation does not make economic sense when driven by Petroleum
Products import.
Thanks
for listening!
