23rd January, 2012
Presentation to the House of Representatives’ Ad-Hoc Committee Hearing on the Operation of the Subsidy Scheme in the Petroleum Sector.
Introduction: 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.
NLC Position on Petroleum products’ pricing: 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 focus on the full cost-benefit implications for the national economy.
Honourable Chairman and Members, 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 of price deregulation based on import-parity pricing 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.
It is also 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. Published data on the users of foreign exchange clearly show 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.
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.
Sharp Practices and Abuse: In our view the major challenge is how to deal with the sharp practices and abuse in the industry. When the Petroleum Support Fund was introduced in 2006, we went before the Senate Committee hearings to argue that to allow the PPPRA and the NNPC as currently structured to manage the subsidy scheme was a recipe for abuse and corruption. We had advocated for a lean independent manager of the Fund and the claims process for subsidy. This was based on our conviction that a process where NNPC would import, determine its claim and net off such claims from due payments to the Federation Account was open to abuse.
We agree with government that the cost of the subsidy scheme is too large. However, we had tried to work with government in the past to get to the roots of the abuse of the system. As part of the Governor Yuguda committee set up by late President Yar’Adua, we participated in a technical sub-committee charged with recruiting international auditors to probe the subsidy scheme. It was chaired by Mr. Steve Oronsaye, then Permanent Secretary of the Federal Ministry of Finance. The committee was not allowed to complete its work. The power of the oil cartel or cabal must not be underestimated.
Within the PPPRA board in 2006 for example, representatives of labour and independent marketers raised concern over the practice where the NNPC was supplying the bulk of the diesel under its control to one individual/firm who had no storage facilities and who merely transferred the supply papers to marketers at a mark-up in excess of 55%. Try as we would, the government representatives on the board, particularly NNPC prevented a review of the matter. Remember, Honourable Members that at this time, diesel was already fully deregulated. Deregulation, by itself, does not eliminate corruption and sharp practices! It merely transfers the impact of corruption to the consumers. The sharp practices that have continued in one form or the other in the case of diesel has resulted in domestic prices of the product which are way above what the import-parity price would suggest. In 2008 for example, while a litre of diesel in Nigeria on average sold for 113 US cents, in Ghana it sold for 90 cents, in Togo it sold for 88 cents, Niger 97 cents and Gambia 75 cents. The following table shows diesel per litre prices for several countries of the world. It should be pointed out that in most of these countries the quoted prices are inclusive of domestic tax.
Retail Price of Diesel (US cents/litre) in 2008
Government has not shown the commitment or sincerity to fight the corruption and sharp practices.
Reform of the Downstream Sector: We believe there is a genuine need for a reform of the oil industry. In the upstream today, Nigerians know that crude is being stolen. However, to concentrate on the downstream for now, we support a comprehensive reform which will confer the maximisation of benefits of oil on the national economy.
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 refineries, encourage the establishment of new ones across the country 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.
Our proposal for reform, therefore, involves the following planks:
1. A revival of domestic refining through existing refineries and promotion of new refineries.
We believe that our domestic refineries must be made to work. Appropriate incentives need to be worked out to attract new investment in refining. While domestic refining by itself is not sufficient to guarantee product price stability, there are clear gains to be derived from domestic refining as opposed to imports.
There are the overall gains in employment and general economic activity. There are also the obvious savings in freight and insurance costs. In addition to these, domestic supply of products will relieve the destabilizing pressure of import dependence on the exchange rate. 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.
2. A re-institutionalisation of a policy of differential between the price of crude for domestic consumption and for export.
As long as the domestic prices of products continue to be tied to the international price of crude, the crisis will remain. It is in recognition of this that we propose a re-introduction of a modified policy of guaranteed crude price for domestic consumption. Rather than returning to the fixed guaranteed price as earlier operated, we propose a price band within which the price of crude for domestic consumption can fluctuate.
In this regard, we agree with the spirit of the proposal put forward in the Senate Committee on Employment, Labour and Productivity report to the Senate on the 7th of October 2004. This proposal involves setting “a price modulating band for crude to be processed in Nigeria for domestic consumption”. As for the specific band, we propose the cost of extraction and delivery to the gates of refineries X as the floor and X+y as the ceiling, where y is the target inflation rate set by government policy in the current year. The adoption of this mechanism will ensure a stable price regime that will allow economic actors make plans.
It should be emphasized that the guaranteed price should not be on offer to only NNPC, but to all refiners and to the limit of the crude actually refined for domestic consumption. Given that in the short run, there are no domestic refiners, tenders should be opened for the domestic crude for potential refiners to bid with clear timelines on domestic refining. In the short term, which should not exceed two years, bid winners will be allowed to arrange off-shore contract refining.
3. Promotion of Competition
The downstream sector as presently constituted is characterised by industry dominance by NNPC and general monopolistic tendencies. Recommendations need to be made on how to open up the sector to competition. We need to design strategies for opening up monopoly assets and infrastructure (such as import receptacles, storage depots and pipelines) to competitors, who must of course pay economic fees.
It needs to be recognised and emphasized that the implicit subsidy implied by the guaranteed crude price scheme need not undermine competition and deregulation. Examples abound the world over where subsidies continue to be provided in deregulated and competitive environments. The agricultural sectors of the economies of the United States and other OECD countries are competitive and deregulated. Yet, agricultural subsidies continue to be provided daily. In like manner, a number of drug subsidy schemes exist in various countries of the world. Yet, the pharmaceutical industry remains deregulated and competitive.
Conclusion: Honourable Chairman and Members, while it is true that the national uprising of the past two weeks was the direct result of the increase in the price of PMS, the issues of corruption and cost of governance became additional rallying points. We appeal to your Committee to address these issues. Nigerians are counting on you to unravel the syndicates of corruption which continue to hold our nation hostage.