By LOUIS IBA and BIMBOLA OYESOLA
LOCAL manufacturers and other large scale business owners in Nigeria say the decision by the Federal Government to deregulate the downstream petroleum industry last Wednesday would go a long way in assisting their investments.
But some analysts have expressed the fear that the policy which has seen pump price of petrol jump from N86 a litre to N145 a litre (about 80 per cent rise) might harm small-scale businesses.
Fuel accounts for up to 40 per cent of overhead or cost of operation for most businesses in Nigeria. In the last one year, the scarcity of petroleum products had wrecked havoc on most businesses, leading to either the shutdown of some manufacturing firms or having them operate at half their installed capacities.
“The deregulation of the downstream petroleum sector by the government is the only way that would ensure the availability of stability of the product in the country. It is a welcome development,” said Franks Jacob, President of the Manufacturers Association of Nigeria (MAN).
“In the last one year, although the Nigeria National Petroleum Company (NNPC) outlets and other major marketers were selling the products at N86 and N86.50k, but not many people were getting it at the regulated price.
“Other outlets by the independent marketers in Lagos sold above N100 to N150. And in Abuja and other states of the country, people were buying for even as high as N250 per litre. So the N145 a litre is not too high. Availability of product is what we want for now. We believe that overtime market forces will eventually bring down the price,” Jacob added.
The Organised Private Sector (OPS), an umbrella body which covers investments in other sectors, outside manufacturing, described the policy as “the best for the economy at this critical period.”
“The overregulation of the downstream sector and the subsidy regime had put enormous pressure on government finances and on the country’s foreign reserves and it was evident that the policy choice was not sustainable,” said the Director General of the Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf. “The review is in the long term interest of the economy and the people,” he added.
Demerits of regulation
Proponents of the deregulation of the petroleum industry had kept pointing at the leakages in the fuel subsidy regime which allows large scale fraud to continue unchecked as one reason for the abolition of the policy.
Many analysts had therefore reasoned that apart from the fact that fuel got to some consumers in some states of the country cheaper at N86 per litre, fuel price regulation had no other benefits.
“There were two components of the subsidy phenomenon in Nigeria. The first, the actual subsidy, which is the differential between the pump price and the landing and other costs of fuel. And the second (and the more disturbing component) the blatant corruption inherent in the fuel subsidy regime,” noted Muda Yusuf.
“Petroleum subsidy management has been characterised by serious transparency issues for several decades. The Nigerian economy, for several years had suffered severe bleeding from the phenomenon; with subsidy payments hitting the N1trillion naira threshold, and even more,” added Yusuf.
“It was not in the overall interest of the economy and even of Nigerian citizens to continue with the subsidy regime when citizens were suffering from the absence of basic social infrastructure,” said Ken Abazie, an analyst.
“What is the point subsidizing petroleum products at the expense of essential infrastructure like schools, hospitals, potable water, security, electricity, etc,” he added.
Managing Director/CEO, Mobil Oil Nigeria Plc, Mr. Tunji Oyebanji in an interview granted Saturday Sun cited the continuous price regulation of products as one reason multinational oil firms that had done business in Nigeria for several decades had failed to build functional refineries in the country.
According to him, no bank or creditor institution would give you a loan to embark on a project whose final products prices will be determined or regulated by the government, thus hampering any effort to ensure timely recouping of the investment.
“It will be very difficult under a regulated environment for private firms to invest in refineries in Nigeria because people invest to make money,” said Oyebanji.
“Bank money is shareholders money. This things are economic things and not emotional. banks will not give you money if they are not sure of how they will get their money back.,” he added.
Benefits of deregulation
With Wednesday’s announcement that the government would no longer continue with fuel subsidy payments, stakeholders in the industry finally heaved a sigh of relief that the long awaited reprieve had come.
Managing Director/CEO, Petrowest Energy Resources Limited, Mr. Reginald Stanley who had been at the forefront of the campaign for the deregulation of the industry said the policy remains the panacea not only to ensure stable fuel supply in the country, but to ongoing efforts to attract private sector investments in the construction of functional refineries.
Stanley, a former Managing Director of the Petroleum Products Pricing Regulatory Agency (PPPRA) said based on his experience as a regulator in the industry, it was futile for the Federal Government to continue to attempt to meet a national demands of over 40 million litres of petrol per under a price regulated regime.
“Nigeria had gotten to a stage where it had to toe the line of what other countries were doing to ensure uninterrupted fuel supplies to their citizens.
“Deregulation, opens up the industry to private sector investors to build refineries, and for market forces to determine fuel prices. This remains the panacea to Nigeria’s lingering fuel scarcity,” said Stanley.
“Look at all other industries that have been deregulated and see how it is being managed,” said Oyebanji, the Mobil Oil boss..
“Deregulation allows you to plan and also to stay competitive. Look at the aviation industry. You can even look at your own newspaper industry. It is a simple thing. In other industries someone is responsible for the imports of their raw materials and he plans ahead and know what is the requirement of the market and how he can achieve his profit. And this can only be achieved is a system that frees up the market and that allows the private sector and market forces determine prices just as it does in all other industries to compete
“Petrol remains a product. It is manufactured like many other things that we import and sell. I feel that if the private sector is given the freedom, and am not taking about the freedom to do what they like, but the freedom to take the business decisions that allows them to compete under a deregulated environment, then things will change automatically for the better.
“So when you free up the market people can take better business decisions, those who want to import will do so, and those who even want to build private refineries will be able to do so as well,” Oyebanji added.
Corroborating Oyebanji’s position, Franks Jacob, President of the MAN says “It will boost private investment in the downstream oil sector especially in petroleum product refining.”
“This will ultimately reduce importation of petroleum products and ease the pressure on the foreign exchange market as well as foreign reserves: It will eliminate the rampant patronage, rent seeking activities and corruption that currently characterise the downstream oil sector
“It will improve product availability and eliminate fuel queues. It will create more jobs for the teeming youth of the country in the downstream oil sector as investment in the sector improves,” Jacob said.
But for the policy to go on smoothly, he opined that the current foreign exchange policy must be urgently reviewed to improve liquidity and transparency in the foreign exchange market.
“Only a limited success will be achieved if the current rigidities in the management of the foreign exchange market persist,” he said.
But others like Ken Abazie, President of the Downstream Group of the Lagos Chambers of Commerce and Industry (LCCI) are skeptical the new government policy would attract the requisite investors into the building of new refineries.
Abazie told Saturday Sun that some operators were not still comfortable with the government fixing any ceiling on pump price.
“What we need as Nigerians and which is what the operators have been canvassing for, is full deregulation of the downstream industry where market forces will determine prices of products,” said Abazie.
“Operators never wanted a deregulation in which any form of ceiling will be placed on prices by the government and it has just been done with the N145 per litre maximum pump price.
“We are not happy with the ceiling policy because that is not the right thing that the government should have done. No one will invest in a refinery under a regime where the government has any form of control on prices of end products,” he added.