It is important to establish the premise for this entire discourse, which is captured in the universal debate regarding under-regulation and over-regulation of sectors of the economy. It should be noted that all economies including the leading world economies of USA and China, still grapple with this matter.
An economy that does not muscle the entrepreneur, encourages innovation and creativity, which leads to positive outcomes including new products and services, greater efficiency in business practices and ultimately value creation for several stakeholders in the economy.
However, a lack of sufficient regulation creates opportunity for certain excesses which need to be curbed to ensure that social values are respected and that rules and regulations are complied with for the long term benefit of the society.
The critical role of the private sector in driving economic growth cannot be over emphasized, however this must always be done within the limits of societal values. The cursor on what type of regulations should be imposed or where it should be placed is continually moving as society evolves and as expressed by the country’s lawmakers in the country’s laws. However, most OECD and indeed northern hemisphere countries and many African countries like Ghana have since moved beyond the question of price regulation because it stifles investments by the private sector who need to be in a position to calculate at what prices they will break-even and make a margin and who need to be able to move their prices based on their business models and business strategy.
The debate over price deregulation of the downstream sector in Nigeria is as confusing as it is divisive and proponents on both sides have argued this emotive issue sometimes from idealistic, dogmatic or doctrinaire perspectives (capitalism vs socialism vs communism), or from self-serving interests including business interests (to make more profits) or political interests (expressing populist albeit sometimes impractical views) to gain votes.
There is the urgent need to make a choice that results in a win-win situation for all the stakeholders who are affected or impacted by the decision, and the urgency of that choice is now thrust upon us by the crash in crude oil prices arising from the slowdown of the economies that buy our crude oil from the CORONAVIRUS pandemic.
Nigeria has till date decided to put a price ceiling on the pump price of petrol (otherwise referred to as Premium Motor Spirit or PMS). The original reason for fixing the price was to ensure that all Nigerians bought petroleum products at the same price throughout the Federation leading to the establishment of the Petroleum Equalization Fund Management Board in 1975. The preamble of that Act states as follows: An act to establish the Petroleum Equalization Fund which is to be applied for the reimbursement of petroleum marketing companies for any losses suffered by them arising from the sale of petroleum products at uniform prices throughout Nigeria and a Management Board to manage the affairs of the Fund.
However, this equalization policy comes at a great cost. Presently, the cost of administering this fund is now in the neighborhood of about NGN40 Billion, which is added to the pump price.
The administrative structure is repeated in PPPRA, DPR and a host of other sub-regulators with varying amounts of oversight in this industry. Creating this type of administration also creates temptation to perpetuate fraud and any internet search will yield decades of cases of fraud associated with the PEF(MB). The greatest argument against the PEF is its inability to enforce its fund contributions evenly and so we end up having only law-abiding companies paying into the fund while others who can get away with it are either very late with their payments or do not pay at all. It may surprise you to know that the greatest defaulter consistently has been the biggest player in the industry, the NNPC!
In essence an unnecessary and unwieldy regulatory structure, which is unevenly implemented has resulted in increased cost, encouraged inefficiency, promoted fraud and corruption and still fails to satisfy the yearnings of all stakeholders in the industry. There are other ways of ensuring that price differences across the country are within tolerable limits rather that spending these Billions of Naira on managing equalization or creating these opportunities for fraud.
Artificial interventions in the market usually create room for arbitrage leading to opportunities for patronage and corruption and should be discouraged. Economists and sociologists that argue against price controls insisting that controlling prices or having all marketers sell at the same price discourages optimization, efficiency, innovation and ultimately growth. Experience has shown that the sanction of the market through proper competition forces purveyors of expensive products and services to either justify its prices or reduce their costs to be competitive.
Economists believe that in the medium to long term, market competition drives down prices to its optimal best. It is however true though that without supervision, marketers may act in an anticompetitive manner, setting prices artificially high or low to manipulate the market or a dominant player may abuse its dominant position. This is why countries set up competition commissions to ensure that competition prevails in the market, eliminating the down-side of a market-driven economy. Thankfully, Nigeria has such a commission, the FCCPC which with the requisite encouragement can successfully play this role. This is the compromise that is needed.
The country is cash strapped and will remain so for the foreseeable future. The country needs the investors to bring in money (local and international) and invest more than ever at this time. There is a trust deficit from both the private sector and the buying public. Many investors have lost their investments and had employees thrown into the street because of the government’s inability to adjust petrol prices when markets dictates such adjustments.
Investors suffer losses on importation of products and poor returns on billions of Naira they have invested in tank farms, trucks and petrol stations. This inability to adjust petrol prices has also led to payment of large subsidies by the government in excess of one trillion Naira per annum. This is money that should have been better invested in health facilities, education and infrastructure for mass transportation amongst other national needs.
There is a sprinkling of countries around the world that continue to set low fuel pump prices and they find themselves in the same economic situation as Nigeria, borrowing funds to stay afloat. The countries that are able to sustain price control have relatively high pump prices, covering the cost of the products, marketer’s margins and government fuel consumption taxes as a key source of government revenues, which is then ploughed back into the economy through building of roads and country infrastructure.
One also observes that Nigeria has the cheapest petrol prices in West Africa and one of the lowest prices on the continent and in the world. Cameroun, Chad, Niger, Ghana and Ivory Coast all have crude oil but do not diminish the value it brings to their countries by fixing low pump prices.
There are many countries whose per capita income is significantly lower than Nigeria’s including some of the poorest countries in the world and they do not subsidize fuel prices, perhaps because they cannot afford to. Indeed, they all charge consumption taxes to optimize the yield and benefits petroleum brings them. Higher prices in the countries around Nigeria will always encourage smuggling of petrol from Nigeria to these countries whether locally refined in Nigeria or imported and this smuggling puts pressure on our currently very scarce foreign exchange earnings and Nigerian tax payers effectively subsidize petroleum consumption in the neighboring countries.
Foreign Exchange is another area where subsidies are enjoyed by a select few to the detriment of the market. Any situation where a few market operators gain access to foreign exchange at a cheaper rate to import products and then sell products based on pricing foreign exchange at the commonly available rate gives undue advantage to those that have this access and distorts the market, even where it is NNPC that has this access. All market operators need to have equal access to foreign exchange at transparent rates for equity and sustainability.
The trust deficit will probably make it much more difficult for Nigeria to apply this formula as many Nigerians complain against government and legislative officials spending on their self-interests in salaries and allowances rather than the public interest.
We must come to terms that the post-coronavirus economy is upon us and Nigeria cannot afford subsidies nor shy away from painful cuts in expenditure as we are already near the limit of our borrowing capacity. An investment in trust building needs to be made. Where we ask Nigerians to tighten their belts, to be believable, politicians those in government must also demonstrate a willingness to tighten their belts to garner support during the tough days ahead.
The Nigerian private sector is the only avenue available to the country now to collectively grow the economy and be the engine that drives economic sustainability as is the case in all developed economies.
Refineries such as the Dangote refinery and other modular refineries could make Nigeria the refining hub of West Africa providing much needed jobs and growth through ancillary and derivative industries. To play this role in Nigeria, the private sector needs to be encouraged to bring in its funding by removing price controls.
Having said that, clear regulations and a strong regulator that will challenge price abuses and sharp practices is also needed to give confidence to the Nigerians and government. Such abuses include pipeline vandalization, oil theft, illegal refining, illegal bunkering, product adulteration and cheating at the pumps.
A visible regulator will prevent chaos and give comfort that the Nigerian consumer buys the highest quality product at the right quantity and gets full value for their money. Source: MOMAN
