Nigeria’s Unorthodox Deregulation

By March this year, the Nigerian downstream oil industry would be marking its one-year anniversary of what the authorities describe as its full deregulation. Emmanuel Addeh examines the peculiarity of Nigeria’s variety of the policy and how it has fared almost 365 days after

On March 19, 2020, the federal government officially announced that it had fully liberalised the downstream oil industry, which in essence meant that the forces of demand and supply would thenceforth determine the prices at which Nigerians will buy petrol at the pumps.

One big part of that announcement was that since the market had been essentially opened up, a horde of players will naturally come into the petrol and other associated products importation business, raising competition and eventually leading to lower prices.

Like the argument currently being marshalled by the players in the Nigerian Electricity Supply Industry (NESI) to the effect that government’s decision to remove subsidy and the push for Cost Reflective Service will be the magic wand, the main hook when government made the announcement was that giving independent marketers the freedom to import will make Nigerians spoil for choice in terms of product prices.

The proponents of a deregulated market maintained that just like the telcos were allowed to determine prices when they newly entered the market, eventually leading to competition and massive fall in the pricing of airtime, data, etc, the downstream should be allowed to evolve in the same manner. But almost a year later, what is the state of play?

A Historical Perspective

The announcement of the deregulation policy in March 2020 wasn’t the first time the country would be going through that route. Indeed, several attempts in the past to remove subsidy and give market forces a free rein had been attempted in the past or poorly managed, thereby taking the country back to where it started.

Deregulation, a highly sensitive subject in the country, since 1999, when democracy was restored, has always posed a serious challenge to successive governments.

The decision as to whether or not to adopt the deregulation policy as previous governments sought to remedy the distortions in supply amid leakages of government revenue through a very opaque subsidy regime has been like an albatross for almost all Nigerian leaders.

While there are always political consequences to this decision, proponents of deregulation have constantly maintained that savings that would accrue from fuel subsidy removal could be channelled to addressing the ailing infrastructure and human capital in the country.

Historically, government’s intervention or influence on pricing of petroleum products in the form of subsidies dates back to 1973 when it became inevitable after the civil war to adopt some short term measures to cushion the effects of the high cost of imported petroleum products on the Nigerian people.

The Gen. Yakubu Gowon-led military administration at the time felt the need to reduce the effect of actual market prices of the products on the people as the landing cost was a huge burden, hence the need to make the products not only available, but affordable.

Although in 1986, Gen. Ibrahim Babangida, then head of state, never indicated that he was deregulating, he however, increased the pump price of petrol from 20k to 39.5k in 1986, representing about 97.5 per cent increase.

The Babangida administration further hiked fuel prices for as many as five times, with the pump price hitting 70k from 60k before he stepped aside in 1993.

Although deregulation or the attempts at deregulating should ordinarily not be synonymous with higher pump price, many Nigerians believe that they are not mutually exclusive, especially with the benefit of hindsight and their experience in the last couple of years.

Mass protests have mostly occasioned the efforts to introduce market-driven prices, but taking advantage of the unprecedented fall in international prices of crude oil early 2020, the current administration seized the opportunity to, as they said, fully deregulate petrol prices.

During the Obasanjo administration in 2000, the pump price was again increased from N20 to N30, up by 50 per cent, it was N65 under the Yar’Adua administration and moved to N87 under Jonathan administration which ended on May 29, 2015.

In all the federal government was said to be spending about N1.4 trillion, approximately 30 per cent of its total yearly expenditure yearly on fuel subsidy.

While previous governments have always mouthed the same reasons why deregulation was the way to go, including the argument that removing subsidy on petrol would make way for savings to be channelled to critical infrastructure in the country and that eventually prices will fall as more players come into the market, Nigeria’s deregulation outcomes have been somewhat different.

In Defence of Deregulation

Like every government before it, the federal government through the ministry of petroleum and the agencies it oversees, gave several reasons why deregulation was the way to go.

It stated that it was to ensure economic growth and development of the country, stop the subsidy regime, because it was benefiting the rich, rather than the poor and ordinary Nigerians.

“Deregulation means that the government will no longer continue to be the main supplier of petroleum products, but will encourage the private sector to take over the role of supplying petroleum products,” minister of petroleum, Chief Timipre Sylva, said while defending the policy.

He pointed out that in line with global best practices, the price of petroleum products will be determined by market forces, stressing that henceforth, the government’s regulatory function will be similar to that played by the Central Bank of Nigeria (CBN) in the banking sector.

He explained that like the CBN, which tries to make sure that deposit money banks do not charge arbitrary interest rates on its customers, the government would also ensure that oil marketers do not rip Nigerians off.

Sylva stated that by reason of the deregulation policy, an increase in crude oil prices would also reflect at the pump price of petroleum products.

“Indeed, one of the reasons we have been unable to attract the level of investments we desire into the refining sector has been the burden of fuel subsidy.

“We need to free up that investment space so that what happened in the banking sector, aviation sector and other sectors can happen in the midstream and downstream oil sector.

“We can no longer avoid the inevitable and expect the impossible to continue. There was no time government promised to reduce pump price and keep it permanently low,” he noted.

He disclosed that the deregulation policy will attract more investments into the oil sector, create more jobs and opportunities and free up trillions of naira to develop infrastructure instead of enriching a few Nigerians.

Unorthodox Deregulation

Succinctly put, deregulation aims at “promoting competition in areas previously considered to be natural monopoly of an individual, group of people or government enterprises.”

The downstream sector of the Nigerian oil and gas industry primarily comprises refining, distribution and marketing of fuels including petroleum, diesel, kerosene and such associated products.

As it is, Nigeria, whether through private operators or public facilities, is virtually not refining any crude. With that out of the way, the focus has always been about distribution and marketing, especially of petroleum products.

If the essence of deregulation is to encourage competition, then in 10 months, that policy which was supposed to have kicked off in March last year, has, to say the least, not commenced.

What currently obtains is that the federal government through the Nigerian National Petroleum Corporation (NNPC) remains the sole importer of these products almost one year after its official announcement.

The idea that the steady rise in the pump prices of fuel will fall as competition sets in, just like in the telecommunications industry, also appears to have faltered.

Till today, government remains the sole importer of petrol. It is therefore, safe to ask if deregulation, the Nigerian way, has failed before it took off.

In the same vein, many Nigerians have argued that what has simply happened is the removal of subsidy, with the government still calling the shots in the industry as to who should import or how much marketers should sell the products they manage to get.

Has Fuel Subsidy Returned?

Although for 2020 and 2021, the federal government had no budget for petrol subsidy, it has become indeed a matter of conjecture whether fuel subsidy has truly gone for good.

It was easy and expedient for the government to tie the pump price of fuel to the international price of crude oil when prices of Brent Crude fell to as low as $10 in the early part of the second quarter of last year.

However, the rise in the price of crude oil at the international market, averaging $55 in January has pushed the landing cost petrol to N160 per litre and has left the federal government in a dilemma, it was learnt.

If the landing cost has hit N160, it them means the open market price, which is the expected price at the pump stations, has also jumped to N183 per litre, given how the arithmetic works.

With an additional N23 in the Petroleum Products Pricing Regulatory Agency (PPPRA) pricing template and an estimated national consumption figure of about 50 million litres daily, it is assumed that the federal government now pays about N1.1 billion on consumption of petrol in the country daily. This has not been disputed by the authorities since it was revealed this January.

FG Remains Sole Importer Despite ‘Deregulation’

The explanation given by the federal government while trying to assuage the usual opposition to deregulation was that within a short time, market forces will drive down pump prices of fuel as more players join the market.

But in a market that’s still largely distorted and the forces being largely manipulated, the dream of the customer being king is yet unrealised.

When curious newsmen sought to know why despite all the talk about competition leading to price crash had not been achieved despite a deregulated market, the Petroleum Products Pricing Regulatory Agency, PPPRA, blamed foreign exchange challenges and prevailing uncertainty for the inability of oil marketers to resume fuel import.

Represented by the General Manager, Administration and Human Resources of the PPPRA, Mr. Victor Shidok, the agency stated that because of the difficulties in accessing foreign exchange by oil marketers, the PPMC is currently the sole importer of the commodity into the country, and announces the prices at which it sells the commodity to oil marketers. The situation remains the same despite almost a year of liberalisation of the sector.

“You know the role that foreign exchange plays with the sourcing of PMS. When you are not producing and earning foreign exchange as you ought to do, then there would be pressure on the little that you have.

“That is why you see the galloping foreign exchange. We did not expect it would remain like that forever; that is why government is doing all it can and in the near future, we would begin to see an improvement in the value of the naira.

“Secondly, we believe marketers are still studying the market before they come in fully to resume fuel import. There is also scepticism whenever a new policy is being put up. We do not envisage that the exchange rate would remain at the rate at which it currently is,” the agency assured.

It added: “With government’s pronouncement that the sector is deregulated it means that prices would strictly be based on the forces of demand and supply. You can have a regulator that always serves as a watchdog to see how these forces are being played out; how the interests of all operators and consumers are taken care.

“It is a market that is open, based on bargaining power and based on where you source your product. PPMC is a marketer; it also sells the product and also carries out analysis as to the price it wants to sell the products to its customers. That is the announcement they always make after doing an analysis of their cost and analysing their margins.”

But oil marketers insist that despite their willingness, they cannot import petrol now because of scarcity of foreign exchange.

Chairman of the Major Oil Marketers Association of Nigerian (MOMAN) Adetunji Oyebanji, while reacting to reports that the PPPRA had cleared qualified marketers to import petrol into the country, stated that it was almost impossible as they had no access to foreign exchange.

“We are engaging CBN on this and hoping for a positive response but it indeed is an issue at the moment,” he said.

MOMAN also clarified that marketers were never stopped from importing petrol but rather the economics behind it then stopped them.

MOMAN CEO, Cletus Isong, also noted said that the problem has never really been clearance to import but distortions within the market.

“We had always had the approval to import, the problem before now was that if we imported and the prices were higher than the fixed selling price here in Nigeria, then we would be unable to sell. That was what the subsidy was about,” he told journalists.

“So right now because the price is low in the market we can import but we are challenged by the access to foreign exchange,” Isong added.

So, basically, the NNPC through its subsidiary, PPMC, still calls the shot.

For instance it put the landing cost of petrol at N128.89 per litre, up from N119.77 per litre in September and October and in November said that the ex-depot price of petrol was increased to N153.17 per litre, not N155.17, ‘based on the prevailing realities of market forces of demand and supply’.

No Reprieve for Consumers

In the final analysis, it would appear that it is double whammy for the average petrol consumer in the country because in one fell swoop, the subsidy they enjoyed before now has been ‘removed’ thereby making them pay more for the product.

Secondly, the expectations of the consumer that the increasing prices of fuel will be driven down once the market is deregulated and there’s competition therein remains a pipe dream.

In a country where public infrastructure like trains and electricity work, the impact of distortions may not be readily felt by its citizens. But a litre of fuel and its price at the pump means much more to the Nigerian.

Will the current situation change soon? Will reprieve come the way of Nigerians who bear the brunt of these policies that rarely serve their purpose? Will the country begin to reap the gains of deregulation, having borne the pain for almost a year?