A New Dawn in Petrol Pump Pricing

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Fuel being sold at a service station

Industry experts had always observed that there will be such a time when Nigeria will have to embrace the economic realities of subsidising petrol consumption for its huge population. Finally, such a time has come, and with the federal government already caught in a catch-22 situation, it had no choice but to end payment of fuel subsidy to oil marketers. Chineme Okafor writes on the new dawn in fuel pump pricing from perspectives shared by stakeholders on the recent development

Last Wednesday, the federal government finally found the nerve to remove the subsidy on petrol consumption in Nigeria, stating that petrol would now sell for not more than N145 per litre in the country.

In doing this, the government chose to cut its losses in paying huge amount of money, which have overtime run into trillions of naira, to sustain the corrupt and hugely inefficient fuel subsidy regime. Successive administrations before the Muhammadu Buhari administration had sustained the subsidy regime despite sustained reports that it had no value to the country’s economy.

Discussions on retention or removal of subsidy on petrol consumption had dominantly featured in Nigeria as public debate.

At all times when the issue is discussed, it has always resulted to division in the polity with two factions often emerging – the government and economic experts on one hand, and labour movements reportedly working in the interest of the masses on the other.

Before the Wednesday announcement by the Petroleum Products Pricing Regulatory Agency (PPPRA) that henceforth, oil marketers should not count on the government as it used to do, Nigeria has reportedly spent trillions to subsidise petrol, the country also owes marketers outstanding subsidy payments running into hundreds of billions of naira.

Further, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, in providing details on the development said the meeting where the decision was taken had reviewed the country’s current fuel scarcity, supply difficulties, and the exorbitant prices paid by Nigerians for the product before opting for it. These prices, according to him, range on average from N150 to N250 per litre currently.

“We have just finished a meeting of various stakeholders presided over by His Excellency, the Vice-President of the Federal Republic of Nigeria.

“The meeting had in attendance the leadership of the Senate, House of Representatives, the governors’ forum, and labour unions (NLC, TUC, NUPENG and PENGASSAN),” said Kachikwu.

According to him, the meeting also noted that the main reason for the current problem was the inability of importers of petroleum products to source foreign exchange at the official rate due to the massive decline of foreign exchange earnings resulting from low oil prices.

He stated that, “as a result, private marketers have been unable to meet their approximate 50 per cent portion of total national supply of petrol.”

The minister also noted that it had become obvious that the only option and course of action now open to the government was to remove subsidy. He thus stated that the following decisions were taken:

“In order to increase and stabilise the supply of the product, any Nigerian entity is now free to import the product, subject to existing quality specifications and other guidelines issued by the regulatory agencies.

“All oil marketers will be allowed to import petrol on the basis of forex procured from secondary sources and accordingly, the PPPRA template will reflect this in the pricing of the product.

“Pursuant to this, PPPRA has informed me that it will be announcing a new price band effective today, 11th May, 2016 and that the new price for petrol will not be above N145 per litre.

“We expect that this new policy will lead to improved supply and competition and eventually drive down pump prices, as we have experienced with diesel.

“In addition, this will also lead to increased product availability and encourage investments in refineries and other parts of the downstream sector.

“It will also prevent diversion of petroleum products and set a stable environment for the downstream sector in Nigeria,” he said.

Petrol Price Hike and Subsidy Payments

According to a report prepared by the Centre for Public Policy Alternative, subsidies were introduced in Nigeria’s oil sector in the mid 1980’s to amongst other objectives keep access to petrol within the reach of the masses but its value has not really translated into that.

Similarly, an academic report prepared for the Academic Journal of Interdisciplinary Studies by Akov Terkimbi, a lecturer in the department of political science and public administration of the University of Uyo, explained that until September 30, 1976, Nigeria had no increase in pump price of petrol per litre.

The report however noted that following recommendations of the Structural Adjustment Programme (SAP), the price of petrol was changed on October 1, 1978 from 8.4/5 kobo to 15.30 kobo, indicating an increase of 73.86 per cent.

The government, according to Terkimbi, explained that it needed to match galloping inflation, reduce cost of subsidising fuel, cut cost of governance and reduce pleasure-seeking life, hence the price hike.

Further price increments were made by the government in 1982 from 15.30 kobo to 20 kobo per litre; 1986 from 20 kobo to 39.50 kobo; 1988 from 39.50 kobo to 42 kobo and 1989 from 42 kobo to 42/60 kobo (42 kobo for commercial vehicles and 60 kobo for private vehicles).

Again on December 19, 1989, pump price was increased to 60 kobo across the board and then 70k before former military president, Ibrahim Babangida, left office.

The increment according to the report was reversed by the Interim National Government (ING) led by Mr. Ernest Sonekan as a carrot to gain legitimacy but then, it introduced a new pump price of N5 per litre.

The price was later slashed to N3.25 per litre by military head of state, Gen. Mohammed Abacha, and increased again to N15 in 1994 before it was reversed to N11. Subsequent increments included N15 and N20 in 1998 and 1999 respectively by General Abdulsalami Abubakar; N30, N25, and N22 in 2000 by President Olusegun Obasanjo; N26 in 2002; N40 in 2003 and N70 and N65 in 2007 and then N140 and N97 in 2012 by President Goodluck Jonathan.

While the pump prices have been hiked by successive governments, there have also been elements of subsidy at every point in time. However, over the past decades, the fuel subsidy regime has been plagued by corrupt tendencies of oil marketers and government officials.

There have been issues of sharp practices in the distribution of import allocations, approval of subsidy payments and actual release of subsidy cheques to beneficiary marketers.

As at the last count, over 25 oil importers have been linked to criminal acts relating to subsidy payments, they are also being investigated by the government for other kinds of fuel subsidy infraction. The regime had in 2010 alone cost Nigeria N600 billion and another N1.426 billion in the first eight months of 2011.

These amongst other resulted in the call for subsidy removal which the government did to save it from obvious economic embarrassments that could await it.

Experts Throw Weight behind Devt

In support of the government’s action, various experts and professional groups including the Nigerian Association of Energy Economics (NAEE); International Institute for Petroleum Energy Law and Policy (IIPELP); Manufacturers Association of Nigeria (MAN) and Lagos Chamber of Commerce and Industry (LCCI) and Independent Petroleum Marketers Association of Nigeria (IPMAN) amongst others have said it was a good decision.

The Vice-President of IPMAN, Alhaji Abubakar Maigandi, said that the decision would help to end the persistent petrol scarcity in the country. He added: “This is a good development; the best that will happen is complete removal of the subsidy.”

He also stated: “The price they put is a good one, but the best thing is to leave the market open so that people will decide what they want to sell after importation.”

The Director-General of LCCI, Mr. Muda Yusuf equally said the decision to liberalise the petroleum downstream sector was inevitable given the acute resource constraints that the country was faced with.

Yusuf, in a statement pointed out, that over-regulation of the sector and the subsidy regime had put enormous pressure on government finances and on the country’s foreign reserves.

According to him, it was evident that the policy was not sustainable, stressing that the review was in the long-term in the interest of the economy and the people.

“Petroleum subsidy management has been characterised by serious transparency issues for several decades.

“There are two components of the subsidy phenomenon. The first is the actual subsidy, which is the differential between the pump price and the landing and other costs of fuel. The second (and more disturbing component) is the blatant corruption inherent in the fuel subsidy regime.”

“For several years, the Nigerian economy suffered severe bleeding from this phenomenon; with subsidy payments in the one trillion naira threshold, and even more,” he pointed out.

MAN, in its reaction, also threw its weight behind the federal government’s decision to end the subsidy regime, while NAEE through its president, Prof. Wumi Iledara, said the decision will infuse efficiency and ensure that the downstream petroleum sector attracts the right kind of investments needed to transform it.

The chief executive officer of IIPELP, Dr. Tim Okon, also stated that with the decision, the government had given private investors the green flag to go on and plan for investment in the downstream sector. He, however, picked holes at the capping of price at N145 per litre.

Labour Kicks

However, the Nigeria Labour Congress (NLC) and its affiliate, Trade Union Congress of Nigeria (TUC), have expressed their disappointment with the development , vowing to contest it.

NLC has vowed to resist the subsidy removal. Its Secretary General, Dr. Peter Ozo-Eson, in a statement said that the increase was disingenuous and smacked of high handedness on the part of government.

Distancing itself from the decision, it said: “The unilateral increase in the price of petrol by government represents the height of insensitivity and impunity and shall be resisted by the Nigeria Labour Congress and its civil society allies.

“With the imposition on the citizenry of the criminal and unjustifiable electricity tariff hikes and the resultant darkness and other economic challenges brought on by the devaluation of the naira and spiraling inflation, the least one had expected at this point in time was another policy measure that would further make life more miserable for the ordinary Nigerians.”

Ozo-Eson described the increase as the most audacious and cruel in the history of product price increase as it represented not only an 80 per cent hike, but was tied to the parallel market exchange rate.

“Furthermore, the process through which government arrived at this is both illogical and illegal as the board of the PPPRA was not duly constituted,” he added.

The TUC on its part stated that it was not in support of the development.

According to the congress, ”the Trade Union Congress of Nigeria wishes to state emphatically that we do not know how the federal government arrived at the new price of N145 for Premium Motor Spirit (PMS), popularly known as petrol.

“Neither do we appreciate how they arrived at their decision to allow market forces alone determine the cost of the product.”

It further said labour was invited to a meeting with the government in which discussions were held but that it was not aware there was such in the pipeline.

“The call for meeting stated no specific agenda, and we were left to conjecture. Little did we know that the government had already concluded plans to hike the price of petrol. Indeed we were taken aback,” it said.

TUC noted that, “the meeting had the leadership of labour in attendance, but we never made any input. Not with the shock we experienced at the premeditated “ambush” by the government which clearly did not invite us for any dialogue.

“When they stated their plan to introduce the new prices, our response was to ask for time to consult with our respective executive organs and subsequently revert appropriately.

“The government representatives agreed. And so we left. We were therefore totally confounded and shocked when we got to know that they later went on air announcing new prices for petrol.”