The Case against Import Licence Exclusivity

0

Energy

It’s one year this month since the federal government announced the deregulation of the downstream petroleum sector. Described as one of the most chaotic and confusing policies, so far, Emmanuel Addeh writes that the recent argument by Dangote Group that petrol import licences should only be granted to entities, who have licences to run refineries or are actively involved in refining, has further compounded an already complicated matter

On March 19, the federal government announced the liberalisation of the petroleum downstream sector, meaning that apart from petrol prices being determined by market forces thenceforth, there will be free entry and free exit for anybody or business entity that has the capacity to do business within the sector.

Against the backdrop that Nigeria currently imports over 90 per cent of its total consumption and the possibility that even if the Dangote refinery comes on stream in the next few months, it may experience downtime or no longer meet domestic needs when it skyrockets, the company recently suggested that only fuel import licences should only be granted refineries’ licenced owners.

While stakeholders have highlighted the need for a more transparent deregulation process, creation of a level-playing field for all operators, full disclosure , especially to the general public on the true state of the sector and stamping out monopoly, recent comments by the company suggesting that import licence exclusivity should be part of the Petroleum Industry Bill (PIB), has brought to the fore the need to avoid past mistakes.

In the same vein, the argument against government favouring a few industry players has always been that such privileges would breed unfair competition, leading to possible loss of jobs and livelihoods of thousands in the sector, who will be affected when their businesses go under.

It also brings to the fore, the need to not ignore the dangers posed by over-dependence on select operators, which at best would lead to an oligopolistic situation.

Highlighting the Dangote Group’s Position

In its recent presentation to the National Assembly’s Joint Committee on the PIB, the Group proposed that petroleum product import licences should be restricted only to companies with active refinery licenses.

It suggested the inclusion of the provision that the licence to import petroleum products should be assigned only to such companies, saying that the development would essentially encourage investment in local refining.

Chief Strategy Officer, Dangote Group, Aliyu Suleiman, while highlighting the company’s recommendations to the committee called for the application of the backward integration policy in the downstream petroleum sector.

“Nigeria is exceptional in being a major oil producer with near zero refining capacity,” he stated.

Suleiman continued: “Though the Dangote Refinery will help address this, there could be periods when petroleum products may need to be imported, such as when the refinery is undergoing turnaround maintenance or if demand grows to exceed capacity.

“To support this, licence to import any product shortfalls should be assigned only to companies with active refining licences. Import volume should be allocated among participants based on their respective production in the preceding quarter. Such import will be done under the Direct Sale, Direct Purchase (DSDP) scheme,” he maintained.

This recommendation has since come under a lot of public scrutiny with many arguing that it would lead to more problems that it was meant to solve , given the hindsight of what is currently happening not just in the petroleum downstream sector, but for other monopolised products.

Already Distorted Deregulation

Without looking too far, anyone with a basic knowledge of how free markets work, would easily pinpoint the distortions in the country’s petrol deregulation policy in the last one year.

If deregulation means the removal of barriers to entry or are essentially decreased to small or new companies, fostering of innovation, competition, and increased consumer choice and ensuring that free market sets prices, which ultimately promotes growth, improves efficiency and lower costs for consumers, then the last one year of the country’s free market policy calls for introspection.

If a fully transparent deregulated downstream sector means that all players within the sector are given equal opportunities to import petroleum products, leaving the regulators to ensure compliance with the rules and regulations, the policy in the last one year , still leaves much to be desired.

One year after, the Nigerian National Petroleum Corporation (NNPC) remains the sole importer of the product, because according to the government, the country does not have access to the required foreign exchange needed to fuel the process.

What exists today, some argue, is simply a monopoly, resulting in a lopsided pricing mechanism, invariably leading to the continued increase in the pump price of petrol, instead of the intended result of deregulation which was to heighten competition, create efficiencies in the process , and achievement of lower prices.

But that reality has not been attained because there still is a monopoly of supply which has hindered the reflection of the true effects of deregulation and by implication, stifling the benefits of the global phenomenon.

The reasoning is that, if the Dangote Group’s argument is sustained , rather than free the market for all capable players, it will further create problems within the system and hold consumers, who will have less choices to ransom.

Has Backward Integration Worked for Cement, Sugar?

Some analysts argue that the cycle of seeking protectionist backward integration policies to protect a few players in selected industries has not helped the country in the past.

With the danger of systemically closing the operating space to others, a gradual increase in price and artificial scarcity due to oligopolistic tendencies, it is perhaps, safe to say that extending what is happening in the cement and sugar industries to the petroleum downstream may not be in the interest of Nigerians.

There is the reasoning that sugar has not become cheaper, neither has cement become more affordable or available because only a select few enjoy government waivers, enjoy pioneer status incentives, and benefit from a backward integration policy that benefits a few.

In those markets, rather than engender a more open, competitive industry, giving opportunities to all comers, the situation has produced monopolistic enterprises, who have a strong hold on what to produce, when to produce and when to supply it to the market, thereby leaving Nigerians at their mercy.

Distilling the Arguments

Although the Major Oil Marketers Association of Nigeria (MOMAN) says it believes that the 650,000bpd refinery in Ibeju Lekki, Lagos, will be extremely beneficial to Nigeria when it begins production, it advised the federal government against preventing marketers from importing refined petroleum products when the refinery and others come on stream in order to create an open market for the sector.

Executive Secretary, MOMAN, Clement Isong, , who recently spoke in Lagos, said that inasmuch as there’s merit on insisting on a minimum in-country investment in order to encourage investment in the oil and gas industry, however, the suggestion by the conglomerate would stifle competition.

“As a core principle, MOMAN believes that free market competition remains the best protection for the final consumer and this would be our most important consideration.

“MOMAN’s position would therefore be: not to limit importation of refined products to refiners only, but allow importers with a set minimum level of investment in the oil and gas supply chain in Nigeria,” he argued.

He maintained that there would also be need for the country to operate under a uniform exchange rate regime irrespective of who imports or refines, including the exchange rate used for the purchase of crude in naira or the purchase of refined products in order to ensure a level-playing field.

Arguing along the same line, an Abuja-based petroleum industry analyst, Fidelis Ejokparoghene, in a recent detailed treatise argued that this demand to have oil import licences given to only companies with active refinery licences, will simply introduce oligopoly into the oil sector.

“There could be a cloning of the same monopoly that has set the Dangote Cement in a rat race squabble with the BUA Group in that sector.

“With a refinery construction project in process, why does the Group need to again dominate the importation of fuel business,” he queried.

Facts and Lessons from the Past

With mechanical completion of Dangote Group’s 650,000 bpd refinery expected before the end of 2021, and commissioning to follow thereafter, Dangote is set to become Nigeria’s largest active refinery licence holder.

While the group may be claiming to be in support of the backward integration, the thinking is that this proposal shifts control of the market to a select few players, of which the refinery will be the most dominant member.

Currently, there are 25 valid refinery licenses which have been issued by the government; 18 are Approval to Construct (AtC), five of which are under construction or have been completed, while seven currently hold Licenses to Establish (LTE).

If allowed, this proposal essentially restricts all forms of petroleum product supply to the five refineries, in the short to medium term.

Nigeria’s backward integration initiatives, especially in the country’s local cement production, essentially restricts imports, to achieve local sufficiency and affordability, by encouraging players to set up plants.

Despite significant local capacity, cement is still very expensive, considering the abundance of key production inputs within the country, proponents of a free market argue.

As for sugar, the Master Plan was established in 2013 to promote the backward integration policy aimed at boosting local production and reducing importation. However, Nigeria has seen its sugar production remain relatively constant in recent years and monopolised by a few players.

All combined, it is believed that the few producers dominating the sugar business still operate at less than 50 per cent utilisation capacity, as gaps continue to exist despite almost 10 years of operation.

“Providing an import licence to the Dangote Oil Refinery under the DSDP arrangement, has no net benefit to the Nigerian government and defeats the point of the investment and support that has already been provided.

“With the refinery’s storage capacity and the combined capacity of other refineries, sufficient capacity should exist to meet any short-term downtime of the Dangote refinery.

“As is reportedly being discussed with the NNPC, providing feedstock in naira to the refinery, and the other support that has been provided so far, will set in motion an uneven playing field within Nigeria’s budding refining space,” one source, who preferred to remain anonymous said, insisting that a move towards backward integration for the refineries will have an adverse effect on midstream and downstream players in the industry.

While the debate rages, it is expected that the federal government takes a dispassionate and non-sentimental decision which will ultimately be in the best interest of Nigeria’s already beleaguered people.