Deregulation at last! FG bows to common sense

After several years of pussy-footing that has led to the near crippling of  the down-stream of its oil and gas industry the Nigerian government yesterday took a bold step towards full deregulation of the sector.

The move is being described as a bowing to common sense for a country that has gradually witnessed everything wrong about regulating the supplying and pricing regime of petroleum products for decades.

A terse statement issued by junior petroleum minister, Ibe Kachikwu, at the State House in  Abuja yesterday, said government will now allow  all comers to bring in petroleum (PMS) products but that they would have to source the foreign exchange to do so independently.

It would be the first time in decades that the Federal Government would remove artificial controls on the supply of the commodity for which availability has seen Nigerians and businesses suffer massively as a result of scarcity that is often disruptive.

Kachikwu’s statement also suggested a partial freeing up of pricing controls with petrol now expected to sell at a price band of between N135 and N145, according to a pricing template released last night by the Petroleum Products Pricing Regulatory Agency.

The new price is seen to accommodate the independent sourcing of foreign exchange by importers and marketers of the products, as well as fluctuations that may be encountered as the new regime comes into full effect.

Yesterday’s policy announcement now means that the price of petrol is moving up by at least N48.50. The Federal Government is yielding to what many players in the economy see as common sense, as the economics of regulating a key sector of the economy had never been understood.

Bismarck Rewane, chief executive of the  Financial Derivatives Company, sees it as a “Great move by the government to take the bull by the horn. Now it will be possible for us as a nation to determine the true cost of our petrol imports.

“Secondly, we must follow this with naira adjustment to, say around N230 to the USD and if this happens, we will begin to see the parallel market rates drop to around N255 as we inch towards equilibrium. So what will be required will be a minimal naira adjustment. A very good start”.

Ayodeji Ebo, of Afrinvest, said that although the move would further compound the agony of Nigerians in the short term, as prices of goods would rise, it would free funds released before as subsidy payment, to be channeled to other productive uses.

Bola Agbola, executive director, Cashcraftasset Management limited, said, “It’s a  long awaited pragmatic decision  by the Federal Government that is bound to tame  once and for all, the spasmodic inflationary spiral that had characterised our economy for ages.Petroleum products pricing will now reflect real time  global crude oil  price trends and the prevailing foreign exchange rate .It is implied from the policy pronouncement, that we are seemingly doing away with the archaic and opaque  petroleum equalisation  scheme.”

Jude Nneji, deputy managing director of ABC Transport Plc, described the subsidy removal as a good development.

‘’Let us remove every element of subsidy. The only negative thing about the increase in the pump price of petroleum is that it is coming at a time when Nigerians are carrying a lot of burden on their heads, worsened by the poor exchange rate of the naira against other international currencies,’’ Nneji said.

He added that his major concern is that government should focus on improving the living conditions of the citizenry by using the funds saved from the subsidy on meaningful projects and services that would better the lives of the down trodden.

Mark Alaba Obu, managing director  of  Mart  Oil and  Zonal chairman  of the  Independent  Petroleum Marketers Association of Nigeria, (IPMAN) told BusinessDay that the move by government is in the right direction, as it would promote the economy and make the operators  more  competitive.

The managing  director  of  one  of the major oil companies, who did not wish to be identified,  said the action was  long  overdue and hoped  that  this would be the beginning  of better things to come in the  downstream sector  of  the economy.

“I hope all the other stakeholders see the need for  government taking this action, despite the initial difficulties  that would be associated  with it,” he said.

Taiwo Oyedele, PricewaterHouse Coopers’s head of tax and corporate advisory services said the move by government amounts to going through the pains of deregulation without the benefits.

“That is not full deregulation, we are still not clear about the direction in which we want to go. So when you deregulate, you don’t fix the price, you allow the market forces to fix the price, otherwise it is still modulation, like you had before, it is just the price that changes.

“Deregulation will mean government will still regulate the industry and support it in terms of licenses and ensuring that people do it right but not fixing the price.

“I have been of the view that deregulation should have happened a long time ago, especially when the price of crude oil was very low such that the market price at the pump was even less than we were paying.

“For a period of time, there was over-recovery, which means the government was selling more than the market price, but better late than never. “The issue now is if you are deregulating and you set a price cap for N145 then that means going through the pains of deregulation without the benefit of deregulation because you are still fixing price. No serious person will come and invest but if you fully deregulate, it will attract investors to invest in refineries and everything else, because they know they can recover their money, whatever the market rate is.

Bongo Adi, a senior economist with the Pan African University, said the increase will certainly penalise economic growth. “Consumers were already buying the product at prices above N145/liter in some cases. “People were buying at between N130-400/liter. But the implication of the new price for the economy will be dire. It will probably raise inflation to the 15-18% range,” he told BusinessDay in a telephone interview yesterday.

“Based on the contracting revenues of the government, its illogical for government to subsidise, in the short run it will compound the problem of Nigerians,  it will negatively impact real wage, and consumer spending but in the medium to long term, prices will modulate, just as we witnessed with diesel. Nigerians will be compensated with availability of products in the long run,” said Adebayo Ado, Head of Investment Research at Afrinvest.

John Ojikutu, Secretary General, Aviation Round Table Initiative, (ART), told BusinessDay that the implication of the deregulation on the aviation sector is that more people will go and source for forex in the black market to buy aviation fuel, since they cannot get it from the CBN.

Ojikutu said this unhealthy situation would lead to an increase in aviation fuel price.

“Because everybody will start importing fuel now, the Nigerian Civil Aviation Authority, (NCAA) will have to go back to the drawing board and set a standard for the importation of aviation fuel,” Ojikutu said.

Nogie Meggison, Chairman, Airline Operators of Nigeria, told BusinessDay that as a result of poor deregulation, kerosene was sold as aviation fuel in the past and this could affect safety and security.

Meggison advised that government should not stop at deregulation but should set healthy standards for operators and operations in the sector, going forward.

Dolapo Oni, Head, Energy Research, Ecobank Development Company (EDC) Nigeria Ltd, believes that “government has taken a good step forward with this decision. Full deregulation would have meant going beyond relaxing the import restrictions to allow anyone also sell at any price they deem fit.

“This would mean some parts of the country would buy fuel at really high prices, due to low supply. However by capping the fuel at N145, this is expected to allow anyone who can access FX at less than N285 a litre at current gasoline import prices, to bring in fuel and still make a profit. Clearly this is a move that favours the larger marketers and anyone who can secure foreign funding in dollars.” 

PPRA’s breakdown of the cost elements used for the price template posted on its website show that the landing cost of each litre of PMS is as follows; Product cost and freight (C&F) is N109.01, Lightering expenses – N4.56, Nigeria Ports Authority – N0.84, NIMASA charge – N0.22, Financing – N2.51, Jetty through put charge – N0.60, Storage charge – N2.00.

For the distribution margins, the breakdown is as follows; Retails – N6.00, Transporters Allowance – N3.36, Dealers – N2.36, Bridging fund – N6.20, Marine Transport average – N0.15, Admin charge – N0.30.

The agency’s statement  signed by Sotonye E. Iyoyo, Acting Executive Secretary of the agency, said that the PPPRA Act No 8, 2003 gives the agency the statutory responsibility to moderate pricing for the industry.

“The PPPRA commenced a petroleum products price modulation framework on the 1st of January, 2016, with the aim of ensuring a ‘fit-for-all’ approach that seeks to serve the interest of the Nigerian consumers, marketers and the economy. “In furtherance of its mandate to ensure the efficient supply and distribution of petroleum products, the Petroleum Products Pricing Regulatory Agency, (PPPRA), hereby announces, effective immediately that the new price band for PMS shall be at a maximum of N145/litre. However, NNPC retail stations on the outskirts of major cities are advised to sell at price lower than N145/litre”, Iyoyo said.

Olusola Bello, Frank Uzuegbunam, Mike Ochoma, Obodo Ejiro, Elizabeth Achibong, Ifeoma Okeke & Isaac  Anyaogu