Government now spends over N1.4 trillion yearly on petrol subsidy – Ibe Kachikwu

LAGOS, Nigeria – Stakeholders in oil and gas industry today said that total deregulation of the downstream sector of the petroleum industry would unlock the huge private investment potentials in the sector and also stimulates sustainable growth.

They expressed worried over the huge amount of money spent by Federal Government annually of subsidy payment, which they said such sum could be used to develop other sector of the economy.

Minister of State, Petroleum Resources, Dr Ibe Kachikwu said that subsidy on Premium Motor Spirit (PMS), otherwise known as petrol, is currently  over N1.4 trillion annually. The stakeholders said this became imperative for government to embark on total deregulation of the downstream sector to attract investors and to also save the country from the huge amount spent on subsidy.

Mr Muda Yusuf, the Director General, Lagos State Chambers of Commerce and Industry (LCCI) said that perhaps the biggest burden on the economy today is the petroleum subsidy regime. Yusuf said the government should encourage private sector players to take over the downstream sector of the petroleum business.

 “When this is done, most of the challenges we see as regards subsidy, refineries and others will be adequately addressed. The government should only play a regulatory and not an operational role. Government has no business refining petroleum products, retailing or distributing fuel as well as the marketing of these products. We cannot continue to carry that kind of burden in the oil sector,’’ he said .

Yusuf added: It is a big hole in the finances of government.  It puts tremendous pressure on the foreign exchange market and foreign reserves, just as it exerts immense stress on the nation’s treasury. It remains a cause for concern that the subsidy regime had subsisted, especially at time when the economy is facing unprecedented fiscal challenges.

“At a time when productivity in the economy is constrained by acute infrastructure deficit; at a time when public institutions are finding it hard to pay salaries. There cannot be a better example of resource misapplication. There are two components of this; the first is the genuine 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 transparency problems inherent in the fuel subsidy administration, including the petroleum equalisation policy. For several years, the economy suffered severe bleeding from this phenomenon”, he said. Muda added that one of the critical elements of the oil and gas sector reform, particularly the downstream sector, is the complete deregulation of the sector.

“This is the spirit of the Petroleum Industry Bill (PIB) which, regrettably, has again got stuck in the legislative process.The reform of the oil and gas sector would create a number of advantages for the economy.

The DG said that total deregulation of the downstream would enhanced  free resources for investment in critical infrastructures such as power, roads, the rail systems, health sector, education sector etc. He said that deregulation would also unlock the huge private investment potentials in the downstream oil sector especially in petroleum product refining. This will ultimately reduce importation of petroleum products and ease the pressure on the foreign exchange market as well as the burden on our foreign reserves.

He said that deregulation would  eliminate the patronage, rent seeking activities and corruption that currently characterise the downstream oil sector.

“Full deregulation will create more jobs for the teeming youths of the country in the downstream oil sector as investment in the sector improves. It will permanently eliminate the fuel queues. The subsidy regime has done incalculable damage to the economy over the years.

“The citizens have in the past suffered untold hardships resulting from scarcity of petrol and in many instances buying the product far above the regulated price. The nation’s treasury and foreign exchange market has been under severe pressure from the funding of petroleum product importation. This should not continue if the Nigerian economy must make progress.

Understandably, it may be difficult to undertake this reform at this time because of the elections; it should be top on the agenda of government post elections.

“The current management model of the oil and gas sector is surely not sustainable,’’ he added. Mr Felix Andrew, an energy expert said that continuous payment of subsidy is not sustainable, while urging government to liberalised market and encourage “free entry, free exit’ to attract investors in the sector.

Andrew, who is also the Executive Director, Blue-Sea Energy Limited, said that currently, Nigeria spends about N1.7trn on fuel subsidy annually whilst its education and health     sector can only access a paltry budget of N300 million and N400 million respectively.

According to him, it is obvious then, that the fuel subsidy programme is placing a huge financial burden on the nation’s resources.

“Hence, there is no better time to deregulate as this initiative is an enabler in freeing up scarce resources to address the concerns clearly expressed by the citizens for which political leadership is unable to find the resources to satisfy such as providing adequate funding to support the health and education sector; improved infrastructure and better working conditions for the average Nigerian worker.

“One of the proposed reforms in the petroleum industry bill is the deregulation and the liberalisation of the downstream oil and gas industry which recommends that the deregulation proposition.

“If fully, implemented, will eradicate waste and corruption currently ravaging the country as a result of the tightly regulated economy; and that monies saved from fuel subsidy can be optimised for development projects that will be beneficial to the people.

The expert said that  fuel subsidy in Nigeria has brought about industry degradation, such as poor maintenance of and inadequate investment in facilities (jetties, depots & stations), infrastructure (roads, bridges, rail & pipelines), Human Resources, transportation (vessels & trucks), existing refineries and poorer implementation of Health, Safety, Environment & Quality matters.

He said that subsidy spending in the sector amounts to a disproportionally high percentage of the country’s budget, adding that funds that would yield a better return on investment if invested in education, health services and agriculture, etc., are gobbled up in the subsidy of petroleum products.

“The opportunity cost of the present regime of petroleum subsidy includes inability of Government to achieve human development which enables every Nigerian reach his or her full potential. The current labour demand for wage increase at all levels could also be directly addressed through the savings that would be made from elimination of the subsidy which will lead to a more efficient use of resources, to address the diverse individual concerns in the country.

Alhaji Debo Ahmed, Western Zone Chairman of the Independent Petroleum Marketers Association of Nigeria (IPMAN) urged government to liberalise and enforce total deregulation of the downstream sector to boost the country’s economic growth. Ahmed said that deregulation remained the best option to move the economy forward, adding that full deregulation would bring in investments into the sector.

He said that only deregulation would encourage the establishment of private refineries in the country. According to him, government should summon the courage to fully deregulate and remove subsidy totally to open the market for investors.

“If government likes, they can introduce gradual removal of subsidy but it should not go beyond 6 to 18 months period. If fully deregulated with rules, you will have the serious investors coming in to invest adequately,’’he said.

According to him, deregulation is the answer and the government must talk to the people and let them understand the advantages. “The government must also show that in the areas where there have deregulation, people are gaining and that whatever comes in as funds will be used for the benefit of the people”, he said.

Ahmed  said that passage of the Petroleum Industry Bill (PIB) remained the best options that would usher in deregulation, adding that even if the current PIB was not perfect, it could be amended after the passage.

“Once you deregulate, these refineries will be coming up. So, we will plead that we get the National Assembly to expedite action on the passage of the PIB. We believe that the PIB will go a long way in encouraging deregulation but if we want a PIB that will be faultless before it will be passed, then we are thinking that we are not human beings.

“Why do we have the word amendment? How many amendments have they done on the American constitution?

Also, President of the National Association of Liquefied Petroleum Gas Marketers, Mr Nosa Ogieva-Okunbor, has said that only full deregulation can bring the much needed investment to the sector. Ogieva-Okunbor, said that full deregulation remained the best option to attract investors for sector development, against the backdrop of huge amount spent on subsidy.

He posited that full liberalisation and deregulation of Nigeria’s downstream oil sector will remove of all hindrances and bottlenecks that having been discouraging improvement of private investment and market competition. According to him, government should fully deregulate the downstream sector to attract investors. We need full deregulation of the downstream sector. We do not need partial deregulation.

“Market prices in Nigeria and international market prices are outside the control of our local policy. The current international price and imported petroleum products pricing template do not conform to the physical landing cost on the products when interpolated with the government’s template.

The president also lauded the commitment of government to reposition the sector, said the fact that Nigeria is one of the lowest LPG consuming countries in Africa remained pathetic.

It would be recalled Nigeria spent N2.582 trillion on fuel importation in nine months, from January to September 2018, rising by 12.9 per cent from N2.289 trillion recorded in the first three quarters of 2017.

The amount spent on fuel import in the nine-month period is 28.3 percent of Nigeria’s N9.12 trillion budget for the 2018 fiscal year and 36 per cent of the N7.17 trillion proposed expenditure in the budget.

This came as the Nigerian National Petroleum Corporation, NNPC, said that the government has paid petroleum products marketers N236 billion, being first tranche of the outstanding fuel subsidy claims owed the marketers.

According to data obtained from the National Bureau of Statistics (NBS), Foreign Trade Statistics for the Third Quarter of 2018, Nigeria’s fuel import stood at N845.12 billion, N720.4 billion for the first and second quarters of 2018 respectively. However, in the third quarter of 2018, the report noted that fuel import rose sharply by 41.03 per cent from N720.4 billion recorded in the second quarter to N1.016 trillion in the third quarter of 2018.

This, according to the report, was in comparison to fuel  import of N802.4 billion, N744.28 billion and N742.82 billion recorded in the first, second and third quarter of 2018 respectively.

In its month-on-month analysis of the Nigeria’s fuel import, the report showed that in January, February, March, April, May and June 2018, Nigeria imported fuel valued at N384.59 billion, N357.45 billion, N103.08 billion, N190.26 billion, N380.7 billion and N149.44 billion respectively.

For July, August and September 2018, the NBS report stated that N343.25 billion, N378 billion and N295.03 billion fuel was imported respectively. The report further pointed out that fuel import in the third quarter of 2018, accounted for 24.4 percent of Nigeria’s total imports in the period under review.

Specifically, the report stated that total imports into Nigeria in the third quarter of 2018 stood at N4.172 billion, rising by 73.8  from N2.4 trillion in the second quarter of 2018. The report further attributed the sharp rise in total import in the third quarter to the importation of an oil rig.

Particularly, the report said the floating or submersible drilling or production platforms worth N1.159 trillion was imported from South Korea in August 2018.

“In the same way, there was a rise of 67.7 per cent when compared with the import value of the corresponding quarter in 2017.  The huge increase in import value during the quarter, resulted into a decrease in the country’s trade balance from N2.103 trillion in the second quarter to N681.3 billion in third quarter representing a decrease of 67.6 per cent. The year to date Total Trade amounted to N23.14 trillion,” it noted.