Proposed Deregulation of the Downstream Petroleum Industry - Good riddiance to an unsustainable system

The Federal Government of Nigeria announced its intentions to deregulate the downstream petroleum industry by discontinuing the current government subsidy on petroleum product pump prices and privatising the Country's refineries. I believe this announcement has potentially beneficial implications for the growth of the sector and for the encouragement of private sector participation in building refining and distribution capacity in the Country.

Although, a cross-section of Nigerians and organised labour are up in arms against the proposed discontinuance of the subsidy and have described it as being insensitive I believe the policy has the potential of modernising the industry, encouraging private sector investments and strongly mitigating the cronyism and patronage for which the sector has achieved notoriety (even in corruption riddled Nigeria!). I cannot help but wonder how much of the 1.6 Trillion Naira (about USD 11 Billion) in Government subsidies was spent in supporting the inefficiencies and corruption in the system and not on actually alleviating the burden of high Crude Oil prices on Nigerians. For example, what warped logic dictates that imported petroleum products which are offloaded in Lagos should sell for the same price in Maiduguri which is hundereds of kilometres in the hinterland, despite the considerable costs involved in trucking these product over hundreds of kilometres from Lagos to the far north.

The current industry structure and the monopoly enjoyed by the PPMC (downstream arm of the NNPC) reminds me of the pre-2001 regulatory regime in the Nigerian telecommunications industry when NITEL was "lord and master" over all. A not so distant era during which NITEL officials had to begged, bribed and paid homage to before we could get overly expensive telephone lines which broke down for more days than they worked. The liberalisation of the telecoms industry and the advent of the various Mobile and Fixed Wireless Access (FWA) operators filled the deep void created by NITEL, rendering it practically irrevelant in the scheme of things with the Nigerian subscriber being the better for it. I am sure that a liberalised downstream petroleum sector will be ultimately beneficial to Nigerians, as it will lead to increased transparency engendered by competitive tension, reduced inefficiencies and greater mobilisation of private resources in building capacity.

Furthermore, the deregulation will help mobilise private investments in developing and improving the Country's refining capacities. All the refineries in Nigeria (which are currently under government ownership and control) are either moribund, grossly underutilised or both, this is in spite of the hundreds of millions of US Dollars which have been spent on various Turn Around Maintenance (TAM) contracts. The best option is for us to privatise the nation's entire refining capacity, so they can quit constituting a drain on the public treasury and a conduit for lining politicians' pockets.

An often cited reason for the inability of private refineries to kick off in Nigeria is the difficulty in securing financing for the projects. This lack of investor appetite is directly attributable to the current pricing regime, as we will be hard pressed to find a rationale investor who will be willing to spend hundreds of millions of US Dollars in developing an immovable asset (i.e. a refinery) to produce goods (petroleum products) over which he will not have pricing control. As someone else (the all knowing Federal Government of Nigeria of course!) will dictate their pump price all over the country and will almost certainly prevent him from exporting to other markets if he is uncomfortable with the prices the Government dictates in the domestic markets. Even if such an investor can be found, I am sure that he/she will not be able to get a bank that will be willing to provide financing for such a venture.

On the whole, I believe the deregulation of the downstream petroleum sector is one of President Yar'Adua's better decisions since taking office. Although the effects may sometimes be difficult for Nigerians to bear, we will all eventually be the better for it.