The case for downstream deregulation

I have always supported downstream petroleum sector deregulation. I did in 2012 and I do now! Deregulation and liberalisation have transformed several sectors in Nigeria-financial services; airlines and aviation; broadcasting and media-radio, television and newspapers; upstream petroleum; universities and polytechnics; and telecommunications. Every sector which relatively “works” is conducted by the private sector; those that don’t – power (until recently), refineries, railways, water, public education, public health, security, judiciary, roads etc. are managed by government! But not every sector can be deregulated and liberalised e.g. security, public health and education. Even there private players can play critical roles such as in the Lagos State Security Trust Fund by its private sector partners, which has transformed the security sector in Lagos.

Clearly downstream petroleum sector should be deregulated so that private capital and investment can build refineries, petrochemical plants and invest down the sector’s value chain. The best insight is drawn from telecommunications experience. Imagine this was 2000 and we were pondering how to provide 100 million telephone lines for Nigerians. Would we hand over $20 billion to then corrupt and inefficient telecommunications monopoly, NITEL and given it “marching orders” to ensure it provides 100 million lines within ten years? That would have been sheer foolhardiness! We would simply have made individuals rich – Minister for Communication, senior civil servants, NITEL officials, contractors, and their friends and cronies, as we had done since independence. Ten years later, NITEL may have moved from 470,000 lines (actually less were working) to may be 750,000!

Instead we acted sensibly – deregulated the industry, sold licenses to private investors (earning billions of dollars from digital mobile license auctions, 3rd generation licenses, second national carrier licenses; additional operator licences) and earned additional revenue from taxes, import duties, spectrum sales. We created thousands of jobs, with employees paying P.A.Y.E taxes to government and the sector impacted other industries – media and entertainment; advertising and public relations; professional practices; small and medium enterprises (even micro enterprises); and telecommunications enhanced overall economic productivity. Private capital in excess of $20 billion flowed into the economy, and government corruption in the telecommunications sector has disappeared. Today the Nigerian telecommunications sector has 215.7million connected lines and tele-density of 106.25 percent! Why would anyone so resolutely insist that we should not use a similar strategy for downstream petroleum?

Why should we continue to support production and jobs in the countries we import refined petroleum products from, instead of building our own domestic refining and petrochemical industry? Why would we leave the value chain of the Nigerian oil industry undeveloped beyond crude oil and gas extraction and export simply because we want to continue with an unsustainable subsidy? Isn’t it clear to everyone that as long as the subsidy regime persists, Nigeria would never have a developed local refining sector?

If we hate corruption, one of our most important actions would be ending the petroleum subsidy system which is one of the largest single sources of corruption in the Nigerian economy – the largest currently in my view is the foreign exchange system which allows favoured Nigerians make N100-120 margin on every dollar at the expense of the national patrimony. The evident irony is that if subsidy stays, the happiest people will be the bureaucrats administering the subsidy and their oil importer cronies. I also think many of the opposing arguments are escapist-a gradual removal (that is what we have been doing since 1986. Global oil prices and exchange rates will go up, while petrol prices remain fixed, so a bigger subsidy will re-emerge and we will have merely postponed the evil day); the timing is wrong (evidence suggests that there could never be a right time to ask Nigerians to pay more for petrol. A sense of entitlement to cheap petrol has developed and prior governments have got negative reactions irrespective of timing); there was insufficient consultation (we hear stories of labour leaders who privately agree with government, but refuse to admit so publicly to preserve their populist base – they may later “change their minds” when they get into government!); it is IMF/World Bank policy (no intelligent observer needs an international conspiracy to know that spending one-third of your budget on a corrupt subsidy scam which stunts a potentially huge industry, while you lack jobs, infrastructure and social spending on education, health and transportation, is nothing short of insanity!)

The big challenge is how government will calm the populace and alleviate the short-term impact on the poor and struggling masses. Government must urgently implement credible and well-thought out measures to ameliorate the impact on the vulnerable. I support downstream deregulation and I hope the policy is successful, but government must offer deep and meaningful sacrifices of its own. Government must also unequivocally begin the process of transforming itself before it can transform Nigeria!

 

(This article was extracted and modified from “The Fuel Subsidy Palava” published on January 11, 2012.)

 

Opeyemi Agbaje