Fuel subsidy killing Nigeria’s economy -2
.We must allow the downstream sector to grow itself–Says MOMAN
Mr. Clement Isong, is the current Chief Executive Officer, Major Oil Marketers Association of Nigeria, MOMAN. He has significant experience in the downstream oil industry. Isong has traveled extensively in Africa, the Middle East, United States and Europe professionally, and has acquired a vast portfolio of digital tools, processes, organisational models and competence to move Nigeria’s downstream sector forward. He spoke in this exclusive interview with Financial Business on the need for government to remove fuel subsidy and deregulate the industry fully for optimum productivity.
“We must concurrently analyse the economic cost to the country of making the product available under this supply regime. A monopolistic environment brings with it known challenges, which we are clearly witnessing in this approach to managing the downstream. The downstream petroleum industry should be allowed to compete and to grow itself”- Isong
Sir, as the Chief Executive Officer, Major Oil Marketers Association of Nigeria, MOMAN, could you give us an overview on performance of the downstream petroleum sector in 2018 and the way forward?
As far as supplies are concerned, the truth is that we went through most of 2018 economic year without scarcity of petroleum products, especially in the last quarter of the year, where the economy experienced increased commercial activities due to Christmas and end of year related expenses. The reality though is that NNPC has been the sole importer of petroleum products into Nigeria.
To be clear, NNPC should be commended for achieving this continuous supply through its proactive engagements with Oil Marketers, thereby creating a platform to expediently resolve issues associated with the supply chain of the business. However, should it really be a big deal that fuel was available at the pumps? We must concurrently analyse the economic cost to the country of making the product available under this supply regime. A monopolistic environment brings with it known challenges, which we are clearly witnessing in this approach to managing the downstream.
The downstream petroleum industry should be allowed to compete and to grow itself.
Mr. Oyebanji, MOMAN’s Chairman in a recent article, was quoted as saying he envisages “a very vibrant downstream sector that is very competitive, where the players are getting adequate returns on their investments”.
The subsidy regime has been very difficult for the industry, coming at great financial cost to the economy of the country.
MOMAN supports the argument that the money spent on subsidy could go to education sector, health care services, railway projects, agriculture, transport and other infrastructure development in the country. Retaining subsidy is unsustainable, creating inefficiency and administrative cost that is heavy to manage. That is why we are calling on government to bring reforms leading to full deregulation of the downstream petroleum sector.
Full deregulation would bring about competition, letting the market decide petroleum prices through the forces of demand and supply.
Let those who significantly invest their capital in Nigeria in product transportation, filling stations, depots, innovation and digital services benefit from their investments.
Are you saying that removal of fuel subsidy would solve the problem facing the industry?
It would be a good starting point. Subsidising fuel prices led to poor functioning refineries and lack of new investments in the industry, which in turn led to massive degradation of the industry over time. For instance, Depots, Pipelines, Trucks and even Service Stations are in bad shape. But well beyond the removal of this subsidy, we need to reform the sector. Such reforms should include alignment of all the relevant government policies and legislation prevailing in the downstream, to create efficiency and sustainability. This is imperative because investors need clarity before committing their resources.
MOMAN members did not make new investments throughout 2018. Is that trend going to change in 2019?
Talking about investments, the industry was handicapped particularly in 2018, as a result of the debt owed Marketers by govenment, a consistent consequence of the subsidy regime. However, two things happened late in the year; the government owed marketers, by some accounts, over N800billon and in December 2018 paid N237billion through Promissory Notes. Though Marketers are still indebted to the banks, the payment from government has helps to ease the situation and hopefully would open up access to operational funding.
Secondly, the Central Bank of Nigeria, CBN, intervened by asking banks to cease accumulation of interest on the money Marketers owe commercial banks and reverse interest payments from 1st of July, 2017.
This implies that the CBN stopped the interest from running for about 18months to date. In essence, the intervention by CBN has lowered the debt government is owing marketers and banks. Currently a reconciliation exercise is being undertaken, which should reduce the overall amount Marketers owe banks. Hopefully, Marketers and the Industry will soon be able to resume investments, at least to renew truck fleets, refurbish depots, filling stations and acquire new assets, provided reformed government policies and legislation encourage them to do so.
You said aside from oil marketers, government is also owing banks. Could you give us explanation on how government is owing banks in this regard?
Well, indirectly I must say. The reason is that when government entered into the subsidy agreement with oil marketers to import products, government committed in writing that associated debt in terms of accumulated interest from borrowed funds and any foreign exchange differentials would be recoverable from government. As such, government is therefore owing Marketers who are in turn owing banks from whom they borrowed to import.
Are you saying that the next payment by government would be lower because of interest rate cancellation by the Apex bank?
Well, we can’t determine the figures now until we finish reconciling with government and the banks.
How do you mean?
The PPPRA that supervises importation process of petroleum products would check the cost and quantity of product imported during that period, as well as the exchange rate at which product was imported. Marketers are currently reconciling these figures with PPPRA. The Presidential Initiative on Continuous Audit, (PICA) which is a unit in Ministry of Finance, would audit the information received from PPPRA before recommending the outstanding debt for payment to the Federal Executive Council and the National Assembly. The process is on-going.
It is absolutely necessary that we complete this process as quickly as possible. Marketers have lost money, time and opportunities. The entire process has been very painful. Some Marketers have gone under, employees have been terminated and a lot of industry investments and maintenance work could not be made due to the huge debt.
With these numerous challenges, how do you look at the business going forward?
With the situation of things in the sector, those heavily invested in the business must decide whether to remain in the industry or sell their assets and move on to other sectors. This is because investors need clarity and transparency on how they would earn their revenue and margins. We appreciate the government re-paying part of the debt owed and are hoping to receive the balance as soon as possible. Recovery and growth in the industry requires more than this.
So, what is the solution?
Reform in the industry is the way forward. The downstream sector is experiencing severe challenges. Investors can read the market but it is not so easy at the current time to understand government’s policies and practices. Enacting policies and legislation initiating price deregulation would bring the confidence that stakeholders in the industry need to make new investments and grow the business. We now have a game of catch-up.
What does this mean?
Catch up game here implies meeting up with modern technology and the modern way of doing business in the downstream sector, like what obtains in other countries. For example, the industry abroad no longer use steel pipes and normal underground tanks for products storage because they rust, preferring HDPVC pipes and double wall HDPVC or steel tanks.
Now, imagine what it would cost to change the old steel tanks and pipes in filling stations across the whole country, or at least put in place mitigating measures to prevent against these environmental hazards. Concurrently, industry truck fleets need be upgraded to more modern trucks, in order to meet with modern safety standards in the industry with features such as satellite tracking and other speed management systems, more modern and superior braking systems, anti-skid and anti-spill protections… trucks that would not spill products even when they fall on the roads, in order to avoid explosions and environmental hazards.
You are aware that a single truck accident conveying petrol could cause great damage and loss of innocent lives. Therefore, imagine how much is required to change the fleet of the current trucks operating in the industry.
More so, let us also look at the investments we need to upgrade the depots, as well as customer services at filling stations with new upgrades in efficiency, environmental protection, digitalisation to prevent or minimise product loss, product theft and cheating at the pumps.
In examining all these factors, we could see clearly that full deregulation is the answer, because the industry needs to upgrade itself and manage itself, instead of being managed arbitrarily from the outside.
Let the investors spend what is necessary to meet the Health, Safety and Environmental Quality, HSEQ, Standards. Let government sit with Industry players to regulate implementation of these advances in HSEQ.
However, let cost recovery, the market forces of demand and supply, as well as quality and services, determine prices of products at the pump.