Implications of price hike on petrol and electricity

 

“Because of the problems of the privatisation exercise, the government has had to keep supporting the largely privatised electricity industry. So far, to keep the industry going, we have spent close to N1.7tn especially by way of supplementing tariff shortfalls. We simply do not have the resources at this time to continue in this way. And it will be grossly irresponsible to borrow to subsidise generation and distribution which are both privatised.”

– President Muhammadu Buhari at his second-term First Year Ministerial Performance Review Retreat in Abuja on Monday, September 7, 2020

Since the increments in the price of Premium Motor Spirit and electricity were announced in quick succession last week by relevant authorities, many Nigerians have kicked against the move as being very insensitive, ill-timed and punitive from a government which promised ‘change’ and ‘Next Level’. In fact, a group in Osogbo, Osun State, mobilised and held a peaceful protest asking the Federal Government to reverse to the old rate within seven days otherwise they would make the country ungovernable. The Trade Union Congress and about 79 other civil society organisations are said to be mobilising to embark on a mass protest sometime this week. In recent days, I had the opportunity to weigh in on the implications of these actions on a number of radio and television programmes cutting across both the publicly-owned and privately-owned news media.

I’ve been vehement in calling for the removal of the fraudulent subsidy for some time now and as such I am in agreement with allowing market forces to determine the price of petrol. I also believe that electricity distribution companies need to be allowed to charge cost reflective tariffs since government has phased out the subsidy regime under the Multi Year Tarriff Order. As of the time I took these positions, government had not given an insight into what the country was up against with 60 per cent reduction in revenue. I must hasten to say that I do not totally agree with the Federal Government on the handling of these issues. However, before I return to that, let’s take a look at the statistics presented by the Minister of Information and Culture, Alhaji Lai Mohammed, on Monday. According to him, despite the recent increase in the price of Premium Motor Spirit to N162 per litre, the price of the commodity in Nigeria remained among the cheapest in Africa.

In his words, “In spite of the recent increase in the price of fuel to N162 per litre, petrol prices in Nigeria remain the lowest in the West/Central African sub-regions. Below is a comparative analysis of petrol prices in the sub-regions (naira equivalent per litre): Nigeria -N162 per litre; Ghana -N332 per litre; Benin -N359 per litre; Togo – N300 per litre; Niger – N346 per litre; Chad – N366 per litre; Cameroon – N449 per litre; Burkina Faso –N433 per litre; Mali –N476 per litre; Liberia – N257 per litre; Sierra Leone –N281 per litre; Guinea –N363 per litre; and Senegal – N549 per litre. Outside the sub-region, petrol sells for N211 per litre in Egypt and N168 per litre in Saudi Arabia”. Little wonder, there is a lot of smuggling of our petrol across the border to neighbouring countries. One successful trip makes the smuggler to laugh to the bank!

Mohammed said, “The cost of fuel subsidy is too high and unsustainable. From 2006 to 2019, fuel subsidy gulped 10.413trn. That is an average of N743.8bn per annum. According to figures provided by the NNPC, the breakdown of the 14-year subsidy is as follows: in 2006, subsidy was N257bn; in 2007, it was N272bn; 2008 –N631bn; 2009 –N469bn; 2010 –N667bn; 2011 –N2.105trn; 2012 –N1.355tn; 2013 –N1.316tn; 2014 –N1.217tn; 2015 –N654bn; 2016 –figure not available; 2017 –N144.3bn; 2018 –N730.86bn; and 2019 –N595bn.

Before the press conference by Mohammed, the President represented by Vice President Yemi Osinbajo had at the opening of the two-day retreat with ministers last Monday listed the rationale behind the removal of the petroleum subsidy.  He observed that there is 60 per cent reduction in revenue accruing to the coffers of the Federal Government as a result of COVID-19 pandemic; the potential return of fuel queues due to potential strike action if government does not pay the subsidy on time; moreover, there is no provision for fuel subsidy in the Revised 2020 Budget because government can no longer afford to pay.  The President noted that, “If reasonable provision must be made for health, education, and other social services, we simply cannot sustain petroleum subsidies.”

I agree with these submissions but since the Federal Government’s purported March 19, 2020 decision to remove fuel subsidy, it went to sleep when it should have rolled out a robust enlightenment campaign to get the Nigerian masses to support the move. True, there was reduction in the price of PMS in June from N145 to N121.50 and N125 per litre. However, it was for a couple of weeks with many of the petrol retail outlets foot-dragging to reflect the price reduction under the guise that they were still selling old stock before the price reduction. Thus, the missing gap is the lack of proper enlightenment of the Nigerian public on the issue. In spite of the huge resources to be freed by the subsidy removal, why are we still borrowing millions of dollars to fix all our critical infrastructure?

Furthermore, has government fully deregulated the petroleum industry? The answer is NO! If and when there is full deregulation, there will be price variations across the country and not a uniform price as presently obtained. Why should petrol be sold at the same amount in Lagos from where it is trucked to the hinterlands in places such as Makurdi or Ekiti state? Also, government has refused to pointedly address the issue of epileptic refineries over which millions of dollars have been spent on their Turnaround Maintenance. Yes, the price of petroleum products may be cheaper in Nigeria than many other countries in Africa as government has argued, but the price would be cheaper and more stable if we are to be self-sufficient in refining crude oil for our domestic consumption rather than exporting crude oil to import refined petroleum products such as aviation fuel (Jet A1), kerosene, diesel, petrol and lubricants.

It is heartwarming that government claimed that three modular refineries have been established in the last one year while we await Dangote Refinery to come on stream next year or thereabout.  However, major licensed oil explorers such as Exxon Mobil, Chevron, Shell, TotalFinaElf and Texaco could be incentivised to set up refineries to process a percentage of the crude oil they produce. It is also high time the National Assembly passed the Petroleum Industry Bill in order to encourage greater and better foreign direct investment into Nigeria’s oil and gas sector.

As for the electricity distribution companies popularly called DISCOs, I am very happy that the new tariff majorly affects consumers receiving 12 hours and above of electricity. However, to whom much is given, much is expected. There must be a concomitant improvement in service delivery. Improved electricity supply and prompt attention should be given to customers’ complaints with repairs attended to efficiently and effectively. There is the lingering issue of affordable and customer friendly pre-paid meter. This should be a priority! It is heartwarming that the Nigerian Electricity Regulatory Agency has capped the amount the DISCOs can charge on estimated billings, however, since these meters are now being produced in Nigeria, it should be easier for customers to get them the same way cable television dishes are made readily available for purchase and installation in a seamless way.

There is no way we can realistically escape paying higher service charge on utilities as those who are providing them are in business to make profit and in order to stay afloat in business, they need to charge cost reflective tariff. With the devaluation of the naira and increase in inflation, these service providers will need to be encouraged. This is the way more investors will be inclined to set up businesses in these sectors. What we are left with is to develop coping strategies. For instance, these utilities are not really inelastic. We can do without them or reduce our consumption of these products.  What is inevitable however is that there will be general rise in prices of all goods and services as everyone gets to adjust their charges and prices in order to leave them with a profit margin. Unfortunately, this will lead to higher cost of living rather than the desirable higher standard of living.