There have been many comments since the federal government announced the new petrol price increase. I will restrain myself from calling it deregulation because the fact that price band of 135 to 145 Naira per liter was slated means there is still price control and that government and not the market has fixed the price band based on the input factors or components.
This has been reflected on the price template, which became effective on May 11th 2016 and posted on the Petroleum Product Price Regulatory Agency's website as follows: cost and freight 109.16; Lightering Expenses 4.56; NPA 0.84; NIMASA Charge 0.22; Financing 2.51; Jetty Thru’ Put Charge 0.60; Storage Charge 2.00; Retailers 6.00; Transporters Allowance (NTA) 3.36; Dealers 2.36; Bridging Fund 6.20; Marine Transport Average (MTA) 0.15; Admin Charge 0.30 resulting into a total cost of 138.26 Naira per liter. The first seven components represent the landing cost subtotaling 119.89 Naira per liter while the remaining six (6) components represent the distribution margins subtotaling 18.37 Naira per liter.
While the Minister of State for Petroleum didn't explain the basis for the increase in the components, he did mention that the importers are free to source their foreign exchange from secondary sources and import in line with regulatory approvals and standards. He explained further that the exchange rate of 285 Naira to 1US dollar has been used, and because the cost and the freight are the only offshore components, one could assume that this is the only component that will be affected by the exchange rate. The question is what happens when the exchange rate goes up in the "secondary" foreign exchange market? Also, can Government encourage the oil companies (including the indigenous) to bring in fuel because they are the major foreign exchange earners and whose "opportunity cost of US dollars" could be less than 285 Naira?
Other components, which are largely onshore components are can be optimized, for example, the financing cost of 2.51Naira per Liter translates to 1.75 percent flat or 21 to 42 percent per annum, depending on the cash cycle. Many of these importers have the capacity to negotiate lower financing cost and thereby make an additional margin. Since, many of the components are onshore, as we achieve local production of petroleum products, the components will disappear, and the cost will come down. Although, this will take 2 to 3 years to achieve, will the government sharply adjust the price down or introduce fuel tax component for further factorization of the price to achieve its goal.
The importance of the change in price regime is that the price of petrol is now cost reflective and that the importers can cover its cost at the pump price of 145 Naira per liter and make an additional margin of 6.4 Naira per liter. This will lead to competition, and many importers will join the market and as supply increases, the price will come down. Also, the policy statement indirectly ended the subsidy payment regime. The subsidy has always been shrouded in secrecy and fed by corruption and greed of the few oil cabal, who have always used the subjective nature of the price components to arm-twist the government in the past. Apart from cost and freight component, the other components in the real term, are costs associated with inefficiency in the system and lack of infrastructures, which are usually "played up" to increase subsidy payments. The players are adept in the game, and they employ port delays, collusion with monitoring and regulatory agents and other Nigerian factors to increase the subsidies collection year in, year out. Over the last five years, petrol subsidy payment has peaked at 1trillion Naira annually and has been charged as a first line item on the federation accounts. This has been responsible for the fiscal contraction at the states and federal levels and with the dwindling revenue, it has now become unsustainable.
Apart from the corruption associated with the subsidy, Nigerians don't get value for the subsidy payments as substantial parts of the fuel are smuggled to the neighboring countries, where petrol prices are higher and more margins are obtained. Nigeria, petroleum product market, has an unbounded space extending all the ways to Mali, Burkina Faso, Niger, Togo, Chad, etc. depending on the local price of petrol in these countries. A closer look at the price of fuels in the neighboring countries reveals the impetus available for smuggling of petrol: Chad 0.77USD; Togo 0.80USD; Niger 0.90USD; Ghana 0.92USD; Ivory Coast 0.97USD; Mali 1.15; Burkina Faso 1.25USD; Cameroon 1.08USD. The Previous official price of 86.50Naira per liter translates to 0.43USD at the exchange rate of 200Naira per USDollar and the new price regime of 145Naira per liter translates to 0.73USD, which is comparable with the price in Togo and Chad. The difference between this new price and that of Niger and Cameroon will no longer be attractive to encourage smuggling into these neighboring countries, unlike the old price of 0.44USD per liter, which gives a substantial favorable gradient to allow smuggling into Benin Republic, Cameroon, Chad and Niger Republic. However, the pattern of flow of petrol between Nigeria and the Niger Republic has been reversed since the Niger Republic built refineries and currently, petroleum products are smuggled into the Northern parts of Nigeria, an indication that the market price of petrol may be in the neighborhood of 1.1USDollar per liter in the northern parts of Nigeria to allow such reverse flow. The porous nature of the Nigeria borders, the fluidity of the market boundary and the lack of infrastructures to monitor and control borders' activities make it difficult to model the petroleum price per liter in Nigeria. Hence the recent attempt by the Government to use the price template to achieve the cost reflective pricing of petroleum product and to arrive at the market price that discourages smuggling and its associated illegal activities at the borders.
This is inevitable, and we need to remove this rent activity called subsidy payment to fuel importers. The reliability of this factorization model depends on the movement of the "market boundary" and this is not unusual to target the pricing in the neighboring countries.
The government will remain transparent in its price targeting and continue to liberalize the sectors to attract more investors, who will build refineries and create jobs for many Nigerians. The government should quickly look at other infrastructures such as depots, pipelines, etc that will support the local production and distribution of petroleum products to bring down the price of petrol.
Dr (Engr) Wale Bolorunduro is a Former Osun State Commissioner for Finance, Budget and Economic Planning.