March 18, 2012:

There were days, very many years ago, when governments were involved in business. But that is past and long forgotten history, at least for countries that have long stepped from under-development into development. Sorry to say, Nigeria is still not developed and, of course, is still in the practise of having its government in business.  Not even during the days of the colonial masters did they come only as a government. But when the colonial masters came, they came with their business men and women. That is a clear sense of division of labour between government and the private sector.

But for the lack of involvement in our refineries by the private sector players, the nation's refineries are almost dead. For instance, the first oil refinery built in the country is located outside Port Harcourt in the southern part of the country, known today as the south-south region, and it started operations in 1965 with a capacity of 38,000 barrels per day (bpd). Since the first refinery was built in the country, three more refineries were built to cater for expanding domestic needs over the last 30 years.

But as it is typical of governments, not only in Nigeria, but across Africa and some other states, the refineries in the country have become objects meant for the museum. They have been left unrepaired, so that the growing population is faced with little petrol to go round.  As far back as in the 1990s, with a fast growing population, the country was caught in the situation with domestic demand for gas far outweighing supply, and with corruption, smuggling and mismanagement, the refineries were operating at less than optimal levels.  Turn Around Maintenance (TAM) was done on the refineries to improve capacity, but this was not getting the desired effect and Nigerian National Petroleum Corporation (NNPC) had to import heavily from abroad, thereby cutting actual revenue derived from oil exports. Tony Ikwere, an economist based in Lagos, said if the refineries were to be in the hands of the private sector, they would have long ago seen that not maintaining the refineries would cost the country much in the future.

According to him, if government had maintained the refineries and even gone further to establish more, it would have been a stitch in time that saved so many more. Ikwere lamented that the country has ended up paying salaries of people employed in other countries, even when Nigeria has teeming unemployed people.  A look at this story would help solve the riddle of how we got to where we are now. We will recall that international financial institutions started lending excessively to oil producing countries and successive Nigerian governments in the 1980s and 1990s borrowed heavily to subsidise for rapidly declining income from oil exports.

Unfortunately because of some periodical non-servicing of those loans by the then military regimes, Nigeria found itself in trouble and was heading for insolvency. By 1992 when Nigeria took its last loan, things were looking bleak and the country asked the Oil Producing ad Exporting Countries (OPEC) for a larger export quota so as to generate more revenue.  The then democratically elected government of President Olusegun Obasanjo, on assumption of office in 1999, found a near comatose economy and a heavy debt burden. Funding government expenditure in the last five years became a real issue since a substantial part of the country's revenue from oil exports is used for debt servicing, the balance being used primarily for recurrent budget needs of the government due to an over-bloated civil and public service, leaving very little funds for capital budget needs and investments in other critical areas of the economy, such as that of welfare, educational and healthcare needs.

After analyzing the problem, with international oil prices rising and actual refined production in the country dropping, the government decided that it could not afford the continued subsidies.  According to Ifiok Ibanga, an analyst based in Lagos, the government, realized that it would be necessary to boost production levels of the refineries but at a huge cost, and decided to invite local marketers to apply for licences to build private refineries.  This approach failed, as the marketers who are solely driven by profit maximization were not interested while government still controlled the pump price of gas. Government decided that it was necessary to deregulate and privatize the downstream sector in the country. So far, the issue of selling the refineries to private sector has been impossible due to some reasons. Nnamdi Dimgba, an analyst, said the huge legal deficit was created by the lack of a competition law or anti-trust legal regime in Nigeria.

He said: "It is a great anomaly that a government would embark on a macro economic reform agenda which is not underpinned by an appropriate legal foundation for the promotion and protection of competition. I have maintained consistently for the past five years in various fora that our economy is overripe for a competition law.  "The central thesis behind our position is that the benefits of market-oriented reforms embarked upon by the Nigerian government are likely to be fully realized only if enterprises act under the spur of competition, so that consumer wishes and opinions are reflected in market performance. A country that has undertaken trade liberalization measures has every interest in ensuring that the welfare and efficiency benefits arising from such measures are not lost due to anticompetitive practices by firms. "Governments which have liberalized vital sectors of their economy through privatization unwittingly create new dangers in the absence of a competition law.  They could usher in, in place of government monopolies, private players who are not constrained by social interests and whose overriding drive is profit, and end up exploiting those positions to the detriment of consumers in the absence of any competition law checking them."

Perhaps, that is one reason. The masses have prevailed on the government not to sell the refineries, but more than before, it is more imperative that the government takes its hands off any form of business. Funsho Kupolokun, former boss of NNPC, has in 2004 tried to convince Nigeria to sell its refineries. He had said that "the goal of the Nigerian government in adhering to the principles of privatization and liberalization is influenced by the successes of other countries in doing the same."  Some other reasons Dimgba gave include to ensure full deregulation of the energy industry by dismantling the natural monopoly of the state-owned enterprise by privatizing and deregulating price control, creation of competition in the downstream sector by encouraging more companies to get involved and eventually supplying the market at competitive pricing levels, reducing the cost government spends on subsidizing the sector which runs as high as $1.5 billion annually, and consequently using the resources freed up to handle the socio-economic and welfare needs of the Nigerian people, boost in Foreign Direct Investment to the Nigerian economy, and cause a reduction in the transportation costs of products and people.

Government believes that, since deregulation has saved other sectors of the economy like telecoms and media, Nigerians should consider it for the oil sector, President Goodluck Jonathan said.  According to him, the Federal Government wants to eventually leave the operations of the refineries to the private sector so that the NNPC will be concerned primarily with building up the nation's oil reserves. Thus, unless the refineries are sold off, the Nigerian government, which has over the last three decades subsidized the price of refined petroleum products consumed in the country, will continue to do so.

Players in the industry say what is now known as subsidy only started as a stop-gap measure to meet supply shortfalls that occurred during scheduled Turn Around Maintenance of the Eleme, Port Harcourt and Warri refineries soon became the norm as the NNPC seemed incapable of managing the operations of these refineries leading to perennial fuel shortages and scarcity. As the population of Nigeria grew, so did the demand for refined petroleum products even as two additional refineries were built in Kaduna and Port Harcourt. Over time, past officials of the NNPC charged with the job of managing the refineries soon discovered that, by keeping the refineries in a perennial state of disrepair, they could award refined product supply contracts to their cronies and proxies and pocket the profits. In order to stave off public criticism of the scheme if they charged the market rate for the imported products, they decided to subsidize the cost and successively set the pump rates, never mind the arbitrage opportunity this provided hoarders of the products, who took advantage of the endemic scarcity, and smugglers and diverters who saw the opportunity to charge multiples of the cost price if they sold the products in neighbouring African countries.

In 2011, the NNPC was estimated to have spent over $8billion on subsidized imported refined petroleum products because the four refineries in Nigeria barely operated at about 15 percent of installed capacity, though the Petroleum Minister, Diezani Alison-Madueke claims between 50 percent and 60 percent capacity utilization in a "townhall meeting" in Lagos.  There is no telling that removing the subsidy on imported petroleum products makes sense. However, it does not take care of the intrinsic problems of corrupt enrichment of selves, cronies and proxies by the managers of the refineries and the perennial scarcity.  In fact, it will only mean that importers of the refined products have a licence to charge higher prices for their products, affording higher returns to their patrons in the NNPC, who will consequently have a higher incentive to keep the NNPC refineries in disrepair and non-functional.  The only way out is for government to sell the refineries so that others who have tendency to make some quick profit from the loopholes created in the industry will not have their way.  The way around the issue of the mismanagement of Nigeria's oil sector is for the government to totally divest its equity stake in all the joint ventures it has with the various operators in the industry. These interests should be sold off in the stock market, encouraging a wide base participation and equity distribution with a cap of, say, one percent to two percent of the total equity stake as the maximum any individual or entity can hold. "In addition to this, the Nigerian government needs to liberalize the ownership of refineries by issuing more licences to allow as many private enterprises as possible to set up refineries all over the country.

This will not only stem the perennial fuel shortages, it will foster competition and reduce prices as the incentive for operators who want to remain profitable will be to hone their operations to be as efficient as possible, say analysts.  Fully divested of its equity stakes in the industry, the government will, through its agencies, provide regulatory and oversight control of the industry and raise revenue through licensing fees, tariffs, duties and taxes. This will in one fell swoop take care of the current inefficiencies and massive corruption in the system.  If the refineries were sold, it will help government reduce bureaucracy, reduce state monopolies and ensure level playing fields, reduce bad management, correct defective capital and financial structures, increase competitiveness, increase the quality of goods and services, reduce corruption and control by government, increase staff quality and supervision, improve market analysis, free up government funds for more pressing problems, create employment, re-invigorate the local economy, expand local businesses, attract direct foreign investments, expand capital markets, redistribute wealth, improve technological transfer, enhance trade control regulations, among others.

By Allafrica.com