Where the Governors Got it Wrong

By the end of the amnesty proclaimed for Niger Delta militants on 4th October, 2009, virtually all the known leaders had surrendered their camps to the federal government along with 287,455 different types of ammunitions,

2760 assorted weapons, 18 gunboats, 1090 dynamites and 3155 magazines. But there remained the issue of redressing the problem of decades of neglect which, in the first place, led to the violent agitation.

Given that the late President Umaru Musa Yar’Adua had made it clear that he preferred a new outlook that downplayed constitutional issues in favour of a funding regime that would directly impact oil communities, he was at odds with the Niger Delta Governors and many stakeholders within the region who canvassed increasing the percentage of derivation fund from 13 percent to as high as 25 percent. As he argued, it would be practically impossible to sell such agenda to the states most of which were already finding it difficult meeting their obligations. His own proposal was to give oil communities some form of stake in the ownership of petroleum assets while embarking on massive infrastructural development in the region.

In the bid to get critical stakeholders on his side, he decided to take his case directly to the militant leaders a few days after the amnesty process was concluded. Before the meeting (which became a confidential briefing), Yar’Adua asked then Minister of State for Finance, Mr Remi Babalola, to prepare for him a comparative analysis of revenue allocations from the federation account to all the 36 states for the period between June 1999 and December 2008 with specific highlight of what had accrued to Niger Delta since the 2002 Supreme Court ruling on onshore/offshore dichotomy.

While the president succeeded in convincing the militant leaders that the call for increasing the percentage for derivation would be a hard sell, Babalola’s paper was also instructive in that it shows clearly the wide disparity in the allocation to the various states of the federation. In year 2008 for instance, the allocation to Akwa Ibom state alone was N204.5 billion which far exceeded the allocation of N176.2 billion to the entire five states in the South East within the same period. It is also bigger than the N198.4 billion allocated to the six states in the North East at a period the six states in the North Central zone also got N197.2 billion.

The lesson from Babalola’s paper is that while four states (Bayelsa, Rivers, Akwa Ibom and Delta) by virtue of derivation fund can be said to be relatively buoyant, outside them, the only other state that is self-sufficient is Lagos, essentially on account of its internally generated revenue.

Against this background, it is easy to understand the financial predicament of some states of the federation with regards to the demand by Labour for the implementation of the N18,000 national minimum wage. The fact is that many of them cannot pay it. But their call for removing subsidy so they could have more money to share is not only cynical but completely misses the point, especially at a period of serious economic challenges for the large majority of our people.

While the Ondo Formula offers a way out of the minimum wage logjam for any honest state executive who can put his cards on the table, I believe what the Governors should be canvassing is a serious dialogue that would examine the current national economic structure and how we can make Nigeria work. Whether we want to admit it or not, the current situation is unsustainable as the nation is gradually going bankrupt even with the oil revenues. Beyond the downstream sector of the petroleum industry, there are several other issues we have to examine, including the revenue sharing formula, the scandalous remuneration of political office holders, the tax policy, collapse of social sectors like education and health, the management of the federation account by the federal government and the creative accounting at the NNPC etc. But even all these do not obscure the fact that the current regime of subsidy is in favour of a few at the expense of the collective.

In March 2009, as a member of the government delegation involved in the negotiation with representatives of Labour over the issue of deregulation, I wrote a piece titled ‘Deregulation: If not now, when?’ which captured my thoughts on the issue. The critical point which needs to be underscored, as I argued back then, is that once you remove the rent element which the current arrangement promotes and also do away with certain bottlenecks, especially with regards to operational difficulties at our ports, a lot of racketeering and inefficiencies will be cut off and the price of petrol will quite naturally adjust to market reality and ultimately stabilise.

According to the Petroleum Products Pricing and Regulatory Commission (PPPRA) template, the pricing model for the determination of the domestic prices of petroleum products is based on an Import Parity Principle (IPP).

The implication is that the moment we begin to refine locally (which will not happen under the current dispensation) some cost components would either reduce or be eliminated from the pricing model. On the PMS template of the PPPRA for the month of February 2009, for instance, product cost was 65 percent while freight accounted for 5.75 percent. Another component called Lightering expenses accounted for 5.13 percent with Storage charge put at 4.18 percent. Other charges were: Jetty-Depot Throughput, 1.12 percent; NPA, 1.62 Percent; Financing, 0.72 percent while margins for distribution accounted for 18.41 percent.

In the year 2006, the entire PMS refined locally was 1.623 billion litres while 7.701 billion litres of PMS were imported by NNPC and other marketers. In 2007, because the refineries were working at their lowest capacity, the quantum of their contribution to local supply had dwindled to 356 million litres of locally refined PMS while 9.867 billion litres of PMS were imported to the country by NNPC and other marketers. In 2008, 1.227 billion litres were refined locally with 10.867 billion litres imported.

The pertinent questions which I posed in 2009 but remain relevant till today are: How much of the PMS purportedly consumed in the country over the years was smuggled out of the country after it had been heavily subsidised? What percentage of that number is spoof since facts on the ground suggest some marketers import less than they claim but have valid papers to show ‘evidence’ of full supply? What is the place of our banks in all these shady arrangements? And then, what percentage of the ‘imported’ products were real and what percentage were actually the (relatively cheaper) locally refined products that were round tripped to the high sea and then brought back home so that subsidy money would be claimed?

While I concede to people who would argue that the foregoing merely represent a failure of government, the fact also remains that there is no country in the world where you create this kind of incentives for corruption that the system will work. Yet given the huge market that we have within our country, and also considering the fact that our supply outlets feed the sub-region, it goes without saying that not only we will eliminate waste and racketeering, there will be investment in private refineries if the conditions were right. As things stand today, no rational investor will commit his money into building a refinery in an environment where government fixes the price because there is subsidy money to be shared by a few individuals. Investors will not come in because they know such a system cannot for long endure as the bubble must somehow burst somewhere.

There are several unnecessary costs that we pay for by virtue of the unbridled regime of importation. If the products were refined locally, for instance, the cost of freight which contributes about another six percent would be eliminated. Then you have Lightering expenses, one of the most questionable items on the PPPRA template. These, I understand, are incurred on imported products due to the peculiar draught situation of the Nigerian ports. This contributes about five percent to the pump price of Petrol. The way the whole thing works does not even lend itself to any rational or verifiable explanation.

According to the tale from our ports, expenses claimed by marketers on ‘mother vessels’ are based on the allowable 10-day demurrage exposure at the rate of $28,000 per day. But these ‘mother vessels’ we are told incur demurrage for up to 60 days at much higher rate of about $32,000 per day. Sometimes, due to logistic problems, shuttle vessels could incur demurrage for up to five days at about $8,000 per day. Yet these are some of the costs that are passed to government and which are paid as subsidy while any delay in payment is usually met with threats of fuel scarcity with all the attendant security implications.

I know that the argument for deregulation is difficult to sell because while it may be convenient to say that fuel subsidy benefits the rich more than the poor (which is true), the vulnerable in the society may also argue (as indeed they do) that they will settle for the crumbs if that is the only thing they benefit from the State. It even sounds callous to demand any form of sacrifice from them at a time when it is common knowledge that some public office holders are taking bank loans not to invest in projects but simply to share among themselves. That is why government has to begin a meaningful conversation with all the critical stakeholders on what should be done with the ‘savings’ from deregulation as opposed to the idea of simply sharing the money as being proposed by the governors.


• This piece was first published in THISDAY on 30th June, 2011

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