Amid fluctuating prices of petroleum products, Nigerians pick holes in the role of Petroleum Equalisation Fund (PEF), an agency established to bridge the cost of conveying products and enhance price stability, Idu Jude of thisnigeria news writes
Amid fluctuating prices of petroleum products, Nigerians pick holes in the role of Petroleum Equalisation Fund (PEF), an agency established to bridge the cost of conveying products and enhance price stability, Idu Jude writes
When the Senate passed the Petroleum Industry Governance Bill (PIGB) in May, 2018, there was a lot of fanfare over what appeared to be a tangible step in reforming the oil and gas sector.
Understandably, legislative attempts at the reform have spanned four presidencies and nearly two decades.
However, it is important to remember that the PIGB is just one of five bills created from what was initially designed as a single comprehensive Petroleum Industry Bill (PIB), which primarily deals with the broad strokes of the regulatory agencies and government entities that will operate in the sector.
Furthermore, while one of the stated objectives of the 2012 draft PIB was to “deregulate and liberalise the downstream petroleum sector”, the PIGB might not be geared towards the same goal.
In particular, Section 4 of the PIGB provides for the establishment of the Petroleum Equalisation Fund (PEF) to replace the one that currently exists.
The proposed PEF should be an upgrade in terms of administration and efficiency, but given the stated ambitions of the original PIB, it is worth asking: is the PEF compatible with a liberalised petroleum sector?
Reform or repeal.
A civil rights activist, the co-founder Green Environment Advocate, Prince Godswill ThankGod Livingstone, proposed the scrapping of the agency, saying it is wrong of the government to reform an agency that has not added any positive impact on the industry.
“We know that government cannot let go of the downstream sector deregulation because it will always try to control the price, and that is why we are saying that the existence of PEF is over,’’ he said.
The civil rights activist observed that the PEF was set up in 1975 to ensure that prices of petroleum products like kerosene and petrol are the same across the country.
“Let me educate you here, the PEF’s ability to do this is made possible by the way petroleum products are priced.
‘’The Petroleum Products Pricing Regulatory Agency (PPPRA) sets a uniform price for petrol and kerosene that incorporates allowances for transporting fuel.
“Marketers pay the allowances to the PEF from fuel sales, and the fund redistributes the money to sellers based on how far away from a depot their products were sold.
“While this may work in theory, as stakeholders have previously argued, the PEF’s track record of price equalisation has been questionable.”
However, this kind of price-setting, according to him, is not compatible with a liberalised downstream petroleum sector.
He added, “If marketers are allowed to operate in a competitive market, they will price petroleum products based on how profitable it is to sell in a given area, regardless of the location.
‘’Changing transport costs and demand means that prices may fluctuate on a frequent basis, making it difficult to implement the same kind of compensatory scheme in place at the moment.
“This is why the 2012 draft PIB effectively pushed to dissolve the PEF and deregulate prices. An earlier version of the PIGB did not include a section on the PEF, but the bill was modified at the request of the Nigeria Union of Petroleum and Gas Workers (NUPENG) and the Petroleum and Natural Gas Senior Staff of Nigeria (PENGASSAN).
“The new fund is still charged with uniform pricing, but the PIGB does not indicate that it will ever go away.”
Holes in deregulation
The Nigerian Labour Congress (NLC) and its affiliate bodies have been at daggers’ drawn over the Minister of State for Petroleum, Timipre Sylva’s disposition in the new form of price deregulation.
Early this month, the minister had described deregulation as the total removal of government control of the prices of petroleum products, a position which he said, was accepted by the labour team at their September meeting.
But the Deputy President of NLC, Joe Ajaero, in a chat with ThisNigeria, debunked the minister’s claim, saying, “How can government give a new definition to deregulation? If the sector has been truly deregulated, why is the price of petrol uniform across the country?
“In a deregulated environment, the price in Lagos will be different from that of Sokoto or even Calabar.
“Also, labour did not accept a deregulation that is based on importation. We said government should revitalise the refineries first. That has not been done. All what we requested at the meeting was a return to status quo ante.
“We cannot agree on some items and the next thing government would do is to increase the price in the middle of a discussion. This was the point we raised when the minister of labour said the meeting was his and so he determines what happens. It was at that point that we left the meeting.”
Another Deputy President of NLC, Dr. Nasir Idris, gave the terms and conditions for suspending planned September 28, 2020 protests against fuel price and electricity tariff increments.
“The conditions include fixing the existing refineries, entrusting them to efficient managements, creating an enabling environment for new refineries, and doing all positive things that would ensure enhanced and sustainable local refining capacity.
“Furthermore, a government/labour committee is to be set up to review the increase in electricity tariff.”
According to Idris, “there is nothing in the agreement that gives government licence to embark upon pain-inducing and life-crippling increase in pump price of products at this difficult time.
“Indeed, the letter and spirit of the terms and conditions of the agreement presuppose that contemplation of an increase would constitute a breach of the dialogue process.”
Beyond Equalisation
A former deputy secretary-general of NLC, Mr. Titus Oyeleke, said, “Let us re-examine the rationale for a uniform pricing scheme.
“If the goal is to ensure that areas without depots are not left behind in economic development, it is time to explore alternatives that would achieve the same ends without the current market distortions.”
Oyeleke opined that one option would be to offer extra funding to states that do not have depots.
“Indeed, this comes with its own set of political hurdles, and a plan like this would likely be as controversial as the long-proposed Host Communities Fund,’’ he said.
In his view, there is also the matter of perverse incentives as certain states may prefer to have non-functional depots, but to collect cash instead.
“An alternative would be to invest in more infrastructure: pipelines, depots and refineries to permit cheaper product transportation across the country,’’ he said.
His words, “Unfortunately, this approach requires time. In the long run, however, Nigeria would benefit more from infrastructural investment than consumption subsidies.
“For one, it would reduce the cost of transporting other products like diesel that are not currently subsidised by the PEF. It would also relieve pressure on our road network and decrease the number of deaths and injuries from petrol tanker-related accidents.
“The PIGB does seem to account for this by including a requirement for the PEF to fund ‘infrastructural development’. However, the bill does not specify which kind of infrastructure qualify for funding, and it is equally vague on the nature of the additional financial support it is to provide at the minister’s discretion.
“Since this spending will be in addition to the usual uniform pricing payments, we should expect the PEF’s expenditure to be significantly higher in the future. Where will all the money come from?
The five per cent debate
One of the questions industry stakeholders ask persistently is about the most significant changes to the PEF, which indicated that it would be funded by a five per cent levy on “all fuel sold and distributed in the federation”.
Interestingly, this is subject to approval by the minister, which implies that the tax may not be charged if the minister does not consider it necessary or feasible.
More importantly, the PIGB does not clarify whether this levy would replace the current source of funding for the PEF (the allowances built into the prices of petrol and kerosene).
It also leaves open the question of VAT on petroleum, a product which is currently unresolved.
Perhaps tax matters are reserved for a future bill, but it is worth pointing out that if both VAT and the PEF levy are charged on petroleum products, it will present a non-trivial tax burden to consumers.
Across the board
ThisNigeria gathered from a former group general manager, public affairs of the Nigerian National Petroleum Corporation (NNPC) who craved anonymity, that regardless of the PEF’s ultimate role in a reformed petroleum sector, its effectiveness will be mainly determined by its leadership.
In this area, he said, the PIGB does make multiple changes designed to make the fund’s management more transparent.
He described the move as ‘quite unfortunate’, since the new PEF would be having 12 board members, which doubles the number in the current PEF Act, including an executive secretary and three executive directors who are appointed by the Minister of Petroleum Resources.
He said, “Under the act, in a bid to constrain some of the minister’s discretionary powers, appointees are required to have 10 years’ relevant experience and are limited to two terms of four years each.
“This will presumably ensure that the appointments to the board are more likely to be based on merit and aptitude, than as a reward for political supporters.”
However, stakeholders still believe that there are still avenues for abuse of power. For example, while the PIGB prohibits appointees from having financial conflicts of interest, it also gives the minister considerable leeway in waiving this requirement.
And although the bill states that fund would be ‘independent’, it is also required to implement policy directives from the minister. It is unclear who the fund is independent of.
Altogether, while the PIGB’s changes might increase transparency and accountability, it remains to be seen whether these changes would make it more efficient. And there remains the question of whether the agency should exist at all.
Amidst denial by the ministry of petroleum on the new increase in petroleum products across the nation, more retail stations are also being recorded without daily sales due to non- availability of Premium Motor Spirit (PMS), otherwise known as petrol.
The situation, however, has added more pressure on the few retailers who have limited stocks at their disposal.
Downstream deregulation
As the controversy over price per litre in the country continues, the government and indeed the agency saddled with the responsibility to ensure price control with government subsidy are expected to clarify certain issues begging for answers.