Monday, January 2, 2012

Between subsidy removal and deregulation

There is a difference between subsidy removal and deregulating the downstream sector of the oil industry.  So far the debate has concentrated on the removal of fuel subsidy instead of deregulating the sector. Without a proper deregulation of the downstream end of the oil industry, the gains of subsidy removal will not be achieved.

For a better understanding between the removal of fuel subsidy and deregulation, we need to understand the deregulation that took place in the telecom sector. Before the deregulation of the telecom sector in Nigeria, NITEL was the monopoly player in the sector. The government first broke the monopoly of NITEL, then licensed other providers in the sector, and then gave the new operators incentives including a five year tax holiday and waivers on equipment imports to ensure that they were able start operations as fast as possible. The result has been the GSM revolution we have in Nigeria today. We all remember that the initial cost of acquiring a GSM phone was on steep side until the right regulation and competition resulted in the lower costs enjoyed in the sector currently.

This could happen in the downstream end of the oil industry if deregulation is pursued instead of subsidy removal. By deregulation I mean that, government should not just stop at removing subsidy as it has done now. It must go along with providing the necessary incentives to ensure that the required business activity in the sector that will ultimately benefit Nigerians take off.

The government has announced the removal of fuel subsidy, but we have not seen the incentives that will ensure we develop local refining capacity within the shortest possible time. Over 18 licenses for the establishment of local refineries have been issued for several years now. Not one refinery has been established till date. This is the time for the government to move immediately to find out what is holding back the holders of these licenses from building the refineries. Those holding the licenses as commodities must be made to give it up for those ready to start the business of refining fuel locally. 

The government must within the shortest possible time announce incentives and timelines for local refineries to take off. The existing refineries must be sold off immediately. The government has shown that it does not have the skill to manage these refineries.

The existing refineries can be sold to four different importers of refined petroleum products. They should be given incentives to get these refineries working again within the shortest possible time. The removal of subsidy will translate into suffering for Nigerians unless it is followed immediately with the incentives needed to get the downstream end of the oil industry working again.

It must also be followed with an active transport policy. The rail lines must be made to work again and fast. All work currently on going in the sector must be given immediate and urgent attention. If more goods and people can be moved across Nigeria by rail, it will create the needed efficiency in the economy and reduce the burden of cost of road transport. The private sector can also be incentivised to invest in the rail sector. There is an urgent need for Nigeria to move ahead with critical infrastructure if we really want to be a leading economy in Africa and become competitive globally. 

The privatisation and reforms in the power sector must be accelerated. The cost  impact of subsidy removal will greatly be reduced if Nigerians have stable electricity supply in their homes.

Finally, the road network and conditions must be improved urgently. It will be sad if Nigerians pay more for transportation and end up staying hours in traffic and bad roads burning away that expensive fuel. The government must be seen that after taking with one hand, it is giving with the other. For me, the pressure groups fighting against subsidy removal will do well to ask that the incentives and infrastructure that will make the pain of subsidy removal easy to bear go together. 

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