I will suggest we adopt a pricing model similar to that of South Africa. Prices are set by the government (PPPRA in our case) and updated at the beginning of each month. Variable allowances are set for each region to account for transportation cost differences, especially between coastal and inland regions. PPPRA could then retain the floating margin of N6.74 in the pricing template but expunge the bridging fund. It should then divide the country into geographical zones based on the National Transport Average.
It is no longer news that the Federal Government of Nigeria has removed the much talked-about subsidy on Premium Motor Spirit (PMS) popularly called petrol. The announcement by the minister of state for Petroleum Resources, Ibe Kachikwu, attracted mixed reactions from Nigerians:
i. Those in support of the removal on a purely economic logic;
ii. Those who support the removal but believe the timing is wrong;
iii. Those who now support the removal because they voted for the current president and can trust the incumbent government more than the previous one;
iv. Those who are purely against subsidy removal, and;
v. Those who are against the subsidy because the current proponents were against same policy by the previous government.
I have read arguments and counter-arguments on social media on why those who led the nation to ‘Occupy Naija’ protests in 2012 should or not do the same now. Whatever side of the divide we belong to, however we twist history or ‘sugar-coat’ what we say, it was wrong to oppose fuel subsidy removal in 2012 and it is wrong to attempt to oppose it now or rubbish the current attempt made by the government.
Where do I belong? I support subsidy removal. I’m also a believer in the school of thought that we need some level of price control to ensure consumers are protected from arbitrary prices by marketers. What I disagree with is making me as a consumer pay for the inefficiency in the importation value chain and spurious cost elements in the pricing template.
I will attempt to review all the elements of the current PPPRA PMS pricing templates and give my view on each of them. The views are based on information available to me. Most of the information I use in this article are available on PPPRA website. My views could change if I have any other information that invalidates any of my current assumptions.
I have categorised the cost elements on the PPPRA templates into two — Landing Costs and Distribution Margin. Landing Costs are typically costs associated with the foreign purchase of petroleum products, freight and delivery into the depots at the ports. Distribution Margin are in-country costs incurred in order to move the petroleum products from ports of delivery to the consumer, mostly into the cars and unfortunately into generators.
The contribution of the different cost element to the final retail price is depicted in the picture below:
Landing Costs
1. Product and Freight Cost (C+F): Product cost represent the monthly moving average cost of products as quoted on Platt’s Oilgram. The reference spot market is North West Europe (NWE). Freight cost is the average clean tanker freight rate (WorldScale (WS) 100) as quoted on Platt’s. It is the Cost of transporting 30, 000MT (30kt) of product from NWE to West Africa (WAF). Freight rates are based on publications by London Tanker Brokers Panel on January 1 each year. There is also Trader’s margin of $10/MT factored into the Freight cost.
This cost element also includes Insurance costs associated with product importation. There is a War Risk Insurance which is charged at a weekly rate of between $10,000 — $12,000 for standard vessels. This comes to between $0.67 — $0.8/MT. Also, petroleum products are imported using foreign flagged vessels as against Nigerian vessels due to concerns around the ship worthiness of the Nigerian vessels. This leads to an additional increase of N1 million for the Temporary Import Permit (TIP).
C+F is currently N109.16 on the pricing template. It represents 79 percent of the Expected Open Market Price (EOP) of N138.26 or 75 percent of the current retail price of N145.00.
My View: We cannot do anything about this cost. Without local refining, there is a near zero opportunity to reduce this cost element. If we refine locally, the freight cost, which is abysmally high because of insecurity and activities of pirates, will be eliminated. However, PPPRA should separate product from freight and insurance costs on the template for more transparency. The Trader’s margin which comes to N2.22 per litre (using N298:$1) should be removed if it has not been removed already. It is like rewarding an importer twice since we already made provision for the profit margin.
2. Lightering Expenses: This refers to Ship to Ship (STS)/Local Freight Charge incurred in the trans-shipment of petroleum products from a mother vessel to a shuttle vessel, for onward movement of both vessels into the jetty. Lightering is included in the template because our ports have low draught and cannot accommodate vessels of high dead weight.
This charge includes receipt losses of 0.3 percent in the process of products movement from the high sea to the Jetty and then to the depot. The mother vessel’s expenses are based on the allowable 10 days demurrage exposure at the rate of $28,000 per day.
The Lightering Expenses also include the Shuttle vessel’s chartering rates from Offshore Lagos to Lagos and Port Harcourt. Transshipment (STS) process is as a result of peculiar draught situation and inadequate berthing facilities at the Ports.
These cost element contribute N4.56 to the current EOP.
My View: The deep-sea port in Lekki should resolve some of these issues when completed. However, allowing 10 days demurrage which comes to $280,000 on each vessel amounts to rewarding inefficiency in the system. We can make some savings here to reduce the EOP.
3. Financing Cost: This is the cost of funds for the imported product. It includes the cargo financing based on the International London Interbank Offered Rates. This element contributes N2.51 to the current EOP.
My View: This is a valid cost item which needs to be included in the template. On a good note, the interest charge on the subsidy element which has an allowable 60 days period at Nigerian Inter Bank Offered Rate (NIBOR) seems to have been expunged as expected.
4. NPA Charge: This is the cost to utilise jetty facilities based on the tariff set by the Ports Authority. Jetty facilities are utilised to off-load petroleum products from vessels into on-shore storage facilities. This cost element contributes N0.84 per litre or $3.8 per metric tonne of petrol to the pricing template.
My View: PPPRA needs to be commended for bringing down the NPA charges from $10.5/MT to the $4/MT. However, NPA needs to justify these charges by ensuring the ports do not contribute unnecessarily to vessel demurrage and bottlenecks.
5. NIMASA Charge: This refers to charges on each vessel by the Nigerian Maritime Administration and Safety Agency. This contributes N0.22 to the current pricing regime.
My View: This is an unnecessary charge on the template. Government can waive this on the importation of petroleum products.
6. Jetty Throughput: This is the tariff paid for use of facilities at the Jetty by the marketers to move products to the storage depots. NNPC uses its own Atlas Cove Jetty. The value is currently N0.60/litre.
My View: This is a valid cost and will encourage investment in jetties.
7. Storage Charge: Storage Margin is for depot operations covering storage charges and other services rendered by the depot owners. The charge is currently N2.00/litre, down from N3.00/litre previously.
My View: This is a valid cost and will encourage investment in depots especially in other locations such as Lekki, Calabar etc.
Distribution Margin
1. Retailers Margin: The margin allows for costs incurred by the retail outlet operator in selling petroleum products. In this cost, account is taken of all related costs such as rental, interest, labour and overheads. This contributes N6.00/litre to the EOP.
My View: I do not understand the basis for increasing the margin from N4.60 to N6.00/litre. Any serious player will look for efficiency in the chain to make sure he maximises margin. Consumers should not pay for inefficiencies.
2. Transporters Allowance: Margin for trucking petroleum products and distributing to retail outlets. Transportation is either by road and pipeline or by a combination, from coastal to inland depots. This element contributes N3.36/litre to the open price.
My View: This charge provides excessive rewards to marketer/retailers who sell their products in Lagos, south-western states and other coastal states where transportation cost is less than N2.00/litre. I will come back to this later.
3. Dealer Margin: Margin for procurement, importation and clearance of petroleum products till the point it is stored in the depot. This cost element contributes N2.36/litre to the current pricing calculation.
My View: This charge assumes that some individuals will only import the products and sell to retailer at the depots. However, there is already a provision of N2.13 as trader’s margin in the C+F cost. Therefore, I consider this cost as double-counting. It should be removed from the template.
4. Marine Transport Average: MTA is for movement of petroleum products to riverine areas that are not accessible by road through floating jetties. This represents N0.15 on the template.
My View: This charge should be scrapped. The volume of petrol transported through this medium is negligible compared to average national consumption.
5. Admin Charges: This cost component accounts for the services of PPPRA, DPR for documentation activities. This represents N0.30/litre on the template.
My View: This charge should be scrapped. We pay taxes to government. These should be used to fund agencies to perform their statutory roles.
6. Bridging Fund: This is the transport cost for distribution of petroleum products from coastal regions to the inter-lands (up-country) that are outside the boundaries as defined in National Transport Average (NTA). It ensure products are sold at same price all over the country. This represents N6.20 on the price template.
My View: To me, this is the most ridiculous item on the template. Should we still retain Petroleum Equalisation Fund with the removal of subsidy? I believe this cost should be scrapped. There are a lot of incentives already in the template that allows retailers to sell products within the price band in Sokoto, Kano, Maiduguri etc. We should remove all avenues for corruption associated with managing the fund. It has never been successful. I live in Lagos and I do not want to pay extra N6.20/litre so that fuel can sell at same price in Kotangora. The same principle applies to food commodities like yam and tomatoes which are more expensive in Lagos than Paiko (Niger State) and Katsina respectively. Let each enjoy his/her geographical advantage. If the government is courageous enough to remove subsidy, same courage should be applied to removing the bridging fund.
Exchange Rate
This is the main driver of the new pricing regime. Any upward or downward movement of the exchange rate will have significant impact on the fuel price. PPPRA has pegged the exchange rate at N298:$1 in the latest pricing template. Many analysts believe that by this single action, the government has unofficially devalued the naira. It will be interesting to note that naira fell to about N345:$1 in the parallel market in response to the subsidy removal by government.
How sustainable is this new ‘official’ rate? Only time will tell. If the marketers are not able to source USD at N298 and the template needs to be adjusted to N320:$1, open market prices will be about N150/litre thereby moving the upper limit of the price band to around N160/litre.
Talking about the upper limit of N145/litre as the retail price band given by the government, this to me is over-rewarding the marketers. The EOP of N138.26 already provides N6.00 as retailers margin (up from N4.60), N2.36 as dealers margin etc. So why create additional margin of N6.74/litre (N145 minus N138.26) for the marketers? We know fully that marketers will opt for the upper limit of the price range.
This is a very good time for NNPC to be profitable in its retail business. The Honourable minister of state/ NNPC GMD said NNPC will compete fairly with other marketers in the city but sell close to N135 in remote areas. Three questions are still begging for answers though:
a. How many NNPC outlets are in the remote areas vs city, and what’s NNPC’s definition of remote areas?
b. Thanks to the efforts of the current regime, the refineries are now working at ~40 percent. Would we be paying N145 too for the locally refined products at NNPC outlets? Bearing in mind that freight and some other costs have been eliminated.
c. What rate is NNPC sourcing its forex? If NNPC gets it at N197, why should it sell at N145/litre?
In conclusion, I will suggest we adopt a pricing model similar to that of South Africa. Prices are set by the government (PPPRA in our case) and updated at the beginning of each month. Variable allowances are set for each region to account for transportation cost differences, especially between coastal and inland regions. PPPRA could then retain the floating margin of N6.74 in the pricing template but expunge the bridging fund. It should then divide the country into geographical zones based on the National Transport Average. We will then have the upper limit of the band (N145/litre) for Sokoto and Maiduguri while the lower price band (N139/litre) is enforced in Lagos and other cities in Zone 1.
Lest I forget, Yoruba people are very good at forming greetings for any occasion. There are different greetings for early morning, late morning, early afternoon, late afternoon, evening, night etc. I was jogging within my estate on Wednesday, the day subsidy removal was announced. Someone I knew just stopped me and greeted me in Yoruba “Eku ko si subsidy mo”. I gave him a cynical grin knowing well that it will now take about N14,000 to fill my tank.
To all reading this piece, Eku ko si subsidy mo oh!
demaikel@gmail.com
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