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Subsidy: Disincentive to downstream investment –Petroleum Club

By Adewale Sanyaolu

The Petroleum Club, an advocacy group of leaders in the oil sector, has warned that subsidy is a disincentive to both investment in the downstream and efficiency in fuel consumption.
According to its Chairman, Board of Governors, Mr. Godswill Ihetu, while the intentions of subsidy may be good, but it distorts the market because it also fosters various forms of corruption.
‘‘Government has to resolve the fuel subsidy issue completely. However, the immediate challenge is to ensure that the required subsidy amounts are paid and that all the petroleum products for which subsidies are paid do indeed reach the Nigerian consumers and that they do not pay more than the official price,’’ he said.
He added that petroleum products subsidy has been an issue in many countries around the world, stating that the trend has been to phase it out progressively.
Nigeria, he said, has also endeavored to move away from a subsidy regime and the prices of most products are no longer regulated.
However, he maintained that the price of petrol is still regulated and the level of subsidy is dependent on the prevalent international price, which, in turn, is dependent on the crude oil price, stressing that there has been a sharp increase in the crude oil price in recent months, which has resulted in higher petrol prices and consequently, a requirement for a greater level of government subsidy.
On refineries, he maintained that the problem has been studied in depth over the years but successive governments have had difficulties in implementing the recommendations, noting that efforts to privatise the refineries have been unsuccessful owing to objections from various stakeholders.
He reasoned that maintaining the current situation, whereby the refineries are simply departments of the Nigerian National Petroleum Corporation (NNPC), cannot solve the problem.
‘‘It is clear that private management and operatorship of the refineries is required as well as private investment for repairing, upgrading and, in due course, expanding them. If outright sale of the refineries is not desired, there are other models that can be adopted, which may be acceptable to all stakeholders, particularly if the process of bringing in the private investment is required’’.
He regretted that the current severe product shortage has resulted in friction between the government/NNPC and the Direct Sale Direct Purchase (DSDP) contractors, who have been accused of not importing the stipulated amounts of petrol and of importing larger amounts of deregulated products such as diesel, contrary to the provisions of their contracts.

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