Conduct appraisal of the refineries continues; Cost Benefit Analysis (CBA)
In carrying out the appraisal of the refineries, one of the key activities is to carryout the Cost Benefit Analysis (CBA). A lot of government and private organization do not carry out comprehensive CBA, this usually lead sinking in finance/funds into a non-economical and non-financially viable project. In the case of the government own refineries in Nigeria, it is proper for any private investor and government to conduct comprehensive Cost-Benefit Analysis on the refineries before sinking in funds/finance into the significant rehabilitation of the refineries.
Definition of CBA
(Kee 2005) defines Cost Benefit Analysis (CBA) “as an economic technique that attempts to assess a government program or project by determining whether societal welfare has or will increase (in the aggregate more people are better off) because of the program or project. At its greatest degree of usefulness, Cost-Benefit Analysis can provide information on the full costs of a program or project and weigh those costs against the dollar value of the benefits. The analyst can then calculate the net benefits (or costs) of the program or project, examine the ratio of benefits to costs, determine the rate of return on the government’s original investment, and compare the program’s benefits and costs with those of other programs or proposed alternatives”.
Also read: REVIVING NIGERIA’S REFINERY THROUGH PUBLIC PRIVATE PARTNERSHIP
CBA in broad terms has been considered in terms of direct or indirect, internal or external. External factors are those which affects the third parties beyond the population which to which the project addresses. Direct benefits could be accessed through the local markets, i.e. is there demand for petroleum products in the Nigerian market? Also, beyond the Nigerian market, are there other climes where petroleum products could be sold in the event that Nigerian market is saturated?
In the case of Nigerian owned refinery, Nigerians consume approx. 36 million litres of Premium Motor Spirit (PMS) popularly known as petrol daily. This figure represents a huge market for petroleum products in Nigeria. The Dangote Refinery possess the capacity to produce PMS and other products for Nigeria’s consumption. However, it is necessary for Nigerian own refineries to be productive in order to create competition within the subsector. Although the petroleum sector in Nigeria has been somewhat liberalized, the need for government own refineries to work optimally will serve as a check to Dangote refinery.
One of the ways to ensure the workability of government refinery is its procurement through the use of Public Private Partnership as a Yellow Field Project.
In calculating the CBA, most of the cost are direct cost such as cost of the investment and other cost of works done. In the case of the refineries which are at various stages of Yellow Field, the cost of rehabilitating which include major renewals of obsolete parts and retrofitting of modern parts will form part of the direct cost. The project indirect cost as well as negative externalities will also be incorporated into the CBA.
Other concept to be considered is Opportunity Cost which is the tradeoff associated with choices over another. In the case of Nigeria, government may decide not to pay attention to the refineries in terms of abandoning the infrastructure or providing grant financing as well as certain conditions that may derisk the project but decide to invest the money in another project such as roads or payment of subsidies.
Regardless of whether the project will be procured as PPP or not, CBA is to be adopted before any project/infrastructure is carried out.
In the next episode, we will continue to discuss appraisal of the current stage of Nigeria’s refinery for the benefits of intending investors.
