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Government can remove fuel subsidy, but it must first win the trust of the people through action

Deregulation is a sensitive and emotional issue; it divides Nigeria into various ideological camps and could sometimes be as delicate as the country’s thin religious lines. Previous governments who have flirted with the idea of deregulating the downstream petroleum sector have hastily dropped it because of the lack of political will on an imminent Pandora box. As a stop gap measure, successive administrations in Abuja have resorted to increasing fuel prices and at a time erroneously ending the toll taxes on the inter-state highways as a bargaining chip with opponents of deregulation. As a result, the price of fuel rose over 12,000% between 1990 and 2005. Each round of increase faces stiff opposition from civil right groups and the labour unions.

Protagonists of the fuel subsidy argue that Nigeria by virtue of its generous supply of hydrocarbons should provide its citizens with cheap fuel even if it has to be subsidised. Nigerians are quick to brag about the country’s status as Africa’s biggest oil producer and the world’s tenth largest producer. They also argue that should Nigeria remove its fuel subsidies, it will be one of the few in the top OPEC echelon to deny its citizens this subsidy. According to AirInc, a company that tracks the cost of living in various places around the world, a few Latin American and Middle-Eastern nations, such as Venezuela and Saudi Arabia, keep oil prices low for the benefit of the nation’s citizens. These countries produce oil through government-companies which also ensure that citizens get cheap gasoline in the local market. On the other hand, many European nations tax gasoline heavily, with taxes making up as much as 75% of the cost of a gallon of gasoline.

“Fighting cartels is hard”

Amongst many factors, those who favour the retention of the petroleum subsidy insist that corruption is the major reason why deregulation is failing in Nigeria. They therefore argue that instead of removing the petroleum subsidy, the corruption that weakens the effectiveness of the subsidy should be addressed. Paradoxically, friends and foes of the subsidy agree that corruption is the problem; but even the propositions from the two camps on handling the corruption bit of the petroleum subsidy further polarises the groups. Talks of simply removing the corruption layer and getting the petroleum subsidy right appear idealistic and may not be far from utopian considering the depths of corruption in Nigeria. According to the authoritative Economist magazine “fighting cartels is hard”. Painting a graphic picture of the corruption around Nigeria’s fuel subsidy regime, the Economist explains that fuel importers “routinely falsify bills of lading, inflate the amount of fuel imported fivefold, then collect the government subsidy on all of it, and finally smuggle the fuel to a neighbouring country to sell at double or triple the price”. Reformers who favour the removal of the petroleum subsidy argue that the current system of subsidised petroleum serves as the nursery for the patronage system from where corruption blossoms. Eliminating this regulatory system which promotes rent-seeking will inadvertently check corruption. It will also help promote a free market and engender competition. Pro-deregulation reformers have local landmark testimonies to draw reference from. Nigeria has risen to become Africa’s biggest telecoms market in just ten years of embracing free markets. In contrast, the government owned telephone company could only supply half a million lines in over 40 years.

What is the cost of Nigeria’s petroleum subsidy?

Since 2009, the federal government has been hinting that the price of petrol would be increased. The then Energy Minister, Mr. Odein Ajumogobia, said by December 2010 that the bill for fuel subsidy over the previous two years would hit N700 billion (about US$5 billion). According to him, this is unbearable, as it is of no benefit to the ordinary people on the streets. Indeed, it has been argued over the years that the ultimate beneficiaries of fuel subsidies are the contractors who import the products on behalf of the Federal Government.

In June 2010, Nigeria’s Central Bank Governor, Mr Lamido Sanusi said “the subsidies will cost the government N520 billion (US$3.4 billion) in 2010, compared with N1 trillion in 2009”. That compares with a federal budget deficit of N1.9trillion in 2010. According to Senator Saraki, “an amount of N240 billion (N20 billion monthly) was allocated to fuel subsidy in the “Appropriation Act and in 2011.  Of the N20 billion monthly allocated, N11.2billion was allocated for domestic fuel subsidy (NNPC) and N8.8 billion for domestic fuel subsidy (market) as stated in the Appropriation Act 2011.” Senator Saraki posits that although N240 billion was appropriated for fuel subsidies in 2011, as at August alone, N931 billion had been expended on the subsidy; representing a shortfall of over 280%. Petroleum subsidy is a first line charge in the budget which implies that it takes priority alongside other spending on independent bodies like the Judiciary. Once again, there is need to ponder whether to reform the management of the petroleum subsidy or simply remove the system that promotes this corrupt rent seeking and waste of resources.

Local refining first, subsidy removal to be discussed afterwards

Is subsidy related to just importation? If Nigeria achieves self-sufficiency in local refining and importation stops today, would there still be a budget for subsidies? These questions are often taken for granted by government officials, whereas they may be at the heart of the debate. The focus has always been on the amount spent on importation of products without any attention to several other issues that are critical to answering the question. In opposing the pump price cut in January 2009, labour argued that basing local pricing on imported products is not a feasible way of calculating the subsidy. The first step is to achieve local sufficiency in refining in order to be able to determine the actual economic price of the products. This argument however is subject to criticism on two fronts. One, the major difference in the prices of imported and locally refined products will be the cost of shipping – which some say is negligible. For as long as the local refineries buy crude oil at the international prices, the prices of end products would be similar. Two, subsidy is defined in two ways, the first being the difference between the cost of production and sale price, and the second being “opportunity cost”, that is: at what price can I sell my product in another market? Therefore, the opportunity cost of providing subsidy is germane to the entire debate.

Building a refinery cannot be that difficult, can it?

Iraq, still smarting from an internal war, has managed to put a new refinery on stream despite its political and economic fragility and the climate of instability. This crude oil distillery unit at the Dura Refinery in Southern Baghdad was inaugurated on January 26, 2009. It will produce 70,000 barrels per day. At the official opening ceremony, Iraq’s Minister of Oil, Hussein al-Shahristani, said his country would increase its oil refining capacity to become self-sufficient in oil production by the end of 2010. Although due to growing local demand, the country is not yet self-sufficient in oil refining, it has announced the plan to build a fifth refinery that will be completed by end of 2012.  In spite of recently announced plans to end fuel importation by 2020, the Nigerian government still remains aloof on when it would achieve self-sufficiency as all refineries are not only down, but even when fully operational, their collective production output will be inadequate to meet increasing local demand.

To the public, government cannot be trusted to deliver on promises

At a town hall meeting organised by the News Proprietors’ Associations of Nigeria (NPAN) on Thursday 22nd of December, 2011, the Federal Government of Nigeria in an interactive session with stakeholders explained with a large degree of precision the consequences of continued subsidy payments. The issue of the petroleum subsidy has been much discussed over the years with subsidies subjected to progressive reductions over the years due to financial necessity, however this time around; the government seeks to abruptly remove the economic cushion enjoyed by the masses, because the huge financial burden is considered inefficient and diverts resources away from potential investments in critical infrastructure. The government estimates the total projected subsidy re-investible funds per annum at N1.134 trillion based on a probable average crude oil price of US$90 per barrel. Out of this, N478.49 billion accrues to Federal Government, N411.03 billion to State Governments, N203.23 billion to Local Governments. Each tier of government is expected to design its own utilization programme.

The subsidy removal policy should be a win-win situation for the government and the people.

We understand the government’s position and fears, which is mainly the potentially disastrous effect an unsustainable and continuously increasing subsidy bill would have on the economy.   Also current economic contractions across the Eurozone and the developed nations have intensified apprehensions. We also commend the government for actively interacting with the citizenry on such topical and important issues, steps which are novel and dissimilar from predecessor administrations.

However we feel the recommendations given in the town hall meeting should be taken on board such as subsidizing transportation for the masses, power generation for homes and the political will to ensure proper implementation whilst sanctioning erring officials. Also to build trust from Nigerians, we also think it would be wise to have an assessment period for projects execution before the total removal of the subsidy.