Experts are of the opinion that opposition against the removal of fuel subsidy are driven by sentiments, and that its removal is a necessary price to pay for the socio-economic transformation Nigerians crave
It has been an uphill task for President Goodluck Jonathan to convince many Nigerians that there is subsidy on petroleum products, let alone persuade them to believe that removing it is the tonic for re-invigorating his administration’s economic transformation agenda. The President, for instance, argued passionately that the removal of subsidy would lead to increase in government revenues and substantially raise the pool of funds available to the various tiers of government to fund crucial infrastructure programmes that would impact positively on the lives of the common people, predicting that the country would collapse if the subsidy was not withdrawn. Government also disclosed that it has been subsidising fuel consumption for many years, and that in 2011 alone, about N1.3 trillion would be paid out as fuel subsidy, an amount that far outstrips this year’s budget provision for subsidy of $6 billion or N930 billion.
Although there is no provision for fuel subsidy in the 2012 budget, which is a pointer that there is no going back on the administration’s resolve to do away with subsidy on fuel prices beginning from the 2012 fiscal year, a groundswell of opposition has continued to mount against the policy. The Nigeria Labour Congress, Trade Union Congress, the opposition parties and some concerned Nigerians have so far refused to be swayed by government’s argument in favour of subsidy removal. Opponents of the policy have been spoiling for war, threatening to shut down the country should the federal government go ahead to withdraw subsidy on petroleum products. Their grouse is that the withdrawal of subsidy would trigger inflation, leading to loss of jobs in an economy where the rates of unemployment and poverty are already high. They also fear that the development would in turn lead to social unrest and threaten the fragile stability of a country still grappling with the high incidence of insecurity.
Real and genuine as some of these fears might be, those who are knowledgeable in the dynamics of contemporary Nigerian political economy, including analysts and experts in the global oil industry, say that opponents of fuel subsidy removal are rather too emotional in their arguments. This school of thought argues that no economy is managed on emotions, but on sound reasoning, which in this instance favours fuel subsidy removal. They contend that the rule of demand and supply works in every market, and that Nigeria will continue to play the loser if the country closes its eyes to the politics and economic reality of fuel subsidy. Part of that reality is that fuel subsidy has become unsustainable and that there is need to fully deregulate the oil sector and leave the determination of prices of oil products to the forces of demand and supply.
Ross Alabo-George, chief executive officer and principal consultant, Proxy Logics Nigeria, a Port Harcourt-based firm of geo-information and planning support system consultants, noted that most of the arguments against the removal of subsidy are made in isolation of the situation in other oil-producing countries that are, like Nigeria, members of the Organisation of Petroleum Exporting Countries, OPEC. “The convictions and posturing of our political thinkers on fuel subsidy are based on reasons that surpass normal political and economic logic,” he said, adding that opponents of fuel subsidy removal are either unaware or chose to ignore the fact that gross domestic product, GDP, consumption and population are the dominant indices for any discussion on energy subsidy of any kind.
Nigeria, despite being the most populous nation among oil-producing countries, has the least fuel consumption rate. For instance, Kuwait has a population of 2.5 million and daily fuel consumption of 42.7 million litres per day, about 10 million litres more than Nigeria’s 31.8 million litres daily consumption (See Table). Alabo-George explained that rather than subsidise fuel, Russia, which exports about five million barrels of oil daily and has the largest energy reserve in the world, leaves no room for waste. A litre of fuel in Russia sells for about N130, about double the subsidised price in Nigeria.
Instead of subsidising fuel prices, the Russian government imposed a fuel tax.
The International Energy Association figures show that the actual price of fuel in Russia before tax is about N65. The other N65 is basically tax that goes back into the federal coffers. According to Alabo-George, this was money the Russian government used to service the economy, create jobs and develop infrastructure. And, this, the country did by liberalising the market, levelling the playing field for private refineries to thrive. He, however, argued that unlike Russia, President Jonathan does not intend to tax petrol, meaning that in a few years, once a couple of refineries start running, fuel prices would return to ‘normal’. Nearer home, Ghana, which recently struck oil in commercial quantity, plans to sell petroleum products at market prices.
Adeola Adenikinju, a lecturer in the Department of Economics and Centre for Petroleum, Energy Economics and Law, University of Ibadan, did not mince words when he said that recent events have shown that current subsidy situation on fuel is no longer sustainable. “Price deregulation is fundamental to the growth of the downstream oil sector. Current dependence on imports, collapsing supply and distribution infrastructure and poor state of the refineries require a change in government policy in the sector,” Adenikinju said in a paper he presented at a recent seminar on the state of the Nigerian economy organised by the Nigerian Economic Society. According to him, the rising crude oil prices, deteriorating exchange rate, and fiscal challenges facing the government required a change in policy. He, however, pointed out that while fuel subsidisation is a common feature in most oil-exporting countries, efforts are also being made in those countries to address the heavy burden of fuel subsidy.
However, efforts to address this heavy burden called fuel subsidy has met stiff resistance largely because of lack of trust. Besides, issues around the Nigerian oil and gas industry, particularly subsidy removal, are very emotional. This is understandable. Nigeria is a mono-product economy with crude oil accounting for about 95 per cent of its foreign exchange earnings. Unfortunately, the huge earnings from oil in the last 50 years have not translated to better life for ordinary Nigerian due to lack of transparency in the management of oil proceeds.
A reliable source close to the ministry of finance confirmed to the magazine last week that the greatest challenge facing the administration’s reforms, particularly the policy to phase out fuel subsidy is, indeed, lack of public trust. According to the source who pleaded anonymity, Nigerians are suspicious of every move government makes. Current arguments either in favour or against subsidy removal are a rehash of what Nigerians hear each time the issue of deregulation of the oil sector is raised. Also not new is the issue of government’s offer of palliatives aimed at cushioning the pains that may arise from subsidy removal. That the government would create safety nets to cushion the negative impact the withdrawal may cause, build more refineries through private-public partnership, build and rehabilitate roads, expand the rail networks, among other measures, is seen as a repeat of what Ibrahim Babangida, Sani Abacha (late) and Abdulsalami Abubakar, former military heads of state, and Olusegun Obasanjo, former president, had promised the nation each time they felt the need to increase fuel prices. Perhaps, it is this lack of trust that is fuelling doubts that fuel subsidy exists in the first instance.
But it is undeniable that fuel subsidy exists. For instance, the pricing template of the Petroleum Product Pricing Regulatory Agency, PPPRA, shows that as at August 15, 2011, the landing cost of a litre of petrol is N129.21 while the margin for transporters and marketers is N15.49. The expected pump price is N144.70, while the official pump price is N65. This means that the federal government pays N79.70 as subsidy on each litre of petrol consumed in the country. With about 32 million litres of petrol consumed daily across the country, it also means the government is paying about N2.6 billion as subsidy every day, which translates into N18.2 billion per week and N72.8 billion per month.
At present, the country imports most of its petroleum products with the four existing refineries all working at below capacity. Nigeria has an installed crude refining capacity of 445,000 barrels per day, bpd, but currently, the existing refineries are performing below 30 per cent capacity, an output considered insignificant when compared to the national demand. Omotunde Ilori, a retired justice and chairman, Union Atlantic Petroleum Company, one of the private refineries, noted that if Nigeria has four private refineries with each refining 100,000 bpd, the question of importation would not arise and the huge cost associated with it will be avoided.
Ilori explained the reality of fuel subsidy thus: “When other countries that have refineries come to buy crude from Nigeria they pay sundry charges such as freight, port charges and insurance, among others, before they ship the product. The same charges are replicated in their home countries before the crude goes into a refinery. After refining, the product goes through the same process when they are bringing the refined products into the country. All of these costs are ultimately transferred to Nigerian consumers at the end of the day, which is why the pump price of petroleum products is very high in Nigeria compared to other countries that have refineries.”
But why have the private refineries not come on stream despite the recent renewal of licences of eight private refinery operators by the federal government? Experts in the oil and gas industry who spoke with the magazine said that the same full deregulation of the downstream sector of the oil industry, which government is trying to achieve by removing subsidy on fuel prices, allowing the forces of demand and supply to determine prices, is central to the workability of the private refineries. Under the current situation where the price of products is still being determined by government, investors in private refineries are wary of putting their money in the business. The fear of the investors is that with the industry yet to be fully deregulated, they might not be able to recoup their investments as quickly as possible, especially considering the fact that the business is capital intensive. The belief, therefore, is that investors are deliberately biding their time until the industry is fully deregulated before investing their money.
The connection between the removal of subsidy on fuel prices and the take off of the private refineries, including the revival of the four state-owned refineries in Port Harcourt I and II, Warri and Kaduna, is also not lost on Lamido Sanusi, governor, Central Bank of Nigeria, CBN. “As governor of the CBN, we are not too excited about the inflationary prospects of subsidy removal but, do you really think Nigeria can afford to continue paying a trillion naira every year in subsidy?” he asked, adding, “…we are not getting any investment in refinery because nobody will invest in a refinery or in a market that depends on government subsidy and where you are not really in a free competition because of the distortion in the system.” Sanusi posits that Nigeria is losing about $6 billion in external reserves as a result of subsidy.
What all of these mean is that if subsidy on petroleum products is withdrawn, it has the prospects of opening the floodgate for private investment in refineries and distribution networks to roll in. It would also create quality jobs locally and end the traffic gridlock caused by petrol tankers in cities like Lagos. Today, Nigeria is exporting jobs to countries from where it imports its refined products requirement. Besides, ending the subsidy, according to experts, would end the massive cross-border fuel smuggling estimated at around 20 per cent of the total fuel imported into the country, substantially reduce the corruption associated with it, result in vast improvements in the nation’s distribution infrastructure and bring to an end the perennial product scarcity in several parts of the country.
If subsidy is removed, experts also say that it would address the concern of some states which have argued that they are made to subsidise other states, either because petrol is never sold at the controlled price in their own states or because the burden of the subsidy which they bear is more than the proportion of the total domestic fuel consumption in their states or by their people. Proponents of the subsidy removal, however, say that while they acknowledge the real potential of an initial increase in the cost of transportation, a significant number of the commercial vehicles already run on diesel whose price has since been deregulated.
Cliff Mbagwu, an economist and management consultant, also threw his weight behind the removal of fuel subsidy. While noting that government is on the right track, he warned that fuel subsidy is unsustainable. Although he conceded the fact that the removal of fuel subsidy would cause inflation and widespread suffering, especially among the vulnerable members of the society, he said it would only be in the short term. According to him, in the medium to long term when competition among refineries, dealers and domestic market forces begins to impact on the market price of fuel and other derivatives, prices would fall to a level that would harm neither the masses nor the economy.
But before subsidy is removed, Alabo-George says that it is expedient to assess the extent of the immediate economic impact on the poor, and that the result of the assessment should be the President’s guide on whether to adopt the subsidy reduction strategy of Iran or the no subsidy approach of Russia. In adopting any of the strategies, he noted that government must show Nigerians that it is, indeed, ready to pay its own big price by eliminating inappropriate spending and pruning its recurrent expenditure.
Adenikinju could not agree less, pointing out that the greatest challenge in the transition from import to local sufficiency is overcoming the credibility challenges of government. This means that as poor Nigerians brace themselves for the transient hardship, which the removal of subsidy will bring, government should work on instilling trust in the public.
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