The current fuel crises in Nigeria and the harsh reality of falling oil price in the international market has once again open up the debate on deregulation of the upstream sector of Nigeria’s petroleum sector
Deregulation of the downstream petroleum sector refers to the reduction, or removal of government control, rules and regulations that restrain free operational activities in the sector. Deregulation leaves market forces as the sole determinant of product prices, which entails removal of any form of subsidy.
A subsidy is a reverse tax. It is a deliberate attempt by government to support a chosen economic agent –a consumer and a provider and it can be applied in any market that involves the buying and selling of products and or services. It is basically government action that decreases the consumption price of the consume and or increases the selling price of the producer.
In our own case, fuel subsidy is the money paid by the Federal Government of Nigeria to reduce the cost of refining petroleum products.
With debate for or against the removal of fuel subsidy, it is imperative that the regime be critically reviewed.
The issue of fuel subsidy removal has torn this nation into two factions. The government and economic experts on one hand, and the masses led by the labour unions and civil society organizations on the other hand.
Proponent of fuel subsidy had always argued that the regime is good if properly manage. They are of the view that the plan of the government to remove fuel subsidy may be a conspiracy by the high-class to have more money to embezzle, especially going by past records of our leaders misappropriating funds meant for the development of the nation.
They believe that since Nigeria is the biggest producer of oil in Africa, it should have no problem subsidizing petroleum products for its citizens.
The idea of fuel subsidy was to give an average Nigerians access to cheap petroleum products, reduced transport and production costs.
Nigerian economy over the years has been programmed to revolve around the supply of cheap petroleum products. An average household in Nigeria depends on subsidized by-products of crude oil such as petrol and kerosene for domestic and commercial use.
In the developing world, Nigeria inclusive it’s tempting for a country to keep the price of fuels artificially low. The subsidy can take the form of a price cap, preventing oil companies from charging too much at the pump. Or it can come as a tax break to a domestic oil producer, which then usually passes on the savings. In both cases, the government has to make up the difference.
Subsidies usually start as an attempt to avoid inflation and shield citizens from the pain of price increases in global energy markets. But energy subsidies are expensive; they eat up national budgets. Benefits end up going mostly to the richest citizens and crowd out more productive government spending on education or infrastructure and reduce energy efficiency. Subsidies mess with the law of supply and demand, discouraging investment in both alternative energy and fuel exploration.
Nigeria’s fuel subsidy scheme has created rent seeking opportunities, overnight billionaires and cabals that have corruptly fed fat from the inefficiency of an unsustainable regime. What is worse is that the fuel subsidy regime has stifled the repair and privatisation of existing refineries and the construction of new ones, it has impeded wholesale reforms at the state-run Nigerian National Petroleum Corporation (NNPC).
Fuel subsidy costs Nigeria over 1 trillion naira yearly. Last year, Nigeria borrowed a total of about 850 billion Naira to fulfill its subsidy obligation.
An analysis of the 2013 budget shows that allocation for fuel subsidy constituted about 20 per cent of the entire budget. It was also 10 times more than the appropriation for agriculture and rural development (N81.41billion), three times that of health (N279.23 billion), and twice of education (N426.53 billion). The vote for capital expenditure N1.54 trillion was just a little above the fuel subsidy.
The amount spent on petrol subsidy alone in eight years is 15.57 per cent higher than the N4.69 trillion 2014 national budget, and also 10.61 per cent more than the 2013 budget of N4.93 trillion. The subsidy spent for the year is almost twice or 196.07 per cent of education’s N495.28 billion and more than three times the N262.74 billion for health.
Nigeria consumes 35 million litres of fuel daily, part of it which is diverted into neighbouring countries. Also one-third of government expenditure which should be used on providing health services, security, employment, development of infrastructure and power is wasted on subsidy.
On January 1, 2012, Petroleum Products Pricing Regulatory Agency (PPPRA), the agency in charge of petroleum product pricing in Nigeria, announced the total removal of fuel subsidy in Nigeria.
The removal resulted in nationwide protest and harsh criticism of the then president, Goodluck Jonathan. State governors who once threw their weight behind the removal of fuel subsidies, were forced to beat a retreat in the face of the nationwide strike in 2012. This resulted in partial restoration of the fuel subsidies.
With the partial removal of the fuel subsidies, the government of Goodluck Jonathan put in place palliatives to ease the impact of partial removal of fuel subsidies. Government decided to channel its own share of the budgetary savings from the elimination of fuel subsidy into a combination of specific programmes that will stimulate the economy and alleviate poverty.
But as oil marketers and the Federal Ministry of Finance bicker over outstanding subsidy claims and exchange rate differentials, there is very little doubt that the current crisis could have been avoided had the Jonathan administration been allowed to do away with subsidies in January 2012 .
As the new administration of Muhammadu Buhari is settling down for governance, there are calls for total removal of fuel subsidy to open the sector for investment and invaluably create jobs for teaming unemployed Nigerians.
The government of Muhammadu Buhari has given indications that it will not continue with the fuel subsidy regime.
Among strong advocates for total deregulation of the sector is the immediate past Minister of Finance and Coordinating Minister of the Economy, Dr Ngozi Okonjo-Iweala. She disclosed that about $10.85 billion (N2.14 trillion) from the foreign excess crude revenue account savings went into fuel subsidy payments to petroleum marketers between 2011 and 2014.
A breakdown of her disclosure showed that $1.818 billion was spent in 2011; $2.63 billion in 2012; $3.26 billion in 2013; and $3.14 billion for 2014. While the subsidy payment for 2015 is not yet available.
She maintained that the funds should have been used in providing much needed infrastructural development in the country instead of being wasted on subsidy. Asserting that the removal will attract investment, increase refineries in the country, hence create jobs.
Oil mogul and a major player in the downstream petroleum sector, Dr Ifeany Ubah has since reiterated his call for the removal of fuel Subsidy.
Ifeanyi Ubah, who is also the Managing Director of Capital Oil and Gas Limited said total deregulation of the sector will not only cap the distortions of the market created by subsidy, but will also attract fresh investments into the sector.
He insist that deregulation of the sector will help genuine players in the sectors, saying “the only answer to fuel shortages or products scarcity of any kind, is deregulation.”
“I have always being of the view that we should deregulate so that we can cut out corruption but unfortunately Nigerians didn’t take it from Jonathan,” Ubah said.
“I urge president Buhari to take a bold step and deregulate the oil sector. He is not a stranger to the sector having being a former minister of petroleum. He will be respected for taking the step, there’s no point paying subsidy when Nigerians are not benefiting from it. The president will be doing the right thing if he deregulated the sector so that that the product will be sold at cheaper rate in the future,” he added
Adding her voice, Former Minister of Petroleum, Diezani Alison-Madueke stated during Nigeria Oil and Gas Conference in Abuja, that payment of subsidy on petrol ‘cannot be sustained any longer.’
“The subsidy policy cannot be sustained any longer. This is because the subsidy payment did not benefit the poor it was targeting, but rather it is benefiting the rich,” she added.
Mrs. Alison-Madueke said there was the need to deregulate the downstream oil sector to attract investors.
Senate president, Senator Bukola Saraki, in his call urged the Federal Government to completely remove fuel subsidy and restore normalcy to the sector.
Saraki said the subsidy was used to loot the national treasury on a yearly basis.
He argued that it would be better to remove fuel subsidy and deliver the sector and the citizenry from the grip of racketeers in the industry, who would never allow things to work well because of their selfish interest.
The President, Nigerian Association of Petroleum Explorationists, Mr. Chikwe Edoziem, argued that the only reason Nigeria is not self-sufficient in refined products, despite being the sixth largest producer among the OPEC members is because of price regulation
He noted: “I cannot bring in my capital, equipment and other resources to refine the crude and then you turn around to tell me how much to sell the products, irrespective of what my costs are.
“Business is not run like that, let the forces of demand and supply to dictate price and each marketer to sell at his own cost, and the situation will work better” Edoziem said
Also, the International Institute for Petroleum, Energy Law and Policy, IIPELP, said that Nigeria is toeing the path of bankruptcy if it continues to subsidise the importation of petroleum products under the Petroleum Support Fund, PSF scheme.
IIPELP, a think-tank that provides institutional and structural support to the energy sector in Africa, warned that the country could go bankrupt in a matter of months if it continues to regulate domestic price and consumption of petrol by her citizens.
Explaining the rationale behind IIPELP’s position, the President, Prof. Niyi Ayoola-Daniel, said the incoming government will find it difficult to sustain the scheme.
Ayoola-Daniel said: “ If subsidy continues, it can shut down Nigeria’s economy because we cannot continue to subsidies such consumption to the detriment of our economy.
“Government will have to steer clear of the sector because it can run itself but when government decides to interfere, it creates dysfunction in the subsidy regime which is a key problem to the sector. Subsidy is strangulating free market enterprise and when government does not fix the price of the primary product which is crude oil, how then does it intend to fix the price of the by-products.
Ayoola-Daniel also faulted arguments in support of fuel subsidy which says that it is pro-poor.
It is obvious that price regulation on account of subsidy is the only reason why oil producing companies in Nigeria have refused to invest in refining, to meet the nation’s growing need for refined products. It has not translated to sustained economic growth for the nation, as its management has been fraught with corruption and inefficiencies.
The theory is that deregulation and removal of subsidy may initially lead to inflationary pressures but as the market is opened up to investors, billions of dollars will flow into the downstream sector and more private refineries will open for business in Nigeria.
Eventually, the market will self regulate and prices for refined petroleum products and other goods and services will be at the natural market level as competition forces prices down. That the long term benefit will be more than the short term pain. It will also free up funds for government to enable it embark on infrastructural development projects across the country, thereby developing the economy.
*Chidi Arinze is on Twitter as @chiddy158
Good and thoughtful write up. Keep it up. Nigeria need to embrace subsidy removal