In Nigeria, given the absence of functional refineries which makes the country a net importer of products, subsidy removal translates to an immediate increase in pump price of petroleum products, notably on petrol and kerosene the two products currently being subsidized by the government. Diesel and aviation kerosene businesses had long been deregulated with prices soaring higher and higher everyday with trends in the international market.
And that obviously is where the bulk of citizens fault the policy: given Nigeria’s vast crude oil potentials, citizens ought not to buy petroleum products, bye-products of crude oil, at prices dictated by international market forces which is what deregulation will do on petrol and kerosene. But what if the policy has other stronger merits both to individual citizens and the larger economy, deserving consideration from critics? What if proponents of deregulation – and fuel subsidy removal – are right after all? What if the nation is losing and private greedy government officials and their cronies are actually the beneficiaries of the subsidy scheme as alleged by many?
A case for subsidy removal
In 2008 alone, the subsidy fees paid by the Nigerian government to maintain a uniform price regime in the sale of petrol and kerosene throughout the country were put at over N630billion. That amount was equivalent to about 50 per cent of the capital budget of the Federal Government. It is believed that the Jonathan’s government has so far spent in excess of N850billion in subsidizing the price of petrol and kerosene in the last 17 months.
But even more worrisome is the alleged graft (bothering on misapplication and misappropriation of earmarked subsidy funds) by top officials of the Petroleum Ministry, the NNPC, and relevant establishments administering the subsidy scheme.
It is an allegation that has been hovering in the air for the past one decade like a paratrooper who is finding it hard to be dragged down to earth by the force of gravity.
The gravity, however appears to have sprung into force last week with a probe opened by the Senate to look into what appears an over-inflation of subsidy figures in the 2011 Appropriation Act. According to Senate findings, N240billion (or N20billion monthly) was allocated for the implementation of the fuel subsidy policy in the 2011 Appropriation Act. Out of the N20billion monthly allocation, N11.2billion was voted for Domestic Fuel Subsidy (going to the NNPC) and another N8.8billion to marketers.
But intriguing to the Senate was the discovery that although N20billion was set aside for subsidy in a monthly basis in the 2011 Appropriation Act, the total sum of N165billion was expended in August 2011 of which the NNPC got N88billion and independent marketers got N77.7billion. Interestingly, although N240billion was budgeted for the entire 2011, a total of N931billion had so far been spent as at August ending, and this to any curious or discerning mind translates to a variance of N771billion or 700 per cent hike above the figure originally budgeted for.
As noted by Senator Bukola Saraki, in the first three months of the year, both the NNPC and independent marketers did not exceed N62billion monthly, but within the last three months, the figures had shot up to between N150billion and N186billion. Saraki reasons that by the end of the year and going by the trend, the nation would have spent about N1.2trillion on fuel subsidy as against the N240billion budgeted for the programme. “This expenditure is treated as a first line charge and by implication all other expenditures including capital expenditures and even distribution to states and local governments is secondary,” Saraki noted.
“The processes, audit, scrutiny and value for money in the entire subsidy management system lack transparency and control as the costs have continued to maintain an upward swing,” he concluded. It is even also alleged that because of the free money provided via the subsidy scheme, emboldened as the bulk (about 90 per cent of the nation’s petroleum products is imported) those managing the refineries would rather prefer to sustain the import and subsidy regime than see to the proper repair and maintenance of the nation’s four-state-owned refineries to make them functional as that will not be to the personal interest. “There is so much money to be made from subsidy scheme, ” a source told Daily Sun.
“Those who benefit would not want it stopped; they wont want the refineries to work, and they wont want deregulation of the sector either,” he added. Senate President, David Mark admitted the presence of what he referred to as “a cartel” defrauding the country via the fuel subsidy scheme and even queried the veracity of the figures quoted by government. “How much do we spend on subsidy?” Mark queried. “Who are the beneficiaries of subsidy?” “And has subsidy achieved its goals and targets?” These may appear rhetorical, but deserving further serious probe by appropriate auditing agencies if Mark and his team at the Senate are serious at resolving the myth surrounding the fuel subsidy.
Indeed, the many cases of graft reported in the management of the nation’s fuel subsidy scheme have been highlighted repeatedly by proponents of its abolition as one core reason to discard the scheme. Of what use does it serve citizens when in one accounting year, the government spends N1.5trillion on petroleum subsidy which is 14 times the value of capital budget for the power sector in 2011, and nine times the sums appropriated for roads, and 24 times the value on the health sector or four times the entire defence and security budget?
The other reason of course is the fact that, given the absence of functional refineries in Nigeria and the quest to get the private sector to invest in the business, it would be difficult if not impossible to get any profit-driven business enterprise to sink in money into the establishment of a private refinery in Nigeria under a regime where the government regulates the price of the end product sold to consumers as is currently being done. The chances of recouping funds, would be hard, and the business may fold up sooner than expected.
This explains why no multinational oil firm operating in Nigeria floats a refinery, they will rather be more concerned in exploring and drilling crude oil and making their money from proceeds sold at the international market at prices determined by prevailing market forces. A free-market environment therefore becomes imperative for economically thriving refineries in Nigeria.
International donor agencies like the International Monetary Fund (IMF) and the World Bank are also opposed to fuel subsidy regimes.
“Although politically popular, subsidized fuel prices have significant downsides,” said Robert Gillingham of the IMF Fiscal Affairs Department. Gillingham in a new IMF Working Paper which underscores how expensive and poorly targeted energy subsidies are noted that “for governments, the subsidies may direct public expenditures away from more productive uses, reduce revenues from domestic production, or contribute to unsustainable budget deficits. “
“At the household level, low fuel prices also encourage inefficiency in the use of energy. And, as a means of shielding the poor from rising petroleum costs, universal energy subsidies are simply not cost-effective, because they inevitably entail a substantial leakage of benefits to higher-income groups,” he added.
President Jonathan knows this very well; but perhaps he is aBosom with the fraud going on in the management of the fuel subsidy scheme and fears it benefits a few and should be halted. And of course he knows the government is in dire needs of funds for other projects. It is this knowledge that has informed the decision to do away with fuel subsidy next year. The removal is likely to feature in the N4.8trillion budget estimate Jonathan may present to a joint sitting of the National Assembly in November.
Fuel subsidy removal is definitely one price the Jonathan’s administration is prepared to pay; it has other competing socio-economic needs to attend to – from bad roads, schools, hospitals, potable water, electricity, industries and even security – the huge sums spent in fuel subsidies, would be more beneficial to citizens and the economy if channeled into the rehabilitation and building of the afore-listed infrastructure.N1.2trillion (if that were to go into fuel subsidy) would do the nation better if chandelled to infrastructure development than on fuel subsidy. That is the government thinking. Let Nigerians pay more for fuel so the government saves enough money to build infrastructures. However sound or logical this position may appear, Nigerians are bound to receive it with cynicism given the history of past fuel price increases which was hinged on the need to free up funds for capital projects and for which citizens are yet to see any tangible impact from such ‘freed-funds.’
History of fuel price increase
The history of fuel price increase in Nigeria can be traced first to the military era. Fuel price had remained stable at 15koboe per litre for petrol as from 1978 under the regime of Gen Olusegun Obasanjo but it was increased from 15kobo to 60kobo in1990 by Gen Ibrahim Babangida, and he further upped it to 70kobo in 1992 and N3.25kobo in 1993 as part of his Structural Adjustment Programme (SAP) meant to shore up revenue for investments in infrastructural development. And shortly before his untimely exit that same year (1993), fuel price skyrocketed to N11 per litre. All these prevailed under the military era. However, the people hoped for an improved living conditions with the advent of democracy in mid-1999, but they were disillusioned President Olusegun Obasanjo who pushed up price to N20.0k from N11 (in 1998) and up again to N22.0k in 2000.
Thereafter prices kept soaring higher from N22.00 in 2000 to N26.00 in 2001 and N40 per litre in 2003 with the deception that funds would be freed to social infrastructure development just as products would be made more available to consumers. In a subtle way, Obasanjo also commenced the deregulation of the prices of other products like diesel and aviation kerosene by creating an artificial scarcity and subsequently granting licences to private firms to import and sale at market-driven prices.
The Yar’adua government, which President Goodluck Jonathan was a part of, also increased price of petrol from N40 to N70.00 in 2009, but later brought it down to N65 per litre following a crash in crude oil process at the international market that came with the global economic recession.
Since 1978, the fuel price increase has negatively contributed to the country’s GDP downward trend. The tables below summary the effect of petrol price increase to the country’s GDP.?In 1978, the fuel price increased to 15 per cent, while GDP fell by 5.8 per cent. In 1982 the the price rose to20kobo, while GDP fell by 0.2 per cent..In October, 1994 the fuel price fell from N 15.00 per litre to N 11.00 per litre and stood till 1998, while GDP fell by 0.6 per cent in 1994 and rose to 2.6 per cent in 1995.
It should be noted that there exists a negative relationship between fuel price and GDP since the deregulation policy came into effect. Thus, any time the fuel increases the GDP tend to decrease. Deregulation was therefore seen as the panacea to the crisis in government interference in fuel prices. The deregulation policy is a key feature in the yet-to-be-passed-into-law Petroleum Industry Bill (BIP) currently before the National Assembly.
The PIB is based on the report of the Oil and Gas Reform Implementation Committee (OGIC) set up by the Federal Government in year 2000 to carry out a comprehensive reform of the oil industry. It provides the new legal frame work for the organization and operation of the entire oil industry in Nigeria.
Specifically in the downstream industry, where refining and sales of fuel is done, the PIB recommends the deregulation of the industry to allow market forces determine the prices of petroleum products.
By LOUIS IBA
Sun Newspaper - Business Report Monday, October 17, 2011
Source: http://www.sunnewsonline.com/webpages/news/businessnews/2011/oct/17/bussines-17-10-2011-001.html
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