Oil Subsidy and it's Discontents

By

Mustapha Mamudu

mustimamudu@yahoo.com

It's difficult to resist the raging oil subsidy debate as arguments both logical and idiotic are being thrown around. What is more important to my mind is first to educate all of us on what it is, who benefits from it now and how it will affect all the stakeholders if and when removed or discontinued.

What is this Oil Subsidy?

In simple language, it is any discount usually by governments on the cost of any item to it's citizens. The intention is usually to make it cheaper so that the eventual consumer gets a lower and affordable price. Nigeria produces crude oil which is refined into petroleum products such as petrol, diesel and kerosene. These we all use either directly (cars, generators, cooking and lighting) or indirectly through transportation and even goods and services we enjoy because these products are used in the production process. Even your bank will pass on the cost of fuelling cars and it's generators to you via interest and COT! That is why the cost of these products to the public is very important especially because in recent times oil prices have been skyrocketing due mostly to crises in the major oil producing nations in the middle east (Kuwait, Iraq, Libya etc) and rising demand from growths in economies like China and India.

The nation's national oil company, NNPC is saddled with the responsibility of supplying refined products for the Nigerian market either through production in it's refineries or import from foreign refiners. It then sells these products through it's depots (linked by pipelines) all over the country. During the military regimes and part of Obasanjo's civilian term, government sold the crude to nnpc(445000 barrels a day, which is about 1/3rd of total national production ) at a discount that will translate into subsidy in the price of the products at the pump for Nigerians. Because of the frustration with NNPC's inability to make it's refineries functional (discussion for another day), and government's own inability to deregulate (as subsidy removal was then called) the idea of setting up the Petroleum Products Pricing And Regulatory Agency (pppra) became imperative. Among other things, the PPPRA introduced a formula by which any one can produce or import products and be paid the difference between what is determined as reasonable cost of the product and what discounted price government wants the product sold to Nigerians, thus the subsidy. (This idea is rumoured as the brainchild of Dr Funso Kupolokun, arguably one of the most cerebral GMDs of NNPC who also has many other oil industry innovations to his credit including the Nigerian Content Act). Under this arrangement, NNPC began to pay commercial rates to the federation account for it's daily crude oil lifting. And consequently the monopoly of producing or importing refined products was broken and other petroleum marketers can also bring products into the market and expect to be reimbursed the subsidy as determined by PPPRA

Any money Nigeria earns from sales of Crude oil are paid into Federation Account from which the federal Government, states and local governments share monthly in accordance with the Revenue Allocation Formula. So whether the crude is sold at discount to NNPC( before PPPRA) or at commercial rate under the PPPRA regime, the subsidy is a first charge on the crude oil revenues. Suffice it to say that financial arrangements in the upstream sector ( where the crude oil is prospected for and produced) are similarly done by the federal government on behalf of the federation.

Who benefits from the subsidy?

It's clear from my first few lines that the beneficiary SHOULD be the ultimate consumer! But as with everything Nigerian, any subsidy regime including fertilizers and Hajj allocations can by be circumvented by middlemen! Be they politicians through whom these allocations must go or the providers who can introduce different forms of fraud. The Nigerian never misses an opportunity for a quick gain!

It is NOT the business of the bona fide beneficiary to eliminate fraud in any subsidy regime. It is the business of government. It beats my imagination how government officials can argue that because people defraud a scheme , it must be abolished. That's sheer incompetence and admission of self failure! Do we stop paying salaries all together because there are many ghost workers on the payroll or should we all commit suicide because people are being murdered with impunity? For goodness sake let us credit Nigerians with some intelligence and argue our positions honestly.

 

How it will affect stakeholders if and when removed?

Federal government: it will earn more revenues as it's share of the federation account will increase. With this it may decide to continue to waste money on our legislators and presidential dinners, bogus recurrent expenditures or wisely invest in infrastructure particularly transport i.e. rails, roads and other human development capital expenditures and hopefully reverse the ugly ratio of 70:30 recurrent verses capital expenditure. The choice is clear.

States and local Governments: like the federal government, they will receive fatter allocations. But they too have a choice of improving the lives of their citizens. Some Governors are making silly arguments about the effect of the minimum wage act on the recurrent expenditure! How can anybody particularly a supposedly elected official justify payment of anything under 18000 naira (which is about 120 us dollars ) to any family to feed on for 30 days. In any case those earning below that amount appear to be in the minority on the payroll. Any Governor who is defending subsidy withdrawal purely on the basis of minimum wage act is already saying that upon the removal of subsidy he will do nothing more for the state except pay the new wage and as usual pocket the rest! At a time that the lowest elected official, the ward councillor is being paid more than 12times(250000?) the new minimum wage, requiring only attendance in a secondary school as prerequisite, leaders need to be careful not to ignite a Nigerian 'harmattan'.

The common man and woman: should expect and indeed demand improved services and better roads and rails and more electricity in he medium term but immediately should begin to enjoy clean and efficient PUBLIC transportation.

Petroleum marketers: those engaged in sharp practices and claiming subsidies through false imports from PPPRA and cheap products collected on credit from NNPC will go under very quickly as they will not be able to compete in the new competitive environment.

NNPC: this much- maligned organization will have to become more commercial and become free of it's rent seeking drains. No more allocations and perhaps managers can face the business of running a global thinking National Oil Company like it's equivalents in Brazil and Indonesia.

PPPRA : this organization can still remain as a watchdog over products marketing activities in order to protect the consumer from the antics of greedy marketers.

Conclusion

I personally subscribe to removing uneconomic price fixing of any kind while taking care of those who cannot afford commercial rates. Even the almighty USA provides subsidies through tax incentives or food stamps but they have strict laws against fraudsters and their governments are reasonably accountable and can be changed reasonably freely and fairly. It is therefore my conclusion that as with payment of tax we should subscribe to the withdrawal of the subsidy but begin to be assertive on issues of accountability. With the Freedom of Information Act, the press, our docile intellectual community (that is only interested in more salaries and working beyond senility and harassing their students sexually and otherwise) and other well-meaning Nigerians, have the freedom to rise up to this challenge. Governments must be accountable!