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Fuel Subsidy Removal Debate: The Way Forward By Dr. Bello Mukhtar In the last few weeks, there have been lots of discussions, claims & counter claims, threats & counter threats, etc, on the deregulation of the downstream petroleum sector. This came to a peak last week with the government announcement that the deregulation has started and the immediate effect of this has been the removal of the subsidy on petrol. First of all, there are many Nigerians who believe that there is no petrol subsidy in Nigeria instead it is even over priced at N65/litre. Prominent among them is the former oil minister, Prof. Tam David-West. In their estimate, a litre of petrol should cost between N35-N45. Some of them did the estimate arguing that the 445,000 barrels per day, which is meant for domestic consumption, should not be for sell to Nigerians (Dr. Izielen Agbon, Guardian Newspaper, Dec. 28, 2011). It should be free of charge so only the cost of finding/development, production/storage /transportation, refining, refined products pipeline transportation, distribution margins (retailers, transporters, dealers, bridging funds, administrative charges etc) should be considered. On the contrary, the government has said on several occasions that the landing cost of a litre of petrol is about N123/litre based on an average crude oil price of about US$ 114/barrel and the distribution margins are about N16/litre. This means that the supply cost is N139/litre and the government is paying N74/litre while people only pay N65/litre (Public Presentation by the Finance Minister, Dec. 6, 2011). Both arguments have some merits. However, let us believe that the subsidy is real and government is paying on the premise that no responsible government will deliberately tell lies to its people. The federal government has said that the subsidy cost is between N1.3 - N1.5 trillion annually, which represents about 30% of its total expenditure. Though, some are questioning this figure based on the point that the actual daily consumption of petrol is probably not known (Prof. Bolaji Aluko, Gamji Website, Jan. 8, 2012). Therefore, government should make extra effort to verify the actual consumption demand, which may bring some savings. The most outspoken government officials campaigning for the fuel subsidy removal are the Finance Minister (Dr. Ngozi Okonjo-Iweala), Petroleum Resources Minister (Mrs. Diezani Alison-Madueke), Information Minister (Mr. Labaran Maku), Central Bank Governor (Mal. Sanusi Lamido Sanusi) and the Presidential Spokesman (Dr. Reuben Abati). They have been presenting the government opinion that this amount of money that will be freed from the budget will reduce borrowing, helps to preserve reserves, create revenue, allows free market operations and open the sector for new private investments. They further argued that the subsidy only benefits the rich & the middle class, the petroleum marketers, smugglers, the neighboring countries and that Nigeria is not as rich as the other oil producing countries that have subsidized fuel. However, some of these reasons are quite untenable. For example, government is exposing itself as being weak and unable to use the state apparatus to bring to justice the petroleum marketers, smugglers and government officials who connive with them to commit the alleged crimes. Recently, chief executives of some banks were removed and charged to courts for various offences. Can’t government do the same with the so-called “oil cabals, smugglers and their associates in government? Also, the argument that it is the rich and the middle class that benefit from the subsidy is not completely true. Nowadays, if there is anything from government that every Nigerian is benefiting from, it is probably the fuel subsidy. Whether one has a car or doesn’t, affordable and effective transportation system is vital for efficient movement of people and goods, which is very important to the economy. Majority of Nigerians both in the urban and rural areas rely on public transport and in rural areas (in the part of Nigeria I am familiar with), goods are mostly transported using petrol-engine vehicles not diesel-engine vehicles. A clear example is that, following the announcement for the removal of the subsidy, there has been sharp increase in transport fares and the prices of goods and services across the country and so far, the most affected are the poor people. Apart from the transportation sector, millions of Nigerians use petrol-based generators to run their small businesses for their daily income. The rich people, medium and large-scale businesses (owned by the rich people anyway!) use bigger diesel–engine generators so virtually they are not affected by the current removal because diesel has no subsidy. So the suffering is real and it has very little effect on the rich. The point that Nigeria is not rich compared to some oil producing countries interms of availability of infrastructure, crude oil production volume per population and reserves (both resources & money) is true. But it is also true that majority of Nigerians are too poor to afford any further squeezing of their income. In my opinion, among all the reasons government is putting forward to support the deregulation of the petroleum downstream sector, the genuine ones are two (2). First, the need for more funds to tackle the huge infrastructural deficit the country is facing. Secondly, the need to free the market inorder to attract private investments especially in building refineries to meet atleast the local consumption demand and to create jobs. However, the later point is also subject to debate because deregulation is an essential component but not sufficient enough to guarantee private investments. The other important factors include availability of well-developed infrastructure, security and stable political environment. So even after the deregulation, the private companies can still use these factors to refuse to build refineries within the country but rather continue to import refined products. No private company would want to enter into agreement with a government and just to be informed after few years that the agreement is put on-hold because of change of government. A company would also not like its refinery to get burnt during protest after elections. Secondly, no private company will invest millions of dollars to build refinery in Enugu, Benin, Abeokuta, Ilorin, Sokoto or Yola in a situation where someone will just wake up one day and blow-up the pipeline supplying the crude oil or take the employees hostage or even worst, kill them. In addition, there is an urgent need to improve on the infrastructure especially the power and transportation sectors. This will empower the private sector in order to facilitate and expand production, create jobs and consumer demands, attract foreign direct investments, which will help the country to move from an import dependent economy to an export oriented one. Within the last two decades, a number of factories in Nigeria especially in the textile and agro allied industries have closed production, which has caused loss of jobs and huge economic earnings. The country imports lots of textile materials, raw & semi-processed food stuff and many other essential items. This is mostly attributed to be due to lack of stable power supply and right & consistent government policies not because government regulates the industries. So we should be sincere to ourselves that even if the downstream petroleum sector is deregulated, things may not necessary be rosy in the next few years as some government officials try to make us understand. Infact, the other three elements (availability of infrastructure, security & stable political environment) if reasonably satisfied can attract private companies to build refineries within the country to meet the local consumption demand, which will help to reduce the amount government spends on the subsidy or even completely end the subsidy regime. Thus, if one carefully examines the reasons government is giving for the deregulation of the petroleum downstream sector, in particular the removal of the fuel subsidy, the easily understandable reason is the need for more funds to improve on the infrastructure (in particular, power supply and transportation) and human capital development (education, agriculture and healthcare). The question is, where should the needed extra funds for the projects be sourced? Should it come from the removal of fuel subsidy or other options? The government has already said that there are no alternatives to the removal of the subsidy while the Nigeria Labour Congress (NLC) & the Trade Union Congress (TUC) have declared an indefinite strike until the subsidy removal is reversed. The NLC and TUC have a strong support from the World Federation of Trade Unions, Nigeria Bar Association, other professional bodies within the country and more importantly, majority of Nigerians. So what is the way forward? Both the federal government and the state governments are already counting the amount of money they will get from the subsidy removal. The Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, said: “The total projected subsidy reinvestible fund per annum is N1.134 trillion based on average crude oil price of $90 per barrel. Out of this, N478.49 billion accrues to the Federal Government, N410.3 billion to state governments, N203.23 billion to local governments, N9.86 billion to the Federal Capital Territory (FCT) and N31.37 billion as transfers to derivation and ecology, development of natural resources and stabilization funds” (The Nation, Jan. 5, 2012). Also, Benue State Governor Mr. Gabriel Suswam said, “The president will be meeting with us tomorrow for us to further look at how states can also key into some of the palliative measures which the president has put forward because a lot of states for the first time will be getting subsidy. The savings from this, at least Benue will be getting N7.6 billion. It is a drop in the ocean but it will make a difference. If I decide that that N7.6 billion is going to build classrooms, I can achieve that. That subsidy now goes to the common man who ordinarily has never benefited from subsidy” (Thisday, Jan 6, 2012). So the fact is, the federal and states governments are anxious to get the funds to spend and this is the main problem. Over the years, Nigerians have not seen ‘value for money’ in governments spending, which is causing a lot of distrust. For example, some have estimated the amount government has spent in the power sector for the last 12 years to be over US $20 billions (N3.1 trillion) and yet there has not been significant improvement in the power supply. In addition, the foreign reserve has been seriously depleted. This lack of astute use of resources is evident among all the three tiers of government. Last Friday, Mal. Nasir El-Rufai in his article ‘LGs: The Missing Tier of Government’ pointed out that “in the year 2011, the 774 local governments and the six area councils in Nigeria received almost N1 trillion (about $7 billion) from the Federation Account, which is equivalent to the entire annual budgets of Burkina Faso, Rwanda, Burundi and Togo combined. The overall performance of councils has slipped considerably from about 40 per cent in 2005 when the average council got N60 million monthly from the centre, to less than 10 per cent in 2011, when they got an average of N100 million monthly from the Federation Account! What I learnt from the sample is that most councils only pay primary school teachers' salaries and nothing more out of their core functions”(Thisday, Jan. 6, 2012). Thus, in my opinion (which I believe also represents the views of many Nigerians), the federal government should suspend the deregulation of the petroleum downstream sector for now and do its homework first; let the government looks inward. Government at all levels has to work hard to restore public confidence. From the contributions by many Nigerians on this issue, it is very clear that Nigerians want all government officials to join hands and resolve to drastically reduce corruption and waste in the public service if they must earn their trust. A simple example is that of a husband who wakes up one day without having any money. His wife will do her best to make sure that food is prepared in the house if she really believes him. On the contrary, if she doesn’t believe him, he will go to work, come back and meet nothing at home and if he dare asks her why, she will be bold enough to tell him that ...shebe you say no money...so let’s fast until you get money! So I believe Nigerians will not mind sacrificing some of their earnings for government to have more funds if they truly believe that their money will be judiciously utilize. Now, as for the urgent need for funds in order to develop our infrastructure for increase productivity and as an incentive for private sector investments, I suggest the following options: 1) Use of Excess Crude Account Savings Solely for the Federal Government Capital Projects The 2012 Appropriation Bill is based on oil production of 2.48 million barrels per day and a benchmark price of $70 per barrel. The total expenditure is N4.749 trillion, which consists of N398 billion for statutory transfers, N560 billion for debt service, N2.472 trillion for recurrent (non debt) expenditure and N1.32 trillion for capital expenditure. The capital budget represents 28% of the overall proposal while the recurrent expenditure is 72% of the overall proposal (The Guardian, Jan. 4, 2012). Over the years, this has been our budget trend, with very low allocation for capital expenditure compared to the recurrent expenditure. However, often the benchmark price for oil in the budget is lower than the actual market price. This helps to shield the budget from market fluctuations and most of the times results in excess money generated. About a year ago (before the general elections) an emergency meeting of the Federation Account Allocation Committee was called for and the sum of $1billion was deducted from the Excess Crude Account and approved for distribution to the three tiers of government. The federal government received $458.31 million, the states shared $232 million, the local governments shared $179 million while $130 million was shared among the oil producing states based on the existing derivative principle (Thisday, Dec. 31, 2010). Instead of this sharing, let the excess savings be exclusively for the federal government and should be spend as follows: 50% for infrastructural development projects especially in the power and transportation sectors (25% direct spending while the other 25% for servicing debt solely taken to finance the infrastructural development projects), 25% for the development of non-oil sector, in particular, agriculture and solid minerals) and the other 25% be saved for the rainy days. This will require some legislative amendments and understanding of the state governors. However, if the governors, state and federal legislators fully understand that the projects are for the benefit of all Nigerians then it should not be difficult to resolve. And if the federal government cannot convince the 36 state governors to forfeit some of the money that ordinarily should go to their states then I don't see how it can convince over 150 million Nigerians to sacrifice a share of their income
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