Oil & Gas (4) - The Subsidy Conundrum



Nasir Ahmad El-Rufai




In 1962, according to Alhaji Adamu Wazirin Fika, the Government of the Northern Region faced a shortfall in revenues from falling world commodity prices. At a crisis meeting of the regional ministers, the first decision agreed on was that the salaries of the ministers should be cut by 50 percent. Today, even as the polity is becoming more heated due to worsening economic conditions and plans by government to remove the subsidy on petroleum products, President Goodluck Jonathan in his wisdom led a retinue of three executive jets and a contingent of some 120 people to Australia for the Commonwealth Heads of Government Meeting (CHOGM); the Head of the Commonwealth of Nations, the Queen of England went by British Airways.


This scene should set the tone as to whether the fuel subsidy exists at all and if government is justified in its plans to remove it. Does the Federal Government truly provide a subsidy on petroleum products consumed? If there is, should it be removed at this point? Why not?  These are just a few of the myriad of questions bothering the minds of most Nigerians on this issue. What then is subsidy? Does it exist? If so, is it justified? In what ways can the interest of the ordinary Nigerian best protected as far as the subsidy conundrum is concerned?


Broadly speaking, any mechanism that is designed to reduce the cost of an activity (input and/or output) below market prices can be referred to as subsidy. The policy of subsidy by government may be to keep prices low, to maintain incomes, or to preserve employment and to influence investments and consumption patterns in an economy. There are two approaches to this fuel subsidy debate one saying subsidy exists (Opportunity Cost - the government's view) while the other (Resource Endowment  or Aluko-Buhari view) denies its existence.


According to the Aluko-Buhari Approach, there should be no reason why Nigerians should pay import-parity prices for petroleum products since we currently pay more than the actual cost of producing and refining the product. The position is that the actual production cost of crude oil per barrel locally is about $4/barrel and even with an inefficient refining and delivery cost of $5 would sum up to a total cost of $9/barrel.  Even if only one quarter of a barrel of 159 litres is fractionated into petrol, it works out to less than N40 per litre. 


The balance of the barrel produces other valuable products not even factored in this computation. So at the current pump price of N65/litre, Nigerians are paying much more than they should. There is also the contention that Nigerians should enjoy the resource endowment  without bearing the brunt of government inefficiency which has led to the subsidy debate. Conversely, the opportunity cost approach argues that since we do not refine the oil we consume, but buy it at international market rates, that should apply to what we import and consume.


Both positions are plausible, but the Aluko-Buhari approach requires us to be self-sufficient in domestic refining. This means getting our refineries working under private sector management and expanding processing capacity to about 600,000 bpd. The  debate on whether subsidies on imported fuel should not come up at all before government plugs all the leakages in the import and distribution processes.


Indeed, how did government become involved in the importation of petroleum products? Before our first refinery was built the first Port Harcourt refinery in 1966, products were imported by multinationals like Shell, Esso, BP and Total.  The multinationals sold the products at a mark-up which was the pump price at the time without any price regime interference by government.  Then there was neither scarcity of petroleum products nor subsidy in whatever form.


But as local demand grew, there was some justification for government intervention in the process especially after the civil war when local consumption continued to grow and demand outstripped supply leading to shortages.  The Oputa Panel of Inquiry which examined the root causes of the nationwide shortages of petroleum products made wide-ranging recommendations which laid the the foundation for the present involvement of government in the importation, refining and management of local consumption of petroleum products.  


Though government intervention sorted out the problems in the short term, inefficiencies in the system began to manifest. At the time, the issues that were to later change the management of the local consumption of petroleum products thus bringing forth subsidy were not envisaged.  For instance, there was no conception that Nigeria would be unable to meet domestic consumption.  And even if we had to rely on importation, as it later turned out, the devaluation of the naira was not considered. The naira was at par with the dollar.  But today, the naira seems to be on a permanent slide, and at the last count exchanged at N160 to one US Dollar.


With the continual rise in the price of crude oil at the international market, the fixing of pump price of petroleum products became difficult to manage because the prices of imported products were at a bench-mark determined internationally and in dollar terms. So in real terms, it would be right to state that subsidy exists on the petroleum products consumed locally in Nigeria.  As at year 2000, it was about N1.5 billion annually but has risen to a whooping N1.2 trillion in the first nine months of 2011 - nearly the size of the capital budget for 2011!


Beneath the surface of these facts lies the complication on the issue of subsidy. Given the fact that we are oil producing country and the level of corruption in the refining, importation and distribution process, is it justified to give away so much money to a few? Is the interest of the ordinary citizen better served with a subsidy regime, or are we better off without one?


Although it is ascertainable that there is a subsidy – the point remains that it would not have arisen if not for cumulative inefficiency and corruption within the petroluem sector over the years.  Facing the reality of impending subsidy removal, the question that comes up is: ‘why now?’  Since government is a social contract between the government and citizens, it makes sense to demand to know if removal of subsidy on petroleum products was part of the campaign manifestoes of President Jonathan in the run-up to the 2011 Presidential elections. 


On one hand, can Nigeria afford to spend so much on subsidizing fuel importation? On the other, if government proceeds with plans to remove subsidy, there would be inevitable consequences for most Nigerians. This would have been a simple issue had government made adequate provision of effective intermodal transportation system  - in form of metro, bus or urban taxi system. But this is not the case. And since most Nigerians rely on petroleum products to power their individual generator sets, and kerosene for cooking, the effects of the subsidy removal would be far reaching. That points to the fact of already existing poverty, and the result is better imagined.  


A government seeking for belt-tightening among her citizens should be seen to be prudent.  What we have instead is a regime that keeps an avalanche of presidential aides – with more appointed just two days ago. Why should ordinary Nigerians bear the burden of government insensitivity? Where is the legitimacy for a government that keeps its recurrent spending at at least 70% seeking to pass the burden of 360 new cars for legislators to the ordinary citizen? Where are the specific projects to which the proposed savings would be committed? What sustainable implementation plan exists for such projects?  Where is the blueprint to increase capacity to refine what is consumed locally? Who knows how much petrol we really import? Who can tell us how much of it is smuggled while the cost is added to ‘subsidy’?


How many Nigerians know that the country now owes more than we did at the time before our exit from the debt trap in 2005? Does a government that has shown no sense of sacrifice deserve to further burden the impoverished populace with a large number of unemployed people? Can we trust this government to use whatever savings it may get from the removal of oil subsidy to develop critical infrastructure, stimulate the economy and create jobs? Your answer to these questions should be your answer to whether government is justified to remove petroleum subsidy. 


Under an administration that exhibits some prudence and sacrifice, that is disciplined and fiscally-responsible, and led by people of integrity, I would bear the initial pain of subsidy withdrawal while our domestic refining capacity is revamped and expanded. Under the current leadership addicted to spending all it's earnings on recurrent expenses, any more sacrifice from us for them will only encourage Australia-like junkets and tenure elongation! More partying for them, more pain for us.