Dissecting fuel subsidy removal

Fuel scarcity long queue

Queue at a petrol station

THE raging controversy and public discourse on whether or not fuel subsidy should be removed by the Buhari government has generated heated arguments for and against by analysts, commentators, politicians and generality of Nigerians.

To start with, what is fuel subsidy? Fuel subsidy, in the context of the Nigerian situation today, refers to the differential payment by the government to marketers for the importation of fuel, in order to keep the price of fuel below the expected open market price.

This presupposes that the landing cost of the imported fuel is higher than the expected open market price. So, the shortfall between the landing cost and expected open market price is what is called subsidy payment. However, there have been a lot of reported sharp practices in fuel importation by marketers, prompting a number of people to call for the discontinuation of the fuel subsidy regime.

As one commentator noted, “in Nigeria, we see companies that are not into petroleum business benefiting from subsidy and this has to stop. I believe that the Federal Government can still stop fuel subsidy without raising the pump price.”

Recently, it was reported that the Ahmed Joda-led APC Transition committee has advised President Muhammadu Buhari to remove the fuel subsidy. While some Nigerians have criticised and rejected the proposition for fuel subsidy removal as being insensitive and punitive at this point in time when the masses are confronted with crippling socio-economic challenges, others see the move as a welcome development and a right step in the right direction, positing that there is no better time than now for the Buhari government to immediately jettison the oil subsidy regime as a means of finding lasting solution to the perennial fuel scarcity quagmire in the country.

However, for me, the issue of concern, regarding subsidy removal, is not so much about the pros and cons of the debate but really whether the present APC-led government of the “progressives” truly have the moral conscience and justification to remove the subsidy, considering that the same progressives, when in opposition, were in the forefront of protests and agitation by “occupy Nigeria” against subsidy removal by the immediate past Jonathan administration! The question, therefore, is: What has since changed and why the subsidy removal now by a government of the progressives?

The proponents of subsidy removal opined that, in view of the dwindling fortunes of the Nigerian economy and the concomitant fiscal challenges and steady decline in government revenues, the removal of the current oil subsidy regime – which has only succeeded in corruptly enriching a few marketers and their cohorts in government to the detriment of the economy – will immediately plug the huge loopholes and avoidable wastages in government finances in the form of colossal subsidy payments currently estimated in the region of between N800 billion and N1 trillion yearly, thereby potentially freeing the much needed resources for investment in pressing areas of critical national infrastructural renewal and development, including social infrastructure and vital security architecture.

According to this school of thought, the inscrutable and fraudulent oil subsidy regime has been mainly beneficial to the privilege elite in the major cities, in lieu of the majority of the masses in the rural areas of the country, many of whom seldom use fuel, and where they do, scarcely get to buy at the subsidised rates.

Moreover, it is argued that with the deregulation of the downstream sector of the oil and gas industry, through the removal of oil subsidies, as well as the privatisation of the nation’s refineries, private sector operators will be encouraged and fascinated to invest in the sector by setting up refineries which will enhance local production and supply of petroleum products for domestic consumption and possibly for export.

The attendant market competition among the local refineries that will ensue is likely to ultimately drive down the prices of fuel and make it more competitive in the medium to long-term. On the other hand, those against the removal of oil subsidy argued that, considering the prevalent high level, endemic poverty and debilitating socio-economic challenges confronting the masses, the poor and downtrodden in the society stand to suffer the more if oil subsidy is removed as the price of petrol and petroleum products may get out of their reach, thereby aggravating the poverty level and socio-economic discomfort in the land. They further argued against subsidy removal, claiming that it is the only ‘benefit’ that the Nigerian masses enjoy, for now, as citizens of an oil producing country.

While the arguments and justifications canvassed for and against the removal of the oil subsidy regime are plausible and tenable, my take is that, in the interim, before a final decision is taken in this regard, the government should, first and foremost, ensure the immediate rehabilitation and reactivation of the nation’s four refineries, Port Harcourt 1 and 2, Kaduna and Warri, to enable them operate at full, optimal capacities, in order to enhance local production and supply of fuel for domestic consumption.

However, even if and when operating at full, installed capacities, I am aware that the four local refineries combined can only produce an average of about 60% [24 million litres] of the estimated 40 million litres daily domestic petrol consumption in the country.

This means that, until we fully deregulate and privatize the downstream sector and have more private refineries freely operating to sufficiently produce fuel locally, the country will still have to rely on fuel importation for the remaining 40% [16 million litres] in order to augment the shortfall in production by the local refineries.

In that wise, as a short-term measure, pending the eventual privatization of the local refineries, in lieu of the current dispensation of a free for all importation by all manner of “marketers”, a viable, cost-effective option will be for the Nigerian National Petroleum Corporation (NNPC) to solely import fuel in sufficient quantity, which should be sold at the landing cost, without subsidy or profit margin, either through crude swaps or/and direct importation, while the marketers, for now, until the full deregulation of the downstream sector (which essentially involves price deregulation and free market operation), should only engage in the storage, distribution, delivery and sale of the products.

This proposed formula/option, if adopted, will considerably reduce the landing cost of fuel (which has hitherto been over-inflated by the marketers), put a stop to the issue of subsidy payment and make the price of fuel relatively affordable to Nigerians, while restoring sanity to the free for all importation of fuel and minimizing the scandalous, monumental fraud and massive financial wastes that have characterised the so-called subsidy payments to marketers.

Going forward, if and when a decision is finally taken to remove the oil subsidy, the masses should not be taken for granted but rather carried along through wide consultations and discussions with relevant stakeholders, including organised labour, which have reportedly warned that their members would resist any attempt by the government to remove subsidy, Civil society and rights organisations, organised private sector, trade/market associations etc. in addition to effective communication, through mass orientation and sensitisation campaign to enlighten the populace on the rationale, need and long-term benefits of oil subsidy removal; as well as possible short-term challenges.

Furthermore, in removing the oil subsidy, the government must be sensitive to, and take into consideration, the current mood of the people, as well as the debilitating socio-economic realities in the country and, therefore, short of increasing workers’ salaries, endeavour to introduce some palliative measures/social safety nets to mitigate and cushion the effects of the subsidy removal on the masses.

Already, it would appear that Nigerians are beginning to come to terms with the stark reality of the folly and irrationality in the current subsidy regime mired in corruption which most have come to realise is not sustainable, considering the incessant fuel scarcity across the country and, most especially, with the happenings in the twilight of the Jonathan administration, when marketers held the entire country ransom by refusing to import/supply fuel, complaining of non-payment of arrears of their subsidy payments!

All said and done, the government will be well advised to ensure that it is no longer business as usual, by enthroning probity, accountability and transparency in the oil sector, especially in the production, distribution, sale as well as export of crude and petroleum products, which is vitally germane to the continued growth and development of the Nigerian economy.

• Oluwa, a former Secretary-General, Nigerian Council of International Chamber of Commerce, wrote in from the Executive Business School, Lagos.

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1 Comment
  • emmanuel kalu

    this is what i have being preaching for a while. it is time to remove the subsidy. we can ensure decent prices by allow NNPC to do all the importing and selling at cost. deregulate the market so that all capable investor can invest in refineries, importation and retail. with NNPC selling at cost, it would forces the marketers to reduce prices. our refineries should be publicly operated companies. with the federal govt having 20-30%, state another 20% and community 20% and investor the last 40%. this would ensure good pratice and accounting, give nigerian’s some ownership. in terms of cushioning the poor, the only way the poor benefit from low fuel price is public transportation. here the govt can give each state a block of money to operate mass transit buses, that would operate with the smallest of profit margins. this woudl help the poor, create jobs and be a source of revenue for the states. states could also invest in modular refineries that would be another source of income, help reduce fuel cost and provide jobs.