Removal of fuel subsidy

The word “subsidy” has become a notable part of the lexicon in the petroleum sector of Nigeria. Oftentimes, its usage has rather made it a cliché, if not so confusing to an average Nigerian on the street. But what exactly is a subsidy, especially when it relates to the petroleum industry of our country?

Subsidy, according to Investopedia.com, is a benefit given to an individual, business, or institution, usually by the government. It is usually in the form of cash payment or a tax reduction. Typically, the subsidy is given to remove some economic burden, and it is often considered to be in the overall interest of the public, given to promote a social good or an economic policy.

In the context in which it is used in Nigeria, fuel subsidy is primarily the cash payment that government gives out to fuel importers/marketers in order to lessen the cost burden of the product on the final consumers. Petroleum, or fuel, importation in Nigeria has been done by the Nigerian National Petroleum Corporation (NNPC) through a consortium of oil firms commonly referred to as oil marketers. However, the alleged corruption embedded in this arrangement and the petroleum sector at large has seen the policy of fuel subsidy not yielding any economic benefit to the country.

Though subsidy is usually aimed at improving the sensitive sector(s) of a nation’s economy, in the case of Nigeria, fuel subsidy has rather become a conduit-pipe through which our patrimony has been siphoned. Successive governments have spent trillions of naira subsidising fuel, yet the petroleum sector is still lagging. In 2019 alone, the Federal Government, according to the Senior Special Assistant to the President on Niger Delta Affairs, Senator Ita Enang, spent N1.5 trillion on fuel subsidy. But what effect has this had on our economy for years? I will expositorily get back to this in a bit.

In April this year, the Group Managing Director (GMD) of NNPC, Mela Kyari, unequivocally said that the era of fuel subsidy was gone forever in Nigeria. Speaking on a live television chat with Africa Independent Television (AIT), Mr. Kyari said, “There is no fuel subsidy anymore in Nigeria. It is zero subsidies forever.”

Going further, the GMD of NNPC stated thus: “There would be no resort to either fuel subsidy or under-recovery of any nature. NNPC will play in the market place, just like another marketer in the space.”

Kyari’s comment apparently signalled the intention of the President Muhammadu Buhari-led government to deregulate the downstream sector, a decision that government, over the years, has been afraid of implementing because of the public backlash it does receive. When President Goodluck Jonathan’s administration implemented the policy of fuel subsidy removal in 2012, the aftermath of public outcry made it impossible to stand.

Today, Nigerians are kicking against the subsidy removal, the Nigeria Labour Congress (NLC) and Trade Union Congress (TUC) threatened to embark on industrial action because of the hike in electricity tariff and removal fuel subsidy. However, in any case, the pertinent question to ask at this point is, how economically sustainable is fuel subsidy?

Back to the effect of fuel subsidy on our country’s economy.

Nigeria, a country that is one of the major exporters of oil in the world, up till today, still refines over 90 per cent of its petroleum products outside the country in order to meet demand for local consumption. Our dependence on imported petroleum products, at all times, keeps having severe economic implications on the local economy. Indeed, our inability to refine locally means that the inflationary costs incurred in foreign countries, where the products are refined, are indirectly transferred to the local economy.

What is more grievous about the effect of this on Nigeria’s economy, of course, is the moribund status of our local refineries. The refineries, in spite of the fact that they are sitting idle, still cost us a huge amount of money in maintenance, with little or nothing to show for it. Going by the annual reports of the NNPC, not less than N120 billion serves as an operating loss for maintaining the refineries. Specifically, the country’s apex petroleum regulatory body, NNPC, in a full report of its operations for April 2020, said that all refineries were still down, but N10.47 billion was spent in the month under review, further doubling down on the losses incurred as a result of the malfunctional national assets located in Warri, Port Harcourt and Kaduna.

While there is no denying the fact that the petroleum subsidy is economically unsustainable, and its removal long overdue, what is very baffling is why the local refineries are not working. And whereas successive governments, over the years, have spent a humongous amount of money to subsidise petrol and maintain the moribund refineries, the question would be, why has government not been able to channel the same amount of money into ensuring that the refineries function optimally? Or could it be that the alleged ‘oil cabals’ have sworn not to see the refineries work? A lot of questions need answers here.

In the political economy, the regulatory capture and rent-seeking theories believe that subsidy exists as part of an unholy alliance between big businesses and the state. No doubt, oftentimes, some influential companies turn to the government to shield them from competition. In turn, such businesses donate to politicians or bankroll their political ambitions. Though the government may have had good intentions by subsidising fuel in Nigeria, so far, it seems those intentions are compromised.

If our refineries were functioning, it would have multiplier effects on the economy and, at the same time, drastically reduce the high level of unemployment in the country. Of course, the Buhari-led government has promised that the money saved from subsidy removal would be invested in making sure the local refineries work, and I do hope that can be achieved.

At this point, the determination of President Buhari to reform the petroleum sector is very commendable. Perusing through the pages of one of our national dailies, I came across the news that the President has transmitted the Petroleum Industry Bill (PIB) 2020 to the National Assembly and has proposed the creation of the Nigerian National Petroleum Company Limited. By implication, what this bill means is that, if passed by the National Assembly, the NNPC and the Petroleum Products Pricing Regulatory Agency (PPRA) would be scrapped or transferred to government.

From all indications and going by the new  PIB bill, it is quite obvious that the Nigerian government wants to benchmark the proposed Nigerian National Petroleum Company Limited to look like the Saudi Arabia ARAMACO, which is a wholly oil-based limited liability company owned completely by the Saudi  government. To this end, my suggestion here is that the government should fully benchmark NNPCL with the ARAMACO, which has worked for the Saudis over the years. At no time should we, as usual, try the cut-and-paste approach of our policy implementation. The Nigerian government, in any case, has to thoroughly study and borrow such an idea from the Saudis for implementation, and see how it can work for us here at home.

According to Section 54 of the bill, which reads in part: “NNPC shall cease to exist after its remaining assets, interests, and liabilities other than its interests, assets, and liabilities transferred to NNPC Limited or its subsidiaries under subsection 1 of this section shall have been extinguished or transferred to the government.”

It will be interesting to see how this proposed bill would be helpful in fully deregulating the petroleum industry and how the interaction of market forces will shape the sector. Nonetheless, the government must be incredibly committed to building functional modular refineries. Since it has been identified that the existing refineries we have are not refining up to the capacity that satisfies local consumption, it is, therefore, imperative that the government ensures that more refineries are built. In contrast, the dying ones could be revitalised.

While many are hoping that the Dangote refinery would help in making the country less reliant on imported fuel, may I shock you that the proposed refining capacity of the refinery cannot absorb the demands for local consumption? Worst still, if the refinery becomes the only functioning one in the country, then monopolistic tendencies and privileges would be exploited, and this would negate the deregulation policy of the government.

Before I end this article, I will like to draw our attention to the deregulation of the telecommunication sector by then President Olusegun Obasanjo and its effects on our present day. In 1999, when the Federal Government privatized this sector, the price of a GSM SIM card was as high as N50,000 per SIM, but, today, one can practically get a SIM for as low as N100, which is the aftermath of the privatisation. So, your thought is as good as mine.

To this end, I must commend the government for the approval to license private enterprises interested in building modular refineries.

Pragmatically, the success of the government’s subsidy policy is judged by how it helps in improving the overall economy. And, so far, fuel subsidy has not in any way improved Nigeria’s economy. While its removal is grossly affecting almost everybody because of the present economic predicament of the country occasioned by the COVID-19 pandemic, the government deserves the benefit of the doubt that this would be the best for the country in the long run, just like the telecommunications sector.

I highly recommend that all international oil companies in Nigeria (Total, Shell, Chevron, State Oil, etc.) should be encouraged to build refineries with a fundamental law that for each barrel of oil exported they refine the equivalent for local consumption.