Policy Briefs

Ending Nigeria’s Fuel Subsidy By Default

Fuel subsidy ranks very high on the list of policy albatross President Muhammadu Buhari inherited. Fuel subsidy, a recurring theme in Nigeria’s policy realm has been debated for over three decades. Except for President Umaru Yar’Adua, every head of state since General Ibrahim Babangida has skillfully played the fuel subsidy removal game, which turned subsidy into a synonym for fibs and myths. In character, fuel subsidy, translated to an egregious policy, deprivation, and grand larceny of trillions of Naira. Indeed, as ironic and unlikely as it may seem, it was only Gen. Sani Abacha that effectively used the money saved from fuel subsidy for national projects under the auspices of the Petroleum Trust Fund (PTF) managed then by Gen. Muhammadu Buhari, Nigeria’s incumbent president.  President Olusegun Obasanjo tackled the issue by removing subsidies in 2003 and creating the Petroleum Products Pricing Regulatory Agency, (PPPRA), which until date regulated the sector only in name. In 2012, President Goodluck Jonathan established the Subsidy Reinvestment and Empowerment Programnme (Sure-P), which sought to use  federal government savings from the fuel subsidy build better infrastructure, increase human resources and encourage greater use of public health services. Sure-P became a conduit for rewarding political cronies at the federal and state levels.

Hence, the fuel subsidy regime failed Nigerians, as a source of relief and as a source of better services and infrastructure. It was this failed system that President Buhari inherited, even as Nigerians hoped that his administration would also not make nonsense of the already skewered policy. Buhari’s fuel subsidy challenge was gargantuan. The president was aware. After all, prior to his election he had observed that “When you touch the price of petroleum products that has the effect of triggering prices rise on transportation, food, and rents. That is for those who earn salaries, but there are many who are jobless and would be affected by it.”  Buhari’s challenge was best summarized by Kayode Komolafe ahead of his assuming office in May 2015, to wit: “The change that Buhari promised with so much passion would be put to severe test by the manner in which he unties the fuel subsidy knot. The nation cannot simply pretend to be subsidizing the consumption of fuel with trillion of Naira. The subsidy regime is only enriching a handful of persons.  This is one mismanaged policy that should tax the creativity of the Buhari administration in generating fresh ideas to solve old problems.” That prescient analysis materialized fully this month, when Buhari’s found validation for subsidy removal, except by a another name. According to Information Minister Lai Mohammed, “Nigeria is Broke.”  In clear policy language, the fuel subsidy was no longer sustainable. Evoking Nigeria’s insolvency also meant that there would be no reprieves or basis for meeting labour unions’ imminent demands.  As expected, rather than a balanced and considered response, segments of Labour invoked strikes, seemingly oblivious of the inherent contradictions.

What really is subsidization as a policy option? “A subsidy is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.”  Placing Nigeria’s fuel subsidy in its proper context requires understanding that the most common forms of subsidies either producer or consumer focused.  “Producer/Production subsidies ensure producers are better off by supplying market price support, direct support, or payments to factors of production. Consumer/Consumption subsidies commonly reduce the price of goods and services to the consumer.” Whereas successive Nigerian governments harped on the need to end the fuel subsidy, the courage and political will seemed utterly lacking. But on 11 May 2016, the federal Government unilaterally increased the pump price of premium motor spirit (PMS) from N86.50k to N145.00 per litre –a markup of 67.63%.  Even though the Buhari Government will eventually get credit for the gutsy policy of ending fuel subsidy, it was sufficiently concerned about the repercussions of subsidy removal that it elected to call the policy action by another name —fuel hike. Was it policy obfuscation or a lie?

The fuel subsidy was, is and will remain controversial. The merits of removing the subsidy are strong.  Subsidy payments drain resources meant for human and welfare services, and core infrastructural projects such as power, road, bridges, ports and railways.  Fuel subsidy distorted the economy and planning. It always confounded Nigerians why successive governments that deregulated diesel, deregulated aviation fuel and the aviation industry, seemed utterly incapable of deregulating PMS, which was required to drive both the national transportation system, homes and industries. Simply, fuel subsidy was a major source of foreign exchange revenue for select Nigerians, who had privileged access to contracts and facilities to lift, process, procure and market premium motor spirit (PMS) – all at guaranteed favorable foreign exchange rate sourced from the national coffers.  The rest of Nigeria simply underwrote their greed.  But there was more. Till date, “The federal government of Nigeria cannot explain the difference between the amount actually disbursed for subsidy and the cost borne by Nigerians”.  Interestingly, those who opposed subsidy removal while outside government are the first to support its retention once inside government. This means that the historical and political imperatives of fuel subsidy removal in Nigeria have always been controversial and dodgy. Similarly, the compelling arithmetic of the fuel subsidy has been nothing but fuzzy math. Both dispositions are resultant realities of successive Nigerian governments having lost control of the narrative justifying the retention or removal of fuel subsidy in the public interest.

Nigeria’s plethora of subsidies relate to imported items not readily available in Nigeria. Petroleum products should not be among them; but they are. First, if government’s energy policies were right and purposeful Nigerians would pay relatively less for petrol and there would be no need for subsidies. Second, if government energy policies were farsighted, there would be refineries of various sizes and capacities in half of the thirty-six states.  Third, if government energy policies were visionary, there would be alternative sources of energy, and diversified transportation system that would put less pressure on our demand and consumption of PMS. Fourth, if those states that were oil-producing were not insensately greedy, more states like Anambra, Bornu, Kogi, Enugu and Lagos would have become oil-producing states, thus boosting domestic exploration and production capacity. Fifth, if Nigeria really practiced free market economics and enterprise, then, those with the wherewithal would be refining, importing and selling PMS without governmental interference. Because all these desirable assumptions were lacking, the fertile ground existed for those who bilked Nigeria of billions all in the name of fuel subsidies.

Subsidy removal given its sensitivity, required broad consultations and ownership. From every indication, the present policy was clearly implemented by subterfuge or by default. The latter seems more the case.

The subsidy removal is quite emotive and has drawn criticisms and strike action. But depending on the Nigerians you ask, the subsidy removal will either mark the hardheaded and courageous decision of the Buhari administration, or its utter folly. Interestingly, there is still no consensus on whether the recent fuel hike, which pegged the PMS at N145, was a subsidy removal or just a hike. But really, considering the amount of revenue Nigeria earned over the years, Nigerians deserve the right to buy PMS at affordable prices, far less that the pre-deregulation price of N87 and certainly less than the newly fixed rate of N145.

Surprisingly the fuel subsidy issue ripped the labour unions apart, as those in support or in opposition vehemently held on to their positions. Arguing that “it is commonsensical that the fall in the international price of crude oil should only lead to a further fall in the prices of PMS in Nigeria” Chief Mike Ozekhome, a human rights lawyer characterized the fuel hike from N86 to N145, the “most insensate, foolish, unsympathetic and anti-people decision the government has yet taken in its flip-flop one year of clueless and directionless government.” Prof. Obi Nwakanma sees the subsidy removal as part of President Buhari’s policy summersault: “the fact is that he has broken every promise he made in his election campaign, and reversed every position – indicate a level of confusion in his administration that should have Nigerians really worried and prepared for the worst.” In the present circumstance, there remains an obvious critical gray policy area.

Subsidy removal given its sensitivity, required broad consultations and ownership. From every indication, the present policy was clearly implemented by subterfuge or by default. The latter seems more the case. Undoubtedly, there was a meeting on 12 May 2016, attended by Vice President Yemi Osinbajo, Minister Ibe Kachikwu and some ranking members of the Buhari administration, some National Assembly leaders, some governors and representatives of Labour led by NLC Secretary-general Dr. Peter Ozo-Eson. Thus government was well represented. Yet, by Labour’s account, the meeting rose with no agreement on the process or on new pump prices. Nonetheless, soon after, the government announced a new pump price, leaving Labour no choice but to allege that “The minister used deceit to market whatever policy they had brought forward” and did so in violation of the extant Act that set up the PPPRA: “Yes, it is illegal. There is a law; the Petroleum Products Pricing Regulatory Agency Act stipulates the legal framework for the management of prices of petroleum products. That power is vested in the PPPRA board and the law carefully puts in place the membership of that board. The minister has become a sole administrator in the sector. There is no board for the Nigerian National Petroleum Corporation, there is no board for the PPPRA, hence, for anyone to perform their function is therefore illegal.

The Federal Government, for its part, said the fuel hike was predicated on the critical shortage of foreign exchange and the need to allow independent marketers to commence importation by sourcing their own foreign exchange, after NNPC 50-50 bridging efforts collapsed. Vice President Osinbajo offered this insight: “These (major and independent) marketers, up till three months ago, sourced their foreign exchange from the Central bank of Nigeria (CBN) at official rate. However since last year, independent marketers have brought in little of no fuel because they have been unable to get foreign exchange from the CBN. The CBN simply did not have enough (in April, oil earnings dipped to $550 million. The amount required for fuel importation alone is about $225).” What this means, is that the fuel subsidy was essentially ended, not as a deliberate policy option or negotiated policy settlement, but by default, compelled by force majeure. This explains why a government, which had earlier reduced pump prices from N87 per liter to N86 at NNPC stations and N86.50 at others will suddenly do a volte face and jack up prices  unexpectedly. Moreover, the foreign exchange shortage excuse conveniently delinked the subsidy removal from any IMF prescription or recommendation. The split of the Labour Unions only strengthened the government’s hand. Unsurprisingly, consequently it was Labour that blinked. But the potential for renewed conflict exist. Without the favouarble foreign exchange rates, can government regulate maverick importers, who must now sell PMS on the bases of the rate at which they sourced foreign exchange? Will this be a case of ending the subsidy yoke only to submit to importers’ whimsical pricing yoke?

Setting persisting governance insincerity aside, the genesis of the subsidy crisis is traceable to the dearth of affordable PMS in Nigeria; absence of full deregulation of the petroleum industry, (non-passage of the PIB) and a poor tax collection regime. Add to that the unavailability of foreign exchange to support our consumption and the non-diversification of the energy sector.  If the government was policy focused, it would have declared the amount tagged on to petrol prices as luxury tax; while subsidizing the cost of mass transit.  That way, there would be a trickledown effect for poor commuters.  Hence, as Simon Olawale rightly observed, “Any upward adjustment in the price of petrol increases the cost of living and worsens the economic hardship, even if in the short run. It is not just about commuting; we are transporting goods and services. We are powering our homes and businesses withy generators. Even the landlady will raise the rent to make ends meet. That is why the hiking of fuel prices has always led to protests and riots.”

Sentiments aside, myths have always driven the fuel subsidy regime. In his 2012 lecture, Tunde Bakare dissected the unsubstantiated claims by Nigerian governments about the subsidy.  As he noted then, “the federal government of Nigeria cannot explain the difference between the amount actually disbursed for subsidy and the cost borne by Nigerians.” That question of unaccounted-for variance subsists. Furthermore, the notion that subsidy favour the poor remains a fallacy. Indeed, “Findings by the IMF show that globally, the bottom 20% of the household take only 7% of the fuel subsidy while the richest 20% take 43%. Nigeria fuel subsidy at some point accounted for 30% of total expenditure of the Federal Government and 118% of the capital budget”.  In ending the subsidy by default, have we transcended the myth? Since successive Nigerian governments have played coy with fuel subsidy, the Buhari government does not enjoy the benefit of public trust on this matter, when it ought to and when indeed, market forces are now the key drivers compelling subsidy removal. Suspicions and question therefore persist. Some are understandably irrational, but some observations are germane and authentic.  This analyst shares Komolafe’s views fully; “the larger question is about policy disarticulation. There is the huge challenge of making deregulation truly competitive, transparent while ensuring that public interest is protected. For instance, how can it be justified that this policy step of deregulation is taken at a time when the regulatory agency is not properly constituted? And what on earth does it cost to constitute the Board of PPPRA?”

The present policy line, regardless of its appellation, was never a critically thought-out policy option, evaluated for its positive and negative implications. Clearly, the government was simply unable to sustain its official foreign exchange rate, used routinely by marketers for importing PMS. Then again, there has never been any certainty, that the select importers, who got the favourable rates, indeed utilized their entire allocation for importing fuel. One salutary overcome of the subsidy removal or hike, is that the new pump price might make it less economical to ship Nigeria’s PMS to neighbouring states. But the heady question is this: what will the government do with the savings of $255 million a month that was routinely outsourced to importers?  How would the funds trickle down to Nigerians? It seems ironic, that external forces would forcibly end Nigeria’s fuel subsidy, at a time when it seemed most inopportune and least tolerable to do so.  Whether the government and labour unions eventually find common grounds or not; Nigerians feel that another campaign promise was broken. Far more unfairly, there is increasingly a disconcerting sense that Buhari’s policy summersaults continue unabated. Overcoming such distrust remains for President Buhari, a looming challenge.

Oseloka Obaze, MD & CEO

Oseloka Obaze, MD & CEO

Mr. Obaze is the former Secretary to the State Government of Anambra State, Nigeria from 2012 to 2015 - MD & CEO, Oseloka H. Obaze. Mr. Obaze also served as a former United Nations official, from 1991-2012, and as a former member of the Nigerian Diplomatic Service, from 1982-1991.

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