Fuel subsidy removal: The right way to go

Following Federal Government’s plan to completely withdraw fuel subsidies, this move has attracted heated debates giving the socio-economic implications on Nigerians. However, full deregulation of the petroleum sector is believed to ensure sustainable petroleum pricing, writes Alexander Chiejina

In Nigeria today, the most contentious issue is the removal of subsidy on petroleum products which has generated wide debate by Nigerians from all walks of life, including the civil society groups, particularly the Nigerian Labour Congress, owing to its implications on the nation’s socio-economic landscape.

Over the years, the Federal Government has operated a fuel subsidy with the purpose of making petroleum products available and cushion the effect of the true market prices of the products on the populace. According to reports by the Petroleum Pricing Regulatory Agency (PPPRA), the country consumes an average of 35 million litres of fuel daily.

As of August 15, 2011, the pricing template of the PPPRA showed that the landing cost of a litre of petrol is N129.21. It showed the margin for transporters and marketers as N15.49, bringing the expected pump price of petrol to N144.70. But the official pump price for petrol is N65 per litre, a difference of N79.70, which the government subsidises.

While it is believed that the Federal Government spent over N2trillions on fuel subsidy in the past five years, it also pays heavily to subsidise kerosene which is imported into the country through the Nigerian National Petroleum Corporation (NNPC), although the actual amount is not known.

Even as the government plans to remove fuel subsidy as punitive measures to make racketeering by dubious businessmen unattractive, organised private sector and concerned Nigerians believe that fuel subsidy removal is long overdue as it hasn’t benefited most Nigerians even as full deregulation of the petroleum sector will encourage private-sector participation in building refineries and reduce prices in the long run.

Making this known at the recent Presidential Retreat with the National Economic Management Team, NEMT, at Abuja, key players in the Organised Private Sector, (OPS) disclosed that the current subsidy on Petroleum Products by the Federal Government as “inefficient, corrupt and a waste of scarce national resources.”

According to most participants at the retreat with President Goodluck Jonathan and Ngozi Okonjo-Iweala, Coordinating Minister of the economy leading the government team while Joseph Jamodu, President, Manufacturers Association of Nigeria (MAN) leading the OPS to the event, they noted “that the majority of Nigerian citizens do not enjoy the benefit of the current subsidy of petroleum product today, rather the subsidy itself operate to the benefits of very few beneficiaries”.

Key participants such as Aliko Dangote, Femi Otedola, Jimoh Ibrahim, Tony Elumelu, Wale Tinubu, among others who bared their minds on the controversial fuel subsidy, alluded to the fact that the financial burden of subsidy is unsustainable and untenable in a nation where critical infrastructure, human and capital development are in dear need of investment.

Expressing his view, Wale Tinubu, Chief Executive Officer/Managing Director, Oando Plc noted that the issue of deregulation has been over flogged. While noting that this year alone, Nigeria is believed to have spent $8 billion till date subsidising petrol, the Oando MD stated noted this money is two or three times the total value of health, education and other social amenities.

In his words “At the end of the day you ask yourself another question, who consumes petrol? The bulk of petrol is the middle and upper class subsidy, is not subsidy for the most. The largest scale public transportation is run on diesel which is already deregulated, so who is really benefiting from this money? Now imagine if you have $8 billion invested in education, roads and health, you will have a much better society. The challenge really is that are we really sure the government will deploy this money one saved will be channelled to these areas? That really is the challenge.

“So, let’s focus on that challenge by asking the government to put an effective monitoring mechanism to ensure the money saved is spent appropriately. The monitoring mechanism may include the Civil Society, the labour, Nigerians as well as anybody at central level and state level to ensure this is properly channelled. The labour issue is not whether or not we should deregulate but that money should be channelled back to the people who need it; the Nigerian masses,”

Diezani Allison-Madueke, Minister for Petroleum Resources

In a separate forum, Emmanuel Ihenacho, Former Minister of Interior and Chairman of Depot and Petroleum Products Marketers Association of Nigeria (DAPMAN), allude to the fact that deregulation would crash down prices.

While acknowledging that petroleum price might go up immediately after the commencement of deregulation, Ihenacho added that full deregulation of the petroleum sector will encourage private-sector participation in the building of refineries and bring down prices in the long run.

The former Minister of Interior noted that “only the rich, who owns fleet of cars and other vehicles benefited from petrol subsidy and not the masses. Therefore, the task ahead of the President Goodluck Jonathan’s administration is not to roll out the gains of removal of subsidy because they are unquantifiable. 

“Removal of subsidy will encourage Shell, Chevron, Total and other private investors to build more refineries to create employment opportunities, crash down the price of fuel to below N65 per litre and also engender stability in the supply of petroleum products, among other benefits. What this administration should be concerned with is to demonstrate in practical terms that the proceeds from the removal of subsidy will not be stolen by some government officials,” Ihenacho concluded.

A cursory look at Oil Producing Exporting countries (OPEC) such as Saudi Arabia, Venezuela, Qatar, United Arab Emirates, etc, show that they have been able to refine their crude oil locally and at cheaper rate, to meet their daily demands of petroleum products and also export to other countries.

This is principally because unlike other OPEC countries that enjoy cheap fuel because of their functional refineries, Nigeria ’s total dependent on importation of refined petroleum products accounts for the high cost of fuel in the country. With over 36 billion crude oil reserves and average daily production of 2.6million barrels per day, Nigeria is the seventh exporter of crude oil, with 10th largest reserves in the world, but the only country among OPEC that imports refined petroleum products.

"Extra revenue coming into government coffers from no longer subsidizing petrol should not entirely be left in the hands of the government but 50 percent of it should be returned to the people through reduction of Value Added Tax (VAT), personal income tax rates and company tax rates, based on the projected Year 2011 revenues of the federal and state governments from these sources"

Since the country imports fuel, the price of products in Nigeria is a reflection of international oil prices, instead of a reflection of the cost of local refining. However, the landing cost of fuel from the international market is currently over N147 per litre and it is expected that if refined locally, the cost will be far less.

While it is alleged that the nation’s refineries are deliberately sabotaged to pave way for continued massive importation of petroleum from which many highly placed government protégés are defrauding the country, they also argue that what is required for sanity is to expose such people, hold them to account and institute a corruption-free system.

For Ajibola Ogunshola, former chairman, Punch Nigeria limited, he noted that from the country's past salutary experience of deregulation of previously government controlled monopolies and abolition of import licensing, Nigerians wonder whether the best thing would not be to get the government out of the way.

Ogunshola stated that as long as government continues to be involved in the local refining and importation of 

petroleum, with all the associated inefficiencies and corruption, the economic and political tension involved in subsidy removal debates will continue to come up from time to time especially when crude oil prices rise and whenever the naira weakens against the US dollar.

In his words “The government must get out of the way. Refinery construction and petrol importation, storage and distribution should be thrown open, subject only to quality control. The refineries should also be privatized. Since we know that our governments are profligate and corrupt, I propose that the extra money that will come into the hands of government from no longer subsidizing petrol should not entirely be left in the hands of the government but 50 percent of it should be returned to the people through reduction of Value Added Tax (VAT), personal income tax rates and company tax rates, based on the projected Year 2011 revenues of the federal and state governments from these sources on one hand and the projected amount to be spent on subsidies in Year 2011, on the other hand.

 

“This can be easily worked out mathematically and the consequent tax reductions agreed at the next meeting between the governors and the Federal Government and the Nigeria Labour Congress and the Trade Union Congress, along with their technical advisers, should also have a seat at the table to ensure that what is done is what is to be done,” Ogunshola concluded.