Three years after Nigerians grudgingly submitted to the federal
government's conditions for removing fuel subsidy, government-controlled
prices for petroleum products continue to impede the effective
implementation of subsidy reforms. Local refineries in Nigeria are
either comatose or perform below refining capacity. The practice of
adopting uniform benchmark pump prices and reimbursing marketers for
their transportation expenses has infamously stifled productivity,
making local refining even more unattractive. Removing these price
controls and introducing a free market economy are now absolutely
imperative for a successful subsidy reform agenda.
Outrage and widespread resistance greeted the Nigerian government's
attempt to remove fuel subsidy from premium motor spirit (popularly
known as petrol) on January 1, 2012. The reason behind the then abrupt
subsidy cuts was to block leakages that characterised the administration
of subsidies, freeing up important revenue for investment in critical
sectors such as health, education, infrastructure, and to create jobs.
The fuel subsidy removal policy was partially reversed following the
violent protests that erupted in the wake of the reforms. Barely three
years down the line, there are dramatic shifts in public opinion
regarding the propriety of retaining fuel subsidies. Former British
Prime Minister, Tony Blair re-echoed this sentiment at a recent meeting
in Abuja when he urged Nigeria's President-elect, General Muhammadu
Buhari, to eliminate energy subsidies.
So what changed between 2012 and 2015? There are three things to take
note of. First, the shift in public opinion could be attributed to
increasing information about the colossal levels of corruption riddling
the subsidy administration process. Knowledge has also increased about
how energy subsidies benefit low-income households a lot less; impose
deep cuts on national budgets; discourage investments in renewable
energy development; increase atmospheric greenhouse gas concentrations,
while increasing countries' vulnerability to the volatility of energy
prices in the international market. Second, it is instructive to note
that this "growing knowledge" has not yet fully permeated into policy
halls and energy reform processes. A lot more work still needs to be
done to convince the Nigerian parliament to embrace total cuts in
petroleum products consumption subsidy, and codify this commitment in
policy instruments. Third, subsidy reforms will be at the front-burner
of the incoming government's policy agenda. What may be different is
that while the previous subsidy reforms in 2012 were directly initiated
by government, proposals for total subsidy reform under the General
Buhari-led government may be externally-triggered. During the 2012 era,
the federal government made unsuccessful efforts to get maximum citizen
and civil society buy-in for the reforms. But this time around, the
obligation to "win both hearts and minds" within and beyond policy
circles may shift to the civil society. This role reversal is not going
to be an easy task.
As we wait with bated breath for the debates around fuel subsidy
reforms to resume in earnest, it bears underlining that there are pros
and cons to the anti-petro-subsidy policy. Currently leading the chorus
opposing the removal of fuel subsidy is the Conference of Nigerian
Political Parties (CNPP), arguing that fuel subsidy could as well be a
myth. But if it does exist, then one must recognise that "unbridled
corruption" is quite distinct from "subsidy administration." CNPP argues
that what needs to be done is to sanitise subsidy expenditures by
exterminating corruption, so that both the rich and the poor can enjoy
the full benefits of energy consumption subsidies.
This argument has some merits. For instance, an estimated N1.32
trillion was spent on subsidies in the ten months to October 2011, which
is about four times the amount spent in the entire 2010 without
demonstrable corresponding increase in the volume of fuel importation
and supply of petroleum products during both periods. Shocking
revelations from both the Aig Imokhouede-led task force that probed the
subsidy regime unearthed massive discrepancies in official subsidy
calculations and disbursement arrangements. A truly independent forensic
audit would clearly show the extent of gaps that exist and the actual
size of energy subsidies in Nigeria. This is an important first step
towards reforming energy subsidies in Nigeria.
The second drawback is that developing countries contribute a lot
less to atmospheric greenhouse gas concentrations than their developed
country counterparts. That many developed countries with high emission
records - like US and China - continue to subsidise fossil fuel
production further buttresses this point. This means that developing
countries bear the brunt of the adverse environmental consequences
(traffic congestion, air pollution) of energy subsidies in which they
contributed so little to. Arguably therefore, energy subsidies are
evidently not a primary course of the negative impact of environmental
harm and climate change impacts felt by poor countries.
Thirdly, in a country where the World Bank's 2014 assessment
established that over 70% of Nigeria's 170 million people live in
extreme poverty, and depend on $1.25 (N200) or even less per day,
subsidies help the poor pay lower prices for energy. Given that
renewable energy production is still at its infancy stages in Nigeria,
there is really no sustainable alternative to petrol fuel. Even in
advanced economies, no other energy source has successfully displaced
fossil fuels. Because electricity shortages are rife, low prices
significantly expand the access of the poor populations to petro-fuel
which is generally used as an alternative source of electricity. The
extent to which subsidies benefit the poor and vulnerable groups,
especially women, is the focus of a new study being undertaken by Spaces
for Change.
Not only that, the lack of political will to eliminate subsidies has
been the greatest setback to effective subsidy reforms around the globe.
Ample evidence shows huge contradictions between the policy and
practice of States' energy subsidy policies. Recently, Guardian found
out that despite their humongous profits, "the world's biggest and most
profitable fossil fuel companies are receiving huge and rising subsidies
from US taxpayers." For instance, Exxon Mobil's $41bn profit did not
preclude it from benefitting from $119m of state subsidy in Louisiana
since 2011. Similarly, despite instituting bold policy and legislative
commitments to climate change, US federal subsidies have risen by 45%
after President Barack Obama's 2009 call on the G20 to eliminate fossil
fuel subsidies. So, withdrawing fuel subsidy remains an uphill struggle
in both developed and developing economies as consumption and production
subsidies are pervasive, with coal accounting for the highest receipts.
In the Nigerian context, fuel subsidies are unsustainable and the
cost will keep growing... If unrestrained, fuel subsidies will likely
outgrow the national revenue intake, making it difficult for the
government to efficiently utilise its revenues to develop critical
sectors of the economy.
Regardless of these drawbacks, there is little doubt that fuel
subsidies are notoriously inefficient and withdrawing them has many
advantages. The aforementioned pro-subsidy removal arguments advanced by
the Nigerian government in 2012 remain as valid as ever in 2015.
Reechoing those arguments in a recent report, the International Monetary
Fund found that "eliminating post-tax energy subsidies in 2015 could
raise government revenue by $2.9 trillion (3.6 percent of global GDP),
cut global CO2 emissions by more than 20 percent, and cut pre-mature air
pollution deaths by more than half."
In the Nigerian context, fuel subsidies are unsustainable and the
cost will keep growing. Although vehicle importation and registration
figures are not properly tracked, Wall Street Journal reports that the
Nigeria unit of the Toyota Motor Corp. estimates that 155,000 used cars
of all makes were imported into the country in 2008. Compare that to the
number of registered vehicles as of 2011, which the Global Health
Observatory Data Repository puts at 12,545,177. Equally, rising with car
importation is fuel consumption and, of course, a corresponding
increase in fuel subsidies! If unrestrained, fuel subsidies will likely
outgrow the national revenue intake, making it difficult for the
government to efficiently utilise its revenues to develop critical
sectors of the economy.
As Samuel Diminas of Westpaq Oil Inc. rightly observed, fuel subsidy
has never been appropriately budgeted for, and is structured in a way
that allows corruption to flourish. "Subsidy budgets usually reflect the
sums unpaid for from cleared invoices which are carried over from the
past year. This approach incentivizes marketers to manipulate subsidy
figures especially where they are expected to invoice the federal
government 90 days after the fuel has been sold out and consumed in
different locations across Nigeria," Mr. Diminas said.
Three years after Nigerians grudgingly submitted to the federal
government's conditions for removing fuel subsidy, government-controlled
prices for petroleum products continue to impede the effective
implementation of subsidy reforms. Local refineries in Nigeria are
either comatose or perform below refining capacity. The practice of
adopting uniform benchmark pump prices and reimbursing marketers for
their transportation expenses has infamously stifled productivity,
making local refining even more unattractive. Removing these price
controls and introducing a free market economy are now absolutely
imperative for a successful subsidy reform agenda. In addition to that,
policies which target systemic and process checks are the appropriate
means for achieving transparency and accountability goals in the
Nigerian energy sector. The good news is that the falling price of oil
in the international market presents a unique opportunity for countries
like Nigeria to effect the transition to a total non-subsidy regime more
painlessly.
