Friday, 4 May 2012

- FUEL SUBSIDY REMOVAL IN NIGERIA: - PROBLEMS, PROSPECTS AND A WAY FORWARD

INTRODUCTION
Although it certainly cannot be seen nor be described as the best New Year gift to citizens, on January 1, 2012, Nigerians ceased to enjoy all forms of subsidies on Premium Motor Spirit (popularly called Petrol) courtesy of the new policy announced by the Petroleum Products Pricing Regulatory Agency (PPPRA). The question of removing or sustaining the subsidy regime had featured as a dominant topic – of public debate – in the last three months, but any keen observer would have noticed the government had already made up its mind to do away with the policy (i.e. Fuel Subsidy) which it said costs about N1.3 trillion – N1.5 trillion at the end of 2011 to keep afloat. The PPPRA regulates he downstream Oil and Gas Industry on behalf of the Federal Government and in a statement mid-Sunday (January 1, 2012) said, “By the removal of subsidy on Premium Motor Spirit (Petrol), the downstream sub-sector of the Petroleum Industry is deregulated for Petrol”. Deregulation leaves market forces as the sole determinant of product prices. While over the years, many Nigerians have opposed the implementation of the policy in the Oil and Gas Industry, international finance and donor agencies like the World Bank and IMF have been very harsh in their criticisms of the successive governments that have sustained the policy for a single inherent flaw they condemned as harmful to the growth of the Nigerian economy – Subsidy (Iba, 2012).
Furthermore, the issue of fuel subsidy removal has torn this nation into two factions. The government and economic experts such as the Central Bank governor, Sanusi Lamido Sanusi; the Federal Minister of Finance, Dr. Mrs. Ngozi Okonji – Iweala; Federal Minister of Petroleum Resources, Mrs. Deziani Allison-Madueke (among others) on one hand, and the masses led by the NLC, TUCN and CLO on the other hand. Being a new issue in Nigeria, it is therefore necessary that research works with holistic views such as this can be carried out to enlighten and educate both factions so that the rift can be closed. It is therefore the objective of this study to analyze the impacts of Fuel subsidy removal on the economy and as well make recommendations as to how the government can manage the revenue from fuel subsidy.


WHAT IS FUEL SUBSIDY?
A subsidy is an assistance paid to a business or economic sector mainly by the government to prevent the decline of that industry (Todaro et al, 2009). On the other hand, the Oxford Advanced Learners Dictionary (2001) defined a subsidy as money that is paid by a government or an organization to reduce the cost of services or of producing goods so that their prices can be kept low. In addition, Bakare (2012) points out that to subsidize is to sell a product below the cost of production. Within the Nigerian context, fuel subsidy means to sell petrol below the cost of importation.


HISTORY OF FUEL SUBSIDY IN NIGERIA
The history of issues on fuel subsidy in Nigeria dates back to April 1992 when Ibrahim Babangida’s government raised the price of a liter of fuel from 15.3kobo to 20kobo. He did it again on March 31, 1986, from 20k to 39.5k; on April 10, 1988, from 39.5k to 42k. On January 1, 1989, he increased the price from 42k to 60k (although the regime said it was for private vehicles only, but the price remained 42k for commercial vehicles). On December 19, 1989, it moved to a uniform price of 60k. On March 6, 1991, the price of a liter of fuel was increased from 60k to 70k and that was the price when he stepped aside in August 1993. Chief Ernest Shonekan increased the price of a liter of fuel from 70k to N5 on November 8, 1993 but a hectic mass protest, saw Abacha take over power. The incoming Abacha regime reduced the increment to N3.25 on November 22, 1993. On October 2nd 1994, the Abacha junta increased the price of fuel to N15, from N3.25 but after massive street protests, the regime reduced the increment to N11 on October 4, 1994. That was the price till Abacha passed on, and the Abdulsalami Abubakar caretaker regime raised the price from N11 to N25 on December 20, 1998 and after days of sustained protests, it was forced to reduce the increment to N20 on January 6, 1999. The Obasanjo’s presidency adopted fuel subsidy as the bedrock of its economic policy, for no sooner than it was sworn in that it effected an increment to N30 on June 1, 2000 but protests and mass rejection forced it to reduce the increment to N25 on June 8, 2000 and further down to N22 on June 13, 2000. The regime was again to increase the price to N26 on January 1, 2002 and again to N40 on June 23, 2003. He was to raise it up to N70 by the time he left in May 2009 but the incoming Yar’Adua regime reduced it to N65, after general protest against the new price regime. Although the Yar’Adua government made efforts to increase the price of petroleum products it could not scale through following increased mass disapproval for such act (retrieved from http://www.themaceonline.com/hous-of-reps-news/241-fuel-subsidy-removal-the-challenge-befor-house-committee-on-petroleum-downstream).
Presently, the Goodluck Jonathan administration has removed fuel subsidy which the administration claims will save it N1.3trillion to N1.5trillion annually which it will channel into infrastructural development (Lawson, 2012).



MANAGEMENT OF FUEL SUBSIDY BEFORE ITS REMOVAL (01/01/12)
The idea of fuel subsidy was a good one as it was intended to give the average Nigerians access to cheap petroleum products, reduced transport and production costs. The Petroleum Products Pricing Regulatory Agency (PPPRA) headed by the Executive Secretary Mr. Reginand Stanley and the Ministry of Petroleum Resources headed by the Minister Mrs. Deziani Allison-Madueke are responsible for the regulation, enforcement and management of fuel subsidy  (http://www.vanguardngr.com/2012/01/oil-subsidy-removal-and-a-way-forward/). However it should be noted that there were obvious flaws in the policy at inception and up to January 1, 2012 when it was removed (Iyobhebhe, 2012): -
1)   There were more private retailers of petroleum products than the state owned NNPC stations.
2)   The regulatory framework (PPPRA) used to enforce the subsidy was weak, under resourced and suffered from the Nigerian disease. The secrecy and lack of transparency by the administrator of the subsidy (the NNPC) did not help matters either.
3)   Nigeria still could not make her refineries efficient. This means that Nigeria could not produce enough refined products for local consumption.
Finally, due to the weak regulation by the PPPRA, some economic saboteurs/cabal were able to misappropriate the fuel subsidy money and channel it to their own personal pockets instead of using it for what it was intended for. Those who benefitted from the fuel subsidy largesse included: -
1)   Folawiyo Oil, N113.3billion
2)   Oando Nigeria Plc., N228.506billion
3)   IPMAN Investment Limited, N10.9 billion
4)   MRS, N224.818 billion
5)   ACON, N24.1 billion
6)   Atio Oil, N64.4 billion
7)   AMP, N11.4 billion
8)   Enak Oil and Gas, N19.684 billion
9)   Bovas and Co. Nig. Ltd., N5.685 billion
10)Obat, N85 billion
11)AP, N104.5 billion
12)Honeywell, N12.2 billion
13)D. Jones Oil, N14.8 billion
14)Emac Oil, N19.2 billion
15)Capital Oil,N22.4billion
16)AZ Oil, N18.613 billion
17)Eternal Oil, N5.57 billion
18)Dozil Oil, N3.375 billion
19)Fort Oil, N8.58 billion



WHY FUEL SUBSIDY REMOVAL?
According to Iyobhebhe (2012), the Nigerian government stated that its Medium Term Fiscal Framework won’t work unless the subsidy is scrapped or to put it in another way that the scrapping of the subsidy is an integral part of its MTFF. That it needs the Ni.3trillion savings for critical infrastructural development projects.
However, there is a prevailing view in Nigeria that the new Minister for finance and coordinating Minister for the Economy, Dr. Mrs. Okonji-Iweala is advocating the IMF and World Bank agenda (Iyobhebhe, 2012). The     theory is that deregulation and removal the subsidy may initially lead to inflationary pressures but as the market is opened up to investors, billions of dollars will flow into the downstream sector and more private refineries will open for business in Nigeria. Eventually, the market will self regulate and prices for refined petroleum products and other goods and services will be at the natural market level as competition forces prices down. That the long term benefit will be more than the short term pain. If the government is indirectly pursuing the IMF agenda for Nigeria, then the removal is just one puzzle in the massive jigsaw.


BENEFITS FROM FUEL SUBSIDY REMOVAL
If well implemented, there are certain benefits which the government and her economic experts explained can be derived from the fuel subsidy removal. These benefits includes: -
1)   Fuel subsidy removal will allow government access to more funds to develop infrastructure (Iba, 2012).
2)   Reduction in the pressures on foreign reserves
3)   It will provide employment for the teeming jobless citizenry as well as improve education, health, power, water resources and agriculture (Nwadialo, 2012).
4)   It will reduce borrowing
5)   Allows free market operation
6)   Helps address the great imbalance between the recurrent and capital expenditure in Nigeria (Iyobhebhe, 2012).
7)   Encourages local and foreign direct investment in the oil sector (http://www.businessdayonline.com/NG/index.php/analysis/editorial/31627-cushioning-effects-of-fuel-subsidy-removal).
8)   Frees more funds for local investment in the oil sector.
9)   Increases local refinery production.
10)Reduces importation of refined products in the medium to long term.


CONSEQUENCES/DEMERITS OF FUEL SUBSIDY REMOVAL
The Nigerian economy over the years has been programmed to revolve around the supply of ‘cheap’ petroleum products. An average household in Nigeria depends on subsidized by-products of crude oil such as petrol and kerosene for domestic and commercial use. This dependence is not helped either as public electricity supply from PHCN is epileptic. Almost every home and business is powered by generators fired by subsidized petrol. The few small scale businesses such as Hotels, Barbers, Welders, Hair dressers, Pepper sellers, Cool-room owners, Food sellers, Private and Government hospitals etc all rely on subsidized fuel. Transportation costs for instance have gone up and this will result in spiral effect on other sectors- all other businesses in fact revolve around the transport sector. It is very obvious that subsidy removal will worsen the country’s already inflation rate. In fact it will result in hyper inflation as prices of goods and services are bound to skyrocket beyond the reach of many. Even the Naira will not be spared, because it will further depreciate in value as much money will be chasing fewer goods. Creditors also lose during inflation because if they lend out money when there is no inflation and the prices are moderate or stable, the moment inflation sets in the value of that money to the creditor is lost (Louis Iba, 2012). Finally the demerits can be outlined as follows: -
1)   They will be a drop in the standard of education
2)   It will have a multiplier effect on various aspects of the people’s lives thereby making more people to drop from the near non-existent middle class (http://www.thisdaylive.com/articles/cost-gains-of-fuel-subsidy-removal/107366/).
3)   Public and private sector workers on low salaries will see their standard of living drop dramatically as they struggle to make ends meet.
4)   Sharp increases in operating costs Micro and Small Enterprises, many of which rely on small electricity generators powered by petrol (http://www.nigerianbestforum.com/generaltopics/?p=114394).
5)    Pressure from organized labour to increase the national minimum wage to between N50, 000 to N100, 000 per month (Iyobhebhe, 2012).
6)   It may lead to social and industrial unrest as the cost of living in Nigeria pushes the average citizen in Nigeria to below the M46, 500 or less per annum that the average Nigerian lives on (GDP per head).
7)   Unemployment will definitely rise as SMEs (accounting for more than 60% of employers in the Nigerian organized sector) find it more expensive to either hire or retain staff.



MY PERSONAL VIEW ON FUEL SUBSIDY REMOVAL
Fuel subsidy removal and deregulation as economic policies are good. But doing what is good at the wrong time makes it bad. The government did not follow due process and there was no brainstorming of the policy before it was passed. This makes the poor masses to see the government as undemocratic and uncaring because fuel subsidy was removed even as the Boko Haram sect were causing havoc and atrocities. Due to the poor timing, fuel subsidy removal has caused a lot of untold hardships on the poor, parents could no longer afford to pay their children’s fees and families could no longer afford three square meals in a day. In addition to all the demerits of fuel subsidy removal, there will be abuses – abuses of customers by operators. This is because the regulatory institution in the oil and gas sector is grossly incompetent to protect the rights of consumers under a deregulated environment; both the PPPRA and the DPR could not even rise above mediocrity levels of performances during a regulated regime. Hoarding and arbitrary increase of prices were very prevalent even under a regime where government was the sole provider of the fuel and was also paying them subsidies. In some states a monopoly situation would definitely arise and even where it doesn’t, a possible gang up by operators to rip-off consumers is not what can be ruled out.
Furthermore, the experiences in the deregulated telecommunication sector has highlighted how incompetent or fragile the regulatory environment in Nigeria is. Customer abuses are very rampant in the telecoms sector. Sometimes you pay for GSM services you don’t get - either calls don’t get through or text messages fail, yet you are charged. And getting a redress also becomes difficult if not impossible. Oil and gas operators could therefore do worse under the present deregulated regime. For instance, until such a time where deregulation allows more retail outlets to be opened in all villages in the country, an operator can just wake up every week and jack up prices where he knows he enjoys a monopoly and that given his location it will cost consumers more time and resources to get to the next filling station.
Therefore, the federal government ought to have provided the palliative measures to cushion the effect and ameliorate the suffering of the masses (parents) first. It should have extended the period of awareness and sensitization to enable all stakeholders to actually appreciate government intentions and thereafter in a calm atmosphere start a gradual, stage by stage removal of the subsidy with little or no stress.


MANAGING THE REVENUE FROM FUEL SUBSIDY: - A WAY FORWARD
The fuel subsidy removal allows the government funds of approximately N1.3 trillion to N1.5 trillion. But without proper management, control and investment this revenue will be embezzled by corrupt government officials. The government should form a committee or an agency that will be in charge of the management and regulation of the use into which the fuel subsidy is put into. Below are areas or projects into which the government can invest the fuel subsidy funds: -
1)   Construction and maintenance of Roads, Bridges and Rail lines.
2)   Construction of Hydro electric power plants, Dams and other Power projects
3)   For Agricultural and Rural development (which should include Research, Mechanization, Price Stabilization Scheme, Fertilizers and seeds procurement etc.)
4)   For dredging of the Lower River Niger
5)   In the Education sector (Restructuring of schools, Training of teachers, Vocational training centers, giving scholarships etc.)
6)   Eradication of polio, procurement of HIV/ Retro-viral drugs and vaccines, Maternal and child health-care, funding of NHIS etc.
7)   Security of lives and property especially using of Security patrols on highways, beefing up security at ports (both seaports and airports)
8)   Payment of Minimum wages
CONCLUSION
In conclusion, despite its adverse effects the government has decided to remain firm and not reverse the fuel subsidy removal policy. It is therefore of importance that the estimated N1.3 trillion to N1.5 trillion revenue be used judiciously. The government must show real improvement in local refinery output, transport, road and communications. Infrastructure must feel the benefit; electricity generation and distribution must improve. If Nigerians can see where, when and how the revenue is utilized then Nigerians may bear the pain. But if the roads are worse than ever or refined petroleum products and power supply does not improve and hyperinflation ensues, then Nigerians may find it difficult to accept. It would simply be a case of short term pain for no long term benefits.


RECOMMENDATIONS
Finally, I find it necessary to make the following recommendations: -
1)   The Federal government should subsidize other sectors like the Transport, Agriculture, Housing, Education etc., this would add value to the lives of Nigerians. They can adopt the Lagos state model of Public – Private Partnership (PPP) initiative in the Transport sector.
2)   Savings from the excess crude account should be used solely for federal government capital projects.
3)   The government must come up with policies to compensate Nigerians, utilize the savings and explain how the inflation will be managed.
4)   The government should work on the regulatory industry, where the rights of the citizens must be protected.
5)   The government (President) should rebuild the people’s trust in its leaders by: - cushioning the effects of the fuel subsidy removal, curbing the excesses of the three tiers of government, investigating and bringing to Law all those corrupt officials/economic saboteurs/cabal that squandered the fuel subsidy largesse.
6)   Government should increase budgetary allocation to education, if indeed it wants to be among the first twenty economies in the world by 2020.
7)   Managers of Oil Companies and Filling Stations should ensure that the principles of the concept of Total Quality Management (TQM) are practiced in their organizations as this will go a long way in curbing their embezzling tendencies.
8)   The Economic and Financial Crimes Commission (EFCC) should always be at alert and make sure those responsible for the embezzling of the fuel subsidy money are brought to book. The EFCC should be allowed full access to relevant government information.
9)   Finally, I recommend this research work for further study.









REFERENCES
“Adverse Effects and Benefits of Fuel Subsidy Removal”, retrieved from http://www.nigerianbestforum.com/generaltopics/?p=114394.

“Cost – Gains of Fuel Subsidy Removal”, retrieved from http://www.thisdaylive.com/articles/cost-gains-of-fuel-subsidy-removal/107366/


“Fuel Subsidy Removal: A Catalogue of Frauds”, retrieved on January 5th, 2012 from http://www.thestreetjournal.org/2012/01/fuel-subsidy-removal-a-catalogue-of-frauds/

Hon. Uche Nwadialo (2012), “Fuel Subsidy Removal: A Nigerian Dilemma”, retrieved from http://www.vanguardngr.com/2012/01/fuel-subsidy-removal-a-nigerian-dilemma/

John Iyobhebhe (2012), “Removal of Fuel Subsidy in Nigeria: The Issues and Challenges”, retrieved from http://www.nigeriapolitico.com/subsidy%20.html

Lawson Alaenetonwa (2012), “Fuel Subsidy Removal: The Challenge before House Committee on Petroleum Downstream”, retrieved from http://www.themaceonline.com/house-of-reps-news/241-fuel-subsidy-removal-the-challenge-before-house-committee-on-petroleum-downstream

Louis Iba (2012), “Fuel Subsidy Removal: The Gains vs. The Pains, retrieved on January 3rd, 2012 from http://www.sunnewsonline.com/webpages/news/national/2012/Jan/03/national-03-01-2012-0021.html

“Oil Subsidy Removal and a Way Forward”, retrieved from http://www.vanguardngr.com/2012/01/oil-subsidy-removal-and-a-way-forward/

Oxford Advanced Learners Dictionary (2001), 6th edition, Oxford University Press, Oxford: Newyork.

Todaro M.P. and Smith S.C. (2009), “Economic Development”, 10th edition, Addison Wesley: p. 839, ISBN 978-0-321-48573-1. Retrieved from http://en.wikipedia.org/wiki/subsidy

Tunde Bakare (2012), “Much Ado about Fuel Subsidy”, retrieved on January 17,2012 from the world wide web http://www.vanguardngr.com/2012/01/much-ado-about-fuel-subsidy/

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