Fuel Subsidy Removal: Tough Days Ahead

Tough days await Nigerians as civil society groups and Nigerian Labour Congress (NLC) begins nationwide strike today. This is sequel to the refusal of the Federal Government to rescined the decision to halt removal of fuel subsidy, which has almost crippled activities in the New Year. With commencement of the strike, activities across the states of the federation are likely to come to a halt.

Markets will shut down, transportaters will be off the road, banks will close, schools deserted and offices and other business premises will be put under lock and key. With the removal of subsidy, prices of petrolum products have been left to market forces. But the sustained protest against the policy championed by organised labour reveals a deep fear by citizens of an economy that can be made worse with untold hardship for ordinary Nigerians and businesses should the policy be allowed to stay.
It is obvious that there are difficult days, if not months, ahead for the majority of Nigerians.

Worst hit – and from day one of the policy implementation – is the transport sector; fares (inter and intra-states) have skyrocketed by more than 250 per cent, thus forcing similar increases in the cost of food stuff and other essential services whose availability is dependent on petrol-powered generators or are being transported via petrol powered vehicles.

The Lagos Chambers of Commerce and Industry (LCCI), an umbrella union for private sector businesses best captures the prevailing climate propelled by the fuel subsidy removal as possessing “the enormity and dimensions of impacts on the economy” and it also “poses a serious risk to the survival of citizens.”“The economy is experiencing fresh inflationary pressures, resulting from sharp increases in transportation cost as well as high inflationary expectations across all sectors of the economy,” said Goodie Ibru, President of the LCCI.

Ibru cited the following as some of the attendant impact from the policy: “Sharp increases in operating costs of micro and small enterprises, many of which rely on small electricity generators powered by petrol as well as a devastating impact on the psyche of the common people as the new policy poses a serious risk to their survival.”
Indeed, President Goodluck Jonathan has never hidden his intention of doing away with subsidies for petroleum products, if only, as the administration reasons, it could free up an estimated N1.5 trillion sunk into subsidies annually for capital expenditure. But with a poor enlightenment and education campaign on the inherent benefits of the policy, many citizens have failed to see reasons with government. Nigeria ranks as one of the top ten crude oil producing nations, citizens ought, therefore, to enjoy a form of subsidy on refined petroleum products, that’s the general reasoning of majority of Nigerians.

And from such a common and vastly held public perspective, comes a mass protest, following increase in the pump price of Premium Motor Spirit (popularly called petrol) from N65 per litre to about N140 and N200 a litre in various parts of the country. Given the public anger against the policy, is it very wise to dismiss deregulation of the petroleum downstream sector as inimical to the economy? Does it carry no benefits that should necessitate its retention? Finance Minister, Dr. Ngozi Okonjo-Iweala, in assuaging the sufferings – or bitterness – of citizens against the policy said the gains would always outweigh the pains. But that would be in the long-term, Okonjo-Iweala told a stakeholders meeting in Lagos a week ahead of the policy implementation.

“The current fuel subsidy regime does not benefit the poor in Nigeria,”said Okonjo-Iweala, who is also the Co-ordinationg Minister for the Economy.“It is the better-offs in the society who benefit the more from it. Between January and October this year (2011) we’ve spent over N1.3 trillion being borrowed and it is used to subsidise petroleum products consumed mostly by the upper and middle class who own the big cars, SUVs, jeeps and not the poor, who ride bicycles or drive motorcycles. We have to put an end to subsidy; it is not good for the economy,” she added.

Okonjo-Iweala finds a ready-voice of support in Anambra State Governor, Mr. Peter Obi.“I have always supported the idea,” Obi said, referreing to a deregulated oil sector in Nigeria. “It will cause temporary hardship but in the long run, the benefits will be seen.” Edo State Governor, Comrade Adams Oshiomhole, said: “The government had no other option but to deregulate and if we don’t take that decision now, Nigeria will crash.”
Central Bank of Nigeria (CBN) Governor, Lamido Sanusi, said the CBN had to make available about $16.2 billion for the purchase of foreign exchange for oil marketers to aid fuel imports. The federation reserves were being depleted, Sanusi warned, arguing that “subsidy removal was not an ideology but pure economics” and that if it was not implemented “a catastrophic economy awaits Nigerians in the years ahead.”

“We are borrowing from the next generation – our children. And the next government that will come after this one will find it difficult.” Most proponents of the fuel subsidy removal are quick to point out the danger in subsidising a finished product like petrol and diesel in a country so blessed with crude oil yet lacking in functional refineries. They are also quick to point out that no investor – or no banker – will grant credit facilities for the construction of a gigantic project as a refinery in a country where the government will be the sole determinant of the end prices of the products to be sold. “It makes no business sense,” said Emmanuel Iheanacho, Nigeria’s former interior minister.

“Setting up a refinery in Nigeria certainly requires a deregulated environment. The banks will always want the same template as they do with fuel importers.“They will ask: ‘How are we going to recover the money we are giving you?’ and then can you reply them ‘we have a regulated environment that the government will determine the quantity I can refine and the price of the end-product we will sell to the market.’ If this is your reply, the truth is you can’t go anywhere with the banks. “So, only if we deregulate will private sector money come into the sector to build and manage working refineries. That is what every one of us must accept. If private sector money doesn’t come in and we continue to depend on public sector managed refineries as the NNPC is doing, then I say we will go nowhere.”

Perhaps listing the challenges in the downstream oil sector will assist better in appreciating the need its deregulation. The downstream petroleum sector in Nigeria has been faced with a number of daunting challenges, which call for innovative strategies to surmount them. First, the existing four local refineries (with a 445,000 barrels per day (bpd installed capacity) only contributed about four to 20 per cent in the past five years to the national petrol consumption. Added to this is the fact that the tempo of importation activities has increased due to lack of local refining capacity and the guaranteed cost recovery for importers through the Subsidy Scheme (PSF). In fact, there has been a noticeable increase in the national consumption of petroleum products.

Premium Motor Spirit (petrol) national daily consumption for example currently stands at 35 million litres from the observed 30 million litres in previous years. Massive imports of products are required to meet consumption needs. The other challenge has to do with inadequate port facilities. The nation’s ports and existing import reception facilities not designed to handle current levels of product import volumes. Inadequate port facilities lead to incidental (but significant distribution costs) like demurrage and lightering expenses. There is also the attendant problem of high storage costs on the imported products. For instance, the NNPC currently maintains a PMS storage capacity of about 40 days supply made up of inland storage depots and marine floating vessels, and this can be described as expensive and inefficient.

Some of the government initiatives and efforts to transform the sector include: The Turn-Around-Maintenance (TAM) programmes carried out on the existing refineries with aim of increasing the production capacities have not yielded expected results. New TAM on the refineries to be conducted by the Original Equipment Manufacturer (OEM) are ongoing.

To encourage private sector participation in the operation of the refineries, the government proposed the privatization of the refineries. The objectives are to increase capacity and efficiency in the running of the entities.
But a regulated environment also creates an unsustainable subsidy payment regime. The huge subsidy being paid by the government on petroleum products has constrained government spending on the development of adequate infrastructural facilities and depletion of national revenue profile. Huge price disparity is encouraging smuggling of petroleum products across neighbouring countries, where prices are higher despite government regulatory controls.

The consumers of kerosene for instance do not buy the product at a regulated/subsidized price set by the government due to distribution bottlenecks, multiple handling and malpractices by Marketers.
Current subsidies on petrol and kerosene have led to huge unsustainable subsidy burden. And over N3.5 trillion have so far been spent on subsidy payments since 2006. The 2011 projected subsidy payments represent about 115 per cent of the 2011 capital budget.

And fuel subsidy does not encourage healthy competitions among operators as the regulatory environment is controlled by the government. Essayist, Henry Olujimi Boyo, in his work ‘Nigeria: The Sensible Road to Economic Prosperity’ also faults the continuous price regulation in the downstream oil sector as detrimental to the economy especially given the detrimental effect on the naira when exchanged with the dollar.“The absence of subsidy on petrol prices will also save the government about N600billion a year (now about N1.5trillion); this amount can be used to build our infrastructure like schools, hospitals, power and roads, potable water etc instead of paying the same sum as subsidies to fuel marketers,” Boyo said.

“Government will also save another N600billion or more, as the CBN and the Debt Management Office (DMO) no longer have to borrow from the commercial banks in order to reduce the scourge of excess liquidity (cash) that has always plagued the system, when the CBN substitutes the naira for Dollar derived revenue.
“The CBN will remain the custodian of our dollar earnings, as the weekly auctions of dollar reserves and its attendant round-tripping and dispersal into foreign accounts will no longer be possible. Our foreign reserve base will consequently remain buoyant and less vulnerable to speculative dollar demand. Smugglers and money launders will have little or no access to easy government dollar funding for the nefarious enterprise and the level of corruption will be reduced.

“In the absence of the usual huge borrowing of the CBN and DMO, the banks will now have no option but to seek out the real sector and encourage them to borrow at single digit interest rates. Industrialists can now feel confident to obtain loans for productive purposes, when interest rates fall to about five – six per cent without government agencies crowding them out of the credit available in the market as before.” The end result will be a stronger naira exchange rate which will bring down the cost of imported raw materials and machinery and alongside low interest rates will energize the industrial and service sectors to create jobs and reduce poverty and unemployment.

If these are some of the merits of a deregulated downstream oil sector to the economy, why then the public protest?“Our fear is that it is not going to be a win-win policy,” Isa Aremu of the Labour Union said. “Fuel subsidy removal will result in inflation; it will worsen the poverty situation in the country and the government knows this. We will resist it.” In a communiqué jointly signed by the Nigerian Labour Congress (NLC) and the Trade Union Congress (TUC) the government has been mandated to revert petrol price to N65 per litre of a mass protect commence today (Monday).

From labour’s end the problem is not necessary that of the merits or demerits of deregulation, but rather, that of the insensitivity of government in creating a conducive ‘pre-deregulation environment’ before effecting the policy.
The government, in the eyes of labour and the people, not only erred in fixing the commencement date on January 1st, it also acted in bad faith in not concluding its negotiations with stakeholders to work out an acceptable palliatives before the policy takes-off.

Some of the conditions which labour wanted before the sector is deregulated included the fixing of all existing refineries, stable electricity, improved road network facilities and potable water.“We reject as totally unacceptable and a crass display of bad faith the unilateral increase in the pump price of petrol by the government in the guise of ‘subsidy removal,” PENGASSAN, the oil labour union said in a statement signed by its spokesperson, Zaid Kolawole. “It is very unfortunate that the only ‘gift’ government can give to long-suffering Nigerians in this New Year and season of goodwill is the poisoned chalice of fuel price increase.

“It is a reinforcement of the government’s huge credibility deficit that only a few days after the Minister of Finance stated publicly that no date had been fixed for the so-called ‘subsidy removal’ and that government would further consult with all stakeholders, the same government through the PPPRA could turn around on new year’s day and increase petrol prices stating unashamedly that this latest round of fuel price increase “follows extensive consultation with stakeholders”. “Already marketers are inflicting hardship on Nigerians by shutting fuel stations to create artificial scarcity while the few that are open are selling the same product they bought at ‘subsidized’ rates at ridiculously high prices,” the statement added.

Any casual observer of the Nigerian economy would have noticed that it revolves around the utilization of cheap fuel; the bulk of private and commercial transport vehicles run on cheaper fuel supplies when compared to neighbouring countries. And with public electricity supply remaining epileptic, many homes and private industries also resort to power alternatives generated from petrol-powered generators. Government, it appears had failed to take this into consideration because its palliatives, which included the purchase of 1,600 mass transit buses, should have come with the announcement of the deregulation policy, and not belated – five days after the policy, as if it was an after-thought.

And in some quarters there is also the fear that even the gains of the deregulation would not be plagued back to salvage the economy, as President Jonathan has promised. It is a stance fueled by the many broken promises of successive government’s each time fuel price is increased. Both Edo and Anambra State Governors, Peter Obi and Adams Oshiomhole agree there is a bad public perception about government’s sincerity, and therefore urged that rather than halt the subsidy removal, the focus should be on ensuring the prudent management of the resources that will accrue from the policy.

“When public officers steal, they should be dealt with,” Oshiomhole said. “We have a right to insist that every naira resulting from this policy is not ending up in the pockets of a few,” Oshiomhole added.“I understand the anxiety of Nigerians; I mean the belief that the money may not be used properly as was the case in the past,” Obi said. “But this is where I tell Nigerians to insist that the money be used properly which is Mr. President’s commitment. If the money is used to fix our power problem and rebuild our collapsed infrastructure, it will be better for Nigerians,” the Anambra state governor added.

Deregulation, therefore, is not a bad policy that would destroy the Nigerian economy, rather if properly implemented has the capacity to turn around its fortunes for the best. But in the light of the prevalent poverty and high rate of unemployment in the country, the LCCI suggests that government needs to demonstrate its sensitivity and concern to the plight of the ordinary Nigerians by focusing urgently on the following to accelerate the delivery of palliatives to cushion the adverse outcomes of the ongoing subsidy removal.

Said the LCCI, “in order to provide the moral basis to demand sacrifices from citizens, the political leadership and bureaucrats should demonstrate visible fiscal prudence and the governance structure should be more cost-effective and corruption must be more effectively tackled.” “Sustain the momentum of dialogue and enlightenment to stabilize the polity and ensure accountability and transparency in the use of the savings from this policy decision for the benefit of the people as promised.“Stakeholders should cooperate with the Subsidy Reinvestment Board to make this happen and the promise made by government on this matter is a covenant that should be respected.
“Government should fast track the turnaround maintenance of the refineries and encourages the building of new ones to reduce dependence on importation of refined products and protect the economy from the volatility of global oil prices.”

But above all to stem consumer abuses government should ensure an effective regulatory framework to protect the citizens from exploitation by petroleum products marketers and ensure quality assurance. It cannot also be overstated that an accelerate implementation of power sector improvement programmes to reduce reliance on petroleum products as principal sources of energy in the economy. It is, therefore, about time Nigeria begins to seek and utilise other alternative sources of fuel, like solar, wind, bio-fuels, etc. in commercial quantity.