Subsidy regime of controversy

on   /   in Sweet Crude 1:55 am   /   Comments

MICHAEL EBOH

A of years now the Federal Government has mused over the removal of subsidy on some petroleum products, notably, premium motor spirit, PMS or petrol and household kerosene, HHK, simply called kerosene. Datelines have been pushed yearly, and now pegged at 2015.

Fuel-dispenser

However, attempts to remove the fuel subsidy, supported through the Petroleum Support Fund, PSF, managed by the Petroleum Products Pricing Regulatory Agency, PPPRA, have been met with stiff oppositions by various groups based on varied interests.

Fuel subsidy is a system through which the government cushions the effects of high oil prices at the international market, whereby the government bears the burden of the difference between the landing cost of the refined products and the pump prices in the local market.

The fuel subsidy regime in Nigeria has since 2012, been fraught with controversy, such that many believe is capable of crippling the Nigerian economy if not properly handled. The issue took a worrisome dimension, when it was realised that between 2006 and 2013, Nigeria had spent over N5.42 trillion subsidising petrol. This does not include the huge amount expended on kerosene subsidy.

Breaking down subsidy costs

To bring home the truth, the amount spent on petrol subsidy alone in eight years is 15.57 per cent higher than the N4.69 trillion 2014 National Budget, and also 10.61 per cent more than the 2013 budget of N4.93 trillion.

For 2014, the Federal Government budgeted N971.1 billion for payments of subsidy, keeping it at the same level in 2013. At the current rate, subsidy payments over the last three years, including payments made in the last eight years, would have amounted to about N10 trillion.

The amount the country is spending on subsidy is almost twice the amount (196.07 per cent) allocated for education in the 2014 budget, which is N495.28 billion; more than three times (369.6 per cent) the N262.74 billion budgeted for health; and 148 per cent more than the N655.47 billion allocated for the Universal Basic Education Commission, UBEC and the Tertiary Education Trust Fund, TETFUND.

In terms of welfare, subsidy provisions in 2014 can pay the salaries and wages of about half the workforce of Ministries, Departments and Agencies, MDAs, of the federal level given the N1.723 trillion provided for personnel cost in the budget.

Based on the foregoing, the colossal cost of subsidy if redeployed in other key sectors of the economy could have boosted the development of these sectors to the benefit of the ordinary Nigerians. This is opposed to the current regime where a new class of few billionaires has emerged at the expense of the larger populace.

Removal impact assessment

Investigation by Sweetcrude revealed that the Federal Government is considering abolishing fuel subsidy in 2015, and is already meeting with key stakeholders over the issue.

A director in the Federal Ministry of Finance, who spoke in confidence with Sweetcrude on the sideline of a forum in Lagos, said the Federal Government, through the Ministry of Finance has begun a test run and is trying to envisage the impact of the removal on the economy.

The director said the meeting with stakeholders, including labour unions, oil companies and oil marketing companies, is to prevent a recurrence of the nationwide protests that greeted the hike in fuel prices in 2012.

The director further noted that the Federal Government is optimistic that the removal next year will not spur any protests, as it expects that Nigerians would have come to terms with the reasons for the subsidy removal.

Despite Federal Government’s silence, debates have continued to ensue in the last couple of months on whether subsidy should be removed or not. Even the members of the ongoing National Conference, have seen the wisdom for its removal.

Subsidy breeds corruption

Nigerians are however divided on whether the subsidy regime should stay or not. For most of the academia, subsidy breeds corruption and should be done away with.

For Dr. Fatima Waziri-Azi, Head of Department of Public Law, at the Nigerian Institute of Advanced Legal Studies, NIALS, in a presentation titled; “Institutional and Legal Arrangements for Fuel Subsidy Regime,” the subsidy programme has revealed a new trend of corruption in Nigeria.

According to her, it has witnessed situations whereby people collect subsidy payments for not supplying petrol, whilst they collect foreign exchange for the purpose.

Waziri-Azi said corruption in fuel subsidy ensures that the society loses in two ways, “First, some of the subsidies do not reach the intended beneficiaries, and second, the misused subsidy feeds the black economy.

Also, the trio of Fatih Birol, Rabia Ferroukhi, and Aleagha, in their paper titled, “The Economic Impact of Subsidy Phase Out in Oil Exporting Developing Countries: A Case Study of Algeria, Iran, and Nigeria,” maintained that subsidy, irrespective of whether it is given to the consumer (at the pump) or to the producer (refineries) adversely affects the economy.

According to them, the subsidised energy markets ultimately work against the goal of promoting economic development, adding that subsidies given to consumers result in excessive domestic demand, which reduces the amount of crude oil for export, thereby decreasing the foreign exchange revenue needed to invest in the economy.

“Subsidies given to the producers (refineries) results in excessive supply and depletion of resources (crude oil, which is often the main revenue earner for the country).

“Subsidies give rise to debt accumulation which results from a depletion on government resources because of lower export earnings and revenue spent on subsidies which lead to fiscal deficits.”

Also speaking, Comrade Babatunde Ogun, President, Petroleum and Natural Gas Senior Staff Association of Nigeria, PENGASSAN, argued that the payment of subsidy on petroleum products, especially petrol, is not to the advantage of the Nigerian masses, but only favours few individuals who have constituted themselves into a cabal.

He advised other trade unions in Nigeria to change their positions and stop supporting payment of subsidy on petroleum products.

He said, “It is high time labour unions stopped saying no to the removal of subsidy, and look beyond ordinary reasoning to support the government against a policy and process that has been bleeding the country dry as well as stunting the growth of the nation’s downstream sector of the oil and gas industry.

“The money being used in payment of subsidy to these few individuals who are enriching themselves at the expense of Nigeria can be channelled towards other developmental projects, especially the nation’s ailing and dilapidated infrastructures,” he said.

Furthermore, in an analysis of the fuel subsidy situation in Nigeria, Mr. Eniwoareke Egbeme, Analyst, Nextier Capital Limited, told Sweetcrude that successive governments in Nigeria starting from 1978 have gradually removed the subsidy on petroleum products. This resulted in an increase in the price of a litre of petrol from eight kobo in 1978 to the current price of N97 which came into effect into 2012.

According to him, the arguments for removing subsidy on petroleum products in Nigeria have remained largely the same irrespective of the government in power; yet, the expected improvement in the welfare of Nigerians has not been realised.

He further stated that national poverty rate increased from 28 per cent in 1980 to 67 per cent in 2013, adding that, unemployment rate, in the same vein, increased from 6.4 per cent in 1980 to 27.4 per cent in 2012.

“However, the fact is that the Nigerian economy cannot continue to sustain the subsidy on petroleum products. For instance, in 2013, Nigeria spent N832 billion on petroleum subsidy, which is 16.7 percent of the 2013 budget.

“According to the Central Bank of Nigeria, about US$8.46 billion (or N1.35 trillion) was spent on kerosene subsidy between January 2012 and July 2013; amounting to about 153 per cent of the combined allocation to education, health, and agriculture in the 2013 budget,” he said.

“In spite of the partial removal of subsidies in 2012, Nigeria still battles with fuel scarcity and fuel pump price stability. Data from NOI Polls, an independent polling company, indicate that over 78 percent of Nigerians purchased PMS at above the official pump price of N97 per litre between January and March 2014. Some filling stations retailed their products between N110 and N160 per litre of PMS. Black market prices were as high as N200 per litre in some parts of the country.”

Also, the Lagos Chamber of Commerce and Industry, LCCI, declared that given the magnitude of resources committed to funding fuel subsidy, it is clear the subsidy regime is not sustainable.

At its quarterly briefing on the economy, President of LCCI, Alhaji Remi Bello, said the Chamber appreciated the enormity and dimensions of the potential short term impacts of subsidy removal on the economy and the citizens.

Bello said a review of the subsidy regime would result in increased private investment in the downstream oil sector with a corresponding impact on the creation of quality jobs, reduction in the pressures on foreign reserves, a huge chunk of which is currently being used to fund fuel importation, and better fiscal space to ensure macroeconomic stability with a resultant positive effect on the economy.

Similarly, finance commissioners from the 36 states of the federation rose from one of their monthly Federation Accounts Allocation Committee, FAAC, meeting in Abuja, with a resolution asking President Goodluck Jonathan to withdraw fuel subsidy.

The Ebonyi State Commissioner for Finance, and Chairman of the Finance Commissioners Forum, Mr. Timothy Odaah, who spoke on behalf of the group, stated that fuel subsidy had failed to achieve its objectives and had become a source of massive fraud which must be discontinued in the interest of the Nigerian public.

He said, “We looked at subsidy on oil and see that it is more or less a solution worse than the problem you intend to solve. Looking at it, you discover that it is not solving the problem it is meant to solve.

“But you discover now that it is the average poor man that suffers. For example, stand by the street, most of the transporters are not applying any benefit from subsidy in what they charge. We know of course that the Federal Government had a good intention to subsidise transportation so that it will be to the absolute benefit of the poor man and every Nigerian.”

Benefits of subsidy removal

As gloomy as the removal of subsidy appears to be, experts have argued that in view of the current situation the system is not sustainable and should be done away with in order to move the economy forward.

Egbeme for instance advocated total removal of subsidy on petroleum products, saying it does not benefit the masses who are the intended beneficiaries; rather, the funds are lost through elite capture.

He said, “Complete removal of subsidy on petroleum products has numerous other benefits including encouraging competition, reduction of inefficiencies in the petroleum product value chain. Others are discouragement of wasteful consumption, elimination of cross-border smuggling, reduction of shortages, and reduction of adulterating of lower subsidised fuels with higher subsidised fuels.

“Subsidies deter investments in petroleum product refineries and this situation perpetuates the dependence on imported petroleum products. Subsidy removal opens the petroleum sector to local and foreign investments that will in turn create more direct and indirect jobs for Nigerians.

“In fact, the partial removal of fuel subsidy has resulted in increased interest in the development of refineries in Nigeria. For instance, in September 2013, Dangote Group signed a N9.05 billion deal with a consortium of local banks and international investors for the establishment of a refinery and petrochemicals complex in Nigeria.

“Notwithstanding these obvious benefits, opponents of the removal of fuel subsidy may argue that it is the only direct and generalised benefit that Nigerians obtain from the country’s crude oil endowment.”

 

Managing subsidy proceeds

Apart from instituting palliatives, part of the mistrust for subsidy removal is how government intends to invest the proceeds realised from the exercise.

Some experts argued that subsidy removal without appropriate investment of the savings will result in further hike in prices of the fuels enjoying subsidy with direct impact on the cost of production, which in turn will lead to higher inflation and national poverty levels.

As it is, the Subsidy Reinvestment and Empowerment Programme, SURE-P, introduced for the partial removal in 2012 has not lived up to expectations.

Again, Egbeme argued that as government contemplates a removal of the remaining subsidy, it is important that it proves to Nigerians that it has effectively and efficiently managed the proceeds of the last subsidy removal.

He maintained that the SURE-P should do a better job of communicating how its programmes and projects will palliate the effects of the rise in fuel prices, alleviate poverty, stimulate economic growth, and catalyse job creation across the country.

He said, “There is the need for full transparency and to win the buy-in and support of Nigerians that SURE-P is a better outcome than when the subsidy proceeds ended up in few bank accounts. Nigerians will support the removal of the fuel subsidy if they can verify that tangible results have been achieved with the recent partial removal of subsidy on petroleum products.”

 

Good or bad, subsidy should stay

However, the Academic Staff Union of Universities, ASUU, kicked against the removal, saying that Nigerians would never embrace any attempt by the Federal Government to remove fuel subsidy. The union gave pre-conditions for removal.

Dr Ademola Aremu, National Treasurer, ASUU, said the Federal Government would not curry the favour of the union until knotty issues surrounding the petroleum industry were resolved.

According to him, subsidy should not be removed from fuel without tackling other policies and socio-economic issues to re-ignite the faith of Nigerians in their leaders.

He said, “The starting point of this would be the removal of corruption, which has become second nature to oil business in Nigeria, albeit a general characteristic of the business the world over. This could only be achieved through government accountability to its citizens.

“Is it possible for government to give a near estimate of the crude oil being explored in Nigeria on daily, weekly or other such periodic basis? Can Nigerians be made aware of the amount of money invested in refining the crude oil produce? Can the memoranda of understanding between the international oil companies and the Nigerian government be made public with the rules of engagement stated in black and white?”

 

Where we are

Nigeria’s fuel subsidy programme attained controversial heights in 2012, after the announcement the petrol price hike sparked off country-wide protests. When the protests subsided, Nigerians demanded accountability on the monies expended on subsidy over the years, a situation which led to a number of committees being set up, both by the Federal Government and the National Assembly.

The various committees came up with different reports, which revealed massive fraud and abuse in the subsidy programme. Too many figures were bandied about by different agencies such that even the committees and the rest of Nigerians got more confused as to the purpose of the subsidy regime, even as some committee members got caught up in the corruption they tried to expose.

Specifically, an Ad-Hoc Committee of the House of Representatives was set up to verify and determine the actual subsidy requirements and monitor the implementation of the programme. The Committee’s report alluded to a deliberate understanding among the agencies in the petroleum sector not to keep reliable information data base.

Accordingly, this lack of record keeping contributed in no small measure to the decadence and rots in the administration of the Petroleum Support Fund.

It stated, “This is evident also in the budget preparatory process by the MDAs where adequate data is not made available to the National Assembly. The Committee had to resort to forensic analysis and examination of varied and external sources (including the Lloyds List Intelligence) to verify simple transactions.

“In this regard, the PPPRA is strongly urged to publish henceforth, the PSF accounts on quarterly basis to ensure transparency and openness of the subsidy Scheme.”

Continuing, the committee said, “We found out that the subsidy regime, as operated between the period under review (2009 and 2011), were fraught with endemic corruption and entrenched inefficiency. Much of the amount claimed to have been paid as subsidy was actually not for consumed PMS.

“Government officials made nonsense of the PSF Guidelines due mainly to sleaze and, in some other cases, incompetence. It is therefore apparent that the insistence by top Government officials that the subsidy figures was for products consumed was a clear attempt to mislead the Nigerian people.

“Thus, contrary to the earlier official figure of subsidy payment of N1.3 trillion, the Accountant-General of the Federation put forward a figure of N1.6 trillion, the CBN N1.7 trillion, while the Committee established subsidy payment of N2.587 trillion as at 31st December, 2011, amounting to more than 900 per cent over the appropriated sum of N245 Billion.

“This figure of N2.587 trillion is based on the CBN figure of N844.944 billion paid to NNPC, in addition to another figure of N847.942billion reflected as withdrawals by NNPC from the excess crude naira account, as well as the sum of N894.201billion paid as subsidy to the marketers.”

Civil Societies’ alternative

To correct the wrongs done, Civil Society Organisations, CSOs, piqued by the huge infractions in the subsidy programme called on the Federal Government to set up a special financial crimes unit for the oil and gas sector to deal with corruption in the sector, especially in the area of fuel subsidy.

The CSOs made the call in a communiqué issued at the end of a two-day workshop on monitoring and reporting of oil subsidy fraud/corruption cases in Nigeria. Tagged; ‘Advocacy against impunity in oil subsidy regime in Nigeria,’ the workshop was organised by the Africa Network for Environment and Economic Justice (ANEEJ), with support from Justice for All (J4A) and the Department for International Development, DfID.

The group urged Government to create a Special Oil and Gas Sector Financial Crimes Unit, as recommended by the Nuhu Ribadu-led Committee, as the existing anti-corruption agencies are not sufficiently equipped to deal with these specialised crimes.

The communiqué was signed by Mr. Leo Atakpu, Deputy Executive Director, Africa Network for Environment and Economic Justice, ANEEJ; Mr. Kunle Idowu, Nigeria Network of Non-Governmental Organisations (NNNGOs); Mrs. Oyindamola Musa-Oseni, Socio- Economic Rights and Accountability Project (SERAP); and Comrade Lawal Ibrahim Adebayo, Labour, Health and Human Rights Development Centre, Lagos.

The group called on the Presidency to demonstrate the political will to prosecute all companies and individuals indicted for subsidy fraud and corruption by the Lawan Farouk and Nuhu Ribadu committees, adding that there should be no shielding of sacred cows.

The group equally expressed concern over the management of funds running into billions of dollars under the SURE-P saved from fuel subsidy since January 2012 till date.

They also lamented the nonchalant attitude of the Nigerian National Petroleum Corporation (NNPC) and its subsidiaries in the release of information to the general public, even when sought under the Freedom of Information Act, especially as it relates to oil subsidy.

Furthermore the group urged, “The Judiciary should expeditiously adjudicate all pending criminal matters relating to oil subsidy fraud/corruption and bring all erring persons to justice as justice delayed is justice denied.

“The Anti-Corruption Agencies (ACAs) should release and make public information on all cases currently going on relating to oil subsidy fraud and corruption.

“The National Assembly should revisit the issue of oil subsidy fraud/corruption and demand accountability from the executive and judicial arms of government as part of its oversight functions.

“The Economic and Financial Crimes Commission, EFCC, and the Special Fraud Unit, SFU, should be properly financed and resourced to execute their mandates of thoroughly investigating and prosecution of suspects.”

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