By Les Leba
The Obasanjo, Yar’Adua and Jonathan administrations have all decried what they consider to be the unnecessary and stifling burden placed on the economy by government’s increasing subsidy on the price of petrol.  Last week, the Finance Minister, Olusegun Aganga was quoted in an interview he granted in faraway London that the cost of subsidies which touched N1 trillion (N1, 000bn) in 2009 would fall to about N520bn according to CBN estimates. (D. Independent, 4/9/2010, pg 3).

Aganga further indicated that the abolition of the subsidy would increase fuel prices to between N115 and N120/litre from the current price of N65/litre!  The Minister confirmed that removal of petrol subsidy will come sooner rather than later and for the sake of clarity added that “it will be difficult to give a date, but I would hope within six months”.  In other words, Nigerians will be in for a bolt of a shock on their purchasing power and their social welfare before February ending 2011!!

This column believes that Aganga may have spoken out of turn on this matter and his warning or is (or is it a threat) is unlikely to be actualized, IF AT ALL, until well after a new government takes over in April/May 2011!  Even a political neophyte can successfully predict that Jonathan’s precarious bid for Presidency will collapse, if petrol price reaches N120/litre before January 2011 elections.  The promise of an allocation of N10bn to facilitate mass transit system failed as a palliative in 2003-4 and will most certainly fail again!

Furthermore, the N120/litre price indication is obviously calculated on the current $70 – 80/barrel for crude oil.  In the event that worldwide economic recovery triggers crude prices above $100/barrel, our petrol prices may actually touch N150/litre at a time when government’s unbridled and contradictory fiscal and monetary policies are already pushing up inflation with adverse consequences on the purchasing power of subsisting paltry incomes of most Nigerians!

The following is the first of a two-part article, first published November 2009, titled “WETIN CONCERN NLC/TUC WITH FOREX MARKET?”.  In it, we have proffered solution to government and Labour’s predicament on the subsidy issue.  This column is very confident that the issue of petrol price and subsidy can never be successfully resolved until the simple solution canvassed is adopted.  Please read on.

“Our Government and Organised Labour are once again for the umpteenth time in about five years embroiled in what may best be described as an unending petrol price war, which was ignited over two decades ago with the drastic devaluation of the naira.  Former President Obasanjo, during his second term, floated the kite of deregulation to put an end to this endless attrition. We recall that the government considered the existing N350bn subsidy at that time as unsustainable and consequently accepted the advice of local as well as IMF experts to completely withdraw all subsidies so as to engender a free market in the downstream sector of the petroleum industry.  The arguments in favour of deregulation were truly unassailable; indeed, the argument recognized the reality that market dislocations, price distortions and parasitic supply chain often accompany monopolistic markets everywhere!

“In other words, prices of market offerings would be higher than normal as the monopolist controls market supply and prices for maximum profit.  Of course, the situation could be expected to be much worse if a government agency (as opposed to Private Corporation) is the monopolist!  Nigerians will testify that no government monopoly in any sector has succeeded in offering competitive and superior services to the Nigerian public!

Indeed, gross mismanagement, waste and inefficiency have become fully evident also in the domestic market for fuel, where Nigeria National Petroleum Corporation (NNPC) monopoly of the downstream oil sector requires additional subsidy of over N600bn annually to stay afloat.  Government sources decry the over N2, 000bn burden that was paid to private oil marketers in the last four years.

“We note, for example, that no other sub sector attracted so much funding in federal budgets in the period 2007 – 9!  Inexplicably, in spite of this huge subvention, fuel scarcities persists, differential pricing still exists nationwide, and the direct benefit of allocating over 25% of federal revenue each year for oil subsidy remains unclear, especially as other vital sectors such as education, health, transportation, etc, receive relatively paltry allocations that would virtually make it impossible for our country to attain the  minimum standards of welfare defined in the United Nation’s Millennium Development Goals!  The predicament of subsidy has become a great embarrassment to our government, such that in spite of the huge expenditure on subsidies, no provision was included in the national budgets of the last three years!  The relevant question here is, from which account, and with whose authority was the annual subsidy value deducted from the federation account?

“Our lawmakers, whose turfs have been violated by such unilateral executive impunity, surprisingly, do not seem to care, and have never queried these withdrawals without legislative approvals!  The apparent main focus of the Legislature seems to be in the magnitude and speedy disbursement of constituency project allocations, which concerned Nigerians, have alleged to be also without constitutional endorsement!

“So, in spite of the recognized failures in budget allocation of resources and the sustenance of a terminally sick NNPC at the expense of other vital sectors because of subsidies; why does ‘Organised Labour’ oppose deregulation of the downstream sector and the unbundling of the unwholesome monopoly of NNPC with the beneficent expectation of annual savings of over N600bn which could fund social welfare improvements elsewhere in the economy?  Furthermore, why would Labour recognize that the current NNPC monopoly breeds and sustains corruption and yet insist that the defective and anti-people structure of this market be retained?  If one was not aware of the antecedents of the leadership of Organised Labour, we may conclude that only self-interest would restrain the support of Labour for a process that would bring down prices, provide better services and release or inject additional billions of naira revenue into the economy to address our infrastructural inadequacies and improve the welfare of the masses which the NLC/TUC represent.

“Even if Labour opposition may suggest anti-people posturing, such perspective will be grossly incorrect!  Labour, without a doubt, is sincere in its apprehension that deregulation will not bring down prices and stem inflation with salutary impact on all income earners including that of its members, as per government’s promises! Labour recognises that the concept of deregulation is ideal, but they have learnt over the years to take government promises with a pinch of salt!  In this particular instance, they intuitively know that something is amiss in the simple equation of deregulation = lower prices, but they cannot place their finger on the missing link! In any event, historical experience  has demonstrated that local fuel prices rise whenever crude oil prices rise, and they cannot yet see what government can put in place to stem this sympathetic relationship between rising crude and local petrol prices, and recognise that not even deregulation as presently construed has the capacity to change this framework!

“An end to NNPC monopoly and introduction of market determined price regime may be expected to attract more importers and indeed serious investors in the provision of additional private refineries; but, it would be out of place to supply our crude oil to such refineries at a price below the current world market price for the commodity.  Any attempt to do this would be akin to reintroduction of subsidy through the backdoor!  Indeed, the potential abuses of such a system would create a bigger hole in our pockets than the erstwhile N600bn allegedly currently paid to fuel importers in the present price regulated market.

“Besides, the attraction of cheaper petrol prices brought about by subsidized crude to local refineries would lead to a huge leap in estimated domestic demand as our expansive boarders quickly become porous outlets for servicing and subsidizing the fuel needs of Chad, Benin, Cameroon, Niger, Togo and other neighbouring countries.

“With the above scenario, Labour’s demand that the four existing refineries be rehabilitated to produce at full capacity and more refineries built is obviously not the answer!  Yes, more refineries may mean more fuel availability, but may not necessarily bring down prices, especially when international crude prices rise.  Indeed, it is curious that in spite of Labour’s awareness of the hundreds of millions of dollars ‘wasted’ on turnaround and other maintenance projects in our four refineries, the production stream still remains epileptic, and yet Labor insists that more good money (which could improve our social infrastructur) be further wasted on refinery refurbishment as we have done over the years!  Surely, the intention of Labour is not to encourage and sustain corruption, but the truth is that Labour is perplexed on how to put its best foot forward without becoming a victim of its own advocacy with regard to deregulation!

“Well, this is not really surprising as Organised Labour’s traditional strategy of ‘reduce price/increase wages or we go on strike’ has worn thin and the futility of extended strike periods and subsequent capitulation as a result of public restiveness after prolonged deprivations and government’s token concessions have also dawned on Labour.  Meanwhile, there does not appear to be any constructive or solid palliative that would put a lid on fuel price hikes when crude oil prices rise in a deregulated market.    Nonetheless, the possibility of petrol prices exceeding over N150/litre becomes more real with eventual economic recovery in Europe and America and possibility of crude oil prices once again exceeding $100/barrel mark!    So, the question of how deregulation can keep a lid on domestic fuel prices even when crude prices rise while fortuitously increasing our reserve base is still left unanswered as there is no window for such a prospect!

“What should Labour do?  Well, it is clear that Labour would have to think out of the standard box of strike action.  Labour would require taking a closer look at the workings of the economy and the result of a monetary framework that guarantees that increasing dollar revenue creates problems of excess liquidity, high interest rates, high unemployment, rising domestic fuel prices and spiraling inflation.  Next week, we will conclude this article on “‘Wetin’ Concern NLC/TUC with Forex Market?” and open a new vista of opportunity that would stabilize or indeed reduce petrol prices whenever price hikes occur in the international crude oil market.”

(The juxtaposition of the payment of the N18,000 minimum wage against the removal of fuel subsidies by the Governors’ forum  underscores the relevance of this article, which  was last published in September 2010.)

SAVE THE NAIRA, SAVE NIGERIANS!