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Subsidy: Unending economic crisis

Right from the days of former military president, Ibrahim Babaginda, Nigerians have been made to pay higher costs for refined petroleum products with unending promises of unfulfilled economic promises. However, Sebastine Obasi, writes that as in the days of military, nothing has changed under the democratic dispensation, as the higher subsidy the government promises, the worse the quality of life of the people.

Eight months after the contentious fuel subsidy protest that shook the administration of President Goodluck Jonathan, Nigerians are yet to feel the impact of the promised palliatives, following the increase of petrol pump price from N65 to N97. The administration had promised to establish refineries through a public – private partnership arrangement. The plan was distinct from the other refineries that would be set up by other private sector concerns.

Apart from the refineries, the government promised to execute mass public works to provide employment for the youths, facilitate a comprehensive mass transportation system for workers and students by providing 1,500 buses, build and re-habilitate select key roads around the country. The government also promised to build and extend the nation’s railway network and implement social programmes targeted at women, children and the elderly.

The proceeds from the subsidy removal were to be invested in realising the new agricultural strategy which is focused on job creation and boosting the contribution of the sector to the entire economy.  Most importantly, the government promised to ensure that all aspects of the withdrawal of subsidy were managed in a transparent and accountable manner.

But the promises of the Jonathan government as regards the palliatives are in tandem with those of past administrations, whose promises yielded no meaningful results. For example, the Olusegun Obasanjo administration increased fuel price about 10 times, but the increase effected in 2004 aroused widespread condemnation and protest.

In an attempt to douse the prevailing tension, the government set up the Ibrahim Mantu –led committee to fashion out a framework that would cushion the effects of the policy on the people.

One of the recommendations of the committee, was the provision of a minimum of N100 million as grant-in-aid by the federal government to each state with a 200 percent matching contribution by each state government for on-lending to bona fide transport owners/operators.  The interest was not expected to be higher than three percent, with input by the state governments in the routes plied and fees charged.

It was agreed that the contributions of the state governments should be charged to their share of excess crude oil proceeds. Other palliatives included the reduction of duties on buses from 22 to 10 percent and a reduction of duties on pharmaceutical drugs from 20 to five percent.

The committee also recommended building of more refineries as a way of resolving the intractable problems in the downstream sector. That is not all. Recommendation was made for the “establishment of a modular mechanism to stabilise domestic prices of petroleum products and mitigate the impact of upward movement in crude oil prices in the domestic products markets.” These recommendations did not see the light of the day due to poor co-ordination and faulty implementation.

Nigerians experienced another plethora of fuel price increases during the eight-year rule of military President ,Ibrahim Babangida. Within the period, increases were effected not less than six times, with the attendant promises of palliatives that would mitigate the sufferings of Nigerians. The usual promises of infrastructural provision were broken sooner than they were made. As a matter of fact, every Nigerian government since 1973 increased fuel prices except Muhammadu BuharI and Umaru Yar’Adua.

Presiednt Jonathan

At the centre of government’s argument for subsidy withdrawal is, the inability of the four existing refineries to meet the growing demand of petroleum products. Nigeria, the sixth largest producer of oil, with a population of more than 140 million, has only four refineries with a combined capacity of 445,000 barrels per day, whereas Venezuela, with a population of 29.33 million, has three refineries with a combined capacity of 1.26 million BPD.

Similarly, Saudi Arabia, with a population of 27.13 million has seven refineries with a combined capacity of 2.1 million BPD. Libya has five refineries with combined capacity of 378,000 BPD, which serves its population of 6.03 million. Cote d’Ivoire’s one refinery with a capacity of 62,200 BPD serves its population of 18.01 million.

With the current price of N97 per litre, Nigeria’s petrol still remains the most expensive among OPEC countries. In Algeria, Kuwait and Qatar, petrol is sold at an equivalent of N49.30, N34.80 and N31.90 respectively, just as it is sold in Libya, Iran, Iraq and Venezuela at N20.30, N4.50, N4.50 and N3.20 respectively.

Folorunso Oginni, Chairman, Petroleum and Natural Gas Senior Staff Association of Nigeria, PENGASSAN, Lagos zone, said that the problem of perennial fuel scarcity in Nigeria is self-inflicted. “The problem of Nigerians in perennial fuel scarcity is Nigeria itself, midwived by the NNPC as the industry umpire.

“It is therefore laughable when NNPC that is riddled with the huge burden of corruption, struggling to save itself, masquerading as Nightingale, whereas it is in sheep skin which International Oil Cartels (IOCs) and their local collaborators used to subjugate the people, the economy and the nation, is the body being proposed for full commercialization with 100 percent government equity,” he said.

According to Oginni, to address the challenges of fuel subsidy regime, government must not allow any further rise in the pump price of fuel. Also, government should rehabilitate the existing refineries, drive competition through the organised private sector for the building of at least six new refineries within 30 months, with a combined capacity of one million barrels of crude oil per day.

He also pointed out that government should allocate crude oil to the refineries at special rates, as distinct from the export dependent prices.

Oginni further enjoined the government to monitor the local refineries to ensure that output equals the quantity of crude allocated to forestall diversion, while the NNPC must be unbundled to become publicly quoted companies with government having not more than 10 percent shares in any of the companies.

Oginni also said that importation and exportation of finished products such as PMS, AGO and DPK should be banned upon completion of the refineries for five years in the first instance to stabilize the local petroleum market and protect the new and existing investors.

According to Oginni, an automated refinery can be built within 24 months. That explains why Singapore, a non oil producing country has about 62 refineries. He further stated that Petrobas, Brazil’s national oil company, which was established the same year as NNPC, has more than 700,000 workforce, whereas at NNPC, records kept are at variance with those kept at DPR, its subsidiary.

But Faruk Mohammed, principal partner, Nextier Advisory, a petroleum, power and agricultural consulting firm, stated that Nigeria could adopt the Ghana model of subsidy removal in order to make a meaningful headway in the sector.

According to him, in January 2004, Ghana government realised that world oil prices would remain high and it could no longer afford the fuel subsidies. Consequently, Ghana launched a poverty and social impact assessment (PSIA), which was completed with guidance from a committee of key stakeholders.

In February 2005, the government increased fuel prices by 50 percent, using the PSIA report as justification. It showed empirical proof that subsidies benefitted the well-off and not the poor. As a follow up, the Minister of Finance announced programmes to be funded with the subsidy savings.

The government developed measures for tracking progress on the intervention programmes. The measures were transparent and easy to track by the public. One of the measures included immediate elimination of school fees at government – run primary and secondary schools, as well as massive investments in public transport network.

Also there was continuous communication from the government on how the savings are being spent. Mohammed enjoined the government to encourage private investments in refineries to meet local demand, reduce pressure on foreign exchange and enhance production capacity of the economy. He also said that to reduce unsustainable subsidy burden, the government should start to issue bonds for subsidy payments.


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