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Why fuel subsidy must go (2)

By Clara Nwachukwu & Sebastine Obasi
LAGOS — As the world awaits the inauguration of Muhammadu Buhari as the President of Nigeria, controversy over the contentious fuel subsidy claims has taken a centre stage following the fuel scarcity that almost brought the country to its knees.

This is coming as the Federal Government is said to have spent more than N6 trillion from 2006 to 2014 on fuel subsidies. Vanguard can now reveal the amount spent on subsidy since 2006. The table below shows the amount spent on subsidy from 2006:

*2006 – N151.9 billion;

*2007- N188 billion;

*2008 – N256.3billion (January to July);

*2009 – N421.5billion;fuel-subsidy-station

*2010 – N673 billion;

*2011 – (N1.3 trillion)revised to N2.19 trillion;

*2012 – N888 billion + N161.6 billion supplementary

*2013 – N971 billion; and,

*2014 – N971.1 billion

Although figures are now being bandied about by respective groups, but former President Olusegun Obasanjo reintroduced subsidy on fuel as a palliative to cover the difference between the landing cost of premium motor spirit (petrol) and household kerosene and their respective pump prices.

An analysis of the 2013 budget, for example, shows that allocation for fuel subsidy constituted about 20 per cent of the entire budget. It was also 10 times more than the appropriation for agriculture and rural development (N81.41billion), three times that of health (N279.23 billion), and twice of education (N426.53 billion). The vote for capital expenditure N1.54 trillion was just a little above the fuel subsidy.

To drive home the reality, 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. The subsidy spent for the year is almost twice or 196.07 per cent of education’sN495.28 billion; more than three times (369.6 per cent) the N262.74 billion for health; and 148 per cent above the N655.47 billion allocated for the Universal Basic Education Commission, UBEC, and the Tertiary Education Trust Fund, TETFUND.

Excess crude account

Addressing journalists last weekend in Abuja, Minister of Finance, Dr. Ngozi Okonjo-Iweala, revealed that Nigeria earned $61.7 billion (N12.3 trillion) in four years from excess crude oil against government’s spend of $42.86 billion, as shown below:

*$18.14 billion and spent $13.57 billion in 2011;

*$18.16 billion – $9.5 billion in 2012;

*$15.19 billion – $12.91 billion in 2013;

*$8.01 billion – $5.95 billion in 2014; and,

*$2.17 billion – $93.6 million within four months of 2015.

Okonjo-Iweala also explained that about $10.85 billion (N2.14 trillion) from the foreign excess crude revenue account savings went into fuel subsidy payments to petroleum marketers between 2011 and 2014.

The Excess Crude Account is one of the two accounts (dollar and Naira) where the Nigerian government saves revenue earnings from the difference between budgeted benchmark crude oil price and the actual price at the international market in a given year.

Subsidy payments

A breakdown of the subsidy payments showed $1.818 billion was spent in 2011; $2.63 billion in 2012; $3.26 billion in 2013; and $3.14 billion for 2014. The subsidy payment for 2015 is not yet available.

Since the beginning of 2015, only $93.6 million was released as special distribution to the three tiers of government, with the balance of the excess crude account currently at $2.08 billion.

Subsidy criticisms

Oil marketers, including the majors, independents and depot operators have continued to insist on the full deregulation of the downstream sector of the economy, not only to cap the distortions of the market created by subsidy, but also to attract fresh investments into the sector.

For the Major Oil Marketers Association of Nigeria, MOMAN, “the only answer to fuel shortages or products scarcity of any kind, is deregulation.”

In particular, price regulation on account of subsidy is the only reason why oil producing companies in Nigeria have refused to invest in refining, to meet the nation’s growing need for refined products. Even attempts by the Obasanjo’s administration to compel them to refine at least 50 percent of their crude in-country, failed woefully.Excess-crude

The President, Nigerian Association of Petroleum Explorationists, Mr. Chikwe Edoziem, argued that the only reason Nigeria is not self-sufficient in refined products, despite being the sixth largest producer among the OPEC members is because of price regulation.

He noted: “I cannot bring in my capital, equipment and other resources to refine the crude, and then you turn around to tell me how much to sell the products, irrespective of what my costs are. Business is not run like that; let the forces of demand and supply to dictate price and each marketer to sell at his own cost, and the situation will work better.”

Other analysts have argued that the continued provisions for fuel subsidy have not yet translated to sustained economic growth for the nation, as its management has been fraught with corruption and inefficiencies. They further add that the purpose for which the subsidies were put in place, such as making energy more affordable and to distribute the wealth from the country’s fuel resources, have not been achieved.

According to a recent research from NOI Polls, many Nigerians purchase petrol at prices way above the official pump price of N87 stipulated after the partial removal of fuel subsidy by government last year.

Also, the International Institute for Petroleum, Energy Law and Policy, IIPELP, said that Nigeria is toeing the path of bankruptcy if it continues to subsidise the importation of petroleum products under the Petroleum Support Fund, PSF scheme.

IIPELP, a think-tank that provides institutional and structural support to the energy sector in Africa, warned that the country could go bankrupt in a matter of months if it continues to regulate domestic price and consumption of petrol by her citizens.

Explaining the rationale behind IIPELP’s position, the President, Prof. Niyi Ayoola-Daniel, said the incoming government will find it difficult to sustain the scheme.

Ayoola-Daniel said: “When people queue at filling stations for two days to buy petrol, you have effectively taken out their sources of livelihood because those days are wasted. If subsidy continues, it can shut down Nigeria’s economy because we cannot continue to subsidise such consumption to the detriment of our economy.

“This game of subsidy has been a political one and has not been played on the rings of economic data, neither is it fact-driven. It is emotionally driven and politically played by those people that use it as a political tool and we cannot continue like this.

“Government will have to steer clear of the downstream petroleum sector because it can run itself but when government decides to interfere, it creates dysfunction in the subsidy regime which is a key problem to the sector. Subsidy is strangulating free market enterprise and when government does not fix the price of the primary product which is crude oil, how then does it intend to fix the price of the by-products.

“When government does not allow the downstream sector to operate in a commercial framework that allows for healthy competition as seen in the telecoms sector, there will continue to be queues at our filling stations.”

Ayoola-Daniel also faulted arguments in support of fuel subsidy which says that it is pro-poor.

He said: “The arguments mostly proposed in support of subsidy and which is always at the heart of its continuation is that it is pro-poor, it may be a fair one but as long as there are long queues in our filling stations, then we are compounding the problems of the poor because the real beneficiaries of the subsidy are not the poor at all but the middlemen and rent seekers.”

The Nigerian Natural Resource Charter, NNRC, in a recent briefing note on fuel subsidy, said Nigeria can secure the social and economic benefit of the current and future generations, by using revenues generated from its subsoil resources.

These, it said, will enable and maintain investments outside the resource sector in sectors which would benefit the general populace such as infrastructure, health, education and agriculture, transportation and manufacturing.


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Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.