By Brown Ogbeifun

WHEN socio-economic  matters get rocky the way it is currently in Nigeria, the Government, the unions, and the people of Nigeria should step back, rationally introspect into the past, project their thoughts into the future and make the best choice possible to avoid negative consequences. Refusal to do this, which is the right thing to do, makes all of us sinners- Philippians 4.17. Most governments implement targeted subsidies to boost a particular product’s production and make it less expensive for citizens, thereby balancing supply and demand market forces.

The reason for this is simple. When products are not available in the correct quantity, prices will increase, making it difficult for most citizens to afford the cost. When this happens, it might lead to disenchantment, civil disobedience, industrial actions by the unions, and a possible threat to the democratic practice, which could bring down a government. Unfortunately, instead of subsidizing production, Nigeria is subsidizing consumption, which the people are used to enjoying and becoming difficult to remove.

Unbeknown to Nigerians, the Federal Government indirectly subsidised refined petroleum products by setting lower selling prices from the onset of the oil boom era of the mid to late 1960s. As the global oil glut, energy prices increased, and inflation of the 1970s crept in, the Government of General Gowon gradually moved toward appropriate pricing by raising petrol prices from 6k to 8.45k in 1973. General Murtala Muhammed increased it from 8.45k to 9k in 1976; General Olusegun Obasanjo increased it from 9k to 15.3k in 1978, and President Shehu Shagari from 15.3k to 20k in 1982 and General Ibrahim Babangida increased it four times from 20k to 70k.

Market prices

Outside selling below the market prices at the inception of our refineries, the Government introduced the petroleum subsidy to cushion the impact of fuel importation during the shutdown of the refineries during rehabilitation known as the turnaround maintenance, TAM, which was supposed to have lasted six months. In the early days of the refineries, the TAM was performed by professional employees of the refineries in conjunction with a few foreign partners who were the original builders. The Nigerian refiners were rotated around the refineries to conduct TAM as when due. It never failed and at no time did TAM last more than ninety days during that era, and none of the refineries ran below 70 percent capacity utilisation.

However, the decline in the performance of the local refineries started in the early 1990s when the military Government under Babangida carried out sweeping reforms, which centralized operations of the refineries in the 90s. First, the reform came with the loss of the NNPC’s autonomy to operate as a limited liability company. The reform also took away the powers of the refineries’ Managing Directors to react to emergency operations. From 1991, purchasing critical spares and maintenance became centralised through the Procurement Management Services, PROMAS, at Abuja. With red-tapism, lengthy approval processes, and a lack of the MDs’ financial autonomy, most of the automated critical parts began to fail.

Secondly, issues of pipeline vandalism slowly crept in, and the military Government would rather sell the crude in exchange for dollars than refine it locally. The NNPC was directed to close down all its accounts and domicile them with the Central Bank with any allowance for first-line charges. The implication was that the Managing Directors and their Executive team would be at Abuja running from one ministry to another, and the CBN pursuing approvals to kickstart the procurement process. The long lead time for approvals to procure failing or failed parts and lack of financial authority began the failure of the NNPC to carry out regular the two-yearly TAM (Source: NNPC Refineries Performance Reports 2012). To the best of my knowledge, the last comprehensive maintenance of the refineries was in the mid-90s.

Thirdly, to enable the NNPC to salvage and restore the TAM process, the Government directed the NNPC to contract it out to local entrepreneurs. The directive also took away the TAM from the professionals in the NNPC, who hitherto managed the TAM process. The TAM contracts became juicy slots for government-backed contractors. The externalization of the TAM began the beginning of the end for the refineries. They never recovered from that culture shock till today. All the faulty steps taken by the enterprise’s owner, which is the Government, led to a decline in the performance of the refineries, inadequate lack of refining capacity.

Twelve factors have persistently prevented Nigeria from optimally benefitting from the previous and present crude oil boom and the Russian-Ukrainian war. •Rising global crude prices increase Nigeria’s burden of ‘under-recovery or subsidy applications; •Vandalism of petroleum products pipelines and crude oil theft have made it impossible for the country to meet the OPEC Quota; •Rent mentality that promotes export of raw crude products to finance the Federation account and in exchange import back finished products to service our energy needs; •The sustenance of subsidy means that Nigeria is burning over 4 trillion Naira through exhaust pipes, which according to the IMF, may increase to five trillion Naira by the end of this year. The implication of this is the opportunity cost in goods and services for the people in the form of; health centers, free and qualitative education for the downtrodden, solar electricity to the national grid, boreholes, low-income housing, etc., that the money burnt through exhaust pipes would have provided for the people.

•Not knowing the exact amount of internal consumption by Nigerians thereby also subsidizing the consumption of petroleum products for Nigerian neighbours;• Porous borders facilitate the illegal smuggling of petroleum products out of Nigeria; • High cost of funds, which makes lending for importation attractive; •Free fall of the Naira against the dollar; •Poor incentive structure could encourage investors because of supply and demand market structure distortions. For example; An investor wants to run a refinery in the most cost-efficient manner to recoup investments made and also make profit. For example, capping petroleum product prices by regulation for political reasons makes it unattractive for major and independent marketers to import petroleum products, leaving the NNPC as the sole supplier in times of scarcity.

•High crude production costs made the GMD of the NNPC, Mr. Mele Kyari, to persistently harp on reducing crude oil production cost structure if Nigeria must survive the ongoing energy transition; •Scams and corruption-laden subsidy regimes have made it impossible to remove subsidies with all the earlier reforms and efforts; •It is estimated that the importation and use of generators in Nigeria is close to 50 percent of electricity generation and supply in Nigeria. There is no way the suppliers of generators will support any reform that could gradually remove the high dependence on generators, which is also a factor in the low-level value chain responsible for the high consumption rate of petroleum products.

Challenges: Nigeria currently has a double-digit inflation rate with a growing fiscal deficit, and therefore, facing severe economic challenges and needs money to fund critical infrastructures. It has, in the interim, resorted to borrowing to fund its annual budgets and increasing the funds required to service its debts. In the long run, the borrowings and repayments reduce the funds available for projects’ development. Growth is low, and the unemployment rate is high and still rising. Corruption seems not to be diminishing as the ongoing revelations of the misappropriation of funds in the Accountant General of the Federation’s Office have shown. The sudden removal of petroleum subsidy will adversely affect the small and medium enterprises that rely on PMS to drive their businesses.

With inflation at an all-time high of 17 percent, any increase in the cost of petroleum products beyond the current level will astronomically push up the prices of goods and services. Salaries of civil servants have been static, and the trade union reactions to further increase in petroleum products may lead to industrial unrest, adversely affecting the ruling party’s fortunes. The Government is facing severe security and economic challenges, which has raised its funding and borrowings. Five trillion Naira in subsidy is draining the financing needed to build and rebuild decaying infrastructures. Serial borrowing will reduce the amount of money available for real infrastructure development. Workers’ anxiety over the ripple effects of increasing fuel pump prices, which has always stood them against subsidy removal. The political class’ politicisation of ‘subsidy’ on petrol’ has been a sore point in its removal process.

Removal of subsidy: Petroleum pump price products increase or the removal of subsidy is excruciatingly painful. Gasolene subsidies are often very difficult to scrap or remove and are emotive. We have been at this bus stop several times, and in dealing with the issues now, we need to step back and think through the next steps so that we do not make more mistakes. The subsidy regime is not a bad idea. Many countries use it to protect the poor and the average consumers from price fluctuations due to the instability in international markets like we just witnessed with COVID-19. 

Besides, it is supposed to shield the consumers from market manipulations by the capitalists that want to maximise profits at the expense of the masses. The petroleum subsidy is a social protection measure to protect the vulnerable in our society. Unfortunately, the rich and elite are the direct beneficiaries of gasoline subsidy regimes. They are the ones with several cars and own the transport industry. The poor indirectly benefit from subsidy transfers in organized mass transits, low-cost housing schemes, and low cost of food. All these do not exist in Nigeria. Besides, it has become a source of monumental corruption.

Our economic growth has been slow and low. Besides, unemployment is high and rising, and inflation is in the bracket of double digits with a growing fiscal deficit, the Government is struggling to deliver development to its people. Recall that in 2018, we were labeled the poverty capital of the world. The reason for this is that we overtook India. This is because we now have the largest absolute number of people living in extreme poverty. Regrettably, every minute, six Nigerians drop to the poverty bracket.

Import driven process

Sadly, Nigeria is one oil-producing nation that is unable to produce its fuel for local consumption, thereby relying on dollar and import driven process to serve its people. The mismanaged and corrupt fuel subsidy regime is also contributing to the crisis.

Things are changing for the worse at a breakneck pace too. Nigeria’s population growth is geometric in progression, and her economic growth is arithmetic. Succinctly put, Nigeria’s population growth rate is 3 percent, and her economic growth rate is less than two percent. According to Dr. Okon Timothy, any nation with this type of variance would fall into the Malthusianism trap, thereby susceptible to the Malthusian catastrophe.  With all the reasons mentioned earlier, it becomes logical to do away with it. However, efforts must ensure that Nigeria refines her crude to reduce the burden on Nigerians. There is a school of thought which believes that it is the Government’s irresponsibility and inefficiency that caused the non-performance of the refineries and the economy and, therefore, should not transfer the cost of its inefficiency to Nigerians.

While this looks a plausible argument, that does not remove the fact that the country is in bad shape economically and needs some surgical emergency treatment.

 It is in the DNA of successive governments in Nigeria not to have the initiative to manage businesses successfully. They always believe in rent collection and the philosophy of “export the natural resources for dollars and import finished products to have more money to share in FAAC. They are dollar-focused and, therefore, lost all the initiatives to use natural resources to create more wealth and employment opportunities. That is why foreigners connive with our locals to carry out illicit mining of the mineral resources right under the nostrils of State Governors.

The generalization that Government has no business in business is true to the extent that “only irresponsible government should have no business in business or the running of refineries.” I say this because, even when not directly involved in running businesses, which is not a forbidden fruit, it must create an enabling environment for businesses to thrive. Therefore, the head or tail, Government has business in business.

Even at this, it is a swan song to deliberately assist in running the enterprises aground, shout government has no business in business, then turnaround to sell them to cronies. Often, they don’t run them; they strip the assets. Check out what happened with the steel industries and NITEL facilities.

Kindly do well to investigate the owners of the privatized electricity companies. Check out how many trillions of Naira went into their private pockets in the name of subsidy and bailouts to privatized companies.

 But since we have shamefully proven to be unable to manage anything outside the NLNG, our models of privatization should be that which works.

 For the avoidance of doubts, here are examples of a few state-owned oil and gas companies to emphatically state that responsible Government has business in business. Sinopec, PetroChina, Sinochem, and China National Offshore Oil Corp (CNOOC). These companies are China’s state-owned commercial entities. CNOOC has vast investments in Nigeria. It is China’s largest offshore oil and natural gas developer. China has close to US$1 trillion in assets and rated one of the world’s largest sovereign wealth fund. Chinese Government is investing heavily in alternative sources of energy. Are the state actors from the moon?

Equinor ASA (formerly Statoil and StatoilHydro) is a Norwegian state-owned multinational energy company. Its HQ is in Stavanger. It operates in about 36 countries and now heavily investing in renewable energy. Norway used her oil wealth to build efficient health and educational infrastructures, a good network of roads, and has over US$1 trillion in assets and rated the world’s largest sovereign wealth fund. Saudi Aramco, also known as the Saudi Arabian Oil Company,  is rated as the world’s most profitable company, dwarfing technology giants like Apple Inc. Aramco owns and runs a 600,000 barrels per day refinery in far away from the USA and has over $300 billion sovereign- wealth fund.

These three governments have proven that responsible Government has business in business, and their leaders do not have ten heads. The only difference is that they are patriots, they respect their citizens, love them, want them employed to deal with corruption without the party, religious or tribal affiliations. They also consistently work to remove their citizens out of poverty. Here, our leaders believe in the philosophy of handouts to win elections. For Nigeria to optimize the benefits of our hydrocarbon resources, we need our refineries using the NLNG model. The USA, with a population of about 331million  people, has refineries in 30 States. Texas alone has more than 30, and California has 18. Yet Nigeria, with a population of over 200million people, has four moribund refineries. Doesn’t this tell us a story of how much the Government treats the comfort of its citizens?

Panacea to subsidy crisis

• Create enabling environment to attract foreign investors in the downstream sector of the oil and gas industry.

• Rehabilitate the existing refineries under a new model, possibly using the NLNG private ownership model, which the unions have advocated for since the early 2000s because refineries do not get too old to function. Refineries are upgraded periodically to modern standards. For example, the Digboi refinery in India was commissioned in 1901 and still running.

• Build new refineries to meet the escalating demands.  Like I said earlier, with over two hundred million people, Nigeria has four comatose refineries. In contrast, the United States has a population of over a 331million people, with Texas alone having 30 refineries over 50 years old. The difference between them and us is our maintenance culture.

• Embark on a phased-subsidy withdrawal and rechannel the fuel subsidy expenditures to establish social protection policies and programmes and to build long-term public utilities. The social protection programmes should target low and medium-income salary earners and the vulnerable in our society. Part of the subsidy funds withdrawn should be used to subsidize agriculture, water, health, education, and public transportation to reduce food costs in low-income families.

• Embark on robust renewable and other energy transition programmes to tap into Nigeria’s abundant wind and solar energy supplies.

• Citizens should also help reduce fuel consumption and carbon emission through car pooling and car-sharing systems.