How Not to Remove Fuel Subsidy

08 Jan 2012

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Simon Kolawole Live!: Email:

As I was saying, subsidy is an emotive issue anywhere in the world. You just don’t wake up one morning and announce that the perk is gone and expect the masses to give you a standing ovation. At the root of the London riots last year was the tension over cuts in perks. The unrest in Greece was stirred by austerity measures. No matter the merits of the case, withdrawal of subsidy is not a policy decision to be taken in a hurry, marketed in a rush and implemented in haste. A lot of thinking has to go into it—a lot of what I call “policy impact assessment”: weighing the pros and the cons, analysing the potential winners and losers, devising ways to address each concern, working out how to get the citizens’ buy-in, and providing a cache of safety nets to lessen the pain. You just don’t remove subsidy and say water will soon find its level and everybody will adjust. No way.

Now, let me be clear on one thing: I am pro-subsidy (it may be fuel or something else). In a society where 90 per cent of the citizens live on less than $2 a day—according to the UNDP Human Development Index—you would be courting trouble to declare that every single thing should be left to market forces. Market forces are only interested in profits, not people. Even classical economists will tell you that “market doesn’t deliver everything”. Market, they agree, does not always provide the most optimal outcomes. That is why even extremely capitalist countries provide a bundle of safety nets for the vulnerable in the society—such as payment of social security, child care allowance, subsidised mass transportation, free healthcare, and so on and so forth. Not everything is left to the market forces. When crude oil prices rise, for instance, some governments cut fuel tax to reduce the direct impact on motorists’ pockets. They know quite well how fuel prices hurt disposable income.

In Nigeria, there is virtually nothing for the people. The rich and the powerful gather like vultures and tear into the national treasury at will, leaving the people high and dry. They ride all the cars, own all the houses and eat all the food. At our expense, of course! We fuel their congregation of cars, finance their egos and sponsor their libidos. The people can only watch helplessly as the gap keeps widening. The closest to social security that the people enjoy here is fuel subsidy. Those who said removal of fuel subsidy would not impact on transport costs for the poor must be reviewing their words by now. Transport fares have hit the roof since the fuel price hike of last Sunday. Even buses that run on diesel have hiked their fares. Opportunism, you call it, but it could be market forces too, come on.

I am not unmindful of the fact that fuel subsidy has not been very efficient in Nigeria. In fact, the only reason I can ever support its removal is because of the massive corruption it has been used to perpetrate over the years. The more we campaign for the retention of subsidy, the more we play into the hands of these buccaneers who have now turned private jets into toys. This alone constrains me from campaigning for fuel subsidy. On the one hand, I believe subsidy is not a sin. On the other hand, I remember the infamous cartels. The last time I visited Abuja, I was shocked at the number of private jets on the terminal. I was told most of them are owned by fuel importers. The briskest business in town—where you could become a multi-billionaire in just one transaction—was fuel importation. The removal of subsidy now means nobody goes to Abuja to make claims for it anymore. No more N1.5 trillion dubious payments. No more over-invoicing, or whatever it is called. To that extent, removal of fuel subsidy is desirable.

But, then, we ignore the larger issues. What makes fuel subsidy corruption so easy? Should we deal with the corruption or make the people pay the price instead? Should we visit the sins of economic criminals on the innocent citizens? This is where a lot of us are unable to reach an agreement. Some will argue that the only way to deal with this corruption is to remove the incentive: subsidy. If there is no subsidy, there is no claim. If there is no claim, there is no over-invoicing and round-tripping. Since the sleaze is engineered by government officials in collaboration with their cronies in the endemically corrupt private sector, ending the subsidy regime effectively puts an end to the bizarre bazaar. This is not a bad argument at all. But if we have to follow it through, we may soon privatise our rotten police force. How can you tell me that the only way to cure headache is to cut off the head?

I’ll now make my point. Or points. One, the corruption in the subsidy regime was possible because government endorsed it. In fact, government was responsible for it. To start with, fuel import licences were allocated politically. There was a whole chain of patronage and kick-back mechanism. Two, this corruption, as difficult as it sounds, can be dealt with. I have it on good authority that when Mr. Reginald Stanley became the Executive Secretary of the Petroleum Products Pricing Regulatory Agency (PPPRA), he—within two weeks—substantially cleaned up the place. The volumes of import being claimed by the buccaneers reduced drastically. The real daily petrol consumption went far below the 42 million litres we had been subsidising for ages. It means we can actually confront this monster if the government is sincere about it.

Three, we keep saying nobody will build refineries without deregulation. That is a wrong conclusion. If government issues a deadline to those drilling our crude oil today to build refineries or quit our shores, you will see a difference. It is all about whose interest we are protecting. It’s our oil and I don’t understand why we should be the underdog all the time. The way things are done in this country, I don’t expect anybody to build refineries. And without refineries being built, deregulation will not mean anything at the end of the day. Diesel market was deregulated seven years ago—how come nobody has built refineries for diesel since then? Petrochemicals were never regulated—how come Nigeria is not filled up with petrochemical companies? Deregulating petrol is therefore not a magic wand. It takes a patriotic and activist government to deal with these issues in a way that will produce results.

Four, government cannot be preaching sacrifice to Nigerians while its wasteful spending continues. It is criminal how government officials continue to feather their own nests while preaching sacrifice to us. They never cease to travel first class all over the world with a retinue of aides. It’s crazy. The message of sacrifice will be better received if government officials lead the way. Let us all make this sacrifice! You can’t be drinking champagne and preaching sacrifice to someone drinking “zobo”. There is nothing we would gain from subsidy removal that we cannot gain from reducing recurrent expenditure and other wastes. Five, in removing the subsidy, government obviously did not prepare any “palliatives” (I hate that word) ahead. Amidst public protests, President Goodluck Jonathan summoned an emergency cabinet meeting after which it was announced that government was going to buy 1600 buses. I’m not even interested in the details of whose buses they actually are. If government was really thinking ahead, the buses should have been on the road days or weeks before the removal of subsidy.

Finally—and this is where I’m going—I believe that we can manage the subsidy regime until the conditions are properly designed for deregulation. We were told that the subsidy bill for 2011 was N1.5 trillion. For the life of me, I can bet that the actual figure was at most a third of that. I am basing my assumption on previous spending even when crude oil hit an all-time high $147 per barrel (although with a better exchange rate which still does not account for the huge gap in subsidy payments last year). Governments at all levels must trim their wasteful spending by at least 50 per cent. The twin strategy of tackling the subsidy fraud and cutting wasteful expenditure will free up a lot of funds for development. We can spend the savings on improving infrastructure and preparing the ground for a well-programmed deregulation.

Deregulation is a fantastic policy that can unfurl our oil and gas potentials, create millions of jobs and spark off economic growth and development if properly planned and implemented. We can truly begin to enjoy being an oil-rich nation. But so far, I am not convinced that this government has properly thought it through. A good policy with good intentions that is badly implemented will end up a big disaster.

And Four Other Things...

IBB’s Timing
The fuel subsidy struggle has gained an activist. His name is General Ibrahim Babangida, former military president – who increased fuel prices in his first budget on January 1, 1986. Commenting on the January 1, 2012 increase in petrol price, IBB said: “It is my opinion that it is ill-timed. The issue of subsidy should be seen more as politics and not economics, because the sole purpose of government is for the good of the people and not to create hardship. It is better to seek political solution to the subsidy discourse than invoking the sentiments of economics.” This is one of the most interesting ironies I have ever witnessed in my lifetime. In the days of IBB as president, those who raised issues about political economy when criticising his policies were branded “radicals” and hurled into detention. IBB’s latest statement, carefully released when Nigerians were seething with rage over fuel price hikes, was well-timed. He’s now officially the defender of the masses. Smart guy.
‘Fela Don Come Again!’
Since the latest round of fuel subsidy crisis broke out, I have not read or heard a more robust take on it than the one international motivational speaker, Mr. Fela Durotoye, posted on facebook. In case you missed it, here are excerpts: “I have heard some preposterous arguments that the removal of the fuel subsidy will be justified by wise investments that will benefit all… how will a wasteful government suddenly realise the genius of prudence and making the right investment decisions simply because there is more money available from oil subsidy removal? Have we sought to honestly find every way we can plug wastage in our leaking economy before we ask a feeble populace to carry the burden of corruption and gross ineptitude of a few gluttons? Have the Presidency, the state and local governments and the Legislature discovered how to travel without a convoy of 20 cars to the airport? How come our 'leaders' in government earn so much and still spend so much furnishing the same houses and offices they furnished with our money last year? Do you furnish your office every year?” Another Fela is here with us!
Petragony (Petrol Agony, that is)
As soon as I learnt that fuel was going to sell for N141 per litre, I started strategising with my driver on how I would psychologically tune my mind to the new realities. I said I would be topping up my tank with N3000 fuel regularly, rather than fork out N13,000 at a go (on an empty tank). Day One: I still had above half tank, so I estimated that I could top up with less than N2000. Guess what? It ended up costing me N5000! I had never been that reluctant to open my wallet all my life! If crude oil prices eventually hit $120 0r $130 this year, I hope my N5000 would be able to buy four litres! Meanwhile, a friend of mine said he branched at a filling station and asked the attendant to sell N2000 worth of fuel to him—that was all he had in his wallet. The attendant filled up the tank, having misunderstood my friend. I won’t tell you how it ended—but it was quite embarrassing.

Those US ‘Experts’
Western countries have all kinds of experts specialising in all kinds of topics. I always find it bemusing reading articles from former US Ambassador to Nigeria, John Campbell, who specialises in churning out dangerous halt-truths and jaundiced analyses on Nigeria. There is now a female version, Prof. Jean Herskovits of New York State University, who did a fantastic job of suggesting that Boko Haram may not be responsible for the growing bomb attacks in the country. It’s curious because the pattern of attacks is the same; the targets are the same; and the channels of passing information to the public to claim responsibility are the same. There may be the odd attack not linked to Boko Haram, but an exception does not become the rule. Boko Haram itself claims responsibility and we are supposed to say: “No, it’s not you”! Reminds me of when MEND claimed responsibility for the October 1 bombings and President Goodluck Jonathan said: “No, It’s not you”…

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  • I think that the mistake has been made by the president by not at least providing the so called palliatives before removing the all demonstrates how shallow minded ,uncaring and insensitive our economy managers are.i still insist that the president with his promise of reducing the overhead by 25 percent can still do more,he can suspend action on the 7 billion naira mansion for the vice president reason being that we are broke,he can reduce his budget for food,it is outrageous the 2 mercedes benz cars can wait,let him manage the available ones in the presidential fleet and then sanusi lamido who has been dishing out all the economics should have a second thought on the 1 billion residence for the CBN governor,if he doesn't do do that then he doesn't have any moral ground to be throwing tantrums on other fellow thieves.he that comes before equity must come with cleans hands and maybe the president can begin to make inquiries as to why the 300 million dollars spent on the port harcourt and kaduna refineries could not turn around the refineries,if i pay a man for a job and he fails to do I'll take him to court for breach of contractual agreement.government ain't father christmas.I think Nigeria would not have been broke if we have leaders that are out to fight corruption.At the heart of all this mess is corruption and government is yet to convince us that it's interested in fighting corruption if not why have we buried the Halliburton and siemens cases under the carpet.The failure of government to go after the thieves in the land is like an incentive to others to be corrupt.And to labour going to strike might not be the way out.let them engage government in serious negotion to ensure that the palliatives kick in as soon as possible

    From: oduna austine

    Posted: 3 years ago

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