Benefits of Fuel Subsidy Removal


The federal government’s partial deregulation of the downstream sector will, no doubt, be an incentive to private refiners, and boost capacity utilisation, as well as employment generation in the sector. Many believe the move is long overdue and will go a long way to  freeing enormous resources into infrastructure development,  Ejiofor Alike reports

The federal government recently removed petrol subsidy and ushered in a regime of partial deregulation in the downstream sector of the Nigeria’s oil and gas industry.
Though the sector would have preferred full deregulation, the action is a right step, which will eventually lead to the ultimate goal, if the government could muster the political will to move a step further in the future.
This belated action is however coming when the crude oil price has hit the bottom level, with corresponding drop in the price of refined products.
But for the high cost of foreign exchange, which has led to high cost of product, the drop in the crude oil would have made mockery of the subsidy removal as there would have been nothing to subsidise.
Subsidy removal would have made more economic sense when crude oil price was high to save the trillions of naira wasted on payment of subsidy.
But when former President Goodluck Jonathan attempted to remove subsidy on January 1, 2012, the then opposition All Progressives Congress (APC) used the organised labour and other civil society groups to ambush and frustrate him, forcing the former administration to reverse it.
However, even though the price of refined products has dropped but with the high cost of forex, the government has freed itself of sourcing for forex at the official exchange rate of N197, which is far below the N318 black market rate.
Apart from the trillions of naira spent over the years in the payment of subsidy and its attendant corruption, perennial crisis in the downstream sector occasioned by government’s interference in the market through the management of subsidy regime has also fueled the need for  deregulation, be it full or partial.
The new pricing regime will no doubt resolve the recurrent fuel scarcity crisis by ensuring availability of products as marketers will now import product to their full capacity without government’s restriction in the form of import approval.
It will also reduce hoarding, smuggling and diversion substantially and stabilise price at the actual product price.
The new regime will also ensure market stability and improves fuel supply situation through private sector participation
Most importantly, it will create labour market stability, potentially creating new jobs through new investments in private refineries and retails and at the same time prevent potential loss of jobs in existing investments, which were threatened in recent years.
Imperatives for new regime
This new regime been brought about by the non-availability of foreign exchange to import petroleum products.
Marketers have drastically reduced their importation since third quarter 2015 due to a scarcity of forex.
Also the rise in crude oil price and prevailing high cost of importation has brought back subsidy regime at the price of N86.50 since April 2016.
Due to decline in government income related to crude oil price and limited crude oil output caused by the spate of renewed vandalism and sabotage of oil infrastructure in the Niger Delta, there is neither funding nor appropriation to cover this in the 2016 Budget.
The government through this new price regime will ensure that the price of products are monitored and modulated to ensure that citizens get a fair value for products they purchase.
The failure of investors to invest in private refineries was attributed to the inefficient and ineffective subsidy regime which did not allow free market forces to determine price of product.
Unavailability of foreign exchange and Inability to open letter of credit has forced marketers to stop product importation and this imposed over 90 per cent supply on NNPC since October 2015 in contrast to the past where NNPC supplies  8 per cent of the national requirement.
NNPC lacks the resources for and is not designed to meet this increase in supply, this has resulted in the current fuel situation across the country.
With the new price regime, marketers will source their foreign exchange independently of CBN and ensure adequate product supply  in all locations of the country whilst catering for full cost recovery and averaging of prices across the nation
With the trillions of naira subsidy claims becoming unsustainable,  the continuation of subsidies in any form  limits the ability of government to deliver its statutory functions such as power generation, security, education, health, among others.
The new price regime will enable government focus on these critical sectors and free up our scarce foreign exchange via CBN to be used in other sectors
The national leader of the All Progressives Congress (APC), Asiwaju Ahmed Bola Tinubu echoed this sentiment, when he said that the action would President Buhari to reallocate funds once earmarked for the fuel subsidy and commit those funds to other more socially productive services and undertakings was a difficult decision.
Tinubu acknowledged that politically, it would have been easy for the President to sit back and let the subsidy remain in place.
He alleged that the subsidy regime had been distorted to where it no longer functioned for the benefit of the masses but for the undue enrichment of a small club of businessmen – some legitimate in their work, some not.

“Instead of remaining a positive aspect of the social contract, the subsidy was transformed into an opaque haven of intrigue and malfeasance. It was turned into a shadowy process from which the unscrupulous extracted large sums of money without providing the services and products duly paid for. Fake businessmen became true billionaires over night as if by supernatural force,” he added
Illegality of action
However, a constitutional lawyer and Senior Advocate of Nigeria (SAN), Mr. Femi Falana said the removal of subsidy was illegal, immoral, insensitive and a disobedient of court order.
He noted that during the campaign last year, the candidate of the APC, General Mohammadu Buhari pledged that if elected as President by the Nigerian people his administration would not remove fuel subsidy.
“Since he won the election last year President Buhari has consistently resisted pressures from the neo-liberal characters in the government to remove fuel subsidy and increase the price of petrol,” he said.
He lamented that without any public debate or consultation with relevant stakeholders whatsoever the federal government took the Nigerian people by surprise when it decided to increase the pump price of petrol from N86.50k to N145 per litre.
Falana recalled that not too long ago, the federal government had supported the imposition of higher tariffs paid on epileptic supply of electricity by consumers.
He said in sentencing the Nigerian people to excruciating economic agony the Ministry of Power defied a court order which had restrained the government from giving effect to the proposed electricity tariff.
Falana argued that the decision to increase the price of petrol is also illegal and contemptuous, citing the case of Bamidele Aturu versus Attorney-General of the Federation (unreported suit No. FHC/ABJ/CS/591/2009), where the Federal High Court declared illegal and unconstitutional the policy decision of the federal government to deregulate the downstream sector of the petroleum industry contrary to the combined effect of the provisions of the Price Control Act and the Petroleum Act.
“In total defiance of the said order of the federal high court the federal government has deregulated the downstream sector of the petroleum industry,” he added.
Falana also argued that since the Petroleum Products Pricing Regulatory Agency (PPPRA) which is statutorily empowered to recommend the price of petroleum products has not been reconstituted, the unilateral decision of the Executive Secretary of the body to fix the pump price at N145 per litre is ultra vires and illegal in every material particular.
“In view of the illegality, insensitivity and immorality of the price increase the federal government should cancel it, revert to the status quo and consult widely with all relevant stakeholders in the society,” Falana added.