Can Fuel Subsidy Really Go Away?

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In April, last year, the federal government bowed to decades of pressure to restructure the downstream arm of the Nigerian oil and gas industry via the removal of the ‘dreaded’ fuel subsidy. But unknowingly to Nigerians, the corporation was still paying fuel subsidy because the corporation came back to tell Nigerians that it had been expending N120 billion monthly as subsidy within the last one year. Now, close to 12 months later, it is again saying it plans to ‘remove’ the fuel subsidy. If the news did not ring through last year due to the very low prices of crude oil, it is certainly coming with a louder bang this time. Evidently, like Chinua Achebe’s Amalinze the cat (in his Things Fall Apart novel), the monster fuel subsidy has nine lives. But it appears the Nigeria National Petroleum Corporation is determined to do away with it, once and for all. Will the subsidy be finally removed this time? Chris Paul asks

To douse the growing tension in the downstream sector arising from the proposed removal of fuel subsidy and subsequent fuel price increases, towards the tail end of this week, the Nigerian National Petroleum Corporation (NNPC) said it would maintain its current ex-depot price of Premium Motor Spirit (petrol) until the conclusion of ongoing engagement with the organised labour and other stakeholders.

The Group General Manager, Group Public Affairs Division, Dr. Kennie Obateru, made the statement when he addressed newsmen in Abuja, on Friday, 26th March 2021.

He said the corporation was taking on the responsibility of importing refined petroleum products as sole supplier, to guarantee energy security for the nation.

Throwing more light on the recent interview by the Group Managing Director, Malam Mele Kyari, at the State House, Obateru stated that the NNPC had no intention of pre-empting on-going dialogue with labour by unilaterally increasing the ex-depot price of petrol, even though the corporation is bearing the burden of price differentials between the landing cost and pump price of petrol.

According to him, NNPC had made arrangements for robust stock of petroleum products in all its strategic depots across the country to keep the nation well supplied at all times.

While appealing to petroleum products marketers not to engage in arbitrary price increase or hoarding of petrol so as not to disrupt the market, Obateru urged motorists not to engage in panic buying, stressing that NNPC was committed to ensuring energy security for the country as the supplier of last resort.

He gave the assurance to marketers and all other relevant stakeholders in the downstream sector of sustainable collaboration for the public interest.

So, pending the outcome of the talks between the labour and the downstream actors, NNPC regains its role as the sole importer of fuel into the country, while it continues to subsidise the product.

The subsidies have always been appreciated by the citizens as one of a few positive things they could receive from the state. The economy of the country has always been highly dependent on revenue from crude oil. Similarly, the absence of constant and stable electricity supply has forced households and small enterprises to depend on generators.

The fuel subsidy policy in Nigeria was introduced as a means to stabilise the price of fuel until the local refineries are rehabilitated. It was meant to last for six months only, but has lasted over 26 years, due to the inability of the government to fix the refineries.

In 2016, when the President Muhammadu Buhari administration decided to end the subsidy, Nigeria had spent an excess of $5 billion (4.3 billion euros) on keeping fuel subsidies.

Experts believe the process of subsidising the petroleum industry was corrupt and hugely inefficient. They claimed it neither alleviates the sufferings of low income earners nor end fuel scarcity. But two years later, in 2018, the subsidy was surreptitiously sneaked into the downstream once more; prompting the House of Representatives to raise alarm over the development.

Chairman of the House committee on petroleum resources (downstream), in the eighth Assembly, Joseph Akinlaja, accused the federal government of illegally reintroducing subsidy on fuel.

He said Nigerians deserved an explanation on the development concerning the ‘illegal’ reintroduction of subsidy on petrol

According to Akinlaja, the news on the payment of N26 on every litre of fuel, which cost N145/liter at the time, came as a surprise to the House of Representatives.

Akinlaja said the National Assembly did not appropriate the N26 on every litre of fuel sold to motorists, expressing his shock at the news of the subsidy payment.

“I call it backdoor subsidy because as a legislature, we are not aware of the N26. The executive has assumed the role of the National Assembly through the NNPC,” Akinlaja said.

Dissociating the National Assembly from the policy, Akinlaja said, “As a legislature, we didn’t make any new law or appropriation of money in the name of subsidy on petrol.

“Who appropriated this N26 per litre? One million litres is equal to N26million and one billion litres is equal to N26billion. Is N26billion small money? Can N26billion be approved through Executive fiat or order? No!”

Akinlaja disclosed, then, that the House had commenced investigation on what has happened to the distribution system and why petrol was scarce despite all the assurances given by the NNPC. They also wanted to know how NNPC came about the N26 it was paying on petrol.

On the surface, the plan to eliminate subsidy on fuel may result in considerable savings for the government.

The issues to be considered, however, include the impact it will have on companies and individuals. Also, what government can do to ensure that the savings do not go to waste.

The price at the pump is projected to rise from N162 per litre to over N200 per litre.

Eliminating the subsidy will lead to higher costs for companies leading to lower profit and less tax revenue. Companies and individuals will consume less and therefore pay less VAT.

Lower consumption among individuals could have a knock-on effect on economic growth, profitability and employment leading to less personal income taxes.

But if the savings from removing the subsidy is managed transparently and applied directly to develop infrastructure, fix power supply and create employment, Nigerians might visibly feel that the removal was worthwhile. Savings could also be invested in improving Nigeria’s refinery capacity, which would reduce the country’s reliance upon imported refined products.

To show sincerity and demonstrate good faith, government should look at other areas where savings can be made; such as the high cost of running government, due process in the award of contracts and diligence in monitoring project implementation.

What government does with the savings is what makes the fuel subsidy removal good or bad. It is important, therefore, that effort should be made to ensure that full deregulation of petroleum products becomes a catalyst for economic development and greater growth.

More than any government in the country, the Buhari administration is fortunate to have private refineries springing up under its watch.

It would be beneficial to the Nigerian people and the economy at large, if the government can assist in fast-tracking the construction of refineries that are nearing completion and supplying them with the crude oil stock they require, at a highly discounted rate.

This way, the government can negotiate the price of the product in favour of its citizens, while at the same time ensuring the refineries make money. Regardless of what some experts may say, there is no way any local private refiner can lose money selling petroleum products to over 200 million Nigerians.

For instance, a Dangote Refinery, that would have spent over $15 billion on its facility, can never run at a loss; when it considers it could take a large chunk of the over $10 billion Nigeria expends on importation of the products annually.

The other window opened to government, in this quagmire, is to repair all its four refineries at once and immediately.

But as NNPC Group General Manager (GMD), Mele Kyari revealed recently, Nigeria does not have the resources to build new refineries.

The controversial $1.5 billion budget the state oil firm plans to use to repair the Port Harcourt Refinery proves that point.

The more realistic option would be to continue the subsidy which the NNPC now chooses to describe as paying for a shortfall between the Landing cost and the process for the eventual delivery of the product at the pump.

Even though the burden placed upon NNPC by the on-going subsidisation of the cost of petrol in the country is overwhelming, the NNPC boss, however, refrained from calling the shortfall payment a subsidy, stressing that the fund was paid to maintain the pump price of petrol at the current level.

At the weekly presidential ministerial media briefing on Thursday at the State House in Abuja, the nation’s capital, Kyari stated that Nigerians would have to pay the actual cost for petrol sooner or later, due to the huge sum being paid to import the product

He affirmed that the product was currently being sold below the cost of importation, causing the NNPC to pay the difference.

According to him, NNPC can no longer bear the monumental cost, saying market forces must be allowed to determine the pump price of petrol in the country in the nearest future.

When asked when the corporation would stop subsidising petrol, Kyari declined to give a specific date.

Kyari’s admission of an eventual fuel price hike will definitely condition the pumps price-wise. His silence over the question of whether or when government will end fuel subsidy is an affirmation of the fact that no matter its will to restructure, deregulate the downstream, fuel subsidy will continue to be a recurring decimal.

In other words, fuel subsidy may not be going away, anytime soon.