Addicted to Fuel and Electricity Subsidies: Getting the Reform Strategies Right

Economists posit that subsidies on the consumption of energy (petroleum products and electricity in particular) by governments to achieve a range of social welfare policy objectives are one of the ways of mismanagement of oil and or tax revenues as the case may be. For example, the Economist magazine recently points that:

"HALF of the world's population enjoys fuel subsidies. This estimate, from Morgan Stanley, implies that almost a quarter of the world's petrol is sold at less than the market price. The cheapest petrol is in Venezuela, at 5 cents per litre. That makes China's pump price of 79 cents seem expensive, but even this is a bargain compared with $1.04 in the United States and $2.35 in Germany…[see Chart] An IMF study of five emerging economies found that the richest 20% of households received, on average, 42% of total fuel subsidies; the bottom 20% received less than 10%. That money would be better spent on health, education and infrastructure. Not only would this benefit the poor, but higher prices would also help to dampen global oil consumption, and hence the price of oil" (see, "Fuel subsidies - Crude measures: Not everybody is paying higher prices for oil". Available Online at: http://www.economist.com/finance/displaystory.cfm?story_id=11453151 [Accessed last on Sunday, 06 July 2008].

Source: The Economist Magazine: May 29, 2008 (Online eition)

URL: http://www.economist.com/finance/displaystory.cfm?story_id=11453151

The above analysis is in consonance with the conventional neo-liberal economic paradigm and doctrine. This doctrine or economic policy thinking is also a generally considered view of what is popularly known as the "Washington Consensus". This doctrine is championed and promoted in the developing, transition and emerging countries by the World Bank and the International Monetary Fund (IMF) – the twin Britton Woods Institutions.

In contrast however, citizens from these countries, particularly those from the countries that are rich in oil, minerals and natural resources see it in a different way. For example, Nigeria is a typical example a country where the sentiments and emotions of the citizens who are against the conventional neo-liberal economic thinking and prescriptions are echoed. For instance, a Nigerian citizen's response to the above quotation echoing neo-liberal or Washington Consensus on fuel or energy subsidies is captured in the following comment:

"In as much as I agree with the writer in principle, because the analysis made is logical, it is important to note that he missed out the corruption index. What is the guarantee that savings from removal of subsidies will translate into improvements in Health, Education and Infrastructure? In Africa, we have learnt that the more funds available in liquid form, the richer the leaders get. Subsidies, in my humble opinion, is the best way of helping the poor, at this our stage of development in Africa, may be later, we should remove it, but it is important to consider all possible factors involved in the analysis of subsidy removal." (Chinedu Amadi: June 03, 2008 03:19, comment based on The Economist Magazine's article of 29 May, 2008, culled from the Readers' comments section). Available Online at: http://www.economist.com/finance/displaystory.cfm?story_id=11453151[Accessed last on Sunday, 06 July 2008].

Thus, petroleum product (i.e. fuel) and electricity consumption subsidies in Nigeria are some of the longest lingering national issues yet to have lasting solutions (if any). For example, over the years, there has never been a time, especially in the past thirty five years or so, when fuel and electricity subsidies; particularly fuel subsidies have not been major contentious national issues. Therefore, the recent re-visiting of this unending problem by the Nigerian government and the Nigerian Labour and Trades unions is not anything surprising to Nigerians at all. In fact, many Nigerians have been anxiously waiting and expecting the expected to happen, any way.

Now, the federal government, through the Hon. Minister of state for energy (petroleum), Odein Ajumogobia, opened up and made it clearly known and in unmistakable terms to the Nigerian fuel consumers that, the government will lift the freeze on price increases on petroleum products, which has been in place since June 2007. He made this known on July 16, 2008 at the Lagos Airport Hotel, Lagos, where he addressed members of the national executive council (NEC) of the Trade Union Congress of Nigeria (TUC).

At issue this time around, is the huge financial outlay, which the Hon. Minister put to be in the range of N700bn to N1.5trn on oil subsidy by December 2008. This projected figures includes subsidies to Petrol (Premium Motor Sprit), Kerosene and Diesel. Presently, only Petrol and kerosene are covered by the generous government subsidies. According to statistics released by the Petroleum Products Pricing Regulatory Agency (PPPRA), fuel subsides for the affected two products amounted to about N450 billion by the end of 2007 - about 3% of GDP!

Furthermore, according to a projection by the PPPRA this will swell to about N700bn by December 2008. However, if diesel is added to the subsidy regime, the figure will balloon to over N1.5trillion by December 2008! Moreover, on top of these is the electricity subsides of N178bn annually for the next three years approved by the federal government through the Nigerian Electricity Regulator Commission (NERC).

Thus this arithmetic is mind boggling to say the least! This means that this year alone, the federal subsidies on petrol, kerosene and electricity consumption is close to N800bn or more. One of the obvious reasons for these high levels of subsidies has to do with the surge in the costs of petroleum products between 2003 and 2008 in line with the rise in the price of crude oil in the international crude oil markets.

Therefore, the bond  of contention is whether spending over 3% of Nigeria's GDP on fuel and electricity consumption is a wise public finance decision or mismanagement of the nation's oil revenues; taking into consideration the huge problems facing the country - all deserving immediate financial attention from the government budgetary resources. For example, if we take just one problem area facing the country – electricity supply for example, the sums of N700bn (over US$6bn) committed for subsidizing consumption of petrol are slightly over the sums of money needed for the implementation of the long-waited President Yar'Adua's Power Sector Emergency.

However, one of the counter arguments against the removal of subsidies in Nigeria is that the issue of subsidies on consumption of petroleum products and electricity is not real! What is happening according to this school of public opinion is that our downstream domestic petroleum product sector has nothing in common with international prices of petroleum products as long as we can put our domestic refineries back into full operation by using our local crude oil and labour force to produce our needed products.

Hence, according to this school of public opinion; inefficiency, corruption and rent-seeking activities going on in the downstream energy sector are what the government is busying subsidizing to the detriment of the economy and the citizens. For example, this school of public opinion points to the fact that why the government is not interested in repairing the ailing four refineries so that products can be produced locally with full benefits of our competitive and comparative advantages in terms of labour costs and in-country abundance of basic raw material feedstock (i.e. crude oil)!

Furthermore, another counter argument is that oil is God's gift to Nigeria and thus Nigerians should consume it on the cheap. This school of thought has very large followers in Nigeria and is often backed and promoted by the organized labour/trade unions and other mass movements within the civil society. However, this is just a false illusion as indicated above at the beginning of this write-up; only a tiny fraction of the citizens enjoy the subsidies and the so-called God's gift or the patrimony of the masses from the country's rich petroleum resources.

The Nigerian government on the other hand, is been pushed by internal expediencies and external pressures; largely from the Washington Consensus promoters (i.e. the World Bank, IMF and other development/donor partner organizations or agencies) to eliminate fuel and electricity consumption subsidies. The following reasons are often advanced to justify such policy prescriptions:

1.  That subsidy cannot continue for too long in view of its negative social, economic and environmental impacts on the development of the oil sector itself and other sectors of the national economy. For example, the huge government expenditure on subsidy seriously affects government's capacity to revamp the oil refineries, pipelines, and other associated facilities and also retards the development of other sectors of the economy such as provision of portable drinking water, roads, rail service, education, health etc.

2.  Subsidy encourages sharp practices and riff-offs as middlemen buy at low prices and resell to fellow Nigerians at black market rates and as well take the products across the porous Nigerian borders where they sell at higher prices thereby defeating the purpose for the subsidy in the first place.

3.  That subsidy in reality was benefiting the rich who have ready and easy access to the government sources where they buy the subsidized products for their insatiably consumption and in addition, resell the excess to fellow Nigerians at the ubiquitous black-market outlets at rock-bottom prices.

4.  That price controls and subsidies are disincentives to private investors who have stayed back from providing the direly needed massive private sector funds to build new refineries, distribution and marketing infrastructures in the downstream oil sector. Thus government's policies bordering on deregulation, liberalization and privatization of the sector are being compromised if price controls and subsidies are retained.

5.  Fuel and electricity subsidies distort price signals and fail to reflect the true economic costs of supply; they lead to inefficient levels of consumption of the products and services. For example, fuel consumption subsidies in Nigeria result in overuse; wasteful and inefficient use. And because fossil fuels are important sources of pollution, including greenhouse gases, they contribute a lot to negative environmental effects; including climate change.

6.  The last but by no means the least, is the issue or question of the rights of the poor, vulnerable groups and future generations have in the disposition of the oil revenues today?

Therefore, government, business and labour leaders have been divided over the issue of provision of subsidy on petroleum products. Moreover, organized opposition to subsidy removal is largely concentrated in the hands of the Nigerian Labour Congress (NLC)/Trades Unions Congress (TUC), their affiliates, Student Unions and numerous coalitions of civil society organizations.

Thus, Nigerians, under the leadership these stakeholder groups question what government intends to do with the subsidies if withdrawn. Their concerns were largely informed by the sad practices experienced previously whereby, monies saved from subsidy withdrawal or reduction ended up looted by politicians, government officials and other rent-seekers in the corridors of power instead of using the money to provide paved roads, education and health care etc to the general public (e.g. the dismantling of the Petroleum (Special) Trust Fund – PTF that was established ostensibly to revitalize Nigeria's dilapidated general public infrastructures and services using recovered fuel subsidies funds is one of the sad memories of Nigerians).

Furthermore, Nigerians are also sick and tired of government excuses for the woeful failures regarding the issue of repairs of the ailing refineries despite the huge sums of money (over US$3bn so far) expended on them in the name of Turn around Maintenance (TAM) over the years but they are still comatose. Their concerns are that increasing the price of petroleum products is just another ploy to finance the criminally outrageous insatiable appetites of politicians, businessmen-cum-smugglers and government bureaucrats who have been feasting and rent-seeking on public oil revenues in the name of fuel subsidies over the years.

Hence, in order to bridge this often acrimonious and conflicting division between the government, the private sector and the stakeholders opposed to the removal of subsidies, a multi-stakeholder decision-making and negotiation framework is needed to discuss how the subsidies when withdrawn will be spent for the common good. Therefore, extending the debate and dialogue on subsidies reform deeper, I pose the following theoretical, empirical and public policy questions:

1.  Can there be a "win-win" solution in Nigeria's domestic petroleum products price subsidy reform agenda?

2.  If yes, what is it and how can it be implemented?

3.  Who will be adversely (i.e. negatively impacted) or positively affected, as the case may be, by the fuels subsidies removal?

4.  Who are the most vulnerable among the potentially impacted?

5.  Who strongly supports or opposes the policy changes and why?

6.  Whose opposition could be detrimental to the success of the implementation of the policy reform agenda?

7.  Who is it (stakeholders or stakeholder groups) critical to engage with first by the government, and why?

8.  What is the optimal sequence of engagement with the identified stakeholders or groups?

9.  Will fuel subsidies removal lead to higher economic growth rates?

10.  What role will these increases play in the dynamics of poverty and poverty alleviation in Nigeria?

11.  How can the losers of the reform agenda be compensated?

12.  Will subsidy removal reduce negative environmental effects, including climate change effect?

These questions are at the heart of an on-going research initiative premised upon designing a multi-stakeholder political economy (management) institutional framework for negotiating Nigeria's fuel (and energy) subsidies reform implementation strategies; arrangements and management by the author.

Abubakar Atiku Nuhu-Koko

aanuhukoko@yahoo.com

Friday, July 18, 2008




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