Where is the Fuel Subsidy?

My friend, Farooq Kperogi has devoted several weeks of his column, "Notes from Atlanta" in Weekly Trust to the fuel "subsidy" debate. His commentaries have been as persuasive as they have been revealing; revealing because he has summoned a compelling archive of facts to refute the kernel of the government's case for "subsidy removal." I endorse all that Kperogi has written on this debate so far. Even if his withering critiques do not sway a government in search of novel ways of inflicting economic pain on its citizens, they will have exposed the grand rip-off that is the "subsidy" regime.

I want to take Kperogi's excellent analysis in a new polemical direction. I want to question the taken-for-granted truth of subsidy. Fuel subsidy is an elaborate fiction that needs to be deconstructed. Unless we see the hoax beneath the rhetoric, the government's "subsidy" proselytizers will succeed in establishing the terrain of the debate and we will merely be fighting on their turf. Much of the public debate on "subsidy removal" has proceeded from the problematic premise that there is a massive and growing government subsidy on fuel that enables Nigerians to access the product cheaply while threatening to bankrupt the state. We are told that to avoid this impending bankruptcy, subsidy must be removed.

With the exception of Professor Tam David West and a few other commentators, those who have challenged the government's "subsidy removal" plans in the public square have conceded this crucial premise by either declaring their agreement with it or skirting it altogether. This error has enabled the government to escalate its alarmism on a coming financial Armageddon. The strategy has been to spook and blackmail unsuspecting Nigerians into submission to the government's case. The first stage of this persuasive endeavor is to get Nigerians to accept the myth of an unsustainable government spending on subsidizing cheap fuel for Nigerians.

Fuel is neither cheap nor subsidized inNigeria. And it is not fuel subsidy that is threatening our economy. To begin with, the official diagnosis of our troubled economy, issued by the government's economic voice, Ngozi Okonjo-Iweala, contradicts the argument that fuel subsidy is the cause of the government's financial troubles. Iweala announced with fanfare recently that the culprit inNigeria's financial and infrastructural woes was recurrent spending, which she put at an astronomical 75 percent of revenues.

She was referring to the cost of maintaining the government - salaries, services, and supplies. The biggest chunk of this cost comes from funding the highest-in-the-world salaries and perks of elected and appointed public officials. This is unsustainable, Iweala argued, as it sucks up resources that should go to investments in education, healthcare, roads, and electricity. She vowed to push for a reduction of this figure by 5 percent. This was a paltry ambition on her part, but we applauded her for at least correctly identifying the source ofNigeria's financial and infrastructural predicament.

The government cannot have it both ways. It cannot claim that the enemy is government's bloated recurrent spending and that its reduction holds the key to avoiding bankruptcy and then turn around to cast the blame on so-called fuel subsidy. It is possible that both factors are a drag on our fiscal wellbeing. But why target the price of fuel, which is a strategic national product that has a bearing on the livelihood of all Nigerians while effectively sparing the luxuries of a government incapable of fulfilling even the most rudimentary obligation of governance: public safety? Why seek a solution to our financial trouble that will further decimate the masses while protecting the perks of a tiny political class?

Even posing the above questions concedes too much. For the more pertinent question is: what and where is the subsidy? We must be clear about what the government is subsidizing. It is not subsidizing cheap fuel for Nigerians. It is subsidizing the unmitigated greed of the fuel importation cartel and their friends in high government places.

The government is routinely overbilled for fuel imports, as the scandalous $100 million Trafigura overbilling scandal clearly illustrates. The fuel importers haveNigeriaby the jugular. Already rendered incapable of confronting this powerful cartel by its own entanglements, and unwilling to risk an economy starved of imported fuel, the Jonathan administration is doomed to pay whatever fictitious claims the fuel importers submit. With no regulatory oversight over fuel importation and no independent review of importation claims payments, the importers have been having a bazaar at the expense ofNigeria. They can billNigeriamany times over their actual expenses and pad their invoices with scandalous margins of profit andNigeriawill pay, as long as importation remains our formula for meeting domestic fuel consumption.

Whatever subsidy exists then is not subsidy qua subsidy. It is largely a windfall payment to fuel importers. These payments subsidize the insane profits of the fuel importers and are thus not the main reason why fuel is priced at 65 naira a liter. To call the payments subsidy is to engage in mythmaking of the most callous kind. Unless we separate the legitimate costs of importation from the massively inflated costs and then adjust for the abysmal quality of the fuel dumped on Nigerians, any talk of subsidy is deception on a grand scale.

If the government actually subsidized fuel, if true subsidy existed, Nigerians would not be paying 65 naira for a liter of petrol. We would be paying much less than 65 naira, which, as Kperogi has demonstrated, is the highest among the oil-producing countries. I say again: fuel is neither cheap nor subsidized inNigeria.

The government's deceptive narrative suggests that once "subsidy" is "removed," and the fuel industry is "deregulated" this would be the end of the matter and we would not have to deal with the issue again as the price of fuel would be dictated by the forces of demand and supply. There are several fallacies in this claim. The first one is that we have heard the same canard many times over the years only for the government to speak glibly a few years down the road about the crippling fiscal effects of subsidy and the need to once again "remove" it.

Here is why "fuel subsidy" keeps reemerging. Once the government transfers the dubious, unconscionably inflated costs of importing fuel into the country (a.k.a subsidy) to Nigerians, there is no reason why the importers would not inflate their costs and expenses five years from now, especially since they know that, in the absence of a robust domestic refining capacity, the government has no choice but to pay up. In fact, with successive governments being so quick to agree to their fraudulent financial claims, there is a lot of incentive for the importers to keep increasing their profit margins through claims inflation. The importers and their friends in government have been perpetrating this "fuel subsidy" scam on us for many years. This is the secret of our five-yearly debate on "fuel subsidy."

Deregulation is several myths rolled into one. Government spokespeople claim that deregulation would actually reduce the price of fuel. First, despite multiple "deregulations" in the past, the price of fuel inNigeriahas never fluctuated downwards as it sometimes does in theUnited States. What this says is that deregulation without domestic refining, deregulation in the context of an oligopoly of fuel importers, will not drive competition and downward price fluctuation. This is elementary economic logic.

Second, deregulation by itself has never determined the price of fuel. In theUnited Stateswhere I live, the fuel market is "deregulated." Yet, as many experts agree, speculative activity in the oil futures market, much of it bordering on illegality, contributes as much to pricing as the mythical forces of demand and supply.

All of this brings us back to the underlying issue: the lack of domestic refining capacity, which is the reason fuel importers and their champions in government have constituted themselves into a class of permanent economic blackmailers who thrive on the myth of subsidy.

The stubborn question is: why should we spend trillions of naira paying the fraudulent and non-existent claims of fuel importers when we can solve the problem at its root by investing that money in the building and refurbishing of refineries? That's the only way we can eliminate the many costs associated with fuel importation and banish the fiction of fuel subsidy forever.

Given the evidential and logical challenges plaguing the government's case, should we still oblige it and discuss "subsidy removal" or should we introduce and debate the more appropriate term, "cost transfer"? Is the GEJ government not merely trying to transfer the cost that it pays to subsidize the insatiable greed and outrageous profits of the fuel importation cartel (a.k.a subsidy) to the Nigerian masses? Language matters. And the linguistic tools with which you debate can make or mar your argument. The idea that the Nigerian masses enjoy a subsidy on fuel does not stand up to empirical logic, and the related notion that the government is "removing" the excessive payments it makes to fuel importers is equally wrong. The government is merely transferring the burden of these payments to Nigerians. Let's not frame the debate in terms that give the government the rhetorical upper hand.

The two operative words in the government's "fuel subsidy" offensive are "subsidy" and "removal." Both are misleading as foundational terms in this debate. What exists is, properly speaking, not subsidy and so the question of "removing" it should not be allowed to structure the debate. The government is trying to transfer the fraudulent costs that it calls subsidy to the Nigerian masses. But we cannot concede the rhetorical premise of "subsidy" to it. If you proceed from the problematic premise that subsidy exists, you unwittingly legitimize the government's foundational argument even when you disagree with its prescription. Take away the premise by delegitimizing it and you foreclose the "removal" prescription.

Again, language matters, especially in a debate with such high stakes.

The author can be reached at meochonu@gmail.com. A shorter version of this essay was published as a guest Op-Ed in Farooq Kperogi's "Notes from Atlanta" column in Weekly Trust.