THE PROS AND CONS OF FUEL SUBSIDY REGIME

When we add the various infractions highlighted earlier to the President’s assertion that “the petrol subsidy regime has increasingly favoured the rich more than the poor” it becomes glaring that the subsidy issue calls for a comprehensive, objective reflection and interrogation. As we can smell it, the country’s subsidy scheme stinks.

ADEREMI MEDUPIN

A Debate that refused to die

Just when I arrived at the junction pointing to the end of the road where the whole debate around Nigeria’s fuel subsidy regime had been exhausted, I received a polite signal from my publisher suggesting a need to revisit the subject. Of course, I could understand the prodding against the backdrop of the official declaration by the newly sworn in President that the fuel subsidy regime had come to a terminal end.

According to the President: “Subsidy can no longer justify its ever-increasing costs in the wake of drying resources. We shall instead re-channel the funds into better investment in public infrastructure, education, health care and jobs that will materially improve the lives of millions”. The declaration is, of course, what supplied oxygen to the dying debate and it looks logical to attempt a revisit, starting with the recall of an insightful comment by an analyst who views the Presidential subsidy policy announcement along with recently commissioned Dangote Refinery;  his words:

Now that the MUCH AWAITED Dangote Refinery has come on stream, there REALLY should be no NEED for any subsidizing of fuel. So, in principle, removing fuel subsidy is the logical thing to do. However, it SHOULD have been done, ONLY when the private refinery has started SELLING to Nigerians, at an EXPECTEDLY CHEAPER price. Just when you thought it was too early for the new president, Bola Tinubu, to have ANNOUNCED its removal in his inaugural speech as president, the NNPCL FOLLOWED up IMMEDIATELY with ANOTHER abominable fuel price INCREASE. If truly it was meant to help Nigerians, why the RUSH? [Emphases in the original-AM]

Our attempt here will take the route of first reminding the reader about the conceptual and practical essence of subsidy and pointing to its strength and weakness as a policy thrust. Without doubt, the harvested arguments for and against any public policy must take on board experiences from other climes because as the common saying goes: there’s no point in reinventing the wheel; our approach obeys this procedural logic which expectedly links with the challenge of exploring the options before policy makers.

Essence of subsidy

From the records, subsidy is a phrase that has been around since the 1300s, and as corroborated by Google, subsidies have a long history in all nations. They were extensively employed by governments during the mercantilist period preceding the Industrial Revolution, when it was thought that the accumulation of gold through a favourable balance of trade required the protection of domestic manufacturers. Going to its roots, the term originates from the Latin ‘subsidium,’ which means auxiliary force, reserve force, or aid. It implies financial assistance or concession that a government gives to specific sectoral activities benefitting the economy.  Usually, subsidy is given to remove some type of burden, and it is often considered to be in the overall interest of the public, to promote a social good or an economic policy. In economic theory, subsidies can be used to offset market failures and externalities to achieve greater economic efficiency.

As clarified by the online knowledge-sharing platform, Investopedia, a subsidy typically supports particular sectors of a nation’s economy and takes direct and indirect forms. Direct subsidies are those that involve an actual payment of funds toward a particular individual, group, or industry while indirect subsidies are those that do not assume a predetermined monetary value or involve actual cash outlays. Subsidies can include activities such as price reductions for required goods or services that can be government-supported, thereby allowing the needed items to be purchased below the current market rate, resulting in savings for those whom the subsidy is designed to help.

Using the platform of Intelligent Economist, Prateek Agarwal has elaborated on the four broad types of subsidy, namely:

1. Production subsidy: A production subsidy encourages suppliers to increase the production of a particular product by offsetting part of the production costs or losses. Production subsidies aim to expand production of a particular product so that the market would promote it without raising the final price to consumers.
2. Consumption subsidy: A consumption subsidy helps to encourage specific consumer behaviour. Usually, governments will subsidize such things as food, water, healthcare, and education.

Note that the distribution of benefits to consumers and producers depends on the price elasticity of supply and the price elasticity of demand.

• Export subsidy: As the name suggests, this subsidy boosts exports by granting funds to companies exporting items to foreign countries. Exporters keep track of their exports and report them to the government, which compensates them with grants. It is to be noted that the World Trade Organization (WTO) has imposed some restrictions on export subsidies; however, it permits the Export Credit Guarantee Program and the Dairy Export Incentive Program, both run by the U.S. Department of Agriculture, to encourage farmers to become more productive and competitive.

1. Employment subsidy: This serves as an incentive for businesses to provide more job opportunities to reduce the level of unemployment in the country or to encourage research and development. Social security benefits are an example of employment subsidies.

Globally, while many industries receive government subsidies, three of the biggest beneficiaries are energy, agriculture, and transportation. In all, the fundamental principle of subsidy is that it should be a specific policy objective in order to remedy an identified market failure or address issues of equity. Incidentally, with focus on Nigeria, Felix Ayanruoh in The Guardian of May 30, 2023 while doing a piece titled: “Why Fuel Subsidy Removal Is Good For Nigeria”, spotted a lacuna which registers as a legitimate concern about subsidy policy implementation as he lamented that, “fuel subsidy has been a growing liability to Nigeria’s budgetary allocations for almost four decades”. The question is: why did the successive governments fail to address the problem?

The arguments for and against subsidy

Different rationales exist for the provision of public subsidies; some are economic, some are political, and some come from socioeconomic considerations. Pro-subsidy economists argue that subsidies to particular industries are a vital helping support to businesses and the jobs that they create. Relatedly, economists who promote a mixed economy often argue that subsidies are justifiable to provide the socially optimal level of goods and services, which will lead to economic efficiency. Free market economists, on the other hand, are wary of subsidies for a variety of reasons, especially the belief that subsidies unnecessarily distort markets, preventing efficient outcomes and diverting resources from more productive uses to less productive ones. Furthermore, the subsidy regime is criticized for giving the receiver an unfair advantage; and besides, they are concerned about the technical challenges of managing unseen costs, as well as the process of mathematically optimizing the administered subsidies, and how to avoid confounding political motivations that could cause subsidies to be harmful to the interests of the public, rather than being beneficial.

Leading the Wallstreetmojo team, Dheeraj Vaidya has offered a representative and simplified summary of the advantages and disadvantages of subsidy, after making a preliminary general observation that subsidies may benefit specific socio-economic activities for public welfare, while simultaneously harming the general public due to large sums of money going to the corporate entities. The demonstrated advantages (pros) of subsidy come from the fact that, it:

• empowers marginalized and poor people,
• increases production and consumption,
• brings in social and economic efficiency,
• makes essential items affordable,
• minimizes costs of doing business, and
• reduces unemployment.

At the same time, however, subsidy has some disadvantages (cons), resulting from the fat that it:

• tends to increase tax rates for businesses and the general population;
• causes a supply shortage as a result of stringent limits that impede a balanced demand-supply chain,
• allocates resources to less productive uses,
• stifles competition,
• results in political corruption, and
• lowers prices-which fuels demand and, in turn, raises prices.

On balance, subsidies are often necessary—the decision of whether a subsidy is beneficial overall depends on whether the benefits they provide to the public outweigh their potential negative effects, such as increasing taxes or undermining efficiency.

Country sample with subsidy regime

In an ideal world, governments would learn from the experiences of others, taking on board what has worked well in one place and can be repeated or badly in another place and to be avoided. Of course, one place is different from another so that modifications to any policy are usually necessary. Across jurisdictions and sectors, governments have applied subsidies in diverse forms. For example, governments in some countries offer oil subsidy incentive to promote petroleum production to maintain domestic fuel supplies, in which case oil companies receive these grants to keep oil prices under control and affordable.

In retrospect and as recalled by Nancy Pfund, managing partner at DBL Investors: In the USA, government subsidies for energy are as old as the nation, Pfund and coauthor Ben Healey, trace U.S. government energy incentives back to 1789, when leaders of the new nation imposed a tariff on the sale of British coal slipped into U.S. ports as ship ballast. Over the years, these subsidy payments have taken up a sizable portion of the U.S. annual budget especially since the First World War. Also, subsidies for solar installations have resulted in a record-breaking expansion in the U.S with these installations growing to 46% in the first quarter of 2021, totaling over five gigawatts (GW). At another level, the U.S. government introduced a 100% COBRA subsidy as a part of the $1.9 trillion American Rescue Act designed to allow nearly two million laid-off individuals to seek a temporary extension for their healthcare insurance.

European Union (EU) countries signed a deal on June 25, 2021, to reform the farming subsidy scheme to make the bloc greener as a follow up to a three-year-long negotiations over the EU Common Agricultural Policy to help smaller farms combat climate change and protect them against losses due to pandemics. As a part of the deal, effective from 2023, small farmers will get incentives to adopt environment-friendly agricultural methods, such as wetland restoration and organic farming, to minimize greenhouse gases emissions. The UK’s new domestic subsidy control regime came into force on 4 January 2023, introducing a new way in which subsidies are determined and regulated.

Not long ago, Russia announced subsidizing electric vehicles by covering 25% of their purchase price to boost domestic demand and manufacturing while reducing carbon emissions. The decision came following the revelation of figures from 2020, which depicted that only 11,000 of the 45 million cars used in Russia were electric cars.

As documented by the World Bank in its July 2016 Policy Research Working Paper 7755: “A Comparative Analysis of Subsidy Reforms in the Middle East and North Africa Region”, authored by Abdelkrim Araar Paolo Verme: “consumer subsidies in the Middle East and North Africa (MENA) region are widespread. All of the countries in the region administer energy subsidies, and most countries administer food subsidies on at least a few items. These subsidies are important for households in that they constitute a sizable part of household expenditure and represent an important share of governments’ expenditure or forgone revenues”.

The Nigerian experience

Nigeria is one of Africa's largest producers of crude oil, and it relies heavily on this resource for its public finance and economic growth. Unfortunately, due to the heavy corruption and many years of neglect, the local refineries have remained idle; as a consequence, the country imports nearly 70% of the petrol used in the country. Sometime in 2022, Thisdaylive in a special feature titled: “Nigeria and the Fuel Subsidy Conundrum” authored by Kene Obiezu, recalled the submission of the Nigeria Extractive Industries Transparency Initiative (NEITI) to the House of Representatives ad-hoc committee investigating fuel subsidy regime between 2013 and 2022; the submission is a fact-filled report which reveals that N13.7 trillion ($74.386 billion) was spent on fuel subsidy) in 15 years- from 2005 to 2020.  A breakdown of the subsidy payments gives the following picture:

The Minister of Finance, Budget and National Planning, in her presentation of the 2023-2025 Medium Term Expenditure Framework and Fiscal Strategy Paper disclosed that the federal government was projected to spend the sum of N6.7 trillion on petrol subsidy payments in 2023.

Felix Ayanruoh, an Energy, Infrastructure, Project Finance, Commercial and Transactional Attorney based in the US, writing through the medium of Sahara Reporters has demonstrated unambiguously how the Nigerian oil and gas industry and especially the fuel subsidy component has for long been riddled with fraud; hear his submission:

It is instructive to note that previous investigations by the government and several petroleum subsidy litigations before our courts have further exposed massive graft by both government officials and private participants in the petroleum industry. Take for example, the Mallam Ribadu’s Petroleum Revenue Special Task Force Report, indicated that NNPC withheld N1.983 trillion subsidies between 2006 and 2011. This amount represents almost 40 percent of the 2016 national budget. Also, the Farouk M. Lawal led House of Representatives Ad hoc Committee on Subsidy Verification concluded that the subsidy regime, as operated during 2009 – 2011, was laden with colossal corruption and entrenched inefficiency. The subsidy claims made were not for consumed fuel. The committee went on to state that, contrary to the earlier official figure of subsidy payment of N1.3 trillion, the Accountant General of the Federation put forward a figure of N1.6 trillion, the Central Bank of Nigeria (CBN) N1.7 trillion while the committee established subsidy payment of N2.6 trillion as at 31st December, 2011, amounting to more than 900 percent over the appropriated sum of N245 billion. Additionally, a subsequent report by the Presidential Committee on Verification and Reconciliation of Fuel Subsidy Payments, led by Mr. Aigboje Aig-Imoukhuede, revealed that in 2011, 197 subsidy transactions worth N232bn were illegitimate.

From the above facts, one can appreciate the endorsement given to the Nigerian President’s position as signified by Olorogun Okumagba, a former Commissioner of Finance in Delta State: in a press statement dated June 1, 2023-as published in Vanguard newspaper, asserting that: “the truth is that the fuel subsidy regime has been a drainpipe on our resources and commonwealth. It has created a class of corruptly wealthy businessmen and women and some public officers with whom they collude to inflate consumption figures that determine the rates of subsidy payments.”

Going back to its origins, the online Legit platform recalled how the fuel subsidy policy in Nigeria was introduced as a means to stabilize the price of fuel until the local industries pass the rehabilitation process. They were meant to last for six months only but have lasted decades. The licenses for the rehabilitation of the country's refineries were given to a range of companies that have, actually, done very little or nothing to improve the situation. It is undeniable that fuel subsidy has led to increased corruption and mismanagement due to weak oversight mechanisms, with some individuals and companies taking advantage of the system to make illegal profits. As a Guardian columnist, Akinola Soremekun, in the newspaper’s March 27, 2023 edition recalled, the history of fuel subsidy dates back to October 2000 due to supply inadequacies from the country’s four refineries. However the result is that the government spends a significant amount of money on petroleum subsidies, leading to increased public debt. In some cases, the cost of subsidies exceeds the revenue earned from the sale of crude oil. Way back in 2014, a public analyst had highlighted the need for the President Jonathan’s administration to jettison fuel subsidy due to alleged corruption associated with its implementation, quoting the Natural Resource Institute, an independent, non-profit organization, on how “Domestic Crude Allocation (DCA) has become the engine of waste and revenue loss of the Nigeria National Petroleum Corporation (NNPC)”. Specifically, according to the cited source:

The Nigerian Government allocates about 445,000 barrel of crude per day to NNPC, which it in turn sells to derive revenue. The DCA money spent by NNPC delivers poor value for money. A large portion of NNPC’s withholding is spent on fuel subsidy payments, which are vulnerable to misappropriation and excessive spending. KPMG, the global audit firm for example found that in three years, NNPC paid itself roughly $6.6 billion to fund the subsidy on 15.6 billion liters of products that “apparently were not available to the Nigerian market.”

This is the basis for the perennial loud calls for the deregulation of the industry which has to be taken along with the basic fact that addressing the challenges of petroleum subsidy through full deregulation of petroleum products in the country can have significant impacts on Nigerians, including potentially higher fuel prices, increased inflation, and economic hardship. It is indeed a dicey balancing act on the part of the government resulting from a historic failure to fix the refineries that have gone comatose due essentially to what is known as state capture. In the Thisdaylive feature piece cited earlier, the point was made that:

 What makes discussions and debates about fuel subsidy so heated in Nigeria is that there is always a pool of those who propose its removal and those who oppose same. The World Bank has repeatedly warned that Nigeria`s huge subsidy bill poses an existential crisis to the country and its more than two hundred million citizens. Experts have long foretold that with Nigeria`s revenue constantly dwindling, it is only a matter of time before subsidy is ditched.  Many of these experts have been consistent in maintaining that the trillions of naira spent by the country on fuel subsidy can be deployed to other creative sectors of the Nigerian economy, particularly education.

Meanwhile, the Nigeria Labour Congress (NLC) in a swift reaction to the President’s ‘subsidy is gone’ declaration, issued a statement reading: “We at the Nigeria Labour Congress are outraged by the pronouncement of President Bola Tinubu removing ‘fuel subsidy without due consultations with critical stakeholders or without putting in place palliative measures to cushion the harsh effects of the ‘subsidy removal’. Apart from the trade unions, in response to the policy declaration of subsidy removal, many Nigerians are calling on the President to follow up on his announcement with measures to cut the outrageous costs of running the government so that it is seen as sharing in the pain.

Since the President’s inauguration announcement, series of video chats have been shared via WhatsApp-all pointing to a sad but avoidable national shame, three of which are recalled here:

1. Mrs Ngozi Okojo-Iweala, former Finance Minister: Nigeria has a fiscally challenging fuel subsidy regime. The country exports crude oil and imports most of its refined needs because its refineries are in very bad shape – and provides a subsidy for the sales of refined oil at the pump. At the end of 2011, a total of ₦ 1.73 trillion –US $11 billion equivalent-was submitted as claims for subsidies by 143 marketers who were importing the product. These numbers seemed horrendously large compared to what I had last seen when I was in government in 2006, which was closer to $2 billion in subsidy. So, we decided to audit these claims. We audited about $8.4 billion worth of claims and we found $2.5 billion worth of fraud in these claims, i.e. many of these marketers were trying to claim $2.5 billion fraudulently . . .
2. Vie-President Kashim Shetima: . . . The oil subsidy has become an albatross round the neck of the Nigerian economy for the past 40 t0 50 years . . . But it must be borne in mind that, we must all be aware of the consequences of unveiling a masquerade; the oil scam cabal is a very powerful cabal that are dangerously loaded and they will go out all their way to undermine this great initiative (of fuel subsidy removal-AM).

• An unnamed video producer on “The Ugly TRUTH about FUEL SUBSIDY in Nigeria . . . (accessible on You Tube): NNPC lied-No money has been paid for subsidy in the past eight years. We need to hold some people accountable; monies that have been paid under the false pretense of subsidy must be refunded. There is no fuel subsidy at all in Nigeria. At the most generous level of cost estimation, the landing cost of petrol comes to about N80 per litre, based on the DSDP arrangement.

After watching the almost-impossible-to-believe third video referenced above, I did a Google search on a key concept in its surprising submission, namely: Direct Sales Direct Purchase (DSDP) contract, which threw up the following entry of August 11, 2022: The DSDP agreement was a scheme introduced by the NNPC Ltd in which oil companies lift crude oil and bring in same value in refined products into the country. This validates the position of the angry Nigerian. Furthermore, we are informed that: The DSDP contracts are high-stakes agreements used to supply nearly all of Nigeria’s petrol needs as well as cover some of its diesel and jet fuel consumption.

Records show that the value of DSDP for 2019/2020 contract period stood at about $9bn. Meanwhile, as reported by Adedayo Adesanya on www.businesspost.ng members of the House of Representatives in late 2022 told the Federal Government “to suspend DSDP contracts”, based on the report of its ad-hoc committee which investigated the country’s subsidy regime. One would have been forced to ask: what exactly is going on? Well, we now have some insight: as usual, members of the consortium abused the flow of largesse by importing methanol-blended petrol from Belgium, in contravention of the explicitly stated contract terms. What happened was that, on February 8, 2022, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) confirmed the importation and distribution of petrol with methanol quantity above Nigeria’s specification. The assurance came a little too late as some vehicles had already been affected by the methanol-laden petrol. Nonetheless, for balanced reporting, it is pertinent to note, as an energy expert, Desmond Okon pointed out at a privileged forum: Methanol is a regular additive in petrol, and it is usually blended in an acceptable quantity. It is a clean-burning, high octane (hydrocarbon) blending component for gasoline that is made from alternative non-petroleum energy sources such as natural gas, coal, and biomass. The problem is that high percentages of methanol in fuels are capable of lowering the energy density of the fuel to the point where hard starting and stalling (a situation where the car refuses to start or dies after starting) become issues for some motorists. In a viral video, a petrol attendant in Lagos complained about how the product supplied to the station damaged motorists’ cars and motorcycle engines.

The way forward

Let us refer to the highly critical observation made by a former executive director of the Nigerian National Petroleum Company Limited, Bello Rabiu, while speaking at a virtual conference organised by the Major Oil Marketers Association of Nigeria, MOMAN in December 2022, as he highlighted the defective pricing format of the national oil firm and the overall operating model of the company’s downstream businesses to the effect that: the PPMC Ex-depot price is now the only basis for pricing PMS across the nation and Nigerians would therefore have to pay for any inefficiency associated with the monopoly supplier. Furthermore, he took exception to the fact that “the inability of PPPRA to continue publishing the monthly guiding prices for the deregulated products has created confusion as to which exchange rate should be used for the importation of Petroleum products”. He added, that “insufficiency of market and industry information that would allow all importers and consumers to understand the basis for any change in price is lacking”. In essence, “in the current context, it is difficult to establish the true cost of PMS importation into Nigeria.”

When we add the various infractions highlighted earlier to the President’s assertion that “the petrol subsidy regime has increasingly favoured the rich more than the poor” it becomes glaring that the subsidy issue calls for a comprehensive, objective reflection and interrogation. As we can smell it, the country’s subsidy scheme stinks.

As a starting point, given what we know about the opacity and indeed high-level irregularity characterizing NNPC’s operations, the entire ownership and operational mode of the NNPC should be made public –including and in particular, the essence and fate of the DSDP contract. This first step also entails probing and penalizing accordingly the circumstances and principal figures in the collapse of the country’s refineries. In undertaking the suggested exercise, it is logical that beyond past efforts at reforming the oil and gas industry, the scandal of oil theft –involving the deployment of highly visible tankers and ships-as well as pipeline vandalism –which led to the government handing over its primary responsibility on security to private outfits-must be treated with the comprehensiveness it deserves. The bottom line is that an end must be put to the crude and reckless transfer of public resources into private pockets in Nigeria under a dubious fuel subsidy regime.  I come in peace, please.