Wednesday, 28 December 2011

Article: Exploding Myths Around Removal Of Oil Subsidy By The Nigerian Government


Dr. Okonjo-Iweala: Nigeria's Finance Minister
 By Jaye Gaskia
Where To Begin?:
If there has been one policy option or pronouncement by the government of President Goodluck Ebele Jonathan [GEJ] that has excited the most agitation, concern and anger from the populace, it must be the proposal to remove the so-called subsidy from petroleum products and by thus doing hike prices by more than 100%.
From the moment the present GEJ regime began to speak of assembling a so-called ‘world class’ economic team, through to the actual assemblage of the team to the firs utterances of members of the team concerning fiscal discipline and reforms; it had become obvious to the discerning eye and mind, that this was going to be a regime of cuts, belt tightening, sacrifices and further hardships on the ordinary citizens, while the rich, and in particular, the corruptly enriched, will continue to grow richer and increase their wealth!
Conversely though, one other thing that has become quite glaring over the decades is the near absolute lack of confidence and trust of the people in their governments at all levels, engendered by the failure of governance. This fact of the lack of trust and confidence in governments and those who govern, is in any case one of the few points around which both the government and the governed are agreed generally, and in this particular instance of the core agenda of this government to fill the gap in its revenue base through the hiking of the prices of petroleum products and the costs of basic services – for example increases in electricity tariffs, in water rates, in tenement rates, and now the plan to make us pay for using the highways!
It is important to very clearly situate the driving urge for removal of so-called fuel subsidy, in the need by government to increase its revenue generation capacity, and shore up its dwindling resource base. It needs additional resources to continue to finance and support its profligacy, to continue to oil the giant wheel of the prebendal relationships on which politics and governing depends in Nigeria’s endemically corrupt polity.
But in seeking additional resources, this regime understanding the distrust of the ordinary citizens in the political class, cannot just come out openly wringing its hands to ask the people for more money. It needed to dress this gluttonic desire in borrowed, but ill fitting altruistic robes! Hence the series of myths woven around the desire to raise additional revenue by making us pay more for petroleum products.

The Myths:
1.    Subsidy Or No Subsidy? The first myth is around the nature of the so-called subsidy. What is it that the government calls subsidy? How did the government arrive at its calculations? What the government calls subsidy is the difference between the landing cost of imported petroleum products  [N123] + the cost of local distribution [N15.72] + Profit margin for the marketers and filling station owners [N2] = N141 per liter; that is the difference between this N141 and the N65 per liter that we actually buy the products from the filling stations.
So this difference of about N80 per liter which is covered by the government to keep petro costs at N65 per liter is what the government calls subsidy! But there are several questions to be asked and answered around these? This landing cost is calculated from the international cost of crude + international cost of transportation/shipping  [to and fro]+ international costs of customs, tariffs etc [at both ends]+ international cost of refining + cost of demurrage. So Nigerian crude is sold, it is exported, refined, then the refined product is bought and imported, and all of these at costs priced in US Dollars [$]. So it follows that this cost arises simply because we import refined products! What is more? This cost will vary depending on the US Dollars price put on the various processes, on the one hand, and as well depending on the exchange rate of the Naira to the US Dollars, on the other hand! These amounts to what the late Fela Anikulapo Kuti would call double wahala for dead body and the owner of the dead body; or what others would call a double jeopardy! The conclusion that can be drawn from the above is that without importation this additional cost will not exist, and there will therefore be no talk of subsidy. And we now know from two sources, who have written on domestic refining cost that if we were refining domestically, that the cost of refining plus that of distribution, including profit margin, would have been able to make the product available at filling stations at less that N35 per liter!
Why should we continue to be dependent on importation when we can develop a robust domestic refining capacity that will not only meet our own needs, but that will also be able to supply the needs of the sub region? Why are our refineries not working? Why is it taking our government forever to revamp existing refineries [4] and complete the building of new ones [3]? Why should ordinary Nigerians be made to pay for the gross ineptitude, and grave incompetence of their government? Granted that this particular government inherited the mess, and even at this we must be careful, because this is a government formed by the same party that has ruled for over 12 years now; So granted that it inherited the mess, if it has no ideas or clues concerning how to resolve the crisis, or if it is overwhelmed by the challenges, it should simply vacate the space for others to do the job!
This is because nothing in the government’s first budget indicates a seriousness to tackle the root cause of the problem by ensuring the acquisition of a robust domestic refining capacity. Rather what is emerging from the 2012 budget proposal is the concrete identification of those who in concrete terms have always been the perpetual and disproportionate beneficiaries of public subsidy. We are now beginning to find out just exactly how much we pay in public funds to write off the ostentatious lifestyles of our leaders – more on this further down!
2.   Who Actually Benefits From The So-Called Subsidy? The second myth is the presentation of the argument as one in which a concerned government, helpless against a cabal in the petroleum sector, and determined to fight in the interest of the citizens, is trying to correct a social injustice by stopping a government subsidy which only benefits the rich, the oil marketers and the cabal!
Nothing can be further from the truth. In real terms who actually benefits from the current prices of petroleum products? There are two broad ways to answer this question. The first is that the current low costs, of petroleum products [which could actually have been 100% lower if we were refining the crude domestically], is of the most benefit economically, and socially to the teeming majority of Nigerians in their tens of millions. In an economy where between 80% and 90% of production of goods and services, including their distribution, is dependent on electricity produced from generators, the overwhelming majority of which are petrol based, there can be no gain saying the fact keeping prices of petroleum products, low, and therefore accessible is central to household livelihoods and keeping the economy running.
We know for example, from available records from the Manufacturers Association of Nigeria MAN], that due largely to high overheads/cost of doing business, in the last ten years since 2001, over 1,000 factories have folded up, leading to the loss of over 1,000,000 jobs! More than 50% of the cost of doing business is taken up by the cost of running generators. And this is just in the formal sector, and in manufacturing, we have not factored in yet, the service and none manufacturing sectors in the formal sector, or have we factored in the situation with respect to the informal sector. Little wonder that even by official figures, unemployment rate is hovering around 30% and youth unemployment around 45%, that is absolute terms, more than 40 million people who are able to work, but who are out of functional employment.
It does not require a degree from Harvard or Oxford, or a career at the world bank or in the banking and petroleum industries to be able to draw the conclusion, that in an economy where provision of basic services and products like bread, mamaput, barbing, hair dressing, vulcanizing, pumping water, etc are dependent on operation of petro based generators to produce electricity needed; that in such an economy any increases in prices of petroleum products, much less doubling of current prices, will have a serious, sustained, and deleterious effect on the livelihoods of tens of millions of Nigerians, and a calamitous if not near catastrophic impact on the economy and social well being of the country and her citizens!
As to the other argument with respect to the fact that the rich and the oil marketers/importers and the cabal benefit the most; available facts show that they indeed benefit, but they do these through corruption and leakages in the system, for example through round tripping of crude and refined products, bunkering, smuggling of crude and refined products, and the commission system which oils the corrupt business practices in the country. All of these areas of benefit, beyond the generalized benefit to the citizenry, are all areas that have to do with the regulatory and law enforcement framework, something which it is the role and function of governments to handle! The gross ineptitude of a government to enforce its own regulations, and to tackle criminality and corruption, should not be paid for and subsidized by the citizens. Otherwise why do we have a government?
But there is also a very salient point in this that the government tries to hide or shy away from. The removal of the so-called subsidy will not on its own end importation of fuel, and so will not end the payment of the 1.3 trillion naira annually to the oil marketers/importers! It will only transfer the burden of payment from the public purse, to the individual private pockets at the point of purchase of the products. So although, fuel prices would have been increased, and the so-called subsidy withdrawn, however, the cartel will continue to smile to the bank and get paid these trillions of naira! But even more revealingly, along with the cartel or cabal, the top echelon of our elected leadership will continue to receive their flamboyant salaries, and as well continue to have more than 100% subsidy to sustain them; as we continue to pay for their house rents, their electricity bills, their water bills, buy their cars and pay the fuelling bills for the cars, pay for their food and pay for their domestic staff etc. How can we expect anyone in this condition to understand our apprehensions at the inevitable deleterious impact of the hiking/doubling of prices of petroleum products on our conditions of living? In case they have forgotten, the rest of us have to pay from our meager earnings for all of these expenses!
3.   Financing The Subsidy: This is the area most covered in secrecy! The coordinating minister of the economy and the minister of finance, along with minister of petroleum resources have sometimes hinted that this subsidy is being financed through public borrowing. They together with the President and the governor of the CBN have also been quoted as saying to several audiences that the level of public borrowing required to continue financing this subsidy is not sustainable for the economy! In fact both the president and the finance minister have dramatically emphasised that the economy will simply collapse and crash if subsidy is retained. The governor of the CBN on the other hand, have less dramatically said that perhaps we can sustain this level of drain and borrowing until 2015; but that certainly the next government will inherit an economic crisis of such a scale that it will have no chance!
The finance minister has even put a figure to it. To finance the 2011 budget, the FGN had to borrow 852 Billion Naira; while the CBN governor has said $16Bn have so far been spent on oil importation [$8Bn sold to marketers + $8Bn they received in subsidy payments]!
Now this is the interesting twist and paradox in the oil subsidy removal saga. In order to sell its proposal to remove the subsidy, the government has said that removing the subsidy will enable government to save/free up resources that it can then use in developing what it has called ‘critical infrastructures’. It has even gone ahead to develop a programmatic concept for this which it calls ‘Subsidy reinvestment and empowerment program [SURE].
However, before we are deceived it is important to ask critical questions. If the government is financing the subsidy from borrowing, where is the savings going to be made from to finance the SURE program/development of critical infrastructures? Because, the removal of the subsidy through the transfer of the burden of payment from government finances/public borrowing, to private pockets/private borrowing, would not have amounted to any savings being made. This is so because the marketers will still have to be paid for the importation, and that is why the removal of the subsidy actually amounts to ordinary citizens paying more [double current prices] for the products. So if no savings will be made, where is the government going to get the funds to finance the development of critical infrastructures which it is dangling as palliatives to the removal?
This subterfuge or sleight of hands seems to me to be the greatest fraud embedded in the oil subsidy removal debate. More worrying is the fact that although in its 2012 budget proposal the regime has made no provision for fuel subsidy, the main driver of deficit budgeting as we have been told; yet we hear from the Finance minister that inspite of these we are going to borrow 1.1 Trillion Naira to finance the 2012 budget, that is 300 Billion naira more borrowing from the 2011 level of 852 Billion Naira! So why are we still borrowing? And from where? What is the source or what are the sources of the borrowed funds?
4.   Development Of Critical Infrastructures As Benefit Of Subsidy Removal: This government seems to be hinging its ability to embark on a program of developing basic infrastructures on the freeing of funds from the removal of oil subsidy. But as we have seen above, the subsidy from the statements of leading government personnel including the president is being financed through borrowing/public debts, and at a rate that is said to be unsustainable. So how is the SURE program, which is being presented as a social contract between the government and the citizens after removal of oil subsidies to be financed? Is it going to be financed through borrowing? Furthermore, it needs to be said that the current SURE brochure of government amounts at best to description of intention, and at worst to a shopping list of things to be done. Where is the implementation strategy and investment plan for executing the program? What is the total cost of the infrastructural development spending over the three year period? How are these infrastructural development projects to be phased? Which projects are earmarked for year one, two and three? When is the start and end dates for each project? If we assume for the moment that this subsidy money actually exists and is available, what percentage of the total cost of SURE will the Federal governments’ share of 478 Billion Naira annually be able to fund? What will be the funding gap? And how is this funding gap to be filled? What is the guarantee that the funding gap will be filled up?
5.   The Need To Sacrifice For Our Country: It is to be considered an insult for those whose life styles and mode of existence is subsidized, and in most cases paid for in full from public purse, to turn around and preach the virtue of sacrifice to those of us who have to pay through our teeth for every service or process we need to stay alive.
We would expect to who live at our expense to actually lead by example when it comes to sacrifice and saving funds for development purposes. So this nation will feed its president and his vice and their families at public expense at the cost of 1 Billion Naira in 2012, yet they call unto us who will have to pay for our own food to make sacrifices! We will also be paying 1.3 Billion Naira at public expense to fuel generators in the presidency over the same period! Yet those of us who will actually have to bring money out of our pockets from meager earnings are being told we should be able to afford the doubling of fuel prices as a way of sacrificing for our country! And this is just the cost of fueling generators alone? What about the cost of fueling the vehicles in the presidency? Costs that will also be borne at public expense? While the rest of us struggle to pay higher costs for our transportation? What about the 920 Billion Naira proposed to be spent on combating the symptom of insecurity while, the budget reflects not strategic plan to address the root cause in poverty and unemployment?
6.   The Real Deficit: For a regime that is operating in trust deficit and confidence deficient environment; and one that is asking us to trust it, it is important that it is not seen to be, or caught lying! Unfortunately all the facts above point to the fact that it has been systematically lying to us: it has kept quiet about the root cause of the problem – importation + volatility in exchange rate of the Naira; it has pretended that it is powerless to deal with criminality and acts of sabotage including corruption in the sector, because its functionaries are major beneficiaries of the rot in the system; it has tried to make us believe contrary to evidence that the overwhelming majority of Nigerians do not benefit from the low cost regime for petroleum products, and that we would have had more benefits, by halving the present costs if petroleum products were being refined locally; It has not been entirely transparent about the funding for its palliative program, about the total cost for the program, the total funds available, the funding gap, and how this will be filled up; And what is more? It has demonstrated that it places the comfort and security of its own personnel and leading functionaries over that of the average citizen.
An Alternative Scenario To The Doomsday Scenario:
Our contention is that the solution to the crisis in the petroleum sector in general, and the crisis in the supply of petroleum products in particular requires a fundamentally new, innovative, and radical approach. Since 1978, and on 18 different occasions, the Nigerian government has responded to this crisis by removing this eternal subsidy, and thereby consequently constantly raising prices of petroleum products, while depending more and more on importation of refined products! This trend must be reversed. The sector needs to be thoroughly scrutinized and its Augean stables cleaned. To achieve this radical transformation, and since we know that we have a window of opportunity until 2015 [according to the CBN Governor]; any responsible government ought to be able to do the following:
A.      Set up an independent commission of inquiry with powers to investigate and compel prosecution, to look into the oil and gas sector; identify economic crimes, acts of sabotage, and instances of corruption; identify the beneficiaries of these processes; and recommend deterrent punishments. [This should include the Turn Around Maintenances, the importation contracts, the subsidy regime, etc]
B.      Develop and implement a three year intervention strategy backed with an operational and investment plan for the sector. This 3 year strategy should focus primarily on ensuring robust and adequate domestic refining, (including storage and distribution) capacity [through revamping of existing refineries and building of new ones] + the building/investments in building of refineries and distribution outlets [filling stations] in strategic locations across the sub region.
C.      To gradually stop importation of refined products as domestic refining capacity increases until importation is finally phased out by the end of the 3 year period.
D.      Maintain prices of petroleum products at current prices over the 3 year period. At the end of the 3 year period, with adequate domestic refining capacity, determine appropriate prices for petroleum products including downward review of prices if and where necessary!
The combined effect of the implementation of these recommendations include, low and affordable costs for petroleum products; stability in pricing regime as well as significantly in cost of doing business and cost of living for citizens; and job creation in the construction, refining, distribution sub sectors as well as in the service sector associated with these subsector.
To Conclude:
If as it is becoming quite clear that this regime is incapable of, unable to, or unwilling to listen to its citizens, and open its eyes to and embrace alternatives; then it is incumbent on the citizens to take every step that is necessary to compel it to listen to them, or to bring about a situation where those placed in government will listen to and derive their mandate from the citizens.
The regime is trying to use scare tactics to force us to accept its bitter bills, nevertheless, it is important to state that hiking fuel prices is not an economically sustainable policy nor can it also be a socio-politically sustainable policy. There is a always an elastic limit to the level of tolerance of a people burdened by economic hardships. And if there is any one act capable of pushing Nigerians beyond that limit, then hiking fuel prices in conditions of privations must be ranked first on that list!
The oil subsidy issue is very much an economic, political, ideological as well as emotional issue. It is for this reasons that it has become necessary for our responses to be not only ideological and emotional, but also political and economic in nature! Their economics does not add up, and it is our duty to expose this.
(Gaskia is National Convener, United Action For Democracy (UAD))