By Adewole Kehinde
A subsidy is an incentive given by the government to individuals or businesses in the form of cash, grants, or tax breaks that improve the supply of certain goods and services. With subsidies, consumers are able to access cheaper products and commodities. Markets that have positive externalities, which are extra benefits to society, tend to be favored in policy to provide a greater supply of that good and service.
Nigeria started subsidizing its petroleum industry in the1980’s after the state-owned company, the Nigerian National Petroleum Corporation (NNPC), had planned to unify the price of crude oil in accordance with the global market. But then-incumbent president, Olusegun Obasanjo, said average Nigerians would not be able to afford a gallon of petrol at the pump. Instead, President Obasanjo introduced a subsidy plan to keep the price of petrol low.
Despite being Africa’s largest oil producer, Nigeria still relies heavily on imported refined oil. Its four refineries Port Harcourt I and II, Warri and Kaduna have a combined capacity of around 445 thousand bpd, which covers 63 percent of domestic demand. However, these refineries are running far below their capacity due to operational failures, poor maintenance, sabotage on crude oil pipelines feeding refineries, theft, and fire.
From available information at my disposal, the Nigerian National Petroleum Corporation has incurred the sum of N274.03bn as subsidy payment for Premium Motor Spirit popularly known as petrol between January and May this year. The figure was contained in the NNPC Report for June which the Corporation submitted to the Federation Account Allocation Committee.
A breakdown of the N274.03b subsidy payment showed that the NNPC incurred the highest sum of N126bn in the Month of May 2021, which is about 45.98 per cent of the entire N274.03b subsidy paid by the NNPC since 2021.
The Report showed that the NNPC paid the sum of N25.37bn as subsidy in February while March and April hadN60.39 and N61.96bn respectively. It will be recalled that the Federal Government had in the 2021 budget abolished the payment of fuel subsidy as no provision was made for such expenditure.
Since the Federal Government didn’t make provision for fuel subsidy in the 2021 budget, the burden of the N1trnfederation account remittance shortfall has been pushed to the NNPC in the form of under recovery that would arise from the price differential between the landing costs and pump price of petrol.
Since the deregulation of the downstream sector of the petroleum industry in 2020, which led to the removal of fuel subsidy, there had been a push by the Nigerian Labour Congress and other stakeholders for the reintroduction of fuel subsidy. With the deregulation of the downstream sector in 2020, the price of PMS had risen from N121.50 to N123.50 per litre in June, to N140.80-N143.80 in July, N148-N150 in August, N158-N162 in September and N163 in November.
Since November 2020, the price of Petrol has remained unchanged despite the increase in crude oil prices in the international market. As of the time the fuel subsidy was removed in June 2020, the price of crude oil was about $45 per barrel. But as of Wednesday 21stJuly, 2021, the price of crude oil had risen to about $71 per barrel. This price is far higher than the 2022 Federal Government budget benchmark price of$57 per barrel.
What this means is that while expectations are high that there would be more revenue to be earned from crude oil sales by the NNPC for the government, the adverse effect would be on the imported price of crude oil. And with the continuous push for subsidy, it therefore means that the Nigerian National Petroleum Corporation has been made to bear the burden of subsidy payment through the reintroduction of under recovery.
The implication of this is that with the under recovery element of cost being borne by Nigerian National Petroleum Corporation with subsidy reintroduction, the amount that is being remitted by the Corporation into the Federation Account has been significantly reduced. For instance, the statutory payments made by the Corporation to the Federation Account declined by over 63percent in the first five months of 2021.
An analysis of the data from Nigerian National Petroleum Corporation, the corporation was only able to remitN225.85bn out of the prorated total sum of N613.83bn. A breakdown of the N225.85bn showed that the Nigerian National Petroleum Corporation remitted N90.86bn in January, N64.16bn in February and N41.18bn in March. While the Corporation did not remit any amount in April, it was able to pay the sum of N29.647bn into the Federation Account in May.
It will be recalled that the Minister of Finance Mrs Zainab Ahmed, during the public consultation of the Medium Term Expenditure Framework/Fiscal Strategy Paper for 2022-2024 describes the amount spent on subsiding petrol as a drain on the economy. She said that a whopping sum of N900bn will be spent next year in subsidizing the price of Premium Motor Spirit, adding that such would have been spent on more productive sectors of the economy such as health, education and infrastructure.
An analysis of the 2022 Federal Government spending showed that the projected subsidy budget of N900bnis higher than the N292.7bn for sinking fund, N750.03bn personnel cost for Government Owned Enterprises, and N335bn overheads cost, It is also higher than theN261.2bn budgeted for overhead costs for Government Owned Enterprises;N567.02bn for pension, gratuities and retirees; and N366.13bn capital supplementation budget.
In debating the merits of fuel subsidy it is important to understand who benefits the most from the program. Contrary to popular belief, it is the rich not the poor who disproportionately benefit from fuel subsidies. With the Federal Government subsidizing the market to keep domestic fuel prices artificially low, it is those who consume the most that have a greater benefit from the subsidy.
Many low income earners rely primarily on public transportation as such their per capita fuel consumption is significantly less than the country’s rich, who generally use private vehicles. Neighboring Countries also benefit significantly from Nigeria’s fuel subsidy through smuggling. One legitimate criticism against the Federal Government is that it has done a poor job in planning for the subsidy removal and in communicating the huge costs of the fuel subsidy and the benefits of its removal to the population.
In a country where there is already a lack of trust between the people and government, communication is critical. Otherwise Protesters will continue to believe that this is just another ploy by Nigeria’s elite to further capture the country’s resources. The real challenge the government faces is winning the trust of the people. Working Nigerians are hurting and their livelihoods are in danger with the doubling of petrol prices.
They Want to know that the government has a credible plan and the protests representa call for the government to quickly implement post-subsidy programs. Some form of social protection must be launched immediately to protect the most vulnerable.
This could include measures to reduce the cost of public transportation in the near term. The Federal Government must implement a transparent system for redirecting and monitoring the use of funds from the fuel subsidy program so that its citizens can review and scrutinize the expenditure. The government has announced its intention to redirect the funds from the subsidy into infrastructure, support for small businesses and safety net programs.
This is a step in the right direction, but the success of these programs rests on having proper oversight and participation of civil society. The government should assemble a committee of key civil society organizations to oversee the investment of these funds. Unlike the fuel subsidy itself, these programs should be targeted toward helping the poor including programs to reduce maternal and infant mortality and improve road quality and access.
Most importantly, the programs must be tied to Nigeria’s Overall development goals. The government and the proposed civil society oversight committee must prioritize sustainable investments that will have a long-term development impact. Pork barrel type investments spread across the country to appease the people will not serve President Jonathan and his government well in the long run.It is too early to tell whether the Federal Government will succeed in these efforts but after 20 years of dodging the issue and trillions of Naira spent, the removal of the fuel subsidy should be supported.
If implemented correctly, the subsidy funds could lead to major development gains.Moreover, the removal of the fuel subsidy; if successfully implemented, creates the space for Nigeria to finally develop refinery capacity and consequently increase its potential revenue from the oil sector and create jobs. Civil society organizations should take this opportunity to fully engage in the debate on how best to redirect the funding from the subsidy program. In turn, the Nigerian government must communicate its plans and actions transparently to the people.
Adewole Kehinde is the Publisher of Swift Reporters and can be reached via 081662408436, 08123608662