Groaning Under Fuel Subsidy

With an estimated N3 trillion spent on oil subsidy in the last 10 years, experts fear that the nation’s economy may remain in bondage for a longer time to come

By MUYIWA LUCAS

Ajumogobia: Worried about the low production capacity of refineries

Abdul Aminu, a middle age businessman, enjoys the proceeds from his oil business, which he started about five years ago. His trading activity in this business is transnational, as he sells in neighbouring countries. The huge profit margin he enjoys is made possible as a result of the cheap price of this commodity in relation to what obtains in other countries. With the prices of crude oil constantly on the rise in the international market, Nigeria’s domestic price for refined oil which stands at N70 per litre, is believed to be the cheapest in most part of the world. This is mainly as a result of the federal government’s subsidy on the product. While the government may have put the subsidy in place as a welfarist policy to cushion the biting economic effect on its populace, the activities of Aminu and his comrades in the illicit trade have consistently rubbished the desire of the government, which has had to contend with the burden of subsidising the cost of the commodity, at a cost said to be detrimental to the economy.
In keeping with the said welfarist policy, the federal government has earmarked about N450 billion for fuel subsidy in the current fiscal year; this represents about 16 per cent of the 2008 budget of N2.748 trillion. In 2007, N207.85 billion was spent on subsidy, while in 2006 government spent a total sum of N261.10 billion to subsidise the prices of the product. In 2003, it cost about N70 billion to subsidise the product. Now, with international price of crude oil on the rise, analysts contend that the amount on subsidy may also be on the rise given the precarious situation the country has found itself, as it is mainly dependent on importation of refined petroleum products to meet its domestic consumption estimated at 30 million litres daily. Available data from the Petroleum Products Pricing Regulatory Agency, PPPRA, indicates that based on an exchange rate of N117.98 to $1.00, government incurs N20.40 on every litre of petrol and another N53.61 on each litre of kerosene. From available records, petroleum industry sources estimate that so far, government has sunk between N2.5 trillion and N3 trillion into fuel subsidy in the last 10 years.
The continued subsidy is believed to constitute a burden on the spending of government, thus impacting adversely on other sectors of the economy. Industry experts maintain that if truly such amount has been spent, it is tantamount to economic waste since it has not helped in the quest to have any of the refineries working; neither had it led to building new ones. For Olatunde Runsewe, president, Independent Petroleum Marketers Association of Nigeria, IPMAN, the important thing is to get the refineries working. “How much does it cost to build more refineries when we are spending so much on subsidy; why can’t we put that money down and spend it on the refineries and get them to work?” he queried.
Tam David-West, professor of Virology and former petroleum minister, sees subsidy as fraudulent. “The fundamental question is whether there is subsidy at all? I am not alone in this believe, General (Muhammadu) Buhari also believes there is no subsidy. I don’t believe in subsidy because it does not exist”, David-West argued.
In the early years of his administration, former President Olusegun Obasanjo contended that subsidy may, after all, be an economic waste. This thinking may have informed his intensions to stop subsidising the product. In 2002, however, the efforts proved abortive as the government had to bow to pressures from organised labour. Earlier in 2000 at the talks with the nation’s labour leaders following the nationwide strike sparked off by the hike in fuel prices, Obasanjo submitted that “government subsidy on petroleum products has never made any economic sense and never will”. David-West agrees with Obasanjo. According to the former oil minister, there is a lot of waste in the industry and those involved are only holding the country to ransom because they are benefitting from it. “Is it not shameful that we are spending money importing fuel?” he asked.

Scooping fuel from burst pipeline

Before the establishment of the Petroleum Support Fund, PSF, a source in the Budget Office told the magazine that funds for payment of subsidy were sourced through deductions from the various sectoral allocations in the budgets. This has since stopped with the setting up of PSF in 2006. It is from this fund that government now draws the funds for subsidy. Oluwole Oluleye, executive secretary, PPPRA, while making cheque presentation of N21.4 billion, representing payment for the audited 2007 outstanding subsidy reimbursement for petroleum products to marketers in Abuja last month, disclosed that "two years into the implementation of the PSF scheme, the PPPRA is taking an appraisal of the scheme with a view to strengthening it and sustaining the successes recorded so far”. This has, however, not gone down well with some stakeholders in the industry. They argue that this act is anti-investment, as such funds should have gone into other areas of the economy that earnestly yearn for attention. One of such areas even within the industry is the refineries which have remained comatose for long. For instance, Oluleye disclosed that local production from the nation's refineries have increased from four per cent for premium motor spirit, PMS, or petrol, in 2007 to 11.46 per cent in March 2008 and kerosene, DPK, moving from 15 per cent in 2007 to 59 per cent in March 2008. This is still a far cry from the daily consumption requirement.
A recent report from the Department of Petroleum Resources, DPR, indicates that only 4,046,250 barrels of crude oil was refined in the country during the third quarter of 2007, representing 10.83 per cent of the production capacity of all the refineries put together. Odein Ajumogobia, minister of state for energy (petroleum), insists that “even if we have all the refineries working, we are still going to be importing at least 50 per cent of our needs; and if there is no new refining capacity in Nigeria, the amount of petroleum product we need to import will increase as our consumption increases”. By implication, the chances that subsidy on the product will increase are high.
Bashir Borodo, president, Manufacturers Association of Nigeria, MAN, agrees that the high cost of subsidy is a reflection of the poor state of the refineries. “The high cost of the subsidy came about as a result of the inefficiency of our domestic refineries. If our refineries were working well, the subsidy would not have been that high. If the refineries were in working condition, the products would have been transported through the pipelines; but they are now moved by road, from Mosinmi in Lagos, or Port Harcourt to Sokoto”, Borodo submits.
The state of the refineries remains a sore point within the industry. David-West wants government to stop the ‘squander mania’ since “all the money they are wasting under the guise of subsidy can build about four new refineries”. He explained that the Port Harcourt Refinery was built with less than $1 billion. “I signed the contract to build the new Port Harcourt Refinery, generally acclaimed to be the best in Africa at the time, which the World Bank said would last us for at least 20 years, although it was destroyed in less than 10 years. It has the capacity to produce about 160,000 barrels per day, bpd”, a bitter David-West told the magazine. He explained that the N450 billion meant for subsidy this year is enough to build at least two medium-size refineries capable of refining about 300,000 bpd. This means that the N3 trillion so far spent on fuel subsidy in the last 10 years could have built between 10 and 20 refineries of medium-size capacity.

Niger-Delta Oil Field

But stakeholders argue that it is not in the interest of government to continue to run the refineries; rather, it should be left in the hands of private sector investors. Both Borodo and Tunji Akande, director-general, Nigerian Institute of Social and Economic Research, NISER, share this view. “Government has no business running refineries, they have tried it before and we can see what has happened. It is the private sector that can run it”, says Borodo. But this may be a tall order given the spate of policy reversals by the present regime and the continued subsidy policy.
A top official of a leading oil exploration company, who asked for anonymity to safeguard the interest of his employer, informed the magazine that government’s continued subsidy in this sector is a major disincentive for oil companies that wish to invest in the sector. According to the source, “No major oil company will go into local refining as long as the subsidy regime exists since we would not be able to sell at the real cost”. Borodo agrees that the situation has been abused since oil meant for use in the country is being smuggled to neighbouring countries for sale at a higher price; this is a leakage which the government needs to checkmate. He nonetheless, insists that without subsidy, prices of goods and services would have gone up beyond what currently obtains. “Prices of agricultural products could have been much higher, transportation cost; importation for our factories would have been more expensive. I believe that the money on subsidy has gone to the right place because indirectly, it has reached almost every Nigerian. You and I are benefiting from the subsidy, those moving agricultural products are benefiting from it, if you are moving raw materials to the factory, you are benefitting from it”, he argues. Akande sees subsidy as a palliative measure meant to help Nigerians live normal lives. “It is a social expenditure. Subsidy does not contribute to economic growth. I believe it is desirable because every country has to assist her citizens”, Akande said. He explained that subsidy is used to assist the beneficiaries from facing the full rigour of the economic impact of a commodity and the government does that kind of a thing when it sees that the purchasing power of the consumer is low. The NISER, DG, contends that fuel goes into every aspect of our economy, and it would have been difficult for anybody to actually pay for the actual price of fuel in the present economic realities. “It is critically important that subsidy exists for the citizens to have access to power the economy. Subsidy has contributed in a way to the welfare condition of the people, it may not really have assisted manufacturers, but if they were to face the full rigour of the price, then cost of production may have gone up beyond what they have now; in fairness, how many Nigerians can afford N150 per litre of fuel. Everybody is benefiting from the subsidy, but the degree of benefit may vary. The only one on the losing side is probably the government”, Akande offers. Tokunbo Korodo, secretary, Lagos zone, National Union of Petroleum and Natural Gas Workers, NUPENG, shares Borodo’s views. He insists that if subsidy is the only succour government can give to the people, then so be it. However, he believes, subsidy is the consequence of a comatose refinery, advising that the refineries should be made to work so that the situation can improve for all.
Fred Itua, an oil and gas consultant, said Nigeria is losing billions of naira by not developing the downstream sector because it is importing refined petroleum products, and, therefore, subject to the vagaries of the international market situation. “By not deregulating, we are losing a lot of money more than we would be losing if we deregulate; private investors would come in and take charge of the entire process and sell at the appropriate price”, he reasons.

Nigerian Oil Refinery

In all of these, the cost of subsidy to the economy is enormous. The source in Budget Office told the magazine that fuel subsidy places an enormous burden on the country’s budget, distorts market prices, and encourages smuggling and criminality. Interestingly, government appears to share this view. The thinking in government circle is that the continued subsidy in the downstream sector of the petroleum industry is affecting investments. Sanusi Daggash, minister, National Planning, recently, said there was no way to stimulate private sector investment in the downstream sub-sector of the nation’s petroleum industry unless internal pricing was addressed. “It is internal pricing that is hindering investments in the downstream sub-sector of the nation’s petroleum industry and it is a sensitive political issue that can cause people to protest and all that and we are careful about it”, he argued.
The magazine also gathered that because of the relatively cheap prices of petroleum products, smuggling across the borders has continued to flourish. Yet, government is forced to import more at a higher rate which is another drain on the government finances. The situation creates a lucrative business for importers, who are often said to have a hand in the poor state of the nation’s oil refineries. In 2002, Obasanjo explained that government's continued importation of the shortfall of 17 million litres per day was not only too costly, but was also benefiting only a few rich individuals and their trade partners in neighbouring countries through smuggling. Such money, he said, could have been saved and used in providing education, health, water supply, roads, security and food.
Oluleye believes that increasing local production of refined products will free the PSF facilities for other governmental purposes. That is stating the obvious. For instance, the state of the health sector is so appalling that government general hospitals have become mere consulting clinics largely due to lack of funds. In the 2008 budget, a combination of N138.17 billion allocated to health, N210 billion for education and N14.89 billion for environment and housing, remains a far cry from the N450 billion for subsidy in the same year. Likewise, in 2006, health, education, environment and housing got a paltry N44 billion, while N261.10 billion went on subsidy.
David-West berates the government for neglecting sectors that are more critical. “They are neither interested in agriculture nor education. To them these two can go to blazes. A nation that cannot feed itself is not a powerful nation; a nation that does not have a good educational system is a nation in decay”, he warns. But Akande differs. According to the economist, the problem of the country is not investible funds. He worries that if the money spent on subsidy had been spent on other areas, there is no evidence to suggest that it would have been spent efficiently. “ We also have no evidence to suggest that if we had spent it on education or health it would not have generated a kind of inflationary fire that would make the fire worse”, he argued.
The question on the minds of concerned Nigerians now is whether subsidy should be abolished and the funds for it channelled into other critical areas of need in the economy. Our Budget Office source argues against continued retention of subsidy but calls for caution. “Harmful as subsidy is said to be to the economy, abolishing it abruptly without adequate protection of the beneficiaries would be disastrous socially and politically; therefore, phasing out should be contingent on adequate domestic supply and public education”, he warns. But Akande insists that placing a timeframe for removal is not an option since economic indices may not be favourable to the people. “If we plan to have a timeframe, what conditions in this economy tells you that the average condition of Nigerians have improved to be able to face the full economic conditions of market forces to justify our removal of the subsidy. If the purchasing power and the welfare condition of the people have improved, then you can now remove it and allow the market to determine the prices”, he submits.
Proponents of subsidy contend that it is not peculiar to Nigeria alone. In places like Saudi Arabia, Iran, Kuwait and even the Western countries, governments are subsidising oil substantially, though in different ways. But the world appears to be changing in that direction. For instance, the International Monetary Fund has tried to work with Organisation of Petroleum Exporting Countries members like Angola and Iraq to eliminate subsidies for domestic fuels because they are a big drain on government funds. In Iran, fuel sales averaged 19.4 million gallons a day, out of which about 40 per cent of it had to be imported, and at world prices. The expensive system of subsidies needed to keep the populace happy, broke down when the country imposed gasoline rationing, sparking riots across the country.

Oli Polluted Community

As oil prices have continued to soar, Asian governments try to keep fuel costs down through subsidies. But those reaping the biggest windfalls are not poor consumers, but highly-organised smuggling rings that siphon the subsidised gasoline, diesel and kerosene to sell at a premium abroad. Indonesia is losing about $862 million or N102.5 billion and Malaysia loses about $175 million or N20.82 billion a year to smuggling of petroleum products.
While the obvious answer to smuggling, economists say, would be to end fuel subsidy region-wide, putting an end to, or at least narrowing price differences from country to country should be paramount. But given the peculiar situation of the country, especially with the growing rate of poverty, the nation may be caught between the devil and the deep blue sea in the situation, especially with the known resistance of Nigerians to change. How well is the country prepared for the looming reality?