Friday, 9th June 2023

‘With fuel scarcity, arbitrary pricing, subsidy removal overdue’-Experts

By Collins Olayinka and Kingsley Jeremiah, Abuja 
29 January 2023   |   4:33 am
As Nigerians grapple with the difficulties occasioned by the artificial scarcity of Premium Motor Spirit (PMS) and its arbitrary pricing across the country, energy experts yesterday insisted on the need for the Federal Government to remove subsidies being paid on the product.

Fuel Pump PHOTO: istock

• Experts Say Move Best For Economy, Nigerians
• FG Wastes N667b Yearly Subsidising Unused Fuel
• Unions, Energy Experts, Oil Marketers, CSOs Differ On Implementation
• Labour Spoils For War, Prepares For Major Nationwide Protest
• Tasks FG On Revamping Refineries, Halting Smuggling, Wage Increment
• Partial Deregulation To Free N1.1 Trillion, Says Emmanuel

As Nigerians grapple with the difficulties occasioned by the artificial scarcity of Premium Motor Spirit (PMS) and its arbitrary pricing across the country, energy experts yesterday insisted on the need for the Federal Government to remove subsidies being paid on the product.

With motorists now queuing to buy the product amidst scarcity and uncontrollable price, which now ranges between N195 and N500 per litre depending on location and the retailer, industry players said the total removal of the scheme is long overdue.

Their stance was premised on the fact that the gains of its removal far outweigh the challenges currently being faced or that may be faced in the future.

This was as some other schools of thought suggested a partial and phased deregulation of the downstream sub-sector of the Nigerian oil industry, an approach estimated to free about N1.1 trillion per annum for government to be used for interventions in other segments of the economy.

It would be recalled that President Muhammadu Buhari had backed the payment of N10.6 trillion as subsidies on the consumption of PMS between January 2022 and June 2023. 

Nigeria currently runs two forms of subsidy. The first is the payment of the difference between the actual pump price of PMS, which is arrived at after calculating the landing cost and the extant margins. The other is the cost of transportation (about N30) paid on every litre to ensure that the price of PMS is similar across the country.

To put in better perspective, in Nigeria’s 2022 budget, capital expenditure stood at N5.4 trillion while subsidy payment was initially N4 trillion but rose to about N7 trillion before the end of the year. In the 2023 budget, the subsidy from January to June when government said it would stop the subsidy stands at N3.6 trillion.

With debt of about N77 trillion, Minister of Finance, Budget and National Planning, Zainab Ahmed, said this month that the Federal Government was borrowing money to fund PMS subsidies. “Fuel subsidy cost was a very high one; we have been funding it from borrowing,” she said.

Although industry players have insisted that subsidy removal remained the best option for the country, the intricacies of the impact on the economy, the corruption, lack of accountability, smuggling and the inability of government to refine petroleum products locally despite being the leading crude oil producer in Africa have divided labour unions, energy experts, oil marketers and civil society organisations.

For most unionists, subsidy remains the only gain for the masses after years of crude oil extraction. They challenged government to get the refinery working, halt smuggling of the products or increase wages due to possible inflationary impacts of subsidy removal on prices of goods and services. 

Managing Director, 11 Plc and former Chairman, Major Oil Marketers Association of Nigeria (MOMAN), Tunji Oyebanji, noted that subsidy would negatively affect investment in the sector, stressing that government has historically been constrained to retain the price due to political consideration, especially since the move has always had civil unrest as fallout.

Oyebanji disclosed that the lack of uncertainty in the sector has already led to divestments, adding that the industry needs significant investment, which could only come from certainty and full deregulation as well as a level playing field.

Demanding an enabling environment to make the sector revamp the nation’s sick economy, Oyebanji said: “We need to put behind us the need to control price. What we need is an agency to come down heavily on anyone who abuses regulations and imposes significant fines as it is done in other sectors like telecommunication. That would address the concern that some people may have expressed.”

Renowned energy economist, Prof. Wunmi Iledare, on his part, noted that the government has itself to blame for digging a hole and now finding it difficult to climb out of the hole.  

According to him, no where in West Africa is the price of PMS less than twice what Nigerians pay for PMS, adding that the government has no choice than to remove subsidy on PMS. 

Iledare also noted that, given the dictates of the Petroleum Industry Act 2021, it is illegal to fix price of PMS. “No power is given to any entity in the PIA 2021 to fix the price of PMS. Government cannot keep breaking its own laws. The reason you have PMS shortages in the system is because of price ceiling, setting the price below the market clearing price,” Iledare said. 

He said subsidy removal would make the economy better than it is, stressing that the development would create less crowding out of private investment in the sector. 

There would be less pressure on external reserves thereby improving Forex rates, Iledare said, noting that the removal would create less borrowing for consumables and more money to do more important things. 

“The labour union will experience higher purchasing power for the naira because they will not have to be spending on behalf of government to provide basic things for their family, including good education and health services. 
“Honestly, the labour unions are myopic in calling upon the government to continue to borrow money to subsidise PMS consumption. It is basically calling on the government to commit economic suicide,” he said.

Iledare insisted that subsidy removal would not make Nigerian economy worse off, adding that it will more likely than not rekindle it. According to him, in the short run, prices may go up but it would stabilise.

A civil society organisation, Policy Alert, also condemned the continuous payment of subsidy on PMS, insisting that the country is fostering corruption through the scheme.

Executive Director of Policy Alert, Tijah Bolton-Akpan said: “We are discussing the removal of a subsidy that no one knows for sure how much it amounts to. How much exactly will you be removing when you eventually come around to deregulate?
“The problem really is that because corruption has dogged all efforts at fixing our refineries over the years, it defies every logic that we could be a super-producer and still be here talking about the economics of spending nearly a trillion naira in just over two years for just freighting refined products back home for domestic consumption. How can you be a yam titleholder and be depending on other people to eat pounded yam?”

A professor at the Department of Economics and Centre for Petroleum, Energy Economics and Law at the University of Ibadan, Adeola Adenikinju noted that with the rising population imposing a growing demand on the product, the burden of sustaining fuel subsidy year-in, and year-out has become quite heavy. 
“The fuel subsidy scheme has been fraught with fraud and corruption, and the report of a Presidential Committee on Verification and Reconciliation of Fuel Subsidy Payments between 2009 and 2011, revealed that the government wasted up to ₦667b (about $4.3b) annually subsidising millions of litres of petrol that Nigerians never used, or even needed. Some of the gasoline could not even be traced,” he said.

Adenikinju said the current subsidy regime fuels current inflation through higher budget deficits that are financed through ways and means and other forms of public debts.
“A shift to liberalisation will ensure that fuel prices like other commodity prices will crawl around a long-term trend rather than by fits and jumps that cause significant price shocks in the economy. This will be a lot easier for consumers to adjust to, and less disruptive of economic agents’ budget constraints.
“Both current fuel subsidies and what will occur after subsidy removal have negative equity effects. Nearly 80 per cent of current subsidies are appropriated by the top 20 per cent of the society. The last 40 per cent of the society benefits less than 10 per cent with poor rural folks even with lesser benefits. In the short term, the poor will not only lose their share of the benefits but also pay some share of the inflationary costs. It is this category of society that should be considered in petrol price adjustments. 
“Some forms of cash transfers, or more appropriately channeling more government expenditure to support commodities that the poor consume could be one way of mitigating the economic impacts on the poor. The subsidy recovered from the rich can be used to support the poor,” he said. 

Energy expert, Madaki Ameh weighed in, saying that the prevailing situation has showed that there is zero benefit of the PMS subsidy on the Nigerian economy. 

He described the subsidy as wasteful, adding that it only benefits the very rich and the few people positioned to make humongous amounts of money from it. 
“It is quite sad that after almost eight years in office, this government is kicking the can down the road, totally unable to end this wasteful subsidy regime, which they campaigned on as being fraudulent in the first place,” Ameh stated.

According to him, there are ingenious ways of stopping payment of subsidies without any increase in the price of petroleum products. He urged the government to explore such ways rather than a blanket removal of PMS subsidies, which will definitely be mismanaged and exploited to create further hardships for the people.

Meanwhile, the Chief Executive Officer of Dairy Hills Limited, Kelvin Emmanuel, on his part, advocated a partial deregulation of the downstream sub-sector of the Nigerian oil industry, disclosing that it is capable of freeing about N1.1 trillion per annum.
He also submitted that in the short term, the Federal Government should raise the ex-depot price of PMS to N240 and the pump price moved to N270 per litre to solve the face-off between the Nigerian National Petroleum Corporation Limited and marketers.
“In the short term, it is important for the government to officially raise the depot prices to N240 per litre and set the pump prices at N270 per litre in order to avoid the stand-off between the independent marketers and the NNPC. This partial deregulation will free up 1.1trillion naira in subsidy payments that represents 5.1 per cent of the budget, and reduce the burden of raising N8.8 trillion through debt to plug the existing budget deficits,” he explained.

Explaining further, Emmanuel said considering that one litre of PMS in Ghana where the markets are deregulated is $1.20, deregulation of PMS through the removal of under-recovery will move petrol prices to 76 cents per liter, adding that this because the 27 per cent handling charge on imports will be deducted from $1.05 per litre, and the external risk of currency depreciation and devaluation is eliminated.

Emmanuel stressed that the most viable means for eliminating scarcity is import substitution, which is best represented in the new commercial refinery that is coming onstream in 2023.

He added: “At full capacity utilisation of 650,000 barrels daily, it will deliver 50m litres of PMS to the markets, which is 15m litres higher than the true daily consumption of Nigerians.”
“The next President needs to work with BUA, AXEN & NPA to fast track the development of the Ibaka Sea Port, as well as the 200k barrel refinery as a means to make Nigeria a net exporter of petroleum derivatives and create excess supply. A good place to start is to ensure that NNPC gets to the point where it can raise an IPO to fund Joint Venture in midstream financing infrastructure for commercial sized refineries,” he explained.
For the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), the persistent shortages of PMS in the country has become a source of pain to the Nigerian people alleging that the current shortages are being perpetuated by players in the downstream sector in order to hike the price far above the government approved threshold.

It accused non-state actors of arrogating to themselves the power to determine the price of a litre of fuel far above the rate pegged by government in the current subsidy regime.

PENGASSAN demanded that the various security agencies, especially the men of Nigerian Customs and Immigration charged with manning the nation’s borders act professionally and in conformance to their oaths of allegiances to stop high rate of smuggling of the products across the West African countries.

It also demanded that the various deports and other storage facilities, especially those owned and operated by the NNPC, should be upgraded and made accessible to all operators to lift the product.
“PENGASSAN demands an immediate end to the avoidable, unnecessary, crippling and pain-inducing fuel shortages and unapproved price hike in the country. No excuse is good enough to cripple the country. If there are challenges, they should be fixed; we have a government in power to fix challenges not to make excuses,” it stated.

The union hinted that it is willing to collaborate with the Federal Government and assist in all ways possible to overcome the present challenges.

On its part, the Nigeria Labour Congress (NLC) has also vowed to resist imposition of more hardship via high petrol prices.

Congress President, Ayuba Wabba added: “On our part as a pan Nigerian, progressive, pro-masses, and pro-poor organisation, we would not fold our hands and watch Nigerians being taken advantage of in any manner. We call on those whose work it is to provide Nigerians access to affordable public services, amenities and utilities to undertake their responsibilities with utmost diligence and patriotism. Nigerian workers and citizens are not slaves. They deserve tolerable and indeed decent living conditions in order for them to continue to make contributions to the arduous task of nation building. In light of this, we would want this statement to be a message to all those involved in these mischiefs and evil that we are mobilising our members across the country for a major protest.”

In this article