Learning from the Fuel Crisis IV: Subsidies

This article is Part IV of a series. Read Part III here

To Subsidise or not to Subsidise?

January 2012 was an interesting time to be a Nigerian. Inspired by the mixed success of the Arab Spring, people across Nigeria took to the streets in protest against the sudden removal of fuel subsidies. Ever since 1999, Nigeria has had in place a price control and subsidy system in which the Federal Government pays petroleum importers and marketers the difference between the nationally regulated petrol price and the import price. The unprecedented nationwide protests put an end to policy-makers’ attempts at totally scrapping the system but it is no secret that many of Nigeria’s top leaders harbor plans to one day abandon the regime for good.

The Opportunity of a Lifetime

The subsidy debate never died, and is now being argued more vocally. A combination of low oil prices, frequent and recent fuel shortages, and a new government elected on the mandate of “change” have created uniquely conducive conditions to tackle the subsidy issue. This fact has not escaped the attention of anti-subsidy advocates who continue to gather support for their cause.

One of their main reasons for pushing to remove subsidies now rather than later is the aforementioned low oil prices. Subsidy payments to oil marketers usually fall as the international price of oil falls but this effect is offset by severe reductions in government revenue as oil revenues fall. Removing subsidies while oil prices remain low will minimize the impact on local customers and at the same time, free up important funds in a government budget currently geared towards austerity.

However, such an argument runs into trouble in Nigeria, a country where public officials can scarcely be trusted to efficiently use discretionary funds. At the moment, despite glaring leakages, the funds allocated to subsidies at least serve a clear and traceable purpose. Because of this, it would be extremely important to create a clear breakdown of where the freed subsidy funds will be allocated. This should also ensure that the rent-seeking in the Oil & Gas industry is not simply transferred to another industry. Subsidy removal offers the opportunity to reduce the high levels of government corruption at present but only if an acceptable level of agreement and transparency over how the discretionary funds will be spent can be reached.

Subsidising Consumption

The Nigerian subsidy regime breaks two rules of subsidy provision. The first is that governments should subsidise production, rather than consumption. This is particularly relevant to Nigeria given the deplorable state of its local oil refineries. Industry experts have argued that the subsidy payments create dangerous vested interests and the funds would be better spent improving the infrastructure in the petroleum industry. The truth is that subsidies tackle the symptom of the Nigerian petroleum disease while exacerbating the causes.

The second rule is against subsidising the use of non-renewable energy. Many Nigerians benefit from the subsidy regime because they use cars, which of course remain significant contributors to climate change. However, such concerns are yet to fully penetrate Nigerian society and alternative forms of energy remain at early stages of adoption.

The paucity of energy and power alternatives partly explains the manic response to the previously attempted subsidy removal. The fuel crisis in May also illustrates how reliant Nigerians are on petroleum products and this presents the biggest challenge to anti-subsidy advocates. It is difficult to estimate the exact effect of subsidy removal but undeniably, there are short to medium term hardships that the general population would need to endure.

Sacrificing the livelihoods of Nigerians today is a tough proposition both morally and politically. A brief look at the enduring geographical class divide in the UK mostly as a result of Prime Minister at the time, Margaret Thatcher’s privatisation policies in the 1980s provides one example of the danger of imposing hardships on one group in the pursuit of long-term economic progress.

RIP Subsidy?

Moving from policy to regulation to consumer experience, a number of truths come to light. The most damning is the fact that a significant proportion of the population regularly pays above the nationally regulated price. Whereas this has been widely known in the case of kerosene, the parallel reality with fuel has struggled to attain universal acceptance. This contention seriously undermines the credibility of the subsidy regime and demands for the case for removal to be properly heard.

There are some who believe the subsidy regime has already met its end. The 2015 National Budget does not make sufficient allocation for it and in a world of fiscal stringency, this may effectively terminate the system. The Ministry of Finance has been coy on this issue and the official stance remains that the subsidy regime is still in place. Such opacity, though perhaps well intentioned, poses further problems of accountability and transparency in how the federal government handles the subsidy phasing out process.

Subsidies have dominated conversations in an industry badly in need of reform. The Petroleum Industry Bill (PIB) remains unpassed in the Senate and the Nigerian National Petroleum Company (NNPC) remains in its cumbersome, bureaucratic form. The country needs to place greater emphasis on generating local content (an issue highlighted in the Nigerian Content Act) while both Federal and State governments must develop more sophisticated and integrated approaches to transport policy. More roads and more cars are unsustainable outcomes. Fuel Subsidy should go, and even when it does, the journey has only just begun.

This article is Part IV of a series. Read Part III here

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