This Subsidy Scam — What Do We Do?

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As usual, an Inbox game necessitated a discussion about subsidy, particularly fuel subsidy in Nigeria. At the end, he advised I open it up to the public and leave them to make their choices.

I’ve looked at the topic, and a Q&A format seems a good approach to this topic. I hope this serves its purpose.

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Questioner: Let’s start from the basics — what does Subsidy mean?

Tosin: When I was a kid, at the beginning of every year my mum would ask me to save a certain amount of money if I intend for her to buy me Christmas clothes. She would tell me the more I saved, the more the quantity (or quality) of the clothes she would buy me. For example, if at the end of November, she discovered that I had saved N2000 after smashing my Kolo, the home-made bank, she would add funds to it and buy me clothes. In economic circles, they would say my mum subsidized my Christmas clothes. Subsidy is essentially a gift; the receiver won’t pay back.

Subsidies refer to direct contributions, tax breaks and other special assistance that governments provide businesses to offset operating costs over a lengthy time period.

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Q: This is what they mean when they talk about fuel subsidies on television?

T: Yes, it’s a fraction of the price that consumers are supposed to pay to enjoy the use of petroleum products paid by government so as to ease the price burden.

As you may know, Nigeria is the largest oil producer in Africa, pumping around 2.0 million barrels per day of crude oil, as per 2018 figures. But for some reasons, despite owning four refineries, we still import about 70% of the petrol used in the country.

In other words, we get crude oil, we send them abroad for refining despite having refineries, and then import them back into the country for consumption.

However, as with global and even open market commodities, the price of refined petrol is not stationary. It fluctuates. It can be low today and high tomorrow. On 21st Oct, it was $53.31 per barrel. On 5th Nov, it was $57.23. On 12th Nov, $56.80. But it is bound to be especially expensive to us because there is an additional cost of sending the crude oil abroad and bringing it back refined. Say the landing cost of fuel is N5, that is how much it should be sold to Nigerians, but the government determines that it is better to sell it at N3 and add N2 for every litre sold. If the landing cost based on international pricing becomes N3, the government adds nothing, but if it becomes N7, the government will have to cough out N4.

However, note again it is as expensive as it is because we are not refining the crude oil with our refineries. It would be cheaper if we refine in-country.

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Q: When did all this start?

T: Certain events happened in the 1970s with the Organization of the Petroleum Exporting Countries (OPEC) which led to the rise of oil price in the international market. Thus, the military regime under Olusegun Obasanjo decided to introduce the fuel subsidy as a cushion. The intention was for it to be a temporary measure. But here we are…

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Q: Based on this explanation, fuel subsidy looks like a good thing especially for Nigerians who don’t have a lot of money. Why are people like you against it?

T: I will simply lay the facts down for you for you to decide.

Putting in mind that the pump price today is N145/litre, in April 2019 former Minister of State for Petroleum Resources, Dr Ibe Kachikwu, said the landing cost of petroleum to the country is N180/litre. Therefore, there is a subsidy of N35 for every litre of fuel you buy. But Nigerians don’t enjoy this subsidy equally.

Assuming someone like Mike Adenuga, who everyone knows is very rich, has 25 cars with each having 100 litre tank. If he buys a full tank every week, it means that every month the government is paying N350,000 (N35 * 25 cars * 100 litres * 4 weeks) on his behalf. That’s N4.2m every year.

Let’s say your MD has 12 cars. It means the government will be paying N168,000 (N35 * 12 cars * 100 litres * 4 weeks) on his behalf. N2m annually.

Let’s say your Landlord has just 3 cars. It means the government will be subsidizing him with N42,000 every month. N504k annually.

Let’s say you have no car and jump buses, we may not be able to calculate how much the government pays you, but we can agree that it is much less than those 3 guys above.

This proves the point that the richer you are, the more you get from this fuel subsidy, whether it’s through your cars or generators. Mike Adenuga doesn’t care for 350k a month, he is worth $9.2 Billion. But that N350,000 a month is everything to a woman at Aswani market. That’s why it’s said that fuel subsidy in Nigeria is quite wasteful as it is helping the least those it is meant to help the most.

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Q: This is eye-opening. But how come this has never been explained like this?

T: I have no idea. To me, if there should be subsidy on any petroleum product, it should be kerosene or liquefied petroleum gas (that’s what you have in your cooking gas cylinder). These are the fuel types you see most Nigerians using in large quantities. Alas, there is no subsidy for them. If the international price increases, you pay more for them. If the international price reduces, you pay less.

In my mind, it is the petrol subsidy that is an anomaly. As important as technology is right now, the government does not guarantee the price of laptop in the market for anyone. You pay the prevailing market price. So, what’s special about Petrol?

In fact, the subsidy regime has led to what some analysts have called unparallelled corruption. In 2012, The Guardian reported that $6.8bn had gone missing over 3 years. That was more than 20% of 2012 national budget. Unknown to Nigerians, importers with close links to senior government officials were being given funds for subsidies for nothing. It was reported that there was a day that payments totalling exactly $6.4m flowed from the state treasury 128 times within 24 hours to “unknown entities”.

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Q: Wait…but President Buhari once said that there was no such thing as subsidy. Then, I was confused when he said he has removed subsidy, only to hear again that there is still subsidy. What should we believe?

T: I would not be the one to say that President Buhari does not know what he is talking about. What I do know though is that even though the President vowed to end the subsidy regime before resumption of office in 2015, subsidy is well and alive under his regime. What happened was that they stopped independent marketers from importing fuel (for which they would have collected subsidy payments directly), and from 2017 gave the sole responsibility of importing fuel to NNPC. NNPC deducts payment (of the difference between how much it lands it and the N145 it must sell to the public and other oil marketers) before remitting to Nigeria’s federation account. Thus, they simply changed the official name from Subsidy to Underrecovery. Every time you hear Underrecovery in the news, it’s technically Subsidy you are hearing.

Between 2015 and 2018, Nigerian spent N1.2 trillion on petrol subsidy. In case you are not aware, the entire sum spent on capital expenditure (health, education, security, roads, etc) in 2018 was N1.65 trillion. We had a budget performance of 55% yet we spent more than 70% as much on petrol subsidy which benefitted the already rich than we spent on things that would improve the lives of Nigerians. It’s unbelievable.

One of the things that gets me thinking when I think of this subsidy regime is the incentives it provides for smugglers. The other day, I saw some Nigerians applauding Customs’ move to stop fuel supply to filling stations close to the border on account of smuggling of fuel to neighbouring countries.

Yet I have consistently said that imports and smuggling is a response to a flaw. If fuel sold in Nigeria at N145 is sold for around N300 in Benin Republic, then we will continue to see stories of Customs seizing billions of naira of fuel being smuggled to our neighbouring countries. Closing the border will not solve this problem. Close the borders for 10 years, when you open it up again, smuggling will continue. Economics 101 — demand and supply.

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Q: I think I agree that we should remove fuel subsidy now.

T: That would be my choice too. In 2018 alone, fuel subsidies swallowed 648 billion naira ($1.8b). To put that in context, that’s four times more money subsidizing fuel than building new schools, health centers and equipping new science labs. No nation grows this way.

A shameful episode happened just before the last general elections. In November and December 2018, N16.212 billion was spent on subsidies. But in January and February 2019, a record N206.585 billion was spent. How come? There was no radical change in the price of oil.

While I’m not telling you to conclude anything, remember that the presidential and national assembly elections held on February 23 while the governorship and state assembly polls took place on March 9. That’s all.

For 2020, the government has projected to spend N450bn on petrol subsidy. While the country had projected to spend N305bn on subsidy in 2019, current figures shows we are moving in the direction of spending three times what was projected. But even if we end up just spending N450bn, that’s a gross misplacement of priorities, seeing that in the same 2020 budget, the capital expenditure for Health, Science & Technology, Education and Power come to around N420bn (Page 32); still less than the amount budgeted to be spent on subsidies. We can be wiser

I will be blunt now: we need to scrap subsidies. President Joko Widodo of Indonesia scrapped petrol subsidies in 2015 and was able to release $16bn per year which he is using to guarantee and ensure that all children, especially from poor families, are able to get educated till the completion of high school/vocational school. India’s Narendra Modi also scrapped subsidies and with $11bn per year to play with, he’s investing in the country’s infrastructure.

This is what Nigeria wants. You don’t want to keep lining the pockets of those that are already well to do, or providing more avenues for corruption. You want these funds to be used for the development of your country, not on consumption.

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Q: But will President Muhammadu Buhari make good use of the savings from subsidies?

T: I don’t know but not removing it is already an albatross. The disadvantages are too numerous for the few gains people may think they are deriving.

If the government is interested in this, there are proven ways of phasing out implicit fuel subsidies while strengthening social safety nets to mitigate the impact on the most vulnerable, reduce the poverty gap and free up additional fiscal space in the country.

As an aside, this would be one less problem for whoever is taking over after this administration.

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Q: Thanks for this. I am better educated now. But let me ask one last question. What do you think Nigeria will stand to benefit with the massive 650,000 per day capacity Refinery by the Dangote Group?

T: First of all, let’s not overplay this hand. It was while reading Reuters in August that I heard NNPC say that they will be a “supplier of first resort” for the Dangote refinery. If you don’t understand what that means, it means that NNPC will do everything in its power to sell to Dangote Refinery which means they are willing to offer discounts. Yes, discounts, or why else does it want to sell to Dangote Refinery when it has refineries it has refused to make functional? NNPC is saying its ambition is to sell crude oil to Dangote refinery.

So, I believe that if fuel subsidy is not scrapped before the refinery becomes functional, it will be scrapped when it becomes functional to make it competitive at home, and then there will be crude oil subsidies to the refinery, because ‘patrotism’.

Don’t think that because Dangote Refinery is stationed in Nigeria that you will pay less for petrol. You have Dangote Cement in Nigeria; don’t you pay double the global prices for cement?

Please, wake up!

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