A couple of days ago I read a speech which was given by His Royal Highness, Sanusi Lamido Sanusi, Emir of Kano. It was about the government’s energy subsidies, particularly for fuel and electricity. His arguments need no introduction as we have heard them countless times before. Every naira spent on fuel subsidies is a naira not spent on education. Every naira spent on electricity subsidies is a naira not spent on healthcare. And you know what we should be spending money on. Needless to say, I agree with him. But something struck me as missing from the whole debate about subsidies. We know that in general the rich and middle class benefit the most but are there spatial differences in the benefits as well?
Think of this from a fuel subsidy perspective in the context of where fuel is actually consumed. Some states with a lot of economic activity and higher fuel consumption per person should be benefiting more than states with lower fuel consumption per person. If the average person in state X uses 50 litres of fuel a week, they are benefiting more from the subsidy than in state Y where the average person used only 20 litres of fuel per week.
On the other hand, the costs of the fuel subsidy are not borne based on the amount of fuel consumed but based on the revenue allocation formula. Recall the subsidies, or under-recovery, are currently paid by the NNPC before it hits the federation account. So, all the tiers of government are indirectly paying for it. If N1tn is spent on fuel subsidies by the NNPC for instance then the states and LGAs are missing out on roughly N473.2bn that they would have shared if there were no subsidies. Shared according to the formula of course.
In general, some states, where there is relatively higher fuel consumption, are benefiting from fuel subsidies perhaps even more than they are losing from lost income. On the other hand, some states who have relatively lower fuel consumption are losing from lost income due to fuel subsidies even after taking the amount of fuel consumed into account. So, who is gaining and who is losing?
We don’t have data on actual consumption per state but there is data on the number of trucks sent to each state by the NNPC which is a good proxy. Of course, this data is not perfect. In Q1 of 2019 Zamfara state got almost as many litres of fuel as the FCT and we know most of that probably made its way across the border. But still. On the lost revenue distribution side, the revenue allocation formula is public information so its easy to determine what each state would have got if nothing was spent on fuel subsidies and the money just paid into the federation account instead.
Which states actually gain and lose from fuel subsidies? Turns out that Lagos, FCT, Ogun, and Kano gain the most from fuel subsidies. That is, if you subtract the amount lost from money not remitted to the federation account from the amount gained by consumers in that state not paying as much for fuel as they would have, only those four states gain. The rest of the states actually lose money from fuel subsidies. Based on Q1 NNPC truck distribution numbers, for every one million naira spent on fuel subsidies, Lagos state gains just over N127,000. The FCT gains about N46,000. Kano gains almost 557,000 while Ogun gains about N32,000. The majority of the rest of the states lose with the worst being Bauchi state which loses about N29,000, closely followed by Jigawa, Katsina, Sokoto, and Yobe. If you assume that the NNPC spent one trillion naira subsidizing fuel in 2018 then a state like Bauchi lost N14bn in subsidy payments for fuel that its residents did not consume. Essentially Bauchi spent N14bn subsidizing fuel for people in Lagos, Kano, Ogun, and the FCT.
You can also see the obvious unfortunate pattern there. The states who lose the most are all poor northern states with higher levels of poverty, and lower human capital development indices. The states where investments in education and health are needed the most. Yet they indirectly are subsidizing fuel for much richer and more economically active residents in Lagos and the FCT. An absurd state of affairs no matter how you think about it.
The part that continues to leave me puzzled is why these states don’t argue for the removal of subsidies. If subsidies were scrapped, Bauchi state, for example, would be able to pay all its resident enough to cover their loss from increased fuel prices and still have a lot to spare. This would be true for all the states that lose. So why do all the states that bear the brunt of subsidies without the benefits not fight for its removal?
Dr. Nonso Obikili
Dr. Nonso Obikili is chief economist at Business Day.