Eight years ago, Mark James (not real name) was one of the people who lined the streets of Lagos carrying placards in protest against Federal Government announcement on January 1, 2012, that it was quashing a 30-year-old petroleum subsidy that was both expensive as it was wasteful.
James, a middle-aged civil servant, and a hoard of other protesters succeeded in giving the wasteful subsidy a new lease of life, and they are raring to go again this year.
That is following the government’s latest resolve to end the practice that has culminated in the pump price of petrol rising to a record high of N162 per litre.
According to James, the hike will crush the poor and jerk up the price of everything from food to transportation.
What is worse is the timing, according to James, as this was a time when Nigerians have taken big hits to their incomes and are increasingly being laid off work as they reel from the harsh economic impact of the COVID-19 pandemic.
“This government wants to strip away the only thing that the poor count on as dividend from the government,” James said, saying, “We cannot accept such madness.”
The extent of James’ ignorance is deep.
He does not understand that the rich, who consume far more fuel than the poor were actually the biggest beneficiaries of the practice and that the government was essentially subsidising the rich and not the poor whose biggest expenditure is on food.
That is evidenced by results of surveys combining annual subsidy estimates with households’ expenditure data, which show that petrol subsidy is concentrated to high income groups as the top 20 percent households enjoy three times as much the benefit of fuel subsidies as the bottom 20 percent households.
He does not understand that by consuming less fuel than the rich, the government was essentially taking from him and other taxpayers, through taxes, to subsidise the rich by reducing the amount they paid to fuel their cars and power their generators.
He also does not understand that the government spent four times more money last year, N730.9 billion, subsidising fuel than building new schools, health centres and equipping new science labs.
He does not know that each time he fights against subsidy removal he denies his children and family access to more affordable education and healthcare.
He is perhaps also unaware that artificially low petrol prices in Nigeria have also led to large-scale smuggling of the product to neighbouring countries where it is twice more expensive, which means the Nigerian government was also subsidising nationals of other countries at the detriment of its citizens.
All of these somehow never matter when protests erupt over the controversial subsidy as another round of protests begins.
The Nigeria Labour Congress (NLC) and Trade Union Congress (TUC) already said they were in talks with civil society allies and relevant organs of Labour towards embarking on strike over the petrol price hike.
“Clearly, the action of the Federal Government is most insensitive and an affront to the Nigerian people who are bearing heavy burden of the COVID-19 pandemic,” the president of NLC, Ayuba Wabba, said.
“We will resist this latest move to impoverish the mass of the working people,” he said.
Despite the unrest, the decision to abolish Nigeria’s fuel subsidy is the right one. While deregulating the downstream petroleum sector could hurt working Nigerians initially, it would bring relief in the long term.
This is because it would pave way for new investors in the sector and that would ultimately drive down the price of fuel and reduce Nigeria’s dependence on petrol imports. Stopping petrol imports also helps the CBN conserve scarce dollars.
Keeping the domestic price of oil artificially low with the fuel subsidy has discouraged additional investment in Nigeria’s oil sector, according to a Brookings Institution report in 2012.
This is why despite issuing multiple refinery licences, Nigeria still does not have a single well-functioning refinery. The problem for investors has been how to recoup their investment under the artificially low price structure.
The abolition of the wasteful subsidy also frees up government resources to be invested in more meaningful social protection programmes that actually have a direct and meaningful impact on the poor.
If keeping the petrol subsidy actually had an impact on the livelihoods of the poor then it has failed after Nigeria became the poverty capital of the world in 2019, overtaking India for the first time despite having only a third of the Asian country’s population. Some 87 million Nigerians are categorised as poor as they live under $1.90 a day.
There is perhaps no better time than now to end the fuel subsidy and channel resources into areas that can help reduce the poverty level in the country.
Economists are of the opinion that production subsidies are more impactful on the economy and in protecting the poor than consumption subsidies, citing examples from even the United States that subsidises its farmers.
Power subsidy
Another subsidy that continues to create controversy for its ineffectiveness is the power subsidy. But even that may be set to end as the government doubles down on wide sweeping reforms to revive the ailing power sector.
Consulting firm, PriceWaterhouse Coopers (PWC), estimates that Nigeria spent about N3.9 trillion to subsidise electricity and petrol consumption in the country between 2015 and 2019.
PwC in a recent webinar conducted on the potential impacts of the Covid-19 on Nigeria’s power sector, said that between the aforementioned years, the country’s expenses on petrol subsidy amounted to N2.3 trillion while that of electricity was N1.63 trillion.
The first bailout for the sector in that period was in 2014 when the federal government approved a loan of N213 billion for power Discos as part of the Nigeria Electricity Market Stabilisation Facility (NEMSF) by the central Bank of Nigeria CBN.
In March 2017, the Federal Executive Council (FEC) equally approved a N701 billion CBN facility as Power Assurance Guarantee for the Nigerian Bulk Electricity Trading Plc (NBET) for a period of two years.
In August, 2019, the government again signed the release of N600 billion for the power sector which was meant to cover the shortfall in the payment of monthly invoices by key stakeholders in the sector.
The government is however showing a resolve to also end the power subsidy.
Homes and offices in Lagos are already receiving letters from their electricity providers notifying them of a hike in electricity costs as the government doubles down on ending the equally wasteful subsidy that benefited the rich more than the poor.
The government approved a rise in rates starting September after a previous tariff hike slated for July 1 was halted by the parliament.
Power distribution companies had been asked to put off any tariff increase until the first quarter of 2021 due to “the current economic challenges in Nigeria.”
However, consumers, except those receiving less than 12 hours of supply, will have to pay more for electricity starting from Sept. 1, according to the Nigerian Electricity Regulatory Commission (NERC).
The benefits of the move have been immediate.
Weary investors are now renewing their interest in Nigeria’s beleaguered electricity sector as they count on the new service-reflective tariff regime kicking off today to breathe new life into the sector by vastly improving liquidity across the value chain, BusinessDay investigations reveal.
One critical electricity venture that has been stranded for years, the $500 million Geometric Integrated Power project in Aba, could be the first beneficiary of this renewed investor interest.
According to BusinessDay investigations, the Cairo-based pan-African multilateral trade finance institution, Afrexim Bank, has indicated its willingness to open a credit line of $100 million to complete the Geometric project in Aba now that the service-reflective tariff regime proposed by NERC is coming into effect and following a resolution by National Council on Privatisation (NCP) of the long-running battle over the separation of Aba Disco from Enugu DisCo, between Interstate Electrics (core investor in Enugu Disco) and Geometric Aba Power Limited, a dispute that dates back to the privatisation of Enugu Disco in 2013.
Like is the case with the petrol subsidy, the removal of the electricity subsidy frees up government resources for more impactful ventures and could ultimately bring an end to years of incessant power shortages that have been a burden to companies and households who must generate their independent power.
Telco example
The telecommunications sector presents a good example of what could happen when markets determine the price of a product and private investments are made.
From as high as N30,000 for a sim card, Nigerians can get the same card for free today as the sector has grown from when the government-owned NITEL was the major supplier of phone lines to when private investor MTN came in 2001 and other private investments from Econet to Glo followed.
The transformational impact that market forces played in the telecommunications sector could be replicated in the downstream and electricity sector which means while it may bring initial pain it holds long term gains.
Why Nigeria can see through to end petrol/power subsidies despite backlash?
Confidence seems to be running high that Nigeria would see out the wasteful power and fuel subsidy and that this is no false start.
There are compelling reasons for this renewed confidence in Nigeria’s ability to push through such difficult reforms that have eluded past administrations.
The first one which applies to the petrol subsidy is that the pump price of the product has been allowed to increase from N145 per litre to between N158-N162 per litre.
There was initial scepticism whether Nigeria would stick to its guns when oil prices rise and allow the market bid the price of petrol higher. This was given that the end to subsidy was announced at a time when oil prices fell to a record low which gave room for a reduction in petrol price.
But the government has silenced critics so far by not budging despite widespread uproar following the increase in petrol prices this month as global oil prices recover.
Second is that the government has basically run out of cash to sustain the practice. The oil price decline and the economic fallout of the COVID-19 pandemic means the government now expects to earn about half of what it earned last year. This means there’s less cash to sustain wasteful subsidies.
The third reason is that current President Muhammadu Buhari is in his second and final term as President which means he is not returning to the polls to seek votes at the next election. This could help him resist political pressure to retrace his steps on ending the fuel and power subsidies.
Whatever the case, Buhari has a chance to do the economy a world of good if he sticks to his guns on the subsidy removals.
