26 May 2015

The Scam Of Fuel Subsidy - by Emmanuel Nwachukwu

Nigerians are yet again going through the misery of fuel scarcity for the umpteenth time. This time round, the effect of the scarcity has been particularly brutal in the capital city, Abuja, with reports of motorists spending days in queues at petrol stations. For those who cannot endure the painful agony of waiting in queues, petrol hawkers provide a welcome relief, that is, if you are prepared to pay as much as N300 for a litre of petrol. The queues are said to be less outside Lagos and Abuja where operators are reportedly selling petrol at prices in excess of N120 a litre- way above the control price of N87 per litre.

So, although the government would have paid these oil marketers subsidy to sell petrol at N87, apart from the Nigerian National Petroleum Corporation, they have collectively decided not to pass on the subsidy to consumers in the form of lower petrol prices; no doubt, believing that there will be no consequences for defrauding government, – and so the fuel subsidy scam continues with impunity.

The cost to the country in lost revenues as a result of this policy is huge. We continue to allocate over a quarter of the federal budget to just one line of expenditure. We continue to pay trillions of naira to Nigeria’s 130 or so oil marketers for fuel subsidies that are only passed on to residents of Abuja and other major cities, whilst the rest of the country buys their fuel at market price. It is common knowledge that the closer you are to the Nigerian border, the less likely you will ever buy petrol at the controlled price of N87, as marketers would rather drive their tankers across the border where they would obtain a higher price for their product. With the depreciation of the naira, the country may yet find itself spending up to N1.5tn on fuel subsidy; more than the combined budgets of Education, Health, Agriculture, Rural Development, Works, Transport, and Lands and Housing put together. Insanity of the highest order.

You do not have to be Albert Einstein to see that the current subsidy regime is corrupt and unsustainable. As a nation, we can no longer afford to fund this scam, especially in the present climate of falling oil revenues, where states and the Federal Government are struggling to pay civil servants. Although fuel subsidy is supposed to help the poor, the biggest beneficiaries are actually the rich. We cannot be spending a paltry N600bn on job creating capital expenditure and over a trillion naira to subsidise the lifestyle of the rich, so they can maintain at least two fuel guzzling jeeps and their generators. This does not make social or economic sense. It is indeed immoral.

The truth is that the subsidisation of petrol distorts the market and has resulted in inefficiencies and substantial loss of revenue for the government through corruption. It has contributed to the collapse of our local refineries by making them unprofitable for private investors to invest. The subsidy regime has also been responsible for sporadic fuel shortages at fuel stations as corrupt marketers, after receiving subsidies, have then proceeded to sell the subsidised fuel to neighbouring countries at higher prices.

It would be irresponsible for the incoming government to do anything else but abolish subsidies. We should be subsiding the cost of travel (mass transit), not petrol at the pump. The poor will benefit more through targeted measures as I argued in my article during the fuel subsidy protests of 2012. In the United Kingdom, for example, bus tickets are subsidised by government to make travel for the masses more affordable but petrol is taxed to fund public services. The trillions of naira we expend making dollar millionaires of marketers would be better spent equipping our schools and hospitals, building our transport infrastructure and investing in power.

The debate on the removal of subsidies has been plagued by sentiments, scare mongering and misinformation, even by our so-called economists who should know better. One of these individuals even stated in a TV interview that the United States subsidises petrol at the pump, – shocking untruth. Far from subsidising petrol, the US actually levies taxes on petrol and diesel (13 per cent tax on petrol and 12 per cent tax on diesel); as do most developed economies. In Britain for example, 60p of every pound spent on petrol goes to the government in taxes to fund public services.

For decades, expensive and unsustainable subsidies on fuel have curtailed growth in developing countries. Apart from perhaps the rich Arab states that have huge reserves and where vital infrastructure is already in place, many developing countries are grappling with strategies to unburden themselves of fuel subsidy payments in order to release resources for economic development. The last of Morocco’s diesel fuel subsidies came to an end January this year, following two years of careful planning and a public outreach programme. Malaysia, Indonesia and Egypt have significantly cut fuel subsidies and plan to phase them out altogether. With Venezuela’s economy in recession and widespread shortages of goods, the embattled president, Mr Vincent Maduro has hinted his intentions to remove petrol subsidies. For Nigeria, falling oil prices present a golden opportunity for the new government to remove subsides. The new government will do well to learn from the failed attempt of the present government to remove subsidies in 2012. It must put in place measures to cushion the impact of subsidy removal on the poor.

The removal of subsidy will make little difference to motorists outside our main cities as they already pay well above the market price for petrol anyway. If anything, the forces of supply and demand would drive prices down. With no subsidy, it won’t make business sense to transport petrol to neighbouring countries, with all the attendant risks and transport costs. All of this should increase the supply of petroleum products in Nigeria and drive down prices. Also, the government in the new competitive environment would be able to use its presence in the forecourt as major shareholder of the NNPC to drive down prices through its pricing policy.

The current subsidy regime cannot be policed or reformed. The only sensible thing would be to scrap it. As long as this subsidy regime persists, there will be no end to fuel scarcity in Nigeria. To continue with the current policy will be suicidal for the country. It is time to put sentiments to one side and bury the lie that subsidy helps the poor. The poor will be better served if the trillions of naira currently spent on fuel subsidy were invested in schools, health centres, hospitals and poverty alleviation.

- Emmanuel Nwachukwu is an international business consultant based in London

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