Thursday, 05 January 2012 18:09

Jonathanomics and the rest of Us : Why Subsidies should be Reduced not Removed and why I support its removal to certain extent

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Let me seize this opportunity to provide a gloss for recent Nigeria government Oil subsidies removal proposal and its implications .I will like to take this opportunity to share my personal idea on those frequently-raised questions. Going back to history, we all know that there is a systemic crisis of governance in Nigeria, in which there is the virtual absence or loss of national vision, direction, leadership, role models, rules, procedure, and institutional performance but Nigeria is a country to love. A country endowed with tremendous immeasurable natural resources. We all know and believe that we have series of institutions and political actors that are supposed to protect democracy regrettably subvert it with fanfares and reckless abandon; impunity is a culture of life in governance taking advantage of loony society and populace day in day out, and we all know that all our key public institutions which should be democratic champions like the judiciary have become culpable in its erosion. There are two cords that hold the house together - oil peppermints and uncourageous leaders. No doubt, that our house is in cracks; the foundation is shaking; its inhabitants are walloping in darkness, poverty and pains; but the care-takers or sycophants/handlers of the house are in self-delusion that all is well.

Before going to the first one, oil subsidy removal and why its essential at this point in our social development. I would like to mention a famous saying that when the leadership is right and the time is right, the people can always be counted upon to follow—to the end and at all costs. Sometimes I likened, Nigeria House to, a mad fellow and a drunk fellow who were both dumped in a house and the house was set on fire. The mad fellow notice the rabid change in temperature and the change in the constitution of the house and his own conditions and sought the exit way and saved his life. But the drunk fellow sat ensconced in his delirium only rejoiced and shouted: oh at last it has become warm.

Our current crisis is the result of the misguided notion that financial markets can regulate themselves in an unplanned economy. Here's a rundown of the mistakes we've made and the three reforms we need now. To me, as a board certified/Charted Fraud Examiner, I have over the years analyzed various agency overseeing oil marketing and banking industrial system and it all amount to sheer greed and unbalanced sheet economic practices. I strongly believe, Nigerians need to pay close attention to the role of PPPRA (Petroleum Products Pricing Regulatory Agency )allocations, in order to be able to understand the magnanimity of fraud- based syndrome on capacity allocations. We have seen in the past a re known oil companies such as Chevron, Mobil with less allocation, with capacity for say 65,000 MT as big as there are, and a relatively no name (unknown name but well connected) companies with more capacity of over 100000 MT.

That's speaks a- tons -fraud volumes in subsidies accrual (what a wastage of resources) and that is a total failure of accountability, hence I support oil price deregulation and for cogent reasons......in a simple terms, we have seen in the past years, just a few abysmal Nigerians culprits of less than 0.01% of our society ( 16,000 out of 16 millions- extremely wealthy individuals if not less than that) are taking advantage of unregulated economy to maximize their ill gotten wealth while 99% are walloping in abject poverty . We all know that PPPRA is supposed to give license only to marketers with a national distribution network suffice it to say 50% of the allocations are fictitiously awarded by this agency to companies that do not even own a filling station in Nigeria contrary to its principle and law that guides PPPRA. That's is something to worry about folks. If china did followed Nigeria path of looking the other way when financial crimes been committed, they wouldn't have reached the level of sustainable economic development today. In china, corruption is no go area, If you are found committing fraud, the simple term penalty is firing squad. It is not your aptitude but your attitude towards results will take you to your highest altitude. Nigeria attitude towards corruption is uncontrollable

For me this could well explain the first and foremost factors ( Corruption) which uncontributed to China’s fast development: the leadership of the ruling Chinese Communist Party (CCP). Looking back on the 90-year history of the Party, it is its wise and correct leadership that has successfully united and mobilized Chinese people of all ethnic groups to concentrate their efforts in realizing the goal of the revolution and development of China.

The leadership, since its founding in July 1921, had run through the New-Democratic Revolution against imperialism, feudalism and bureaucrat-capitalism, which led to the founding of the People's Republic of China (PRC). The termination of the long-existed status of semi-colonial and semi-feudal society, and in particular the systematic large-scale socialist construction, led to the rapid development afterwards. The success and advancement of CCP has won it countrywide admiration and support with people taking pride in becoming a member of the Party. Chinese Communist Party is now the world’s largest party, having registered members of more than 80 million and 3.9 million primary organizations. A generally peaceful environment at home and abroad has made it possible for China to achieve development during the past several decades and to focus entirely on development in the fundamental interests of the Chinese people. A peaceful world is all the more important for China to concentrate on development in the future. China will therefore remain steadfast on the path of peaceful development and work with other countries in a joint endeavor to build a harmonious world of enduring peace and common prosperity

The first responsibility of a leadership is to define reality. People’s Republic of China was founded a country with a large population and weak economic foundation. How could it overcome the poverty and backwardness and feed the over one fifth of the world population? The answer of CCP to this reality is development. A generally peaceful environment at home and abroad has made it possible for China to achieve development during the past several decades and to focus entirely on development in the fundamental interests of the Chinese people. A peaceful world is all the more important for China to concentrate on development in the future. China will therefore remain steadfast on the path of peaceful development and work with other countries in a joint endeavor to build a harmonious world of enduring peace and common prosperity

My  Analysis

Let's take United States Of America for Instance, in his fiscal year (FY) 2012 budget request, President Obama proposed to end subsidies for oil companies by eliminating tax breaks, including accelerated depreciation options. A growing number of policymakers have echoed that call.

Though the President’s anti-subsidy rhetoric is on track, there are several fundamental problems with the Administration’s crusade. The President overreaches on what truly is a subsidy for oil and ignores the fact that the government does far more to hurt oil production than help it. He singles out the oil industry, which already faces a higher marginal tax rate at 41 percent compared to 26 percent for the rest of businesses in Standard & Poor’s 500.

The President attacks oil subsidies while continuing to push for subsidies for renewable fuels, electric vehicles, wind, solar, clean coal, and even natural gas. According to the Congressional Research Service, President Obama’s tax hikes on the oil and gas industry proposed in his FY 2012 budget would increase the price of oil and gas for American consumers. A much better policy for taxpayers and consumers would be to define subsidies accurately and then remove all energy subsidies. Any repeal of tax breaks should be offset with a broad tax cut to avoid any net tax increase. Unlike Nigeria, the current estimate of the proposed Nigeria budget for 2012 is N4.749 Trillion naira that conspicuously exclude oil subsidy, representing 6 percent increase over the N4.48 Trillion in 2011. The petroleum subsidy allocation was excluded in the budget proposal; thus, validating that subsidy on petroleum will be eradicated by end of the year. With the removal, prices of petrol at the pump are expected to rise to N 130 per litre from the current N 65 per litre. According to President Jonathan, the 2012 budget is based on a set of assumptions reflecting Government's determination to maintain prudence in the face of continued uncertainties in the external environment.

Consequently, the budget is based on the following: Oil production of 2.48 million barrels per day (mbpd) up from 2.3 mbpd for 2011; Benchmark oil price of US$70/barrel, a cautious revision from the US$75/barrel approved in the 2011 Amended Budget;Exchange rate of NGN155/US$; Projected GDP growth rate of 7.2%; and Projected inflation rate of 9.5%.
The landing cost of a litre of petrol was N 129.21, the margin for transporters and marketers was N 15.49 the expected pump price is N 144.7 while the official pump price today is N 65 per liter this shows that the Federal Government spends N 79.70 as subsidy on each liter of petroleum consumed in Nigeria with about 32 Million liters consumed daily. It means the country spends 2.66 billion as subsidy every day.18.2 billion per week and 72.8 billion monthly. According to the presidential letter, a major component of the policy of fiscal consolidation is government’s intent to phase out the fuel subsidy beginning from 2012 fiscal year

The accrual to the sovereign wealth fund [S.W.F] as a result of subsidy withdrawal will also augment funds for critical infrastructure. Through infrastructure windows of the S.W.F., Government said it will save 1.2 trillion naira in 2012 alone which would be used for the provision of safety nets for the poor to ameliorate the effects of the subsidy removal.

The four refineries in the country have 445,000 barrel per day installed capacity. But their output is currently epileptic and insignificant. Nigeria requires up to 32 to 35 million liters of PMSS per day. Nigerians will be paying little above N 150 per liter initially if subsidy is withdrawn, before the market competition will ensure price drop. Nigeria currently pays one of the highest pump price even at N 65 per liter if you compare the table below:-

No

Country

Pump Price

Using N 155 per USD

  

USD

Naira

1.

Nigeria

0.42

N 65

2.

Saudi Arabia

0.12

N 18

3.

Kuwait

0.21

N 32

4.

United Arab

0.37

N 57

5.

Venezuela

0.05

N 7

6.

Qatar

0.22

N 34

7.

Iran

0.11

N 17

8.

Algeria

0.2

N 31

The prices are this low because these OPEC countries and other petroleum producing states have refineries and produce the petroleum products locally while Nigeria has to add the cost of freight to and fro and other handling charges.

If subsidy withdrawal becomes effective, it would be the fifteenth time fuel price was adjusted between 1998 and 2011. Late Gen. Abacha pegged the pump price at N 11 per liter from 1993 to 1998. Gen. Abdusalami Abubakar adjusted it to N 19 per litre. Chief Obasanjo adjusted the price more than 10 times in his 8 years regime 1999 to 2007 from N 19 to N 70 before Late Umaru Yar’Adua adjusted it to N 65.00. And Jonathan now gamed proposing N 145.

The current discourse on oil subsidy in Nigeria cannot be said to have been over flogged.

Nigeria is currently practicing a regulated economy in the oil sector.                                   For some time now, in fact since the era of (IBB) Gen. Ibrahim Babangida in the 80’s, the federal Government of Nigeria has continued to talk about Government intention to remove oil subsidy in the downstream sector of petroleum products market. It is obvious today that the remaining subsidy is more on premium motor spirit (PMS) also called petrol. The federal Government argues that there should be an end to the high cost needed to make importers of PMS happy. The importers have claimed to be bringing these products at a higher cost than pump price of N 65.00 [Sixty five naira] per litter which is the controlled price fixed by the Government. The Federal Government claimed that oil subsidy will be removed in stages from 2012 .I know its very hard bitter pills to swallow, esp. to an ill-informed society, when you are dealing with a corrupt leadership and as for students of economics, we all know that subsidies impede social development and investment ladder in the world where investment means revenue paybacks hence our oil industries are less developed and up till now, nobody asked questions as to why our 5 refineries haven't perform to par, and govt rely exporting crude oil abroad for processing. No doubt that our fuel prices is under priced by inordinate govt . subsides with no microeconomic and fiscal measures to it. The fact remains that if we insisted in keeping subsidies they would be less investment in that sector and nobody will like to invest in a venture when the cost for production of a gallon is 140 naira and we want govt. to keep price at 65naira , that is very unrealistic but quite plausible given global economic situation and level of poverty in our society. Take for instance, the current budget of Nigeria govt. Unemployment rate is at 23%, 2012 federal Budget fails to address some key economic points such as subsidies , but white elephant expenditure esp. on govt. security I know it is widely known that there was no provision for fuel subsidy in the 2012 budget.

 
The Gross federally collectible revenue for the 2012 budget is projected at N9.406 trillion, of which the total revenue available for the Federal Government’s Budget is forecast at N3.644 trillion.
The aggregate expenditure proposed for the 2012 fiscal year is N4.749 trillion. The share of recurrent expenditure in the 2012 Budget proposal is 72%. The aggregate expenditure comprises N 398 billion for Statutory Transfers, N 560 billion for Debt Service, and N2.472 trillion for Recurrent (Non-Debt) Expenditure (payment of salaries). Capital expenditure has an allocation of N1.32 trillion. Based on the above, the fiscal deficit is projected at about 2.77% of GDP in the 2012 Budget.
As to the long-list members that constituted that committee - that's is just a big joke and huge mistake on the part of govt. that always clamoring for national fiscal sanctity, the cost alone to run that committee could run into millions of dollars, henceforth, the idea fell short altruistically. It was a total farce and rip- off and lack of seriousness of purpose. Ministry of Finance should have handled that area with integrity and sense of resourceful purpose rather than looking for ways of creating positions for party loyalists. It is a DUMB process. Old sneakers run poorly, Belgore in his 70s, Chief Kolade @79 have done their part in that country. Govt should play smart and tap on young intelligentsia to run the affairs of the country

Measurement of Subsidies
The financial cost of subsidies funded directly out of the government budget can be measured precisely. However, even for these interventions, their economic impact needs to be estimated. An additional problem is to agree on the list of policies that constitute subsidies, and it is noteworthy that not even the European Union has been able to agree on a standardized list of energy subsidies.
A practical approach to the measurement of consumer subsidies that can be applied to almost any country is the so‐called price gap approach. It identifies the gap between the actual price charged and the reference price for that particular form of energy. The difference is the subsidy per unit sold and may be financed either explicitly or implicitly. The reference price is calculated differently in the case of traded and non‐traded forms of energy. In the former case the reference price is based on the international price (adjusted for transport costs and quality differentials), applicable particularly to oil, natural gas, and, to a lesser extent, coal. Where an energy source is not traded—most commonly with electricity, followed by coal, and lastly by natural gas—the reference price has to be calculated from assumptions on what would be the cost of domestic supply for an efficiently run firm. For oil exporting countries that face production quotas, the reference price may be lower than the international price and is the higher of the marginal cost of supply and the discounted value of an additional barrel of unproduced oil.

The hidden‐cost calculator is able to split the difference between the reference price and the actual price into three components: under pricing (setting the price below the level that would be charged by an efficiently run firm in a liberalized market), unaccounted losses (due to theft and excessive technical losses), and collection failure (due to failure to send out bills or to enforce their payment). In Sub‐Saharan Africa, one third of the losses to power utilities that have to be covered by explicit or implicit subsidies arise from the latter two components, indicating that these need policy attention as well as the level of power tariffs. Both the price gap and hidden‐cost method have been applied to a number of countries and are capable of further extension to other countries and through a wider definition of the costs of an efficient utility.


Channels through Which Energy Subsidies Affect the Economy

Energy subsidies have a variety of aggregate impacts on the economy. The macroeconomic effects include government accounts, the balance of payments, the long‐run growth potential of the economy,and the degree of energy intensity of capital investment. Partial equilibrium analysis of the effect of energy subsidies emphasizes the deadweight losses that occur within the sector where the subsidies apply, including an allowance for the presence of externalities. General equilibrium analysis goes beyond this to evaluate the spillover effects into other markets that are themselves affected by the presence of the energy subsidy. A number of studies using computable general equilibrium models have evaluated the impacts of reducing or removing energy subsidies, mainly applied to single countries. These generated estimates of the change in the level of output of the economy, and of use of different energy sources. These studies were conducted along rather different lines and used different assumptions so that a unified approach to modeling the global effect of reducing energy subsidies does not yet appear to have been established. A group of such studies applied general equilibrium modeling to large energy consumers in order to estimate how reducing energy subsidies affect energy demand and the economy.

I wholeheartedly agree with Nigeria pundits appeasement given reality on the ground. No doubt our people had suffered in the face of wealth inequality and countless social ills in the hand of their leaders. No doubt things are extremely hard for average Nigerians especially on this ill-timed measures of decontrolling fuel prices leading to excessive price hikes. It will noteworthy that the minimum wages in Nigeria is leveled 18,000 naira monthly which fell short of average 20,015 naira a month to fill gas tank for SUV used or new ( doesn't matter) in Nigeria on N 143-145 estimate monthly. No doubt, average man's life in Nigeria will never be the same after this oil imbroglio.

But on a more serious note, let's face it squarely, when do we really going to see the change that we all yearning to see in Nigeria? I strongly believe that failure in life is an opportunity to begin again, this time more intelligently. Discontent is the first necessity for success and for greater results yet to come. Unfortunately, it will be hard for everyone not to take opposing view on this removal subsidy and not reiterate its discomfort and not that I'm completely in agreement with President Jonathan, if only is been done in a good faith and on how he introduced it at the wake of Boko Harram and on the pedestal of New Year. It was shallow approach and ill-timed and seem an inept failure to study circumstances that bedeviled his understanding and morale of the Nigeria society that he rules as a leader. The temperament of Boko Haram surging still at large, he could have tempered the introduction by first try to woo and build rapport not tantrums and discussing it on open forum,explaining why it's necessary thing to do to grow investment and revamp our economy. He needs to educate average Nigerians on ' ''WHY'' factors, but he failed in that capacity. Am additional problem is to agree on the list of policies that constitute subsidies, and it is noteworthy that not even the European Union has been able to agree on a standardized list of energy subsidies.

A practical approach to the measurement of consumer subsidies that can be applied to any country is the so -called price gap approach and with ebbing Consumer price index . It identifies the gap between the actual price charged and the reference price for that particular commodity. The difference is the subsidy per unit sold and may be financed either explicitly or implicitly . The reference price is calculated differently in the case of traded and non- traded forms of commodity.In case of Jonathan deregulation( reducing govt. roles and allow market and industry greater freedom in how it operates) He's impulsive when it comes to subsidy stake with little thought given to its long- term viability and affect effect implication on his unpopular administration that plunged his subject to untold hardship inadvertently, that which beset various conflicted issues since his administration inception some of which might not be his own making but indulged. No doubt that this is Ill-timed but as an international  economist it's right thing to do, it is just matter of when and how is to be implement and under what fiscal monitoring scale.

Nigeria has become an active part of the  global world, inevitable  economic strength and role model to her African brothers. The strategic importance of Nigeria  needed to be stemmed in world global arena. If better can be achieved, our good education, innumerable natural and human resources are not enough, enough said on our highly orchestrated potentials, potentials will not move a needle unless actions, self -consciousness, conscientiousness   and accountability are been put to play  

In conclusion, this house, Nigeria house, for the discerning mind, is a house with swampy roots; its tenuousness is palpable; its longevity depends on hope and prayer. It is a house, whose form, shape and essence must change radically, if ultimately it is not to fall !!!

Akin Awofolaju, PhD, CFE, CLE, CSP (Cornell)

Board Certified International Fraud Examiner

President/CEO

Amerihire Inc-USA

New York, NY -USA

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Akin Awofolaju Ph.D

As a corporate executive with extensive fortune 100 corporate background both in personal and corporate business. Dr Awofolaju is a governance, risk  management and compliance guru, managed many organizations in leadership capacity. His company is one of the leading Leadership Business Development, Strategic Programs in Tri States Area. He is an American Board Certified Financial Forensic Examiner, American Board Certified Executive Leadership Development educator, American Board Certified Strategy Planner and also a Strategic Thinking Expert. An Applied Economist (Regional Development Economics)- PhD

He has been a top ranked Human Capital Engineering Business Resources & Leadership Development for executive educational industries in NY/NJ Regions for three consecutive years and also leadership development expert for the fortune 100 companies where he worked as an award winning leadership professional with over 17 years of management experience, demonstrated analytical skills. Dr. Awofolaju is a member of over twenty professional bodies amongst which are the American Association of Financial Forensic Fraud Examiners, the Nigerian Institute of Management, American Economic Association, and International Research for Income & Wealth, etc Author, a prolific writer and columnist on contemporary issues.

Dr Awofolaju is a motivator and mentor with a collaborative, entrepreneurial management style with expertise in translating the big picture into specific business leadership strategies. Dr Awofolaju was a leading Corporate Executive (New York/New Jersey regions) for Verizon Wireless Telecommunication Company in America, where he worked for over 10 years before he started his own company. Dr Awofolaju managed team of senior-level managers, and for his entire career there he was the top performer in his region, as well as nationally. As a management expert, he has broken many sales and marketing records with several awards and recognitions and also attended Advanced Program at Harvard University Business School & Cornell University   graduated from S.C Johnson Postgraduate Business School in Executive Leadership Development & Strategic Thinking/Planning. 

He has spent a significant amount of time in continuous personnel leadership development of his team as their team leader. Dr Awofolaju also managed over 500 high-performance driven  team that generated over 450 millions of dollars  in mergers & acquisitions when he worked as Regional Account Executive for British Petroleum Company for Tri- States ( PA/NJ/NY) - 1999 -2001. His strengths are his motivational and mentoring skills. A keen listener and creative thinker, Dr Awofolaju has been a consultant for individuals and businesses since 1991. He managed European financial powerhouse as President/CEO - Bayland Investments Company in Eastern Europe (1991- 1999), he discovered executive keen interest in his experience and insight into maximizing peak performance. 

Dr Awofolaju developed the leadership development & training program that unleashes potential of individuals or organization value adding by opening up creativity and recharging passion requisites for consistently perform at their best. Dr Awofolaju's focus resonates with others because it sheds light on why people do not perform to their potential even when they're talented and committed. Dr Awofolaju works with various CEO's, corporate executives be it in Wall Street, business professionals to athletes – professional basketball players. Dr Awofolaju’s wide range of clients illustrates how anyone can benefit from performance coaching. He makes you to better maximizing your potentials, it is everyday for greater results. Dr Akin Awofolaju has been a consultant for individuals and businesses since 1991, when he discovered executives' keen interest in his experience and insight into achieving peak performance.


Chairman : State & Local Government  Nigerians in Diaspora: Nigeria Constitution Review Commitee  
Honoree: Top 50 Nigerians in US/Canada commemorating 50yrs of Nigeria Independence @ United Nations -New York, NY -USA
Founding Chairman : NigeriaCEO Council - New York 2010
Steering Committee Member: Nigeria In Diaspora Constitution Review Committee ( 1999 Consistitution Amendment Committee)
Alumni : Cornell University - Postgraduate  School : S.C Johnson School of Business , Itacha, New York - USA  
Member: Nigeria Global Forum - USA
Member of American Economic Association (AEA) -USA
Member: Association of Certified Fraud Examiners (ACFE)- USA 
Member of International Association for Research in Income and Wealth (IARIW) .
President : Acumen Investment Club of  State of New Jersey
Board Member: Aberdeen Township Planning Board -New Jersey
 

Website: www.Amerihireinc.com