Monday, 12 December 2011 07:19

The Political Economy of the Removal of Petroleum Products Subsidy in Nigeria: Part I -The Politics

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1.      Purpose

The purpose of this paper is to critically examine the politics and pure economics of the debate on petroleum products subsidy in Nigeria. The paper is divided into three parts. In this first part, I will examine the politics of the debate. Part II will look at the elementary economics (Economics 101) of petroleum products subsidy, otherwise known as fuel subsidy[i], in Nigeria. In part III, I will undertake an advanced economic analysis of fuel subsidy in Nigeria from a global perspective using available data and statistical tools and then examine different options to address the issue. I will then conclude the paper by recommending an “optimal” approach to the pricing of petroleum products in Nigeria after[ii].

2.      Background

The issue of “appropriate” pricing of petroleum products or removal of subsidy has always been a thorny and controversial public policy issue in Nigeria over the past 30 years. Successive governments, including the current one, have grappled with this problem to no avail. Like most other public policy issues, there seem to be no generally accepted solution because of the interplay of politics and economics. The federal government maintains that petroleum products subsidy has increased significantly in the past decade even though the prices of petroleum products have also increased significantly at the same time. For instance, according to Adenikinju (2009), total subsidy on petroleum products increased from N261.1 billion ($2.03 billion) in 2006 to N623.2 billion ($5.37 billion) in 2008[iii]. It apparently reached N1.348 trillion (about $8.5 billion) between January and October 2011 (ten months of 2011).  At the same time, the price of motor premium spirit (PMS) otherwise known as petrol or gasoline, which accounts for between 70% to 85% of total petroleum products consumed in the country,  has increased from N27 per litre in 2000 to N51 per litre in 2006, N59 per litre in 2008 and N65 per litre in 2009. The problem is that the prices of petroleum products are administratively determined and do not reflect true supply cost and the forces of supply and demand. So long as petroleum products prices are fixed by government the government will continue to grapple with the issue of subsidy and the debate will not end. Thus whenever the so-called subsidy is “removed” or reduced, it resurfaces within a few years due to changes in the underlying factors. This leads to another round of debate on the removal or reduction of the new subsidy.

In an attempt to ensure that petroleum product prices reflect supply cost and the forces of demand and supply, President Obasanjo embarked on the deregulation of the downstream oil industry in August 2000 with the setting up of a Special Committee on the Review of Petroleum Products Supply and Distribution (SRCPPSD). The Committee submitted its report in October 2000 and the government issued its White Paper on it in January 2001. The President forwarded the Bill for an Act to Establish Petroleum Products Pricing Regulatory Committee (PPPRC) to the National Assembly in March 2001.  
In January, 2002, the government commenced the liberalization of the downstream sector of the oil industry by fixing the ceiling prices for petrol (PMS), diesel (AGO) and kerosene (HHK) at N26, N26 and N24 per litre, respectively. An import duty N1.50 per litre on imported petroleum products was introduced while selling price of crude to local refineries was increased from $9.50 to $18.0 per barrel. However, the import duty was removed in July 2002 to encourage marketers to import petroleum products which meant that imported petroleum. The Senate passed the Petroleum Products Pricing Regulatory Agency (Establishment) Bill on February 5, 2003 and the House of Representatives did the same on May 22, 2003.

President Obasanjo, signed into law the Petroleum Products Pricing Regulatory Agency (PPPRA) Bill on Mat 27, 2003, and inaugurated the Governing Board of the PPPRA on June 19, 2003.  The mission of the PPPRA is to “reposition Nigeria's downstream sub-sector for improved efficiency and transparency”, and its vision is to “to attain a strong, vibrant downstream sub-sector of the petroleum industry, where refining, supply, and distribution of petroleum products are self-financing and sustaining”. The functions of the PPPRA are to:

a) Determine the pricing policy of petroleum products;

b) Regulate the supply and distribution of petroleum products;

c) Create an information databank through liaison with all relevant agencies to facilitates the making of informed and realistic decisions on pricing policies;

d) Moderate volatility in petroleum products prices, while ensuring reasonable returns to operators;

e) Maintain constant surveillance over all key indices relevant to pricing policy and periodically approve benchmark prices for all petroleum products;

f) Identify macro-economic factors with relationship to prices of petroleum products and advice the Federal Government on appropriate strategies for dealing with them;

g)  Prevent collusion and restrictive trade practices harmful in the sector; and

h) Create firm linkages with key segment of the Nigerian society, and ensure that its decision enjoy the widest possible understanding and support.

The PPPRA announced new pump prices of petroleum products on June 20, 2003. This was greeted by a nation-wide strike declared by the Nigeria Labour Congress and its affiliates.  The nation-wide strike action ended with the adjustment of the prices to N34.00 per litre for petrol, N32.00 each for diesel and kerosene. These prices have almost doubled since then.  Eight years still it was established, the PPPRA is yet to achieve its mission and objectives as the evidenced by the ongoing debate of the removal of fuel subsidy. It major achievement is the development of a petroleum products pricing template (PPPT) to determine the supply price of imported petroleum and the level of subsidy which is computed as the difference between the supply price and the pump price fixed by the government. It is therefore safe to say that the deregulation policy which started almost ten years ago has not achieved its objectives.  

The prices of petroleum products are still administered and Nigeria is increasingly relying on imported petroleum products while the existing refineries are producing at less than 30% of their installed capacity. In fact, the cost of importing petroleum products has increased so rapidly in recent year that it is threatening the country’s balance of payments and capital expenditures. This is what has given rise to the recent round of debate on the removal fuel subsidy which started when President Jonathan submitted the 2012-2015 Medium Term Expenditure Framework (MTEF) and 2012 Fiscal Strategy Paper to the National Assembly on September 22, 2011. In the letter conveying the document, the President stated that: “A major component of the policy of fiscal consolidation is government’s intent to phase out the fuel subsidy beginning from the 2012 fiscal year. This will free up about N1.2 trillion in savings, part of which can be deployed into providing safety nets for poor segments of the society to ameliorate the effects of the subsidy removal.” The proposal quickly ignited a fierce debate with the representatives of government insisting on the phasing out or outright removal of fuel subsidy while many non-governmental individuals (NGI) and civil society organizations (CSO) and labour unions are vehemently opposed to the idea.  Unfortunately, as in the past, the federal government and its agencies have not done a good job in presenting or “selling” their case to the National Assembly and the general public. In fact, many educated Nigerians including some decision makers do not have adequate knowledge about the politics and economics of fuel subsidy nor have they been provided adequate and credible data by the government to make an informed decision on the issue.  In what follows, I will analyze the issue of fuel subsidy in Nigeria from both political and economic perspectives, with focus on the latter, and using as much data and evidence available from published sources.

3.      The Politics of the Petroleum Products Subsidy Debate

Although the “appropriate” pricing of petroleum products should, ordinarily, be an economic issue, the fuel subsidy debate has been overtaken by politics with proponents and opponents adopting “war” approach (Ayoola, K.A & Salami, O, 2010)[iv]. This approach is based on the assumption that all public issues are political and politics is about power grab – the power to make decisions, to control resources and to control other people’s behavior and decisions. Thus, in a public discourse, politicians seek to gain power by trying to “manufacture” the consent of the public and decision-makers by presenting their beliefs/positions/ideology as the “common sense” or dominant one. They do so by careful, selective and deceptive use of language. This is why the proponents and opponents of the removal of fuel subsidy have been employing polarizing language or expressions to present their case as the “common sense” one while ignoring the “pure” economics of the issue.  Thus, the federal government and politicians who are arguing for the “removal” of fuel subsidy have been using expressions to steer people to believe that petroleum products are underpriced and that the subsidy is inimical to the economy. In addition, they claim that fuel subsidy is unsustainable and that the money being used for subsidizing fuel can be used in a better and more effective way to reduce poverty and benefit the poor. For instance, the Punch of Monday, October 24, 20100 reported that at a meeting President Jonathan had with the National Working Committee of the ruling Peoples’ Democratic Party on Friday, October 22, 2011 to sell the fuel subsidy removal plan, the President said that failure to remove the subsidy would lead to the collapse of the Nigerian economy. According to a source at the meeting, “The President told us that there was the need to remove the subsidy and that though he appreciated the pains Nigerians would pass through after the removal, he said it was necessary if we did not want the economy to collapse”.  The President also said that the “N1.2trn saved from the subsidy removal would be spent on providing social projects for the poor…the planned removal would be followed by a lot of palliatives, which he said were still being worked out.”(O. Fabiyi & O. Adetayo. Punch, October 24, 2011).  Also, about the presidential dialogue with global chief executive officers at 17th Nigerian Economic Summit on Thursday, November 10, 2011, President Jonathan reportedly said that the critics of the fuel subsidy removal policy have turned the issue into full-scale politics with the sole aim of bringing down his government. He reportedly claimed that “the opponents of fuel subsidy removal in their closet saw the wisdom in fuel subsidy removal, but they resorted to politicizing the policy when they saw it as an opportunity to bring the government down” and added that the government had to slow down on the implementation date of fuel subsidy removal to ensure that all stakeholders were carried along through mass education and logical reasoning (G. Subair & L. Usigbe. Nigerian Tribune, November 11, 2011). 

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Emmanuel Ojameruaye Ph.D

Dr. Emmanuel O. Ojameruaye is President/CEO of Capacity Development International, LLC based in Phoenix, Arizona State, USA. He was Vice-Resident for Research & Program Development with the International Foundation for Education and Self-Help (IFESH), an NGO based in Scottsdale, Arizona State until 2013 when that organization closed its operations. He joined IFESH in 2002, first on loan from Shell International Oil Company until 2008 when he retired from Shell. He worked for the with Shell Petroleum Development Company of Nigeria (SPDC) from 1992 to 2002, as Head Community Development (Western Division) from 1997 to 2002, Head Community and Environmental Issues Management (1995-96) and Head Government and Community Affairs in the Lagos Office. Before joining Shell, he was a National Consultant (appointed by the UNDP) for Nigeria’s National Data Bank Project in the Federal Ministry of Budget and Planning in Lagos (1989-1992) and a Lecturer in Economics and Statistics at the University of Benin in Nigeria (1982-1989). He was also the National Secretary of the Nigerian Economic Society (1986-1990). He holds a PhD degree in economics and has several publications to his credit including three books, Political Economy of Oil and other Topical Issues in Nigeria, A First Course in Econometrics and A Second Course in Econometrics (both coauthored), and several articles on energy economics and community development in the Niger Delta region of Nigeria. He is married with five children.