WHY AND HOW THE FUEL SUBSIDY SHOULD BE REMOVED

You do not assess the soundness of a policy based on its popularity. You however as a statesman prevent at all cost, civil disorder and widespread discontentment- as these tear at the  fabric of society and have long term negative repercussions. 

Adebayo Alonge ( Public Policy Analyst)

While I agree that a leader must stick to his convictions and have a clear plan to lead his people. I disagree however that he must also have the tenacity to press on even in the face of widespread dissatisfaction and his people’s suffering.That is tyranny and such a leadership approach has no place in civil democracies. In Western countries, government coalitions fall apart as a result of civil opposition to government policies. It happened in Holland over extension of military service in Afghanistan to mention an example. Consensus building is the approach to governance in this age. And if a leader cannot build consensus for a policy he must drop it or modify it. If he however feels so strong about his convictions, then he should resign.

You do not assess the soundness of a policy based on its popularity.  You however as a statesman prevent at all costs, civil disorder and widespread discontentment- as these tear at the fabric of society and have long term negative repercussions.

The soundness of an economic policy, I beg to differ, is not judged strategically by its impact on jobs and inflation (as these are only short term indicators of an economy’s performance). Rather,the soundness of economic policies are judged by their impact on a country’s competitive advantage- which is the ability of a country to derive integrated  economic benefits from all derivatives of a key resource which may be people, oil or gold. In Nigeria’s case though, it is oil.

Let us look at the impact of crude oil exploration in Nigeria in the last 40 years. How many jobs have been created by the petroleum industry for Nigerians? Agriculture still employs the bulk of labor in Nigeria. How many derivatives have been created from this oil? Do we have a thriving petrochemical industry? Are we processing chemicals for use by other sectors of the economy from this oil in question? Even the Nigerian pharmaceutical industry imports its entire API’s. If I ask why, I am sure many Nigerians will be quick to say it is due to government mismanagement of the economy and of public corporations such as the Eleme petrochemicals company. Yes this is true and is so because of firstly the breakdown of the value system in Nigeria and secondly because business is never managed right by government anywhere in the world. There are always higher inefficiencies and redundancies with government run business than there are with private sector businesses. This should be no surprise because when responsibility/business is held for everybody (the public in this case), nobody (public officials) is motivated to exert the right labour to ensure sustainability of the business. Government business is therefore in itself inefficient because of the nature of man. Also there are three components to price-rent (for land), wages (for labour) and profit (for stock). Government business is therefore always positioned for lower returns and thus is poorly positioned for long term sustainability because public office holders are never as motivated as shareholders or entrepreneurs to exert the right amount of effort.

If the Nigerian petroleum industry was liberalised from the start of the industry as is the case in Ghana, the free market system would have encouraged investors to set up local refineries and petrochemical companies and unemployment will not be as acute as it is today in Nigeria. Also, a culture of proper resource management will have permeated the Nigerian society and very few Nigerians will have an unnecessary number of cars and this would have led  to the development of a multimodal transport system that employs roads, rail, water and air. Now this is the power of a derivative policy not a shortsighted obsession with a low value commodity as oil. A strategic competitive advantage with a resource provides not just economic advantage but also social advantages that encourage the development of a right value system.

Now, let us address the issue of the impact of oil on the Nigerian society. Nigeria is today suffering from the ‘resource curse’ which is the negative impact of a resource that is centrally controlled on the social fabric of a nation. Because of the high immediate value accruable to a central body with minimal effort, different aspects of society contest violently for control of the centre and the resource.Social inequalities result, because of the central control, that lead to a cycle of social unrest, high political turnover and the use of instruments of oppression. This is because the majority resent the control of the benefits of the resource by the privileged few; who in turn attempt to maintain their possessions through force. When you consider the foregoing critically you see the reason why our state is in the mess we are.

Look at the 10 year post independence period when Nigeria earned most of her income from agriculture,the so-called good old days.Agriculture by its nature rewards you based on exerted effort. As there was correlation of reward to effort, society revered hard work. Honesty was important as was the severe punishment for stealing, after all who would take lightly the stealing of even a tuber of yam that was the fruit of back breaking labour under the sun. This was the social benefit of a highly privatized industry. If you debate this, you must recognise that most farmers worked then and even now for themselves. This is not the case with oil; its price first and foremost is dependent on investor sentiment. The Nigerian economy has been riding  a fantasy  on the back of high international prices since 2006. Government spending has expanded in line with this increased revenue leading to inflation and no real benefit to the Nigerian economy. The emerging middle class is living a bubble-their ‘Tokunbo’ cars and Blackberries are not tied to any real growth in the Nigerian economy. Agriculture is down and manufacturing is comatose. Investment on research and development is nonexistent and the minds of the people have become tied to their next pay check. This situation is unlike that of China whose expanding middle class have benefited from real economic growth due to their activities in manufacturing, agriculture and innovation.

Now that was for oil. Let us discuss subsidies. Are you aware that the North African riots are linked to bread subsidies? Please look it up. Be well informed in the mean time that subsidies create market inefficiencies and encourage waste, laziness and corruption. When the price of a commodity is N100 and I pay only N50 to have it, why should I exert the extra half of labour required to become worthy of owning the commodity (remember the three components of price discussed previously).This makes people to be less responsible for themselves and to develop a culture of wanting ‘freebies’. Look at another disadvantage. If I sell a tuber of yam at N100 and government pays me N50 for every tuber bought at N50 by a Nigerian citizen would that not be good for the Nigerian people. Yes you will say. However what about if in Togo the market price of that tuber is N100 ,what do you think I will do? If I produced 100 tubers, I will collect N5, 000 from the Nigerian government and put up a sign in my shop selling it at N50 to Nigerians. If I did this I will collect at total of N10, 000 after total sales. If I however after collecting the subsidy took the tubers to Togo and sold it, how much will I make at the end?  N10, 000? Oh no! I will make a total of N15, 000-which is a 50% markup on what I would have made selling it in Nigeria. And of course if I sold it in Nigeria I would have still sold at a profit at N100-after all the government pays the difference. But because of the subsidy in Nigeria I have the opportunity to make at least 50% more profit than I would have been entitled to. Please note that in this instance I have fixed prices in Togo which is assumed in this scenario to be a free market. So it is therefore possible that this profit margin made on sales of subsidized yam tubers may be more or less, depending on prevailing prices in Togo. However if the prices in Togo fall below what will yield a profit, these marketers will simply sell their stock in Nigeria. Either ways they gain. The Nigerian people however can never gain from market induced price reductions.

Now let us assess the impact of subsidies on investment into the sector. When there is a prevailing subsidy regime, prices are usually fixed. If my manufacturing process after refining of the product through my refinery in Nigeria enables me to sell the product at N70 why will I do that when other marketers are receiving subsidies for fixed prices at N100? In this scenario the government is tied into paying out money to preserve the system as even local refiners will take the subsidy and still sell the subsidized products in Togo for example, if the prevailing market price there is high enough to make a decent profit. In such a scenario, the benefits of having a local industry will never accrue to the government or its people. In such a situation there is no incentive to refine products locally since profit margins on sale of imported and locally refined products are similar. Economies of scale may even enable foreign refiners to offer lower cost of refining to Nigerian marketers who take their crude oil there.

If on the other hand there are no subsidies and government takes control of the refining and sale of these products directly at a subsidized rate, it will have to struggle against black market profiteers who will buy up the product for sale at a higher price in neighbouring countries . Scarcity will develop locally whether or not the government can get to prevent illegal export of the product.

Look at the list below of the beneficiaries of the fuel subsidy program in Nigeria. You will notice that most of these companies are owned by the ‘so-called’ big boys and acclaimed entrepreneurs. These people and their companies are nothing but leeches of the state and profiteers. They made their fortune from sucking the state and have then expanded their holdings into other sectors of the economy.

Beneficiaries of oil subsidies:

1. Oando Nigeria Plc., N228.506 billion;

2. MRS, N224.818 billion;

3. Enak Oil & Gas, N19.684 billion,

4. Bovas & Co. Nig. Ltd, N5.685 billion;

5. Obat; N85 billion

6. AP, N104.5billion.

7. Folawiyo Oil,N113.3billion;

8. IPMAN Invest. Ltd,N10.9billion;

9. ACON, N24.1billion;

10. Atio Oil, N64.4billion;

11. AMP, N11.4billion;

12. Honeywell, N12.2billion;

13. Emac Oil, N19.2billion;

14. D.Jones Oil,N14.8billion;

15. Capital Oil, N22.4billion

16. AZ Oil, N18.613billion.

17. Eterna Oil, N5.57 billion

18. Dozil Oil, N3.375 billion

19. Fort Oil, N8.582 billion

Remove the subsidy today and will Oando be affected? No it won’t. It is now a big time player in gas.

Look at the list again. Is your name there? Do you own any of the companies there? How many young people around you are unemployed? I am sure you know that many of them may have had jobs if the Nigerian government did the right thing in the 1970’s at the start of our oil industry. I am however not excusing the Nigerian government from mismanagement and in fact it is highly probable that savings from removal of these subsides may be mismanaged or channeled to the wrong priorities. However what I do know is that once liberalized, government cannot pass along its infecting virus of waste to entrepreneurs who start up firms in the petroleum industry. Returns made by these companies will be well managed and this will lead to expansion in their capacities with the consequent result of increased employment for many Nigerians.

I cannot close this discussion without mention of  the vast industry created on the importation and sale of petrol generators. This again is a government failing, as if it had supplied electricity this industry will not have developed. But again the power issue is tied to the inefficiencies of monopolizing and selling a commodity at a subsidized rate and I will not go into it here. Be aware however that the very nature of monopolising and subsidizing this industry is reason why the product i.e. electricity is so scarce and investors are unwilling to invest into the industry. Now again who benefits from sale of these petrol generators? Is it you or the big merchants that import them? Who rakes in revenue, is it your government or the people of Asia? Are you aware that if fuel had not been so cheap that social pressure would have made the Nigerian government reform the power industry a long time ago? Do you realize that our dependence on these generators and our failure to develop sustainable alternatives to solve our power deficit crisis is linked to the availability of cheap fuel?

On the long run, removal of these subsidies will create a level playing field for entrepreneurs to operate in the petroleum industry. This is so because it will eliminate the need to settle  a godfather in order to get access to allocations to market refined petroleum products. It will lead to creation of more jobs than is lost today on its removal. The subsidy removal will thus help create a competitive advantage for the country in the use of its key resource-oil.

In conclusion, the government however has mis-timed the removal and it ought to have sorted out other pressing issues as power outages, insecurity, high government spending, and bad roads. It should have embarked on extensive public sensitization. To remove the subsidy as it did on New Year’s Day is at best insensitive and it may find itself ill-prepared for the consequences that may arise.