Frames Sustaining Nigeria’s Wasteful Petrol Subsidies

Guest Column by Waziri Adio

The Federal Government has, wittingly or unwittingly, reopened the decades-long debate about the desirability and effectiveness of petrol subsidies in Nigeria. Most policy watchers had thought that the argument in support of retaining the sub-optimal and profligate petrol subsidy regime had been lost, that its proponents had been wrestled to the ground with superior facts and logic, or that Nigeria’s dire fiscal state had, at least, made a compelling case for why and how fuel subsidies are both unaffordable and unsustainable. They were wrong.

The resistance to ending the fuel subsidies goes beyond the labour unions. It runs deep and wide. It is anchored in deeply held even if misguided beliefs, and it stretches from the highest reaches of government to the subconscious recesses of the streets. The resistance may be dormant, as it had been in recent times. But it is always there. All it ever needs to come alive is a tiny nudge. In the last week of January, the dormant resistance got more than a nudge. It received a big boost when the government decided to pause by 18 months the law-mandated take-off of the deregulation of the downstream sector of the petroleum industry and topped it by entertaining a whooping N3 trillion proposal for petrol subsidies for 2022.

Old arguments against petrol subsidy removal have thus been given a new lease of life. As I stated last week, this is an easy victory for the pro-subsidy lobby, and this will embolden that camp not just to harden its position but also to strongly resist future efforts at ending petrol subsidies. The logic is simple: if you can get the government to blink and bend backwards with the threat of strikes, imagine what actual strikes and other extreme measures can do. This doesn’t mean that we are stuck with these inefficient and draining subsidies. It means more work needs to be done, and that includes understanding and tackling more vigorously, more persuasively, and more strategically the narratives that give subsidy retention such a strong and wide latent appeal.

Before we get into the subsidy-enabling narratives, it is important to quickly get some things out of the way. The first and most important is that subsidies are economically an inefficient way allocating scarce resources: the gains to the society are usually lower than the losses, creating what economists call deadweight losses. However, many countries, including the most capitalist ones, adopt subsidies either to fix market failures or to achieve strategic goals. To reduce the inherent inefficiencies of subsidies, it is important to be clear what the strategic goals of the subsidies are; be certain that there are no more optimal ways of achieving these goals; be sure that the subsidies will lead to the achievement of those goals; ensure that the subsidies are well-targeted, not open to capture or corruption; and to cap the cost, ensure the country can afford the cost and that the subsidies have a terminal date.

All over the world, however, it is easier to start subsidies than to end them. So, resistance to subsidy removal is not just a Nigerian thing. It is par for the course. It is also important to note that successful subsidy removal requires investment in strategic communication and negotiation and a form of compensation to address the most reasonable concerns of its advocates. We shall return to this part shortly after examining the subsidy-sustaining frames in Nigeria.

The first frame is the one that boldly asserts that there is no fuel subsidy in Nigeria. For five years, I had the privilege of being the head of the Nigeria Extractive Industries Transparency Initiative (NEITI), an organisation that tracks payments by companies and receipts by government from the oil, gas, and mining sectors. I can confidently say that for more than 99% of the time, petrol is sold below what should be the market price in Nigeria. It is very tempting to dismiss the no-subsidy frame because there is indeed subsidy except for some fleeting moments when refined products were either sold at or above market prices.

But my sense is that this argument alludes to other ones: that what passes as subsidies are mostly inefficiencies and corruption. When you have refineries that operate at less than 30% of installed capacities and you keep all the staff and you import most of your refined products and questionable volumes of these refined products, it is difficult to completely laugh this frame out of court. That said, all the ways we have used to make refined products available—whether through local refining, offshore processing agreements, swap deals or through direct sales, direct purchase— have resulted in the landing cost of petrol being higher than their regulated prices. That difference (plus the less spoken about additional difference between the official exchange rate and the one used by the national oil company), is the subsidy which is taken mostly upfront from the revenues due to the Federation. So, subsidy exists, whether budgeted for or not, and whether called by its real name or disguised as under-recovery.

The second frame, which flows from the first, is the conditions precedent frame. This argument has two legs: either that certain conditions when met will show that subsidy doesn’t really exist or that when met, these conditions will reduce the quantum of subsidy or reduce the pain of subsidy removal. These conditions include fixing government’s four refineries to ensure they can operate at full or close to full capacities, building new refineries or encouraging others to build new ones, and ascertaining the actual daily consumption figures of petrol. It is possible that these suggestions emanated from a good place. But these ideas are either solutions to different problems altogether or simply an exercise in futility.

To be sure, increasing local refining capacity will create a few thousands of direct and indirect jobs in Nigeria, will improve our balance of payments, and reduce pressure on our foreign reserves and our currency. It will definitely boost the supply of refined product locally available but will not significantly affect the market price of petrol because the main cost component is the price of crude oil, which is internationally determined. Refining locally can at best shave 10% off the market price (meaning that if, for example, the price of imported petrol is N350 per litre, the market price for locally refined petrol would at best be N315, which is still N150 or 91% higher than the regulated price of N165 per litre.) By the way, many with existing licences have not built refineries and international companies that venture into refining elsewhere are not doing so in Nigeria because investors will rather not deal with the hassle of queueing up or lobbying to collect the balance between real price and the regulated one after investing millions or billions of dollars. If you really want to boost local supply of refined products, deregulate the sector.

While we can ignore whether trying to fix the government refineries (as we have tried to do forever with little to show for it) is a good use of public resources, the fixation on ascertaining actual volume of petrol consumed is misplaced. According to the BBC, the actual consumption was around 35 million litres per day in 2011 but subsidy was being paid on 59 million litres per day. Subsidised daily consumption is now between 65 million and 72 million litres per day. Petrol subsidies have created perverse incentives that will always be exploited. When petrol is sold in Nigeria between 37% and 45% of what it is being sold in our neighbouring countries, are we surprised that most of the imported products will be smuggled out? A relevant aside is that our border with Chad is 85km; with Benin Republic, 809km; with Niger, 1, 698km; and with Cameroon, 1, 997km. You can’t realistically contain smuggling even if you line up your entire security forces on the borders. You cannot create a boon for smugglers and security and other government officials and be griping that they are doing what should be expected. We have no business with actual consumption and whether there is leakage if there is no subsidy. The conditions precedent arguments amount to both a distraction and work avoidance.

The third frame is the entitlement one. It comes in different hues, from ‘we shouldn’t be paying market price for what God gave us in abundance’, through ‘this is about the only thing we enjoy from our government,’ to ‘we can afford cheap fuel because we are a rich country.’ The summary of this frame is that this is our entitlement, a mentality that successive governments have also encouraged over time. Cheap petrol has been offered as a sop to the populace to keep them calm. It is also a form of devil’s pact between the rulers and the ruled: enjoy this and look away from the unceasing abuse being meted to the commonwealth. Apart from the matter of opportunity cost, the key problem with this frame is the faulty assumption of riches and unreflective consumption of finite resources.
To start with, we are not as rich or as naturally endowed as we think both in absolute and relative terms, especially when you factor in our population. A country that uses 97% of Federal Government’s revenue to service debt is not exactly a rich country.

But let’s stay with crude oil for now. Saudi Arabia produces between 9m and 11m barrels per day and has a population of 35 million people while we produce between 1.4m and 2.5m barrels per day and we have a population of more than 200 million. Meanwhile, Saudi Arabia that used to be known for its exceedingly generous cradle to grave subsidies now sells petrol at a price 55% higher than that of Nigeria. And talking about riches, Norway (which has a population of just 5.4 million people and an oil savings of $1.2 trillion as against ours of a little over $2 billion) sells petrol at a price almost 500% above that of Nigeria. What other countries, especially more endowed and less populous ones, have shown is that there are better ways of enhancing the welfare of the populace than by mindlessly frittering away finite resources.

The fourth and the fifth frames are linked: political stability and protection of the poor. Attempts to remove fuel subsidy have always upset public peace, even under the military. Demonstrations, strikes and sometimes arsons and deaths always accompanied subsidy removals. So, it is natural that this will weigh heavily on the minds of decision makers. In trying to balance the books, you don’t want to create a spark that will lead to a conflagration. Experience has also shown that attempts to remove fuel subsidies are politically mobilizable and have political consequences. President Goodluck Jonathan did not recover from the 2012 Occupy Nigeria protests, despite his clear victory in the 2011 general election. However, while concerns about peace especially after the carnage that attended the #EndSARS protests in some parts of the country and as we move towards next year’s elections should not be dismissed, timing is only an issue now because the government had failed to act on deregulation at more receptive and less risky periods.

When the political-consequence frame is twinned with the need to avoid imposing undue hardship on the most vulnerable and most sizeable segment of the populace, it acquires more power as a deterrent to sensible economic policy. There is ample evidence, beyond the anecdotal, that fuel subsidies benefit the rich more than the poor, are inefficient as a poverty alleviation mechanism, and shift valuable public resources from areas that lift the poor. But it is also established that the poor will lose more from subsidy removal at least in the short run. From experience, subsidy removal will increase inflation rate between 2% to 3%. Also, the poor will be more affected by resultant even if opportunistic hikes in food and transports costs. These sometimes consume up to 80% of the incomes of the poor.

Though readily and derisively dismissed in some quarters, the pro-poor frame is a strong and reasonable argument, especially in a country with high rates of food inflation, unemployment, and poverty. But this is not the reason to keep a subsidy system that doesn’t serve the poor and is likely to drive the country and the poor deeper into the abyss. This is where the reasoned conversation and credible, alternative provisioning come in. It is better to devote a sustainable portion of the money earmarked for petrol subsidies to channels through which the poor will be negatively impacted by subsidy removal such as transportation and food and to other areas that will improve the quality of life and the productivity of the poor such as public education and health. That will not only be a more targeted approach but will also be good investments for the country at large. That’s the way to go.