Facts and Nagging Questions on Fuel-Subsidy Removal

Economic Confidential
The recent abrupt subsidy removal, now increasingly dubbed deregulation in the downstream petroleum industry, is posing new challenges both to the Nigerian citizenry (in terms of direct increase in fuel price and of other essentials due to the impact of the petrol “macroproduct”) and to the Federal Government (in terms of protests from various sectors of civil society).

 

The coming days will be crucial in determining where the pendulum will swing over the issue.  The coming months and years will also see whether private investors will come rushing into the downstream sector, because without a national consensus, private money tends to bide its time, fearing future policy reversals.

Some Background Information
According to reliable information, Nigeria’s petroleum products consumption pattern is heavily weighted towards Gasoline (PMS), which takes up almost 80%, with Diesel (AGO)  almost 10% and Kerosene (House-hold HHK and Aviation ATK) about 10%. (See Table 1.)  There is also the data (see Figure 1) to show that  our DAILY crude oil demand in Nigeria is actually less that 300,000 barrels per day, and that the actual figure could be as low as 215,000 bpd but probably no more than 275,000 bpd at this time.

When we note that Nigeria is an oil-producing country with 2.5 million barrels per day of production,  endowed with valuable “sweet” crude (see Table 2),  then refining only 12% of our oil would fulfil our local demands.  It would also be wise to increase that refining capacity to 20% for local consumption expansion and export purposes.

On that score, Nigeria has three complex oil refineries (in Kaduna, Warri and Port Harcourt) with a total nameplate capacity of 445,000 barrels per day only,  and with theoretical favorable product yields structure (see Table 3).  What that means is that if these refineries could run at only 70% efficiency, they would supply more than our daily needs.  Alas, for the past ten years, none of the refineries has ever run above 61%, often running significantly less than half of that figure –  if at all  (See Table 4.)

What the above information means is that in order to meet our daily needs, Nigeria has had to import on average 40% of our daily needs for petroleum products, and sometimes as high as 75% – which is a huge net drain on our foreign reserves, bearing in mind that we first have to sell and transport the crude abroad, refine it there, transport the refined product back, with freight and insurance charges,  port/demurrage costs, etc. 

Which brings us all to the vexing question of fuel subsidy, which government, defining it as the difference between the landing cost of imported fuel and the government-fixed pump price (for example N141 – N65 = N76 per liter for PMS, and N148.98-N50 = N98.98 for HHK), says it can no longer afford (at least for PMS), abrupting discontinuing it effective January 1, 2012.  (See new PPPRA Table 5 below). 

Based on a 76:6 volume ratio of PMS:HHK consumption estimate (see Table 1), and the disclosure that N1.4 trillion (N1,400,000 million) was  spent in 2011, that  roughly comes to unverified amounts of 16,700 million liters of PMS per year and 1,300 million liters of HHK per year – or about 46 million liters per day of PMS and 3.6 million liters per day of HHK.  If it is the often stated consumption of 32 million liters per day of PMS that we were paying for, then that would mean 14 million liters per day of HHK.

Some Nagging Questions
These latest calculations bring to mind four more vexing questions that need to be fully addressed before this pill of fuel subsidy removal can be “sweetened” and trust (re-)established between the “governors” and the governed:

1.  Were these fuel consumption estimates real or imagined – that is,  the PMS and HHK consumptions ?  Or  did the subsidy collectors  – those 100+ companies of Majors, Petrol Depot Owners and Independent Marketers and Road Construction Companies  (see summary in Table 7) – merely quote figures for which the federal government paid up, or was there a credible check on the actual amount of petroleum product delivered? 

2.  If not, is there a refund possible, particularly from those subsidy collectors who illegally used their HHK allocation as asphalt cutback for road construction?  Can we just allow the manipulators of the system get away with impunity, when they have been identified so publicly?

3.  With PMS price previously set at N65 per liter and HHK at N50 per liter, should we have, as an oil-producing nation, despite being forced by refining incompetence (or sabotage?) to import products, been subtracting  these figures from international prices of N141 and N148.98 respectively, or should we not be comparing them with the much less local prices as given for example in Table 6 – between N35 per liter to N60 per liter by some estimates, with the concomitant argument that there is in fact no subsidy?  Can we come to some agreement on these figures, as part of the confidence-building measures?

4.  why can’t we just simply make one or more of our refineries work (as a national emergency commitment) to almost maximum capacity first before phasing out the subsidy removal, preferably on a quarterly basis?  Should that not be a major focus of the SURE (Subsidy Reinvestment and Empowerment) program, at least from the federal government angle?

5.   why can’t we begin to ensure that the fore-gone SURE money – rather than being allocated according to the usual FAAC formula –  be considered a SPECIAL INTERVENTION Fund at least for the next five years and distributed as shown in Tables 8 and 9, with specifications of  70% for INFRASTRUCTURE and 30% for SOCIAL SAFETY NET?  Then we assign SPECIFIC tasks to the various tiers of government based on their best readiness/appropriateness to intervene – rather than having the federal government do EVERYTHING and the lower tiers do NOTHING IN PARTICULAR –  and use objective measures (population, area) to allocate the money?  Then there is greater possibility of holding all tiers of government accountable, particularly if furthermore monitoring boards – not just one federal board, as recently announced to be led by Dr. Christopher Kolade –  are set up at the federal, state and local government levels, comprised more of civil society members than government officials , which bureaucracy can be paid for by some of the N31.37 billion SURE money currently allocated to “Transfer” . These boards would ensure “adequate oversight, accountability and implementation of the various projects” etc. as suggested in the FGN’s SURE program document.

These are questions begging for answers, with those answers blowing in the wind.

On the Matter of Involving all Tiers of Government Appropriately in the SURE Program
I quote Ezekiel Greg Omafume here when he writes: “As Governor Lamido said recently that ‘The governors are united irrespective of party differences on the fact that we need more money in our states, so that we can also increase the quality of service to our people.’  Yet, no state or local government has come up with a programme as comprehensive as that released by the Federal Government. Activists and agitators, who have seized the national platform, have failed to equally demand details of the “quality service to our people” at the state level, and by extension the local government level. That is the crucial missing link in the on-going heated debate over the planned removal of fuel subsidy. I am of the strong feeling that unless we adopt true federalism in tasking our tiers of government (in this case, th
e matter of deregulation and fuel subsidy removal), we will continually focus our critical energies on just the Federal Government, and thereby lose an opportunity to interrogate other tiers. This is notwithstanding the fact that the Federal Government gets a disproportionate share of the country’s revenue. We must focus on recipients of the remainder and hold them to account. If we did this, our democracy would be much sweeter, and the gains more bountiful.”

Now that the subsidy on gasoline/petrol (PMS) has been officially removed quite suddenly – but not on Kerosene HHK –  it remains to be seen whether the removal will be sustained in the face of expected protests over the more-than-doubling (from N65 per liter) of the pump price.

Moving on…
In the time being, as described in a government document dated November 2011 (and in a December 6, 2011 ministerial briefing by Finance Minister Dr. Okonjo-Iweala)   the FGN has developed  a “Subsidy Re-Investment and Empowerment”  S.U.R.E. program, where the fuel subsidy to be fore-gone is to be re-invested/re-distributed to the various tiers of government to the tune of N1+ trillion annually.  The following two tables apply:
Table 1: Government Tier-by-Tier SURE Money Distribution

Table 1: Government Tier-by-Tier SURE Money Distribution

S/N

TIER OF 

GOVERNMENT

AMOUNT

(Naira, Billion)

%

1

Federal

478.49

42%

2

State

411.03

36%

3

Local

203.23

18%

4

FCT

9.86

0.9%

5

Transfers

31.37

3.1%

 

Total

1133.98

100.00%

 
The Table 2 below shows distribution by geo-political zone viz (see Table 5 for a detailed state-by-state break-down):
Table 2: Geopolitical Zone SURE Money Distribution

S/N

Geopolitical

Zone

Amount to 

States (Naira)

Amount to 

Local 

Governments (Naira)

Total

(Naira)

1

SW (Lagos, Ogun, Oyo, Osun, Ekiti, Ondo)

50,404,247.71

35,146,030.50

85,550,278.21

2

SE (Abia, Anambra, Enugu, Ebonyi, Imo)

35,926,888.1

23,602,236.54

59,529,124.64

3

SS (Edo, Delta, Bayelsa, Akwa-Ibom, Rivers, Cross-River)

179,991,529.06

30,706,593.04

210,698,122.1

4

NW (Kebbi, Sokoto, Kano, Katsina, Kaduna, Jigawa, Zamfara)

58,028,638.24

49,514,297.41

107,542,935.65

5

NE (Gombe, Bauchi, Taraba, Borno, Adamawa, Yobe,  )

44,103,035.55

31,417,722.09

75,520,757.64

6

NC (Niger, Kwara, Kogi, Benue, Plateau, Nassarawa)

42,579,937.34

31,037,547.14

73,617,484.48

7

FCT Abuja

0

1,811,053.26

1,811,053.26

 

Grand Total

411,034,276

203,235,479.98

614,269,755.98

The Federal Government has outlined what it wishes to do with its own money (infrastructure and social safety net) – in this particular instance about 46% – while it leaves it up to the states to do what it wishes with its own allocation.

This excessive anti-federalism concentration on the Federal Government – without holding state and local governments accountable – is what worries commentator Ezekiel Greg Omafume below, and which should also be of concern to all of us.  If the federal government typically takes 56% of all our funds, what are the state and local governments supposedly closest to the people doing with the rest of the 44%?  Just salaries?  If we cannot hold those close to us accountable, how can we expect to hold those far away in Abuja accountable?

It is for this reason that I have suggested that the fore-gone SURE program money – rather than being allocated according to the usual FAAC formula as evident in Tables 1 and 2 [with a weighting towards the Federal government, followed by a mix of derivation (heavy weighting), population (medium) and area (light weighting), with a small bow to need (even lighter weighting)]  –  should be considered a SPECIAL INTERVENTION Fund at least for the next five years and distributed as follows:

1.  70% for INFRASTRUCTURE and 30% for SOCIAL SAFETY NET.

2.  Of the INFRASTRUCTURE money:  64% to the Federal Government (for national infrastructure, concentrating only on the REFINERIES and RAIL in that order, (leaving normal intervention for ROADS and POWER), while 36% should be allocated to the 36 States specifically for intra-state infrastructure,  concentrating on ROADS and DISTRIBUTED small-scale (less than 20-50MW) power.

3.  Of the STATE INFRASTRUCTURE money: distributed to the states BASED on their relative AREA, and shared EQUALLY within each state between the STATE and the LOCAL GOVERNMENTS (but shared among the LGAs based on their relative AREAs).

4.  Of the SOCIAL SAFETY NET money:  28% for the Federal Government for national safety nets, concentrating on Youth Employment and Vocational Training Schemes;  and 72% to the 36 States for developing intra-state safety nets, concentrating on health services and urban mass transit schemes.

5.  Of the STATE SOCIAL SAFETY NET money:  distributed to the states BASED on their relative POPULATION (2006 Census), and shared EQUALLY within each state between the STATE GOVERNMENT and the LOCAL GOVERNMENTS (where shared among the LGs also based on CENSUS population).

By assigning SPECIFIC tasks to the various tiers of government based on their best readiness/appropriateness to intervene – rather than having the federal government do EVERYTHING and the lower tiers do NOTHING IN PARTICULAR –  and using objective measures (population, area) to allocate the money, there is greater possibility of holding all tiers of government accountable.

If that were the case, then the following tables would apply:

TABLE 3: SUGGESTED DISTRIBUTION (Based on Greater Emphasis on Infrastructure, and De-Emphasis on Derivation)
TABLE 3: SUGGESTED DISTRIBUTION (Based on Greater Emphasis on Infrastructure, and De-Emphasis on Derivation)

S/N

TIER OF GOVERNMENT

INFR.

SOC. SAF. NET

AMOUNT

(Naira, Billion)

%

 

Current SURE

Distribution

%

1

Federal + FCT

493.97

79.38

573.35

51%

 

488.35

43%

2

State

138.93

125.70

264.63

23%

 

411.03

36%

3

Local

138.93

125.70

264.63

23%

 

203.23

18%

 

Sub-Total

771.83

330.78

1102.61

97%

 

1102.61

97%

5

Transfers

 

 

31.37

3%

 

31.37

3%

 

Total

 

 

1133.98

100.00%

 

1133.98

100.00%

 

TABLE 4:  SUGGESTED ALTERNATIVE SURE MONEY  DISTRIBUTION – TIER-BY-TIER, PROGRAM-BY-PROGRAM

S/N

EXPENDITURE ITEM

Federal

State

Local+FCT

Total

 

(i) SOCIAL SAFETY NETS: 

 

 

 

 

 

1

 

Maternal and child health services,

 

 

 

125.70

 

125.70

 

2

 

Public works/youth employment programme

 

52.92

 

 

 

52.92

 

3

 

Urban mass transit scheme

 

 

125.70

 

 

125.70

 

4

 

Vocational training schemes

 

26.46

 

 

 

26.46

 

 

Sub-Total, Social Safety Net

 

79.38

 

125.70

 

125.70

 

330.78

 

 

 

 

 

 

 

 (ii) INFRASTRUCTURE 

 

 

 

 

 

5

 

Roads and Rail

 

164.66

(rail)

 

46.31

(roads)

 

 

210.97

 

6

 

Water Resources 

 

 


138.93

 

138.93

 

7

 

Refineries

 

329.31

 

 

 

329.31

 

8

 

Power

 

 

92.62

 

 

92.62

 

 

Sub-Total, Infrastructure

 

493.97

 

138.93

 

138.93

 

771.83

 

 

   

 

 

 

 

Grand Total

 

573.35

 

264.63

 

264.63

 

1102.61

In order to ensure greater accountability, monitoring boards on the federal, state and local government levels, comprised more of civil society members than government officials, which bureaucracy can be paid for by some of the N31.37 billion SURE money currently allocated to “Transfer” can be used. These boards should ensure “adequate oversight, accountability and implementation of the various projects” etc. as suggested in the FGN’s SURE program document.
?

Professor Mobolaji Aluko is a Guest Columnist with the Economic Confidential.

Check Features Clumn of the Economic Confidential for similar articles and rejoinders on Fuel Subsidy removal.

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