Subsidy removal in Nigeria: Implementation Strategy

By Our Correspondent

One of the policies of the outgoing administration in Nigeria is the removal of the fuel subsidy regime because of inherent massive corruption, revenue leakages, smuggling of petroleum products outside the country, improper allocation of subsidy, overbloated subsidy claims, apart from other macroeconomic challenges arising from weak fiscal regime of high fiscal deficit, huge debt burden and weak infrastructure.

The Federal Government (FG) has initiated a number of laudable initiatives in the energy industry and the Petroleum Industry Act (PIA) which was signed into law in 2021 is one of them. Indisputably, subsidizing the consumption of petroleum products in the way it has erstwhile been done in Nigeria will not only make the PIA an exercise in futility, but destroy the very fabric of her economy and ultimately run it aground. This reality has contributed to the decision to do away with the subsidy regime as it is currently implemented.

By taking this stance, the FG is making it clear that subsidizing consumption of petroleum products alone, at the expense of education, health, power and infrastructural development in general, cannot be the solution to inefficiencies or economic wastages in the energy industry. It can be argued that there is no better time to swallow the painful pill than now when the country is practically broke and cannot sustainably support the subsidy regime. Subsidy Removal was bound to happen and the question has always been – when?

The beauty of this policy is that it ultimately aims to protect the oil and gas industry in Nigeria from collapsing to the level witnessed recently in Venezuela. Some of the additional merits of the subsidy removal policy include unlocking additional investments and revenue, creation of additional jobs, elimination of recurrent fuel queues and fuel shortages, to mention but a few.

This policy among other things provides an opportunity to deepen competition in the oil sector and encourage market/private sector led investments while providing appropriate framework environment, in addition to fiscal and monetary policies.

The goal should be for sector players to improve operational efficiency and produce competitively against imported products. Also, it makes it highly possible to subsidize upstream operations by selling crude to investors at discounted prices to their refineries while curbing smuggling of products outside her borders.

Note that only illegal transportation of oil products should be negatively affected. This is to avoid the situation where discounted prices do not give rise to an artificial suppression of prices for our West and North African neighbours.

The multiplier effect on the economy will cover for the “subsidy of discounted prices” as other sectors of the economy will witness a boom especially if focus is shifted to gas-to-power systems.

This kind of subsidy will easily be paid for by the industrialization that will take place from the development of gas-to-power infrastructure being implemented under praiseworthy intervention of the FG in the energy sector, the Presidential Power Initiative (PPI).

Other potential economic benefits that may arise from this policy will include job creation and its attendant impact on disposable income and consumption capacity. Potentially, when properly implemented, this will boost our foreign reserve especially as we sell refined products to the African market and curb smuggling.

Also, this is a clear opportunity for experts and professionals in the oil and gas industry to provide solutions required for the correct implementation of this policy. This way, the industry will be more aligned with the intent of the Petroleum Industry Act (PIA) 2021. Apart from this, it will encourage/enhance local content and human capacity development.

Conditions Precedent

A major drawback to the implementation of policies in general is the absence of credible and reliable data. For example, if the assertion that subsidy is negatively affecting the economy is not backed up by empirical data to support it, or if where available, such data is at best, unverifiable, it can quickly become a risk to the removal or re-allocation of subsidies and priorities. To that end, it may be argued that just removing subsidy without proper planning may cause the reversal of the policy.

What then are some of the possible conditions precedent to the implementation of the policy?

Before the actual implementation of the subsidy removal policy, consideration should be given to a number of pre-conditions. There is need for accurate and verifiable data on the basis of which the removal and subsequent re-allocation of palliatives and priorities will rest. It will be worth the while to have the data behind the assertion that the total cost of subsidy being bandied around is the actual amount used for subsidy in the past.

Apart from the absence of qualitative, verifiable, reliable and dependable data to back up the decision to remove subsidy, the absence of functional refineries in Nigeria is a threat to the implementation of this policy.

It will be far easier to implement this policy if all refineries in-country are fully functional, and or, if other refineries (including modular refineries), such as those of Dangote and BUA are already on stream before the implementation.

More than that, if inefficiencies and wastages can be reduced while getting the refineries into working conditions, a data based analysis will help in the correct implementation of the policy. Prioritizing investments in functional refineries and blocking the sources of wastages/leakages ahead of subsidy removal will serve the intent of the policy better.

Furthermore, it will be more effective to carry out subsidy removal in phases to minimize shocks on Nigerians. A robust competition framework and level playing field with equal and unimpeded access to foreign exchange available to all sector players will improve implementation.

As highlighted previously, one of the reasons touted for the removal of subsidies is that petroleum products escape the shores of Nigeria into neighbouring countries and are sold at higher prices. But, irrespective of subsidy removal alone, the price will always be higher across the border.

Therefore, it is possible to run into a situation where the status quo remains even when subsidy is removed in Nigeria. The price will only shift both “here and there” by roughly the same amount equal to the removed subsidy.

Also, the best implementation strategies are not those that make the most vulnerable in the society to suffer the more. The reaction of civil society organizations (CSOs), trade and labour unions to this policy is a major threat to its success. Since it affects the generality of the masses, this will no doubt court the wrath of organized labour and other unions that have always expressed opposition to such a move.

In addition, there is the risk of inflationary pressure and loss of political goodwill on the part of the incoming administration that will essentially be saddled with the implementation of the policy.

Implementation

The economic principle of providing subsidy is not bad in itself. To be sure, governments worldwide subsidize their energy systems. As a matter of fact, this is how to crystallize development of energy systems.

For instance, in December 2022, in the wake of the energy crisis arising from the war in Ukraine, many industrialized nations subsidized energy consumption by giving cash donations directly to households, the nost vulnerable, and working families in their domains. Prior to that, direct subsidies were given to energy companies. The effectiveness lies in the availability of data that is transparent, credible and reliable.

Hence, only the manner of implementation of subsidy in Nigeria requires amendment in view of the fact that only a few people benefit from the hitherto subsidy regime rather than the larger society. The theory of the greater good has been thrown out of the window a very long time ago!

As this policy has the potential to affect the “pockets” of Nigerians directly, palliatives in the form of over $800m have been set aside to ameliorate the impact. However, judging from the history of distributing palliatives, and with paucity of credible data, it can be very difficult to manage disbursement effectively. To address this, it is better to among other suggestions:

Establish a functional gas-to-power system.Establish local refineries.Establish more of BUA type and Dangote Multipurpose Mega Refineries with integrated petrochemical & fertiliser Industries. Establish modular refineries or small scale refineries of petroleum products to guarantee enough supply of products that would be solely made in Nigeria/ produced in Nigeria for the local market.

Where palliatives are required….

Aim, among other things to reduce:

1. Cost of goods and services in general.
2. Cost of rented apartments, shops, offices.
3. Cost of utilities – electricity, water and other essential services.
4. Cost of other Utilities- road, air and rail transport systems.
5. Cost of logistics in general.
6. Cost of maintenance services for vehicles, generators and other machinery, and or equipment that require routine maintenance/ services by artisans, mechanics & professionals.
7. Cost of school fees.Cost of food and related intermediate products in the production value chain.
8. Cost of living.
   Taxes and related policies.

In conclusion, like I have always maintained, the results of good policies are best experienced if they are well thought through, robustly discussed by a well constituted team of experts (based on the principle of meritocracy) and implemented on the basis of their recommendations. Our best brains must be deployed to take the required leap forward in this regard.

Competence, Capacity, and Capability must be the new song in the Nigerian Energy Industry as we “put our best foot forward”.