Removing the Fuel Subsidy

Ifeanyi Uddin

The queues are back at the filling stations; and our lived experience has taken a turn for the worse; a few fires have started.

Yet, this is but a seasonal experience. Like the rains which will soon start to fall, methinks our response ought to be to prepare to contain its less salubrious fall outs, rather than rail against it. As with all seasonal occurrences, our perennial fuel scarcity has leitmotifs that we should interrogate further.

The resumed debate around removal of the fuel subsidy as solution to these shortages is one of such recurring themes. Its main question is whether we should continue to dispense fuel at the pump-stations at prices far lower than the market clearing rate?

The huge sums that government spends in keeping the price of petrol at N97 per litre across Nigeria could arguably be (better?) used elsewhere. Nonetheless, the decision over whether these alternate uses are better than the current expenditure line is contingent on how we estimate the gains to the economy from keeping fuel prices artificially low.

It would seem that in our case, a large portion of the gains from lower fuel prices is appropriated by society’s middle and upper classes (whatever these categories mean) who are able on account of cheap fuel to maintain private car pools. The meat, though, is cornered by fuel importers (pretend and real) who through a variety of scams divert subsidy payments into their pockets. These then buy private jets and yachts.

What about the poor and the vulnerable? These are left holding the short end of the straw. Sad, really. For the world over subsidy schemes are designed to protect this category of persons from the deleterious effect of high or rising prices. With three quarters of our 150 million compatriots eking out a living on less than US$1 a day, higher fuel prices would always impact negatively.

The “poor and the vulnerable” may not have private cars, jets, or yachts, but they would face rising prices across a range of spending options: food; transportation; rent; children’s school fees; medical bills; etc. Indeed, deferring to this reality, government then goes about designing lower order subsidy programmes (SURE-P being the latest in a long line of alphabets soups) aimed at ameliorating the poor’s poverty.

In a roundabout way, we thus reach a point of inflection in this conversation. There is nothing intrinsically wrong with a programme of “subsidies”. So long as its rationale (social and/or economic) is clear; its target beneficiaries are identifiable and reachable; and its administration is transparent. Sunset clauses are useful, too, when self-negation is a key part of the design of the subsidy’s structure.
On these measures, the problem with our “fuel subsidy” programme is simply one of an inept government. Translucent accounting\administration mean that folks are robbing the scheme blind, and government is not aware until the public physically resist a price hike. Government has not successfully prosecuted anyone since the scandal aired. And we have no guarantees that the robbery is not still on.

Indeed, the plethora of often competing (and official) reasons for the current scarcity, including the activity of speculators, pipeline sabotage, fuel tanker diversion, etc. indicate how not on top of the sector government is. As if we needed reminding. We are currently in as much need of foreign forensic auditors as we are in need of answers to what may have happened to US$20bn oil money.

At this point, I can think of a dozen reasons why the fuel subsidy should stay. Easily the first is why any Nigerian should trust this government with any fiscal savings that arise at his/her expense. We ought not to endure further increases in our tax burden without a palpable scaling up of the quality of our representation.

Then there are process arguments. The leading case for removing subsidies in the downstream sector is a market-based one. In search of an easy example? Take the ease with which private providers in the telecommunication sector solved the stasis that NITEL had superintended for aeons. Is there space for private provision doing the same for domestic petrol distribution?

Unfortunately, by conflating private provision of a service with a proper market for such service, we ignore two possibilities. The first is the likelihood of the transfer of a public monopoly to a private monopoly. And the second is the possibility of private providers colluding in the absence of a strong anti-trust infrastructure.

Two illustrations are useful here. The first is provided by the poster child of government’s reform efforts: the telecommunication sector. The lesson of more than ten years of private provision in this sector is that whereas private providers are more efficient than the public sector, in the absence of a properly functioning market (i.e. where supply responds to price signals, and vice versa), this “efficiency” could turn out to be more apparent than real.

Compared with the quality of GSM service provided elsewhere, the Nigerian offering is rudimentary to the point of insulting. (In parenthesis, we have been invited by the sector regulator to go to court to enforce our right to value for subscriptions paid). The same argument holds with the advances we have purportedly made in the cement sector. Over the 6 months to end-December 2013, a glut in the Ugandan cement market, resulting from reduced demand in its export markets, pushed prices down from US$180 per metric tonne, to US$150 per metric tonne. In contrast, in Nigeria, a glut in the market for cement usually pushes prices up.

Several years ago, General Ibrahim Badamasi Babangida was reported as have argued that he Nigerian economy defies economic logic. True. But only because, as in the oil sector, significant non-economic actors have hijacked the nation and its processes. A feckless government then runs from the “private sector provision” pillar to the “market” post, searching for quick fixes!