Home Analysis Mixed reaction trails FG planed subsidy removal

Mixed reaction trails FG planed subsidy removal

by Business News Report

—- OPS divided, some for others against
—–CBN it is desirable but poses policy challenge
—–NLC no to subsidy removal
—– FG pays N79.70 per liter
—- CNPP vows to truncate removal

The planned subsidy removal by the federal government next year has sparked off mixed reaction in the economy. While some operators in the organised private sector welcomes the development saying it is long over due, others are saying it will hurt the economy. Organised labour in particular has vowed to resist the move. Those who are for the removal have said that subsidy has caused a lot of distortion in the Nigeria economy and has denied the nation the needed investment in refineries.

CBN Governor had in Washington said that subsidy removal will pose a challenge to monetary policy authority due to its inflationary impact in the short run. He said “though the ministry of Finance has plans to reign in government spending, it can only come be realised in the medium to long term. He said in practice fiscal retrenchment cannot hold in the short term”.

According to him “the monetary authority has been battling with excess liquidity which is causing inflation and undue pressure on the exchange rate of the naira and interest rates”. He said that “subsidy removal though desirable will pose a great challenge to monetary policy authority because in the short run the immediate impact of the removal will be on prices of goods and services. This he said has the potential of pushing up prices of goods and services in the country. He said in the interest of the economy and the nation there is the urgent need for greater collaboration and coordination between fiscal and monetary authorities to deliver better policies to move the economy forward.
Following the plans by the Federal Government to completely withdraw subsidy on petroleum products, private sector operators admit that Nigeria spends about N72.8bn monthly on petrol subsidy. According to the pricing template of the Petroleum Product Pricing Regulatory Agency as at August 15, 2011, the landing cost of a litre of petrol is N129.21; the margin for transporters and marketers is N15.49; the expected pump price is N144.70; while the official pump price is N65.

This means that the FG pays N79.70 as subsidy on each litre of petrol consumed in the country. With about 32 million litres of petrol consumed daily across the country, it also means the government is paying about N2.6bn as subsidy every day, which translates into N18.2bn per week and N72.8bn per month.
The country currently imports most of its petrol with the refineries all working far below capacity. Nigeria has an installed crude refining capacity of 445,000 barrels per day but the refining output is insignificant when compared to the national demand.

Lagos Chamber of Commerce and Industry President Otumba Femi Deru in a position paper said “The Lagos Chamber of Commerce and Industry, is even more worried over the horrific cost of sustaining the current system especially through the following channels: Subsidy on imported petroleum products, which runs into Hundreds of Billions of Naira through the Petroleum Support Funds (PSF); Colossal sum of taxpayers’ money spent on the bridging of petroleum products through the Petroleum Equalization Funds (PEF); Profound integrity and transparency issues associated with the management of subsidies, the bridging funds and the refineries.

“This spending pattern poses very grim consequences for the economy. Worse still, most of this expenditure was not appropriated by the National Assembly. It is a major economic governance challenge. In the light of the foregoing, the following steps should be taken to ensure a virile and sustainable downstream oil sector: An exit strategy for all public enterprises should be immediately worked out to stop them from direct production, procurement, distribution and marketing of petroleum products; the Petroleum Equalization Fund should be scrapped; There should be creative incentives for the private sector to set up refineries both for domestic consumption and for export; private sector agencies should be engaged to manage and maintain the pipelines; The refineries should be immediately privatized, with labour issues adequately addressed; The NNPC should disengage completely from retailing petroleum products. The ongoing acquisition of retail outlets by the NNPC is totally inconsistent with the proposed reforms in the sector. Retail outlets, is the least of the problems in the sector. The commitment of public funds to the acquisition of retail outlets is absolutely unacceptable; there should be a strong regulatory institution with clear guidelines to guide investors in the sector and protect the interest of the consumers.

The outcome of the adoption of the foregoing is greater private investment in refineries, procurement, distribution and marketing of petroleum products in the economy. Also, the economy would save the huge sums of money currently being disbursed as subsidy and bridging funds and be rescued from the massive rent seeking activities and economic parasites in the downstream sector.

Dr. Simon Chukwuemeka Okolo immdediate past President of NACCIMA said “We support real deregulation that will increase private sector participation in the down stream oil sector not government increase of pump price. Also, now is not the right time to remove subsidy on fuel as cushioning measures are not yet on the ground. Government should ensure real deregulation,”

Institute of Chartered Economist
The Institute of Chartered Economists of Nigeria, ICEN, has urged the Federal Government not to rely on market forces alone while removing subsidy on petroleum products as there were compelling reasons to reduce poverty and ensure social justice in the country. Co-ordinator of ICEN in the South – South zone, Friday Udoh who made this known while reacting to the Federal Government’s decision to remove fuel subsidy from next year said that the major reasons why Nigerians mainly resisted removal of fuel subsidy or deregulation included corruption, weak regulatory or legal framework, poverty and decayed infrastructure among others. According to ICEN, there were no in-built mechanisms to guarantee the success of the deregulation policy as the country would only rely on imported fuel since there were no local refineries to compete with foreign companies involved in expected competitions that would guarantee lower prices in the long run to justify the removal of subsidy.

”Altogether, all the antiquities called local refineries produce about 445,000 barrels of crude oil per day if they produce at full capacity but this has never happened in the last 10 years and there are no private refineries. It is not just the removal of subsidy alone, but ensuring the existence of the enabling laws to galvanize the relationship with the upstream operators for security of feed stock and difficulty in accessing credit facility due to global and domestic financial structure fragility, a situation that call for government intervention in addressing the challenges.

”We feel that it is the responsibility of government to seek to know the problems and supporting the initiatives for the interest of its citizens by developing collaborative structure for contacts and innovative financial structure to boost local production capacity to ensure appropriate pricing regime of petroleum products in the country. While waiting for next year for the deal to be struck, government should involve interactive and participatory process between them, other stakeholders and relevant groups as part of the formulation process in order to incorporate views of market actors, and the consumers as all necessary factors must be carefully analysed through quantitative and qualitative means to resolve this lingering problem,” ICEN added.

CNPP vows to truncate fuel subsidy removal
The registered opposition political parties in the country yesterday vowed to join force with the Nigeria Labour Congress, NLC, Trade Union Congress, TUC and other progressive patriots to resist the proposed withdrawal of fuel subsidy by the Federal Government. The parties which vehemently opposed the idea in a statement issued in Abuja, said they will do everything humanly possible “to protect the little benefits we drive from our God given Oil Resource.”
Operating under the platform of Conference of Nigerian Political Parties, CNPP, they agreed that not only the idea was alien, but said the Peoples Democratic Party, PDP, led Federal Government lacked the moral high ground, credibility and indeed the political will to prudently utilize the savings to neither provide the safety nets nor provide critical infrastructure. The statement signed the CNPP’s National Publicity Secretary, Mr. Osita Okechukwu, said “on the vexed issue of removal of Fuel Subsidy, the CNPP, with uttermost sense of responsibility, highest consideration for the survival of our fledgling democracy and the need to save the little Nigerians benefit from our God endowed Oil Resource; candidly appeal to President Goodluck Jonathan to drop the idea of Fuel Subsidy Removal – that is abandon the Washington Consensus economic model and embrace the Nigerian Consensus.

“The subsisting national consensus is in favour of the prevailing fuel price in the market; indeed some Nigerians query why petroleum products are not as cheap as in Venezuela and other OPEC member countries? The puzzle has been why has the successive government since our return to civil rule failed to build new medium refineries inspite of the unprecedented oil receipts? This school maintains that new refineries will not only provide petrol, kerosene and other derivatives; but provide employment to our teeming unemployed youths. We are not unaware that the Fuel Subsidy is bleeding blood heavily on our national treasury; however it is our considered view that the Peoples Democratic Party {PDP} led Federal Government lacks the moral high ground, credibility and indeed the political will to prudently utilize the savings to neither neither provide the safety nets nor provide critical infrastructure.

“The intendments of the withdrawal notwithstanding, may we remind President Jonathan that Nigerians have lost confidence in public officers generally and his capacity to wage the war against corruption ; therefore the crisis and social unrest which will follow the subsidy removal, will outweigh whatever economic considerations or the intendments of the Economic Team, because of the following reasons:-

“Nigerians regret that between 1999 and 2010 over $2 billion was spent on the rehabilitation of the four refineries and yet they are producing below 40% of its installed capacity of 445,000 barrels per day. Nigerians bemoan a scenario where the PDP led government without any patriotic justification since 1999 abandoned the Nigerian Consensus and adopted the Washington Consensus which abhors government investment; a scenario which breed monumental corruption and made it impossible to utilize our huge oil receipts to build new refineries
Nigerians are fully aware that between 1999 to date over $5 trillion was earned from Oil and Gas sales; yet there are no commensurate results in the provision of critical infrastructure? For example the Federal Government of Nigeria {FGN} between 2004 and 2007 lost $1512.13 billion, because FGN Equity Proceeds in Nigeria Liquefied Natural Gas {NLNG} is not paid into the Federation Account. Only God knows how much we lost since then. {Source Minutes of Federation Accounts Allocations Committee 8 September 2009}

That the Revenue Mobilization, Allocation and Fiscal Commission, under Engineer Haman Tukur as Chairman took the Federal Government and indeed the NNPC to court over fraudulent practices and the withholding of Oil proceeds? The same fraudulent activity of NNPC was re-echoed few weeks ago. Finally, CNPP will join hands with the Nigeria Labour Congress, Trade Union Congress and other progressive patriots to resist the withdrawal and protect the little benefits we drive from our God given Oil Resource. “
Mr Ituah Ighodalo, Partner, SIAO Nigeria speaking to Vanguard said “Fuel subsidy has caused a lot of distortion in our economy and even though petrol is relatively cheap it has led to a lot of misallocation of resources and greatly enriched only a few.

“My opinion is that it should be removed and let every one compete fairly. The price of products might go up and fuel inflation but it will stabilise and there will be efficiency. What Government should also do is make sure there is constant power supply, as this will reduce demand for diesel and fix our refineries while actively encouraging private sector participation in refining.

Mr. Seye Adetunmbi, Chief Responsibility Officer, Value Investing Nigeria on his part said
“The short-term effect may make the already impoverished masses worse off, likewise the already tasked/challenged manufacturing sector and may cause hike in inflation.
The extent which this short-term challenges may go or endure will depend on the judicious/prudent use and application of the money saved from the removed subsidy.
In essence, it should be a bold step in the right direction towards impacting the economy positively in the long run, provided there will be probity in the public sector when the resources are channeled to salvage the infrastructural problems facing the nation.
By implication, one’s fear is if the poor masses won’t be worse off in the final analysis. However, if it is executed and managed prudently by blocking the leakages peculiar to the Nigerian factor, then it may be what the economy needs to look up.
Mr. David Adonri, Chief Executive Officer, Lambeth Trust and Investment Company Limited
said “It is a welcome development that the Federal Government of Nigeria has finally summoned the political will to remove petroleum subsidy. This is an audacious step towards total deregulation of the Energy industry.
”Like the telecoms industry post deregulation, market determined prices will create the enabling incentive for private capital formation to flourish in the Energy industry. Eventually, market mechanism will drive prices to competitive levels beneficial to consumers as currently witnessed in the telecoms industry.

“Petroleum subsidy has been a failed attempt at subsidizing consumption in an economy begging for subsidy on production. Whereas, it is through production that wealth is created and productive employment generated. If in 1980s, the Military regime had deregulated the Power, Energy, Metallurgical and telecoms industries as advised by IMF, the inefficiency of state monopolies in those industries would not have forced the country’s light industrial production into deceleration.

”Due to institutionalized corruption attendant to public finance in Nigeria, it has failed woefully to catalyze capital formation in the energy industry. This will be redressed when the industry is deregulated, paving the way for capital formation through private equity type finance.

Removal of petroleum subsidy is just a step towards eliminating the structural imbalances in the economy. Sustainable macroeconomic transformation will occur only when the Federal Government privatizes all state enterprises that still occupy the commanding heights of the economy. The economy can no longer continue to endure under their inefficiencies.
But organized labour sticks to its position for NLC position remains the same. We are strongly opposed to any hike in fuel prices in the name of subsidy removal and indeed any new policy that will further impoverish Nigerians. We are opposed to any new policy that will undermine the new minimum wage. Whether you call that policy subsidy removal or fuel price increase, we have opposed it before and we are going to strongly oppose it again.

Do not forget that we have done all our studies on this and have a comprehensive report on it. We believe strongly that Petroleum sector just like any other sector needs a holistic restructuring. We must move from importation of petroleum products as the sixth largest producer of oil to value adding activities of refining our crude oil.
“We must move from import to refining of petroleum products. We must move from servicing other refineries abroad to building our own refineries. We are even encouraged that President Jonathan said in a broadcast speech that Nigeria is going to build more refineries while reviving the old ones. This is what the president should concentrate on. This is what he was elected to do. “He never campaigned that when gets to office within one year he will increase prices and inflict more hardship on Nigerians. The country is already tensed with physical insecurity, we have challenges of physical insecurity and we should not add economy insecurity, we should not add income insecurity. Because more inflation and eroded income mean economic insecurity, angry workers, angry masses that pay more for transportation, for food cannot be patience with any government. I know that NLC under the leadership of Comrade Abdulwaheed Omar has made NLC’s position known and as affiliate of NLC, we are committed to that NLC position.

“We are already down economically. As a matter of fact, it is the Nigerians that are subsidizing the government. We subsidise by buying generators to power our houses and factories, we buy diesel at deregulated prices, we subsidise by building our boreholes and wells in the absence of public water supply, we subsidise by looking for money to pay school fees for our children because of absence of public schools, we subsidise by getting private security because for whatever reason, the Nigerian Policemen are not coping with the challenges of insecurity. We are the people who need sympathy because we are the people subsidizing the government. The only way government will pay for our subsidy as the case maybe, is to make sure the government does not add additional burden on us through fuel price increases.
“President Jonathan is talking about transformation agenda, you cannot transform if you do not have a new transformed idea. This is the same old debate that we have been having in the past 20 years which has put Nigeria in this precarious situation. In 1987 when IBB started this madness of fuel price increase, we were buying fuel at about 50 kobo per litre, today the price is N65.00. Look at the increases, yet they are still telling us subsidy is still there. I think there is something that is completely wrong. President Jonathan should govern the country and not to rely on market forces. To govern means that we must remove all the leakages in the distribution of the petroleum products. What are the leakages? Check the templates of the fuel price now, three quarter of the money they are passing on the masses and the poor workers, has nothing to with the price of petroleum product.

“ They talk about demurrage which importers have factored into the price, they ask you and I to pay. They will import and delay clearing and do business with customs to incur demurrage and pass the price on us. There is also banking charges, they also charge haulage fees and pass on to the consumers. How a country so endowed put Tankers on the road to move product from Apapa to Maiduguri when you have railway not working? Government must lower cost. Nigeria cannot be competitive and be part of the 20 leading economies in the World by 2020 with the high cost of business. Fuel price increase will lead to higher cost, it will lead to more factory closures because companies have to pay more, they will pay more for production and transportation among others because we do not have other means of transportation. Not only that, workers that they have employed must also ask for more pay at a time they that have not implemented the existing pay.

“The politics of this whole thing is also in the best interest of President Jonathan, he should not bring any issue that he never campaigned for to us. Nigerians gave him mandate. He said he will fix refineries, he will make petroleum product available and cheaper, he will build roads among other promises, he never told us that when he gets there he will remove subsidy or increase prices. To do so will be a violation of the mandate we have given to him and it will be an abuse of trust. The burden is on him because he is the one that was elected. The other jesters who call themselves ministers, they are just appointed and they are not accountable to anybody or facing the electorate. So, elected people should never short change us when they get to office. They should keep to the mandate which they promised us.

Also commenting, President of the National Union of Petroleum and Natural Gas Workers, NUPENG, Comrade Achese Igwe. Said “is now the government can remove subsidy or embark on to deregulation because the conditions for full deregulation have not been met by the Government.

The NUPENG President who dismissed the claim that deregulation will not leader to higher prices of the product, insisted that deregulation would definitely lead to higher prices. “The Workshop noted the Federal Government’s subtle campaign for a full deregulation of the downstream petroleum sector. It, however, reiterated a standing NUPENGASSAN, a fusion of National Union of Petroleum and Natural Gas Workers, NUPENG and PENGASSAN, resolution that certain irreducible minimums must be put in place before a total deregulation of the downstream petroleum sector will be acceptable to PENGASSAN and the Nigerian masses.”

Some of the requirements before the total deregulation of the downstream sector by the Federal Government included; socio-economic relief measures to assuage the impact of import driven deregulation with affirmative enabling policy to stimulate local production and efficiency within a defined timeframe, affirmative arrangement for the provision of affordable mass transit buses, rail systems and water transportation, and effective maintenance and repair of roads for affordable alternative means of transportation of people and goods. The conditions also include, “dredging and expansion of products loading and receiving terminals /jetties and fixing of other related facilities to overcome delays and demurrage, stronger commitment to increased local refining with specific date to end importation of petroleum products.”

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