17 August 2009

Nigeria: The End of Subsidy

The Federal Government last Tuesday signalled stoppage of petroleum subsidy in Nigeria, saying modalities to deregulate the sector is at its peak.

The government hinges the reason to deregulate the industry on the increasing funds the Petroleum Support Fund scheme is gulping from the Federal Government coffers.

For instance, between January and May this year, petroleum subsidy stood at N150 billion, fuelling deep concerns that before year end the country's subsidy portfolio will be in the region of N1 trillion.

At its Tuesday meeting, state governors supported the Federal Government over the discontinuation of petroleum subsidy.

They also backed Government's privatisation policy of the petroleum sector and the controversial Petroleum Industry Bill (PIB) currently in the National Assembly.

Justifying the reason for removing subsidy, Petroleum Minister Rilwan Lukman had told a meeting of the Peoples Democratic Party: "The removal of petroleum subsidy is ultimately inevitable because government is spending so much on subsidy that other government activities have become compromised to the extent that the resources which should have been put into these projects like health, education, road construction is being used on subsidy.

"This situation is untenable, it is unacceptable and we have to deregulate. We have virtually reached that point and the ministry has now finalized the approach. In the next few months we will get ready to effect this for the benefit of our economy and more importantly for the benefit of our teeming population."

Lukman also said: "When we liberate the market, free the market by deregulation, it will be possible for people to bring in petroleum products freely. When they do so, there will be enough. At the beginning, there may be surge in the price, a little bit more but when the market is freed and products are able to flow freely, the price will tend to moderate and it will most certainly go down."

Hymning the same chorus, Finance Minister Mansur Muhtar had said the 2009 budget excluded petroleum subsidy which has become too costly for the government considering the current global economic crisis. Muhtar said the Federal Government spent N1.6 trillion in the last three years on petroleum subsidies, saying only last year alone, about N640bn (US$4,354 billion) was reportedly spent on subsidies. He said that Nigerian government could no longer sustain the subsidies in view of the decline in its revenue and huge infrastructure gap, also emphasising that petroleum subsidies did not benefit the average Nigerians.

"The government found out that the subsidies encouraged inefficiency and corruption in the petroleum industry," he said.

He said the government would undertake a comprehensive review of the activities of the Petroleum Products Pricing and Regulatory Agency (PPPRA) to ensure effective and efficient regulation of the downstream sector of the petroleum industry. According to him, President Umaru Yar'Adua had fully endorsed the comprehensive review of the price template, the strengthening of the PPPRA, open general licensing, offshore refining, boosting strategic reserve, competition bill and the privatisation of the refineries. He also assured that the government will not commence the implementation of the recommendations until the economic reform committee has dialogued with all the stakeholders, including labour.

"On petroleum sector, as you know, there have been over the years discussions in relation to the supply, distribution and pricing of petroleum products. In this context, basically in the recent past, there has been concern about the huge amount of money being spent by government by subsidising inefficiencies in the fuel supply and distribution," he added.

In 2006, the Nigerian National Petroleum (NNPC) was paid N241, 692, 533, 397. 23 while other marketers got N19, 212, 470, 162.02, totalling N261, 105, 003, 559.45.

In 2007, NNPC was paid N227,471,074,960.35, while other marketers went home with N51,388,244,282.48, as fuel subsidy, showing a total of N278,859,319,242.83

Also in 2008 N680, 183,350,348.76 was paid. Out of this amount, NNPC received N370, 490,290,445.05 and other marketers N309, 693,059,903.71. Amount yet to be paid to NNPC and other marketers in 2006 remain N2, 662,016,109.01. Hence, within three years, the government paid a staggering N1, 222,769,689,260.05 as subsidy. This means that in 2006, about 50 percent the size of Federal Government's capital expenditure went into subsidy while about 40 percent of same was paid in 2007. In the same vein, in 2008, actual subsidy payment was about 133 percent the size of actual Federal Government's Capital expenditure. The projected subsidy payment for 2009 is running into 133 percent. Again, the estimated subsidy payment for this year is about 400 percent of the budgeted capital expenditure for Human Capital Development.

The subsidy removal has already sent jitters down the spine of major marketers and the country's banks who provide loans for the importation of petroleum products while they awaits reimbursement from the Petroleum Products Pricing Regulatory Agency (PPPRA). The Federal Government owes members of the Major Oil Marketers Association of Nigeria (MOMAN) a subsidy of N70biillion.This is through the Petroleum Support Fund scheme. The association also said that its members are also indebted to the banks. Oil marketers are reported to have a total debt portfolio of N804 billion, majority of which are borrowed from banks.

This is coming as the Central Bank Governor Sanusi Lamido Sanusi Friday said the total loan exposure to oil and gas of the five problem banks stood at N487.02billion. The five banks which were being bailed out with N400 billion by the apex bank are: Intercontinental Bank, Oceanic Bank, Afribank, Finbank and Union Bank.

On the other side of the coin, oil workers and the Nigeria Labour Congress (NLC) have rejected the incoming deregulation regime which marked the end of subsidy.

The oil workers under the aegis of National Union of Petroleum and Natural Gas (NUPENG) and Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) said the announcement by the National Economic Council last Tuesday contravenes the decision reached between the government and the oil workers. NUPENG'S National Deputy President Comrade Mustapha Nuhu Wali said: "We vehemently reject import driven deregulation. Removing uniform prices is not deregulation that is not our understanding." He said although the two unions agreed with the deregulation policy before now, but that they had a different understanding of deregulation which it supports and that was what the government wanted. He said government is going on with deregulation without guaranteeing the palliative measures for Nigerians. He noted that there are no provisions as to who supervises the import parity and at the same time no knowledge of what will happen to the refineries.

He told Daily Trust: "Before you deregulate, a lot should be put in place. Government should go back to Mantu Committee's report on palliatives which should be put in place before deregulation. Bring it out and let us look at it and see whether it is still relevant or not." According to him, some of the palliatives that should be put in place include a mass transit system, a youth empowerment scheme and a massive development of the road network and railway lines.

He said: "Government should come out with a sincere document and start engaging all stakeholders on the pre and post deregulation. They should come out with a blue print on local refining especially now that there is relative peace in the Niger Delta. They should start repairing the Channomi Creek pipeline which supplies crude oil to the Warri and Port Harcourt Refineries."

He also said that PENGASSAN wanted full autonomy for NNPC as provided in the Petroleum Industry Bill (PIB).

In the same vein, the Nigeria Labour Congress (NLC) has also threatened that it would direct Nigerian workers to embark on mass strike if the Federal Government does not rescind in its planned deregulation. President of the NLC Comrade Abdul waheed Umar said the planned deregulation is not acceptable to majority of Nigerians. Umar in his address expressed concern that the Federal government was only after additional revenue that would be generated through the deregulation rather than having the interest of the Nigerian masses at heart, stressing that the plan was unacceptable to Nigerian workers.

Apparently, the coast is not yet clear for the government to go ahead with a full fledged deregulation of the downstream sector and removing subsidy on the Petroleum products. Nigerian workers and oil marketers have already drawn the battle line. The question therefore is can government go it alone without the backing of these groups? The answer can be predicted.

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