Lagos — Mr. Nwabuko Adimora is a Lagos based legal practitioner, but hails from Isingwu, Umuahia, capital of Abia State. Until recently when fuel became scarce which necessitated the illegal increase on the pump price of the product in some gas stations, he has always bought the product at the regulated and susidised cost of N65 per litre. But during the same period he bought the product at the cost of N85 and N90 per litre when he travels to Umuahia, Aba, Port Harcourt or Nnewi all in the southeast and south south parts of the country.

Since late last year when the fuel became scarce, any time he travelled to the eastern part of the country, he bought the product at N95 or N120 per litre from the gas stations when their gates are open to sell to the public. Last week, Adimora told THISDAY: "in fact, people like me are tired of queuing at filling stations waiting to buy fuel at exorbitant rates, thereby wasting man hours. If the removal of the subsidy will make the product available, I think I am going to support the campaign. Let government please lift this burden from some of us."

Over the years, several governments have canvassed for the removal of the subsidy but have met stiff opposition from the public, labour and opposition parties. Every argument put forward by government, her agencies and agents have been severally shot down, while government groan under the weight of payment of subsidy to petroleum importers and marketers. Recently, the federal government paid the N40b outstanding petroleum subsidy owed oil importers and marketers.

The subsidy payments, according to the Central Bank of Nigeria (CBN), are often made from the proceeds of either the domestic or foreign component of the excess crude account domiciled with the nation's apex bank. According to information from the office of the Presidential Steering Committee on the global economic crisis, Aisha Yolah, in Abuja , federal government is desirous of ensuring that it is relieved of this perennial yoke through reforms in the downstream sector of the petroleum industry.

It would be recalled that the Central Bank of Nigeria recently revealed that many oil marketers were heavily indebted to the five banks whose chief executives were axed by the apex bank. As a result, the marketers have in turn put a lot of pressure on the federal government to settle the outstanding subsidies.

According to a recent advertorial, the Petroleum Product Pricing Regulatory Agency (PPPRA) said the sum of N40 billion claimed by the marketers and importers as outstanding was not factual. It said that the figure allegedly included additional costs incurred as a result of bank interests, foreign exchange differentials and other charges, occasioned by delays in reimbursement by government.

According to government document, over N1.2 trillion has been spent on petroleum products subsidy payments between the period 2006 and 2008, while the 2009 subsidy payments are projected to be about N600 billion. Government said this amount could have financed 45,000 kilometre of roads, 15,000 megawatts of power and 615,000 blocks of classrooms.

Moreover, according to the Implementation Committee for the Reform of the Downstream Petroleum Sector, Abuja, the bulk of the subsidies are being funded from the country's reserve for rainy days, which makes the system even more risky and unsustainable, and has the potential to cripple government finances. A comparison of subsidy payment on fuel products to the federal government expenditure during 2006 to 2008 is illuminating. In 2006 subsidy payment on fuel products was N255.7 billion, which was ? times the size of federal government spending on social amenities and capital development projects.

In 2007, it was N290.4 billion and nearly tripled the N654.7 billion in 2008 such that the actual subsidy payment was about 11/2 times the size of actual federal government spending on infrastructure. Furthermore, the projected subsidy payment for 2009 was about 11/3 times the amount devoted to critical infrastructure like power, aviation, petroleum resources, works, transport and infrastructural projects within the Federal Capital Territory. It is also about four times the budgeted capital expenditure for human capital development-health, education, Millennium Development Goals (MDGs) conditional grants and its quick win projects-as shown over time.

According to the Committee, due to the guaranteed profits for oil marketers in the current subsidy regime and pricing template, there is limited incentive for these marketers to reduce inefficiencies in the system, which they eventually transfer to consumers. It said the 19 per cent profit margin on the PPPRA template reflects an uncompetitive and inefficient fuel market and shows that opportunities exist for cost reduction. In addition to this, is the high interest charges factored into the calculation of the pump price and subsidy template implies that oil marketers only utilise borrowed funds for importation. This, the committee said, transfers all risk and additional costs to consumers and the government.

Ironically, the Nigeria's abundant oil reserves create favourable conditions for the development of a competitive petroleum downstream sector that could ensure a reliable and cost-effective supply of refined petroleum products to domestic consumers and regional export markets. Moreover, products derived from refined petroleum products could be a basis for new industries that would diversify the non-oil economy and could create large-scale employment. In spite of the country's oil wealth, its petroleum downstream sector has been in persistent decline for over two decades. Currently, Nigeria is the only OPEC country that meets most of its demand for refined petroleum products through imports.

The dependence on imports, inadequate supply and distribution and difficult state of the refineries require a change in government policy in the downstream petroleum sector. This is so because Nigeria has spent huge amounts of resources over the years to subsidise domestic consumption of petroleum products, inefficiencies and rent-seeking activities in the downstream petroleum sector. Also, over time, this sector has been characterised by lack of investment, especially in refineries, excessive dependence on imports, supply and demand in-balance leading to shortages, smuggling/leakages, inadequate port and reception capacity, high cost of distribution and storage costs, uncompetitive market structure as well as inefficient pricing structure.

Are petroleum subsidies really serving Nigerians? This is one question the proponents of the removal of petroleum subsidy would always want to ask. The truth however is that petroleum subsidy has impacted on the revenue situation of government at all tiers and has resulted in the diversion of scarce public resources away from spending on critical infrastructure and human development, while putting further pressure on government resources. This they argue denies the citizens important social benefits.

They further argue that subsidy provides an incentive for smuggling to neighbouring countries where the prices are higher. As a result, fuel subsidies are not reaching intended beneficiaries, as the administration of the subsidy regime is beset with shortage, black market activity, leakages and corruption. It is common knowledge, they further argued that even the pump price of N65 per litre is not constantly available in many parts of the country, especially, the hinterland.

Those who oppose the removal of the petroleum subsidy have on their part argued that the removal would not change the system much. For example, they posited that if there is a free market price, it will automatically jerk up the pump price of petroleum, the price would also go up at the borders therefore defeating the whole exercise. Another argument is that no matter what government does, there would be corruption and inefficiency in the sector. Another fear is that the money that would be saved from the subsidy when its removed may not likely be channeled into the areas government has been trumpeting that it would go, but into the pockets of the officials. There is the need to invest in new refineries for us to stop the importation of petroleum products.

They said what government needs to do is to sum up the political will to deal with corruption and restore discipline in the sector. Apart from discipline and political will, government should show enough commitment to the development of the country, especially the Niger Delta area. The consensus is that government has not shown any precedent in responding quickly to infrastructural needs of the country. Instead, government officials flaunt their ill-gotten oil wealth on the faces of frustrated masses.

In as much as these and other arguments or fears are genuine, would subsidy removal hurt the poor? Manson Nwafor, an associate fellow at the African Institute for Applied Economics, said a jump in fuel prices is never welcome by the general populace. Yet in Nigeria, where fuel prices are regulated, the government has recently allowed the price of refined petroleum products' to rise, and is prepared to continue doing so.

The Nigerian government routinely imports petroleum and sells these imports at below cost on the domestic market to keep price levels down. In 2003, he said this subsidy on imported petroleum products amounted to more than one per cent of Nigeria's Gross Domestic Product. Allowing prices to increase to their market levels will ease the government's financial burden, while also encouraging both local and inward foreign investment - including the building of more refineries - into the domestic petroleum sector. Indeed, he argued that investors shy away from situations where they may face rising costs but are required by law to keep their prices low.

"However, until recently efforts to assess the economic impacts of higher fuel prices paid little attention to poverty effects. This was a major oversight. In a country like Nigeria, where more than half of the population lives on less than one dollar per day, it is important to evaluate policies that may raise poverty levels. Moreover, it is critical to evaluate such effects before implementing the policies so that complementary reforms, where necessary, can be put into place to address the burden on the poor.

"Fuel shortages affect both the rich and the poor. Prices at the pump for premium motor spirit (PMS), diesel and kerosene all go up when there are shortages. While the rich fuel their cars with PMS, it is also a basic fuel for the transportation sector used mainly by the poor. The poor also use diesel and kerosene. The government's importation of these products in the past has thus benefited both groups," Nwafor explained.

According to him, recent studies that investigated the effect that increased fuel prices would have on poverty in Nigeria found out that subsidy removal, without spending the associated savings, would increase the national poverty level. This is due to the consequent rise in the cost of inputs relative to the selling prices of products sold by most firms and farms. The key commodities, which experience nominal output increases, are refined petroleum products, production of which provides income for an extremely small number of households.

"The posture of the government's fiscal policy stance following subsidy removal will be important in determining poverty effects. For example, the inflation resulting from subsidy removal can be considerably reduced with a conservative fiscal policy response. In this case, inflation comes from two sources: the initial increase in general prices due to the higher cost of fuel and more spending by the government as funds are freed up.

Therefore, if their goal is to reduce the inflationary effect, the government will want to keep spending to a minimum, focusing on areas that can increase the country's productive capacity," he emphasised.

By contrast, other researchers like Nwafor believe that a highly expansionary policy of spending all savings from subsidy removal would favour rural households, while increasing urban poverty. This is because urban households earn most of their incomes from input-intensive sectors while rural households tend to produce inputs. An expansionary policy also fuels inflation, further decreasing urban income.

A "non-inflationary expansionary policy" that increases transfers to households would have the least negative effect on poverty. To achieve this goal, government spending of associated savings needs to increase purchasing power and raise production so as not to stimulate inflation. Wasteful projects, which do not add much to the country's productive capacity, should be avoided.

Two areas that would benefit from more expenditure are transportation and electricity. Investments in transportation infrastructure would dampen prices in the economy as transportation costs are reduced. An improvement in electricity generation will also have a large impact on production levels and costs in the country. Presently, many firms are seriously constrained by the lack of electric power for production. It should kept in mind, however, that such investments will take years to materialise," the researcher admonished.

In the short run, increasing transfers to households would reduce the negative effects of fuel subsidy reform considerably. With proper targeting, poor households could be supported for a limited period, for example, a year. After this period the positive effects from the careful investments suggested above should start yielding fruits. Moreover, as new refineries are built through funds saved from the lifting of subsidy on petroleum products, Nwafor said competition in the market will ensure that prices are as low as possible. This was observed in the telecommunications industry where SIM card costs were reduced by more than 90 per cent due to increased competition.

Apparently, Nwafor and other Nigerians are advocating that time is now for government to lift the subsidy on petroleum products if the benefits enumerated must trickle down to an average citizen.

Nigeria has spent a total of N1.8 trillion to subsidised petroleum products in the last four years, which the federal government has said is not sustainable. The Minister of State for Finance, Mr. Remi Badalola who disclosed this said, "The diversion of scarce resources in the form of petroleum subsidies, which amounted to N1.8 trillion in the last four years, was not sustainable in the long-run". He noted that the nation spent over N 1.2 trillion on subsidies for petroleum products between 2006 and 2008; while the subsidies accounted for over N600 billion in 2009.

According to him "full deregulation of the oil and gas sector remains very imperative. This will encourage investment in refining and marketing infrastructures" stating that the legal and regulatory framework for the comprehensive reform of this sector is currently being considered by the National Assembly."

Babalola, who chairs the monthly Federation Account Allocation Committee (FAAC) meeting knows where the shoe pinches. He also identified transformational leadership, physical infrastructure development, macroeconomic stability and the deregulation of the downstream petroleum sector, among others, as very fundamental for a new prosperous Nigerian nation. He listed other fundamentals to include: rule of law, accountability and transparency; governance reforms, enhanced human capital development, and employment-oriented development strategy.

"The remedies to the maladies confronting our polity cannot be found within the context of the government alone. There is the need for all stakeholders in the Nigerian nation to be alive to their responsibilities" even in supporting government at this critical time to arrive on a decision to embrace the deregulation of the petroleum sector.

At the end of an emergency meeting by NUPENG and PENGASSAN in 2009, the two labour bodies in the oil sector agreed that "lack of competition in the downstream sector has stalled growth and jeopardise opportunities. It, therefore, reasoned that any policy that guarantees competition and delivers petroleum products to consumers will be encouraged on the ground that the enabling environment and criteria are guaranteed." For many, the time to do this is now.