Oil subsidy, cost of governance and budget restructuring in Nigeria
Presented to the Inaugural Philip Asiodu Economic Initiative (PAEI) Roundtable Conference at Transcorp Hilton, Abuja, Nigeria on December 7, 2015
Every country in the world has one form of subsidy or the other. So the issue is not about subsidy but how it is managed, the costs and benefits of the subsidy to the country. In the case of Nigeria ,it is estimated that fuel subsidy costs between 20% to 30% of the budget. This figure is actually huge especially considering the infrastructural deficit in the country.
However a good percentage of this figure is perceived as cost of corruption in the fuel subsidy management process. And this is partly the reason why it is difficult to convince the unions and the ordinary people that the solution to the fuel subsidy conumdrum is removal of subsidy. For instance, the fuel consumption pattern for subsidy computation and payment of subsidy is flat, same figure is allocated throughout the year, without recourse to changes in consumption pattern at certain periods in time.
The PPPRA template that is used for the computation is a good example of legalised fraud as it is made up of every known and conceivable cost item. CORRUPTION and not fuel subsidy is the single most important factor militating against the development of Nigeria. Furthermore , there appears to be an inverse relationship between the removal of fuel subsidy and state of public infrastructure over the years, such that the more government removes subsidy the worse our public infrastructure becomes.Government therefore has a serious credibility deficit and any argument to increase the pain of the ordinary Nigerian by subsidy removal is bound to attract negative reaction from the populace.
Moreover the legal framework for the deregulation of the petroleum industry is no where as the Petroleum Industry Bill was not passed by the 6th and the 7th National Assemblies.Government must therefore engage key stakeholders such as the labour movement with credible solutions to the current crises which must be anchored on growing the local refining capacity such that within the next 5 years Nigeria would meet locally all her domestic demand for refined petroleum products in Nigeria, and such that within the next 7 years, Nigeria will be exporting refined petroleum products .
On behalf of Comrade Peter Esele former National President of the Petroleum & Natural Gas senior Staff Association(PENGASSAN) and former President-General of the Trade Union Congress of Nigeria (TUC) who has asked me to attend this event in his stead , I sincerely thank the Governing Council and Trustees Board members of the Philip Asiodu Economic Initiative for this inaugural conference. Indeed as an accounting student and later graduate student of Economics, I have been looking forward to meeting the erudite Chief Philip Asiodu,CFR,CON. So when Comrade Esele called me and explained that he was outside the country and asked that I attend in his stead, I was very happy. However the happiness was later overtaken by sober feelings as soon as I got the invitation letter and looked at the topic for discussion.
Sober feeling because as a graduate student of economics at the University of Calabar my M.Sc thesis was “Gas Utilisation and Nigeria’s Economic Performance”. The study showcased how Nigeria could diversify the Nigerian Oil industry into an integrated oil and gas industry by utilising the flared gas. It also showed the relationship between gas and power; more so as 40% of the Nigerian gas exported to Europe is used for Power, while back home Nigeria cannot provide power for its citizens and businesses. Moreover it showed the gas value chain and explained that gas drives economic development more than oil if utilised in the domestic economy. And more than 10 years after that thesis, the reality is that Nigeria with some 179 trillion cubic feet of proven gas reserves has done little to utilise its huge gas resources beyond exporting gas through LNG as commodity and flaring the associated gas. This is also what Nigeria has done with crude oil. Export the crude oil as commodity and do little to ensure that the crude oil is refined locally to meet the daily demands of refined petroleum products in-country. By the way, Nigeria is the only country in the world that I know has huge gas resrerves and yet her Fertilizer company collapsed.
So, the result is that Nigeria’s four government-owned petroleum refineries, with combined capacity of 445,000 barrels per day, are operating at about 26 percent capacity utilisation due to many reasons from the obvious political interference in the management of the nation’s refineries to the preposterous lack of crude to refine. Curriously however, none of the refineries operated in October 2015!
The result is that Nigeria now exports crude oil and imports refined petroleum products, and in the process started a subsidy programme in 1973, initially as a short-term measure, and supposedly aimed at assisting the citizens pay some part of the full cost of the imported refined petroleum products. I say supposedly because, the reality today is that the subsidy regime has become the greatest scam in Nigeria.The PPPRA template , the process of giving license to import and the entire subsidy process is laced with fraud and corruption.
Consequently, there is no incentive for private investors to build refineries and what we have seen is that the country is littered with investments and infrastructure for the importation of refined petroleum products like tank farms, fuel depots etc and a cartel that holds the country at the jocular manipulating the supply of refined petroleum products at the expense of the generality of Nigerians.
You would recall that between 1978 and 1989 (a space of 11 years) Nigeria built and commissioned 3 refineries – Warri, Kaduna and Port-Harcourt II with a combined capacity of 385,000 barrels/day. One therefore wonders why in the 16 years since the return of democracy in 1999, Nigeria has not attempted to build at least one refinery.
Worse still, the existing refineries have been left to rot and functioning at far less than their installed capacities, causing the country to import needed fuel with the attendant opacity and corruption which government itself claims exists. Even the Green Field Refineries promised as part of the Subsidy Reinvestment Programme in 2012 when government convinced the labour movement to support it in its programme of subsidy removal is no where to be found. Rather SURE-P funds became free money for political patronage across the three tiers of government.
Also, none of the over 30 licenses issued by previous administrations for private refineries has resulted in a working refinery in Nigeria, except for the Dangote Refining and Petrochemical Plant which Newspaper reports say will begin operation in 2018. Recently also, it was reported that President Muhammadu Buhari has granted licences to 65 Nigerian companies to construct modular refineries.
As at November 25, 2015, petrol sold for N180 per litre at filling stations in Port Harcourt as against the official price of N87 per litre. A city that has two of the Nigeria’s four refineries. This is as the Nigerian Senate just approved N521billion out of the N574 billion supplementary budget to settle fuel subsidy claims at a time when crude oil price is very low, below $43 per barrel and not a few question if indeed there is still subsidy at the current crude oil price or we are paying for institutionalised corruption via the instrumentality of the PPPRA template especially when the revenue of the country has fallen drastically.
So ,the topic of this round table conference is very apt , timely and relevant to the economic survival of Nigeria as a nation, especially in view of the fact that the price of crude oil which according to the World Bank accounts for close to “90% of exports and roughly 75% of the country’s consolidated budgetary revenues” has fallen by some 65% since the second half of 2014. This steep fall in crude oil price has led to severe contraction in government revenues and has once more exposed the vulnerability of Nigeria’s over dependence on crude and the urgent need to diversify the economy.
2. Oil Subsidy, Budget and the Petroleum downstream sector
“The value of the subsidies has gone from $1 billion in the 1980s to a prohibitive $6 billion. Available data show that the Federal Government spends about N1.4 trillion, about 30 per cent of its total yearly expenditure yearly on fuel subsidy.Specifically, the government spent a whopping N4.5 trillion on fuel subsidy claims between 2006 and 2012, according to the audit reports of the Nigerian Extractive Industries Transparency Initiative (NEITI)”
Every country in the world has one form of subsidy or the other. So the issue is not about subsidy but how it is managed, the costs and benefits of the subsidy to the country. In the case of Nigeria ,it is estimated that fuel subsidy costs between 20% to 30% of the budget. This figure is actually huge especially considering the infrastructural deficit in the country. However a good percentage of this figure is perceived as cost of corruption in the fuel subsidy management process. And this is partly the reason why it is difficult to convince the unions and the ordinary people that the solution to the fuel subsidy conumdrum is removal of subsidy.
Labour leaders and their civil society partners believe that the government should remove the corruption in the fuel subsidy scheme and not the subsidy itself. To us, the issue of subsidy removal is more about transferring the burden of the payment for the corruption in the subsidy scheme from the government to the ordinary people! For instance, the fuel consumption pattern used for computation and payment of subsidy is flat, same figure is allocated throughout the year, without recourse to changes in consumption pattern at certain periods in time. The PPPRA template that is used for the computation is a good example of legalised fraud as it is made of us every known and conceivable cost item.
Below is a Table showing fuel price in Nigeria from 1973 to date.
As the table shows, the last effort to remove subsidy in 2012 was not the first time government will propose or indeed partially remove subsidy on petroleum products. From 1973 to 2012 there have been at least 18 increases in petrol pump prices with about 6 of them within the period of this democracy. Government has curiously advanced the same argument each time – to use the money to provide “critical infrastructure”. You may also recall that in 2006 when Nigeria exited its Paris Club debt, government promised that the savings to be made (i.e. funds that would have been used to service the debts) will be invested in the same “critical infrastructure” – education, health and public works.
Unfortunately, we have witnessed an alarming decline in the state of our public infrastructure since then. There thus appears to be an inverse relationship between the removal of fuel subsidy and state of public infrastructure (or what government calls “critical infrastructure”) such that the more government removes subsidy the worse our “critical infrastructure” becomes.
Government therefore has a serious credibility deficit and any argument to increase the pain of the ordinary Nigerian by subsidy removal is bound to attract negative reaction from the populace. Moreover the legal framework for the deregulation of the petroleum industry is no where as the Petroleum Industry Bill (PIB) was not passed by the 6th and the 7th National Assemblies.
It is important to note that a key objectives of the 2012 Petroleum industry Bill (PIB) was to “ deregulate and liberalise the downstream sector” (Section 1f). Unfortunately the PIB was not passed into law despite being in the National assembly for 8 years and despite the fact that the reforms in the oil and gas sector started since 2000 with the inauguration of the OGIC.
So, without a legal framework for deregulation and liberalisation of the down stream sector, how will labour Unions believe that the political class, and indeed government , is serious about the down stream sector reforms and indeed the reforms in the nation’s oil and gas sector? This is a question that this conference will assist us answer!
The fact is that the starting point for any believable reform in the downstream sector is the passage of the PIB.T he Petroleum Industry Bill (PIB) which has been in the National Assembly since 2009, contains comprehensive provisions on regulatory and fiscal framework to govern the petroleum industry in Nigeria and its non-passage so far has created uncertainty in the industry and denied our country much needed investment. The issue of deregulation (of which subsidy is just a subset) and restructuring of the NNPC (amongst others) were generously provided for under the 2012 PIB.
It therefore our view that the Federal Executive Council and the National Assembly should as a matter of urgent national importance begin the process of passing the PIB. If this is done, the issue of subsidy would have been dealt with as the legal and regulatory framework, and not an ad-hoc or administrative approach, as government is wont to do which is akin to only treating one symptom of a systemic disease.
Secondly, the present subsidy regime is import driven and this needs to be addressed prior to any subsidy removal. The existing subsidy and purported landing cost of PMS is driven by imported inflation as freight costs (to and fro), insurance, port charges, custom duties, high labour costs in foreign refineries, demurrage, etc constitute the present landing cost. It is therefore imperative that policies that would allow for the expansion and growth of the Nigerian refinery and dowmstream sector through the development of private refineries are clearly articulated in the PIB.
The argument that the present pump price of petrol discourages investment in refineries is specious at best because Nigeria has one of the highest pump prices among OPEC countries and other OPEC countries where petrol sells far cheaper than in Nigeria have functional refineries.
Let me however clarify that the labour unions in Nigeria especially those in the oil and gas sector are not against the deregulation of the downstream sector of the Nigerian Petroleum industry, provided any attempt to deregulate will not be import driven. In essence we will support deregulation if it will improve the welfare and living standard of the ordinary Nigerians by reducing poverty and unemployment.
It is very obvious that an import driven deregulation will only worsen the poverty situation in Nigeria and we will not support any policy of government that will increase poverty and unemployment. We have a sacred duty to do that and that is why we are completely against the Federal government model or proposal on deregulation which is essentially the removal of fuel subsidy so that the funds applied to subsidy will be freed and shared across the three tiers of government.
Our main concern with the government model or proposal is that much of the funds that will be freed from the removal of fuel subsidy will disappear through corruption and inefficiency. The fact remains that corrupion in Nigeria is a very huge industry and has crowded out investments in the real sector. Our manufacturing industry is comatose due to corruption and the inability of the government to fix the power sector problems.
CORRUPTION and not fuel subsidy is the single most important factor militating against the development of nigeria. It is therefore clear that any plan to transform Nigeria without a clear demonstrable plan and political will to reduce corruption by atleast 60% in the first instance will only end up achieving the opposite – increasing the suffering of the ordianary people of his country who bear the burden of corruption and inefficiency.
We are not encouraged by the stories we read daily about how huge sums of money are stolen from the public treasury and the inability of the Nigerian government to effectively prosecute the perpetrators beyond the initial media hype.For instance, the Chief Justice of the Federation was reported on December 1st 2015 to have said that “ the lacklustre attitude of government towards the prosecution of such criminal cases, ‘especially those involving politically exposed persons or political party family members,’ was a major factor that has stalled trial of so many corruption cases”.
Also the inability of the Federal Inland Revenue Service and State Boards of Internal Revenue to prosecute wealthy politicians and their cronies for tax evasion in view of the apparent fact that there is no relationship between the income taxes they pay and their luxurious lifestyles including Solomon palace type houses, the various unexplainable import duty waivers given to political associates and cronies thereby subsidising their imports to the detriment of the rest of us, the inability of the EFCC and the various Governments to prosecute any person for the huge number of ghost workers being discovered in the federal and states payrolls. For instance at the federal level a total of almost 200,000 ghost workers were discovered between 2011 and 2013 ranging from that of the Nigeria police , the MDAs etc and yet not even one person has been prosecuted for this huge drain on our resources, etc.
Away from the issue of corruption. The next concern that we have is that government over the years seem to be only interested in the removal of oil subsidy and not the total transformation of the downstream sector for the economic development of Nigeria. This if allowed to happen will be catastrophic. We expect the government to carryout a sincere, detailed and comprehensive review of the downstream sector with a view to finding and implementing lasting solutions to the industry’s problems . The solution will include legislating the framework for the sustainable development of the sector. To this end, we will like to delve a little bit into history.
Many Nigerians have wondered why there are effectively no private refineries in Nigeria. Some have accused the private sector of not showing interest in our local refining industry. But that may not be the complete story going by the content of a lecture delivered by Alex Ogedengbe, a former managing director of Port Harcourt Refinery, at an induction ceremony of Nigerian Academy of Engineers, in University of Lagos.
Ogedengbe had in the lecture averred that as the local demand grew for refined petroleum products in the 1960s and following the local availability of crude oil by pipeline, establishment of a refinery in Nigeria became commercially viable. According to Ogedengbe , two oil marketing companies in Nigeria , Shell and British Petroleum, BP, formed a 50/50 joint venture refining company in Nigeria , the Nigerian Petroleum Refining (NPRC) in 1960. The NPRC built a 38,000b/d petroleum refinery at Alesa-Eleme, near Port Harcourt to refine local crude oil into five petroleum fuel products. Construction of the refinery commenced in 1963 and production started two years later, in 1965. The refinery was de-bottlenecked in 1973, in order to increase its crude oil processing capacity from 38,000b/d to 60,000b/d. The domestic demand for petroleum products which steadily increased was satisfied by the NPRC refinery for about 8 to 10 years.
Ogedengbe also averred in the paper that between 1970 and 1978, the Federal Government acquired the NPRC from Shell and BP. The name of the NPRC was changed to Port Harcourt Refinning Company Alesa-Eleme, near Port Harcourt .
The government later built a second and bigger refinery plant in Port Harcourt, as well as one refinery each in Warri and Kaduna.
We are therefore unable to understand why since the late 1980s , government began to show that they prefer to rundown the refineries so that they will justify selling them to their cronies at ridiculously low scrap value or continue to import petroleum products into Nigeria.
For instance as at April 23, 2010 when the leadership of TUC Rivers State Council visited the Port Harcourt Refining Company ALESA Eleme, we were shocked to learn that no Turn around maintenance (TAM) had been carried on the Port Harcourt Refining Company PHRC Refining plants for some 11 years as the last TAM on PHRC was done in 2000. We know that without TAM the refining plants cannot be reliable and the safety of the workers would continue to be a major issue. We sincerely hope that the government would by now have carried out the TAM on the PHRC plants. During same visit to PHRC we were also shocked to learn that the turbines in the PHRC Power Plants that are supposed to be mandatorily overhauled about every four years were last overhauled in 1993. The turbines had not been overhauled some 17 years then! No wonder there was recurrent failure of the power generation plant leading to loading failures.
There is also the issue of security of pipelines as we understand that PHRC pipelines are, often as is usually the case, vandalised by illegal bunkerers and operators of illegal refineries etc. The truth remains that the refineries cannot function properly without adequate security for the pipelines. Let me also state that while I was PENGASSAN’s National industrial Relations Officer, we proposed the use of vessel as alternative to pipeline to supply crude to the refineries especially that of Port Harcourt. We are therefore shocked as to why the refinery was not given any crude to refine in October 2015.
One would have said, okay let the government privatise the refineries. However the revelations during the National Assembly probe of the past exercise of privatisations in Nigeria clearly shows that the intention was not privatisation but the criminal sale at ridiculously low price of government assets with huge potentials. We also understand that these assets were deliberately rundown to provide government with seemingly good reasons to sell them to their cronies as scrabs.Even the recent sale of government Power assets have not transformed to improvement in power supply to Nigerians. Moreover the debate on the impact of privatization is still ongoing. In fact, the Economist Magazine on February 2014 conducted a debate on privatization and the result still affirms that there are divergent views by economists on the effectiveness of privatization as a policy.
We therefore urge the federal government to consider the concerns of the various stakeholders as well as come up with how to grow the local refining capacity such that within the next 5 years we would meet locally all our domestic demand for refined petroleum products in Nigeria, and such that within the next 7 years we will be exporting refined petroleum products . Policies without local capacity building will only remain ineffective for technology is the Vehicle with which nations drive economic growth.The policy must also include local capacity building through the Nigerian Oil and Gas industry Content development.
As a recommendation, permit me to restate the position of PENGASSAN and NUPENG to the National Assembly on PIB regarding the refineries. Accordingly, we propose that the PIB makes provisions for the following:
1. With regards to the existing refineries, the country adopts a modified model tailored towards the NLNG Model with the National Oil Company(NOC) holding some 49%; core investors/local participation having a working majority; and staff and staff unions – PENGASSAN and NUPENG holding minority shares.
2. Refineries should be stand-alone entities independent of the proposed NOC (NOCs will hold the government shares). The management of each refining company should be autonomous and fully responsible for its success and failure.
3. Effective incentives should be granted to allow for the development of private refineries alongside the existing refineries. A framework should be articulated that will make available required crude for effective functioning of local refineries. There is need to incentivise and/or compel International Oil Companies(IOCs) to refine an agreed percentage of crude oil in the country. A suggestion is to tie upstream licensing to downstream investment.
4. New players to reinvigorate the Oil and Gas Industry especially, the downstream sector backed by government collaboration could be considered in 1 above in the event that the present IOCs are not keen to invest in refining. These new players with refining interest could also partner in a consortium for upstream licensing as to achieve 3.
3. BUDGET RESTRUCTURING AND THE COST OF GOVERNANCE IN NIGERIA
The current structure of the Nigerian budget is not sustainable and will not lead to the expected economic development as recurrent expenditure take morethan 70% of the budget leaving capital expenditure with a paltry sum. We commend President Buhari for advocating the use of Zero based budget for the 2016 budget.
• Comrade Onuegbu is the state chairman Trade Union Congress of Nigeria (TUC) Rivers State Council
We hope that it will be applied effectively so that double dipping, budget padding , traditional cost items that does not add value and duplication of activities which contribute to the high recurrent expenditure will not form part of the budget.
The cost of governance in Nigeria will be impactful when Government organs including the Civil Service are facilitating the economic growth for every penny spent. The Civil service should be more accounting to the Nigerian people and how well they facilitate private sector development is one indicator of efficiency. This calls for a re-orientation with a specific and measurable accountabilities that should be validated by the Nigerian public. There should be a benchmark of our civil service levels to promote competitiveness of our economy. Budgetary sums without value for money is essentially a zero sum game.
4. Diversification Of The Nigerain Economy , Review Of System Of Fiscal Federalism & Passage Of The Petroleum Industry Bill(PIB)
Every government agrees that diversification of the Nigerian Economy is key and strategic to the development of the country. Unfortunately successive governments have not done anything significant to actualise it. It is therefore crucial that the administration of President Mohammadu Buhari which is premised on change, takes practical steps to ensure that the Nigerian economy is diversified by truly growing other sectors such as agriculture, solid minerals, manufacturing and services.
There is an urgent need therefore for the Labour movement to put pressure on Government at all levels by engaging them at all levels of policy and programmes to design frameworks for moving Nigeria out of the the grips of the Oil and Gas industry. We must increase our advocacy outreach in this direction so that Governments will understand the urgency to move away from this present comfort zone and spread the nation’s root into various sectors such as agriculture, solid minerals mining, manufacturing and services etc. We cannot afford to continue putting all our eggs in one basket as they say.
Furthermore, the country must be courageous enough to review her system of fiscal federalism such that states and local governments would be effectively motivated to grow their economies in their areas of comparative advantages, rather than continue to depend on federal allocation. This further calls for Constitutional reviews and amendments as diversification of economy may not be achieved without relevant sections of the constitution such as the Exclusive list etc being amended or repealed as the case may be. For instance, A state desirous of investing in power sector may be scuttled by the fact that its plans and outcomes will be controlled by the Federal Government starting from granting of licenses and permits to use of generated power etc .What it means is that the development of the respective states will be hindered by a Federal Government that is not favourably disposed given the political system in Nigeria.
It is important that the government urgently implements the Gas Masterplan. This is because Gas revolution is a catalyst for diversification of the economy as investors in power, manufacturing and Refineries will depend on its strength for propulsion.
As we have aforementioned, the PIB is key to the Nigerian oil and gas sector. The effective passage of the Petroleum Industry Bill (PIB) into law will signal the commencement of the conclusion of some 15 years of reforms in the Nigerian oil and gas industry. Indeed its non-passage by the 6th and the 7th National Assemblies despite all appeals by various stakeholders presented the country as very unserious. Also, the fact that the PIB has been the subject of discourse in the National assembly for 8 years without any progress created significant uncertainty in the Nigerian oil and gas industry and made investors to adopt a wait and see attitude. This uncertainty therefore led to the loss of $80bln in investments and arrested development of the industry.
It is not enough for the government to present the PIB or any of its parts as is being currently suggested to the National Assembly. We have seen that since 2008. Government must , more importantly show the necessary political will to ensure that it is passed into law before the end of 2016 and implemented to the letter.
5. GOOD GOVERNANCE AND EFFECTIVE FIGHT AGAINST CORRUPTION
Government at all levels must identify leakages in the system and block them effectively. Duplicated services must be stopped, while agencies that carryout similar activities must be merged for effectiveness and efficiency. The fight against corruption must be pursued tenaciously; while the cost of governance pruned down significantly. Let me commend the leadership of NLC and TUC for the September 10th 2015 National Day of Action against Corruption and for Good governance. It is a step in the right direction. However the scale of corruption in Nigeria and the desire for good governance by the ordinary Nigerians dictate that the labour movement goes beyond that, to proof critics wrong. The Labour movement must match words with action!
Corruption has expanded its borders beyond financial misappropriation and leakages. Corruption is not only about the actions or inactions of indivivduals; it is also about group aspirations. In the economic and political parlance, it is now viewed in the modes of government structures, policies and implementations and lack of them ;and by the individuals and sections of country as it impacts their well-being. This has a far-reaching consequence for our polity! Good governance must address these concerns to earn legitimacy.
Finally, let me conclude by thanking you once again for the opportunity to share my thoughts with you. Let me also advise that at these difficult times both globally and locally, government and the various stakeholders such as the Nigerian Labour movement, must ensure that they do not inadvertently derail the country by putting on our familiar thinking caps. They must review their options in the light of available information.
They must avoid unilateral actions on sensitive issues such as fuel subsidy and privatisation of refinery. It was the unilateral action of the Federal government in removing fuel subsidy on 1st January 2012 that led to its eventual reversal in the same month after so much economic and political losses.
Effective engagement and inclusion of important stakeholders like the labour movement is key to any far-reaching and successful change programme and Nigeria cannot be an exception!
Thank you for your attention.
• Onuegbu is the state chairman Trade Union Congress of Nigeria (TUC) Rivers State Council
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