In the last 2 weeks in May 2015, Nigeria experienced a gruesome fuel scarcity. The fuel scarcity was occasioned by the Federal Government’s non-payment of subsidy arrears to oil importers. Subsidy is a payment made by a government to reduce and control the price of a particular commodity. In Nigeria, successive administrations have subsidized the price of refined premium motor spirit (petrol or PMS) used by vehicles, and dual–purpose kerosene (Kerosene or DPK) used as cooking fuel.
Due to the severity of the latest crisis and the far–reaching consequences felt by the populace, our two leading contributors have given their views on the thorniest issues around fuel–subsidy regime in Nigeria. We believe that Senator Iyere Ihenyen‘s and Yibakuo David Amakiri‘s views are vital contributions to the public debate. Essentially, you will also find that both contributors’ views bring some legal flavour to the debate.
1. Does subsidy exist?
S. I. Ihenyen: I think subsidy in the sense of economic policy exists. The question is whether it has been subsidizing the landing cost of fuel or a corrupt system.Annually, we pass a budget that applies a flat rate to fuel subsidy, disregarding the actual consumption by the populace. This creates a bottomless belly for corrupt marketers and compromised regulators in the petroleumindustry. Under the outgoing administration, subsidy costs have jumped from N200 billion to over 1.2 trillion annually. That’s 600% increase! And this happened after2 years. Did Nigeria become India or China overnight? Of course not. It’s just a scam. When you have 30 companies in the fuel-subsidy scheme suddenly shoot up to 300, it gives you an idea of how companies with no verifiable addresses, tank farms, vessels, bank guarantees have since joined the oil-subsidy bazaar. And because the government can’t keep wasting so much money on what is now an official scam, we’ve been told that subsidy removal is the solution.
Y. D. Amakiri: I do think the federal government subsidizes the pump price of petrol. This is a long practice which has been carried on by several governments in this country. As at today, if fuel pump price is not subsidized and with crude oil price at approximately $70 per barrel, the landing cost will be something around N100+ from my estimation. This estimated cost price excludes clearance, freight, haulage, and other associated costs. So there is subsidy on every litre of petrol sold at the stations. Usually this is provided for in the budget– the Appropriation Act of each year by the Federal Government. I would like to note that management of these subsidy payments is another issue altogether.
2. The current fuel scarcity have had Nigerians as victims. Should anybody be punished for this situation? Do you see any such punishment coming?
Y. D. Amakiri: I think who is to blame for the situationwill determine whether anybody should be punished for Nigeria’s fuel crisis. So who is to blame? Some will point to the marketers for shutting their depots and refusing to lift products. But the marketers are business people who do business with the expectation of being paid for their goods and services. Every business man wants to makeprofits too. So nothing legally stops them for demanding payment for goods supplied, except there are express agreements to the contrary. So do we blame the government for (1) not paying the marketers and (2) patronizing the marketers in the first place? Well the government can argue that this whole subsidy issue has been on for some time and since the government is experiencing dwindling revenues due to fall in oil prices, discovery of shale, amongst others, it is no longer sustainable to fuel subsidies. So why patronize marketers then? The reality is even if our four existing refineries were functioning to full capacity, they would still not refine the quantities that can carter for the whole country. Today the refineries produce less than 20% of what’s needed. The state oil corporation – Nigerian National Petroleum Corporation (NNPC) – alone cannot import what’s needed. Private investors who were given licenses to build refineries have mostly not turned on. So that’s where fuel importation by marketers come in. I think the blame does not lie with one person but a failure of successive administrations.
There is currently no law in Nigeria against subsidy but I think that where there are proven cases of marketers presenting fake documents and collecting payments where they did not lift products, such marketers should definitely be prosecuted and government officials who are implicated should also face the music.
S. I. Ihenyen: If one looks at the fuel crisis closely, I think it is a national disaster that was bound to happen. It was only a matter of time. Nigerians are just victims of successive administrations’ irresponsible and myopicleadership. By being so short-sighted, we have mortgaged one of the nation’s most critical resources to marketers. So what do we expect from the marketers who are merely doing business in a business-as-usual environment the government has provided to these marketers? Corporate responsibility? I weep for this country. It’s a liberal economy. You can’t punish marketers for doing what they are in business for. It’s a government that fails to build refineries for decades, relying on importation of refined products that we should worry about. Even the outgoing Minister of Finance, Ngozi Okonjo-Iweala, recently likened the oil marketers to a small cartel that can ground the nation to a halt at will and strongly suggested that the nation does something about it. And the marketers has just brought Nigeria to a standstill. Private interests have become more powerful than public institutions. Until we’ve a government that has the political will to put Nigeria on the right track, we’ll continue to look for scapegoats to punish. In a yam-and-goat administration, I don’t expect any punishments; not even for marketers who have swindled the country for many years. For me, the problem is within. We need reforms. Serious reforms.
3. Should subsidies be removed?
S. I. Ihenyen: To decide whether subsidy removal is the solution, I think we need to understand why subsidies were introduced in the first place. When you subsidize a product or service, the aim is to make it available to users or consumers at a lower cost.
Are Nigerians getting gas and kerosene at lower costs? If they are, what’s the price they are paying for the lower costs? The price Nigerians are paying in terms corruption, lack of accountability and transparency is much higher than any argument for the cost in terms of making fuel more affordable to Nigerians.
We need to focus our limited resources on building and revamping our refineries. We need to block the loopholes through which a budget-supported scam is eating us alive. We need to demand for a reliable data on which subsidies are based. We need to step up our transparency and due-process system so that government is not mortgaging our future for 87 naira while cartels gulp billions of naira every year. Until we do these, we will continue to pay highly and dangerously in the long run.
We will continue to read reports like that of the Ad-Hoc Committee set up to verify and determine the actual subsidy requirements and monitor the implementation of the subsidy regime in Nigeria. After investigating subsidy for 2 months, the Committee presented its report before the National Assembly. It was discovered that a presidential directive removed kerosene subsidies in 2009. But in 2011, NNPC paid N310.4 billion in ‘arrears’ on kerosene subsidy from 2009 to 2011. It was also discovered that Nigerians consume about 31.5 million litres of PMS per day. With 445,000 barrels per day (bpd) of crude assigned to NNPC, local refining and offshore swaps (crude for PMS) was found to be sufficient to meet our local demands. So the Committee questioned the need for third-party marketers. The report implicated many officers, including the former Finance Minister Olusegun Aganga and Augustine Oniwon, former GMD, NNPC.
How long can we subsidize systemic failure in the country? It is neither healthy nor sustainable. Oil subsidy since 1999 badly needs to be probed. Only then can wemake an informed decision about the way forward.
Y. D. Amakiri: The issue of subsidy removal has beenon the frontburner of several public–discussion forums since the dawn of the new millennium.
I think Nigeria missed a big opportunity in 2012 to have fuel subsidies removed. We all remember how the country came to a standstill to protest the increment of petrol pump price from N65 to N127 in a move that was to see the deregulation of the downstream petroleum sector. What was then seen as a victory for the common man was actually a victory for those whose businesses are weaved around fuel importation.
This will be one of the hardest decisions of the incoming government. According to a ThisDay newspaperheadline, this will be a make or mar decision.
We will eventually need to do away with fuel subsidies. This is another good time to decide on the removal of subsidy. The removal will have several benefits. One is attracting private sector investment into the refining industry. As it is increasing difficult to attract good investment capital into an environment where the commodity price is highly regulated and not cost reflective. As we are seeing with the electricity sector,low and regulated prices could affect financing ofinfrastructure projects to support the sector and in some cases hamper the ability of an investor to recover its investments within a reasonably time.
However, fuel pump price is a big deal in this country. Price fluctuations can easily lead to social unrest. As fuel price virtually ‘regulates’ every other price – it’s a key consumer–price indicator.
Let it be clear that removal of subsidy will completely reset the petroleum–downstream market dynamics. Once subsidy is removed, pump price will be determined by market forces. International crude price movements will be a major determinant. Foreign exchange rate fluctuations will also be a determinant. Are Nigerians ready for the ups and downs of the international oil market? Also, there is a likelihood that, if not well managed, subsidy removal will result in the ‘marketers’ giving way to the ‘refiners’.
Whenever subsidy is removed it will have a huge impact like it did in 2012.
4. Assuming fuel subsidy is removed, what legal mechanism should be in place?
Y. D. Amakiri: There is no express law on subsidies apart from it being provided for in the Appropriation Acts (federal budget) of successive years. There are usually some kind of executive directives. For example, it is said that there was an executive directive in 2009 ordering the stoppage of subsidies on imported kerosene(DPK) but subsidy was still paid in arrears because the Petroleum Pump Price Regulatory Agency (PPPRA) was not provided with an official gazette of the directive.
If subsidy were to be removed, it has to start from budgeting. For example, it is reported that the National Assembly slashed down the budget for fuel subsidy by 80% this year. Some smart budget planning will be needed.
Also the Petroleum Industry Bill (PIB), which has been with the National Assembly since the better part of 2011, will be a very important piece of legislation when passed. It intends to reform the NNPC which has had a fair share of corruption allegations levied against it during this recent subsidy impasse. The NNPC is one vertically integrated corporation performing functions from upstream to downstream with some regulatory and commercial duties. If it is unbundled, it will be better positioned to operate transparently.
I think, having in mind what I said above, proper government policy and plan needs to be in place rather than any major legal maneuvering to help mechanise the subsidy removal.
S. I. Ihenyen: The Nigerian Constitution embraces the concept of economic democracy. There is one part of the 1999 Constitution of the Federal Republic of Nigeria that I think is the most brilliant part of the Constitution. It‘s Chapter 2. I think every serious administration should dream with it. No political party manifesto should be approved by INEC without the manifesto adopting the provisions of Chapter 2 as a fundamental objective.
The state must aim to manage the economy in a way that brings the greatest benefit to the Nigerian people. Section 16(1)(b) provides that the state must control the national economy to secure the maximum welfare, freedom, and happiness of every citizen on the basis of social justice and equal status and opportunity. Subsection 2(b) of the same section emphasizes on harnessing and distributing the material resources of the nation to serve the common good.
So assuming subsidy is removed, there is a constitutional backing for any economic policy by the government to ensure the greatest happiness for the greatest number. We need a holistic approach, not just a legal mechanism. We need a political, economic, and social solution with a strong legal framework.
The National Assembly is best positioned to drive reforms in the oil sector. That is why we need our legislators to do serious work on the PIB so we have a more open and transparent oil-market business. The National Assembly should also amend the NNPC Act. NNPC cannot continue to operate as a regulator and player. This dual role is too dangerous to the health of the petroleum sector especially if we are serious with ourderegulation–policy drive. The National Assembly should also step up its oversight functions. The 7th Assembly largely failed in this respect.
Except we embrace tough reforms in the petroleum sector, a number of marketers will continue to rob the country blind.
5. What are your final words on fuel subsidy? Going forward, how should the government begin to treat theissue under the incoming government from May 29?
Y. D. Amakiri: We are seeing that dwindling national revenues can no longer sustainably sustain these huge fuel subsidies year in, year out. With growth in population and increase in economic activities, this trend is likely to continue. As Africa’s largest economy and the most populous black country on the planet, Nigeria cannot continue to jump from one energy crisis to the other.
The incoming administration will certainly have its hands full as far as fuel subsidy is concerned. As my colleague pointed out earlier, any government that wants to dream with Chapter 2 of the Constitution will need to formulate policies that will ensure the economic welfare of the people. But does fuel subsidy ensure the economic welfare of the people?
If there is going to be a paradigm shift in the petroleum downstream sector, we need at least four refineries with a capacity to refine at least ten million litres of petrol per day. This is a hard call.
On a final note, when the chips are down on the continued relevance of fuel subsidies, Nigerians will soon see that the devil is in the detail.
S. I. Ihenyen: For me, it’s simple. The incoming administration will need to be more of a team of doctorsand surgeons than politicians. The entire petroleumsector needs urgent diagnoses and treatments. It is an emergency. And it should start with fuel subsidy. The incoming administration should probe fuel subsidy since 1999. Depending on its diagnosis (or diagnoses, most likely), it should then treat. I imagine the sector needs urgent surgery.
I don’t think those who introduced fuel subsidy thought it would still be relevant in 2015. The only reason fuel subsidy is such a big issue today is because successive administrations have shamelessly failed to invest in petroleum infrastructure.
Nigeria shouldn’t have any business importing refined oil at the rate the country does today. Fuel subsidy takes attention away from what our medium-term and long-term goals should be in the petroleum sector; one of which is getting our own refineries to work, at least for local consumption. So instead of investing in our petroleum infrastructure, we’ve been investing in a corrupt system maintained by myopic leaders. It is unacceptable, irresponsible, and criminal.
So this is no time for politics. If anything is clear to us now, it is the reality that Nigeria is in a mess. So when my learned friend says when the chips are down Nigerians would discover the devil is in the detail, Ithought to myself the chips are already down and we’ve seen the devil in the detail. The devil now lives with us. I appeal to Nigerians to support the incoming administration to enable it carry out objective diagnoses and successful treatments. I hope the political will to do so will not be lacking this time.
Our conributors have spoken. We believe Nigerians should have a voice on these issues. The market woman who relies on public transport every day; the big malls who run on constant diesel generators; the civil servants who must dispense their duties timeously; all depend on fuel being readily available. But the ultimate decision lies with the Federal Government of Nigeria.
S. I. Ihenyen and Y. D. Amakiri are lawyers practicing in Lagos, Nigeria.