The Nigerian economy is set to suffer for another 18 months under the burden of fuel subsidy going by the postponement of full implementation of the Petroleum Industry Act (PIA) which provided for the complete removal of subsidy on Premium Motor Spirit (PMS), popularly called petrol, reports GIDEON OSAKA.
President Muhammadu Buhari had last year August signed the PIA into law with provisions that deregulated the downstream sector. Certain provisions in the law required it to become operational within six months, at least from February 2022, potentially resulting in the gradual removal of subsidy on petrol. But following widespread uproar from labour and prominent Nigerians, the government eventually backed down and suspended the removal until what it called “further notice.”
The Federal Government had in November 2021 announced it would remove subsidy on petrol this year as part of its efforts to deregulate the sector altogether. At that time, the Group Managing Director of NNPC, Mallam Mele Kyari, said that by the end of February 2022, the nation should be out of the subsidy regime, asserting further that fuel subsidy removal would definitely be achieved in 2022, as it was now fully backed by law.
This decision by the government at that time to finally take a backseat in the regulation of the price of petrol, after several failed attempts in the past, was triggered largely by cash crunch. According to anti-subsidy promoters, the removal of subsidy or under-recovery on petrol, which cost the country about N1.2 trillion in 2021, will ensure savings and availability of scarce resources for more impactful projects. It will also help curb the corruption and smuggling associated with petroleum products.
But announcing the president’s approval to suspend subsidy on Tuesday, January 25 during a special briefing on fuel subsidy at the Presidential Villa in Abuja, Minister of State for Petroleum Resources, Timipre Sylva, said the extension of the implementation of the PIA is to ensure that all necessary modalities are in place to cushion the effect of subsidy removal, in line with prevailing economic realities.
“We don’t intend to remove subsidies now. We also see the legal implication. There is a six-month provision in the PIA that will expire in February and that is why we are coming out to say that before the expiration of this time, as I said earlier, we will engage the legislature,” the minister said.
Continuing, he noted that “we believe this will go to the legislature, we are applying for amendment of the law so that we would still be within the law.”
“We are proposing an 18-month extension but what the National Assembly is going to approve is up to them. The law has been passed but there is no law that is cast in stone.”
Explaining further the rationale behind the government’s decision to suspend PIA implementation, the Minister of Finance, Budget and National Planning, Hajiya Zainab Ahmed, explained that the government had initially planned to remove subsidies on petroleum products from July, as reasonable provision was made in the 2022 national budget for subsidy payment till June.
Her words: “Sequel to the passage of the PIA, which indicated that all petroleum products would be deregulated, we amended the fiscal framework to incorporate subsidy removal. We, therefore, need to return to the National Assembly to now amend the budget and make additional provision for subsidy from July to whatever period that we agreed was suitable for the commencement of the total removal.
“It is clear to everyone that operationalizing the law is not possible within a six-month framework that has been provided for and if that time frame provided for in the law is not feasible, then it is a legislative responsibility now to see what can be done in extending that time frame for it to be in the purview of the law.
“It is very clear to the blind and audible to the deaf that it is not feasible at this time to remove subsidy. I know that some naysayers or political pundits want to bring politics into it but it is not within the contemplation of this administration now to remove subsidy,” the minister said.
As a result of this, about N3trillion is now being proposed as fuel subsidy compared to 1.2 trillion spent in 2021.
“The Nigerian National Petroleum Company (NNPC) has presented to the ministry a request of N3 trillion as fuel subsidy for 2022. What this means is that we have to make an incremental provision of N 2.557 trillion to be able to meet the subsidy requirement, which is averaging about N270 billion per month.
The Minister said, “in 2021, the actual under-recovery charged to the Federation was N1.2 trillion, which means an average of N100 billion per month, but in 2022, because of the increased crude oil price per barrel in the global market, now above $85 per barrel, coupled with NNPC’s assessment of the country’s daily consumption of 65.7mpd, the country will end up with the incremental cost of N3 trillion in 2022.”
Analysts who have criticized the decision of the government to delay the implementation of the PIA and, by extension, continue paying fuel subsidy, said that what the government did was to delay the evil day.
According to Prof. Omowumi O. Iledare, former President and Fellow, Nigerian Association for Energy Economics, “though there is the fear that if PIA 2021 is implemented within the context of petroleum price deregulation, there is going to be societal misfortunes in the form of rising public transport fares, disproportionate income redistribution among the poor, inflation, and public discontentment.”
Yet, for Iledare, the advantages far more outweigh the costs, as the PIA 2021 offers a glimpse of the pathway out of the perpetual unsustainable petroleum subsidy. He also added that the relevant objective to price deregulation in the PIA is the creation of efficient and effective governance institutions, with clear and separate roles for the petroleum industry.
This underscores why PIA 2021 established the Nigerian Midstream and Downstream Petroleum Regulatory Authority (the Authority) and scrapped the Petroleum Pricing Regulatory Authority (PPPRA), the Department of Petroleum Resources (DPR), and the Petroleum Equalisation Fund (PEF).
According to Section 29 (3), the authority shall be responsible for the technical and commercial regulations of midstream and downstream operations in the petroleum industry. Section 31(d) also specifies one other function of the Authority as being to promote a competitive market for midstream and downstream operations, which literarily means no subsidy payment policy is executable by the authority, because such policy is anti-competitive and inconsistent with the provision of PIA Act, according to Section 31(m).
Other experts held that the federal government had a second thought on fuel subsidy removal to save the ruling APC from defeat in the 2023 general elections. As announced by the government, the suspension of the removal of fuel subsidy intervention would continue for 18 months. President Muhammadu Buhari has 16 months to the end of his second term, meaning that the next administration would most likely inherit the debacle.
A source with knowledge of the matter said, “In 18 months, a new administration might just be in the horizon. It would probably not be a good time for that new government to take a look at this subsidy thing. So, technically speaking, we are looking at more than 18 months.
“At the expiration of the 18 months, the new government will be busy trying to settle down and when they finally settle down, they will ask for another 18 months to study the subsidy removal,” the source said, adding that the subsidy conundrum may linger.
An energy expert, Michael Faniran, in a media interview, said policy summersault by government always erodes investors’ confidence in any economy. According to him, some investors would have been planning to take advantage of deregulation as provided in the PIA.
“Reversing this now means the provisions of the PIA would not be trusted by investors since the government could wake up any day to reverse any of the provisions,” he maintained.
Faniran further noted that the upcoming elections may have played a crucial role in the reversal of the subsidy, stressing that until the government summons the political will, the country will continue to run around in circles on the subsidy regime.
Although subsidy removal may address key economic situations in the country and especially conserve foreign exchange, increase external reserves, boost local refineries and related industries, as well as lead to job creation, the concerns for many, particularly labour organizations in the country, border on the uncertainties surrounding alternative plans after the subsidy is removed.
Removing what has been removed
The recent unsuccessful effort by the Buhari-led administration to remove subsidy on petrol adds to several failed efforts in the past to address the root causes of the subsidy that guzzles billions of naira monthly. The federal government had on May 11, 2016 announced a new petrol price band of N135 to N145 per litre, a move that signaled the end to fuel subsidy. But the government later resorted to subsidy again, following the increase in the landing cost of petrol on the back of rising crude oil prices, with the NNPC, the sole importer of the product, bearing the burden on behalf of the federation.
“There is no doubt about the logic of trying to remove subsidy. However, the reality is that Nigeria has a very unique situation. You see the reaction immediately from PENGASSAN and NUPENG,” former Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, said in 2019. After the move to remove subsidy backfired, he also stated that “any president who is going to make that decision will have to weigh all the factors.”
In an interesting development, Ahmad Lawan, President of the Senate, recently said that President Buhari did not ask anyone in his administration to remove petrol subsidy, with the Minister of State for Petroleum Resources, Timipre Sylva also making a similar statement confirming what Lawan had said.
This leaves the matter to debate regarding the authority on whose order the Minister of Finance was acting when she unveiled the government’s plan to end petrol subsidy.
The 18-month extension by government may have been considered as a means to buy time for the Dangote Refinery to come on stream and start supplying the Nigerian market with petroleum products where no freight charges on shipping would be involved, thereby keeping the pump prices lower, while saving the country a huge amount of foreign exchange. It is also possible that the Port Harcourt Refinery, which is being rehabilitated may have also come on stream with refining activities and supply to the domestic market.
The government has also disclosed its plans to help fast-track the conversion of petrol engines in cars to gas engines as part of its autogas expansion policy and more time may be needed to scale up this plan as a cheaper alternative to petrol when the subsidy is finally removed on PMS. This is considering the fact that Nigeria has an abundance of gas but the country also needs to build infrastructure, such as gas refueling stations around the country so that those who make engine conversions from petrol engines to autogas engines will not be stranded with their vehicles.
Though, Timipre Sylva had announced in March 2020 that the Federal Government had reached a conclusion that it could no longer bear the burden of petrol subsidy. Sylva later in a statement in July with the title ‘Deregulation: The Facts and the Reasons Behind the Policy,’ said “after a thorough examination of the economics of subsidizing PMS for domestic consumption, the Federal Government concluded that it was unrealistic to continue with the burden of subsidizing PMS to the tune of trillions of naira every year, more so when this subsidy was benefiting, in large part, the rich rather than the poor and ordinary Nigerians.”
Sylva further emphasized in September 2020 that the Federal Government had stepped back in fixing the price of petrol, adding that market forces and crude oil price would determine the cost of the product.
The statement followed the removal of petrol subsidy in March 2020 by the government after reducing the pump price of the product to N125 per litre from N145 on the back of the sharp drop in crude oil prices. However, the price reduction lasted below six months, as fuel subsidy, or under-recovery for NNPC, returned till date.
Quadri Olaleye, National President, Trade Union Congress (TUC), said fuel subsidy and the proposed hike in fuel price is a rather prominent and recurring one, noting that TUC was not against the removal of the fuel subsidy if it would yield positive results.
In his own words, “how can we trust the government and be certain that they will actually remove it this time around, because in the past, they have claimed to remove the so called ‘subsidy’, so how can what has been removed be removed again?”
What are the alternatives?
Although subsidy removal may address key economic situations in the country, especially conservation of foreign exchange, increase external reserves, boost local refineries and related industries, as well as lead to job creation, the concern for many, particularly labour organizations in the country, border on the uncertainties surrounding alternative plans after the subsidy removal.
Organized labour in the country, as well as experts in the industry, have continued to outline conditions the Federal Government should fulfill before removing petrol subsidy. Among the conditions given is that the existing refineries in the country should first be fixed, while new ones, including modular refineries, should be established. They also want the government to ensure effective policing of borders to stem the rate of petroleum product smuggling.
No doubt, there is a sound economic and business case in favour of fuel subsidy removal, even though, the social and political contexts are equally critical, what the government can do for now is to explore alternative avenues as suggested by Valuechain.
According to opinion poll conducted by Valuechain in December 2021, respondents advised that an immediate and forceful shift to gas as alternative fuel for automobile and other prime-movers could become the needed buffer to cushion the impact of the eventual removal of subsidy on petrol by the Federal Government. In their own opinion, if the current subsidy bill can be properly channeled to autogas expansion, it could finance the entire investment required to convert up to four million vehicles from petrol to gas, thereby stimulating employment and economic growth. Autogas is the common name for liquefied petroleum gas (LPG) when used as a fuel in internal combustion engines in vehicles, as well as in stationary applications such as generators.
Autogas is the most accessible alternative fuel. Driving an LPG vehicle is safe, easy and, in many countries, considerably cheaper than driving a petrol or diesel model. Its acceptance and use have been growing widely in countries like Australia, Canada, China, France, Korea, India, Italy, Japan, Spain, Portugal, Thailand, Ukraine, Poland, Turkey, and USA, with Nigeria being one of the foremost African countries to encourage using it as alternative fuel.
Valuechain reported that with the potential removal of subsidy in 2022, reviving the gas for fuel scheme will not only cushion the effect of the downstream subsidy removal but also create new markets and enormous job opportunities for Nigerians. Substituting traditional white products with gas could help the country leverage its huge gas assets, cut down excessive demand for fuel and foreign exchange.
The global focus towards the climate-change-net-zero-emission debate has further necessitated the need to optimize the use of Nigeria’s abundant gas resources domestically as a transition or alternative fuel to move the country from the conventional dependence on white products for autos and prime-movers to cleaner, more available, accessible and affordable energy sources.
This move is much needed for Nigeria, which has about 600 trillion cubic feet of gas reserves and is Africa’s second largest gas producer, but still lags behind many of its continental peers in domestic gas utilization.
Nigeria’s abundant gas reserves could become less useful as the global campaign against fossil fuel/hydrocarbons intensifies and as the transition to cleaner energy increasingly becomes a reality.