By Gideon Osaka
On May 29, Asiwaju Ahmed Bola Tinubu will be sworn in as president to lead Africa’s largest economy after clinching the February 25 presidential election. On assumption of office, Tinubu is expected to take one of the most difficult political and economic decisions the new government will be faced with. Among the several unmet targets in the energy sector that the new administration will inherit is the implementation of petrol subsidy removal and palliative measures, started by the Muhammadu Buhari administration.
The Buhari administration promised to remove fuel subsidies by June and has kickstarted the process for the president-elect to carry on. The decision to finally do away with subsidy was predicated on the enactment of the Petroleum Industry Act (PIA) on August 2021 which provides for total deregulation of the downstream sector, implying the removal of subsidy and enthronement of a free market regime for the sector.
Valuechain reports that majority of Nigerians including labour and trade unions as well as oil industry experts agree that removal of subsidy is a necessary step towards long-needed reforms and because of how fuel subsidy continues to crowd out other development spending. State governors are feeling the heat in the monthly allocations from the Federation Accounts Allocation Committee (FAAC), while continued borrowings to service the government’s expenditure mount pressure on earnings. A report in September 2022 by the Nigeria Extractive Industries Transparency Initiative (NEITI), showed that the country had spent N13.7 trillion on fuel subsidies in fifteen years (2005-2022). About N3.36 trillion was earmarked as subsidy payment for the first 6-months (January to June) in 2023. This will total an average of N17.6 trillion spent on fuel subsidy from 2005 to mid-year 2023. Fuel subsidy has also discouraged additional investment in the oil sector and this has been especially problematic given that the oil sector is the lifeblood of the Nigerian economy.
On the other hand, the fear of inflation, often considered as the enemy of the common man, and waning trust in the government’s spending plans equally make it difficult for the government to win public appeal for subsidy removal. While it is commonly agreed that with the state of the country’s economy, fuel subsidy removal is non-negotiable, many have not hidden their disapproval of how this would hurt Nigerians considering how the policy had been handled in the past, and how improper application of palliatives have caused more pain to Nigerians.
Fuel subsidy removal should be a promise the president-elect will keep and it should not be a hard nut to crack, after all, subsidy removal was clearly Tinubu’s position during and after the electioneering campaigns. Anchoring his promise on fixing the energy sector, Tinubu in his 82-page manifesto tagged “Renewed Hope 2023 – Action Plan for a better Nigeria”, argued that subsidy payments were most beneficial to the rich and, therefore, ought to be stopped. He promised not just to end the wastage but re-channel the money to the people who truly need it.” As president-elect, Tinubu has hinted no matter how long people protest, it would not stop him from removing fuel subsidy.
Tinubu’s administration and post-subsidy removal palliatives
The customary response to subsidy removal over the years is the rollout of new programs and projects, in some cases, strengthening of existing programs aimed at cushioning the effect of fuel price hikes on the vulnerable segments of the population.
The outgoing Buhari administration recently announced through the Minister of Finance, Budget and National Planning, Zainab Ahmed, that the country had secured $800 million from the Washington-based World Bank to serve post-subsidy removal palliatives for Nigerians. The Minister said the post-subsidy palliative plans would be distributed to 50 million Nigerians representing 10 million households considered to be most vulnerable, to cushion the effect of the subsidy removal.
“We’ve secured some funding from the World Bank, that is the first tranche of palliatives that will enable us give cash transfers to the most vulnerable in our society that have now been registered in a national social register. Today that register has a list of 10 million households. 10 million households is equivalent to about 50 million Nigerians,” the minister said.
“But we also have to raise more resources to enable us to do more than just the cash transfers and also in our engagements with the various stakeholders, the various kinds of tasks that we have go beyond the requirement of just giving cash transfers. Labour, for example, might be looking for mass transit for its members.
“So, there are several things that we are still planning and working on, some we can start executing quickly, some are more medium-term implementation.”
What is clear so far is that the incoming administration will remove subsidy as it believes subsidy has outlived its shelf life as a public good, however, the policy dimensions and direction as to plans for the savings from subsidy removal, remains unclear, although the President-elect has hinted that, “..the subsidy money will not be ‘saved’…Instead, we will redirect the funds into public infrastructure, transportation, affordable housing, education, and health, strengthening the social safety net for the poorest poor, thus averting increased security challenges.”
How will the Tinubu administration implement the $800 million cash transfers to the most vulnerable as post-subsidy removal palliatives secured by the Buhari administration or will the ne w government decide some other policy direction? Many energy policy and economic experts have cautioned that any conversation on subsidy removal and palliatives should be left for the incoming administration to handle.
Subsidy removal & palliative-Examples from the past
In the past, fuel subsidy removal and the compensation mechanisms to cushion the impact of hikes in fuel prices have yielded mixed results. Several reports analyzing fuel subsidy regimes concluded that every attempt to deregulate the price of petroleum products has largely been unsuccessful even though such efforts were often accompanied by various palliative schemes to mitigate the effects of the price hikes.
The story of subsidy removal and the Nigerian governments’ pattern of response to the impact dates back to 1978, when, the then military government of Gen. Olusegun Obasanjo reviewed upward the pump price of fuel from 8.4 kobo to 15.37 kobo. Since then, it had been from one subsidy removal or price adjustments of petroleum products. The civilian government of Alhaji Shehu Shagari maintained the fuel price regime implemented by the Obasanjo government up to April 1982 when subsidy became a significant target for cuts in expenditure, and the price of PMS was raised from 15.3 kobo to 20 kobo per litre.
As a result of the fiscal crisis that ensued under the Babangida regime (1985–1993) the pump price of PMS was raised to 39.5 kobo per litre on March 31, 1986 and to 42 kobo on April 10, 1988. In January 1989, the price of PMS was increased to 60 kobo per litre and later 70 kobo in 1990. To a large extent the hike in the price of PMS during the Babangida regime did not precipitate civil unrest, as the increases were implemented in instalments and the government introduced programs to cushion the impacts of the increases on the poor and vulnerable groups. These programs included the Directorate for Food, Roads and Rural Infrastructure (DFRRI) in 1986; the formation of the National Directorate of Employment (NDE) in 1986; and building of 23 NNPC depots to improve the availability of petroleum products.
The Interim National Government (ING) of Ernest Shonekan attempted a complete deregulation of the price of petroleum products by increasing the price of PMS from 70 kobo to N5 per litre on November 8, 1993. To calm the protests after forcefully taking power from the ING, General Sani Abacha reduced the pump price to N3.25 per litre on November 22, 1993, but later raised the price by over four times to N15 on October 2, 1994. Following mass protests in reaction to the increment, the price was revised downward to N11 per litre on October 4, 1994. As a mechanism for compensating the poor and vulnerable for the adverse effects of the higher cost of PMS, the Abacha government established a Petroleum Special Trust Fund (PTF) headed by Muhammadu Buhari to manage the extra revenue accruing from the fuel price increase. The fund was dedicated to the development of physical infrastructure and social services aimed at improving the livelihood conditions of the people. In addition, the Abacha regime instituted a Federal Urban Mass Transit Agency with a target to provide 1,000 mass transit vehicles at concessionary loan terms to transporters that would in turn charge affordable fares to commuters.
The regime of General Abdulsalami Abubakar further increased the price of PMS to N25 per litre on December 20, 1998; and just like previous increases, this sparked mass protests across the country, leading to a reduction in price to N20 on January 6, 1999. The Abubakar administration maintained the palliative measures instituted by the Abacha regime for the duration it held power.
The Fourth Republic Administrations, 1999 to date under the civilian administration of Olusegun Obasanjo (1999-2007), witnessed the increase in price of PMS to N30 per litre in 2000. As a result of the mass protests that followed the increase, which lasted for about two weeks, the price was reduced to N22. The price was subsequently increased to N26 in 2002, N40 in 2003, and N70 per litre in 2007. The Obasanjo administration recognized the importance of introducing compensation mechanisms to lessen the effects of the price hike. For example, it was reported that in response to the 2003 protests, Obasanjo negotiated an agreement with the Nigeria Labour Congress (NLC) and its allies through which the federal government would give N100 million to each state, which every state was expected to match with a further N200 million to provide loans to reputable public transport companies. In addition, the Obasanjo government sustained the National Directorate of Employment’s programs and introduced the National Poverty Eradication Programs (NAPEP) within the ambit of a broad program of poverty reduction under the National Economic Empowerment and Development Strategy (NEEDS).
The hike in the price of PMS in 2007 was reviewed downward to N65 per litre by the Yar’Adua administration in June 2007. The government did not introduce any new program of compensation for the hike in the price of fuel but continued with the poverty alleviation programs of the Obasanjo government.
On January 1, 2012, the price of PMS was raised by the government of Goodluck Jonathan to N145 per litre in a bid to totally deregulate the prices of petroleum products. This was met by unprecedented opposition by civil society groups and labour unions galvanized in an “Occupy Nigeria” movement. The hike was later revised downward to N97 and N87 per litre by January 2015. To cushion the effects of the price increase, the Subsidy Reinvestment and Empowerment Program (SURE-P) was launched in February 2012 to provide support to various strata of the population through a range of programs, including the financing of infrastructure and the creation of job opportunities for unemployed youths.
While Jonathan faced serious backlash from the adjustment in fuel price, the Buhari-led administration on May 11, 2016 adjusted the pump price from N87 to N145 without any protest, just as subsequent adjustments were equally accepted until fiscal policies and pandemic-induced inflation pushed Nigerians to the edge.
Post-subsidy palliative measures for consideration
Crisis times require bold reforms and the President-elect has the ability to take on the issue of fuel subsidy, one of the most difficult problems in the country at the moment. But in order to succeed, he will also have to take on another challenge – transparency in the management of the $800 million fuel subsidy palliative secured by the Buhari government and deployment of subsidy savings to future palliative programs. The government must utilize these resources more efficiently to create social welfare and infrastructure improvement programs that will not only improve the quality of life for Nigeria’s poorest but also put the country on track to meet its development goals. It must implement a transparent system for redirecting and monitoring the use of funds from the fuel subsidy program so that citizens can review and scrutinize the expenditure.
Managing palliatives in oil-rich countries is a complex issue that requires careful consideration of a range of factors. It is important for the Tinubu government to work closely with stakeholders such as NGOs, community leaders, and other experts to ensure that palliatives are managed in a fair, effective, and sustainable manner.
As Tinubu prepares to take office, after a review of past post-subsidy buffer programs, experts suggest social protection program ideas for the Administration’s consideration in implementing measures to compensate for the impact of fuel price or subsidy reform. Rather than dole out cash handouts, the federal government could channel its own share of the savings into a combination of programs to stimulate the economy and alleviate poverty through critical infrastructure and safety net projects.
One of the government palliatives that has been found to have worked to a significant extent is the Subsidy Reinvestment and Empowerment Program (SURE-P) started February 2012 under the Jonathan administration. It is one palliative measure the government can restructure as a means to tackle the imminent mass suffering that may result from subsidy removal.
The broad objective of SURE-P was to invest the savings accruing from the partial removal of fuel subsidy to cushion the effects of the price hike. The areas where the subsidy savings were invested include the execution of road projects across the country, notably the Lagos-Ibadan Expressway, Abuja-Lokoja Road, Kano-Maduguri Road and the Benin-Ore/Sagamu Expressway. SURE-P intervention areas also included rehabilitation of rail networks from Lagos to Kano and Port Harcourt to Maiduguri and the modernization of Abuja-Kaduna rail and the EastWest route. In 2014, some FCT projects including the Abuja light rail and satellite town development were integrated into the SURE-P arrangement. Certain social programs—including those for maternal and child health and primary health care and rehabilitation work on some existing health care and public works infrastructure—received counterpart funding from SURE-P. Community services, women and youth empowerment programs were also supported by SURE-P. The selection of programs and projects for SURE-P by the Ministry of Finance is perceived by some stakeholders to have limited the effectiveness of SURE-P. However, the infrastructure projects, especially roads, provide evidence of some accomplishments of the program. Politics associated with the SURE-P programs grossly constrained its effectiveness and limited the impact of the intervention programs.
The government could invest the subsidy savings to the Universal Basic Education (UBE) program. The UBE which was launched in 1999 was to improve access to primary and basic education in Nigeria. The program entitles children to free and compulsory education for the first nine years of education, i.e., from Primary One to Primary Six and Junior Secondary School 1 to 3. Thus, the UBE scheme is designed to ensure that children from poor homes have the benefits of basic education and also to draw out-of-school children into the basic education system.
Bus Rapid Mass Transit program implemented by the Federal Capital Territory Administration is an illustration of existing publicly financed mass transport schemes in Nigeria the government can invest and replicate across the country or support states already running such programs with subsidy savings. The mass transit program facilitates commuters’ transportation, mainly within rural and suburban centers. The target beneficiaries are mainly public sector employees and informal sector operators who belong to the category of people that may be hurt by fuel price increases. The experience of the FCT mass transit scheme has been generally effective and largely embraced by commuters. Furthermore, BRT is another classical example of public mass transit that works in Lagos, and can be replicated in other cities.
To show sincerity and demonstrate good faith, government must look at other areas where savings can also be made especially the high cost of running government, due process in the award of contracts and diligence in monitoring of implementation. What makes fuel subsidy removal good or bad is what the government does with the savings. If government must withdraw fuel subsidy, then the savings must be productively utilized to improve the economy with palliative measures for the poor. Every effort should be made to create employment, ensure local refining and address the power sector challenge to serve as catalyst for economic development and widen the tax base for further growth. Unlike the fuel subsidy itself, these programs should be targeted toward helping the poor including programs to reduce maternal and infant mortality and improve road quality and access. Most importantly, the programs must be tied to Nigeria’s overall development goals.