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FUEL SUBSIDY WILL WORSEN POVERTY SITUATION -AREMU

By NBF News
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• L-R:Mr. Diezani Alison Madueke, Ngozi Okonjo-Iweala and Sanusi Lamido Sanusi at the fuel subsidy removal parley in Lagos.

President Goodluck Jonathan in his 2012 budget proposal had tactfully omitted the issue of fuel subsidy removal, but events in the two weeks following that budget presentation to the National Assembly clearly indicates the government is only buying time before announcing the take-off of the policy.

The Jonathan's administration sees fuel subsidy removal as the panacea to the many woes of the economy. It is a fact enunciated last week Thursday by Finance Minister, Dr. Ngozi Okonjo-Iweala at a Town Hall Meeting organized by the Newspaper Proprietors Association of Nigeria (NPAN).

'The current subsidy regime does not benefit the poor in Nigeria. It is the better-offs in the society who benefit the more from it,' said Okonjo-Iweala, who is also the Co-ordinating Minister for the Economy.

'Between January and October this year we've spent over N1.3 trillion being borrowed and it is used to subsidized petroleum products consumed mostly by the upper and middle class who own the big cars, SUVs, jeeps, and not the poor who drive in bicycles or motorcycles. We have to put an end to subsidy; it is not good for the economy,' she added.

Corroborating the Finance Minister was the Governor of the Central Bank of Nigeria (CBN) who foretold of very hard time in the years ahead should the subsidy regime not be brought to an end.'I want an end to it soon,' Lamido Sanusi, the CBN Governor said. 'We are borrowing from our children to sustain a lifestyle that favours only the elites and not the poor,' he added. According to Sanusi, the total forex sold to petroleum marketers involved in the importation of products between January and November 2011 was in excess of $8billion. Total subsidy given to the marketers was also in excess of $8biliion. Sanusi said if the two items is combined it amounts to over $16billion - going just into the sustenance of the fuel subsidy business. According to him, the irony and danger to the economy was that the total amount of money that the government earned from the federation reserved during that period was $200,000 less than the $16billion. The nation was running at a deficit, sanusi said, in an attempt to supply cheap fuel to rich citizens.

'This government can continue to pay this subsidy, but it will be catastrophic for the next government if this government does not stop the payment of this type of money on subsidizing fuel. We have to avoid a crisis in the future because what we are doing is that we are forcing our children to subsidize the fuel we are consuming today

Both Ngozi Okonjo-Iweala and Lamido Sanusi agreed the current fuel subsidy regime was responsible for the large scale corruption in the petroleum downstream sector as witnessed in the large scale smuggling of Nigeria's refined products to neighbouring countries of Niger, Togo, Ghana, Benin and Cameroon. The quest to sustain the subsidy policy, Okonjo-Iweala said, had also forced government into massive borrowing.

'This subsidy creates an opportunity for corruption in the system. The banks we intervened to save, part of the problem they had was with petroleum marketers who borrowed and could not pay back. There is so much opportunity in the import business for fraud because of rent seekers. I am a proponent of the removal of rent. There is a danger ahead we have to avoid, ' Sanusi cautioned.

But can Nigerians ( the masses still in abject poverty) survive a system where fuel subsidy is completely removed.

Aremu specifically expressed grave cynicism over government ability to translate the gains from subsidy removal to the betterment of citizens, if eventually allowed. Deregulation, he said, would have been best appreciated under a atmosphere where the nation had functional refineries and not a net importer of petroleum products as it is currently being experienced.

'Our fear is that if we allow the government to remove subsidies, it is not going to be a win-win situation for government and citizens. Removing subsidy will worsen the poverty situation in this country because inflation will go up. And we are not prepared for this,' Aremu said.'Government has been responsible for the distortions in the market, for the poor state of the local refineries which has forced us to be importing fuel as we are doing. This inefficiency cannot be pushed to the masses. Why are our refineries not working? Who is responsible for the failure? Why are they not persecuted?

'Nigerians will resist attempts by this government to force citizens to pay higher prices for petroleum products imported from outside the country while we could have paid cheaper if we had our refineries working. It is time we compel the government to work. Let us have refineries so that we produce what we have and consume what we produce. It is an issue of good governance and not fuel subsidy removal,' Aremu added.

It is evident that from its inception in May 2011, the Jonathan regime had made no pretence on its plan to deregulate  the downstream sector of the oil and gas industry, a key policy that grants it the legal teeth to hands-off all forms of subsidy in the petroleum industry. To buttress its hard stance, against popular wishes to retain subsidy, the government says, so far this year, it has invested more than N1.4trillion on subsidies to allow citizens enjoy cheap fuel. This amount, the government insists, should best be deployed into fixing the poor state of infrastructure in the country. When the government therefore eventually deregulates, and that is what should be of primary concern to all for now, can Nigerians cope under a regime where fuel prices (especially for petrol and kerosene) is solely determined by market forces?

As it stands today, under a price regulated environment, the government pays about N75 on a litre of petrol to allow citizens buy the product at N65 a litre. Ideally, it should be sold for N140 a litre. For kerosene, it is believed the government pays up to N70 on a litre to sustain the current regulated price of N50 a litre.

But then, in some states kerosene is sold for between N180 and N200 a litre today. Even the subsidy granted in petrol is certainly not enjoyed by all, as some consumers still report the sale of the product at above N65 per litre in some parts of the country, even in the south-south oil producing areas.

But there is a worrisome truth, which proponents of the fuel subsidy removal have not really factors into their template: the Nigerian economy, revolves around 'cheap fuel' granted by the government. No one can really deny that fact. Anyone that doubts this - or considers it a faulty assertion - should just take a look at the volume of petrol consumed daily by Nigerians who power their homes, vehicles and businesses with petrol-reliant cars and generators. A recent data indicated the figure had gone up from 30 to 35 million litres. For kerosene, it amounts to a daily consumption of 12 million litres. And the reason for this rising consumption can be linked to just one flaw: the epileptic power generation and supply situation from PHCN which has left almost all citizens with no choice than the utilization of petrol and kerosene as alternative sources of energy.

So, with most homes or families spending the bulk of their disposable incomes on self-generated electricity, and on accommodation, transportation, education for children and other dependents and feeding, have proponents of the fuel subsidy removal policy given a thought on the impact the policy will have on the masses of Nigerians?

Have they cared to find out how financially buoyant Nigerians are to buy petrol at an average price of N140 per litre (and it could go up to N200 a litre in some northern states) when the industry is deregulated?

Have they bothered to ascertain if fuel subsidy removal will truly boost or will worsen the poverty situation in the country?

The possibility of an inflation evolving with the fuel subsidy removal is one that no one can honestly rule out. Prices of food items and other services are bound to go up, especially in the first few months of the policy implementation, even if it will come down later, as many have argued.

Take such common services like hairdressing, common eateries, welders, vulganisers, grinders, cool-room and refrigerating businesses, and these all power their appliances largely from generators benefitting from 'cheap petrol'. When the subsidy is removed, no one can deny these groups will jack up the rates or prices of their services or goods - and pass it over to consumers because they are also made to buy petrol at far more exorbitant prices. And because commercial transporters who fuel their vehicles with petrol will pay more for the product, the cost of transport fare is also bound to go up.

And then there is no guarantee that if landlords who are made to pay more for other services will equally not feel compelled to jack up house rates. The spiral effect could even be worse than the picture already painted. And if you ask if incomes will be upped for both public and private sector workers, the answer is a resounding No!

Why hell-bent on subsidy
It is not the absence of crude oil or even its refined product, if it were gotten in-house that is propelling the government to be so adamant in its quest to end the fuel subsidy regime. Rather, the problem can be traced to the absence of functional refineries in the country, a trend that has seen the country become a net importer of petroleum product.

The other factor is the dearth of necessary infrastructure to store and pump the products from the ports in Lagos and Port Harcourt to consumers in other parts of the country. Initially this was done via large storage facilities and pipelines managed by the Pipelines and Petroleum Marketing Companies (PPMC). Today, these facilities are non-functional or too weak to support the large volume of products consumed daily in the country.

So a typical template of the subsidy regime, which is a refund paid to marketers, contains both the cost of freight, storage of the products, and transportation of the products from the ports to other destinations in the country for end-users.

So the government is subsidizing, to a very large extent, its inefficiency. Had the refineries and fuel storage and distribution facilities been functioning effectively, the added cost on products won't have been that high.

Having been boxed to a tight corner by the dearth of these facilities, the other option left for the government is to deregulate the industry because that remains the only open door that allows private sector funds into the sector.

This fact is unmistakably stated and defended by Jonathan's former Interior Minister, Capt. Emmanuel Ihenacho, who is also an operator in the downstream sector of the oil and gas business.

Ihenacho, in an interview with Daily Sun, and trying to debunk speculations on the existence of a cartel within the oil marketing group benefitting from the subsidy regime, said deregulation and fuel subsidy removal had emerged as the last option for government to wriggle itself out of the mess in the industry and free up funds for other capital projects.

'Oil marketing firms involved in the importation and distribution of petroleum products in Nigeria are in no way benefitting from the fuel subsidy regime implemented by the Federal Government in the oil sector,'Ihenacho said.

Ihenacho, whose company (Integrated Oil & Gas Limited) is involved in the petroleum importation business, said it was erroneous to single-out marketers as the greatest beneficiary of the subsidies in a manner that tended to suggest they were sabotaging the economy.

According to him, oil marketers, rather than rip-off the economy, were in fact making huge sacrifices to supply products on credits for consumers with very thin profit margins.'It is the money spent by the oil companies to import fuel and distribute that is being refunded,' said Ihenacho. 'It is not free money for the marketers; it is certainly not a benefit. People have to get this right because the impression created out there is very negative and untrue.' And he proceeded to shed light on how the current import tariff structure works. Oil marketers, he said, land petrol at the Lagos port at about N140 per litre, but because the product is subsidized, it is sold at N65 per litre to consumers.

'The Federal Government has to pay back or refund the marketers the balance N75 which is often referred to as the subsidy sum paid by the government to ease supply at a cheaper rate to consumers, notably the poor,' Ihenacho said.'We put in the money and what we get is a refund. And it must be noted that marketers approach banks for credit facilities to import and it is usually a three-month cycle which comes with an interest paid to the banks. And you have to show approval from the Petroleum Pricing Regulatory Agency (PPPRA) to the banks to get credit.

'It should also be made clear that the government does a thorough investigation into claims by marketers before payment is made. And because of the nature of the agreements with the banks, the government pays the money directly to the banks whenever the re-imbursement has to me done. So where does the marketer benefit. Even the poor doesn't benefit,' he added.

Ihenacho said under a typical import deal, a marketer invests about N4.5billion to bring in a cargo of fuel, but he noted that after all the subtractions have been done, a marketer could end up with just about N100million or slightly more as profit.'No oil marketer can claim to have gotten up to two per cent of what he borrows from the bank for the business. Is that a deal anyone in business can really say the marketers are benefiting?' he queried.

He said markets were quite aware that the beneficiaries of fuel subsidy were not the poor but the rich. 'Those who can drive to petrol stations to fuel two, three, four or more cars - these are the ones benefitting,' Ihenacho said.

'So marketers support the removal of fuel subsidies because as it stands the government is simply subsidizing the lifestyles of the rich. The poor man and woman is in fact robbed of many things in the name of subsidies; robbed of good schools, roads, electricity, security, hospitals etc.

'We want government to put an end to the subsidies and reallocate the resources spent on subsidies to other projects that will benefit the poor.  We know that the President is not finding it easy with funds for projects. If we can save N1.4triilion spent on subsidies yearly, we can improve the state of our infrastructure

'Subsidies are a waste of money. The removal of this subsidy and the deregulation of the industry will also allow private investors come into the country to establish oil refineries. And the country will be better for it,' he concluded.

Crush the cartel responsible for the graft in the downstream sector of the oil and gas industry, apprehend and prosecute the group of racketeers having a field day in the petroleum products import and distribution business, and citizens will acknowledge the government has the will to re-invest the gains from the removal of fuel subsidy to the betterment of citizens.

This is the position of Edo State Governor, Mr. Adams Oshiomhole on the subsidy removal issue and how to end the corruption in the system.'I support the deregulation of the oil sector because I realize that this President has no other option. It is even unthinkable that the prices of other products and good sin the market has moved up in the last five years following the increase in the pump price of petrol, so petrol cant remain the only item that should remain the same. My worry however is that if this President doesn't take this decision it is very possible that the Nigerian economy may crash,' said Oshiomhole.

'But we have a right to insist that every naira resulting from the implementation of the policy is being spent to improve lives of citizens. We have a right to insist that the money does not end up in the pockets of a few,' he added.

Oshiomhole while faulting the over 35million litres of petrol consumption per day in Nigeria, said it was important for government to move speedily to crush the cartel responsible for the fraud in the system. It is the activities of the cartel that results in an overinflated figure both for products consumed and the over N1.3trillion being spent by the federal government to subsidize fuel.'The gap between what is budgeted and what is spent is far too wide. The fraud in the industry has to be checked and the time is now,' said the Edo State Governor.

'There are candidates of prison walking the streets free and these are those involved in the fraud in the petroleum industry and the system appears not to be capable of handling them.' Oshiomhole said past attempts to get the system audited had failed with the local audit firms and that when efforts were made the bring in foreign reputable audit firms to audit the accounts of the NNPC and petroleum ministry, the cartel had moved in quickly to thwart that effort. He said President Jonathan has to exhibit the rare courage to prosecute officials of the NNPC and petroleum ministry involved in the award of contracts for the turn around maintenance of the refineries noting that there was a possibility that funds allocated for the projects were misapplied or misappropriated.

Interestingly, Oshiomhole while supporting the deregulation of the petrol business, queried the government deregulation of diesel and low pour oil fuel  (LPOF) business saying it was counterproductive and a negation of the government's poverty eradication and job creation policy.'You can not deregulate diesel and low pour oil fuel used by industries and then you make things difficult for their business and at the same time you say you want to create jobs and end poverty,' Oshiomhole said. According to him, the deregulation of diesel and black oil had upped the cost of operation of the industrial sector as the two fuels provided the ready alternatives to PHCN epileptic power supply to the industrial sector. Government, the said, had failed to reason in this direction. But it was not too late to effect a change, the governor said. His views on corruption was supported by right activist Mr. Femi Falano who said the nation had enough laws to check fraud in the oil industry, but sadly, the government had exhibited the inability to enforce the law.

Battling a prevailing cynicism
Inheriting a country bereft of the necessary infrastructure to support the growth of the economy, the Jonathan's government has also failed to move at the pace that matches the yearnings - or enthusiasm - of citizens. The initial goodwill that greeted his Presidency is gradually waning and is being replaced with a high level of cynicism. That a key battle the government has to fight; re-convincing citizens it has the will and courage to deploy the millions that will be saved from the fuel subsidy removal for the right cause - rehabilitating the poor state of the nation's infrastructure.

The Jonathan's government continues to hinge its deregulation quest on the non-availability of funds for capital project given that it spends N1.4billion on fuel subsidies.

Electricity remains the most visible as generation continues to hover around 3,000 and 3,400megawatts. Businesses in the country are badly affected due to poor electricity supply and this, more than any other factor, has stalled efforts to boost employment. One out of three industries that set out in a year is believed to collapse due to the high overhead incurred generating power via either diesel or petrol powered generators. The healthcare sector is not faring better. An unquantifiable billion of naira is lost annually as the poor state of our health care institutions has forced many citizens to seek for medical attention overseas. In education more Nigerians now patronize academic institutions outside the country, including neighbouring Ghana. The state of our roads is not getting better stalling both intra and intra-state movements. Security is also a major threat, hampering even investments. Had these crises been resolved, marketing the fuel subsidy idea would have been much easier for the government.

The PIB as bottleneck
Until the Federal Government gets the PIB out as law, managing the economy properly and prosperously will remain an uphill task to his regime. Not even the administration's believe that the deregulation of the oil and gas industry with the stoppage of fuel subsidy will become a reality, without the PIB becoming law. That is the only legislation that empowers the federal government legally to effect changes in the oil and gas industry.

It is gladdening to note that President Jonathan knows the obstacles posed by the non-passage of the PIB into law for he clearly stated in his budget speech a readiness to resolve the crisis stalling the bill.

'The Federal Government is conscious of the need to bring the Petroleum Industry Bill  (PIB) debate to conclusion so as to give investors the comfort and policy certainty that they require,' said Jonathan.

'My Administration is determined to bring this matter to closure by engaging with all stakeholders and I therefore call on the National Assembly to work with us in this regard,' he added. But Jonathan added that efforts were equally made to resolve the crisis in the electricity sector.'My Administration is pressing forward with key structural reforms. We are implementing the privatization of the power sector based on the Power Roadmap which I unveiled last year,' he said in his budget speech.'We believe that the power sector can benefit from liberalization and privatization by attracting investors in the same manner as the telecommunications sector has done.

In the same vein, government will come up with policies to encourage investment in the downstream sector through liberalization so as to create jobs for our people.' Petroleum Resources Minister, Diezani Alison-Madueke said government was concerned about the impact the removal of subsidy will have on the economy and citizens and has taken steps to ameliorate such hardships.

He said efforts were ongoing in fixing some of the infrastructures especially roads and the local refineries. According to her, the original contractors who built the refineries had been brought back to carry out their Turn Around Manitenance (TAM) a development that has resulted in  a 50 - 60 per cent increase in the capacity utilization of the four-state-owned refineries. She said, hopefully, in the next 18 months the situation would be better.

But she cautioned,' It is not in the best interest of the government to remain in the business of refining petroleum products in Nigeria. Government will be better in holding equity but we will have to allow the private sector do this. We need to deregulate; we need to upon up if must grow.'

Alision-Madueke said the benefits of the deregulation policy was being worked out and expressed strong optimism that the masses will be better-off with the policy.

According to the petroleum minister,  the government had agreed to set up a Board to manage the proceeds that will accrue from the deregulation policy. The Board will be constituted by the President and would comprise eminent and reputable Nigerians drawn from all sphere of work and from the six-geo-political zones.'I can assure that deregulation benefits are being worked out by the government,' She said. 'We are also carrying out changes in the regulatory agencies like the PPPRA and DPR to ensure they meet up with the challenges of the policy. we are all working for the poor in our country and we need the support of all,' she added.