"WR6_gUnUj-ztiW07KQcOCnTel9A"/> Notes From Atlanta: 11/12/11

Saturday, November 12, 2011

Where is the Fuel Subsidy?


By Moses E. Ochonu

I endorse all that Farooq Kperogi has written on the fuel subsidy debate. Even if it doesn’t sway a government in search of novel ways of inflicting economic pain on its citizens, it will have exposed the grand rip-off that is the “subsidy” regime.

I want to take Kperogi’s excellent analysis in a new polemical direction by questioning the taken-for-granted truth of subsidy. Fuel subsidy is an elaborate fiction that needs to be deconstructed. Much of the public debate on “subsidy removal” has proceeded from a problematic premise that there is a massive and growing government subsidy on fuel that enables Nigerians to access the product cheaply while threatening to bankrupt the state. We are told that to avoid this impending bankruptcy, subsidy must be removed.

With the exception of Professor Tam David West and a few other commentators, those who have challenged the government’s “subsidy removal” plans in the public square have conceded this crucial premise by either declaring their agreement with it or skirting it. This error has enabled the government to escalate its alarmism on a coming financial Armageddon. The strategy has been to spook and blackmail unsuspecting Nigerians into submission to the government’s case. The first stage of this persuasive endeavor is to get Nigerians to accept the myth of an unsustainable government spending on subsidizing cheap fuel for Nigerians.

Fuel is neither cheap nor subsidized in Nigeria. And it is not fuel subsidy that is threatening our economy. To begin with, the official diagnosis of our troubled economy, issued by the government’s economic voice, Ngozi Okonjo-Iweala, contradicts the argument that fuel subsidy is the cause of the government’s financial troubles.  Iweala announced with fanfare recently that the culprit in Nigeria’s financial and infrastructural woes was recurrent spending, which she put at an astronomical 75 percent of revenues.

She was referring to the cost of maintaining the government—salaries, services, and supplies. The biggest chunk of this cost comes from funding the highest-in-the-world salaries and perks of elected and appointed public officials. This is unsustainable, Iweala argued, as it sucks up resources that should go to investments in education, healthcare, roads, and electricity. She vowed to push for a reduction of this figure by 5 percent. This was a paltry ambition on her part, but we applauded her for correctly identifying the source of Nigeria’s financial and infrastructural predicament.

The government cannot have it both ways. It cannot claim that the enemy is government’s bloated recurrent spending and that its reduction holds the key to avoiding bankruptcy and then turn around to cast the blame on so-called fuel subsidy. It is possible that both factors are a drag on our fiscal wellbeing. But why target the price of fuel, which is a strategic national product that has a bearing on the livelihood of all Nigerians while effectively sparing the luxuries of a government incapable of fulfilling even the most rudimentary obligation of governance: public safety? Why seek a solution to our financial trouble that will further decimate the masses while protecting the perks of a tiny political class?

Even posing the above questions concedes too much. For the more pertinent question is: what and where is the subsidy? We must be clear about what the government is subsidizing. It is not subsidizing cheap fuel for Nigerians. It is subsidizing the unmitigated greed of the fuel importation cartel and their friends in high government places.

The government is routinely overbilled for fuel imports, as the scandalous $100 million Trafigura overbilling scandal clearly illustrates. The fuel importers have Nigeria by the jugular. Already rendered incapable of confronting this powerful cartel by its own entanglements, and unwilling to risk an economy starved of imported fuel, the Jonathan administration is doomed to pay whatever fictitious claims the fuel importers submit. With no regulatory oversight over fuel importation and no independent review of importation claims payments, the importers have been having a bazaar at the expense of Nigeria. They can bill Nigeria many times over their actual expenses and pad their invoices with scandalous margins of profit and Nigeria will pay, as long as importation remains our formula for meeting domestic fuel consumption.

Whatever subsidy exists then is not subsidy qua subsidy. It is largely a windfall payment to fuel importers. These payments subsidize the insane profits of the fuel importers and are thus not the main reason why fuel is priced at 65 naira a liter. To call the payments subsidy is to engage in mythmaking of the most callous kind. Unless we separate the legitimate costs of importation from the massively inflated costs and then adjust for the abysmal quality of the fuel dumped on Nigerians, any talk of subsidy is deception on a grand scale.

If the government actually subsidized fuel, if true subsidy existed, Nigerians would not be paying 65 naira for a liter of petrol. We would be paying much less than 65 naira, which, as Kperogi has demonstrated, is the highest among the oil-producingcountries.

The government’s deceptive narrative suggests that once “subsidy” is “removed,” and the fuel industry is “deregulated” this would be the end of the matter and we would not have to deal with the issue again as the price of fuel would be dictated by the forces of demand and supply. There are several fallacies in this claim. The first one is that we have heard the same canard many times over the years only for the government to speak glibly a few years down the road about the crippling fiscal effects of subsidy and the need to once again “remove” it.

Here is why “fuel subsidy” keeps reemerging. Once the government transfers the dubious, unconscionably inflated costs of importing fuel into the country (aka subsidy) to Nigerians, there is no reason why the importers would not inflate their costs and expenses five years from now, especially since they know that, in the absence of a robust domestic refining capacity, the government has no choice but to pay up.  In fact, with successive governments being so quick to agree to their fraudulent financial claims, there is a lot of incentive for the importers to keep increasing their profit margins through claims inflation. The importers and their friends in government have been perpetrating this “fuel subsidy” scam on us for many years. This is the secret of our five-yearly debate on “fuel subsidy.”

 Deregulation is several myths rolled into one. Government spokespeople claim that deregulation would actually reduce the price of fuel. First, despite multiple “deregulations” in the past, the price of fuel in Nigeria has never fluctuated downwards as it sometimes does in the United States. What this says is that deregulation without domestic refining, deregulation in the context of an oligopoly of fuel importers, will not drive competition and downward price fluctuation. This is elementary economic logic.

Second, deregulation by itself has never determined the price of fuel. In the United States where I live, the fuel market is “deregulated.” Yet, as many experts agree, speculative activity in the oil futures market, much of it bordering on illegality, contributes as much to pricing as the mythical forces of demand and supply.

All of this brings us back to the underlying issue: the lack of domestic refining capacity, which is the reason fuel importers and their champions in government have constituted themselves into a class of permanent economic blackmailers who thrive on the myth of subsidy.

The stubborn question is: why should we spend trillions of naira paying the fraudulent and non-existent claims of fuel importers when we can solve the problem at its root by investing that money in the building and refurbishing of refineries? That’s the only way we can eliminate the many costs associated with fuel importation and banish the fiction of fuel subsidy forever.

Dr. Ochonu is an Associate Professor of History at Vanderbilt University, USA, and can be contacted at meochonu@gmail.com

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