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Nigeria’s downstream petroleum sector deregulation’s endless crisis is largely the result of absence of consideration of the nation’s political economy in the formulation, design and implementation of the policy from the onset. The fact of the matter is that Nigeria, for over 30 years has been trying to transit from a largely Keynesian type of economic management paradigm to a neo-liberal “Washington Consensus” economic management paradigm; largely anchored on “free market” fundamentals or in other words, market-oriented reforms.
Thus neo-liberal economic policy consensus has been the main driver of the Nigerian downstream petroleum sector’s reform with respect to pricing and subsidisation issues over the past 30 years or so. The main aim and objective of such a policy shift is to among others, ensure increased economic and energy efficiency, energy and fiscal conservation and fuel substitution.
However, since 1986, when the first major reform efforts or initiatives were introduced in the downstream petroleum sector, consumers of petroleum products in Nigeria have been in perpetual quandary and worse-off by the reforms. The reform initiatives were introduced under the broader World Bank’s and International Monetary Fund’s (IMF) inspired and guided Structural Adjustment Program (SAP).
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Thus, as mentioned above, the reason for the perpetual conundrum in the Nigerian free market-oriented downstream petroleum sector deregulation policy can be largely understood using the tools of modern political economy. The reason is not far fetched. For example, empirical studies show that a reduction in the government subsidy raises petroleum prices and production costs throughout the economy. Consumer demand, production, and income decline as output prices increase and consumer purchasing power decreases. Furthermore, an important result of empirical studies is that urban household groups will be the most significantly affected by the subsidy reduction. This largely explains why oppositions to price liberalization and subsidy removal are largely urban phenomena in Nigeria and in other climes implementing similar reforms in developing and transition economies. Hence fuel price liberalization and subsidy reform have often been difficult to implement in Nigeria, for example.
To overcome oppositions and barriers to successful deregulation of Nigeria’s downstream petroleum products sector; which entails fuel price liberalization and subsidy removal, government’s reforms should include steps toward building political support from across the organized urban based stakeholders and introduce a set of safety net programs to shield the urban and rural poor from subsidy cuts. This is where political economy consideration becomes vital to successful domestic fuel price liberalization and subsidy reforms formulation, design and implementation in the present dispensation of President Yar Adua’s administration in particular.
The challenge before the administration, therefore, in the face of mounting organized oppositions to the current full scale deregulation efforts is to urgently establish a political economy framework that will facilitate a successful implementation of pricing mechanisms that are resilient to such oppositions and at the same time accommodative of the price increases. Thus, this is a great challenge to President Yar Adua’s created downstream deregulation implementation committee under the leadership of Bauchi State Governor, Mallam Isa Yuguda.
Therefore some of the considerations of Yuguda’s Committee and the NNPC management under the new leadership of Dr. Sanusi Barkindo should thus, when evaluating removal of subsidies, it is important to assess their impact on the efficiency of resource allocation, the distribution of resources, the fiscal burden, and their spill over effects and most importantly, put in place measures towards building political support. For example, measures to overcome vested interests include promoting transparency, safety net programs to shield the poor from subsidy cuts and educating the public.
But, the most difficult and or challenging tasks are: building political support, formulating, designing and implementing social safety net to insulate urban and rural poor from the spill over effects of subsidy cuts. Building political support is a herculean task because the past efforts of placating the organized labour, trades and students unions were not successful over time.
Moreover, the notion that transparent reporting of subsidies helps clarify the cost of subsidies and assess trade-offs through public debate has not worked in the case of Nigeria either. For example, over the years, the Nigerian public, particularly the organized civil society groups mistrust the government over subsidy figures. In particular, assuring the public that the savings from subsidy removal and or reduction will be used well to promote pro-poor programs and projects -for example to finance additional spending to achieve the Millennium Development Goals (MDGs) has been rejected by the organized civil society groups in light of the high level corruption and looting of public funds ear-marked for such purposes. For example, the mismanagement of the Petroleum Support Fund (PSF), Petroleum Equalization Fund (PEF) and petroleum products round-tripping, power, health and transport sectors rehabilitation scams are cases in point.
Therefore, how to overcome or politically handle and deal with the vested interests created by the prolonged existence of price control and subsidies are at the roots of understanding of the political economy of the real and distributive effects of petroleum products price liberalization and subsidy reform (i.e. downstream deregulation) in Nigeria today. Hence, addressing political economy issues requires a multi-prong approach. Therefore the following steps are thus suggested for consideration by the Governor Yuguda’s deregulation presidential implementation committee and the new management of the NNPC:
a) Establish a multi-stakeholder institutional Civil Society Census Framework for dealing with organized oppositions to deregulation implementation and genuine concerns of Niger Delta stakeholders with specific emphasis on government and corporate social responsibilities in the communities negatively impacted by oil and gas exploration, development, production and pipeline transportation activities. The principal purpose of this framework is to negotiate with organized civil society groups on modalities and trade-offs of deregulation implementation.
