The deregulation of the price of premium motor spirit (PMS) is naturally off the agenda in the run-up to the elections scheduled for February 2015. The 2014 budget projects spending within the subsidy reinvestment and empowerment programme (SURE-P) of N268bn, little changed from the allocation the previous year (some of which was not disbursed).
It would be unusual if the contesting political parties were to advocate the reform during campaigning. No electorate wants to be told to expect a policy change which they will feel directly in their pockets. However, we hope very much that the new administration in power after the polls moves quickly to remove the remaining fuel subsidy, which has become an insupportable fiscal cost in the context of Nigeria’s economic development.
The related arguments for the status quo are that the subsidies are “pro-poor” and that the state has an obligation to provide a basic commodity to the population at large. They were successfully deployed by an alliance of the labour movement and commercial interests in January 2012 when the FGN made its most recent attempt at deregulation. They prevailed despite their inherent weakness because of the government’s credibility gap. The greatest beneficiaries of the subsidies are the car-driving middle class. As for the state’s role, its failure to deliver product consistently speaks for itself. There was a time when governments felt they had to refine petroleum, run a national airline and produce steel. This time has passed, and in Nigeria’s case each project has failed.
We read that the four NNPC petroleum refineries achieved 26% average capacity utilisation in December, compared with 6% the previous month and 31% in December 2012. This is a poor advertisement by any criteria for a 30-year experiment in state ownership of the industry. When we make allowances for the government money pumped into the four NNPC refineries for maintenance and upgrades over three decades, we have to question their purpose.
The solution in our view is to remove the subsidy and wait for the private sector to build greenfield refineries. There is no shortage of viable projects with credible backers. The one with the highest profile is the Dangote Group’s proposed US$9bn petroleum refining and petrochemicals complex on the coast near Lagos. The group is talking of completion as soon as 2016 and refining capacity of 400,000 b/d. None of these proposals is likely to materialize until deregulation and the replacement of the subsidy with a market-based structure. Once the new refineries are meeting domestic consumption and,, in all probability, exporting to the sub-region, we assume that the NNPC refineries would, NITEL-like, wither away.
Other benefits are self-evident. On the fiscal side, the cost of the subsidy in 2011 was as high as N2trn. The following year, when the FGN failed to deregulate but at least hiked the retail price of PMS, the annual cost halved to about N1trn and remains around that level. When the FGN finally achieves its mission, we recognize that these costs will not all be saved. In order to push the measure through and avoid the nationwide protests of January 2012, it will have to soften the blow.
This could mean an enlarged version of SURE-P. A more imaginative approach would be more effective. In Iran, for example, all households received a one-off payment in their bank accounts. This had the advantage of not adding to the base of recurrent spending, which in Nigeria’s case is close to choking economic development. The other point to make on the fiscal side is the close relationship between subsidy and fraud. The National Assembly, the CBN, a number of officially appointed commissions and numerous think-tanks have already had their say on the subject.
There are gains too for the balance of payments. In 2012 imports of energy products amounted to US$18.8bn, of which a large proportion would have been refined petroleum products.
Asset sales by the government in Nigeria have a mixed record. NITEL has been an embarrassment although cement was successful. More recently, there was the unbundling of the Power Holding Company of Nigeria (PHCN) into privately-owned generation and distribution companies across the country. The sales proceeds have been consumed by severance payments to former PHCN employees but, more importantly, a failed system has been replaced by one with the potential to meet consumption demand (once the state has made the right policy choices on transmission and gas supplies).
The next step is the sale of an 80% stake in ten national integrated power projects (NIPPs). Preferred bidders were announced last month, and the Bureau of Public Enterprise has indicated that the sales could generate as much as US$5.7bn. This would represent about one fifth of projected total gross spending in the 2014 budget although we do not expect a sizeable contribution to deficit financing from the privatization.
The case for subsidy removal, as for the unbundling of the PHCN, rests not upon fiscal gains but on the development of the economy’s productive base and the resulting wealth creation. We just hope that the new administration next year will impose fuel price deregulation at the outset and allow the private sector to offer a new experience for the vast majority of Nigerians: a steady supply of PMS.
Gregory Kronsten
