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Dec 18

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Energy Subsidy in Nigeria: Why, How & Way Forward - Okechukwu Onwuka

 Photo: africanleadership.co.uk

Photo: africanleadership.co.uk

Subsidy: In Simple Terms

Our lives revolve around energy utilization from domestic and industrial heating, cooking, transportation, lighting, construction to day-to-day business operations. The need for energy also includes industrial manufacturing, power systems, medicine, and healthcare provision among others. For this purpose, Governments all over the world provide one form of Energy subsidy or another. In simple terms, Energy subsidy is the costs borne by the Government to give citizens cheaper access to Energy or Energy products such as Petrol, Kerosene, Diesel and Electricity.

In other words, any Government action that lowers the price paid by energy consumers is an Energy subsidy. This subsidy may also result in lowering cost of energy production or increases the revenue of energy producers.  There are two main types of subsidies: Consumer Subsidies and Producer subsidies (Burniaux et all., 2009).

Regardless of subsidy type, governments can effect the action via a number of ways including but not limited to:

· Tariff Benefits: waivers or lowered customs duties, etc.

· Preferential Tax regimes/treatment

· Subsidized Energy-related services, such as power supply by PHCN in Nigeria

· Regulation of the Energy Sector, i.e. fixing the prices of retailed products and paying the differential cost incurred in producing and delivering the product. This is the case with Petrol and Kerosene in Nigeria.

· Direct Financial support or concession: better exchange rates, lower interest financing, waivers, direct Government loans.

One common subsidy objective is to drive economic and business development and also give the people reason to feel the support of the Government. In Nigeria, a major producer of crude oil, it is expected that Nigerians should benefit from energy subsidy in one form or another. For this article, we shall focus primarily on the subsidy that lowers the price paid by energy consumers for Petrol.  

Diesel was formerly part of the subsidized products but is now fully de-regulated. Allowing marketing companies with statutory licenses, permits and finance, import directly and compete effectively for the huge diesel market share Nigeria currently offers.

 

Subsidy: Issues and Way Forward

The issue of subsidy; to remove, sustain, or lower it, has been a recurrent thorny issue in Nigeria. Attempts to remove the subsidy and deregulate the sector completely, has often met with massive opposition by organized labour and the masses in general. There have been claims and counter claims. Some claim there is no subsidy at all, and that all the subsidy business is about corrupt enrichment of a select few in Government; friends of the Government and powerful individuals. Others argue that the subsidy figures are inflated or manipulated. 

Some others argue that the masses do not benefit from the so called subsidy, as the product is sold at higher rates in many states outside of Lagos. Interestingly, some marketers are even calling for a complete deregulation. Some ask why we have three major refineries, one each in Port Harcourt, Warri and Kaduna, and we continue to import refined petroleum products. While some arguments are subjective, others are objective. Whichever side of the divide you opt for, the fact remains that the majority of the populace believe that, as a major producer of crude oil, Nigeria should not be in the business of importing refined petroleum products. Rather, the country should have the capacity to refine its crude locally. They argue that we should be able to meet our demand for the refined product, and also price the locally refined products at rates that match, or better those of other oil producing nations; and if need be, export what is left, after maintaining our strategic stock reserves.

 Photo:cdn.guardian.com

Photo:cdn.guardian.com

When you consider the primary objective of Subsidy: Lower energy costs to drive economic and business development, the way forward should be the strategy that truly benefits the majority of Nigerians and the economic prosperity of the Nation. The subsidy application should stimulate growth and add measurable value. The vehicle for the implementation should also discourage systemic corruption.

Has Nigeria achieved this objective with the current subsidy administration? The answer is NO. Industrial development is stunted, cost of power remains high as businesses depend on diesel to power their facilities, resulting in high costs and reduced profitability. With subsidy costs sometimes up to $5.5b per annum, the prospects do not look encouraging for the future in terms of sustainability. It is impossible to do justice on all the conflicting factors surrounding the subsidy issue in Nigeria on this piece but my suggested way-forward improvements are highlighted below:

· Government needs to be bold (accept that interest of the entire Nigerian population is of far greater importance that satisfying a few stakeholders) and make policy changes on Energy subsidy. Political heavy-weights are important for re-election, but an overwhelmingly satisfied populace, will make re-election a lot easier.

· Place an 18-month timeline for products pricing subsidy removal effective from a reference future date. This will give the people benefitting from the subsidy, via corruption or otherwise, just enough time to plan their exit strategies to other businesses. This would also minimize the resistance to fuel-price subsidy removal from sponsored parties.

· Change the mechanism of energy subsidy from Petrol pump price subsidy to alternate production based subsidy. This would assuage the masses to some degree in knowing that the Government is still in the business of subsidizing energy for economic growth and improvement to quality of life. A significant portion of petrol consumption in Nigeria is used for domestic power generation. With more reliable power generation and supply in Nigeria, there will be significant savings in consumption and associated subsidies, in the current dispensation. This savings can be diverted to energy production support (Power, Refineries, Petrochemicals, etc.)

·  Put in place a Law that compels All Oil Producing Companies in Nigeria to refine at least 30% of their crude oil in Nigeria. The conditions for renewing OML licences should include the successful commissioning and operation of a standard refinery in the operating area. Allow competition between Refining companies to determine pump price of products. The West African Market also provides additional sales opportunities for Nigerian oil companies due to lower transportation costs, compared to overseas refineries.

· Allocate 2-Years subsidy savings as Direct Financial grants or support to private companies to build refineries in addition to Oil Producing companies. Publish the names of beneficiary companies in national newspapers. $10b dollars will surely build a few refineries. Competition between the various private companies will benefit the masses in terms of lowered prices.

· For each recommendation, there are negative and positive risks. Successful implementation would require associated risk assessments to ensure all high negative risk issues are matched with appropriate risk control measures.  Positive risks shall also have measures to pursue realization.

In summary, it is safe to conclude that the continuation of subsidy via discounted pricing at the pumps is a drain on the country's economy. 

The ultimate solution, however, is for us as a nation to increase our present refining capacity to levels that will ensure we do not have to import refined petroleum products at exorbitant international prices, which inevitably results in either an increase in pump price, or added subsidy from the Federal Government. 

Government however needs to create the right and compelling environment for the establishment of new refineries, and also resolve the issues regarding the steady supply of crude oil especially from the Niger Delta region of the country, to service the proposed refineries. 

This will in addition to making products readily available, drastically reduce the cost at which refined products are available to the populace, and also be a source of employment for our teeming youth population.

 

 

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