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Nigeria: Subsidy Controversy – What Labour Told Govt 10 Yrs Ago

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Over the years, successive Governments from military regime to current civilian dispensation have used subsidy and deregulation gimmicks to exploit and inflict pains on Nigerians whenever they need more revenue.

Starting from late General Sani Abacha’s regime, the purported subsidy removal led to the set up of Petroleum Task Fund, PTF, and up till the present Muhammadu Buhari led-administration which in 2016 jerked up the price of fuel from N86.50 to N145 promising that the extra fund would be saved for among others, social welfare and repair of the refineries.

The government also told Nigerians that the fund would be jointly managed by a federal government committee and civil society organizations, CSOs.

What has happened since then is left for Nigerians to decide.

Now that the nation is back to the same road, it instructive to recapture the report of Nigeria Labour Congress, NLC, Committee on deregulation in 2010 for Nigerians to interrogate whether the government of today is telling the citizens anything new.

NLC’s report

Among others, NLC report said “the subsidy claim by government with regard to the difference between oil crude to NNPC for domestic market and the international market price is a notional subsidy or an opportunity cost. The position of the NLC is that even at the current or indeed any price at which a barrel of crude oil is sold to local refineries, the Federal Government still makes a profit.

This is because the production cost of crude is always less than the price of a barrel of crude oil. This profit is apart from the royalties and petroleum profit tax accruing to the Federal Government on the crude oil produced. The situation did not change even when the price of a barrel of crude oil increased over the years. Why complain about subsidy, when profit is made?

“Currently, government claims that it paid out N1.2 trillion in the period 2006 to 2008 and about N600 billion in 2009 in subsidies to meet the shortfall between the costs of imported petroleum products and their selling prices locally in Nigeria. This claim also raises a number of fundamental questions: How much does government actually pay out in subsidies and for what? To whom are these subsidies paid? What makes up the cost structure of the subsidy or what makes up or contributes to the subsidy? Finally and most fundamentally, why should Nigeria import finished petroleum products instead of producing them locally?

(a) First, the government claims that it pays out an estimated N600 billion annually and that the amount of subsidy has increased dramatically over the years. The question we should ask here is where do the figures of government come from? We know that they are not provided by any department of government. Top government functionaries admitted this in a recent meeting that involved ministers, governors and the President. The government not only admitted that it does not have its own data on subsidies but confessed that it gets its figures from oil marketers! We all know that oil marketing companies cannot be a credible source of such sensitive data because they are the ones to

The worrisome aspect

“More worrisome is the claim that the amount government spends is increasing. To expose the problem with this claim, we only need to know what is subsidised and what quantity of the product is subsidised. At the beginning, government claimed it was subsidising three petroleum products: diesel oil, kerosene and fuel oil.

In the last two years, government withdrew the ‘subsidy’ from diesel oil and kerosene. The situation now is that only fuel oil and one brand of kerosene are subsidised. Is it not surprising that government should claim that the amount of subsidy is increasing even when only one of the three products is currently being subsidised?

The problem with this claim can be further exposed when we look at the quantity of Premium Motor Spirit (PMS) that is consumed in Nigeria. Existing data shows that the amount of subsidy claimed by government cannot be supported by the quantity of PMS consumed.

(b) Te whole no more subsidy argument collapses when we look at the components of the subsidy. “The main elements of subsidy arise from (i) production costs (ii) demurrage costs and landing costs. It is crucial to note that owing to government’s own failed policies, the refineries now produce lower than what the nation consumes and to meet this demand gap, government contracted companies outside of Nigeria such as Spain, which is not an oil producing country, to refine petroleum products for the Nigerian market.

Given, for example, the fact that Spain is not an oil producing country, the cost of refining there is higher than what would be obtainable in countries that have a domesticated technology for refining oil because they produce crude oil. This higher cost is passed on to Nigerians as subsidy. Is this the fault of the Nigerian people?

Imported products

“After being refined in foreign countries, the refined products are then taken by marketers and imported into the country. Demurrage which is the cost incurred by reason of transaction delays in the ports of a country are normally charged by the importer for the duration in excess of the number of days agreed for evacuating the product. In the case of oil imports into Nigeria, the shipping companies or the marketers charge demurrage from the time the products leave the country of importation rather than from the day the ship arrives in Nigerian ports.

This amount which forms a huge part of the cost of subsidising petroleum products has not only been known for years to government, it has been maintained in the interests of the profits of marketers. This is considered by the NLC as fraud.

“Moreover, when the ships carrying products arrive in Nigeria, they cannot berth close to the jetties where the products can be evacuated because the ports are shallow and need dredging to allow the ships in. For example, the Atlas cove which is the main landing port for the products was built to handle a much smaller volume of fuel cargo.

To overcome the problem, smaller boats are used to offload the products and the products are then ferried to the jetties for evacuation into tanks. The government has been aware of the need to dredge the ports for a long time so that the additional costs of paying smaller boats to evacuate and ferry the products (which then also add to the total cost of demurrage) can be avoided. Rather than invest in the dredging of the ports, the government prefers to deregulate in order to swell the profits of marketers! Deregulation will not remove these costs; it will increase the costs which will then be passed on to the hapless Nigerian.

“Lastly, the fundamental question which government needs to answer is, why should Nigeria import petroleum products and which of the oil producing counties import refined petroleum products at the rate that Nigeria does? The answer lies in the fact that government has failed to repair existing and build new refineries as other oil producing nations are doing. Nigerians cannot be made to pay for the failure of government because they are not the ones in government house.”

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