Will Nigeria exit fuel importation and fraudulent subsidy?

“In 2011, when I was CBN governor, Nigeria made $16bn from petroleum sales, and we spent $8bn importing petroleum and spent another $8.2bn subsidising the product…and I asked, ‘Is this sustainable?” – Emir of Kano, Sanusi Lamido Sanusi on June 26, 2019 during the third national treasury workshop held in Kano.

In 1988 the military junta of General Ibrahim Babangida embarked on importation of refined petroleum products while the country’s four refineries undergo the required Turn Around Maintenance. Because the cost of the imported products will be higher, the administration decided to introduce subsidy in order to make the product affordable to Nigerians. The entire package of fuel importation and subsidy was to last for six months. Lo and behold, what should be temporary measure has become a permanent feature of our economic life.  31 years after its introduction, Nigeria still shamelessly imports refined petroleum products while the corruption ridden subsidy regime continues.

Successive administrations, both military and civilians, had promised and failed to make Nigeria self-sufficient in domestic refined petroleum products. Former President Olusegun Obasanjo’s administration in 2002 approved 18 Licensed to Established popularly known in industrial parlance as LTEs but only one of them had come on stream with just 1,000 barrels per day capacity. The refinery is operated by Niger Delta Petroleum Resources which produces only automotive gas oil, better known as diesel.

There was a news report in Vanguard newspaper of August 28, 2015 that President Muhammadu Buhari in June 2015 granted licenses to 65 Nigerian companies to construct modular refineries. The companies were allegedly selected from about 285 applications that were screened for the purpose. Modular refineries are mini-refineries with capacities ranging from 1,000 to 10,000 barrels per day,  which can be assembled and separated easily for enhanced performance and efficiency. How many of these MRs have been constructed?

To the best of my knowledge, out of the whole lot of LTEs only Alhaji Aliko Dangote has braved the odds to commence construction of a  650,000 barrels per day crude oil refinery  which is expected to commence production latest by 2022 according to August 10, 2018 report in Reuters.  Even Obasanjo sold off two out of the the comatose refineries in Kaduna, Warri and Port Harcourt. However, the administration of President Umaru Musa YarAdua was forced to rescind that decision due to pressure mounted by some Nigerians. Since then, despite the millions of dollars pumped into their Turn Around Maintenance none of the local refineries is working optimally.

Many of the entrepreneurs licensed to build refineries have refused to do so because of the guided deregulation policy of the petroleum sector. They are afraid that should they build, they are not guaranteed of cost recovery as government policy has put a cap on amount they should sell the products not minding if they are going to be operating at a loss. This is what has happened to Nigeria’s electricity sector where government have forced Distribution Companies better known as DISCOS not to charge cost recovery tariff while at the same time defaulting in payment of the subsidy. Lack of full implementation of the   Multi-Year Tariff Order which is a tariff model meant to reduce commercial losses and leads to cost recovery in the Nigerian Electricity Supply Industry is at the centre of why privatisation has not worked in resolving Nigeria’s electricity challenge.  

Before the recent call for subsidy removal by Emir of Kano, Sanusi Lamido Sanusi, in April 2019, the Managing Director, International Monetary Fund, Christine Lagarde, has called on the Federal Government to remove fuel subsidy. Addressing a press conference on Thursday, April 11, 2019 at the joint annual spring meetings with the World Bank in Washington DC, the IMF boss said with the low revenue mobilisation that existed in Nigeria in terms of tax to Gross Domestic Product, it was important for the country to remove fuel subsidy. Largarde said by so doing, the country would be able to move funds into improving health, education, and infrastructure

Sincerely speaking we are postponing the evil days by not fully deregulating the petroleum sector. Running the economy on imported refined petroleum products and paying over a trillion naira in subsidy annually is not sustainable. The subsidy regime has been grossly abused with many false and unverified claims being made by some importers of the products. There have been insinuations that because this subsidy is the honeypot of some oil cartels operating within and outside of the shores of Nigeria, that is why there has not been the political will from the federal government to ensure local self-sufficiency  in refined petroleum products.

Before coming to power in 2015, the All Progressives Congress had patently said that subsidy is a scam and indeed there is no subsidy on petroleum products. Four years into this administration, there is now a new song. They call theirs under-recovery. In a January 2018 interview the then Minster of Finance, Kemi Adeosun, was asked about  who pays the differential between the N171 landing cost for the Premium Motor Spirit and the N145 pump price. She responded thus: “…..technically today, there is no subsidy but there is under-recovery. Why that is so is because the NNPC is currently doing all the importation. They are importing at a higher price than they are selling, which means they are losing money. So, there is no subsidy payment in the way the old subsidy scheme used to work where they were paying the oil marketers, but there is an under recovery, a loss on the importation of the PMS being borne by the NNPC and therefore indirectly being borne by everyone one of us.”

According to Premium Times report of December 26, 2018, the Nigerian government incurred N623.17 billion on petroleum products supply under-recovery cost between January and November 2018. It is also not true that there are no longer subsidy payments.  On May 30, 2019, the Nigerian Senate flayed the payment of N11tn to oil marketers as subsidy in the last six years, stressing that the development, if not halted, could kill the nation’s economy. The upper chamber took the decision while considering the report of its Committee on the Downstream Petroleum Sector. The Chairman of the committee, Kabir Marafa, had while presenting the report, told his colleagues that Nigeria spent over N11tn to pay outstanding subsidy claims in the last six years. The development came just as the upper chamber also approved the payment of additional N129bn subsidy claims to 67 petroleum marketers.

I am all for the removal of petroleum subsidy so that the trillions of Naira being paid under this corruption ridden scheme can stop. However, for that to happen, the country needs to be self-sufficient in domestic refining capacity. This needs private sector participation. Thus, I suggest that President Buhari should sponsor the Petroleum Industry Bill as executive bill to the Ninth National Assembly and impress it on the leadership the imperative of quick passage. There is need to fully deregulate the downstream petroleum sector so that market forces is allowed to determine the price of refined petroleum products just like is the case with the telecommunications sector. The cost of these products may initially be astronomic, however; competition will force the price down. Full deregulation will incentivize the organised private sector to build private refineries like Dangote is doing. With this done and subsidy removed, the resources being used to pay for subsidy can then be applied to provide social infrastructures.