Petrol Subsidy Reform: Doing the Right Thing So Wrongly!, By Victoria Ohaeri
…industry watchdogs like Spaces for Change remain cautiously optimistic, and hope that the removal of subsidy will eventually lead to total deregulation of the downstream sector. The red caution flags stem from the government’s poor communication strategy, official price fixing, the petroleum products equalisation fund and other institutional barriers to effective deregulation that are still firmly in place, casting doubts on the sustainability of the recent reforms.
At last, Nigeria has bade farewell to subsidy on petrol, also known as premium motor spirit, ending years of extortionately-high subsidy bills. Nigeria spent N2.19 trillion ($13.6 billion) on fuel subsidy in 2011. This sum was 900 percent more than the N245 billion budgeted for subsidy the same year, and nearly ten times the annual budget for education in 2011, which was then N120 billion. In 2013 and 2014, subsidy costs stayed high at N1.43 trillion. As of May 2016, petrol subsidy claims resumed, snailing into billions of naira after declining oil prices at the international market ushered in a brief period of over-recovery. With this heavy burden of subsidy payments finally lifted off its shoulders, officials heaved a sigh of relief. Doubts, however, linger whether the Nigerian government has done the right thing.
Without mincing words, the Buhari-led Federal Government (FG) could have handled the May 11, 2016 fuel subsidy removal (FSR) quite differently. The same faulty steps of 2012 were repeated, but this time, with greater proportions of insensitivity and dishonesty. The 2012 subsidy removal policy was, by far, better managed: it was preceded by consultations and meaningful engagement with a broad spectrum of stakeholders. In addition, there was a social protection plan in place in the form of wage increases. This was later supported with the institution of a safety net programme (Subsidy Reinvestment Empowerment-Programme (SURE-P) which specifically targeted women and the youth. Despite all of these laudable steps, a wave of resistance against the reforms swept across the country. Sexily branded as OCCUPY NIGERIA, Nigerians screamed, wailed and protested for several days. There were casualties and needless deaths!
The trademark of suddenness heralding the reform of energy subsidies appears to have been elevated to state policy. What probably differentiates the 2012 and the 2016 all-of-a-sudden announcement of subsidy cut is the pattern of public indignation and responses to them. In 2012, public opprobrium was widespread, intense, freely expressed, without inhibitions or fear of repression. In 2016, public outrage was for the most part, repressed, and two main reasons account for this. First, citizens now live in fright of the state, fearing indiscriminate arrests and selective prosecution by security agencies, which have now become the norm in the country. Vocal critics of the government have been hounded by state security operatives, and detained for long periods, pending indeterminately floating investigations, while court orders for their release have been repeatedly flouted.
Second, thanks to the growing shifts in public opinion, the middle class, including the civil society, are seemingly unflustered by the dramatic changes in fuel price. As I wrote elsewhere, the shifts in public opinion could be attributed to increasing information about the colossal levels of corruption riddling the subsidy administration process. Knowledge has also increased about how energy subsidies benefit low-income households a lot less; impose deep cuts on national budgets; discourage investments in renewable energy development; increase atmospheric greenhouse gas concentrations while increasing countries’ vulnerability to the volatility of energy prices in the international market.
As prices soar, and poverty deepens, removing petrol subsidies without a proper social protection plan in place to mitigate adverse impacts of energy subsidy reform, is politically and morally, inappropriate. Empirical evidence shows that subsidy reform triggers inflation, stirring increases in energy prices as we have already seen. When life gets so expensive due to higher energy prices, it significantly reduces households’ effective incomes as a greater portion of expenditure will be spent on buying petroleum products…
There are strong arguments for and against the removal of fuel subsidy. The arguments on both sides are strong and valid. What has been lacking is the political will to take an economically-sensible position, and firmly stand by it, from design through implementation. I have in the past, argued that petrol-fuel subsidies are notoriously inefficient and withdrawing them has many advantages. It has never been appropriately budgeted for, and is structured in a way that allows corruption to flourish. Not only that, the Nigerian government has consistently demonstrated brazen incapacity to manage petrol subsidies efficiently and transparently. That alone attracts a justification for the internment of the petrol subsidy scheme. While removing subsidy may seem tilted in the right direction, the quality of public communication and the manner of execution can mar what should have been an ideal move.
It is, therefore, not surprising to see many Nigerians shudder at the approach adopted for removing petrol subsidy in 2016. The presidency had on several occasions denied the existence of subsidy on petroleum products. This stance later changed to outright support for fuel subsidy, with numerous executive assurances to preserve the policy in the interest of millions of poor Nigerians. On May 11, without an announcement, without warning, without any prior meaningful engagement, and without safety nets for the rising number of people living in poverty, the government brusquely removed fuel subsidy on May 11, 2016, pushing up fuel prices from N86.50 to N145. Automatically, transportation and food costs skyrocketed, pushing many deeper into poverty and want. In consequence, labour strikes and organised protest actions are imminent.
As prices soar, and poverty deepens, removing petrol subsidies without a proper social protection plan in place to mitigate adverse impacts of energy subsidy reform, is politically and morally, inappropriate. Empirical evidence shows that subsidy reform triggers inflation, stirring increases in energy prices as we have already seen. When life gets so expensive due to higher energy prices, it significantly reduces households’ effective incomes as a greater portion of expenditure will be spent on buying petroleum products or paying for other goods like food whose costs have risen because of inflation. Women are already worse off than men in many areas such as education and income and security. Without adequate preparation and compensation, reform can entrench existing inequalities.
Notwithstanding the gaps in the latest subsidy reform arrangements, the good news is that opportunities for correcting the missteps still abound. Reforming and strengthening recently-disbanded safety net programmes like SURE-P, or establishing a similarly-crafted social programme would allow the government to ensure subsidy reforms provide more meaningful benefits to the poor. As appalling as the gaps in SURE-P may seem, it remains the best energy subsidy savings-funded social protection initiative in Nigeria’s history. SURE-P’s health-based incentives, particularly the conditional cash transfer scheme for pregnant women in rural areas, are still globally celebrated as one of the finest examples of how to use energy subsidy savings to promote gender equality, improve incomes and healthcare for rural women.
…may we also begin to see honest and credible mechanisms for deepening consultation, participation, and dissemination of information with the civil societies and the public at large. With a sense of urgency, Nigerians are anticipating the concrete steps that will be taken to mitigate social impact of subsidy reforms.
According to an independent evaluation in Jigawa State that has the highest record of teenage childbirths, improvements made between 2009 and 2014 as a result of the Partnership for Transforming Health Systems Phase II and other community empowerment efforts like the SURE-P’s Maternal and Child Health Programme showed that the percentage of pregnant women making at least four antenatal care (ANC) visits rose from 7.5 percent at 2009 baseline to 49.2 percent in 2014. The proportion of births attended by skilled birth attendants in the state also moved up to 17.9 percent in 2014 compared to 5.1 percent in 2009. The proportion of births that take place in a public health facility, which was at 4.5 percent at baseline increased to 18.3 percent in 2014. The transformative impact and the superlative outcomes SURE-P yielded for pregnant women in Northern Nigeria remains second to none, till date.
Therefore, revamping existing social protection programmes into a better targeted and more efficient one can help address vulnerabilities, avoid duplications, while delivering greater benefits to poorer and marginalised citizens. It is not enough to pay N5,000 monthly to extremely poor Nigerians, without first of all developing a database of the poor and vulnerable. Absent a transparently-developed database that either builds on, or is combined with data from other existing databases, any social welfare programme implemented hastily just to douse opposition to the reforms, will lend itself to the same leakages that marred previous welfare schemes. In-kind transfers, e.g. free or low cost food, water, transport services, education, healthcare, assets etc; or cash transfers: conditional or unconditional; or massive investments in other clean fuels, e.g. distribution of cleaner cookstoves, solar power panels, are some of the notable social protection schemes that have been used in other parts of the world to provide an effective mitigation mechanism against any adverse social impact of any fuel subsidy reform.
Importantly, honesty, consistency and transparency are also key to ensuring that the corrective steps gain traction, and inspire public confidence. For instance, the 2016 budget allocated N500B for soon-to-be-rolled-out social welfare initiatives. The minister of state for Petroleum Resources, Dr. Ibe Kachikwu’s riposte advancing that this budget provision was set aside for post-subsidy palliatives, can be faulted on several grounds. As (All Progressives Congress) APC manifesto makes clear, the proposed social welfare programmes are in fulfilment of a separate election promise that is not conditioned upon the removal of subsidy. It is not difficult to detect that Kachikwu’s linkage of the budget provision to subsidy reform is a poorly-constructed afterthought. In the same vein, Vice President Osinbajo’s explanation that the latest reform is merely a hike in fuel price, and not subsidy removal, is also far from being true. Dishonest and contradictory statements by officials such as these, have strong potentials to derail the reform process, and arouse both policy inconsistencies and investment uncertainty.
Having said that, industry watchdogs like Spaces for Change remain cautiously optimistic, and hope that the removal of subsidy will eventually lead to total deregulation of the downstream sector. The red caution flags stem from the government’s poor communication strategy, official price fixing, the petroleum products equalisation fund and other institutional barriers to effective deregulation that are still firmly in place, casting doubts on the sustainability of the recent reforms. And finally, may we also begin to see honest and credible mechanisms for deepening consultation, participation, and dissemination of information with the civil societies and the public at large. With a sense of urgency, Nigerians are anticipating the concrete steps that will be taken to mitigate social impact of subsidy reforms.