As I was preparing to write this article I went to the Barbing Saloon and here are some excerpts from the conversation.
As I was preparing to write this article I went to the Barbing Saloon and here are some excerpts from the conversation.
Barber 1: “ Bros (Yours sincerely) you talk am oh during the election say Goodluck no go perform and now wetin you talk don dey happen. He enter office we tink say na job him go give us 1st but na so so 6yr single tenure we dey hear when that one tire am, he come move go subsidy. Dem wan remove subsidy, Okonjo Iweala think say Nigeria na World Bank she dey na im she wan come dey bring anyhow policy, she dey collect plenty moni, her children dey obodo oyibo, we dey hear dey suffer, dem wan come remove fuel subsidy. Make them try am see. I thank God say Boko Haram still dey recruit, Niger-Delta militant dey recruit, OPC dey recruit. Dem go know say even if we no sabi grammer, we sabi carry gun”
Barber 2: "If dem remove subsidy, petrol go add price, we sef go increase our rates from N200 to N500 because na Generator we dey use everyday. And this increase in price no go help our business at all because people wey dey com shave 3 times a week go dey come only once, some people no go even come again as dem go dey shave by their selves. E mean say I no go fit pay all my barbers again so I go sack some of them"
Barber 1: “ Bros eh before that one happen I for don become General for Niger-Delta or Boko-Haram and I go even recruit those ones wey u go sack.
“After 50 years of applying nominal policy actions to real problems and identifying nominal problems as real problems, Nigeria deserves better.” Dolapo Ajala"
What does it mean to subsidize? Technically speaking it means to set the price of a good or service below the equilibrium price, in other words it means setting the price of a good below the cost of production of the good. That is a situation where Price is less than Marginal Cost as opposed to the optimum Price equals Marginal Cost . Thus petrol subsidy is the act of government setting the prices of petroleum products below the cost of importing the product. Besides setting of prices of petroleum products, the federal government is also involved in financing the NNPC and its joint venture partners through a cash call mechanism where the NNPC calls cash from the FG in order to finance the cost of exploitation and exploration of crude, other recent arrangements are through the Production Sharing Contracts (PSC’s) and Service Contracts. So subsidy in this case consists of price fixing and financing of exploration activities by the Federal Government.
In reality subsidy is a tool used by governments around the world (The developed ones inclusive) to gain competitive edge, enhance the welfare of certain aspects of its population and also to gain geo-strategic advantage. For instance the U.S govt spends billions of dollars in subsidizing the production of it’s agricultural goods so also does Denmark and Russia especially on it’s diary and wheat products. The reason is clear, policy makers in such countries are smart enough to know that there are cases where economic theory is at variance with structural, geo-political, market and internal realities. And in such cases economic theory are either disregarded or adjusted to fit current realities. However the oil sector is different, unlike the agricultural sector which is a classic example of a competitive market (many sellers and many buyers), that of the oil sector is an oligopoly (few sellers and many buyers) a market situation which gives the producers an advantage over the consumers especially where it is a collusive oligopoly. Thus the idea of the Federal Government subsidizing the production and distribution of crude oil and petroleum products should never have come into play in the first place. This is because the oil sector is self financing.
Prior to 1977 when the NNPC was established, the Federation or any of its agencies did not have participatory interest in the industry for 15 years after the beginning of production of commercial quantity of crude oil in Nigeria in 1956. Through the whole of the 1960’s, the industry remained in the hands of the International Oil Companies ( IOCs), with state involvement restricted to regulation and to the collection of fees from exploration licenses and production leases, as well as taxes and royalties on crude. Oil companies were to finance the building and operations of refineries. Shell the crown prince of IOCs in Nigeria, first discovered oil in 1956 and built the first refinery in Port Harcourt in 1965.
The Federation’s interest was the responsibility of the Ministry of Lagos Affairs from 1959 and then that of the Ministry of Mines and Power effective - 1963. The basis for tax assessment was the same, whether the crude was earmarked for local refining or for export. A non-discrimination clause provided that the local refinery and oil companies “not be subject to less favourable treatment than other commercial and industrial enterprises” in regard to “taxation and other fiscal regulation,” and to the provision of security, electricity, transportation, port and communications facilities and other essential services. Compared to other resource owning countries, Nigerian arrangements with IOCs were relatively favourable because existing “covenants” between the Federation and IOCs guaranteed the latter “equal to the most favourable terms accorded to any other government in Africa and…the Middle East”.
However this arrangement began to change when the government went beyond sheer oversight functions to direct participation in the industry with the Federation’s first acquiring equity interest in the industry in 1971. The immediate reason for this development was Nigeria’s entry into OPEC that year, OPEC required member states to nationalize the oil industry. Other remote reasons were also political in nature, it was reasoned that increased dependence on payments by IOCs would give the latter “an opportunity for great political leverage” in the future. Shell showed an early sign of IOC muscle when it supplied gasoline to secessionist Biafra during the civil war, despite Nigerian government’s disapproval. The Murtala/Obasanjo regime also embarked on a sweeping nationalization programme of IOCs in a bid to arm-twist the British and the West to grant Independence to countries especially in the South African region where it was pursuing a de-colonization programme. There was also a widely held belief that the royalty and sales tax payments by the IOCs were based on “posted prices” which were below realized market value.
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Thus in 1971 under the Gowon regime, the Nigerian National Oil Company (NNOC) was established to manage the Federation’s majority stake in the oil industry, to explore, construct and build facilities and market the Federation’s programmed equity crude. The dearth of the requisite technology and capital compelled NNOC to enter into mostly JV agreements with the operating IOCs. This in effect began Nigeria’s journey into price fixing and subsidy in the oil sector. This arrangement was inefficient , so much so that Nigeria not only failed to take advantage of the crude oil market crises of 1973-74 , but was also losing customers fast.
The new military regime of Murtala Muhammed (1975-76) set up a panel to probe the oil sector and suggest efficient ways for marketing Nigeria’s crude. The panel described Nigeria’s oil resources as a “wasting asset”. Clearly the NNOC had failed the nation. Based on the revelation of the panel, the Olusegun Obasanjo military regime (1976-79) in 1977 replaced NNOC and the Ministry of Petroleum Resources and Energy with NNPC. With this measure, the newly formed NNPC assumed the powers and responsibilities of the NNOC, the regulator and the ministry and policy formulator and co-coordinator, in addition to the new responsibility of refining crude. Again this arrangement was a total failure, the NNPC was hopelessly inept in the words of Prof. Ugo Nwokeji. He goes on to say “fraud was commonplace and the NNPC oversight and regulatory role over the industry was virtually non-existent due to a combination of low capacity, sheer inaction and simply a proclivity of the corporation to break the law... Agreements with IOCs lay around for years without ratification, and the IOCs often acted as if the corporation never existed. NNPC’s accounting system was an unmitigated shambles; the corporation had never prepared and submitted audited accounts.” The Shagari dispensation also set up a panel to investigate the NNPC. This panel also came up with scathing revelations, but this was just the beginning of a cycle of endless probe panels, recommendations, minor re-organization devoid of any concrete/strategic action to deal with the real problems facing the oil industry. The NNPC quickly became used to entertaining panels and probes through every regime and quickly relapsed to its old ways as soon as the heat was over.
Some recurring problems that plagued the NNPC as pointed out by Prof. Ugo included Problem of Focus; the NNPC was at the whims and caprices of the Presidency, the Ministry and top officials in the NNPC who at various times gave it conflicting, duplicative and vague responsibilities.
Problem of it’s Subsidiaries; the subsidiaries were supposed to depend entirely on the revenues they generated. For instance, the revenues of the subsidiary refineries were to be derived from refining fees paid by the NNPC; PPMC was to charge tariffs for transportation of oil through its pipeline network; NETCO was to derive its revenues through consultation and engineering work done for the NNPC, its JVs and other clients; NPDC was to thrive as an upstream E&P outfit operating its own concessions etc. This vision of self-sufficiency however, generally failed to materialize partly based on inadequate/ voodoo accounting system run by the NNPC and inefficiencies, for instance the refineries have perennially produced below capacity utilization or otherwise suffered disrepair since the mid-1980s. The result was that NNPC was hampered by having to subsidize almost all its subsidiaries through subventions and loan guarantees which they are unable to repay, and that’s why it did not come as a surprise to people who watch the industry closely when Remi Babalola, former Minister of State for Finance and a seasoned Accountant disclosed that the NNPC was broke. He was quietly shown the way out because any form of truth or transparency is an anathema to powers that be in the Presidency and NNPC. Problem of Corruption; Corruption is at best what describes the modus operandi of the NNPC and is at the root of every problem the NNPC has faced, is facing and will ever face.
In 1993, the GMD and other senior officials were sacked because they were fingered in a fraud for paying inflated fees for the lease of two supertankers ostensibly for storage. Ten years later another NNPC GMD was reportedly fired over a controversy relating to the award of fuel contracts just as some $2.5b that was supposed to be in Federation account went missing during his stewardship in NNPC between 1999 and 2003. Another senior manager is reported to have diverted about $600m to his private account. Also according to a January 2007 report, officials of the corporation siphoned $5.2b during the same period primarily through payments posted in the name of pre-1999 JV cash call arrears already paid by the Abdulsalami regime, more shocking were revelations of NNPC officials being involved in pipeline vandalism and willful sabotage of the refineries so as to keep getting unending subventions from the Federal Government. An updated NEITI audit report submitted in December 2006, stated that 22m barrels did not reach the refineries between 2001 and 2004. Just as it also submitted that 65m barrels of crude could not be accounted for between 1999 and 2004. This report highlighted the fact that diversion of crude oil and project funds underreporting of crude oil output, inflation of contracts and importation of substandard fuels were the trade-mark of the NNPC. In 1997, the Ministry of Finance in order to address some of these problems cut the amount of Crude to be allocated to the refineries in favour of importing refined products. I t opined that it was 20% cheaper to import oil than to refine it locally since most of the refineries were operating below capacity and crude oil theft was rampant. However officials in the NNPC still found a way of conniving with importing countries to bring in fake petroleum products at a price higher than market prices. Again the civilian Obasanjo administration removed the monopoly of the NNPC from being the sole importer of petroleum products, liberalized the process so that independent marketers could compete against each other in the importation of refined products. Obasanjo hoped that this process would reduce the burden of government in the subsidization of fuel and bring down the prices of petroleum products. Both objectives failed to materialize as high-powered officials in the NNPC connived with the independent oil markets to continue the inflation of the prices of imported products in order to receive government subsidy.
This is the level of institutional and monumental corruption that goes on in the NNPC. The NNPC and most of it’s subsidiaries have become in effect a national sepulcher of corruption and every government, instead of purging the sepulchers always opt for just white-washing it because they all, with the exception of the Buhari and Shonekan regimes benefit one way or the other from this high-level and very well organized fraud. The government of Goodluck Jonathan has claimed that it subsidized petroleum products to the tune of N1trillion naira in 2011, a very staggering and questionable amount. Many analysts have argued that such an amount is spurious as they point fingers at the NNPC and oil marketers in a unholy matrimony to dupe the nation through inflated figures and diversion of products like they have always done. Even the Finance Minister Ngozi Okonjo-Iweala admitted that indeed there were and have been ‘sharp practices’ but she said the fraudsters had to be paid anyway, and the Nigerian people must still have to pay for the sins of these lunatics anyway in the form of immediate subsidy removal which began in effect this January.
The President has constantly said that subsidy has been beset by corruption and so it makes simple sense to scrap it immediately even though nothing is been done to immediately carry out an independent audit and investigation into the alleged fraud that has reached alarming proportions in the oil sector and the administration of oil subsidy. He insists it has to be removed so as to take resources away from a fraudulent few who divert resources and yet he is scared to get the names of such people out, recover our stolen resources from them, prosecute them and get them jailed. What must be carried out with urgency and dispatch is the immediate removal of subsidy not the immediate removal of lunatics and kleptomaniacs from the system. And come to think of it! The same independent marketers who have benefited from the warped administration of subsidy are in support of it’s removal, the PPRA, the agency which has been at the helm of the subsidy administration would still be in charge of setting prices of petroleum products. What does this tell us? The unholy matrimony between the PPRA and the Oil marketers would still go on, but this time not at the expense of govt subsidies but at the expense of the common man as the PPRA would constantly dubiously set prices at higher than market rates to benefit it’s cronies.
Of course the message the President is passing across is clear. He doesn’t have the moral basis to apprehend the looters in the oil industry but he does think he has the moral basis to immediately remove subsidies on oil regardless of its attendant consequences. We can trust him to let the bad guys enjoy their spoil and inflict on the innocent guys more suffering and squalor. The President has also said subsidy is not sustainable, very few people doubt this, at least in view of shabby and shoddy way in which the FG/NNPC have managed the oil sector in the past 3 decades. We agree! Oil subsidy should never have lasted for so long in the first place. But the question is, is oil subsidy the only unsustainable expenditure in the country? The answer is resounding No! Over the years hundreds of billions of naira have been squandered and lavished on undue excesses of public officials and the figures have also progressively risen. The 2012 budget has about 7o per cent of its component to be spent on recurrent expenditure most of which will still service the excesses of top govt functionaries but “never mind this too”, says the Finance Minister Okonjo-Iweala in a Live Telecast; “give us some time and we will reduce such wasteful expenditure and block such loopholes”. In essence while she admits that government expenditure on itself is unsustainable, she maintains that the perks and undue allowances that she and her colleagues enjoy should be left to linger on a little while longer. Perhaps she means she needs time to complete her tenure before such unsustainable expenditure be removed but “some time” shouldn’t be given to the removal of subsidy. It is too unsustainable that if not done with fervent urgency the economy would crash!
The President in a quick move to window-dress this preposterous line of reasoning announced a few days ago that govt would reduce by 25% expenditure on senior public servants and foreign travels and the attendant retinue would be cut to the barest minimum. Never mind the fact that he, the President has sent a Budget to the parliament that doesn’t include any such reduction in expenses neither does he intend to send any other that includes such reduction. What our dear President intends to do is to set up a Committee( a diversionary and cover tactic that almost every administration has used to fooling the people, the most recent one was the Justice Uwais Electoral Committee set up by this President’s predecessor whose findings and recommendations were super but trumped by the Executive) to look into how such reductions would be made. I believe the President and his team know how much they are fooling themselves, perhaps they are just under the illusion this time their folly will sell. An illusion that in recent days have turned out to be a disastrous miscalculation.
And the claim of the President that if subsidy is not removed forthwith the economy would collapse is not only misleading, alarmist and baseless, it tells the obtuseness by which this administration works by, the prices of crude oil (Nigeria’s sole revenue earner) have been rising and independent forecast still predict it’s climb. Over the past 6 months oil prices have hovered between $90 and $115. The reserves are said to be down a factor attributed to the oil importers who exact so much pressure on the foreign reserves, but such an explanation is overtly simplistic, as other factors such as the reckless draw-downs by the administration especially during the past election is not accounted for, the very same reason the administration is unable to prosecute the corrupt officials because its hands are not clean. The most insane of the arguments put by the administration is the supposed claim that refineries are not being built because the subsidy serves as a disincentive to investors. Subsidy isn’t the major disincentive to investors, in real terms the disincentives to investors is the habitual failure of successive governments after the government of the 1st Republic to carry out it’s contractual obligation (“provision of security, electricity, transportation, port and communications facilities and other essential services”). The government of the 1st Republic by and large provided these basic indivisibilities which in turn provided a major incentive for Shell-BP, the major IOC in the country then to build and operate the 1st refinery in the country in Port-Harcourt in I965. Ever since then no private refinery has ever been built because infrastructure have been altogether absent or have progressively deteriorated. Pervasive corruption and distortions in the oil sector especially in the NNPC have also undermined the confidence of investors.
The telecommunication sector touted to be a success story by this administration and the model on which it hinges its deregulation policy, is any thing but a success story. Ten years after liberalizing the sector, the sector still leaves a lot to be desired, basic connectivity still lags behind other African nations not to talk about broad-band, Wi-Fi, 3G, 4G internet services which are at the moment very shabby. Communication rates in the country are about the highest in the world; a slap in the face of those who screamed that liberalization would bring costs down and enhance welfare. The welfare of the people have been enhanced albeit marginal, meanwhile costs of telecom services have not dipped relative to other countries. This is because most Telecommunication service providers grapple with providing the essential services that the government ought to have provided (For instance they have to power on their masts constantly through generators since electricity is near absent in the country, they also have to pay for security of delicate and expensive infrastructure since the country’s police is inept) and providing the telecommunication services that it ought to provide. Besides, the cost of capital is very high because Banks also grapple with the same challenges. Thus Telecommunication companies build in the costs of providing essential services and the cost of capital into the rates they charge the consumers. Apart from the negative impact on rates to the consumer, these twin costs also slows down rapid expansion of the sector and serves as a disincentive to new entrants. This is the exact scenario or even worse that would play out in the oil sector should the government decide to continue it’s senseless deregulation drive without structurally transforming the Economy.
To be sure, it is not the removal of subsidy that irks most Nigerians it is the tactless, thoughtless, illogical, heartless and non-strategic manner in which the President and his rabble team are going about it. The self-same reason Mr. Onaopemipo Owotumi had this to say; ‘If there is an Aso Rock, then there must also be an Aso valley and I think that is where the brain of Goodluck and his advisers live’. Nothing could be truer seeing the way the President has taken a kneejerk policy action that addresses just the symptom and surface of the problem instead of a systematic, strategic and smart set of solution that addresses the root/structural problem. The Governor of the Central Bank, Sanusi Lamido Sanusi on assumption of office suspected that some banks were on the brink of insolvency. What did he do? Step 1, He sends in a group of independent auditors to check their books and conduct stress tests, the results showed that these banks were indeed in a dangerous position due to a couple of factors ( wanton corruption and mismanagement of depositors funds by Corporate Executives, lack of due risk management procedures etc). Step 2, he fires the corrupt Execs and then prosecutes them while immediately replacing them with supposedly more credible Managing Directors. Step 3, he injects new capital to these Banks, lowers rates so banks can loan more money to themselves and the Economy. Imagine if after he had suspected foul play he just immediately withdrew the licenses of those Banks and ordered they be liquidated! That would have sent a serious crises of confidence across the whole Economy, altered the consistency of flow within the Economy and undermined the credibility of the regulator. Ultimately it would have led to chaotic disaster!
No doubt the outright removal of subsidy has disastrous consequences. The Socio-Political Landscape of the country has erupted in a tumultuous head-start even as labour unions, civil society, and other stakeholders have decided to embark on an indefinite strike, protests have been on-going for the past 3 days with the loss of lives and property. This does not portend any good sign to the investors whom Mr. Jonathan seeks to woo.
The Economy is also likely to contract because as the prices of goods and services increase due to high cost of transporting them, consumers would reduce their consumption of goods and services which would hurt growth. Although the government claims that cost of goods would not change significantly because most goods are transported by diesel powered trucks. It fails to take into account the fact that it’s only wholesalers who have the wherewithal and enjoy economies of large scale transportation that use diesel trucks. The retailers, traders and petty market sellers transport goods and services via vehicles, mini-vans and buses that use PMS, these groups would ultimately build in the cost of transporting these goods in the price that ultimately reaches the final consumer. Besides, small and medium scale enterprises which provide direct services would also take a hit. Barbers, Hairdressers, Shoe-makers, Tailors, Commercial motor-cyclers, Bakeries etc who constantly use PMS to run their businesses would begin to find it hard to break-even, since their goods and services would become more expensive and less competitive which would engender a fall in demand for their services. For instance as a rational consumer notices that it is a whole lot cheaper to buy a ready-made dress imported from China than sewing it in Nigeria. He would re-allocate his resources away from the tailor to seller of ready made clothes. Also the Barbers whom I talked about in the beginning of this article have since increased their rates which has also prompted me to reduce the number of times I visit the shop in favour of shaving myself. This fall in demand would result in the loss of jobs in these small enterprises.
The Environment also suffers as the poorest segment of the society who can no longer afford kerosene have embarked on a wanton spree of chopping down trees for cooking. As one who lives in a wooded environment I have seen the rate at which this poor folks are chopping and felling. The other day I accosted one of them for trying to chop some wood off a tree close to my house. His reply? “Oga abeg no vex na Goodluck cause am”.
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This President doesn’t seem to be concerned about these consequences, he forecloses any alternative no matter how superior and still insists that there is no going back on removal of oil subsidy . President Woodrow Wilson once said “I not only use all the brains I have, but all I can borrow.” Mr. Jonathan has demonstrated that he simply does not have the capacity to use all the brains he has; he also isn’t capable of borrowing all the brains he can.
Tomorrow I shall outline what a serious and sensible government should be doing in the interim, medium-term and the long-term especially as regards the oil sector and also what the fledging Occupy Nigeria Movement should be doing if its relevance is to go beyond a temporal reversal of PMS prices.
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