What You Need to Know About Fuel Subsidy

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On the first of January 2012, Nigerians woke up to the news that the Goodluck Jonathan led administration has decided to remove the subsidy paid on fuel imports. Nigerians took to the streets en masse to protest what in many quarters was perceived to be a decision targeted at pauperising average Nigerians. Since then, fuel subsidy has become a highly debated term in Nigeria pitching arms of government, agencies and parastatals against each other.

What is Subsidy?

Subsidy is any form of economic benefit such as tax allowance, duty rebate, cash grant or soft loan provided by a government, multilateral agency or non-governmental organisation to reduce the market price of an item below its cost of production. It is often perceived to be an act of social good. Fuel subsidies are common across many countries and popular among sectors that are subsidised the world over are energy (petroleum products and renewables), agriculture (fertiliser) and health (condoms and birth control pills).

Economists hold different opinions about subsidy. Pro-subsidy economists believe subsidies are social and economic policies essential to help support certain businesses or industries and to create more jobs. Anti-subsidy economists however argue that subsidies should not be promoted as they distort markets and can be used by politicians to defalcate public funds. They emphasise that even if subsidies are introduced with good intentions, they end up being abused by those who benefit from it.

Fuel Subsidy in Nigeria

In 1988, the IBB led regime decided to conduct routine maintenance on Nigeria’s refineries and the implication was that Nigeria would have to import refined petroleum products and be forced to sell at a higher rate than when the country’s refineries were working. The regime then introduced fuel subsidy to palliate the burden of Nigerian’s for the period that the routine maintenance would last. However, fuel subsidy that was meant to be a short-term palliative measure lasting only six months is now in its 30th year.

How Fuel Subsidy works in Nigeria

Fuel subsidy is administered by the Petroleum Products Pricing Regulatory Agency (PPPRA) and paid from the Petroleum Support Fund (PSF), introduced by former President Olusegun Obasanjo and funded by the federal, state and local governments.

Oil Marketing Companies (OMC) must get an import permit from the Department of Petroleum Resources before being able to import refined petroleum products into Nigeria. Once the vessel bearing refined products gets to Nigeria, the vessel operator for the OMC must present required documents to the Nigerian Customs Service and the Nigerian Ports Authority for clearance to dock and discharge the product. Thereafter, the DPR verifies the quantity discharged and certifies the quality in the presence of representatives from Office of the Accountant General of the Federation, Federal Ministry of Finance and PPPRA as witnesses. After this, Nigerian Ports Authority levies necessary administrative charges and the DPR goes ahead to issue a certificate showing the quality and quantity of product discharged signed by all parties involved in the process. The certificate is then forwarded to the PPPRA to compute the amount of subsidy payable to the OMC.

However, at present, only the Nigerian National Petroleum Corporation (NNPC) imports fuel; Oil Marketing Companies have stopped importation since 2016 citing the shortage of foreign exchange and hike in crude prices as major reasons.

Cost of Fuel Subsidy

As at December 2017, the landing cost of petrol is N171.40 while the pump price at petrol stations is N145. What this implies is that the Nigerian government bears the margin between N171.40 and N145 which is N26.04 and the distribution margin of N14.03 which brings the total amount which the Nigerian government bears on each litre of fuel to N40.07.

In the span of 2006 and 2016, Petroleum Products Pricing and Regulatory Agency stated that Nigeria spent about N9 trillion naira on fuel subsidy while it is on record that between January and October 2017, NNPC paid N112 billion as subsidies.

Countless investigations have revealed that Nigeria’s subsidy programme is fraught with numerous irregularities and is a channel for siphoning national funds. To start with, the report submitted by the Farouk Lawan Committee Probe in 2012 revealed that more than N232 billion was paid in the year 2011 as subsidy for fuel that was never imported and that only 21 million barrels per day of fuel was imported as against 60 million claimed by oil marketers. To corroborate this claim, the Presidential Verification Committee on Subsidy noted that in 2011, 197 subsidy transactions worth N229 billion were not legitimate.

From all the aforesaid, fuel subsidy remains a big challenge to the Nigerian government. Questions regarding the subsidy programme and Nigeria’s oil and gas sector that need urgent answers are; should the subsidy programme continue; how can Nigeria stop importation of petroleum products; what technologies can Nigeria adopt to ensure transparency and acoountability in Nigeria’s oil and gas sector?

If you want answers to these questions and more and want to have first-hand knowledge of how the Nigerian extractive sector works, then SITEI (Sustainability in the Extractive Industry) 2018 is where to be.

References
  1. Fuel Subsidy in Nigeria – Highlighting the Facts. Chinwe Ekene Ezeigbo. Nigerian Natural Resource Charter, 2013
  2. Nigeria’s Fuel Subsidy. Stakeholder Democracy Network, 2015
  3. Be prepared to explain to Nigerians who approved subsidy, Senate tells FG. Johnbosco Agbakwuru and Henry Umoru. Vanguard, 30 December 2017
  4. How do Government Subsidies help an Industry? Evan Tarver. Investopedia

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