Monday, October 17, 2011

GEJ: Instead of removing subsidy...Do This

This talk of deregulation is nonsense in so far as the President’s aides keep missing the larger point. That the cause of the corruption in the subsidy scheme they’re purportedly scrapping is not the subsidy itself, but the very essence that an importation cabal has held the nation hostage. It is this cabal that has determined to ensure they skim off the top of the nation woes, while ensuring that a better system to replace what we have now never emerges.

Just like PHCN and our electric grid is in the grip of the generator mafia, the petroleum import leeches have essential declared war on our capability to refine locally, and they were the sponsors of the President at the last election!

Take for instance, in the fiscal year 2011 the total budget for petroleum subsidy was 240 billion naira, roughly $1.70 billion. To date, 931 billion naira have already been spent! Yes, you read that right: Nigeria have expended $6 billion on the economic hit that have been let loose on our nation. They live in sleek palaces across the country, smiling to the banks while the rest of us exist in absolute penury. These are the President’s men, and now they want us not the government to line their pockets.

NOTE: Nations subsidize products that are deemed essential to the national economy. In the United States, gas and food are heavily subsidized to ensure folks can ride out winter, and keep poverty to the minimum. Billions are spent in the capital of capitalism on ethanol subsidy to keep the midwest economy humming. Read, unlike you've been indoctrinated: THERE IS NOTHING WRONG WITH SUBSIDIES. Targeted subsidies are in fact a smart way to run and win in an inter-capitalistic world where you're going against heavily subsidized Chinese and American players. Petroleum is essential in the Nigerian economy where it cooks our food (Kerosene), powers our industries (thanks to PHCN) and drives our vehicles. If the price goes up, inflation will nearly triple imposing invisible taxes on production and ensuring the economy crashes.

Nigeria is a low-income earning country that happens to be blessed with oil. Our citizens should not be paying the same price as an American. For one, they cannot afford it. This obsession by the PDP government with deregulation will destroy our local economy and companies already groaning under the weight of fueling vehicles and generators, it will be the last straw to break their back when the government should rather be stimulating the economy. America, China and Europe are stimulating theirs, why should we be killing ours? This policy will destroy employment, threaten our social fabric, lead to spiraling inflation and could very well lead to a revolution. The President is playing with fire.

I cannot believe the President is simply clueless (or maybe I can); clearly this man cannot be possibly impotent in the face of the cabal (or maybe he is). The solution to the corruption in the subsidy system cannot possibly be transferring the burden of paying that subsidy to the pockets of long suffering Nigerians from the coffers of their ever-leaking non-existent government! Pray tell, how many new refineries can be build with the subsidy the government of Goodluck Jonathan have paid to his sponsors in 2011 only?

Here are few policy steps, just in case his advisors are reading that can take Nigeria from almost 6 billion dollars paid to charlatans to total self-sufficiency in three years, by the end of his term:

  • Commercialize the existing four refineries as separate companies. This will basically involve cleaning shop on management level (hire HR firms to do this), while taking them public (offering 49% control at the IPO, devoting the raised capital to capital expansion to increase production)
  • Continue the practice of selling crude oil to the refineries at below international market rate i.e. indirect subsidy, which allows the refinery turn profit; while putting a lid on the domestic pump price through a regulated system of tariffs similar to electricity.
  • Allocate excess refine products demand to the four operators: allowing them to organize importers to meet this demand beyond what they produce, while disbursing subsidy directly to them to meet the regulated pump price.
  • At the same time, the new regulatory regime should not allow these operators to import directly or through any subsidiary or joint venture, rather they’re to source their imports from the open market, paying market price for such while bridging this with government paid subsidy.

This system essentially means that as a commercial operator, they’re giving up certain margins to the middlemen importers in so far they don’t produce domestically; encouraging them to eliminate these middlemen quickly. Also, the fewer players feeding at the government trough of subsidies will also mean less corruption. As public companies responsible to shareholders, these companies will only act in self interest to continue to expand production to meet local demand and eliminate the middle men.

At the same time, government incentives for new refinery builders including tax holidays, a capital expansion fund that provide up to 51% equity funding or loan guarantees to these builders at the Central Bank will be a more efficient way to spend $6billion than giving it to the President’s buddies. Of course one of these incentives might be a bite at the juicy oil blocs that the majors always want: no refinery no, crude oil concession, no deal. It is called negotiation.

Stop being a coward Mr. President. Where is the Petroleum Industry Bill when we need it anyway?


t said...

Thanks for the numbers. And when you put the question as should the Federal Government subsidize versus should the consumers subsidize then OK, keep the FG doing it. But is that the question? Or is it to not subsidize at all? Then the effect on prices and everything also could be a total disaster (or not).
I'll need to re-read your comments and also maybe you could write a simpler version :D My main question is what form does the subsidy currently take? It seems that it is a rebate on all finished oil products? At what point is that payment or deduction made? Simple stuff like that, it would be helpful to clarify and publicize even.
I should have asked your views about the PIB ages ago, since you're in petroleum.

DonCasiragi said...

Madam T, pardon me for the seeming complexity, there are no easy solutions to these problems. To keep it simple as to my views, I strongly believe Petroleum products have to be continually subsidized to prevent an out sized impact of inflation which amounts to a tax increase on the Nigerian economy i.e. job creators SMEs (the few left).

Currently as a small business, running generator amounts to 60% of our budget in our family company. That will increase to 80% if the subsidies on PMS is removed..couple of workers will have to go.

Petroleum have to be subsidized in Nigeria at least until stable power is achieved, higher incomes through economy growth have been achieved (which can only come in an environment of low energy prices, high employment and local production) and strong infrastructure for energy distribution (e.g. LPG) and mass transportation (Trains especially) in urban areas are in place. Small Ghana is doing all of these already!

And the government should do the subsidizing. How they should do it while minimizing corruption have been laid out in my submission. We cannot keep shooting ourselves in the feet and expect to run.

t said...

Loving the debate. My instinct is that subsidy gat to go.
Businesses already dying from energy costs :) at least power and generators are what my mum (a business owner) had on her mind this morning...and would probably spend the entire workday addressing.

Previously on UpNaira