Petroleum Subsidy Issue Analysis and Stakeholder Mapping

Transcription

1 Petroleum Subsidy Issue Analysis and Stakeholder Mapping By Jibrin Ibrahim Centre for Democracy and Development & Sam Unom Spade Consulting Ltd November 2011

2 CONTENTS CONTENTS... 2 ABBREVIATIONS... 2 EXECUTIVE SUMMARY INTRODUCTION HOW THE SUBSIDY WORKS THE PETROLEUM SUPPORT FUND (PSF) HISTORICAL SYNOPSIS OF PRIOR ATTEMPTS TO WITHDRAW SUBSIDY THE BABANGIDA INCREASES ABACHA AND THE LATE MILITARY YEARS THE POST-1999 CIVILIAN ERA EXPERIENCES OF OTHER COUNTRIES IN WITHDRAWING PETROLEUM SUBSIDIES THE GHANA EXPERIENCE THE INDONESIA EXPERIENCE THE JORDAN EXPERIENCE MAJOR LESSONS FROM THE THREE COUNTRIES... ERROR! BOOKMARK NOT DEFINED. 5. STAKEHOLDERS AND THEIR ISSUES PROPONENTS OF SUBSIDY REMOVAL CONDITIONAL PROPONENTS OF SUBSIDY REMOVAL OPPONENTS OF SUBSIDY REMOVAL CONCLUSION AND RECOMMENDATIONS CONCLUSION STRATEGIC RECOMMENDATIONS TOWARDS LOCAL REFINING Privatise the four existing refineries Provide a partial credit risk guarantee to help licensees build refineries SHORT TERM RECOMMENDATIONS FOR REDUCING THE COST OF PETROLEUM PRODUCTS Reduce the landing and distribution costs Process Measures to take before subsidy removal SUBSTANTIVE IMPACT MITIGATION MEASURES TO IMPLEMENT ALONGSIDE SUBSIDY REMOVAL Extend railway cargo service to non-oil traders Credit guarantees for mass transit operators Abolish fees for first 12 years of education in public schools Provide free health care for pregnant women and U5 children Protect low income users from increases in electricity tariffs LONG TERM RECOMMENDATIONS Undertake comprehensive oil industry reforms Invest in infrastructure development, job creation and service delivery Develop alternative sources of energy for domestic and vehicular use ABBREVIATIONS 2

3 EXECUTIVE SUMMARY This report presents the findings of an analytical study of the fuel subsidy issue carried out in October/November 2011 to promote a better understanding of the issues surrounding the subsidy and downstream deregulation debate. The study sets out to: a) provide a brief synopsis of previous government attempts to address the subsidy, b) conduct a stakeholder analysis of potential winners and losers impacted directly and indirectly by the removal of the subsidy, c) briefly review how other countries have dealt with the issue and d) recommend appropriate actions that could lead towards a resolution of the perennial problem. The price of petroleum products has been adjusted twenty times in the 33 years since the military administration of General Obasanjo broke the mould by raising the pump price of petrol from 8.8 kobo per litre to 15.3 kobo per litre in October Yet even after repeated price increases took the price to the current N65 per litre, the issue of subsidised prices has remained a perennial public policy challenge. Rather than close the gap between the open market price and the approved pump price, the increases have left a huge and rising subsidy bill that is the result of steadily growing demand, reliance on expensive imports, distribution bottlenecks and opaque subsidies that allow a handful of operators to reap off trillions of naira that would have made a difference in the areas of critical public infrastructure, social services and job creation. Subsidy payments have claimed over N3.6 trillion in the period from January 2006 to August 2011, with the bill for FY 2011 alone set to top N1.34trillion. The study highlighted three salient points around Nigeria s efforts at reducing this subsidy burden. First, many of the previous attempts at ending fuel price subsidy or deregulating the downstream sector of the oil industry have been poorly managed. Second, the operation of the subsidy scheme remains seriously flawed. Third, as a consequence of these failures there is widespread distrust of fuel subsidy removal as a policy and the government itself as policy maker. Today the determination of the federal and state governments and affiliated politicians to end petroleum subsidies and free resources for other public policy priorities seems to be matched by the resolve of the Nigeria Labour Congress (NLC) and its allies in civil society to challenge subsidy reform, if necessary through disruptive strikes and demonstrations. Developing a well prepared and comprehensive reform plan that makes the trade-offs necessary to win political support, while minimizing the negative impacts on the poor will increase chances of successful reform. While no other country has implemented the perfect reform plan, without any challenges or unforeseen impacts, lessons can be learned from other countries experiences, including, for example, communications 3

4 strategies and compensation measures that can assure citizens of the government s good faith and credibility as an effective, transparent and responsive policy maker. There are several measures that Nigeria can adopt to similarly navigate a successful path through this difficult policy challenge. The thrust of the measures recommended in the study is to remove the subsidy burden on the public treasury while minimising the impact of subsidy withdrawal on low income earners, which has been the overriding concern of the NLC and other opponents of subsidy removal. The measures themselves reflect the complexity of the challenge and the multifaceted responses needed to address it. The first set of measures are strategic in the sense that they aim at addressing what is commonly identified as the kernel of the subsidy problem, to wit, the historical failure to refine petroleum products locally. The second set of recommendations includes measures to facilitate subsidy removal, which must be approached as a structured process requiring policy action over the short-, medium- and long-term. The recommendations are briefly summarised below. Strategic Recommendations towards local refining This is widely acknowledged as the single most important measure towards resolving the challenge of petroleum subsidy withdrawal. Local refining will eliminate all the importrelated landing costs 1 and make subsidies unnecessary. This calls for a) privatising the four existing refineries and b) providing partial credit risk guarantees for licensees to build new refineries. Short term recommendations to reduce the cost of petroleum products These measures are necessary to achieve the twin objectives of reducing the costs of petroleum products low and thereby reducing the subsidy burden on the public treasury. Pending local refining, the measures are a half-way house towards the negotiated and orderly removal of subsidies. a. Negotiate refining contracts which do not require refiners to buy crude at world market rates b. Expand product reception facilities for imported products by dredging the Apapa port in Lagos and building three single point mooring buoys 2 to improve the draft 3 for 50,000 mt vessels to bring in products without the need for costly trans-shipment to daughter vessels. c. Liberalise the petroleum product supply market and unbundle the underutilised PPMC pipelines and storage systems so that all importers (and not just NNPC) can use them to throughput (i.e. process) their imports for distribution. 1 That is freight, lightering, ports, import financing, jetty throughput and depot storage. 2 A Single Point Mooring (SPM) is a loading buoy that is anchored offshore as a berthing point and interconnect for tankers offloading petroleum products. 3 Draft is the depth a ship needs to float. 4

5 d. Secure the integrity of the distribution network so that it will reduce the burden of road haulage of products. e. End political interference in fuel prices by allowing prices and profit margins to be set through competitive pressures rather than government fiat. f. Waive port charges along with import taxes, as this will obviously reduce the landing costs of petroleum products. Process Measures to take before subsidy removal These are measures to reduce the negative social impact of subsidy removal - and further boost the credibility of government on the subject. g. Avoid worst case scenario in timing. Subsidy removal should not be accompanied by increases in electricity tariffs, reintroduction of road tolls and phasing out of fertilizer subsidies. h. Consult extensively and plan carefully to avoid pitfalls of previous attempts subsidy reduction. i. Conduct studies to assess potential impact and to target mitigation and communications. j. Effective communication of subsidy removal, using broadcasts by the more credible minister of finance and outreaches by other relevant and trusted officials alongside the NLC and its allies. Messages must emphasise a) rationale for subsidy removal, b) status of progress on basic conditions for subsidy removal and timeline and deadlines for completing any outstanding work on the conditions for deregulation, c) expected and guaranteed gains laid out as precisely as possible (including quality, quantity and time), and d) impact mitigation measures specified in terms of beneficiaries, quality, quantity and implementation schedule. Some indicative impact measures are recommended below (these can be reviewed and reshaped during the aforementioned consultative process). k. Bring the same array of stakeholders involved in communication above into a deregulation policy implementation monitoring panel to track projects proposed under the subsidy removal policy. All the measures listed so far will need anywhere from several weeks to a year to complete. However long it may take, it is necessary to complete them before subsidy removal proceeds. They are vital to government s credibility and for preparing Nigerians and the economy for subsidy removal. Substantive impact mitigation measures to implement alongside subsidy removal If Government feels committed to starting subsidy removal immediately, it would encounter stiff resistance from the public. It must initiate the action by publishing a clear 5

6 and credible schedule for the immediate implementation of the following (or comparable) impact mitigation measures. l. Extend railway cargo service to non-oil traders to help reduce the cost of transporting goods and therefore keep prices of foodstuffs and essential household items within the reach of low income earners. m. Provide credit guarantees for mass transit operators as was done in the 1990s and ensure NLC participation as appropriate. n. Abolish fees for first 12 years of education in public schools to relieve a significant financial burden for poor families. Another variation on the theme is to introduce school lunches for the first nine years of school which is good policy in itself and a guaranteed political winner and too. o. Provide free health care for pregnant women and U5 children, making special arrangements to ensure drugs availability. 4 p. Protect low income users from increases in electricity tariffs by providing a lifeline tariff of specified wattage per day per registered user, so that only users who consume above the lifeline should pay at full or premium rates as may be required to subsidise the poor users. Long term recommendations a. Undertake comprehensive oil industry reforms, preferably by passing and implementing the proposed Petroleum Industry Bill, or else through legislative action to limit the downstream role of the NNPC to that of strategic reserves management, which would be the essential condition for deregulation. b. In line with the declared objective of subsidy removal, invest in infrastructure development, especially power, railways and roads, as well as job creation and service delivery. All three tiers of government should pool together to improve services in the areas of health and education, along with investments aimed at creating a business enabling environment for job-yielding economic growth. c. Develop alternative sources of energy for domestic and vehicular use so as to reduce the local demand and price of petrol and kerosene. Development partners can undertake policy dialogue to encourage and facilitate the uptake of these recommendations. They can also provide technical assistance towards the implementation of the recommendations, particularly those relating to the privatisation of refineries at 1a above, liberalisation of petroleum importation (2c), an independent regulatory authority (2c), the process of subsidy removal (3), impact mitigation interventions (4) and, particularly, the long term measures (5). 4 For example, they could be clearly branded as free and distributed in the open market where beneficiaries will access them through coupons issued along with prescriptions. 6

7 Whatever the particular recommendations these development partners agree to take forward, the consistent message is that subsidy removal has to be a deliberated and negotiated long-term process that prepares the economy, the government and ordinary Nigerians for a deregulated downstream sector. 7

8 1. INTRODUCTION With rising global oil prices and related costs, Nigeria s oil subsidy bill has been growing exponentially. Over N3.6 trillion has been paid out in petroleum product subsidies in the period from January 2006 to August In 2010 the subsidy bill was N673 billion. For 2011 it has more than doubled to N1.348 trillion 6 for the first ten months, with the full year s total expected to be about 115 percent of the federal capital budget. This huge and apparently unsustainable outlay has prompted the Federal Government to propose phasing out the subsidies under the Medium-term Expenditure Framework (MTEF), if possible beginning as early as the 2012 fiscal year (just a few months notice). The Federal Minister of Finance has described the subsidy bill as unsustainable, and other executive branch agencies and spokespersons have echoed the line. The government has now produced a Deregulation Strategy Document (annexed) setting out the case for removal and its proposal for apply the subsidy savings. Alongside the Federal Government, the Nigeria Governors Forum (NGF) has since backed the proposal. Indeed the governors further upped the ante by suing the FMF for illegally paying more in subsidies than was appropriated in the approved 2011 federal budget. The National Economic Council (NEC), which is also attended by the governors, has endorsed the proposal. 7 But the proposal has predictably provoked an array of contending and contentious responses from other stakeholders in the legislative branch, the private sector, civil society and the media. The tenor of debate has risen perceptibly, and every passing day adds to the volume and discordance. This study is commissioned in response to the request from Nigerian authorities for assistance in navigating this complex and sensitive policy moment. In this study, we endeavour to unpack the complex issues and interests that underpin the subsidy regime and discourses. We structure the analysis as follows: In the section following this introduction we briefly recall the history of previous attempts at reducing or withdrawing the subsidy. In the third section we set out the petroleum subsidy mechanism as currently exists, while in the fourth we briefly consider how petroleum subsidy withdrawal was handled in other countries. The fifth and concluding section contains our recommendations. 2. HOW THE SUBSIDY WORKS 5 Source: PPPRA, Role of the Petroleum Products Pricing Regulatory Authority in the Administration of the Petroleum Support Fund (PSF) Scheme, October Unless otherwise stated, this is the source for all the PPPRA figures cited in this section and elsewhere in the report. 6 The figure includes arrears of N268.8 billion. 7 Private Sector, governors support removal of fuel subsidy, Daily Times, 17 October,

9 In this background section we describe the structure and operation of the Petroleum Support Fund, which was the official nomenclature given to the subsidy mechanism in The description provides a backdrop for the rest of the analysis and is also the touchstone for the recommendations in the concluding sections THE PETROLEUM SUPPORT FUND (PSF) As a strategic response to four years of fiercely protested pump price increases, then President Obasanjo announced the formal creation of the PSF on October 1, 2005 with the declared aim to mitigate the impact of volatility in the international prices of crude oil and refined products on the domestic pump prices of petroleum products. The guidelines for the implementation of the PSF were prepared by the Petroleum Products Pricing Regulatory Agency (PPPRA) in consultation with the industry stakeholders and were approved by the Government ahead of the commencement of the scheme in January, The PSF is funded by the three tiers of Federal Government, with responsibility for 50% of required funds, 36 states together contribute 25% and the Local Government Areas (LGAs) the other 25%. The Federal Ministry of Finance (FMF) runs the fund, relying on the recommendations of the PPPRA, which in turn relies on verified deliveries as ascertained by the relevant agencies and a government-appointed auditor. To enable marketers to access financing for their operations, the Federal Government approved the use of two Sovereign Debt Instruments (SDIs), namely, the Sovereign Debt Note (SDN) and the Sovereign Debt Statement (SDS). These are promissory notes guaranteeing prompt (i.e. within 45 days) settlement of subsidy liabilities payment. Marketers are guaranteed cost recovery if the landing cost of products is higher than the regulated ex-depot price in an arrangement known as under recovery. Conversely the marketers are expected to pay into the fund if the landing costs are lower than the ex-depot price, which is known as over recovery. As can be seen in the roles, procedures and modalities for PSF administration set out in tables above and below, the principal players in the operation of the are the FMF, PPPRA, audit firms, DPR, Nigerian Navy, Debt Management Office (DMO), Central Bank of Nigeria (CBN) and the oil marketers. 9

10 Table 1. PROCEDURES AND MODALITIES FOR PSF ADMINISTRATION The main steps in the operation of the subsidy mechanism as set out by the PPPRA as follows: 1. Registration by marketers to participate in the PSF Scheme 2. Notification to import by the marketers 3. Approval to Import given by the PPPRA based on the level of products availability and other relevant and critical factors deemed appropriate by PPPRA 4. Witnessing and confirmation of the discharge of the imported cargo by PPPRA staff, FMF-appointed auditors (Akintola Williams Deloitte and Olusola Adekanlola and Co.), DPR, independent surveyors and the Nigerian Navy at the jetties. 5. Verification of the import documents by the PPPRA and the DPR 6. Processing of the import documents and determination of under or over recovery (as applicable) by the PPPRA on the basis of volume endorsed by the DPR and independent inspectors and the published Platts product prices for the period of the imports. 7. Submission of the verified documents and subsidy claims to the Federal Ministry of Finance (FMF). 8. Submission of documents of subsidy claims to the FMF-appointed auditor (Akintola Williams Deloitte and Olusola Adekanlola and Co.) by the FMF through the Budget Office of the Federation (BOF) 9. Sovereign Debt Statement is issued to marketers by PPPRA based on verified volumes 10. DMO prepares Sovereign Debt Note and notifies CBN and PPPRA 11. CBN redeems matured obligations to marketers 12. FMF sources fund and coordinates subsidy settlement 13. Verification/auditing of marketer s subsidy claims by FMF-appointed auditors (Akintola Williams Deloitte and Olusola Adekanlola and Co.) 14. Submission of Audited Report on subsidy claims to the FMF by the Auditors (Akintola Williams Deloitte and Olusola Adekanlola and Co.) 15. FMF reconciles payments to marketers against the auditors report and advises PPPRA accordingly. Source: PPPRA 10

11 The most powerful of these marketers is the Nigerian National Petroleum Corporation (NNPC), the state oil company. In fact NNPC is the linchpin of the oil industry and the downstream sector. As downstream operator, the NNPC and its subsidiaries own the nation s four petroleum product refineries, 5000 kilometres of transmission pipelines, 23 depots and a huge and growing number of petrol stations and distribution vehicles. The refineries have an installed capacity of 445,000 bpd, or million barrels per annum. This is the same quantity of crude that the NNPC is allocated for the purpose of domestic refining and distribution. But the refineries have rarely reached a combined average of 40 percent of capacity over the last two decades, despite hundreds of millions of dollars spent on their maintenance. In the last five years the refineries have contributed between four to 20 percent to meeting local demand, leaving a huge gap which has to be met through product importation. In 2010 they operated at a combined average of 22 percent of refining capacity compared with a global norm of at least 90 percent. The NNPC says some $400 million is required for turnaround maintenance (TAM) before the refineries can produce at the desired levels. But even then their output cannot meet local demand (see table below). Table 2: Daily Local Demand and Installed Refining Capacity of Petroleum Products Products Daily Local Demand (litres) Daily Refining Capacity (litres) Daily Supply Gap (litres) PMS (Petrol) 35 million 18 million 17 million AGO (Diesel) 12 million 8 million 4 million HHK (Kerosene) 8 million 6 million 2 million Source: Compiled from PPPRA data The federal government issued 18 licenses for private refineries in 2005, but the licensees have apparently been unable to raise the financing to get started. It has been suggested that the persistence of petroleum product price controls has discouraged the banks from financing the refineries. In any case the NNPC says it has refining agreements with other African and Asian countries. 8 In the meantime NNPC sells the unprocessed domestic allocation on the international market, where its favoured middle men pocket windfalls from openly 8 Apparently this was the backdrop to the recent news that Nigeria was building two refineries in Indonesia. The Petroleum Minister denied the story. 11

12 auctioning the country s highly rated light sweet crude. In 2010 the trade involved upwards of 128 million barrels, from which the middle men alone reaped about $75 million. Some of the exported oil is refined in non-oil producing countries (e.g. Spain), from where refined products are imported back into Nigeria by importers and marketers licensed by NNPC. Refining costs in non-oil producing countries tend to be higher than in oil-producing countries with domesticated refining technologies and economies of scale. There is a long chain of costs involved from middlemen s brokerage charges, export costs, foreign refining costs, demurrage and landing costs and the bridging charges paid for local transporters to ship the products to the depots. These costs add a significant premium typically more than 20 per cent) to(the prices of imported petroleum products. As at the day 9 of this report (28 th October) the PPPRA calculated the landing costs at N and the distribution margins 10 at N15.49, based on prevailing open market rates. The open market price (OMP) (i.e. landing cost plus distribution margins) of petrol should therefore be N per litre, whereas the regulated price is N65. This means that for that day the pump price of petrol was apparently subsidised at N77.40 per litre, exclusive of four waived taxes. For kerosene, the OMP is N per litre, so the regulated price of N50 per litre includes a subsidy of N per litre 11. It is this difference between OMP and the regulated price that NNPC and the independent marketers claim from the PSF as under cost recovery. 9 Daily costs vary according to fluctuations in the cost of imports, which in turn vary according to currency exchange rates. On this day the exchange rate was N to US$1. 10 According to the PPPRA, these include overheads and all running costs of retailers (N4.60 per litre), transporters margins (N2.75 per litre), dealers margin (N1.75 per litre), bridging fund (plus marine transport average) (N3.95 per litre) and administrative charge (N0.15 per litre). This adds up to N13.20 per litre. See Annex for the definition of these costs. 11 Other petroleum products (diesel, aviation oil and fuel oil) have been deregulated with minimum fuss. 12

13 Table 3: ROLES AND RESPONSIBILITIES IN PSF OPERATIONS 1 Department of Petroleum Resources (DPR) - Analysis of the quality specification of the products - Verification and certification of the quantity imported/supplied by the Marketers - Monitoring of the products supply and distribution chain from the jetties to depots and retail outlets - Enforcement of the prices set by the government 2 Independent Inspectors - Measurement and certification of the quantity imported (both on the vessel and the shore tank at the jetty) i.e. products ullaging - Certification of the quality specification of the products - Ascertain the quantity of Bunker fuel in the vessel to avoid adulteration and volume distortions. 3 Federal Ministry of Finance (FMF)/ Office of the Accountant General of the Federation - Approval of payment due to the Marketers - Issuing of Payment Mandate through Office of the Accountant General of the Federation to the CBN 4 Federal government-appointed Auditors (Deloitte/Adekanola & Co) - Witnessing and confirming quantity imported by the Marketers at the jetties by the FMF s Auditor - Participate in products ullaging - Provision of products statistics (supply & distribution) from depots and jetties to the retail outlets 5 Central Bank of Nigeria (CBN) - Custodian of the Fund - Payment confirmation and remittance 6 Petroleum Products Pricing Regulatory Agency (PPPRA) - Witnessing and confirmation of the quantity imported by the Marketer at the jetties - Monitoring of prices at the depot and retail outlets levels - Monitoring of products evacuation from depots to retail outlets covering bridging and local delivery - Determination of appropriate price build-up subject to approval by the government - Determination of industry operators margins subject to government approvals - Determination of appropriate under and over recoveries in line with the approved Ex-depot and established Landing Cost 7 Nigerian Navy - Issuance of clearance for the vessel to enter the Nigerian waters 8 Nigerian Customs Service - Issuance of clearance to discharge or Authority to unload products/goods with the quantity stated 9 Nigerian Port Authority (NPA) - Issuance of clearance to allow the vessel to berth at the Jetty after necessary payment (Port dues based on the size of ships and volume of products as stated in the bill of lading) - Vessel s berth scheduling 10 Facilities/Depot Owners - Ascertain the volume discharged into the tanks and monitor their distribution through the closing and opening inventory stocks as well as appropriate means of ullaging. 11 Debt Management Office - Responsible for the issuance of Sovereign Debit Note (SDN) - Guarantees marketers payments within 45 days of issuance of SDN - Guarantees security of Petroleum Products imported by marketers Source: PPPRA 13

14 In reality, however, these operators would lose more than the guaranteed cost recovery payments available under the PSF mechanism, at least going by the findings of a KPMG audit that the FMF ordered a couple of years ago. 12 The audit found, among other things, that importers claimed payments for shipments that were still at sea and thereafter diverted the same products. The current subsidy regime provides high returns for the marketers, establishing strong vested interests that will be difficult to overcome. With such perverse incentives and underhand practices at play there is little surprise that the number of privileged importers and marketers, 13 the levels of domestic consumption and consequently reported volume of imported products 14 all keep growing, contributing to the rapid rises in the subsidy bill (the other main factors being the rise in international oil prices and exchange rate changes). Oil marketers will have strong economic incentives to support the status quo, since a deregulated market will bring competition and risks without the guaranteed profit margins of the current regime. Over the long term, however, their real fear has to be increases in local refining, which will altogether end the exportimport licensing regime and the cartel economy of crude export and petroleum products imports that is the mainstay of the subsidy mechanism. 3. HISTORICAL SYNOPSIS OF PRIOR ATTEMPTS TO WITHDRAW SUBSIDY The quest to withdraw subsidies on petroleum product pricing has gradually become a wrenching tug-of-war between the Federal Government on the one hand and the Nigeria Labour Congress and its allies in civil society organizations, the media, academia and the citizenry, on the other hand. This long-running saga started in October 1978 when the military regime of General Obasanjo raised the price of a litre of petrol 15 from 8.8 kobo to 15.3 kobo. The successor regime of President Shagari then increased the price to 20, before military president Babangida hiked it to 39.5 kobo in March 2006 and then to 42 kobo in April On January 1, 1989, 12 Source: Key informant interview. 13 The number of depot operators has risen from 5 in 2006 to 35 in 2011, while that of throughput owners has climbed from 0 to 57 in Overall the number of participants in the PSF mechanism has risen from 5 in 2006 to 128 in Source: PPPRA data 14 The volume of delivery has risen from a daily average of 26 million litres of petrol (6.5 million litres for kerosene) in 2006 to 40 million litres of petrol (9 million litres for kerosene) in 2011, albeit the figures included arrears of NNPC deliveries for 2010 (petrol) and July 2009 Dec 2011 (kerosene). Source: PPPRA data 15 Although price changes normally affect all petroleum products, petrol (or premium motor spirit - PMS) is the benchmark product. It has the highest demand and is also the only product in which price all Nigerians have a direct and indisputable stake. 14

15 the Babangida regime increased the price of petrol from 42k to 60k. This time the regime said the new rate was for private vehicles only, as the price for commercial vehicles remained 42k per litre for commercial vehicles. The differential pricing system ended on December 19, 1989, when the uniform price of 60k was adopted. On March 6, 1991, the price of a litre of fuel was increased from 60k to 70k and that remained the price regime until Babangida s departure in August The interim regime of Ernest Shonekan purported to increase the price of a litre of petrol from 70k to N5 on November 8, But after massive public protests, which provided the backdrop for Abacha s coup ten days later, the incoming Abacha regime reviewed the increment downwards to N3.25 on November 22, On October 2 nd, 1994, the regime hiked the petrol pump price from N3.25 to N15 per litre before reducing it to N11 per litre a couple days later on 4 th October after a huge public outcry. That was the price till Abacha died in May The short-lived Abdulsalam Abubakar regime increased the price from N11 to N25 on December and after sustained protests scaled back the increment to N20 on January 6, Table 4 Petrol Price Changes Since 1978 S/N Date Price (Kobo) Percentage Change Regime If Organised Protest (Yes/No) 1. Jan Oct General N Obasanjo Apr President Shagari N Mar General N Babangida Apr General N Babangida Jan General N Babangida Dec General N Babangida Mar General N Babangida Nov Chief Shonekan Y Nov General Abacha N 16 Applied to private use vehicles only 17 Extended to commercial vehicles 15

16 Oct General Abacha Y Oct General Abacha N Dec General Abubakar Jan General Abubakar Jun President Obasanjo Jun President Obasanjo Jun President Obasanjo Jan President Obasanjo Jun President Obasanjo May President Obasanjo Jun President Yar Adua Y N Y Y N N Y Y N Protests have also accompanied virtually every fuel price increment since the end of military rule. The Obasanjo administration s decision to raise the price from N20 to N30 on June 1, 2000, two days after its first anniversary, was met with massive upheaval, forcing a reduction to N25 on June 8, 2000 and then to N22 on June 13, The regime was again to increase the price to N26 on January 1, 2002 and thereafter to N40 on June 23, In response to the ensuing protests the government negotiated an agreement with the NLC and its allies in which the Federal Government would give N100 million to each state and the states would in turn put up another N200 million to provide loans to reputable transporters so as to lower public transportation costs. The last increase by the administration was on its exit in May 2007, when the price rose from N40 to N70. Amid the inevitable protests that followed, President Yar Adua approved a reduction to N65 per litre, which has remained the price to date. 16

17 It is possible to identify three phases in this historical synopsis of petroleum subsidy reduction saga, to wit: the Babangida years, Abacha and late military years and the current post-1999 era. Each of the three phases provides useful experience and lessons that have relevance to the current policy discourse THE BABANGIDA INCREASES The Babangida regime kick-started the petroleum subsidy reduction and never looked back. There were six price increases within 16 months once the mould was broken. The implications were significant for future attempts at reducing or removing the subsidy. First, the concomitant increases in transportation costs coincided with a period of structural adjustment that saw a sharp decline in the value of the naira and runaway inflation. The pattern was duly set in which rising fuel and transport costs were ineluctably accompanied by higher prices for all goods and services in a national context of growing poverty Figures from the Federal Office of Statistics (now Bureau of Statistics) showed the proportion of households living below the poverty line climbed rapidly from 27 percent in 1980 to close approximately 66 percent by Most of the poor were in rural areas, but the rate in the urban centres had also similarly risen from 17 to 58 percent over the period. 17

18 Second, unlike latter price increases, all five Babangida hikes were virtually unchallenged in terms of civil protests. To a large extent this civil silence was attributable to the fact that the Babangida regime had systematically emasculated all mass organizations with a real or feared capacity for mobilising a collective social response. The NLC and its affiliate unions, the National Association of Nigerian Students, Academic Staff Union of Universities and independent media were all banned, hounded or hopelessly compromised. By the mid-80s there was little capacity left in civil society to mobilize any significant collective resistance to fuel price increases or any other policies for that matter. But the increases were marginal and certainly not as significant as those of the latter phases. Note that all five of them still left the petrol price at less than N1/per litre. True, the naira had a higher value then, which explains the poverty impact of the rising prices, but the currency was also being steadily devalued as part of the structural adjustments. Further, there were some ill-considered attempts at softening the impact, even if these in practice amounted to little more than public relations. There were a lot of policy and project initiatives aimed at tackling poverty and creating jobs. The establishment of the Directorate for Food, Roads and Rural Infrastructure (DFRRI) and the National Directorate of Employment (NDE) and their numerous interventions (rural infrastructure projects, job training, entrepreneurship start-up packs, etc) exemplified these measures. The administration also built 23 depots to improve the availability of petroleum products. However, the benefits of these measures were insufficient, inconsistent or poorly targeted, while the link between them and higher petrol prices was never made explicit. Thus it would appear that the two most important factors for the absence of significant protests were the weakness of civil society and the relatively small changes in price occasioned by the increases. Nearly all other increases afterwards were met with vehement protests, often including strikes and street demonstrations, signifying that the conditions and permutations that had underpinned the civil silence had now changed ABACHA AND THE LATE MILITARY YEARS The first in the series of vehement protests was to occur within 73 days of Babangida s departure. The annulment of the June 1993 presidential elections had provoked such massive outrage that Babangida felt obliged to step aside. When he left two months later on August 27, his handpicked successor as head of a hurriedly assembled interim national government (ING) was Ernest Shonekan, CEO of a conglomerate affiliated to Unilever, who hailed from the same state as the presumed winner of the annulled elections. But Shonekan lacked not just the legitimacy but the firm control of a military dictator to deal with the political crisis. His regime s rather bold decision on November 8 to raise the pump price of petrol from 70k to N5 added fuel to the fire. Incidentally the oil sector unions (i.e. PENGASSAN and NUPENG) 18

19 especially had been very much at the centre of the civic mobilisation to protest the election annulment, taking the role that a previously strong NLC would have played. The two oil unions were also the linchpins for the strikes and demonstrations against the petrol price hike, apparently reckoning that the fledgling regime could not muster as robust a response as a military junta. Alongside a court ruling declaring the ING as an illegality, these protests provided the backdrop for the Abacha takeover on November, only 10 days after the announcement of the N5 price. Perhaps Shonekan s hand in the price hike as in everything else had been forced by his handlers (among whom was Abacha, the defence minister and highest ranking general), or maybe the regime had simply misread the political environment. In any case Abacha took full advantage by taking power for himself. While it is too presumptuous to plot a straight causal link between the price hikes and the collapse of Shonekan s 88-day regime, there is no doubt that the vehement protests against the policy figured in the calculations of coup leader Abacha and his co-conspirators. General Abacha s regime promptly became notorious for its repression of protesters and critics, which probably contributed to ending the protests. But his regime s management of the petrol price issue did not rely solely on repression. Shonekan s decision to raise the price by a dramatic amount had appeared ill-judged and poorly sold, leaving the impression that he had been counting on either the logic of the decision, the force of his military backers or civic inertia to carry the policy. Abacha s approach was more deliberated, suggesting that he had learnt from the Shonekan misadventure. He approved an increase from N3.25 to N15 in October Two days later his speech in response to the ensuing protests o contained three important initiatives. First, he announced a reduction in price from N15 to N11. By itself this could be easily dismissed as a cynical populist gesture to sell what was still tantamount to a monumental increase. But Abacha s accompanying two offerings were substantive enough to withstand the charge of cynicism. One was the creation of a Petroleum Special Trust Fund (PTF) into which the earnings from the price increase would be deposited for the purpose of building infrastructure and improving social services. He underlined the seriousness of this initiative by naming respected former head of state Buhari as executive chairman. The other initiative was the establishment of a Federal Urban Mass Transit Agency (FUMTA) to provide some 1000 mass transit vehicles on soft terms to transporters who would in turn charge affordable fares to commuters. These additional measures were prompt and sufficiently impactful in execution to allow the administration to convincingly claim it had softened the impact of the price hike increase and effectively utilised the windfall from the increase. The measures were still in place when General Abdulsalam Abubakar s regime raised the petrol pump price to N20 in January In addition to whatever continuing cushioning effect fromthe Abacha measures, this price hike was promoted as necessary to finance the transition to civil rule. In fact some of the transitional elections had already been conducted. Although the increases were protested, civil 19

20 society was still re-emerging from the trauma of Abacha s repression and so the protests could not be sustained for long. Moreover, the yearning for a return to civil rule discouraged many from embarking on actions that might be seized upon by military rivals to topple the Abubakar regime and jeopardise the political transition. In any case the regime was able to ride out the protests and hand over in May of that year THE POST-1999 CIVILIAN ERA There have been four major themes to the petroleum pricing saga in the twelve years since the return to civil rule. The first is the frequency and size of the price adjustments: in the eight years of Obasanjo s two terms alone there were six petrol price changes, which match the six adjustments of Babangida s eight-year regime but are much more substantial in percentage terms (see more on this below). A second theme relates to the technocracy of the increases. The government has tried various approaches to the timing of the increases. The first increase in 2000 was on the first anniversary of the Obasanjo administration; the last in 2007 was on the eve of his departure. The June 2003 increase occurred shortly after the start of the second term, presumably to take advantage of a presumed post-inauguration honeymoon period. The 2002 increase was at the start of the year. Given that all but one of the increases was met with sustained public protests, the administration did not get much out of its apparent attempts at auspicious timing. The other themes also relate to the politics and technocracy of subsidy reduction. The increases have almost invariably been poorly packaged and communicated. The 2003 increase, for example, occurred when Obasanjo had not appointed ministers and the post-election mood was still marked by much bitterness (it was certainly not a honeymoon period). The task of promoting the price hike fell to a presidential spokesman and Engineer Funsho Kupolokun, at the time the GMD of NNPC. The duo debated on national television with then NLC president Adams Oshiomhole 19 but were so hapless that the government had to drop many of its talking points afterwards (including the line that the NLC was representing privileged urban classes). Not incidentally the debate and the several other standoffs in which the NLC refused to blink helped to boost the credibility of the congress as a legitimate and trusted representative of the public interest. Its analysis and positions came to be more trusted than those of elected politicians, who were seen as self-interested and out of touch with their constituents. A fifth theme has to do with the substance of the price increases. The only occasion when a price increase did not provoke sustained protests in this era was the January 19 Now the governor of Edo State 20

21 2002 increment. This probably had to do with the fact that the increase on this occasion was relatively small - from N22 to N26. The NLC tried to mobilise protests but in the end conceded that it was difficult to sustain solidarity over what was a change that it could live with. A sixth theme, also related to the substance of the subsidy reduction, is that despite its solemn pledges the Federal Government has not been able to demonstrate a link between higher pump prices and development initiatives in the manner that the Abacha regime did. Following the 2004 protests the government raised a 33-person Independent Coordinating Committee for Cushioning Measures headed by Senator Ibrahim Mantu, the then deputy senate president, which went on to make comprehensive recommendations on preparatory and palliative measures 20 that the government eventually failed to follow through. Several of these themes are still in play in the current debate over subsidy removal, as we shall presently see in the stakeholder analysis below. Of course the withdrawal of subsidies has been part of a broader policy discourse about the deregulation of the downstream sector of the petroleum industry. However, because the debate picks up only around episodes of petrol pump price increases, deregulation has come to be seen as a euphemism for price hikes. The government s continued use of the rhetoric of deregulation to promote subsidy removal is therefore being questioned on the grounds that it has not taken action on other aspects of the policy beyond the refining licences issued sometime ago. In any case deregulation has consequently become a rather hard sell. Yet the challenge facing the government cannot be reduced to a problem of communications or public relations. Indeed the Federal Government has been making a technically sound case for deregulation since 1995, when Engineer Kupolokun, then a Group Executive Director (GED) at NNPC, offered a detailed analysis to the effect that deregulation was essential not only for developing the downstream sector of the petroleum industry but also addressing some of Nigeria s long-standing development challenges. Successive federal administrations have relied on this narrative to reiterate the urgency of deregulation as a necessary condition for fixing infrastructure, creating jobs and reducing poverty. The government has also explained that petroleum subsidies benefit well-off urban classes at the expense of the generality of Nigerians who will reap the benefits if the subsidies are withdrawn and instead ploughed into addressing the aforementioned development challenges and providing safety nets for the poor. The government has used the same argument to sell, to varying degrees of success the Structural 20 Among the palliative measures agreed by the panel and endorsed by the National Economic Council was the proposal to reduce duties on the importation of buses and other vehicles from 22 per cent to 10 per cent and on pharmaceuticals from 20 per cent to 5 per cent. Other measures included a grant of N100 million to each state to match with another N200 million to purchase vehicles for public transportation. For densely populated states like Lagos, Oyo, Rivers, Kano and the Federal Capital Territory (FCT), the Federal Government contribution will be N200 million each and their own matching grant will be N400 million each for the same purpose. 21

22 Adjustment Programme, economic liberalisation, privatisation of public enterprises and deregulation of external trade and telecoms. (It is also expected to extend the argument to the deregulation of the power sector and transport infrastructure). As for fuel subsidy removal, it has also been suggested that the measure will check crossborder smuggling of petroleum products, thereby boosting product availability and affordability. The government case has been challenged on the basis of the explicit and implicit political assumptions underpinning the technical analysis. In particular, the Nigerian Labour Congress (NLC) along with its allies in civil society and the media have formulated the counterargument that there has been no discernible improvements in the prospects of Nigerians despite repeated increases in the prices of petroleum products, which increases these critics have posited are the mainstay of the deregulation policy. According to these critics, the government has increased the pump prices of petroleum numerous times but that the only consequence for ordinary Nigerians has been a spiralling of inflation, ever-rising levels of unemployment, worsening social indicators, poor social services and increased rates of poverty. They have also pointed to corruption and mismanagement as well as collapsed refineries and sharp import practices as the drivers of petroleum product prices, which begs the question as to whether - and, if so, how much - subsidy actually exists. Some critics, mostly based in academia and civil society, have also questioned the case against subsidies on ideological grounds, essentially by insisting that governments all over the world apply subsidies and that Nigerians as citizens of a major oil producing nation can legitimately expect to reap the benefits at the pump. Thus in addition to the technocratic and political management of the subsidy withdrawal, government s credibility has been stretched to the limit on all the key issues in the debate, including the particulars of the subsidy removal under consideration, broader issues around deregulation and the reform of the petroleum industry, safety nets, domestic refining capacity and the political capacity and will to deploy the savings from the subsidy withdrawal in an effective and accountable fashion. It is this lack of trust in government s willingness and ability to follow through on its commitments over these issues that is at the core of the challenge facing the government over subsidy removal. 22