Petrol, Electricity: When Subsidy Finally Goes…

Petrol, Electricity: When Subsidy Finally Goes…

Pricing of petroleum products and indeed the issue of subsidy have in contemporary history been dogged by unending controversies even as the issues may not quieten down soon. This is so because of the sector’s stronghold on various stakeholders in the petroleum value chain.

Earlier, in October, the Group Managing Director of the Nigerian National Petroleum Corporation, NNPC, Mr. Mele Kolo Kyari, yet again, announced plans to remove subsidies on Premium Motor Spirit, PMS, also known as Petrol or Fuel. In another breath, it appears, the Federal Government, FG, is determined to remove all types of subsidies in the power (Electricity) sector. This indication came at the opening of the 14th Nigerian Association for Energy Economics/IAEE conference in Abuja, recently.

In the year 2020, the FG reduced the pump price of petrol from N145 to between N123.50 and N125, following the steep drop in oil prices occasioned by prevailing low demand for oil, as a result of the global economic shutdown itself prompted by the COVID-19 pandemic. Then it was argued that it ought to be rational that the local pricing should reflect the global energy market situation.

Fuel subsidy has historically been a divisive issue, with statistics showing that Nigeria spent at least N10 trillion on fuel subsidy between the years 2006 and 2018.

In the midst of reports that Nigeria projected to spend circa N750.81billion on petrol subsidy in 2020, many had argued that fuel subsidy in the country only benefited the rich, stressing that the funds spent on petrol subsidy would be more appropriately applied to fixing huge infrastructure deficit, as well as providing funding for small and medium enterprises which in turn would benefit a larger segment of the society.

As far as the electric power sector is concerned, the FG pays an estimated N30 billion every month as electricity subsidy. This is in spite of the fact that the power sector is in hands of the private investors after the behemoth National Electricity Power Holding was unbundled. The argument is that several billions of dollars have been spent on subsidies and related issues in the electric power sector without any commensurate improvement.

Not a few Nigerians are at a loss on what the concept subsidy stands for in the Nigerian parlance. In practical terms, the petrol subsidy is calculated as the difference between the Expected Open Market Price, EOMP, and the approved retail price of petrol, both of which are determined by the Petroleum Products Pricing Regulatory Agency, PPRA, in line with set policies. The EOMP is determined as the sum of landing costs of petrol and a distribution margin. In simple terms, it is composed of the cost of production (that is the cost of purchasing refined petrol and importing the same into the country) and an expected profit margin per litre of petrol. The PPRA determines the approved retail price of petrol derived from a consideration of the EOMP vis-à-vis prevailing economic conditions and the government pays the difference between the EOMP and the pump price as Fuel Subsidy to the petrol marketers to ensure that petrol is sold to the public at the approved retail price without incurring losses for the marketers.

As it is now, the pump price goes for an average of N165 per litre with attendant colossal subsidy by the government. The FG at one point said it was cancelling out the subsidy regime, liberalising the market and allowing market forces to determine the pump price of the product. Not long after that it was discovered that the position was a mere political statement as the government had continued to pay subsidies beyond the amount inherited from its predecessor.

We are worried that a sudden wholesale removal of subsidy on petrol and hike in electricity tariff all at the same period would not augur well for the average Nigerians stuck in one spot in their take homes. We contend that salaries of most workers have remained static; it would therefore be a huge burden to bear for many both in the private and public sectors whose earnings are already overstretched by sundry socio-economic hurdles. 

AljazirahNigeria is of the position that a one-off removal of subsidy would further squeeze the informal productive sectors reeling under post-COVID-19 effect amid lack of enabling environment to boost businesses.

In a similar vein, we urge that the planned hike in electricity tariff should be reconsidered to enhance capacity of small scale concerns which businesses rely on electricity. Any hike would have a ripple effect on their products and services as many may be forced to close shop in the event that they are unable to transfer such costs to their customers.