Much ado about subsidies -By Pat Utomi

Filed under: National Issues |
Pat Utomi

Pat Utomi


There are many tracks to the village market of subsidy and optimal utilisation of a finite and wasting asset we have been gifted with, called petroleum.

Language humour always gets me going. The TV series, Mind your Language, was a hit with me, therefore one of my favourite language jokes is of an “Americana” fellow from Owerri who returning from New York greeted his grandmother with full compliments of a Bronx accent: “Grandma, how are you doing (ow-r-u-dooin)?” Poor Grandma, assuming he was speaking the dialect, responded: “Edu rum nga mduru (I am still sitting where I was sitting)”. She had assumed he asked “How are you sitting”? On the matter of fuel subsidy in Nigeria, I feel like the grandmother: “Edu rum nga mduru.”

Those who have sat in my classes know that like most business teachers, I am quick to state upfront, that there are no right or wrong answers, as in case study discussions. As such, what mattered was the rigour in arriving at a decision. Clearly, there are many ways to skin the Christmas ram. Some use boiling water to get the skin clean of hair, others hold it over the naked fire until the hair is burnt up. Surely, there are many tracks to the village market of subsidy and optimal utilisation of a finite and wasting asset we have been gifted with, called petroleum.

As a business teacher, one of my refrains is that there is no such thing as the one and only right answer. We can arrive the same destination through different highways. But as J.K. Rowling reminds in her Harry Porter stories, we are the choices we make. When choice is not marked by rigour, the outcomes tend to be suboptimal, and sometimes defeating of purpose. In this case, of subsidies, the question must be why subsidy? What are the benefits? What were the challenges in its implementation and what are future costs and benefits of continuing such a strategy of enhancing well-being, as the purpose of government is optimal enhancement of the well-being of the people?

My views were and remain that whatever the object of subsidy, it had been converted into a scam that has hurt more, the poor people, and encouraged inappropriate consumption by the more well-off while lining the pockets of scammers. Those views remain. Evidence of this firm stance can be found in the interview I gave on Sunrise Morning on Channels Television during that January 2012 protest of subsidy-induced petrol price hike, and course of action in response. That has not shifted at all.

When someone recently suggested my views on petrol subsidy may have shifted, I could not but remember the Owerri grandmother. “Edurum nga mduru.” My views on the matter have not shifted. What is the difference between being prominent in #OccupyFalomo when subsidy was the excuse for fuel price increase and saying “subsidies”, as we call the phenomenon, are distorting markets and prices, and taking away resources for government investment in the well-being of citizens?

Why do governments turn to subsidies? It could be to reduce the burden of high prices so the people can have access to a product or service that improves their welfare, which a market price would make improbable. It could be to boost production so jobs can be created. Still, subsidies could be designed to bridge regional challenges as with cross-subsidisation, a good example of which would be bridging in distribution of petrol across Nigeria.

My experience is that subsidies, which bring the welfare benefits that the goals that bring them about seek, also have costs. Whether they should continue, generally, then depends on a cost-benefit analysis. Sometimes, the costs come in the form of abuses that subsidies can unwittingly promote. In the case of Nigeria, a major part of that cost comes from a rent-seeking culture which, in a time of impunity, encouraged leakages in which between 2011 and 2012, subsidy’s costs went up by several hundreds of billions of naira when prices of PMS in the international markets hardly moved.

It is clear that the projection of improved benefit for lower price is a phantom. All over Nigeria, only Lagos and Abuja seemed to have those subsidy prices to go to the people. Lately, even Lagos has slipped, as stations in Ajah and some other parts have been verbally advertising prices N20 more for each litre and selling only to those willing to pay those prices. Yet, the subsidy excuse takes away from market conditions that create competition that forces down prices. If we remember the early days of GSM when prices were up, and per second billing was thought improbable. Then, the oligopoly was broadened as Glo came along, and Etisalat followed. Per second billing suddenly became possible. Prices also fell to earth from the stratosphere.

My problem with our petrol subsidy regime is not just that the presumed benefits are being scammed off and a few individuals are amassing wealth from the scam, but that no clear goal, after which the regime stops, is in sight. Yet, many government services are lost for the drain of the subsidy. Arguments have been put forward that the regime should stay in place until the refineries are fixed or more refineries built in the country. As I have pointed out, there is no absolutely right or wrong answer. I not only desire a quick fixing of the refineries, I would like to encourage a regime that sees our coastline dotted with refineries and little, if any crude oil, exported. This would no doubt not only result in more value to Nigeria; as one hundred dollars of crude export could readily be three thousand dollars in income, if we processed; but would increase supply to the point that domestic prices cannot but fall.

The real question is how long we can allow the haemorrhaging in the name of subsidy, which does not result in benefits that reach the people, to continue? Surely, those who profit from this, inappropriately, will be further incentivised to sabotage the system for continued immoral gain.

As I wrote down these thoughts, I watched an NTA report on long queues at petrol stations in Abuja. The anchor then switched to neighbouring Nasarawa State where the lines did not exist. The difference, they were paying more. What was even unjust is that some of the marketers were taking delivery, collecting subsidy money for what they collected, and further marking up what arrived at the filling stations. They were making out like bandits at the expense of economic development and the poor fellows trying to commute.

Surely, a more disciplined government with less leakages reduces the cost of subsidies, but in the end, it just shortchanges everyone, especially if it is not geared at improving production and reducing the demand beyond need, for it. Our middle class drive around far more unproductively that their South African colleagues became the price of PMS. These are the reasons I vote for the market to be used to force down prices instead on that, “edurum nga mduru?