Fuel Subsidy Removal: A Poison Chalice or Pawn?

January 04, 2012 1136hrs / Taiwo Ologbon-Ori

The poison chalice, according to wikianswers, is a term used when something was first perceived as being very good and helpful, then ends up being very bad. Often used in relation to societies to see how or why some of the past civilizations fell. For example, Babylon and Ur developed great irrigation systems; however it was this dependence on the systems that contributed to their down fall. The poison pawn however is a jargon used to describe a tempting target, yet one whose capture would ultimately be self-destructive. In essence, in both cases you end up with a self destructive outcome simply because of one or all of the following: the absence of rigour in the thought process guiding an action, the sequencing or prioritisation of the conditions precedent to a decision, communication management leading to a hearts and minds perceptions of beneficiaries, excluded and enforcers of the move to get a buy-in or/and the lack of creativity or innovation in packaging the change. In all this the place of timing matters a lot. Further, a judgment call has to be made as to when less is more and when boldness has to be matched with audacity and tact. It matters to the extent that the basis of the decision, and in this case, the fuel subsidy removal is done without questions as to motive looms larger than the substance of the action. Some of these concerns, as aggregated from the analyst community, will include the following: N1.2Trillion as the basis of arguement: The FG at the beginning of the 2011 year set aside the sum of N240bn in its budget for oil subsidy (an average of N20bn per month). By the end of the year, the FG is reported to have spent N1.2tn on subsidy payments (outside appropriations by the National Assembly). The drivers of this significant increase (400%) remain unexplained to an enlightened citizenry who are left to wonder why an increase occurred when the international oil price did not spike nor did the local consumption rate increase. The foundation of the argument is thus lost in translation and salesmanship. The 2012 budget and the MTDP 2012 2015 did not include any provisions for subsidy that pretty much meant that there was not going to be a debate about the issue but the selling of the decision as a do-or-die decision to Nigerians might have stretched the logic a bit too far. The sales pitch about palliatives was equally disingenuous as it presented the provision of core basic responsibilities as a favour or an exchange for giving up on the subsidy. The provision of good roads (concessionaire or otherwise), adequate transport enablers like rail lines and ports, provision of adequate security of lives and property, funding of a functional fire service, funding of the sorry healthcare delivery system and good governance cannot be termed a negotiation tools. They are responsibilities. The lack of a clear decision from those who have taken up the call to serve to lay down the gauntlet on the key message in the decision i.e. sacrificing today to provide for a better tomorrow is lost in the profligacy associated with governance and sustained in the pattern of recurrent expenditure which did not reflect an austere approach to the cost of governance. This lack of or absence of personal example acted to condition the minds and remind the people of the trust deficit that has always been a key feature of the social contract between the leadership and the people.
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The increased visibility of the IMF/World Bank in dictating the direction of the economy was always bound to rub negatively against those who believe that there involvement in other climes and our recent past remains a sensitive issue. The decision by Ghana to remove was always thought to be a trigger for an action from Nigeria who would be expected to take steps to address the arbitrage that would arise owing to the FGs inability to efficiently manage its borders and the well known diversion of products to the ECOWAS sub-region. Lastly, there were not to many change champions for the subsidy removal other than the President, the Minister for Finance and the CBN Governor who did a decent job to engage and make their case as best as they could. It must be noted though that this was always going to be a difficult and presidency defining action for which the President will always take the blame. The stage was thus set for a reaction, the manner of which remains unknown even as analyst expect that it may not be a tipping point for a people conditioned to believe that there only dividend of democracy was the subsidies they assumed they got from fuel prices, agriculture, education and health services. In the peoples estimation, if there was corruption and the government knew that the system was flawed; it was expected to bring the culprits to book. From those who ran refineries aground, to importers of fuel, executives of DPR/NNPC and their collaborators. To date, no one has ever been held accountable and this presents a moral challenge if not an integrity dilemma for the administration. Yet, no one is sure whether what we have is a deregulation of the market or a simple removal of subsidy whilst retaining a price control regime. Desperation or Well Reality Response Looking at the timeline of activities leading up to the January 1, 2012 decision by the PPPRA, it would appear that the Abubakar Saraki observation on the floor of the senate precipitated the cascading actions that took place. Yet the debate had started long before this during the Remi Babalola press comment about the state of finances of the NNPC that was hushed away. The government, it can be reasonably said must have therefore anticipated and given enough thought to the action, options and possible reactions; which encourages us to believe that the decision is a fait accompli. The deliberate exclusion of the provision for subsidy in the 2012 budget before the outcome of the NASS enquiry into how the figure leapfrogged by 400 percent would indicate that a deficit-running government needed to shore up its finances and by extension may not be in a stronger position to invest same amount on a sustainable basis in the economy. This position was well echoed during the minimum wage dispute and it would stand to reason that the state governments who in the main, with the exception of a few states, remain unviable entities without FG revenues were in on the removal of the subsidy as a means of covering the hole in their finances. A cursory review of trends using timeline analysis on the issue reveals that this may end up being a poisonous chalice for the masses and a poisonous pawn for the administration/government. Crunching Game of Chess

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In a game of chess a poisoned pawn is one which is left out in the open as a target for an opponent's piece in order to lure that opponent into capturing what looks like an easy capture. But it is a trap that has many uses. By way of illustration, say an opponent has a piece that is guarding a square you want to go to in order to checkmate the king. The pawn is moved to a square where it can be taken by that protecting piece. If the opponent goes for that pawn it moves to a spot where it no longer guards the spot you want. You then move to the now unprotected square and checkmate the king. So the opponent gobbled up an insignificant pawn only to be poisoned by the lack of protection. Actually, any piece can be used as a poisoned piece if used properly in the right game situation Technically, what this means is that the sudden removal of the subsidy on January 1st as a New Year gift as against all expectations is a trap to stir the masses into protest which will provide a ground/platform for the N1.2trillion as new cost of subsidy i.e. this is the win-win gambit for the government. A gambit is a chess opening in which a player risks one or more pawns or a minor piece to gain an advantage in position. So why is the administration staking its governance mandate on this move? It can only be doing so because on the one side, it might have limited insight into the issues, oversimplified the possible outcomes from reactions or on the other hand (and more plausible) it genuinely means well for the people of the country. The informed reasoning would suggest that government, and to a large extent, the people believe that we must confront the challenges of funding the infrastructural deficit holding us back in our pursuit of becoming an industrialised nation. The angst being vented therefore must lie, not in the validity of the subsidy removal but more with regards to tact, timing and talking points all about approach to address the most difficult issue in the most populous black nation on earth where according to the CBN Governor, the majority of the people (the fabled 99%) live on les than $2 USD a day. The numbers and deductions
Subsidy Budget (N'm)
2010 Subsidy (NNPC) Subsidy (Marketers) Total subsidy budget Oil Benchmark Oil Vol. Assumption @N150/1$ 271,921 274,004 545,925 US$60/barrel 2,250,000/day 2011 ?? ?? 240,000 Actual Spent (N'm) 2010 ?? ?? ?? 2011 ?? ?? 1,200,000

Variance
2010 ?? ?? ?? 2011 ?? ?? 400%

Some of the subsidy beneficiary in 2011

African Petroleum A.A. Rano A.S.B Arcon Plc Aminu Resources Avante Guard Avido Boffas and Company Brilla Energy DownStream Energy Fuel Subsidy www.proshareng.com 104.58 Billion 1.14 Billion 3.16 Billion 24.116Billion 2.3 Billion 1.14 Billion 3.64 Billion 3.67 Million 960.3 Million 789.648 Million

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Dosil Oil and Gas Inco Ray Eternal Folawiyo Energy Frado International First Deepwater Oil Heden Petrol Honeywell Petrol Integrated oil AMP Ascon Channel Oil Forte Oil Enak Oil & Gas IPMAN Investment Limited Atio Oil AMP Emac Oil

3.375 Billion 1.988 Billion 5.574 Billion 113.32 Billion 2.63 Billion 257.396 Million 693 Million 12.2 Billion 30.777 Billion 11.417 Billion 5.271 Billion 1.308 Billion 8.582 Billion 19.684 Billion 10.9 Billion 64.4 Billion 11.4 Billion 19.2 Billion

Glimpse of the 2012 budget 2012 Budget

Recurrent Expenditure Capital Expenditure Total Expenditure

2012 (N trn) 3.42 1.33 4.75

% Contribution 72.00% 28.00%

2011 (N trn) 3.33 1.15 4.48

% Contribution 74.33% 25.67%

The proposed 2012 budget shows that 72 percent was earmarked for recurrent expenditure, while 28 percent of the budget was earmarked for capital expenditure indicating infrastructure development will be slow. This unfortunately does not tally with govts reasoning (infrastructural development) for the removal of subsidy.

Budget 2012 and 2011 compared Budget proposal Capital Recurrent Stat. Transfer (NAS, NDDC,etc) Debt servicing TOTAL Highlighted sectors Security (defence, police etc) Education Health Agric Niger Delta

2011 Nbn 4,226 1,006 2,482 3,488 196 542 4,226

2012 Nbn 4,749 1,320 2,470 3,790 398 561 4,749 Variance 12.38% 31.21% -0.48% 8.66% 103.06% 3.51% 12.38%

Contributions 2011 2012

24% 59% 83% 5% 13%

28% 52% 80% 8% 12%

1,042 489 339 139 57 2,066

922 400 283 79 60 1,744

-11.52% -18.20% -16.52% -43.17% 5.26% -15.59%

25% 12% 8% 3% 1% 49%

19% 8% 6% 2% 1% 37%

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Debt service Statutory transfer Other sectors (not separated)

542 196 1,422

561 398 2,046

3.51% 103.06% 43.88%

13% 5% 34%

12% 8% 43%

TOTAL

4,226

4,749

12.38%

About the Author(s): Taiwo OLOGBON-ORI is an analyst at Proshare with input from an editorial advisory issued on the subject. DISCLAIMER/ADVICE TO READERS: While the website is checked for accuracy, we are not liable for any incorrect information included. The details of this publication should not be construed as an investment advice by the author/analyst or the publishers/Proshare. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All opinions on this page/site constitute the authors best estimate judgement as of this date and are subject to change without notice. Proshare encourages its staff members to freely express themselves on non-client related issues and disclose their interest as a way of helping them horn their analytical and writing skills. Subscribers and Investors should see the content of this page as one of the factors to consider in making their investment decision. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This information is published with the consent of the author(s) for circulation in/to our online investment community in accordance with the terms of usage. Further enquiries should be directed to the author at info@proshareng.com.

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