₦airaland Forum

What is government subsidy? Government Subsidy is simply the transfer of economic resources by government to consumers or producers of a good or service. The resultant incentive is to reduce cost of production and boost consumption of the commodity.

The Nigerian government introduced an oil subsidy to cushion the effect of rising global oil prices in the 1970s. The Obasanjo military regime formalised the subsidy in 1977 when it introduced the Price Control Act which regulated prices of items including fuel. Since the introduction of fuel subsidy, there have been deliberate sabotage of Nigeria's refineries by successive governments. Today, government public officials and their cronies (Oil Marketers) have turned the fuel subsidy scheme into a conduit pipe for looting our common wealth.

Many economic experts are of the opinion that subsidies distort markets and discourage investments. Some have argued that subsidies exist where government fails to implement programs to internalise uncontrolled costs in energy markets. Others argue that government regulation creates a subsidy when it fails to set fuel prices equal to the marginal cost of production.

When it comes to fuel pricing in Nigeria, politics and corruption trumps economics. According to the Natural Resource Institute, an independent, non-profit organisation, Domestic Crude Allocation, DCA, has become the engine of waste and revenue loss to Nigeria. The Nigerian Government allocates about 445,000 barrel of crude per day to the NNPC, which it in turn sells to derive revenue.

The DCA allocation spent by NNPC delivers poor value for money. A large portion of NNPC’s withholding is spent on fuel subsidy payments, which are vulnerable to misappropriation and excessive looting by government officials. KPMG, the global audit firm, for example, found that in three years, NNPC paid itself roughly $6.6 billion to fund the subsidy on 15.6 billion litres of products that “apparently were not available to the Nigerian market”.

It is instructive to note that previous investigations by government and several petroleum subsidy litigations before our courts have further exposed massive graft by both government officials and private participants in the petroleum industry. Take for example, the Mallam Ribadu’s Petroleum Revenue Special Task Force Report indicated that NNPC withheld N1.983 trillion subsidies between 2006 and 2011. This amount represents almost 40 percent of the 2016 national budget.

Also, the Farouk Lawal led House of Representatives Ad hoc Committee on Subsidy Verification concluded that the subsidy regime, as operated between 2009 and 2011, was laden with colossal corruption and entrenched inefficiency. Simply put, the subsidy claims made were not for consumed fuel!

The committee went on to state that contrary to the earlier official figure of subsidy payment of N1.3 trillion, the Accountant General of the Federation put forward a figure of N1.6 trillion, the Central Bank of Nigeria (CBN) stated N1.7 trillion, while the committee established subsidy payment of N2,587.087 trillion as at December 31, 2011, amounting to more than 900 percent over the appropriated sum of N245 billion.

Also, a subsequent report by the Presidential Committee on Verification and Reconciliation of Fuel Subsidy Payments, led by Mr. Aigboje Aig-Imoukhuede, revealed that in 2011, 197 subsidy transactions worth N232 billion were illegitimate. Previously released Forensic Audit of NNPC by Price Waterhouse Coopers showed that fuel subsidy cost Nigeria almost $10 billion between January 2012 and July 2013.

It is incredible that over the years, fuel subsidy has been two and five times the size of the federal education budget and up to seven times the health budget. In February 2014, the CBN informed the Senate Finance Committee that NNPC needed to account for $20 billion, as CBN could only confirm receipt of $47 billion out of the $67 billion revenue between 2012 and July 2013. NNPC in it's defence to the Senate Committee on Finance made a vague submission that almost half of this non-remittance funds were used for subsidy claims on imports of Premium Motor Spirit, PMS, and Dual Purpose Kerosine, DPK.

The Nigeria Extractive Industries Transparency Initiative, NEITI, independent audit report stated that, over N13.697 trillion ($74.3862 million) has been paid as subsidy to marketers from 2005-2012. The breakdown of the subsidy shows that N2.197 billion was paid as subsidy in 2006. This rose to N236.64 billion in 2007 and N360.1 billion in 2008. In 2009 the country paid N198.1 billion as subsidy for petroleum products and in 2010 the subsidy payment rose to N416.45 billion.

The payments ballooned to N1.9 trillion in 2011. Payments of oil subsidies for 2022 ballooned again to $10 billion. Recent figure released by NNPC stated that it is owed N2.8 trillion ($6.1 billion) in outstanding subsidies payment by government. And that it is spending N400 billion ($867 million) monthly on subsidising petrol prices.

Again, the amount paid out on subsidies from 2005 to 2021 is equivalent to the entire budget for health, education, agriculture, and defense in the last five years. The sum also equals the capital expenditure for 10 years between 2011 and 2020. Subsidy payment reached its peak in 2011 ($ 13.52 billion or N2.11 trillion). It is true that removal of subsidy will free allocations which can be channelled to the provision of infrastructure like roads, education, health service, power, security, creation of jobs, development of the downstream sector, improve our GDP growth, foreign exchange shortages and provision of basic benefits for the “poor in the society” but since fuel subsidy payments skyrocketed mainly as a result of monumental corruption and greed of NNPC officials, politicians and marketers, removing subsidy will only create a new looting channel for these rogues and won't achieve any economic benefits. I am of the opinion that the failure of EFCC, ICPC and other anti graft agencies/committees to conclude investigations and prosecute litigations of crimes committed through NNPC is a major reason why fuel subsidy payments spiralled out of control. It is obvious, NNPC can not defend the huge daily / monthly fuel subsidy payouts it receives from government.

It is imperative to note that the fuel subsidy scheme failed to help Nigerians buy refined products at much lower than the prevailing market price because of monumental corruption by NNPC officials, politicians and oil marketers. The fuel subsidy scheme is not the problem, the issue here is corruption and looting supervised by our politicians. Even if subsidy is removed today, it still doesn't solve the underlying problem as funds realised will still be embezzled and mismanaged. To make any meaningful progress, NNPC/NNPC Limited must be held to account for it's crimes under the subsidy payment regime. Removing subsidy without resolving the underlying issues why it failed is a futile effort that will yield no meaningful fundamental economic benefit. If fuel subsidy must be removed, a serious government must confront mismanagement, invest in modular refineries and strengthen the independence of our anti-graft agencies. With the recent price hike of petrol from N185 to N700 per litre over alleged sudden removal of fuel subsidy, I fear that Tinubu's illegitimate APC government will do more harm than good to the Nigerian economy.

Bebigiby1:
What is government subsidy? Government Subsidy is simply the transfer of economic resources by government to consumers or producers of a good or service. The resultant incentive is to reduce cost of production and boost consumption of the commodity.

The Nigerian government introduced an oil subsidy to cushion the effect of rising global oil prices in the 1970s. The Obasanjo military regime formalised the subsidy in 1977 when it introduced the Price Control Act which regulated prices of items including fuel. Since the introduction of fuel subsidy, there have been deliberate sabotage of Nigeria's refineries by successive governments. Today, government public officials and their cronies (Oil Marketers) have turned the fuel subsidy scheme into a conduit pipe for looting our common wealth.

Many economic experts are of the opinion that subsidies distort markets and discourage investments. Some have argued that subsidies exist where government fails to implement programs to internalise uncontrolled costs in energy markets. Others argue that government regulation creates a subsidy when it fails to set fuel prices equal to the marginal cost of production.

When it comes to fuel pricing in Nigeria, politics and corruption trumps economics. According to the Natural Resource Institute, an independent, non-profit organisation, Domestic Crude Allocation, DCA, has become the engine of waste and revenue loss to Nigeria. The Nigerian Government allocates about 445,000 barrel of crude per day to the NNPC, which it in turn sells to derive revenue.

The DCA allocation spent by NNPC delivers poor value for money. A large portion of NNPC’s withholding is spent on fuel subsidy payments, which are vulnerable to misappropriation and excessive looting by government officials. KPMG, the global audit firm, for example, found that in three years, NNPC paid itself roughly $6.6 billion to fund the subsidy on 15.6 billion litres of products that “apparently were not available to the Nigerian market”.

It is instructive to note that previous investigations by government and several petroleum subsidy litigations before our courts have further exposed massive graft by both government officials and private participants in the petroleum industry. Take for example, the Mallam Ribadu’s Petroleum Revenue Special Task Force Report indicated that NNPC withheld N1.983 trillion subsidies between 2006 and 2011. This amount represents almost 40 percent of the 2016 national budget.

Also, the Farouk Lawal led House of Representatives Ad hoc Committee on Subsidy Verification concluded that the subsidy regime, as operated between 2009 and 2011, was laden with colossal corruption and entrenched inefficiency. Simply put, the subsidy claims made were not for consumed fuel!

The committee went on to state that contrary to the earlier official figure of subsidy payment of N1.3 trillion, the Accountant General of the Federation put forward a figure of N1.6 trillion, the Central Bank of Nigeria (CBN) stated N1.7 trillion, while the committee established subsidy payment of N2,587.087 trillion as at December 31, 2011, amounting to more than 900 percent over the appropriated sum of N245 billion.

Also, a subsequent report by the Presidential Committee on Verification and Reconciliation of Fuel Subsidy Payments, led by Mr. Aigboje Aig-Imoukhuede, revealed that in 2011, 197 subsidy transactions worth N232 billion were illegitimate. Previously released Forensic Audit of NNPC by Price Waterhouse Coopers showed that fuel subsidy cost Nigeria almost $10 billion between January 2012 and July 2013.

It is incredible that over the years, fuel subsidy has been two and five times the size of the federal education budget and up to seven times the health budget. In February 2014, the CBN informed the Senate Finance Committee that NNPC needed to account for $20 billion, as CBN could only confirm receipt of $47 billion out of the $67 billion revenue between 2012 and July 2013. NNPC in it's defence to the Senate Committee on Finance made a vague submission that almost half of this non-remittance funds were used for subsidy claims on imports of Premium Motor Spirit, PMS, and Dual Purpose Kerosine, DPK.

The Nigeria Extractive Industries Transparency Initiative, NEITI, independent audit report stated that, over N13.697 trillion ($74.3862 million) has been paid as subsidy to marketers from 2005-2012. The breakdown of the subsidy shows that N2.197 billion was paid as subsidy in 2006. This rose to N236.64 billion in 2007 and N360.1 billion in 2008. In 2009 the country paid N198.1 billion as subsidy for petroleum products and in 2010 the subsidy payment rose to N416.45 billion.

The payments ballooned to N1.9 trillion in 2011. Payments of oil subsidies for 2022 ballooned again to $10 billion. Recent figure released by NNPC stated that it is owed N2.8 trillion ($6.1 billion) in outstanding subsidies payment by government. And that it is spending N400 billion ($867 million) monthly on subsidising petrol prices.

Again, the amount paid out on subsidies from 2005 to 2021 is equivalent to the entire budget for health, education, agriculture, and defense in the last five years. The sum also equals the capital expenditure for 10 years between 2011 and 2020. Subsidy payment reached its peak in 2011 ($ 13.52 billion or N2.11 trillion). It is true that removal of subsidy will free allocations which can be channelled to the provision of infrastructure like roads, education, health service, power, security, creation of jobs, development of the downstream sector, improve our GDP growth, foreign exchange shortages and provision of basic benefits for the “poor in the society” but since fuel subsidy payments skyrocketed mainly as a result of monumental corruption and greed of NNPC officials, politicians and marketers, removing subsidy will only create a new looting channel for these rogues and won't achieve any economic benefits. I am of the opinion that the failure of EFCC, ICPC and other anti graft agencies/committees to conclude investigations and prosecute litigations of crimes committed through NNPC is a major reason why fuel subsidy payments spiralled out of control. It is obvious, NNPC can not defend the huge daily / monthly fuel subsidy payouts it receives from government.

It is imperative to note that the fuel subsidy scheme failed to help Nigerians buy refined products at much lower than the prevailing market price because of monumental corruption by NNPC officials, politicians and oil marketers. The fuel subsidy scheme is not the problem, the issue here is corruption and looting supervised by our politicians. Even if subsidy is removed today, it still doesn't solve the underlying problem as funds realised will still be embezzled and mismanaged. To make any meaningful progress, NNPC/NNPC Limited must be held to account for it's crimes under the subsidy payment regime. Removing subsidy without resolving the underlying issues why it failed is a futile effort that will yield no meaningful fundamental economic benefit. If fuel subsidy must be removed, a serious government must confront mismanagement, invest in modular refineries and strengthen the independence of our anti-graft agencies. With the recent price hike of petrol from N185 to N700 per litre over alleged sudden removal of fuel subsidy, I fear that Tinubu's illegitimate APC government will do more harm than good to the Nigerian economy.

Nigeria my country.

Fuel subsidy seem to be the only government policy that Nigerians enjoyed economically over the years. Removing it without building modular refineries or supplementary programs will exacerbate the economic situation of the country..... NNPC/NNPCL must be probed and held accountable for it's crimes under the fuel subsidy payment regime....

IGBOGENE27:
Nigeria my country.

There has been no major improvement on areas affected by petrol prices like power, transport or agriculture.

Yes that is why we can't trust another APC government regarding how fund recovered from subsidy will be used. Nigerians must reject sudden fuel subsidy removal by Tinubu....

Standing5:
There has been no major improvement on areas affected by petrol prices like power, transport or agriculture.