The Reality Of Subsidies In Nigeria: Citizen s Guide To Energy Subsidies

Transcription

1 The Reality Of Subsidies In Nigeria: Citizen s Guide To Energy Subsidies Presentation by Dr Folarin Gbadebo-Smith The Centre for Public Policy Alternatives at the One-Day Workshop on Energy Subsidies in Nigeria and Presentation of the Citizens Guide to Energy Subsidies in Nigeria April 18, 2013

2 Contents Energy Production And Consumption Facts On Nigeria Facts About Energy Subsidies In Nigeria Costs And Benefits Of Energy Subsidies The Subsidy Reform Process Lessons From The Authors The Way Forward

3 Energy Production And Consumption Facts - Nigeria 12 th biggest producer of crude oil in the world 2.5 million barrels of oil are produced daily 98 percent of this is exported

4 Energy Production And Consumption Facts - Nigeria Proven Natural Gas Reserves, Tcf - end of ,575 Natural gas reserve is HUGE; 9 th in the world and largest in Africa at 180 trillion cubic feet 1, billion cubic feet is produced annually

5 Energy Production And Consumption Facts - Nigeria but it is wasted!! about 70% of the gas is flared i.e. 2.5 billion billon of the 3.5 billion cubic feet produced annually Nigeria is second only to Russia This costs Nigeria $2.5 billion per year

6 Energy Subsidies? Energy subsidies are defined as: any government action that lowers the cost of energy production, raises the revenues of energy producers or lowers the price paid by energy consumers - according to; the IEA, OPEC, OECD, World Bank measures that keep prices for consumers below market levels or for producers above market levels, or reduce costs for consumers and producers

7 Subsidies Categories Energy subsidies come in two main categories: Consumer Subsidy Those designed to reduce the cost of consuming energy e.g. Nigeria Producer Subsidy Those aimed at supporting domestic production 7

8 Subsidies Categories The UNEP, the OECD and the IEA identify several mechanisms by which governments support the production and consumption of energy.. Examples Direct financial transfers Preferential tax treatments Energy-related services provided directly by government at less than full cost Direct financial transfers in the form of grants to suppliers/marketers typifies the PMS regime in Nigeria

9 Why Subsidies? According to the IEA, OPEC, OECD & World Bank (2010) Policy-makers often justify energy subsidies with the argument that they contribute to economic growth, poverty reduction and security of supply. Poser 1: Would subsidies be necessary in Nigeria if the country showed administrative capacity to offer social and economic support through other policy mechanisms?

10 Energy Subsidies and Nigeria Consumer subsidies exist for three energy products: Petrol (Premium Motor Spirit-PMS, Gasoline) Household Kerosene (HHK) Electricity

11 Energy Subsidies and Nigeria Petroleum Subsidies In the case of petroleum products, the government requires marketers to sell fuel at below market rates. it then pays the difference Electricity Subsidies Electricity subsidies are conferred by charging tariffs that are too low to cover actual cost of electricity production. In part, state utility companies are reimbursed for this as part of the budgetary lump sum they are paid to cover all their activities

12 US$ / litre Nigeria Gasoline Prices Lowest In The Region Half The Region s Average

13 PMS Subsidy Remains High After Partial Removal In January 2012 April 2012 (adapted from PPPRA website) World oil price rises affect government subsidy budget but not the consumer

14 Naira per litre PMS subsidy cost rose exponentially (PPPRA figures) Average subsidy per /litre Average crude price /litre Average EOMP /litre

15 PPPRA PMS subsidy cost ( ) 2011 Appropriation Bill was 245 billion Lawan Report estimates daily PMS consumption in 2011 was 31.5 million litres per day just over half of PPPRA s 2011 payment record for 59 million litres per day **Actual cost far higher - latest estimate by the Ministry of Finance was 2.19 trillion after arrears were paid in 2012

16 Subsidy cost: Kerosene subsidy Government approved retail price 50/litre Current subsidy over 100/litre {Expected Open Market Price (EOMP) was in August 2012} ***Remains despite government s directive to scrap subsidy on HHK Subsidy cost 310 billion Aug Dec. 2011

17 Poser 2: does kerosene subsidy exist? Is it reaching its intended beneficiaries? NNPC received a Presidential directive in 2009 that it should discontinue HHK subsidies which were not reaching the intended beneficiaries Who benefits? Consumer prices for HHK are typically in the range per litre, depending on location Majority of subsidy disappears into the black market rather than benefitting consumers

18 Components of Kerosene price per Litre

19 Subsidy payment process via the Petroleum Support Fund: Complex!

20 Electricity Subsidy In 2012 and 2013, the average electricity tariff described as amount recovered from customers is still a fraction of the average unit cost of service i.e. supply of electricity Current subsidy between 50 billion and 90 billion per year Plans are underway to gradually increase tariffs to cover costs in full Subsidy would remain to lifeline consumers With consumption of less than 50kW/month Government s failure to make full and prompt subsidy payments starves the electricity utility of revenue (NERC opinion)

21 Electricity subsidy (distribution only) for Vulnerable Classes Recovered from customers (N/Kwh) Subsidy as percentage of Cost of Service Tariff Class Cost of Service Subsidy (Year) (N/Kwh) (N/Kwh) R % R % DIFF R % R % DIFF R1 = Average Consumption <50kWh per month R2 = Average Consumption kWh per month Courtesy: NERC - MULTI -YEAR TARIFF ORDER FOR THE DETERMINATION OF THE COST OF ELECTRICITY SOLD BY DISTRIBUTION/ RETAIL COMPANIES FOR THE PERIOD 1 JUNE 2012 TO 31 MAY 2017 (

22 Cote d'ivoire Chad Niger Cameroun Senegal Benin Ghana Nigeria West Africa Tariffs ( /kwh) Subsidy in Electricity Tariff Social (100kWh/mth) Residential (600 kwh/mth) Commercial (1800 kwh/mth)

23 Benefits of Subsidies Benefits of subsidies are felt more by those who consume most - notably PMS Benefits for Nigerian below poverty line from PMS subsidies are largely indirect e.g. reduced transport cost of people and goods Energy subsidies can benefit consumers by increasing access to goods or services and lowering costs to businesses Kerosene particularly important for cooking since bottled gas is too expensive and only available in definite quantities Kerosene has environmental and economic benefits compared to traditional fuels

24 Fiscal costs of subsidies Money spent on making energy cheap over 1.7 trillion in 2011, around 35% of government expenditure Subsidies also significantly contributed to Nigeria s lack of foreign exchange reserves fear of a serious economic crisis if world oil prices fell Is this expenditure sustainable?

25 Billions Budget Allocation vs Subsidy 2011 Budget allocation vs subsidy ,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Total Budget Petrol Subsidy Recurrent Capital Education Health

26 N Billion Comparison of Actual Subsidy Payments and Some Budgets (2011) Comparison of Subsidy and Some Budgets (2011) 2, , ($14.13 bn) 2, Actual Subsidy Spent FGN Health Budget 1, , Actual Subsidy Spent ($1.66 bn) FGN Health Budget ($2.91 bn) Lagos State Total Budget ($5.06 bn) MEND ($0.18 bn) Teaching Hospital Projects (2013) Lagos State Total Budget MEND Teaching Hospital Projects 24 billion allocation for tertiary Hospital projects = 91 Hospital Projects

27 Other Indirect costs of subsidies Revenue leakage from smuggling of subsidised petroleum products Undermining of the business case for private and public sector investment in the energy sector Low prices lead to gas wastage through flaring offshore Subsidies increase environmenta l pollution by encouraging higher consumption and waste May promote corruptio n

28 Other costs of subsidies - examples Revenue Leakage From smuggling large quantities of subsidised petroleum products across Nigerian borders (how much?) Undermining the business case for private and public sector investment in the energy sector Dilapidated supply and distribution infrastructures Reluctance of private investors to invest in electricity supply system, refineries etc Gas wastage through flaring offshore Only Russia flares more gas than Nigeria Increased environmental pollution, e.g. Adulteration of diesel in car engines Standby generators used extensively to supplement a cash-starved, inadequate electricity supply system

29 Subsidies Promote Corruption Subsidies can create an environment in which corruption can flourish Amongst estimates of alleged abuses, House of Representatives Lawan Report of billion litres of PMS subsidies were paid in 2011 on volumes not supplied to the Nigerian market This is a severe problem But this corruption is not caused fully by, nor is it peculiar to, fossil fuel subsidies. If funds were not spent on subsidies and were channeled to other public spending priorities Would opportunities for corruption be fewer or more?

30 How is the Subsidy Reform SURE-P PERFORMING? The Subsidy Reinvestment and Empowerment Programme (SURE-P) was launched in 2012 To stimulate the economy, alleviate poverty and improve the welfare of Nigerians as a result of the partial withdrawal of subsidy To save at least N426 billion annually

31 How is the Subsidy Reform SURE-P PERFORMING? That same year 2012, N180 billion was budgeted for the implementation of programmes and projects by the Federal Government Key infrastructure e.g. Transport; rail and roads Social safety nets Niger Delta States and Local Governments would be responsible for the balance of N246 billion (57%)

32 How is the Subsidy Reform SURE-P PERFORMING?

33 Reform lessons from international experience price reform A gradual phase-out of subsidies can give recipients time to adjust Avoid price rises of over 10% per adjustment (GIZ) Falling world oil prices give a reform opportunity China, Ethiopia and Vietnam took advantage in 2008 Variable tax rates can help cushion consumers against price volatility caused by world oil prices Used by Brazil and China

34 Reform lessons from international experience managing impacts Many countries have compensated social groups and businesses for the impact of fuel prices Ghana 2005: Package included schooling, healthcare, transport Indonesia 2005 and 2008: Also gave cash transfers Iran 2010: Compensated both the population and businesses through cash payments for a limited time Jordan : Included compensation through state organisations Malaysia 2008: included specific support to fishermen

35 Reform lessons from international experience managing impacts Governments are generally concerned about inflationary impacts Reform should be enacted during low inflation periods where possible Indonesia: Avoided Ramadan and end-of-year holidays Iran: The currency (Rial) was appreciated, consumer staples were stockpiled and distributed Thailand: Introduced free transport on airconditioned buses and third class trains

36 Reform lessons from international experience reform strategies Good practice suggests important elements are: Good Governance: Iran 2010 put money (frozen) in bank accounts 1 month before reform establishing credibility Communication: Raising awareness of the pros and cons: Indonesia s 2005 reform efforts succeeded whereas others had failed, Monitoring: Monitoring of the impacts of implementation Transparency : For credibility and to reduce corruption

37 Reform lessons from international experience reform strategies A reform strategy should include: Consultative Research To more precisely identify the winners and losers Proper Design A carefully designed package of economic and social support measures

38 What the authors learnt from writing Data is unreliable the Citizens Guide Conflicting figures from government agencies Public data accessibility is poor Gaps in official data; the two Committee reports have not filled all these gaps Ongoing data for 2012 is largely unavailable Does not give confidence that loopholes have been closed Not clear who is responsible for taking decisions and enforcing processes and procedures are followed A long-term solution to the energy pricing problem hinges upon the existence of efficient redistributive mechanisms

39 Panel 2 Discussion: Which way forward Reducing fraud and corruption in the subsidy mechanism Process reform Strengthening systems Reducing the subsidy A roadmap towards deregulation Technical and political elements Efficient redistributive mechanisms Implementation of fuel tax Supporting reform Increasing trust Open Government Data CSO involvement: how much would it have cost to put a monitoring mechanism in place?

40 About The Centre for Public Policy Alternatives (CPPA) The Centre for Public Policy Alternatives (CPPA) is an independent researchfocused organization committed to investigative enquiries through which public policies and processes are examined and supported, and through which best practises are disseminated.