Subsidies are a tool for achieving the set economic and development objectives of a country, in this case, to stimulate consumption by improving purchasing power of consumers. They however also come at a heavy fiscal cost to the government.
In Nigeria, that cost has become an uncomfortably significant portion of government expenditure and has triggered a long-running public debate on whether the gains justify the costs. President Bola Ahmed Tinubu brought that debate to a sharp head with his pronouncement in his Inauguration Day speech that subsidy was gone. Since that pronouncement, the subsidy issue has become the most topical issue in the country, dominating all conversations and drawing angry and emotional reactions from commentators. Meetings of government officials across various tiers and arms are being hurriedly put together. Policy pronouncements have been made and reversed. There is a general atmosphere of instability, uncertainty and looming chaos. Many commentators insist that the entire hoopla is avoidable, if a little more restraint had been applied by the president and a lot more planning had gone into the process.
If subsidy must be removed, it has to be done in a measured and well coordinated manner that has taken the potential fallout into account and provided solutions to problematic outcomes, BEFORE the removal announcement. I had a conversation with a friend recently and he suggested diversion of petrol subsidies to energy conversion subsidies. I have built on that idea and suggested a different approach below. The underlying assumption here is that the PMS subsidy in Nigeria is a long-standing problem that will require medium to long-term thinking in efforts to eliminate them.
To this end, let us play out a little scenario game. Imagine that:
1. The president announces that subsidies are a strain in the fiscal health of the economy and has to be removed. He announces that it will be removed effective Dec 31, 2024.
2. He secures a syndicated $10bn loan from international development partners. The loan will be used to provide:
a. Subsidy for conversion of desirous vehicles to CNG powered vehicles. Please note that according to NBS data, we had about 12 million vehicles in Nigeria as at 2018. Also note that we have natural gas in abundant supply in Nigeria so supply will always exceed demand. Let us assume that conversion can be done at an average rate of N300,000 per vehicle.
b. Subsidy for provision of solar inverters for 2 million SMEs. Again let us assume that each solution can be provided at an average rate of N1 million each.
For (a), a portal would be created for applications processing. All citizens will be entitled to benefit from the programme but must have a vehicle registered in their name or proven to belong to them. They must have valid vehicle papers and a valid drivers’ license. They must provide their registered mobile number and must provide a proof of address. Once approved, beneficiaries would be directed to proceed to a conversion plant near them for conversion of their vehicles. The loan will have very low single digit interest rate and will be paid back over a 5 year period with a 1 year moratorium on interest and principal. Beneficiaries must contribute not less than 10% of conversion cost.
For (b), an application portal would be provided. Applicants’ businesses must be registered with the CAC. They must provide proof of address and show a history of their business for not less than 1 year (or maybe even 6 months). Evidence must also be provided that they employ at least 1 person in that business. Once the application is approved, an installer will be scheduled to visit the beneficiary for installation. The loan terms will be the same as in (a) above.
Before all this goes live, government would have partnered with gas conversion companies and provide bulk purchase and aggregation capacity that will ensure conversion costs are significantly reduced for operators. The same approach will be adopted with solar installers.
Please note the additional benefit of widening the tax net and improving the revenue base of the government this could have.
3. The President announces take-off of this scheme within 6 months of his inauguration.
4. Solar-powered or electric buses are procured by state governments, with 10 buses provided per ward. Fares would be significantly reduced because fueling costs are eliminated, with maintenance and personnel costs being the major costs. The scheme should be run by private operators partnering with each state. The Scheme takes off 1 year after inauguration and runs for 6 months before subsidies are removed to ensure all potential issues are addressed before the set date.
5. Having taken the subsidy matter out of the conversation even before it had been removed, Government can continue its normal business of governance and provision of social services and infrastructure as required by law.
It is important to note that vehicle conversion programme and the solar energy programme can be funded with about N6.5 trillion, equivalent to the subsidy bill for one fiscal year, based on the grossly inflated subsidy payments of the last few years. It is by no means an unrealistic amount to be deployed in the short to medium term to solve a problem we have struggled with for decades.
For the country to emerge from the other side of this subsidy removal imbroglio, it may well be necessary for the President to hold up his hands and admit that maybe things were done too hurriedly. A temporary reversal of the subsidy removal policy may be a brave, bold and honourable path to follow for the President. This will give him the benefit of having done a test run and learning hard lessons from it.
There are many other issues that need the attention of the president. The subsidy matter is only one of them. The issue of power supply is a pressing one. Food security is another. The insurgency in the north east and insecurity across the country are also pressing national matters. The subsidy issue has taken far too much time from the country.
It’s time to admit what has been done is not working and find other ways to deal with the problem.
SEGUN SOPITAN
Good Governance Advocate
@segunsopitan on all social media platforms
