No justification for CNG subsidy

Despite the clamour to end the outrageous fund spent on petrol subsidy and save the federal government some money to deploy into more productive projects, it is somewhat surprising that the FG plans to embark on another form of subsidy through the use of Compressed Natural Gas (CNG) as alternative petrol.

The Minister of State for Petroleum Resources, Timipre Sylva, notified that plans were already on-going by the federal government. According to him, CNG could be made available at a cost between N95 and N97 for Nigerians who found petrol too expensive.

Here is the challenge. At such price, CNG would be trading at a huge discount to its market price and the difference borne by the federal government. Could the minister forget so quick that the federal government is currently battling with revenue challenge, hence, its move to increase VAT to 7.5 percent? The problem with such plan is not only its lack of practicability but another avenue to waste insufficient fund on another expensive subsidy.

To put in context, the average market price of CNG according to CNGprices.com hovers between $2 (N723) and $3 (N1,084.50). Selling at N95 would amount to a cost of N628 or N989.5 to be borne by the government. This is worse than about N85 currently borne by the FG in form of petrol subsidy. This is rather confusing when you juxtapose this illustration with Sylva’s justification.

According to him, “the switch to CNG will help reduce the burden of petrol subsidy on the finances of the country, and the government is working towards encouraging Nigerians to use CNG as fuel for transportation.”

While CNG can be used in place of PMS (petrol), diesel fuel and propane/Liquefied Petroleum Gas (LPG), the CNG industry could also create local employment opportunities, spur economic growth, aid domestic manufacturing with cheaper electricity and reduces strain on foreign exchange reserves for US dollars.

However, for a frontier economy like Nigeria, creating a natural gas market is not an easy undertaking. Investments in gas projects are inherently capital-intensive, requiring large increments for each expansion. This largely explains the truism, implicit in the fact that Nigeria’s natural gas reserves places her 9th in the world, yet she is not among the top 20 gas producers in the world.

For a successful adoption of CNG, we must be prepared to fix our gas infrastructure, stimulate private-sector involvement through tax holidays, import duty waivers and also provide a legal framework and not subsidy.

Currently, the federal government clearly doesn’t have enough funds to deploy into such capital-intensive project given uncertainties in the crude oil market which we are still dependent on, also about 60 percent of revenue still channelled towards debt servicing, FDI statistics showing very low foreign exposure in Nigeria, on-going battles with tax compliance etc.

Equally, there is no specific agency set up to promote the automotive use of CNG in Nigeria. The government-owned Nigerian Gas Company Limited (NGC), which is wholly responsible for gas transmission and sales, and a local company entered into a joint venture agreement in 2007 to establish a chain of CNG refilling stations. The pilot scheme is in Benin City, within the Niger Delta region, where gas is produced. Targets included the conversion of 50,000 vehicles in the first four years and the construction of between eight and ten CNG stations, 50km of steel pipeline and two conversion workshops in the first two years.

As at the end of 2015, nine years after the commencement of the pilot programme, only the target for conversion workshops had been met.

The federal government clearly has no business doing business. Give room for private investment while you provide an enabling environment for efficiency and effectiveness.