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Reliance on Natural Resources for Public Finance Brings Risk, Even if Irresistible

Kenyatta Lovett, Constance Eneh, Meg Streams

The Nigerian fuel subsidy and its withdrawal. Ironically, although the world’s eighth largest oil producer, Nigeria is still importing fuel for domestic use 52 years after its independence: 90 percent of petroleum products used inside the country are imported, according to the African Development Bank Group’s 2011 African Economic Outlook. The same report notes that the country’s main source of revenue is oil and gas, accounting for nearly all export earnings and almost two-thirds of government revenue. Despite these assets, Nigeria has been importing fuel for decades due to the gradual collapse of its own refining capacity. The fuel has then been sold at a substantially subsidized price inside the country; the gas is vital not only for transportation but also for powering generators, given problems with the electrical grid.

President Goodluck Jonathan’s announcement of the fuel subsidy’s withdrawal on January 1, justified by promises of reallocation towards needed infrastructure investment, sparked widespread protests and a national strike which ended January 16, 2012. As reported by Robyn Dixon in “Nigeria president’s bungled fuel policy hurts his reputation” from the January 19, 2012 Los Angeles Times, the week-long strike ended after the government partially restored the subsidy (yielding a gas price of about $2.27 a gallon or 97 Naira per liter); it is estimated that the fuel subsidy amounted to $8 billion every year. The subsidy was originally introduced by the Nigerian government to provide fuel to citizens at a reduced rate, while acting as a profit margin guarantee for importers. However, claims that this policy led to extensive arbitrage and fraud are now being investigated in the wake of the controversy over the subsidy removal. The public demonstrations arose from many factors including weak trust in government and the timing of the new policy. Adeshola Ogbodo also identifies ineffective communication with the public as a contributing factor in “Subsidy crisis: between reputation management and consensus building”, in The Guardian – Nigeria of February 4, 2012. Many observers note that corruption has limited Nigeria’s capacity to channel revenues towards benefits for the common good in the past. It is not surprising that some skepticism greets the theoretical benefits of withdrawing the highly visible subsidy, despite its inefficiencies.

Allure and challenge of relying on natural assets for public finance. While Nigeria’s situation is part of a complicated and unique context, some broader implications for the politics of public finance are brought into high relief by these events. First, governments’ reliance on natural resources is a tempting but risky revenue strategy. By their nature finite, such resources nonetheless create the irresistible opportunity to distribute benefits widely, yielding broad-based support and perhaps limited public scrutiny. The societal discomfort of re-distribution can be avoided…as long as the benefits flow and the resource lasts. Nigeria now confronts the issue of disparate views on the popular distributional policy’s opportunity cost. Citizens and politicians must evaluate the tradeoffs of devoting so much wealth to the fuel subsidy, in contrast with the potential benefits of longer-term public investments as the Jonathan government promises–discounted, perhaps, by estimates of the probability of those promises becoming reality.

Less dramatic examples of reliance on natural resource revenues for distribution of popular public benefits can be seen in the United States. Consider Alaska’s Permanent Fund Dividend (see timeline from the State of Alaska Permanent Fund Dividend Division). Alaska has neither an individual income tax, nor a sales and use tax: in fact, residents receive a check from the state each year, based on the state’s investment of oil and mineral revenues. In a December 15, 2011 press release, the Department of Revenue asserted that “…Revenue from oil and gas production is expected to provide over 90 percent of the state’s unrestricted revenue through FY 2016.” In the same press release, the agency acknowledges that oil tax revenues are decreasing. Residents have become used to receiving the benefit of an annual dividend check. But as oil resources are finite, so is the state’s ability to rely on them so heavily, presenting both a political and fiscal challenge in the future. Another resource-rich state, Texas, likewise has Permanent Funds, and the state pays for government operations without either individual or corporate income taxes–though unlike Alaska it does levy a sales tax. Rather than sending Permanent Fund dividend checks to citizens, Texas uses them to invest in education. The Permanent School Fund was created in 1854 using land revenues, but rent and sales of off-shore Gulf lands, valuable thanks to mineral assets, became a major component beginning in 1960. The Permanent University Fund, established in 1876, has meant a great deal to the development of the University of Texas and Texas A&M systems of higher education, as Texas’ public lands became so valuable after the oil discoveries beginning in 1894 (see timeline from the University of Texas Investment Management Company).

Whether used to provide dividends, subsidies, services like education, or a combination, revenues based on severance of natural resources are often volatile and ultimately exhaustible. The date of anticipated exhaustion will change with technology as market conditions evolve. Thus any government relying on such revenues must engage in careful projection of demand and husbandry of resource rights. The key question for resource-reliant governments, even at the state level, centers on the opportunity cost decision that faces Nigeria. What is the best way to use finite resources to build for the future when those resources will be exhausted? What is the best path of transition to redeploy public resources to address current and future social problems?

When the good times end…Nigeria’s recent experience also reminds us that withdrawal of a benefit creates conflict, in proportion to the benefit’s visibility and scale. Whether that withdrawal occurs because a natural resource runs out, or because of the choice to use the assets differently as in Nigeria’s case, the beneficiaries’ response is predictable. All subsidies create clienteles, and are easier to start than to cut back or stop–even when stopping may be the defensible action to take in the interest of both efficiency and social welfare, in light of changing fiscal circumstances. We could look at reactions to policy changes in a relatively new “entitlement” like lottery-funded merit scholarships around multiple U.S. states to see this pattern in another context. Time will reveal the outcome of Nigeria’s reallocation of revenues away from the subsidy. Even the most trusted government would encounter resistance to this change, and prior issues of accountability for the oil industry and the Nigerian government are further complications. Yet, the challenges of withdrawal of broad-based subsidies funded by natural resources could face many governments to some degree. The situation in Nigeria highlights the feasible limits of such reforms, and the pain accompanying such a major policy transition.

If you would like to comment on this article, click the Post A Comment link below. If you would like to submit an article to PA TIMES Online, contact Editor Christine Jewett McCrehin at [email protected]

Kenyatta Lovett is a doctoral student in the Department of Public Administration, College of Public Service and Urban Affairs at Tennessee State University (TSU).

Constance Eneh is an MPA student at TSU.

Meg Streams is an assistant professor of public administration at TSU. Email: [email protected]

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