and Williams (2010), this study contrasts such labour tax cuts with other ways of recycling reform revenues: increasing public expenditure, or the provision of uniform lump-sum transfers to citizens.

# **4. Background: Fuel subsidies in Nigeria**

As a developing country with substantial fossil resource wealth and a mixed track record of fiscal prudence and transparency, Nigeria is a frequently cited case for studying FFS and natural resource management (Rentschler, 2016). Nigeria is the fifth largest oil exporter in the world (World Bank, 2015; IMF, 2013). Yet, only 55% of Nigerians have access to electricity (34% in rural areas); annual per capita electricity consumption in 2012 was 155 kWh (compared to 4,405 kWh in South Africa). Chronic underinvestment and corruption in the electricity sector mean that the average Nigerian enterprise experiences over 36 power outages a month. Problems also plague the country’s four national oil refineries, which operate at just 20% to 30% capacity. While over 70% of fuel consumption is met by imports, shortages are endemic (World Bank, 2015; IMF, 2013).

Through the Petroleum Products Pricing Regulatory Agency, Nigeria maintains artificially low fuel prices, specifically petrol. The gap between fuel import costs and regulated prices are financed through the Petroleum Support Fund, which administers fuel subsidies<sup>3</sup> . Nigeria does not provide significant subsidies to fuels other than petrol.

At about 3% of GDP in 2011 subsidies are a significant expense for the government, and fail to reach Nigerians in more than one sense (NEITI, 2013; IMF, 2013; Soile and Mu, 2015): As with all FFS schemes, the direct financial benefits to households are concentrated on the rich, thus failing to benefit the absolute poor (who constitute 61% of the population<sup>4</sup> ). In addition, a complex and opaque system of intermediary dealers and political influence means that, instead of lowering the market price, subsidies are often privately appropriated before the fuel reaches the market. Finally, rampant fuel smuggling means subsidy benefits are leaking out of the country.

Facing mounting fiscal pressures and recognising the inefficiencies of its subsidy scheme, Nigeria attempted a radical subsidy reform in 2012. While the need for such reform was pressing, the government failed to garner sufficient public support for its reform efforts. Public opposition to the reform had two key reasons in particular: (i) A lack of credibility and transparency with respect to the handling of reform revenues, and (ii) inadequate plans for compensation and social protection, resulting from a poor understanding of the needs and vulnerability of affected consumers. Subsidy removal was met with extensive

> 3The Petroleum Support Fund is managed by the Petroleum Products Pricing Regulatory Agency, and receives a set allocation in the federal budget. Contributions to the fund are made by the federal, state, and local governments. Moreover, the fund is supplemented by subsidy “surpluses”, which essentially occur when international market prices exceed the government-set fuel price (GSI, 2012).

> 4This figure is based on the national absolute poverty definition, using an absolute poverty line of N54,401 (National Bureau of Statistics, 2010)

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