Opinions of Thursday, 7 July 2005
Columnist: Kwakye, John Kwabena
...Should be Taken Directly to the People
In a previous article, we tried to make a case for deregulation of the petroleum sector. We were encouraged by the responses that we received?some complimentary, others critical. That is really the spirit of our involvement in this process?to provoke open debate on the subject. The restricted medium used for these articles?Ghanaweb and Daily Graphic?however, means that our audience tends to be equally restricted. We have to emphasize that the purpose of these articles is not to support one group against another, but to present our objective views on the subject and, naturally, take a stand, as others are equally entitled to take a stand as well.
Since the last article, the Government has, commendably, moved the deregulation agenda forward, including by establishing the National Petroleum Authority (NPA), the independent body to oversee the application of the automatic pricing mechanism. At the same time, opposition to the process has also intensified, with anti-deregulation demonstrations being organized across the country. It seems to us that the case for deregulation, while meritorious, is not being made forcefully enough and is, regrettably, being drowned by a more vociferous campaign against it.
This article is a continuation of our crusade for deregulation, which we believe is right for Ghana. The purpose is to reinforce the case for deregulation and also to encourage the Government to take the case more forcefully and openly to the wider Ghanaian public in order to broaden consensus for and ownership of the deregulation policy.
The costs of the subsidy system
For the benefit of those who must have missed the first article, we restate, briefly, the costs of the current subsidy system to buttress the case for change.
? The subsidy cost the budget cedis 1.8 trillion in 2004 alone (or about $200 million).
? The subsidy deprives government of resources that could otherwise have been used for development and provision of social services.
? The subsidy reduces the incentive to economize in the use of petroleum products.
? The subsidy provides an incentive for smuggling petroleum products to neighboring countries where prices are higher.
? The management of a subsidy entails a bureaucracy with administrative costs.
The principal beneficiaries of the subsidy system?the poor or the rich?
A consumer subsidy is normally used to protect more vulnerable people who would otherwise be disadvantaged by an existing policy. In that sense, who is the real beneficiary of the petroleum subsidy? A study by ISSER (2004) shows that the transport sector accounts for 80 percent of petroleum product consumption in Ghana, households for 6.2 percent, industry for 6.7 percent, and agriculture for 4.2 percent. Household consumption is generally limited to LPG (largely used by urbanites) and kerosene. Coming to the transport sector, since rich people have more cars per capita, they consume more petrol per capita than poor people. You can see clearly that rich people travel around with 1-5 passengers per vehicle, while poor people travel around with anything from 5 (in a taxi) to 30 or more (in a large bus). On that score, rich people use more petrol and, therefore, benefit more from a subsidy than poor people, and would, naturally, want it to stay.
Deregulation will, undeniably, have an impact on household incomes?directly from the higher petroleum prices and indirectly via the passthrough of petroleum prices to other goods and services. A recent officially-commissioned study found the direct impact in terms of loss from a subsidy removal to be much higher for rich households than poor households?about 34 percent for the top quintile (20 percent) as against 14 percent for the lowest quintile. On the indirect effect side, the study also found that the richest households bear a disproportionate amount of the subsidy removal loss?35 percent for the top quintile and 8 percent for the bottom quintile. So, on both accounts, rich people who benefit more when a subsidy is in place, also stand to lose more from its removal. What these facts also demonstrate is that petroleum subsidy is an ineffective means of protecting poor households since there is an unintended leakage of the benefits to the rich.
Therefore, if rich people speak out against deregulation and persuade poor people to join them in demonstrating against it, you can understand their motive?whether it is egoistic or altruistic. In the same vein, one wonders if the opposing voice is really the ?peoples? voice.? Are the people opposing the deregulation really fighting for the interest of the average Ghanaian, who is presumably poor? The foregoing facts do not seem to support such motivation. They are pursuing their own interest rather than that of the poor. We need to point out that people who oppose the subsidy removal do not exclusively belong to the ?political opposition.? You will find them even on the Government side (although they may then be silent sympathizers) or in other public service or private capacity. Their common motive, however, is to have the subsidy retained as they are the principal beneficiaries. Only a few rich people who are really altruistic would advocate for deregulation because they want the poor, and not them, to benefit.
The benefits of deregulation
Again, let us restate the potential benefits of deregulation, which are really the flip side of the costs.
? Deregulation will free huge resources for government to spend on productive ventures and social sectors.
? Market pricing will encourage efficiency in the use of petroleum products, which will save the country money in terms of reducing oil imports.
? Removing the subsidy will reduce the incentive to smuggle petroleum products, which will save the country money.
? Even more fundamentally, deregulation will depoliticize petroleum pricing and eliminate the speculations, rentseeking, and other practices usually associated with government-announced price increases.
? Automatic pricing should allow the benefits of cost reductions, including through world oil price falls, efficiency, and competition, to be passed on to consumers.