Home News Lack of Transparency and Mismanagement of Fuel Subsidy Revenues

Lack of Transparency and Mismanagement of Fuel Subsidy Revenues

With insufficient refining capacity, Nigeria is forced to import almost all the fuel it needs despite being the Africas largest and worlds 6th largest exporter of crude oil. Keeping the country running is therefore dependent on a regular flow of imports.

To smooth the importation process and keep supply constant, domestic prices of petroleum and diesel are kept low by a $5billion Federal subsidy – equivalent to a fifth of the federal budget, and more than double education spending – paid to marketers importing the products. At the pump, petroleum costs N87 per litre ($0.44), diesel N150 per litre ($0.76).

State-Owned Process

The Nigerian National Petroleum Company (NNPC) is a state-owned oil company that controls the domestic fuel supply . It acts as the publics steward of national crude reserves, and licences importers and distributors, fixes local pump prices, owns fuel stations and depots and administers payments of subsidies to distributor.

The NNPC is therefore acting as the regulator, importer, distributor, marketer, producer, competitor, claimant, payer and payee.   NNPC dominance over imports has been built up over decades of state control. Until the introduction of the Petroleum Support Fund Scheme in 2006, it was the sole importer of petroleum products. With the Fund, private marketers are permitted to take part in the importation.

The monolithic enterprise still remains largely unaccountable to anybody, which is problematic because it is not doing a very good job of managing imports. Fuel scarcity is common for Nigerians, crippling the economy and pushing consumers to the black market where prices are two to three times more.

 Avenues for Corruption

Between 2007 and 2014 the amount paid in subsidies has increased by 400% (from N188billion to N971.1billion). Clearly legitimate consumption did not increase at this pace. The few investigations allowed to examine the opaque operations of NNPC have found large amounts of diverted funds.

An audit in 2009 identified over $800m of unresolved differences between what companies said they paid in taxes, royalties and signature bonuses against what the government said it received. That sum exceeded the 2009 budgets for the Ministries of Education, Health and Power.

The audit also revealed that the largest amount owed to the government was an estimated US4.7bn by NNPC for payments of domestic crude.

In 2012, the Farouk Lawan Committee Probe and then the Presidential Verification Committee on Subsidy Administration found over N232 billion mis-paid to marketers for petroleum not supplied in 2011. This claim was for 197 subsidy transitions, equivalent to double the amount of deliveries made.

Examining the issue in more detail, the Berne Declaration calculated that no less than $6.8 billion of unjustifiable subsidies were paid out between 2009 and 2011.

In 2012, the Central Bank governor brought the issue right to the doorstep of the President, writing a letter accusing NNPC for failing to transfer $20 billion in oil revenues between January 2012 and July 2013. This works out as roughly $1 billion a month, in a country where 140 million people live on less than $2 per day.

Swap Deals

The Federal Government engages international commodity traders in crude-for-products swap deals. In the deals, companies are allowed to lift crude oil from Nigeria for free, sell the products in the international market, and then use the proceeds to import petroleum products of equal value.

However, companies are not kept track of in the diffuse process, and as such it is estimated that $8 billion per year are lost through the arrangement.

It is a difficult and complicated process to trace as the NNPC deducts payments internally from the revenue it generates selling the countrys crude oil. What is clear from the few superficial probes conducted is that the subsidy scheme creates huge opportunities for mismanagement of revenues.

Buhari recently announced he intends to dismantle the NNPC to separate regulation and operations, but has not yet revealed a time frame. Some of the most opaque procedures that have evolved within the organisation are detailed below. This follows the National Resource Governance Institute in-depth analysis of how the NNPC sells its oil, published last week.

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