Subsidy Removal: Tackle Fraudulent Regime in the Fuel Pricing, CISLAC Insists
Despite being a crude oil-producing State, Nigeria does not – mainly due to maladministration of her refineries – refine the crude oil she produces into its component products, like the petrol she consumes. Instead, Nigeria exports its crude oil and imports the refined products for most of her domestic use.
For decades, the Nigerian government has subsidized and fixed retail prices of petroleum products. When President Muhammadu Buhari assumed office in May 2015, he vowed to put an end to petrol subsidy from the fuel pricing templates of the Petroleum Products Pricing Regulatory Agency (PPPRA) and allow market forces to determine retail prices at the filling stations.
On May 11, 2016, he announced a nation-wide removal of petrol subsidy. With this, petrol price initially reduced from N87 to N86.50 per litre before adjusting upwards to N141. Later, the price was adjusted further upwards to N145 per litre.
The government, however, quietly restored subsidy in the pricing template of petrol without any formal announcement. The then NNPC, classifies its subsidy spending as “under-recovery” (operational cost), repeatedly arguing that only the National Assembly could approve a subsidy. Under-recovery is the additional cost that the NNPC is incurring in subsidizing the price of petrol in order to ensure that it is sold at the regulated price, even when the real market price is above this regulated rate.
With the NNPC being the sole importer of petrol into Nigeria, it was essentially subsidizing the product for users. The price remained at N145 per litre despite variations in the international price of crude.
Arguments for the removal of fuel subsidy have always bordered on a need to free resources and take needed measures towards long-needed reform, as the cost has become unsustainable, especially as the economy hovers in and out of recession.
The present deregulation (subsidy removal) agenda is part of what is contained in the Petroleum Industry Act (PIA).
What has Nigeria lost?
A report by the House of Representatives committee, revealed that Nigeria’s fuel subsidy scheme cost the country $6.8bn over a three-year period (2009-2011). The NNPC was single-handedly responsible for almost half of the siphoned subsidy funds and was “found not to be accountable to anybody or authority”. Seventy-two (72) fuel importers, some of whom had allegedly close links to senior government officials, were also singled out. In one case, payments totaling exactly $6.4m flowed from the state treasury 128 times within 24 hours to “unknown entities”. Investigators discovered that importers were paid for 59 million liters a day, while the country only consumes 35 million.
In 2012, the pump price of fuel was N65 ($0.40) per litre, against a landing cost of N139. The government thus contributed a N73 subsidy per litre, for an annual total of N1.2trillion ($7.6billion), or 2.6 per cent of the country’s GDP.
According to the Nigeria Extractive Industry and Transparency Initiative, Nigeria spent about N722.3 billion on fuel subsidy in 2018.
The NNPC’s financial and operations report for 2019 showed that Nigeria spent N326.43 billion in four months (N104.35 billion, N102.24 billion, N30.64 billion and N89.19 billion in January, February, March and April, respectively) in 2019.
The PPPRA disclosed that the NNPC spent an average of N36.59 subsidizing every litre of petrol imported into the country in November 2019. The NNPC currently the sole importer of petrol in the country reported that Nigeria consumes between 55 million and 60 million litres of petrol every day. Going by a daily consumption of 55 million litres and an average of N36.59 spent on subsidy per litre, the federal government of Nigeria spent N60.37 billion on subsidizing fuel in November 2019, increasing by over 2000% when compared with the amount spent on subsidy in the same period 2018.
According to Bloomberg, Nigeria averagely spends $7billion on fuel subsidy annually. These fiscal burdens are often financed by a combination of higher public debt, higher tax burdens, and disruption of potentially productive public spending (for example, on health, education, and infrastructure), all of which can be a setback on economic growth.
What are the gaps?
The fuel subsidy regime in Nigeria has been rife with elite manipulations and intrigues. It is worthy of note that no administration has been able to give Nigerians the true picture of what happens in NNPC.
Likely causes for the perpetuation of the 2009-2011 travesty according to the forensic reports from the last administration included:
- The conflict of interest in having the then Oil Minister being both on the board of NNPC – a fuel importer – and the supervisor of the subsidy regulator, the PPPRA.
- The discrepancies between the PPPRA Regulations, the Act and the other petroleum industry related laws.
- The fraudulent listing of “ghost” fuel importers by the PPPRA which rose from 5 in 2006 to 10 in 2007, 19 in 2008 and 140 in 2011.
- Unchecked and fraudulent payment transactions made by the accountant-general’s office including 128 subsidy payment transactions of 999 million naira each in the space of 24 hours between January 12-13 2009 — equal to about $6.36 million almost every 10 minutes.
The real issue is that there been an erosion of trust from the people who need the assurance of a credible plan and the challenge that will arise when oil prices rebound amidst call for the government to quickly implement post-subsidy programs. Some form of social protection should have been launched immediately to protect the most vulnerable.
- Public trust: There must be clarity and opacity in disclosing information on the scale of subsidies, their costs and impacts, who pays and who benefits, access to foreign exchange for petroleum marketers to import petroleum products, plans for reform, and complementary measures that will be taken.
Our position is clear on the fuel subsidy removal. We have been calling on the Nigerian Government to end subsidy fraud by fixing the local refineries and by extension prevent avoidable corruption ,wastage and oil theft that have continued to stymie the nation’s economy. Without doubt, the solution to the problem of subsidy is local refining of products, which will drive down cost of products and end the corruption associated with the present subsidy regime.
More importantly, the recently commissioned multi-billion dollar Dangote Refinery and Petrochemical Company in Lagos; as the largest single-refinery train in the world with the estimated capability of meeting 100 percent of the nation’s domestic demand for fuel is another anticipated development to ameliorate the impact of the removal.
However, giving the purchasing capacity of common Nigerians and the rising inflation level that has rendered majority of households incapacitated to afford basic goods and services, adequate and sustainable measures must be instituted by the Federal Government to mitigate the impact of the removal. It is at this point that the Presidency has the fundamental mandate to with immediate effect address Nigerians on her proposed measures and plans for the removal. This includes mainstreaming the concerns of civil servants and other Nigerians who earn minimum wage. The Presidency must take this as a matter of priority.
We have been engaging the Nigerian Government on macro-economic issues including the fuel subsidy fraud removal and will continue to engage because so far there is no transparency on the actual consumption and cost of landing of fuel in Nigeria and the consequent pump price as been manipulated by NNPCL.
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CISLAC calls for critical dialogue that stimulates transparency and accountability in the extractive sector as the new administration emerges. The Petroleum Industry Law is clear NNPC has no absolute power to be fixing prices without dialogue and having the interests of the poor Nigerians therefore Petroleum Industry Act must be implemented and complied with as a way of stamping out corruption in extractive sector in Nigeria.
