• Sat. Sep 30th, 2023

Subsidy removal: Opaque fuel pricing mechanism must be removed for credibility


Jun 2, 2023

By Auwal Musa Rafsanjani

The non-transparent pricing mechanism in the subsidy removal scheme by the regulatory agencies in the downstream sector of the petroleum industry is unacceptable, the Civil Society Legislative Advocacy Centre (CISLAC) has said. 

The anti-graft civil society organisation, which is also the Nigerian Chapter of Transparency International (TI), said the inability of the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) and the Nigerian National Petroleum Company Limited (NNPCL) to let Nigerians know the pricing template used to arrive at the latest premium motor spirit (PMS) price hike makes the process susceptible to fraud and corruption. 

On Wednesday, the NNPCL unilaterally announced over 195 percent hike in the retail prices for PMS, popularly called petrol across its filling stations in the country. 

The prices were increased from an average of N184 and N199 per litre to an average of N488 and N557 per litre. 

Since the announcement, neither the NNPCL nor the NMDPRA, which is the regulatory authority responsible for monitoring and regulating prices of petroleum products in the country has offered any explanation on the component of the template they used to arrive at the new prices. 

“This is unacceptable. The lack of transparency and openness in the pricing mechanism opens the entire process to manipulation by corrupt and fraudulent elements against consumers of petroleum products. Government must immediately remove the fraudulent element in the fuel pricing mechanism to make the subsidy removal scheme credible,” Executive Director of CISLAC and Head of Transparency International-Nigeria, Auwal Musa Rafsanjani, said in a statement on Thursday. 

Despite being a crude oil-producing country, Rafsanjani said Nigeria does not, mainly due to maladministration of her four refineries in Port Harcourt, Warri and Kaduna, refine locally the crude oil she produces into its component products, like the petrol she consumes. 

About 445,000 barrels of crude oil is allocated daily for locally refining to take care of the national demand for refined petroleum products. 

Rather than refine, Nigeria exports its crude oil under various swap arrangements and import the refined petroleum products for her domestic use.

For decades, the Nigerian government has subsidised and fixed retail prices of petroleum products. 

In May 2015, when immediate past President, Muhammadu Buhari, assumed office, he vowed to remove petrol subsidy from the fuel pricing templates of the defunct Petroleum Products Pricing Regulatory Agency (PPPRA) and allow market forces to determine retail prices at the filling stations.

He described fuel subsidy payment by previous administrations as corruption perpetrated against the people. 

On May 11, 2016, Buhari formally announced the removal of petrol subsidy in the country. 

With the pronouncement, petrol price was initially reduced from N87 to N86.50 per litre before it was adjusted upwards to N141, apparently to demonstrate how market forces of demand and supply were interacting to swing the prices under a deregulated fuel market.

In line with the new arrangement, the price of petrol was later adjusted further upwards to N145 per litre.

But unknown to Nigerians, the government through the PPPRA and NNPC, had quietly smuggled subsidy back in the pricing template of petrol without any formal announcement. 

Rather than call it subsidy, the then NNPC cleverly classified its subsidy spending as “under-recovery”, describing it as cost recovered from the government through the deduction from the revenue realised from its operations which should have been remitted to the government coffers.

NNPC’s repeatedly argued that only the National Assembly could approve the subsidy paid on petrol. 

Under-recovery is the additional cost the NNPC claimed it was incurring in utilising its funds to subsidise the price of suppling petrol on behalf of the government as supplier of last resort to ensure the product was sold at the regulated price, even when the real market price was above the regulated rate.

With the NNPC as the sole importer of petrol into Nigeria, it was essentially subsidising the product for users. 

The price remained at N145 per litre for sometime despite variations in the international price of crude oil, as the government had established a ceiling point beyond which the price of petrol cannot go above.

Any price beyond the ceiling point was considered cost of subsidy that must be recovered from the NNPC and the fuel marketers. 

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 became unsustainable, especially as the economy continued to oscillate in and out of recession.

The present  deregulation of the downstream sector of the petroleum industry (subsidy removal) agenda is captured in  the provisions of the Petroleum Industry Act (PIA) passed in July 2021.

What has Nigeria lost?

A report by the House of Representatives committee, revealed that Nigeria’s fuel subsidy scheme cost the country a whooping $6.8 billion over a three-year period (2009-2011).

The NNPC fingered as being single-handedly responsible for almost half of the subsidy funds, as it was “found not to be accountable to anybody or authority”. 

About 72 fuel importers and marketers, some of whom allegedly had close links to senior government officials, were also singled out. 

In one case, payments totaling exactly $6.4 million was reported to have flowed from the state treasury 128 times within 24 hours to “unknown entities”.

Investigators discovered that importers were paid for 59 million litres of petrol a day, while the country consumed only 35 million litres.

In 2012, with the pump price of petrol at N65 ($0.40) per litre, against a landing cost of N139, the government bearing the burden of paying N73 as subsidy on every litre of petrol consumed in the country. This translated to an annual total expenditure of N1.2 trillion ($7.6billion), or 2.6 percent of the country’s gross domestic product (GDP).

The Nigeria Extractive Industry and Transparency Initiative (NEITI), which is in charge of the transparency and accountability in the extractive sector, in its annual audit report, said Nigeria spent about N722.3 billion on fuel subsidy in 2018 alone.

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.

Also, 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 is currently the sole importer of petrol in the country reported that Nigeria consumes between 55 million and 60 million litres of petrol every day. In one instance, the company reported the country consumed as high as 120 million litres of petrol. 

Going by average daily consumption of 55 million litres and an average expenditure of N36.59 on subsidy per litre, the federal government of Nigeria spent N60.37 billion on subsidising fuel in November 2019, increasing by over 2000 percent when compared with the amount spent on subsidy in the same period in 2018.  

Bloomberg reported that Nigeria spent on the average about $7billion on fuel subsidy payments 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. 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 Minister of Petroleum, Ibe Kachikwu 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 five in 2006 to 10 in 2007, to 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 has been an erosion of trust from the people who need the assurance of a credible plan and the challenge that would arise when crude oil prices rebound amidst calls for the government to quickly implement post-subsidy programmes. 

Way forward 

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 crude oil theft that have continued to stymie the nation’s economy. 

Without doubt, the solution to the problem of subsidy payment in the downstream sector of the petroleum industry is local refining of petroleum products, which will drive down cost of production of petrol and end the corruption associated with the present subsidy regime.

More importantly, the recently commissioned multi-billion dollar 640,000 capacity Dangote Refinery and Petrochemical Company in Lagos, 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, given 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 of fuel subsidy. This includes mainstreaming the concerns of civil servants and other categories Nigerian workers and the vulnerable segment of the society whose survival is dependent on minimum wages. The Presidency must take this as a matter of priority.

We have been engaging the Nigerian Government on macro-economic issues, including the fraudulent fuel subsidy 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 manipulated by NNPCL.

CISLAC calls for critical dialogue that would stimulate transparency and accountability in the extractive sector as the new administration emerges. The Petroleum Industry Act is clear on the fact that the NNPC, as a player in the industry, has no role to play in regulating on issues that have to do with fixing prices. Therefore the NNPC has no power under the law to fix petrol prices without consultation and dialogue with key stakeholders. The interest of the poor masses of Nigerian must be paramount at all times. The Petroleum Industry Act must be implemented and complied with to the letter as a way of stamping out corruption in the extractive sector in Nigeria. 

Rafsanjani is the Executive Director Civil Society Legislative Advocacy Centre(CISLAC) & Head of Transparency International-Nigeria

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