CISLAC Laments Corruption Riddled Fuel Subsidy, Highlights Possible Lasting Solutions
Nigeria, despite being a significant crude oil producer, has failed to refine its own oil due to mismanagement of its refineries. Instead, the country exports crude oil and imports refined petroleum products for domestic consumption.
For many years, the Nigerian government has subsidized and fixed the retail prices of petroleum products. However, when President Muhammadu Buhari took office in May 2015, he pledged to eliminate petrol subsidies and allow market forces to determine prices at filling stations.
On May 11, 2016, he announced the nationwide removal of petrol subsidy, initially reducing the price from N87 to N86.50 per litre before later adjusting it to N141 and further to N145 per litre.
Despite the initial removal of subsidies, the government quietly reintroduced them into the pricing template without any formal announcement.
The Nigerian National Petroleum Corporation (NNPC), which is the sole importer of petrol, classified its subsidy spending as “under-recovery,” claiming that only the National Assembly could approve subsidies.
Under-recovery refers to the additional cost incurred by the NNPC to subsidize petrol prices, ensuring it is sold at a regulated price even when the market price exceeds the regulated rate. Consequently, the price of petrol remained fixed at N145 per litre, disregarding fluctuations in international crude prices.
Meanwhile, advocates for the removal of fuel subsidies argue that it is necessary to free up resources and implement much-needed reforms, especially considering the unsustainable costs, particularly as the economy experiences periods of recession. The present agenda of deregulation, or subsidy removal, is part of the Petroleum Industry Act (PIA).
What has Nigeria lost? According to a report from the House of Representatives committee, Nigeria’s fuel subsidy scheme cost the country $6.8 billion over a three-year period (2009-2011), NNPC was found to be responsible for almost half of the misappropriated subsidy funds and was deemed unaccountable to any authority or oversight. Additionally, the report singled out seventy-two fuel importers, some of whom had alleged close connections to senior government officials.
One instance involved the transfer of precisely $6.4 million from the state treasury to “unknown entities” on 128 occasions within a 24-hour period. Further investigation revealed that importers were being paid for 59 million liters of fuel per day, while the actual consumption in the country was only 35 million liters.
Back in 2012, the cost of fuel at the pump was N65 ($0.40) per liter, whereas the landing cost was N139. As a result, the government provided a subsidy of N73 per liter, which amounted to an annual total of N1.2 trillion ($7.6 billion), equivalent to 2.6 percent of the country’s GDP.
According to the Nigeria Extractive Industry and Transparency Initiative, Nigeria spent approximately N722.3 billion on fuel subsidies in 2018. The NNPC’s financial and operations report for 2019 indicated that Nigeria spent N326.43 billion in just four months (N104.35 billion, N102.24 billion, N30.64 billion, and N89.19 billion in January, February, March, and April, respectively) that year.
The PPPRA also disclosed in November 2019, that NNPC spent an average of N36.59 subsidizing every liter of imported petrol. NNPC, being the sole importer of petrol in the country, reported a daily consumption rate of 55 to 60 million liters. Based on a daily consumption of 55 million liters and an average subsidy of N36.59 per liter, the Nigerian federal government spent N60.37 billion on fuel subsidies in November 2019, an increase of over 2000% compared to the amount spent during the same period in 2018.
Side by side, Bloomberg reported that Nigeria spends an average of $7 billion annually on fuel subsidies. These financial burdens are often funded through a combination of increased public debt, higher tax burdens, and the disruption of potentially productive public spending, such as investments in health, education, and infrastructure. These factors can significantly hinder economic growth.
The fuel subsidy system in Nigeria has been plagued by manipulations and intrigues among the elites. It is important to note that no administration has been able to provide Nigerians with a transparent account of the activities within the NNPC.
Potential causes for the continuation of the travesty that occurred between 2009 and 2011 have been identified through forensic analysis.
Possible causes for the continuation of the travesty from 2009-2011, as revealed in forensic reports from the previous administration, can be summarized as follows:
1.Conflict of interest: One of the major factors was the conflict of interest arising from the Oil Minister simultaneously serving on the board of NNPC (a fuel importer) and supervising the subsidy regulator, the PPPRA.
2.Regulatory discrepancies: Discrepancies existed between the PPPRA Regulations, the Act, and other petroleum industry-related laws, contributing to the perpetuation of the issue.
3.Fraudulent listing of “ghost” fuel importers: The PPPRA engaged in fraudulent practices by listing fictitious fuel importers. The number of such entities increased significantly over the years, from 5 in 2006 to 10 in 2007, 19 in 2008, and 140 in 2011.
4.Unchecked fraudulent payments: The accountant-general’s office was responsible for unchecked and fraudulent payment transactions, including 128 subsidy payment transactions of 999 million naira each within a 24-hour period in January 2009. This amounted to approximately $6.36 million every 10 minutes.
5.The lack of trust among the people, who require assurance of a credible plan, is a critical issue. The government will face challenges when oil prices rebound, and there will be demands for the quick implementation of post-subsidy programs.
In resolving these, it is essential to launch some form of social protection immediately to safeguard the most vulnerable individuals.
To address these issues and regain public trust, several measures need to be taken. These include ensuring transparency in disclosing information about subsidies, their costs, and impacts, as well as clarifying who pays and who benefits from these subsidies.
Access to foreign exchange for petroleum marketers should be properly regulated, and comprehensive plans for reform and complementary measures must be put in place.
Our stance on fuel subsidy removal is clear. We have consistently urged the Nigerian Government to combat subsidy fraud by repairing local refineries, which will not only prevent corruption, wastage, and oil theft but also reduce the cost of petroleum products.
The commissioning of the Dangote Refinery and Petrochemical Company, the world’s largest single-refinery train, in Lagos is a significant development that can alleviate the impact of subsidy removal by meeting the nation’s fuel demand.
However, considering the purchasing power of ordinary Nigerians and the rising inflation, which has rendered many households unable to afford basic goods and services, the Federal Government must implement adequate and sustainable measures to mitigate the impact of subsidy removal.
The Presidency has a fundamental responsibility to address Nigerians promptly, presenting their proposed measures and plans for the removal, and taking into account the concerns of civil servants and minimum wage earners. This should be treated as a matter of utmost priority.
We have been actively engaging with the Nigerian Government on macroeconomic issues, including the removal of fuel subsidy fraud, and we will continue to do so. Currently, there is a lack of transparency regarding the actual consumption and cost of fuel in Nigeria, with the pump price being manipulated by NNPCL.
Therefore, CISLAC calls for critical dialogue that promotes transparency and accountability in the extractive sector as the new administration takes office.
The Petroleum Industry Law is explicit that NNPC does not possess absolute power to fix prices without dialogue and consideration for the interests of poor Nigerians. Hence, the Petroleum Industry Act must be implemented and adhered to in order to combat corruption in the extractive sector in Nigeria.