Nigeria’s subsidy: A palliative, a burden

Clara Nwachukwu

06 February 2012, Sweetcrude, Lagos – The outcome of the ongoing probes of subsidy payments for petrol and kerosene in Nigeria may make or mar Federal Government’s deregulation policy. Indications are that government’s handling of the outcome of the probes would determine the kind of investments flow that will jump start the downstream petroleum sector.

Speculations are rife regarding the outcome of the plethora of probes going on in the downstream, as almost every establishment, public or private is caught up in the web of intrigues that trail the subsidy regime.

While the National Assembly strives to unearth what went wrong to shoot up the subsidy payments from the initial N150billion in 2006 to a whopping N1.73trillion five years after, not to mention outstanding subsidy payment claims in excess of N500 billion, the Economic and Financial Crimes Commission, EFCC, has also commenced its investigation of marketers who may have been involved in the subsidy sleaze through various sharp practices.

Already, reports indicate that the Lawan Farouk-led House of Representatives Committee, leading the legislative probe is under intense pressure from the ruling People’s Democratic Party, PDP, and the Presidency over the ongoing investigation into the management of the petroleum subsidy regime.

If carried to its logical conclusion, analysts are of the view that the subsidy probes will open up a ‘can of worms’ even worse than the one unearthed by the Central Bank of Nigeria, CBN, during the financial industry purge.

The mere thought of the fallout is not only giving the Presidency the jitters, as key officials in the industry will be affected, but also making the Peoples Democratic Party, PDP, very uncomfortable as it demonstrates the high level of corruption tolerated in the PDP-led government.

A rude shock
Nigerians woke up on New Year day to the reality of a 116 percent increase in the pump price of premium motor spirit, PMS or petrol, from N65 to N141/Litre without any warnings – making it one of the highest ever single pump price increase in Nigeria’s petroleum history. Government had through the Petroleum Products Pricing Regulatory Agency, PPPRA, announced the sudden removal of subsidy on petrol without outlining any framework for the purported deregulation of the downstream sub-sector. Interestingly, the PPPRA melted into the shadows soon after the announcement, leaving many unanswered questions and allowing innuendos and suppositions to run wild.

It was a herculean task for organised labour and civil society groups to achieve a reduction in price to N97/L, representing over 49 percent increase on pre-January 1, levels and majority of Nigerians are yet to come to terms with the shock and the aftermath of the increases. About N1trillion was estimated to have been lost to the nationwide strikes that paralyzed economic activities in protest of the price hike.

The new pricing
Kerosene is technically referred to as House-hold kerosene, HHK and is presumably still under full subsidy at N50/L, unlike petrol, which subsidy level has been reduced.

Ironically, kerosene, which is the domestic fuel for the poor Nigerians, is actually more expensive than other petroleum products. According to the PPPRA’s pricing template, and based on exchange rate of N159.76 to $1, the expected Open Market Price, OMP, for kerosene when you include landing cost and margins is N162.62/L. Petrol on the other hand is N146.12/L. Automotive gas oil, AGO or diesel, which has been fully deregulated since 2003, sells for an average of N160/L.

Subsidy is a reimbursement to petroleum marketers for selling below the market price, and in the year under review, the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke told the lawmakers under oath that over N250billion was paid as subsidy for kerosene alone in 2011.

But the reality is that apart from the NNPC outlets, there is no other outlet anywhere in Nigeria where kerosene is sold at the subsidised price. The product sells for between N100 and N250/L depending on outlet and location. It is only in Lagos, Abuja, some states in the west and Port Harcourt that petrol is sold at the regulated price.

Some faceless ‘cabals’ have been condemned for being the beneficiaries of the petrol subsidy, but government is yet to tell Nigerians who the beneficiaries of the kerosene subsidy are.

Yet in addition to the subsidy, these products also attract reimbursement from the Petroleum Equalisation Fund, PEF, or bridging for haulage to far flung distances.

According to the Petroleum Equalisation Fund (Management) Board, the PEFMB Act of 1973 seeks “to equalise the cost of transporting petroleum products from depots to Marketers sales outlets (filling stations).”

“This is to ensure that petroleum products are sold at uniform prices throughout the country. The Fund, which derives its main source from the net surplus revenue recovered from Oil Marketing Companies, is utilized for the reimbursement of petroleum products marketing companies for any losses sustained by them solely and exclusively as a result of sale, by them, of petroleum products at uniform prices throughout the country.”

Since the January 1, subsidy slash, the PPPRA has constantly changed the pricing template, which was exclusively reported in the Vanguard. Currently, the price regulator has changed the template yet a third time, but this time around it has excluded the contentious benchmark price, which it prescribed for the pumps and the depots. The appellate has changed to regulated retail price.

For both kerosene and petrol, about 20 cost elements make up their retail prices.

Inflation on the rise
Prices of goods and services shut to the roofs, even after the pump price reduction to N97/L, prices of consumer goods especially food items and transportation rose by between 150 and 300 percent.

Although the National Bureau of Statistics, NBS, has not released the composite consumer price index, CPI for the month of January, according to the bureau as at December, inflation rate was 10.3 percent.

But the CBN Governor, Sanusi Lamido Sanusi, at the last Monetary Policy Committee, MPC meeting in January, noted that the removal of fuel subsidies is an upside risk to the CPI outlook.

“The MPC stressed the mild rebound in inflation in recent months (10.5 per cent y/y in Oct, from 10.3 per cent y/y in Sep), but suggested that the immediate outlook for the CPI was relatively mixed and would benefit from the lagged effect of the sharp tightening in monetary policy this year.

In a related development, we suspect the main risk to the inflation trajectory stems not so much from depreciation, which will be offset by increasingly positive base effects in global food and oil prices in the coming months, but from the likely removal of fuel subsidies in 2012.”

Some states like Rivers, took the liberty after the January 1 price hike to put in place its brand of subsidy, where petrol would not sell above N137/L in order to keep the cost of transportation within the state low to the chagrin of other marketers.

Through some agreements with the state branches of the Independent Petroleum Marketers Association of Nigeria, IPMAN, and the National Union of Road Transport Workers, NURTW, the State Governor, Chibuike Amaechi, announced that the government would pay for the petrol allocations to the state for IPMAN, to keep the pump prices lower than

PPPRA’s prescribed amount to keep transportation costs would not exceed N100 in the Port Harcourt metropolis.
It is however, not clear what became of these agreements following the reduction of petrol price to N97/L.

Probes take toll on industry
The pressure since the subsidy probes began is beginning to take a toll on downstream operations.
One of the marketers who spoke with Sweetcrude in confidence noted, “Let the investigators do whatever they have to do in such a way that it doesn’t weaken the system and trigger another round of acute fuel shortages.”

This, he said is because marketers have had to abandon their regular businesses for the probes. “On the one hand, everybody that is somebody in the sector has been invited by the lawmakers, and on the other, the EFCC is hounding us to know who stole what subsidy money.

“We no longer have time to pursue credit to run our operations, and even the banks have become more reluctant to give us credit because they no longer believe in what we are doing, since we have all been tagged ‘cabals’ that are fleecing poor Nigerians.

“When you put all these together, productivity is fast dropping and pushing the industry on the down side. And if care is not taken, products scarcity is looming large.”

The Probes
The Senate opened the first round of probes to know what went wrong and labeled some petroleum marketers and importers s cabals who benefitted from fuel subsidy payments. Then the EFCC on the invitation of the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, went after who got what. Although the Senate probe is still pending, the House probe is well under way and may have taken the wind out of the sail of that of the Senate.

The Senate Committee Chairman, Senator Magnus Abbe, noted: “There are some loose ends arising from the public hearing that members want to tidy up before we can draw conclusions on those issues. He promised that the probe would be brought to a logical conclusion.

For sure, the House six-day probe was the most elucidating even as it was very dramatic. But for the seriousness of the issue, it would have been even comic.

However, it was quite pathetic and shameful that all the representatives could not agree on the basic facts of a system they are all involved in.

The Minister of Finance, Dr. Ngozi Okonjo-Iweala, whose ministry is in charge of disbursing the subsidy fund quoted N1.3trillion, her petroleum ministry counterpart, Madueke said it was N1.5trillion, Sanusi the CBN governor later dropped the bomb that the value was actually N1.74trillion. Exactly how much did Nigeria pay for subsidy in 2011?

But beyond the amount, the probe revealed the level of executive recklessness exhibited by some government officials in the discharge of their duties:
When did the PPPRA Board meet to decide on January 1 subsidy removal?
Who approved the increase in the appropriation for subsidy from N250billion as budgeted to above NN1.7trillion?
Who gave NNPC the permission to deduct its subsidy payments at source without reference to the Federation Accounts Allocation Committee, FAAC?
Why did the NNPC abandon its storage facilities in favour of throughput arrangements with private depots that cost government a minimum of N3million for the period of discharge?
What is the actual national daily consumption level for each of the products under subsidy?
If 35 million litres is the daily requirement, how come 59 million litres was being imported?
What is the refining capacity of the NNPC refineries for each of these products?

There are indications that due process was thrown to the wind as long as certain pecuniary interests were protected, so much that former Finance Minister, Dr. Kalu Idika Kalu, admitted that “impunity has developed within the system and the political class is responsible for the decay.”

Official responses
• The urgency of the subsidy removal made Nigerians wonder if the country was broke. But Coordinator of the Economy, Okonjo-Iweala said: “Nigeria is not broke. But if we do not take proper measures now, in the next five years, we will be going down the line. The removal of subsidy will enable the downstream sector to open up and investors will come in because investors won’t have survived and made profit at N65/L. ”
• Giving an insight into when the federal government decided to remove subsidy on petrol, CBN governor, Lamido said: “The decision to remove subsidy on petrol was effectively taken even before the elections. All economic system needs to be cleaned out and be above board. The solution is not to keep looking at short term comforts but taking difficult decisions. ”
• Allison-Madueke also confirmed that the N250billion appropriated for subsidy in 2011, was actually meant for just the first quarter, which meant that subsidy was to be removed on April 1, 2011.
• Allison-Madueke, explaining how the subsidy rose to the trillion mark said: “The dramatic change in the level of subsidy was due to increase in national demand to 35million litres/day, sometimes more, as well as increase in the price of crude on the international market, increase in population, and increase in the cost of bridging of products… our borders are very porous, and smuggling will remain a major issue as long as subsidy remains.”
• Honourable Farouk Lawan, Chairman of the House Committee leading the probe disputes the cause for the astronomical rise as he noted: “If you work out the difference between N65 and N141/L, multiply that by 35 million litres/daily, you find that the figure still falls far short of N1.5trillion. Why should Nigerians be made to pay for illegal smuggling when those responsible for manning the borders are not doing their jobs?”
• Prof Assisi Asobie clarifying why the subsidy figures will never add up said: “Due to the inconsistent data from Pipelines and Products Marketing Company, PPMC, (the commercial arm of the NNPC), we can’t determine the volume of imported products, therefore, and we can’t determine the actual cost of subsidy for the products.”
• Julius Nwagwu, representative of the Comptroller General of Customs, said: “Imported PMS does not come with Form M to Customs (as required by law), vessels importing PMS into the country are referred to as mother vessels, but they never get to port in Nigeria but are anchored offshore. So it can be offshore Cotonou, offshore Lome or wherever it is, and there are smaller vessels that pick these products to the ports, so Customs does not board or rummage these vessels.”

Subsidy regime
Subsidy is the brain child of former President Olusegun Obasanjo, which became operational in March 2006. But prior to deregulation, the Obasanjo-led government announced the take off of liberalisation and deregulation by September 30, 2003.

The policy followed the findings of the Special Review Committee on Petroleum Supply and Distribution, popularly called Mantu Palliative Committee, set up in 2001, to look into the causes of perennial products scarcity.

After a nationwide tour of downstream facilities, the committee, among others, called for the setting up the Petroleum Stabilisation Fund, later tagged the Petroleum Support Fund, PSF, which was finally agreed to by Obasanjo on October 1, 2005, during his Independence Day broadcast.

The then Chairman of PPPRA, Chief Rasheed Gbadamosi, clarifying how the facility will be funded said: “The PSF shall be financed from the following sources, namely: All tiers of Government – Federal, States and Local.

“Accruals realised during the period of over recovery (over recovery here refers to the period when the PPPRA recommended price is higher than the market determined price).”

He listed the guidelines eligibility to the fund to include:
An importer should be an Oil Marketing Company registered with the Corporate Affairs Commission (CAC).
A Claimant/Beneficiary is expected to possess the following:
Proof of Ownership of storage facilities with a minimum storage capacity of 5,000 metric tonnes for the particular product as well as dispensing facilities (retail outlet network).
Department of Petroleum Resources (DPR) import permits.
Ability to finance a minimum cargo size of 5000 MT of products under the Fund
The products are expected to arrive the country on schedule and should conform with products specification based on requirements set by the DPR/Standards Organisation of Nigeria, SON.
In view of the revelations from the probes, in many cases, all of these criteria were ignored, and the PSF which was meant to be a palliative, is now a big burden for government and Nigerians.

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