02 July 2012, Sweetcrude, ABUJA – THE Nigerian government on February 28, 2012 set up a Technical Committee on Payment of Fuel Subsidies, headed by Mr. Aigboje Aig-Imoukhuede, Group Managing Director/Chief Executive Officer, Access Bank Plc.
The Committee, which specifically, was meant to “review outstanding claims for fuel subsidies”, has submitted its report to President Goodluck Jonathan.
Details of the Committee findings:
The review of the Petroleum Support Fund (PSF) guidelines by the PPPRA ‘in 2010 included the following amendments to the eligibility criteria for oil marketing and trading companies:
•Removal of the requirement for the capacity to finance a minimum cargo size of 5,000MT of petroleum products
•Removal of the requirement for proof of ownership of retail outlets, •Amendment of the requirement for the proof of ownership of storage facilities with a minimum storage capacity of 5,000MT for the particular product to include a valid throughput agreement of storage facility with a minimum storage capacity of 5,000MT for the particular product
These changes in conjunction with the lack of adequate provisions for dealing with violations (including criminal activities) and of a deterrent to prevent oil marketing and trading companies from making false subsidy claims in the PSF guidelines and the inclusion by PPPRA of oil marketing and trading companies that did not meet the eligibility criteria (even after the above changes) in the PSF guidelines created significant opportunities for abuse of the subsidy process.
These opportunities were clearly exploited by both the operators and the regulators of the process to the detriment of the country. Abuse of the due diligence process for applicants to the PSF scheme, lack of transparency in the process for import allocations, payment of subsidies to oil marketing and trading companies in spite of lapses in presented documentation and the inability of PPPRA to use effective vessel tracking tools to verify the status and location of the vessels supposedly used to import petroleum products and to compare such information with the details on presented bills of lading contributed to the creation of opportunities for abuse of the subsidy payment process.
The inability of PPPRA to use a transparent basis for the conversion factor from metric tonnes to litres used in the PPPRA template created opportunities for abuse in the determination of the volume of imported products for which subsidy should be paid. Nigeria does not have a verifiable statistical basis for computing its daily consumption of petroleum products and the absence of this data opened up the determination of the nation’s requirement for imported petroleum products to abuse. This situation in conjunction with the absence of regulation of the amount of petroleum products imported by NNPC led to uncontrolled importation beyond the country’s requirement.
There has been no consensus among the three tiers of Government (Federal, State and Local) to support the funding of the PSF since its creation in 2006. Funding from the States and Local Governments has not been forth-coming hence the PSF has remained under-funded. This was never sustainable and has led to a convoluted accounting process for cost recovery, with significant arrears of payment due to NNPC.
While the creation of Sovereign Debt Notes (SONs) partially addressed this challenge for private importers, it did not address NNPC’s subsidy claims. This led to a situation where the Federal Government agreed with NNPC to deduct its approved subsidy claims from its crude cost obligations. NNPC was therefore deducting the approved subsidy amounts for any given month before transferring the net amount to the Federation Account. There was no documentary evidence that this process was duly authorised by law, by the PSF guidelines or by any duly designated Government agency and there is therefore no legitimate backing for the current practice.
There is an obvious need to regulate the roles of NNPC in the downstream sector in the import, refining, storage, supply, distribution and retailing of petroleum products. The current lack of regulation has led to NNPC’s introduction of practices that are not permitted or recognised by the current PSF guidelines that if unchecked by NNPC’s internal control mechanisms may allow for significant leakages.
For example, in spite of a directive issued by President Yar’Adua on June 15, 2009 that NNPC should cease subsidy claims on kerosene, PPPRA resumed the processing of kerosene subsidy claims in June 2011 and NNPC resumed the deduction of kerosene subsidy claims to the tune of N331,547,318,068.06 in 2011. In the distribution of DPK which was being imported solely by NNPC was skewed in favor of depot owners who have no retail outlets.
Two-thirds of the kerosene sold by NNPC between 2009 and 2011 was sold to depot owners and “middle men” who in turn sold the product to owners of retail outlets at inflated prices of between N115.00 and N125.00 per litre (compared to the ex-depot price of N40.90), leaving consumers to pay higher prices than the N50.00 per litre directed by Government.
For several years now, the country has been incurring huge subsidy bills for kerosene and its citizens are not receiving the benefit – instead the country has been financing “rent” for the middlemen. In order to correct this situation, the Government has to implement at least one of the following options:
•Allow both private importers who meet the eligibility requirements of the PSF guidelines and NNPC to import kerosene and pay kerosene subsidy under the PSF. The role of private importers in the distribution of the product should be monitored properly by PPPRA and DPR
•Eliminate the current financing of rent for a few by restricting NNPC’s local distribution to only groups that own significant retail outlets – i.e. MOMAN, IPMAN and NNPC Retail at the approved ex-depot price.
While the Committee conducted detailed reviews of several aspects of the subsidy payment process, it is noted that the process for NNPC is significantly more it- than the process for the private sector and would require a thorough forensic audit covering but not limited to the following:
•Funding for subsidy paid to NNPC,
•Process for determination of products imported by NNPC,
•Documentation for NNPC’s transactions for imported petroleum products
•Verification of documentation with NNPC’s suppliers and other agencies involved in the discharge of petroleum products – e.g. DPR, PPPRA, Government auditors, independent inspectors, e.t.c.
Review of documentation submitted to PPPRA by NNPC
Review of PPPRA’s certification process for NNPC subsidy claims
Reconciliation of the deduction subsidy claims from the proceeds of crude oil sales by NNPC to the subsidy claims certified by PPPRA
The Committee was unable to examine all the above to the extent required and therefore recommends that the Federal Government appoints consultants to carry out the forensic audit of the NNPC subsidy claim process. This is without prejudice to the Committee’s recommendations on the process from its high level review.
The Committee recommends that oil marketing and trading companies that failed to respond to its request for information and subsequent reminder and warning through newspaper adverts should be sanctioned appropriately by PPPRA.
The Committee recommends that all the affected oil marketing and trading companies found to have violated various aspects of the PSF guidelines as highlighted in this report should refund the subsidy payments for a total sum of N422,542,937,668.59 (four hundred and twenty-two billion, five hundred and forty-two million, nine hundred and thirty-seven thousand, six hundred and sixty-eight naira, fifty-nine kobo only) for the highlighted transactions to the Federal Government net of the charges they paid to the Petroleum Equalization Fund and PPPRA except where they are able to provide evidence contrary to the Committee’s findings.
The Committee recommends that the eligibility criteria for oil marketing and trading companies in the PSF guidelines should be revised by PPPRA to include the following:
•The reinstatement of the requirement for proof of ownership of retail outlets, •The reinstatement of the requirement for capacity to finance a minimum cargo size of 5,000MT of petroleum products
•The restriction the requirement for the use of a valid throughput agreement of storage facility with a minimum storage capacity of 5,000MT for the particular product to only oil marketing and trading companies that provide proof of ownership of retail outlets as stated in recommendation