21 August 2012

Nigeria: Sustaining the Scam On Kerosene Subsidy

With kerosene selling at well above the official price, Ejiofor Alike questions the huge claims on kerosene subsidy by the Nigerian National Petroleum Corporation

In recent months, the Ministry of Finance and Petroleum Products Pricing Regulatory Agency (PPPRA) have put far-reaching measures in place to reduce the fraud and incidence on petrol subsidy to a sustainable level. However, these measures are yet to fully address the intended challenges as rising subsidy bills on petroleum products have continued to threaten government's capacity to execute capital projects for the benefit of the people.

This development prompted the Federal Ministry of Finance to institute a probe on the subsidy claims after the bills overshot the 2012 budget on subsidy. Though the PPPRA has reduced the number of participants in the Petroleum Support Fund (PSF) scheme from over 100 to less than 39, the funds saved by the government from this measure is easily eroded by the subsidy incurred by the Nigerian National Petroleum Corporation (NNPC) alone.

A worrisome development is that a large chunk of NNPC's subsidy claims is on kerosene, which is not accessible in retail outlets at the subsidised price. Unlike petrol, which is sold at a uniform subsidised price of N97 per litre in most parts of the country, except in extraordinary circumstances, kerosene is not sold at the subsidised price of N50 per litre.

A recent committee headed by the Managing Director/Chief Executive Officer of Access Bank Plc, Mr. Aigboje Aig-Imoukhuede, which verified arrears of 2011 subsidy claims observed in one of its report that for several years, the country had been incurring huge subsidy bills for kerosene, without any benefits to the citizens. The report further disclosed that two-thirds of the kerosene sold by NNPC between 2009 and 2011 was sold to depot owners and "middle men."

According to the report, these middle men sold the product to owners of retail outlets at inflated prices of between N115 and N125 per litre, leaving the consumers to pay higher prices above the N50 set by the government. Indeed, except on few occasions when NNPC mega filling stations have the product, no other filling station in this country sells kerosene at the subsidised price of N50 per litre. So, while NNPC is paid subsidy on kerosene it distributes to other marketers, the same product is sold at exorbitant prices in retail outlets.

Speaking recently at a forum organised by the Nigerian Economic Summit Group (NESG), the Coordinating Minister for the Economy and Finance Minister, Dr. Ngozi Okonjo-Iweala, rightly stated that not all subsidy was fraudulently paid. "We really need to know the exact size of what was fraudulent and what was genuine. You cannot say that the entire amount was fraudulent because people had access to petrol at the subsidised price," she said. However, the same cannot be said of kerosene because while majority of Nigerians have access to petrol at subsidised price, the subsidy paid on kerosene did not reflect in the retail price of the commodity.

Removal of Kerosene Subsidy

Before he died, the late President Umaru Musa Yar'Adua had removed the subsidy on kerosene through a letter signed by his then Principal Secretary, Mr. David Edevbie. The letter, which was addressed to the Minister of Petroleum Resources, had directed the minister to "eliminate existing subsidy on the consumption of kerosene, taking into account that subsidy payments by government on kerosene do not reach the intended beneficiaries."

But in a clear violation of the presidential directive, the NNPC was alleged to have shortly after the directive was issued, mounted pressure on the PPPRA and other relevant government agencies to be paid subsidy on kerosene. However, the various agencies, particularly the PPPRA was said to have resisted NNPC's moves until 2011, when the corporation paid itself over N310 billion as arrears of subsidy for kerosene imported between August 2009 to December 2011.

With this development, the NNPC, not only violated the presidential directive on the removal of subsidy on kerosene, it also ignored the PPPRA's authority as the regulator of the subsidy regime. The corporation neither sought for the vacation of the presidential order nor ensured that kerosene was sold at the subsidised price.

The largely tainted report of the House of Representatives' Ad-Hoc Committee on Subsidy had noted that after the NNPC discovered that the removal of subsidy on kerosene was not expedient, the ministry of petroleum resources ministry should have gone back to the president for the vacation of the order. "Having failed to do that and with the evidence that the product was never sold at N50.00, apart from in NNPC's 36 mega stations, since 2009, there was no basis for seeking any vacation of the order in 2011. But it is bad enough that vacating of the order was never sought, worse is the fact that NNPC and its ministry merely arrogated to themselves the power to override the presidential directive," said the report.

Unauthorised Practices

NNPC has over the years been involved in commercial operations, where it competes with other marketers in the downstream but the playing field is not level.

While the private marketers struggle to obtain bank loans to do business, the corporation derives its funding from the limitless government's resources at its disposal. Also, while the private marketers are effectively regulated and controlled by the PPPRA and other regulators, the Aig-Imoukhuede committee had noted in one of its reports that the NNPC was not accountable to anybody or authority.

"The corporation, in 2011, processed payment of N310.4 billion as 2009 - 2011 arrears of subsidy on kerosene, contrary to a presidential directive which removed subsidy on Kerosene in 2009. The corporation also processed for itself, direct deduction of subsidy payments from amounts it received from other operations such as joint venture before paying the balance to the Federation Account, thereby depleting the shares of states and local governments from the distributable pool," said the report

The report highlighted the need for the PPPRA and the Department of Petroleum Resources (DPR) to regulate the role of NNPC in the downstream sector in the import, refining, storage, supply, distribution and retailing of petroleum products. The Aig-Imoukhuede committee's report indicated that the current lack of regulation of the activities of NNPC in the downstream sector has led to the corporation's introduction of unauthorised practices that were not recognised by the PSF guidelines.

The report noted that NNPC's internal control mechanism was too weak to guarantee the smooth operation of the corporation in the downstream sector and cautioned that if these excesses are left unchecked, they might lead to significant leakages.

Sustaining the Scam

It is apparent that the current efforts by PPPRA and the Federal Ministry of Finance to reduce subsidy bills to a sustainable level will not yield meaningful results unless NNPC is stopped from making subsidy claims on kerosene because the product is not sold at subsidised prices in the market. What is worse is that officials of NNPC and the Ministry of Petroleum Resources have taken advantage of their near monopoly in the sale and distribution of kerosene to line their pockets and those of their cronies who get kerosene allocations from the corporation.

Is it any wonder that when the federal government announced its intention to remove the subsidy on all petroleum products last year, the ministry, under the guise that kerosene is consumed by the poor, lobbied President Goodluck Jonathan to retain the subsidy on kerosene? In doing so, NNPC and the Ministry of Petroleum Resources have sustained the subsidy scam on kerosene.

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