In 2019, the Nigerian National Petroleum Corporation (NNPC) paid the sum of ₦508 billion on petrol subsidy. This spending lowered the revenue it should remit to the government coffers. By implication, for every kobo spent to subsidise fuel, there is a corresponding loss of funds for the necessary infrastructure to every citizen.
Fuel subsidy or under-recovery is a term denoting the amount that the government pays to make up for the losses that oil companies could have incurred due to the lower price at which they are compelled by the government to sell refined products to the people. In this case, the market price of petrol is so high due to the cost of refining crude oil outside the country and transporting the same back to its shores.
While petrol subsidies are meant to reduce the financial burdens on low-income earners, its benefits have tilted more towards the middle class and rich people. Besides this, present fuel subsidy claims eat deep into the revenue accruing to the federation and a window for corrupt financial practices. This is evident in the struggles of the state-owned oil firm to break even, operating at a loss in 2018 and 2019.
This development is partly responsible for the inability of the NNPC Group to remit the mandatory 20% of its business surplus as revenue to the Consolidated Revenue Fund (CRF) as provided in the Fiscal Responsibility Act (FRA).
How phoney subsidy payment breeds corruption
In the last few years, NNPC has become the sole importer of petroleum products consumed in the country due to foreign exchange fluctuations. The Corporation has also arrogated to itself the powers to deduct the subsidy from funds meant for the Federation Account.
Mrs Ngozi Okonjo-Iweala, Nigeria’s former finance minister, said the payment of subsidy contains phoney claims. During the ex-President Goodluck Jonathan’s tenure, the government slashed fuel subsidies to redirect money into public services.
Reports also cited that the domestic sale proceeds are subject to abuse and serve as avenues for corruption. For instance, the sum of ₦508bn and ₦878bn were deducted as under-recoveries (subsidy) from the federation revenue in 2019 and 2018. It was done without verification by any third party, questioning a lack of proper governance framework and transparency.
NNPC’s Losing streak denies Nigeria of statutory revenue for years
For not declaring profits in its 2018 and 2019 audited financial reports, the corporation has denied governments the statutory 20% of its business surplus that should have been paid into the country’s Consolidated Revenue Fund (CRF), going by the 2007 Fiscal Responsibility Act (FRA).
According to section 22 (1) of the FRC Act, “notwithstanding the provisions of any written law governing the corporation, each corporation shall establish a general reserve fund and shall allocate thereto at the end of each financial year, one-fifth of its operating surplus for the year.”
Sub-section 2 further states that the balance of the operating surplus shall be paid to the Consolidated Revenue Fund of the Federal Government, not later than one month following the statutory deadline for publishing each corporation’s accounts.
In this case, NNPC has no operating surplus as a business entity, instead, it made discretionary deductions from the group’s earnings to cater for subsidy.
In Note 18.1 of the NNPC group financial statement 2019, the state-owned oil firm reported that its earnings are not subject to Company Income Tax (CIT), apart from the required 25% of their internally generated revenue.
The Fiscal Responsibility Commission has also been silent on its statutory role beyond the receipt of submitted audited financial accounts. The relevant sections of the FRC Act empower the commission to “compel any person or government institution to disclose information relating to public revenues and expenditure.”
That same law also empowers the FRC to investigate “whether any person has violated any provisions of this Act.” After investigation, the commission is required to “forward a report to the Attorney General of the Federation for the possible prosecution.”
Since NNPC released its financial reports, the FRC has been silent on issues bordering on the propriety of the financial management of the state-owned oil firm.
The FRC needs to ascertain that the NNPC actually adopts prudent financial operations in tandem with international standards, that it returns value for money and exhibits accountability. This increases the chances that the NNPC will declare profits and begin to pay the statutory 20% of its operating surplus to the federal government’s CRF.
Efforts to reach the commission for comments proved abortive. The telephone lines of its Chairman / CEO, Kabiru Bakari did not connect.
Fuel subsidy regime: What does the data say?
In the last decade, Nigeria had spent ₦9.85 trillion on subsidy, more than allocations to the country’s critical economic sectors.
Last year, the Federal Government announced an end to a subsidy regime to enable it free funds for other economic priorities. The Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mr Mele Kolo Kyari, added that the subsidy regime did not benefit the masses.
Analysis of the monthly report of the NNPC showed that the country made zero payments for fuel subsidy in 2020 until November 2020 (the latest report). This excludes some payment arrears made for previously lifting crude in the last three quarters of 2019.
Despite this development, Mr Michael Faniran, an expert with the Facility for Oil Sector Transparency and Reform (FOSTER), said the government only introduced a semi-deregulated market rather than full deregulation of the sector.
Mr Faniran’s position was confirmed recently when the Petroleum Products Pricing Regulatory Agency, PPPRA, announced a market-based advice of ₦212/litre retail price for PMS. The announcement means that the Nigerian government will make payment for under-recovery/subsidy if the fuel price continues at the current retail price of ₦162.
According to The Guardian, President Muhammadu Buhari has also asked the NNPC to suspend the idea of full deregulation pending discussions and consultations before labour unions.
The NNPC’s reversion to bearing the cost of subsidies decreases the likelihood that it will resume making substantial profits. The corporation’s purported subsidy deductions from the funds it ought to remit to the federation account exact strains on state and local governments budget performances due to meagre revenue allocation. This reintroduction of subsidy payments may also wipe out progress made by stakeholders on the Petroleum Industry Bill.
The cost of subsidy far outweighs the benefits
As Mrs Okonjo-Iweala succinctly put it, the cost of these subsidies far outweighs the benefits. The International Monetary Fund (IMF) estimates that more than 40% of fuel price subsidies in developing countries accrue to the wealthiest 20% of households. In contrast, only seven percent of the benefits go to the poor.
Stakeholders and industry experts have called for radical reforms to ensure the masses derived maximum benefits from natural resources.
Reforms would make the oil sector more efficient, shore up public finances and allow more targeted spending on critical sectors needed for socio-economic development. Experts have also advocated for quick passage of the petroleum industry bill (PIB) to revamp the oil and gas sector and make NNPC a profit-driven entity.
To put the oil firm on financial sustainability, the federal government needs to pass the long-awaited PIB, which would restructure the industry and eliminate causes of revenue losses, the Board of NNPC said in its 2019 financial statement.
With the elimination of losses, increased revenue for the NNPC will help Nigeria fund the public education system (including the construction costs) and create community health centres across the country. It would allay the country’s energy problem, lessen water scarcity and reduce government borrowings.
This story was produced under the NAREP Media Oil and Gas 2021 Fellowship of the Premium Times Centre for Investigative Journalism