₦1.4 trillion credit sales: How NNPC’s history of bad debts contributes to Nigeria’s Revenue Crisis

While the Nigerian government is scrambling to finance its budget, a whooping ₦1.45 trillion could lead to another case of bad debt for the Nigerian National Petroleum Corporation (NNPC).

Dataphyte’s analyses of the NNPC’s financial reports show that credit sales to subsidiaries, amounting to ₦1.45 trillion, remain unpaid. Of the twenty-two subsidiaries’ financial records, checks by Dataphyte showed that twelve owed trillions of naira to the parent company, the Nigerian National Petroleum Corporation (NNPC).

The parent company’s substantial uncollected credit sales and overdue payments portrayed how inefficiently oil resources are managed.

The Group Managing Director (GMD) of NNPC promised that the corporation would increase efficiency and increase revenue within the shortest possible period. Yet, this statement conflicts with another N423 billion revenue shortage the NNPC recently recorded when it wrote off the debts of one of its subsidiaries, the Pipelines and Product Marketing Company (PPMC).

Credit sales occur when goods are given to the customer in exchange for future payment. Usually, the seller and the buyer on credit agree on a certain time frame within which the debtor is to pay for the goods. Although credit sales are provided for in business accounting, the lack of a mechanism to recover such debts often leads to bad debt.

Bad debt is a cost a company is forced to bear once it cannot collect the payment for the credit sales. It is facing the reality that payment for credit sales will not be received. Oil sales are Nigeria’s largest revenue stream, and revenue shortages due to defrayed costs could cause a severe financial burden, including an increase in borrowings. This was evident in the corporation’s financial account, with the posting of a loss of ₦16.3 billion in 2019 while the overall Group reported a ₦20.2 billion loss. In 10 years, it had reported a combined loss of ₦474 billion and ₦1.55 trillion, respectively.

Experts at Investopedia, a financial information website, believe cash flow problems affect a company’s overall liquidity. In Nigeria, it may pose a significant concern to the country’s commitment to the Extractive Industries Transparency Initiative (EITI). While commending NNPC for opening up its finances, Ms Murjanatu Ibrahim Gamawa, EITI Country Manager (Anglophone Africa), in an article, urged NNPC to go further to uphold its commitment to transparency and accountability.

NAPIMS and Kaduna refinery owe the bulk of unpaid bills

Breakdown of the credit sales showed that the loss-making Kaduna refinery and National Petroleum Investment Management Services (NAPIMS), a subsidiary managing the Nigerian Government’s investments in the UpStream sector, owed NNPC in unpaid bills to the tune of ₦470.08 billion and ₦534.8 billion, respectively.

Furthermore, Warri refinery (₦169.93 billion) and Nigerian Gas Company Limited (₦157.63 billion) trailed them in unpaid bills. The other subsidiaries are owing less than ₦10 billion each.

BREAKDOWN: NNPC and its huge credit sales to subsidiaries 2019

Source: NNPC 2019 account of subsidiaries/Dataphyte research

Nigeria performs poorly among peers

Though Nigeria’s NNPC is producing about 2 million barrels per day (BPD), in terms of its profitability, the company’s performance pales compared to other state-owned oil firms across the world.

In 2019, Saudi Arabian Oil (Saudi Aramco) posted a profit of $330 billion, Rosneft Oil Corporation (Rosneft), controlled by the Russian Government through Rosneftegaz, posted $140bn profit while the China National Petroleum Corp (CNPC) reported $396 billion profit.

In terms of oil production within the period, NNPC and CNPC are within capacity, producing between 1.8 million and 2 million barrels per day. Within the year under review, CNPC invested in research and development, including refining and petrochemicals to record growth.

Auditor PwC, SIAO Partners, and Muhtari Dangana & Company raised concerns about NNPC’s future operations. The audit firms questioned NNPC’s sustainability plan given a compounded ₦4.4 trillion ($11.58 billion) liability margin over its assets.

Impact of NNPC’s financial performance on Nigeria’s revenue and economy

As of Q3 2020, Nigeria’s debt profile stood at ₦32.22 trillion. For Nigeria to ensure financial flexibility, it needs to increase its revenue by running a viable and profitable oil firm.

Last year, the International Monetary Fund (IMF) described high fiscal deficits as complicating Nigeria’s monetary policy. The Bretton Wood institution had advised the country to perform “major policy adjustments necessary to contain short-term vulnerabilities, build resilience, and unlock growth potential.”

NNPC’s ₦1.4 trillion credit sales tie-down much-needed revenue by the government. This huge amount of unpaid debts by NNPC’s subsidiaries is worth a substantial part of Nigeria’s annual budgets, and can significantly reduce the country’s rising debt profile.

Findings also revealed that a quarter of the subsidiaries’ debts could have helped Nigeria to clean up the oil spills that plagues human and marine life in Ogoni land. The United Nations Environment Programme (UNEP) report had estimated an initial $1 billion (₦394.74 billion) for the cleanup.

Going by estimates from the National Primary Health Care Agency (NPHCDA) and fact checks by Africa Check, the fund held by these owing subsidiaries could have established 50,000 additional primary health centres and equip them with modern facilities. Also, at an estimated cost of ₦11 million each, it could have built 127,000 units of 3-block classrooms across the country.

Presently, Nigeria is estimated to have a deficit of 17 million houses; if channelled into it, the government could have built over 100,000 3-bedroom apartments (flat/bungalow) at an average cost of ₦15 million each across the country. A better-managed national oil firm could generate the much-needed revenue to fix many other infrastructural deficits as this in the country.

How to correct anomalies

Mr Atiku Samuel, a policy analyst, decried a porous inventory management system at the NNPC that was responsible for shady receivables. He said the inefficiencies in supply chain management created room for corruption and a lousy audit control system.

“If NNPC does not even know the amount of oil leaving Nigeria, how would the state-owned oil firm be able to audit the supply of crude and gas and collect appropriate revenue?

“Generally, NNPC is poorly run, and its supply chain management is one of the most terrible in the world; it is old-fashioned and not driven by technology.”

Mr Samuel called for an independent agency that will cross-check the entire audit system of NNPC and design architectural framework with oversight and adequate capturing of the supply chain.

He said this would ensure openness in the national oil company’s activities and drastically reduce the impact of its inefficiencies on citizens.

In its policy recommendation on NNPC Audit Reports, industry experts at the Facility for Oil Sector Transparency and Reform in Nigeria (FOSTER) called for the unbundling of subsidiaries to allow NNPC to optimize its commercial efficiency. This is to ensure higher revenues for the benefit of the country.

 Overall, a quick passage of the long-awaited Petroleum Industry Bill (PIB) would reposition the state-owned oil firm to run efficiently, and provide the template for restructuring the oil industry, thereby eliminating the usual causes of the country’s revenue shortages from the oil sector considerably.

In essence, the Nigerian citizenry can also enjoy a higher quality of life through its government’s provision of adequate infrastructure, funded in part by increased revenues from an efficiently run oil industry.

The spokesperson of the NNPC, Dr Kennie Obateru, did not reply to WhatsApp messages and pick calls when contacted to explain how the National Oil Company is planning to recoup the funds.

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Support for this report was provided by the Premium Times Centre for Investigative Journalism (PTCIJ) through its Natural Resource and Extractive Programme