Fuel Subsidy: How FG Burnt N2tr in Four Years

THIS DAY Newspaper- Shaka Momodu

The Federal Government has so far spent over N2 trillion in the payment of subsidy to maintain the regulated price regime on petrol in the last four years, a report has said.
And why the bill is borne by the three tiers of government – federal, states and all the councils of the federation – only a few areas enjoy the subsidised price of N65 per litre as most Nigerians buy from the black market despite paying part of the cost of subsidy.
This is contained in the executive summary of the findings and recommendations of the Implementation Committee for Reform of the Downstream Petroleum Sector, chaired by the Minister of Finance, Dr. Mansur Muhtar, exclusively obtained by THISDAY.

The committee, THISDAY learnt, lamented the current policy of the subsidy, declaring that it had put the country in a huge fiscal and financial burden which had paved the way for abuses, waste and smuggling.
The cost of subsidy payments on petroleum products between 2006 and 2008 is put at over N1.2 trillion and over N600 billion in 2009.
According to statistics obtained from marketers who made contributions to the findings, the N2 trillion spent on subsidy by the government, if deployed in infrastructural development, could construct 45,000 kilometres of roads, 615,000 blocks of classrooms, two brand new refineries with refining capacity of 300,000 barrels per day and provide 15,000 megawatts of electricity.

“You can imagine if that money was channelled to constructing roads, electricity, water, health, education. But sadly, it is channelled to subsidy,” an industry chief executive told THISDAY.
The irony of the subsidy is further highlighted in the Murhtar report which states that apart from Lagos, Abuja and Port Harcourt, the pump price of N65 per litre is not available in many parts of the country especially the hinterland despite the subsidy deductions at source from the Federation Account.
“Majority of consumers in Mukurdi, Sokoto, Borno, Plateau, Enugu, Owerri and Bayelsa pay between N90 and N120 per litre for a petroleum product that is already subsidised to be sold at N65 but never gets to them at that price. By this alone, huge revenue is lost by the Federal Government in the name of subsidy,” the report said.

There are, however, fears that a fully deregulated downstream will immediately hike fuel price to about N140, a situation that may trigger unrest.
Subsidy, according to the report, provides an incentive for smuggling petroleum products to neighbouring countries where prices are higher in view of the huge disparity in the prices of refined petroleum products between Nigeria and neighbouring nations.
This means government resources, the report said, are being used to subsidise smuggling rather than the consumers, “unfortunately while making it lucrative for smugglers at the same time resulting in product scarcity in the country”.

The report also questioned the deductions of the subsidy from source, describing it as “unconstitutional as no local government, state or federal government budgets for subsidy therefore, there is no appropriation for that purpose”.
The implementation committee recommended that the only way out of the present petroleum product crisis in the country is the “full deregulation” of the downstream sector.

It admitted the sector is beset by a myriad of problems created by structural, systemic and institutional weaknesses as well as policy deficiencies, such as lack of investment in refineries, excessive dependence on imports, supply and demand imbalances leading to shortages, uncompetitive market structure, inefficient pricing structure, rent seeking, budgetary pressure from unsustainable subsidy payment, high distribution and storage costs and smuggling/leakages among others.
It declared that the downstream oil sector is mature enough to immediately provide cost efficiency and attract substantial private sector driven capital investment in the short to medium term.

The Petroleum Act and the 1st Schedule of the Constitution of the Federal Republic of Nigeria exclusively place all matters relating to petroleum under the ambit of the Federal Government. The success or failure of the downstream oil sector lies in the implementation of the policy of the Federal Government, which from an industry perspective is adequately formulated but lacks consistent and meaningful implementation.

The report continued: “Federal Government owns all hydrocarbons in the territory of Nigeria and through the NNPC is the predominant owner and controller of the downstream oil infrastructure i.e. refineries, pipelines and depot facilities. Most of these assets are fraught with problems and are decaying as a result of government/NNPC bureaucracy, inadequate maintenance, frequent shutdowns, pipeline ruptures and vandalisation.

“NNPC’s dominance of the sector and an inadequate margin structure for operators over the years has been a major disincentive to much required immediate capital investment from the private sector. Policy measures and institutions put in place to ensure adequate and efficient sourcing and distribution of petroleum products like the unbundling of NNPC, liberalisation of pricing and margins, the Nigeria Gas Plan, the Petroleum Stabilisation Fund, PPPRA and the Petroleum Equalisation fund have either been stalled, undermined or allowed to deteriorate.

“Meanwhile, a substantial gap between local availability and demand exists; this leaves the federation completely import dependent without the required supporting import infrastructure. Supply gap exists between demand and supply of products. Nigeria has an installed capacity of 450,000 barrels per day from all its refineries. This capacity is at least 35 per cent less than local demand for PMS.
“Capacity utilisation over the last 18 months for PMS production has averaged 10 per cent of local demand leaving the country import dependent. This can only improve with significant investment in the refining infrastructure and cessation of crude pipeline vandalisation.”

The committee also observed that refining capacity utilisation in Nigeria is well below acceptable international standards due to structural problems and inefficiencies i.e. long decision making process, operator’s limited authority to incur expenditure, inability to adhere to regular maintenance schedules, etc, “which has engendered the current situation of near total dependence on imported petroleum products whilst the refineries continue to operate at a substantial loss to the country. Massive import supplement required but limited by finite in-bound infrastructural capacity. In the best of time in the last two decades, the refineries only work at 40 per cent installed capacity”.

It pointed out that “the ports and existing import receipt facilities were not designed to handle the current level of product import volumes. Resultant effects are expensive distribution costs as well as frequent disruptions in product supply”.
The committee accused the Nigerian National Petroleum Corporation (NNPC) of failing in the middle of a privatisation process to make the investments necessary to upgrade the limited import facilities and has been reluctant to partner the private sector to do same. It also classified the corporation as being clearly inefficient particularly in its downstream subsidiaries.

The report said: “NNPC’s control over the limited import facilities and its exclusive access to the proceeds of sale of crude earmarked for local consumption gives it the advantage of being the dominant importer (85 per cent) of the nation’s imports, without any effective oversight.
“It constantly ignores and frustrates the directives of PPPRA that has the statutory obligation of oversight of pricing and certain operational policies for the products sector.”


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