A dispassionate study of the fuel subsidy regime in Nigeria will show that it is an easy incentive for most of the corruption in Nigeria and frighteningly with a potential to crash the Nigerian economy. Wikileaks cables and other revelations from Government officials show that Local and foreign petroleum traders collude among themselves and with corrupt government officials to defraud Nigeria of billions of dollars in the name of fuel subsidy payments.
It can be easily shown that Nigeria's entire revenue can actually be wiped out by petrol subsidy payments alone because of factors that cannot be easily controlled by Government operators. The potential for fraud and the potential fraud associated with the fuel subsidy regime exposes Nigeria to unlimited costs. The exact value of this fraud is not limited to the imagination of the players and their insatiable appetite for wealth accumulation - it can unravel rapidly and uncontrollably. Sadly, actual subsidy payments cannot be legislated through the usual budgeting process because nobody can estimate correctly its value.
Interestingly, the issue of subsidy budgeting is a talking point among pundits on either side of the debate. My investigations show that fuel subsidy is not usually budgeted for in Nigeria. Understandably, factors such as crude oil price, exchange rate, fuel consumption volume and other costs associated with getting petrol to the pump station cannot be accurately predicted. However, in recent years, there has been a notional amount inserted in the budget to serve as estimate which is usually paid out from the excess crude account.
The excess crude account is a creation of the Nigerian Government (in 2004) to save crude oil revenues above a yearly defined base amount.
In this essay, I will show how loopholes in subsidy payments are exploited to expose Nigeria to an unbounded payment obligation even though our revenues are limited.
With drastic reduction in local refining capacity over the years due in part to the unrest in the Niger Delta, and to lack of timely maintenance of the refineries, most of the petrol consumed in Nigeria is imported. This exerts pressure on the pump price and has resulted in pump price adjustments over the years. The table below shows the pump price adjustments, the year of adjustment and the Head of State under whom adjustment was made.
Head Of State
The pump price is a discounted price of the actual cost of fuel production with the discount picked up by the Government and popularly called subsidy. Petrol traders have exploited loopholes in the subsidy payment process to the point that the Government is no longer able to afford the resulting amount. The points below show how the fuel subsidy payment process is exploited and how it exposes Nigeria to possibility of an uncontrollable crash:
1. International and local fuel traders falsify the dates of bills of lading to reflect particularly high market prices, overcharging the Nigerian National Petroleum Corporation (NNPC). See Wikileaks (http://cables.mrkva.eu/cable.php?id=15817). They are able to do this because the NNPC pays the price of petrol based on the crude price in the International market on the day the fuel is loaded on the ship. This is a huge problem because the national budget is based on a fixed crude oil price. Nigeria's revenue can easily be wiped out by a buying pattern of petrol that is priced based on average crude price that is more than the actual average for the year. The beauty of subsidy removal in fixing this particular problem is that all traders are forced to sell their petrol directly in the market at transparent benchmark prices based on true crude prices.
2. Traders come to NNPC with documentation to receive subsidy payments for products that arrive in Nigerian ports but are subsequently diverted to the International waters, offloaded into different ships and then returned into Nigerian ports for another sets of documentation. Note that the profit in this deadly scheme is so huge that it can be used to compromise officials at the ports and at the NNPC. The potential loss to the Nigerian economy from just this scheme is unlimited and can wipe out a 5-year budget within months.
3. The Petrol subsidy regime makes Nigerian Petrol to be cheapest in the neighbourhood creating smuggling opportunities where people take Nigerian Petrol at 65 Naira into neighbouring countries to sell at over 150 Naira. Since the profit margin from selling subsidized Nigerian petrol in a neighbouring country is so attractive, the already porous borders are easily compromised. A compromised border is both a stress on Nigeria's security cost and frequency of such petrol smuggling has a proportional stress on our subsidy "budget."
4. Currency risk. This point is the scariest. With a depleted cash reserve (popularly known as foreign reserve) due to increased subsidy payments arising from the irregularities in the preceding three points, the Naira weakens against the dollar because there are not enough dollars to maintain it. The combination of weak Naira and rising subsidy payments denominated in Naira but calculated based on US dollar crude prices force Nigeria to pay far more Naira to subsidize petrol than it can make from its crude oil sales. The implication of this is that Nigeria potentially may spend all its crude oil sales and borrow more to pay for only petrol subsidies with nothing left for anything else. As is the case with currency risks, this can unravel very rapidly and uncontrollably.
5. Round Tripping: Petrol from local refineries are taken into international waters and returned to Nigeria as imported fuel to qualify for Subsidy payments.
No individual would want to be in Nigeria’s place with payments that are uncontrollable and incomes that are fixed. Nigeria cannot afford to be in that situation.
A partial fix carries the same unbounded potential for disaster. If you fix the price of petrol at 100 Naira and government pays 41 Naira as subsidy today, there still exists the potential for the subsidy payment to rise to any amount the next month (x + Infinity = Infinity, no matter the value of x). The 'infinity' is the uncontrollable component in the subsidy derivation. Conversely, total removal of subsidy does not carry with it that unbounded pricing possibility because traders have to actually bring their products to the market and compete.
I strongly believe that a total removal of petrol subsidy is inevitable for Nigeria and needs to be done immediately. This point is so important that Nigeria will be far better served if (for example), the current government borrows 15 trillion Naira (over thrice our 2012 budget) to fund the “El-Subsideen” cancer palliatives than to continue to pay for subsidy either in part or in full.