Common sense suggests that using 20-40 percent of earnings to pay for subsidies is unsustainable and is a sellout of the future of the Nigerian people to other nations.
( Public Affairs Analyst)
What should come to your mind after this, is what business government has with these subsidies to start with. If it had no business with issuing these subsidies there will be no reason to debate whether the worth of the subsidies is N1.134 trillion or N739.125 billion. There will be no question as to whether our actual consumption of pms was 27million litres daily (as stated by the average daily consumption from 97-2010 in the NNPC records) or 35million litres (as stated by the government in The Nation 09/01/2012) or 41.42million litres daily given the N1.12 trillion said to be spent on subsidies in 2011. These differing figures simply point to the cooking of national pms consumption rates and of actual costs of refined products.
(Diezani Alison- Madueke, Federal Minister of Petroleum Resources, Nigeria)
The government may be responsible for doubling of daily pms consumption rates in the second half of last year from an average in the first half of 27million litres to 55.8 million litres (as given by NNPC records). Otherwise it may be due to collusion between officials of government parastatals e.g. NNPC, PPRA, DPR etc responsible for ascertaining actual fuel imports with marketers. If it is due to a government directive it may be related to the huge spending associated with the election of the present government or with the funding required for their lavish spending. If it is related to collusion of officials of these government agencies with marketers, then it points to deeply entrenched corruption dating to several decades back. Whatever the case, it helps us realize that this government is totally incapable of reforming itself from corrupt practices and that it neither has the will or capacity to weed corruption and its practitioners from within its ranks. We must therefore as responsible citizens, if we cannot change this government, help our country by ending the system that encourages such offensive practices. Though this may not ensure that the monies realized will be used judiciously by this government, there will however be more transparency and this will aid our ability to hold this government and its officials responsible for any misuse.
(By-products of crude oil refining)
If Nigeria’s daily consumption is put at 35million litres of pms (using government figures), given a 30% distillation rate during refining, at least 117million litres of crude oil will be required for consumption. Since 1 barrel equals 152 litres, it means that Nigeria needs to refine at least 769,737barrels of crude daily to meet local demand. Current daily production is put at 2million barrels daily. It means that Nigeria can make use of 800,000 barrels for local consumption and sell off the balance of 1.2million barrels to the international market.
( A Crude Oil Refinery)
Existing refineries have combined capacity of 445,000 barrels daily and have current capacity of 30%. This means that refineries can meet daily demand of 133,500 barrels currently and this implies that the balance of 666,500barrels must be imported daily.
From my estimation,(Click here to read: https://adebayoalonge.wordpress.com/?p=356), selling price of locally refined pms should not surpass N90/litre. Therefore government needs to explain whether it subsidized locally refined pms with N25/litre or N75/litre as with imported pms. If the latter is so, it will need to explain why an extra N50/litre was paid to subsidize locally refined pms instead of N25/litre. This unaccounted claimed subsidy is on at least 6.09million litres of pms daily and may be worth as much as N304.5million daily. Most likely this money is lost to corrupt practices in the NNPC and the refineries.
(Royal Dutch Shell-one of the oil majors in the upstream sector of Nigeria’s petroleum industry)
The NNPC has joint venture agreements with oil majors that involve mostly a 50-50 percent sharing agreement of crude produced from onshore or off-shore fields. Therefore of the estimated 2million barrels produced daily from Nigeria’s oilfields, 1 million barrels belong to the Nigerian government. It may decide to refine 133,500 barrels locally and sell the balance as crude to the international market. Or it may sell all of its 1million barrels on the international market. Given its nature, I can safely guess that the government mostly sells its share of crude daily on the international markets so as to have access to quick cash. Although from analysis, (Click here to read: https://adebayoalonge.wordpress.com/?p=356), you will see that it loses significant value from doing this. The value lost ranges between 300-400% depending on if it had sold refined products locally or internationally.
(Cartoon illustrating how subsidies kill imagination)
If the government paid N1.12 trillion to subsidize pms in 2011, it means it made use of 400,000 barrels daily out of its daily share of 1million barrels for this purpose. This means it made use of 40% of crude oil revenue in 2011 to pay for subsidies. The remaining 60% was then used to service other parts of the 2011 budget. Even if these subsidies had not been double of what had been budgeted in the 2011 budget, the government will still have had to spend at least 20% of its crude oil revenue to pay for what had been budgeted.
As responsible citizens, the questions to ask then are:-
- Does it make sense to spend between 20-40% of earnings from your major resource on subsidizing pms especially when most of this value goes to foreigners (Click here to read: https://adebayoalonge.wordpress.com/?p=356) and corrupt government officials? Also does such spending make sense in the face of severe infrastructure and economic challenges faced by Nigeria?
- How has the balance of 60% of these earnings been spent? Can the budget be made to focus more on capital expenditure as against the current situation where 75% of it is used for recurrent expenditure?
- Can the government explain why it overshot the amount budgeted for subsidies in the 2011 budget by 100%? If corrupt officials and marketers were responsible for this, who are they and why have they not been punished and made to return these funds worth almost N500billion. Or is the government itself responsible for this?
- How much was used to subsidize locally refined pms of about 6million pms litres daily? Or how many days did local refineries work? And on average what was produced daily by this local refineries in 2011? If the market price of locally refined pms is put at N90 per litre, what happened to the N300million spent daily to subsidize, daily output from these refineries, assuming they were subsidized with N75/litre as with imported fuel?
- Since three more refineries with similar capacities with the current refineries in Port Harcourt, Warri and Kaduna, assuming all six work at full capacities, would have met the nation’s current daily demand for pms, why were this not built? Why also are the current refineries not working at full capacities? Who are those responsible for these failures in planning and turn around maintenance, and why have they not been identified and punished?
- Did the government sell all its share of crude oil proceeds of joint ventures? If it did, what was the total value realized and how was it used? If it did not, what proportion was refined locally, how much was realized from sales and how was the money used?
- Can the country explore other areas of revenue earnings asides from oil? How have other sources of income e.g. tax etc. been utilized?
In conclusion, common sense suggests that using 20-40 percent of earnings to pay for subsidies is unsustainable and is a sellout of the future of the Nigerian people to other nations. It is however important that local refineries are encouraged to set up. The government should cut its recurrent expense and weed out corruption from its ranks. It must also explain how the oil industry has been run from its start in the 1970’s. It must identify public officials, past and present, who sabotaged the refineries and colluded with marketers to receive payments for bogus and inflated claims on subsidies. Such a beam light should be passed through subsidies paid on other refined petroleum products e.g. diesel in the years before they were deregulated. The government must show commitment to punish identified corrupt officials, past and present and must henceforth ensure that all operations in the oil industry especially as regards its regulatory function, post-deregulation, are transparent.
4 thoughts on “Understanding the subsidy fraud”
where do we go from here….
Read the follow-up:https://adebayoalonge.wordpress.com/2012/01/21/the-mathematics-behind-the-subsidy-fraud/