The Petroleum Subsidy Probe Report

The Petroleum Subsidy Probe Report: Some Technical Concerns

Emmanuel Ojameruaye

It is safe to say that most Nigerians have welcomed the Report of the House of Representatives Ad Hoc Committee on the Petroleum Subsidy Regime because of its audacity to take on the so-called “cabal” and to call for sanctions against those institutions or persons directly implicated in the corrupt practices associated with the regime. However, notwithstanding the merits of the Report, I have some technical concerns which I intend to address in this article. I was hesitant to do this for fear of being branded an agent of the cabal or the indicted institutions. To be clear, this article should be seen as an “academic or professional critique” aimed at improving the quality of similar reports in future. I commend the effort of the Ad-hoc Committee, but having read and analyzed the report, I cannot resist the temptation to express some of my technical concerns.

My first concern has to do with the Committees’ Terms of reference (TOR) as specified by the House Resolution HR.1/2012 (“to verify and determine the actual subsidy requirements and monitor the implementation of the subsidy regime in Nigeria”) vis-à-vis the Committee’s interpretation of their task – “to investigate the operation of the fuel subsidy regime” as per item 2.0.5 of the Report. A careful study of the Report shows the Committee focused on investigating or probing the operations of the petroleum subsidy regime but veered from “verifying and determining the actual subsidy requirements” and “monitoring the implementation of the subsidy regime”. The difference is clear if we compare the operative words of the TOR -“to verify”, “to determine” and “to monitor” with “to investigate”. The Committee focused on “investigation” of the petroleum subsidy regime between 2009 and 2011. If it had placed a stronger emphasis on “verifying” and “determining” the “actual” subsidy requirements, it would have used more sophisticated analytical methods to do so. Furthermore, there is no indication the Committee has been monitoring the subsidy regime since January, 2012. The word “monitor” (to keep track of an ongoing activity for the purpose of control”) implies that the Committee was expected to monitor the subsidy regime so long it existed. It appears that either the House was unclear about what it wanted the Committee to do or the Committee did not fully understand its assignment.

My second concern has to do with some aspects of the methodology adopted by the Committee. The reasons given for constraining the investigation to three years (2009 – 2011) appear untenable. Most analytical economists would agree that a three-year period is too short establish a trend for projecting “actual” consumption and “actual” subsidy requirements, especially when the data for the period were corrupted by malpractices such as round-tripping, non-delivery, short-delivery, smuggling and over-invoicing. The Committee should have used prior data (at least from 2006 when the PSF was established) in order to have a longer time series. The data could have also been matched with data from comparative countries (e.g. Indonesia, Algeria, Iran and South Africa) in order to “filter” the Nigerian data. Furthermore, the Committee posed 13 “research” questions to guide its work. Although the answers to most of the questions were obvious or implied in the Report, one would have expected direct answers to each of the questions in the concluding part of the Report.

My third concern is with the method used to estimate the consumption level of petroleum products which appears biased at best. The Report noted that the “actual volumes on which PPPRA paid subsidy in 2009 to 2011…was (sic) found to have been corrupted with discharges that could not be substantiated…Lower figures between actual basis of subsidy payment were preferred”. Thus, Committee simply added “PPPRA actual basis for subsidy payment to marketers” to “PPPRA confirmed discharge of PMS by NNPC” to arrive at “Total Consumption” which it then divided by 365 to get the “average daily consumption”. Given the sharp practices by both the PPPRA and NNPC as documented in the report, why should the Committee base its estimate of “actual consumption” (hence, actual subsidy requirements) on the PPPRA and NNPC corrupted data without doing some scientific “filtering”? In the presence of “malpractices” and disequilibrium, “recorded” consumption is always different from “ex-ante” demand, which is the critical variable for planning purposes. The Committee’s estimated consumption is a guesstimate to which no statistical “confidence level” can be ascribed. Furthermore, the inclusion of 7 MLPD to maintain a strategic petroleum reserve (SPR) is questionable given the level of SPR in comparative countries, the current high fuel prices, the lack of adequate underground or safe/secure storage facilities, the potential for mismanagement of the reserves, and the low risk of disruption of fuel supplies. The Committee should have engaged the services of Nigerian energy economists who have conducted analytical studies on the demand for energy products in Nigeria.

My fourth concern is the lack of a recommendation regarding the future of the PPPRA. On the one hand, the Committee recommended that the PPPRA should “use 40 ML of PMS for the first quarter as its maximum ordering quantity per day” On the other hand, it recommended that “the 445,000 BPD allocation to NNPC to refine for local consumption… is sufficient to provide the nation with 40 MLPD.... Since AGO has been deregulated, other marketers can make up for he 3.00 MLPD shortfall”. In other words, the Committee appears to have recommended that the PPPRA should not make subsidy payment to any marketer/importer in 2012 other than the NNPC. Therefore all the N806.766 billion recommended for subsidy should to be paid to NNPC only. Private markers can only import AGO but they will not receive any subsidy payment. If so, why not asking NNPC to import the 3.00 MLPD AGO and revoke the fuel import licenses of all the private marketers? If the private marketers are excluded from the subsidy regime, is the PPPRA still relevant? Of what use then is the recommendation that “The PPPRA should, within two weeks of adoption of this report, conduct a performance assessment of ALL companies involved in the PSF scheme and publish such reports”? Why making subsidy payment to NNPC instead of federal government simply allocating the 445,000 BPD to NNPC at a subsidized rate and tasking NNPC to use the allocation to meet local demand for petroleum products through local refining and exporting of the quantity it cannot refine and using the proceeds for “bridge” importation? This way, subsidy payment to NNPC by PPPRA becomes unnecessary, and the PPPRA become redundant.

Finally, the Committee failed to provide a road map for resolving the oil subsidy imbroglio in Nigeria. Its recommendation was for 2012 only. There was no projection into 2013 and beyond. The Committee ought to have made projections into the future under different scenarios, such as continuing with the current level of subsidy and gradual reduction of subsidy leading to eventual elimination between two to five years. There is a consensus that subsidies are ineffective, inefficient, susceptible to corruption, and should be eliminated in the medium to long-term.

In spite of the above concerns, I still believe that the Report is a bold first attempt to resolve the oil subsidy debacle in Nigeria. It has tackled the issue of corruption associated with the subsidy regime. If its key recommendations are faithfully implemented, at least N1.0 trillion that was misappropriated will be paid back to the federation account for sharing among the three tiers of government. This amount more than enough to purchase over 100,000 Toyota Coaster buses (which translates to about 2,700 per state/FCT) to augment mass transit system throughout the country! The next stage now is to devise an appropriate petroleum product pricing policy which will lead to gradual reduction and ultimate elimination of subsidies in the medium to long-term.