Continues from yesterday
SALES/Distribution: Locally refined petroleum products are basically moved by truck-outs

Imported petroleum products are distributed through a combination of vessel discharges, pipeline throughputs to depots and truck movements to (filling) stations

Aggregate cash inflow for NNPC was lower than cash outflow made up of cost of crude purchased and other operating expenses. Thus, cash available to NNPC was insufficient to pay for crude cost without being reimbursed. NNPC was therefore deducting the approved subsidy amounts for any given month before transferring the net amount to the Federation Account. This process is not backed by any authority of Government and should be discouraged.

Crude oil obligations

NNPC has been meeting its obligations on the crude oil it purchases from Government by a combination of products sales proceeds and the subsidy claims approved by PPPRA. The Committee notes that the downstream petroleum industry’s business model is not sustainable going forward as it does not allow for full cost recovery by industry players. The PSF was created in 2006 with the expectation that it would be funded by the three tiers of government in the ratio of 50:25:25 by the Federal, States and Local Governments respectively.

Funding from the States and Local Governments was not forth-coming hence the PSF has remained under-funded. This led to a situation where the Federal Government agreed with NNPC to deduct its approved subsidy claims from its crude cost obligations.

The Committee recommends that the Federal Government should put in place a mechanism for reimbursing NNPC on a timely basis to ensure that monies due to the Federation Account are remitted without unauthorised deductions. In addition, an independent auditor or an independent standing Committee should re-confirm the PPPRA’s subsidy computation for NNPC before payment.

The Committee recommends that Government should put in place a funding mechanism that would ensure that funds are set aside (by all tiers of Government or the Federal Government) to meet amounts appropriated for subsidy, should the Government decide to continue the subsidy regime.

It is difficult to determine who regulates and supervises the role of NNPC in the PSF scheme especially in determination of quantity of products to be imported by the corporation. PPPRA superintends over the petroleum products supply process by giving import allocations to NNPC and oil marketing and trading companies. While PPPRA discharged its responsibilities in this regard, when oil marketing and trading companies performed below their allocated import volumes, NNPC was expected to make up for the short-fall as ‘the importer of last resort’.

NNPC does not have a verifiable statistical basis for computing daily petroleum products consumption in Nigeria. The absence of reliable data for the estimation of the daily consumption of petroleum products subjected the determination of the nation’s requirement for imported petroleum products to abuse. This in turn led to oversupply of imported products and the associated abuse of the subsidy scheme.

There was no documentary evidence that the NNPC’s current process for processing subsidy payments under the PSF scheme was duly authorised by law, by the PSF guidelines or by any duly designated Government agency. There is therefore no legitimate backing for the process. In addition, NNPC’s practice of deducting subsidy claims before transfer to the Federation Account with the CBN is not backed by any authority of Government.

Accounting process

The accounting process used by NNPC (only one set of accounts for sales proceeds of both imported and locally refined products) made it difficult to account for domestic refining of petroleum products.

The Committee did not see the effectiveness of NNPC’s internal control framework in ensuring smooth operations of its role in the production, sales and distribution of petroleum products, especially in respect of DPK. The Committee noted that import permits for kerosene were exclusively granted to NNPC by PPPRA. This situation created a monopoly and abuse of the kerosene distribution process.

The distribution of DPK which was being imported solely by NNPC was heavily skewed in favor of depot owners, creating a secondary market for the product to the detriment of consumers.

Depot price of kerosine

Even though the ex-depot price of kerosene is N40.90, the reality was that the import and allocation system enabled rent seeking middle men to control the kerosene market at prices of between N115.00 and N125.00 per litre. The subsidy for kerosene was actually a bonanza for the rent seeking middle men while consumers paid higher prices for the product above the N50.00 per litre directed by Government.

The breakdown of NNPC’s kerosene sales of to bulk purchasers between 2009 and 2011 is shown below (in litres):

NNPC RETAIL

The country’s citizens were obviously not getting the benefit of the huge cost to the nation in kerosene subsidy.

•The Committee recommends that NNPC’s roles in the downstream petroleum industry be regulated appropriately by the existing regulatory agencies in the industry i.e. PPPRA and DPR.

•The Committee recommends that PPPRA must always regulate and determine the quantity of products to be imported by NNPC in line with its mandate and the current allocation process for NNPC. All importation of products by NNPC (within or outside PPPRA approved quotas) must be approved by PPPRA. A rigorous process of volume control that will facilitate identification of red flags will reduce malpractices in subsidy claims.

•The Committee recommends that accounting best practices should be adopted by NNPC to enable separate audit trails of sales proceeds of imported and locally refined petroleum products and to determine the cost of domestic refining of petroleum products.

•The Committee recommends that Government should always give documented and clear directives to avoid ambiguity, indiscretion and to encourage compliance. Given the significant financial impact of the NNPC subsidy process on the finances of the nation, appropriate steps should be· taken by Government to document and legalise the process for NNPC’s subsidy claims in a transparent and unambiguous manner.

•The Committee recommends that the relevant Government agencies such as PPPRA and DPR in line with their mandates as regulators and others such as the Ministry of National Planning, Federal Bureau of Statistics e.t.c. using the information at their disposal on locally refined, imported and stored volumes of petroleum products should be mandated by Government to continually determine the nation’s daily consumption levels of petroleum products independent of the industry operators.

Direct allocation of kerosine

•The Committee recommends the allocation of kerosene directly to marketers with retail outlets, specifically IPMAN, MOMAN and NNPC Retail based on the strength of their retail outlets. This will ensure that the impact of the subsidy will be felt by the masses. In addition, the permit to import DPK should be liberalized to include the marketers who meet the eligibility criteria under the PSF guidelines and the subsidy regulated under the PSF scheme as currently obtains for PMS.

In the long run, the option of using cooking gas should be explored. It is expected that the cost of subsidising kerosene would be saved if more Nigerians embrace the use of LPG. In addition, the Committee is unable to recommend payment of subsidy claims on DPK in view of the extant presidential directive of June 15, 2009.