Understanding the Nigerian subsidy quagmire

The subsidy regime is so shrouded in opaqueness that it is difficult to explain it intelligibly to anyone. But simply put, the government alleged that for every litre of PMS purchased at the pump price of N195/litre which was the last operating pump price before the recent jerk up of the prices, the government was paying the importers of the product the difference between the cost of producing that one litre in the foreign refineries and all the related costs (shipping, margins, handling costs, taxes, etc.) which makes up the landing cost, and the price that the end users have to pay for the product at the pump in different parts of the country. In addition to that differential, there is also the cost of bridging, which is the cost of transportation of the product from the ports of discharge in Lagos and Port Harcourt, to far flung places, so that the products can be sold at the same price throughout the country. A really idiotic policy I must say, but that has been in operation since 1975! That was the sole role of the Petroleum Equilization Fund (PEF), which has now been subsumed into the Nigerian Midstream and Downstream Petroleum Regulatory Agency (NMDPRA) under the PIA.

No one seems to know how much PMS is consumed in Nigeria daily, so the figures keep fluctuating depending on who is in charge of the process at any point in time in NNPC and the other regulatory agencies. And the fluctuations can be anything between 30 million litres a day to 100 million litres a day! Since a subsidy of at least N300/litre was claimed to exist on each litre of PMS, you can imagine the level of fraud if you multiply that figure by the total daily consumption claimed, and the actual daily consumption. The more the fraudsters got greedy, the higher the alleged daily consumption on the basis of which subsidy was paid. And this went on for decades on end!

Then there is another dimension to it – DSDP programme. The Direct Sales, Direct Purchase programme was designed to be a swap, trade by barter scenario, where crude oil was swapped for the equivalent in PMS with foreign refineries (15 in the consortium) who were required to ship the finished products to Nigeria in exchange for the crude oil they got, since our refineries are always in a state of being perpetually turned around. This was introduced in 2017 and operated until a few weeks ago, when NNPC announced that they had scrapped it. In a transparent environment, there should be no claim of subsidy in this arrangement, because what you get in the quantity of PMS from the consortium is supposed to be equivalent to the value of crude oil shipped to the consortium under the swap arrangements. But like all things Nigerian, NNPC still claims to have been paying subsidies (or making under recoveries) in respect of the same PMS, whereas there is supposed to be a zero impact in cash terms. Up till this moment, NNPC has not revealed who they have been paying this subsidy to, fuelling the outrage that a few people have been feeding themselves fat on this fraud.

Another interesting dimension to all this is alleged smuggling of refined products across our ever porous borders. The government alleges that our subsidised PMS supplies all neighbouring countries because the Customs, Immigration and other security agencies at the borders cannot effectively checkmate the smugglers who sell the products at a high premium, and so stopping the subsidies would increase the domestic prices of the products and make smuggling unattractive. If there was ever an idiotic argument, this is certainly at the very top! How do you punish an entire populace because of the ineffectiveness of your own security agencies paid with taxpayers money and holding no one accountable?

The full ramifications of this fraud cannot be unravelled without a wholesale, honest and transparent probe of the activities of NNPC and all the regulatory agencies associated with this, including CBN and Ministry of Finance. But like all Nigerian probes, once the National Assembly gets involved, their sole interest is to plug into the drainpipe and scuttle the outcomes, and this has been happening since 2012 when the first such probe was launched during Jonathan’s regime.

I hope this provides some insight into this really vexed topic.