Chamberlain S. Peterside, Ph.DThursday, July 15, 2010
[email protected]
New York, NY, USA



…Truth Foretold

he recent news report making rounds that Nigerian National Petroleum Corporation (NNPC) is insolvent may have come as rude shock to many. But for some long time observers that was no surprise at all. In fact financially speaking, it may be true to say that Nigeria is sitting on a keg of gunpowder. Lets consider some salient reasons and see why.

Despite spirited efforts to debunk the allegation by the information minister Mrs. Dora Akunyili and senior management of NNPC, the cat was let out of the bag and there is no smoke without fire as they say. You can’t help but agree with the bombshell revealed if you analyze the data more closely.

Based on report, NNPC owes Federation Account Allocation Committee (FAAC) $3,0 billion, whereas the Federal Government owes NNPC $7,7 billion mostly in unremitted petroleum subsidy. According to the junior minister of Finance – Mr. Remi Babalola, NNPC is technically insolvent and in a deep deficit to the tune of about $4,7 billion because it can’t collect on its debt and cant meet its current obligations. The counter argument of NNPC and some government officials is that if the debt owed to NNPC by the federal government were to be settled, it would be capable of offsetting its own obligation - therein lies the quandary.

…Financial Black Hole Petroleum subsidy in Nigeria has become a black hole in Nigeria’s public finance system draining about $4,5 billion annually from federal coffers. It is arguably one of the single largest items of expenditure by the federal government with minimal social impact on the citizenry – poor folks might have been better off collecting the subsidy payments in monthly cash subventions than it being funneled through NNPC.

The simple policy premise of the subsidy is to maintain low and/or uniform pricing for petroleum products around the country, somewhat in other to cushion the effects of high import prices on the suffering masses wherever they may be in Nigeria - wrong. As empirical evidence clearly suggests, petroleum products are not necessarily nor always sold at subsidized prices at the pump neither is there an illusionary uniform price structure for these vital products across the length and breadth of the country.

In other words, the importers or marketers (primary recipients) of the subsidies do not ultimately pass it on to end-users/consumers in form of lower prices; rather most often they pocket the money whilst selling at prices dictated by demand and supply dynamics, leaving impoverished populace short-changed. To be sure, despite being a major producer and exporter of crude oil, Nigeria remains a habitual importer of refined products. Hence as crude price in the global marketplace increases, import-bill for refined products and subsidy-payments to importers/marketers continue to escalate, gulping an inordinate chunk of government budget.

This has become a source of very serious concern for fair-minded policy-makers and analysts, that even the Central Bank Governor, Mr. Sanusi Lamido was quoted few months ago in a testimony to the national assembly as saying that petroleum subsidy payment is needless, unsustainable and accrues mostly to a handful of product importers that have now constituted into a “cabal” and feeding fat at the expense of the masses.

Even in the face of that, the labor unions have remained staunchly opposed to deregulation of downstream petroleum sector, which makes you wonder if they truly understand the economics of petroleum subsidy in Nigeria and what their underlying mission is – to protect workers or the cabal.

…The Untouchable Historically, NNPC has remained an untouchable government entity that runs as both a regulator (administering licensing schemes and federal government subsidies on petroleum products) and operator (partnering and investing in projects) within the oil/gas industry. Its financial operations are opaque at best and masked in utmost secrecy, so much that despite repeated calls for transparency, NNPC has never published an audited account.

The status of NNPC in the Nigerian oil industry against the backdrop of global accepted practices remains a mystery to any reasonable person. Whereas it is a senior partner to major oil producers in the country and custodian for the federal government in practically every oil/gas transaction, it has failed to live up to the calling. Now, consider that its stock-in-trade is crude oil that is not only highly lucrative in the international market, in which Nigeria is the 8th largest exporter and from where it earns 85 percent of budget revenue, yet NNPC continues to complain of under-funding and remains unprofitable.

This is in stark contrast to similar entities like Petrobras of Brazil or Petronas of Malaysia that were also state-owned but commercially successful - financially prudent, operationally efficient and economically relevant to their respective shareholders and nation at large – how can that be?

The inability of NNPC to operate as a modern viable petroleum corporation is truly a shame and sour point that exposes not only the entity to risk of financial collapse, but could potentially imperil the whole country as we might soon witness. The argument that if federal government debt to NNPC were to be settled then the corporation would be in position to take care of its obligations seem quite callous and deceitful to say the least.

…Lets Reason Together
From simple financial reasoning - the federal government is a debtor to NNPC on one hand (through the frivolous subsidies) but also is a creditor through debt owed by NNPC to the Federation Account. So assuming the federal government was to pay up the debt owed to NNPC in full ($7,7 billion), the proceeds will subsequently be channeled by NNPC to two principal outlets - Federation Account ($3,0 billion of which 53 percent or $1,59 billion will statutorily inure to the federal government). NNPC will then use the balance of $4,7 billion to offset outstanding subsidy payments to petroleum importers/marketers and pay down other operating expenses. By implication the net debt owed by federal government to NNPC will be $6,1 billion (if you deduct share of the federal government’s revenue in the unremitted money by NNPC to Federation Account).

The unanswered questions bugging me therefore will be as follows:

  1. Given current financial predicament, where exactly will the federal government find $6,1 billion (net debt balance) to pay up NNPC – borrow through bond-issue, tap the external reserves or liquidate the excess crude account?

  2. Assuming the federal government elects to pay NNPC in one fell swoop, under current circumstances if the likely sources of money is either the excess crude account, (which by recent reports has declined to about $3,4 billion as at June 2010 according to the Accountant General) or the external reserves (which now stands at $37,6 billion as at June 2010 according to the CBN Governor from an all time high of $67 billion before the external debt-deal entered by Nigeria in 2005). Which option is more prudent, feasible or less painful?

  3. If the federal government found the money and courage to pay up NNPC with say its share of remaining excess crude account (53 percent of $3,4 billion or $1,89 billion), it will still be left with a hefty outstanding debt balance of $4,9 billion to NNPC. But will it be morally right then to disburse money to NNPC from this excess crude account, only for NNPC to turn around and offset subsidy payments that line up pockets of few petroleum importers?

  4. Conversely, should the federal government even pay the outstanding subsidy debt or abolish the subsidy policy forthwith and channel the money instead to FAAC and other social programs, whereby the state governments can receive statutory allocations that are vital to their survival - execute projects, pay higher minimum wage and run their operations?

…Moving Forward, Which Way Out?
Based on my reading of the situation if final accounts were drawn as at today July 14th 2010, NNPC will not only be technically insolvent like the junior minister rightly pointed out but the Federal Government might also be considered broke – since, Federal Government debts owed to NNPC alone (without other financial obligations) surpasses available funds currently at its disposal through the excess crude account (which belongs collectively to the federal, state and local governments) and other sundry sources. That is a very dicey situation and definitely not the way any purposeful government should run its financial affairs.

Yes I might be reminded that the external reserves is intact, albeit dwindling and exist as buffer that should protect Nigeria from bankruptcy. But don’t forget that the external reserve (in a layman’s understanding) is earmarked for totally different purposes such as maintaining the country’s balance of payment, sustaining exchange rate equilibrium (supporting and beefing up Naira) as well as meeting other import trade obligations. Therefore it cannot and shouldn’t be diverted.

The fact that as a going concern Federal Government and indeed NNPC will continue to earn income from oil exports, VAT and other taxes and thus be able to subsist is a valid argument but lacking in depth. The debt-issuing power (authority to sell treasury bills and bonds) of the federal government and ongoing crude oil earnings are potential lifelines for the country and federating states, but NNPC as a non-sovereign entity ought not have unhindered access to the national purse without commensurate accountability. Therefore whether NNPC deserves to continue operating as a “parasite” and bottomless pit in the economy remains to be proven.

Nigeria has cooked up a very convoluted and archaic financial structure that is soon to unravel and could run the country aground. One option is to allow things to remain unchanged while maintaining current regulatory status quo so NNPC can operate on life-support and dolling out huge petroleum subsidies. Needless to say that the subsidies will ultimately bankrupt the nation in what is already one of the most egregious transfers of wealth and skewed income redistribution pattern in history - from Nigeria’s treasury to handful of highly connected beneficiaries. The consequences could be severe down the line.

Alternatively, why not implement a four-pronged strategy and radical approach immediately, such as:

  1. Passing the long-awaited petroleum industry bill (PIB) to reform the petroleum sector by tearing down NNPC into distinct independent operating units. Separating the operating and regulatory functions and compelling the surviving new commercial companies to play by market rules, source money elsewhere (locally or abroad) and find their feet in a competitive landscape.

  2. Overhaul the outdated subsidy system to determine if subsidy and uniform pricing policy is indeed a panacea or pain to Nigerian citizens. If not, then eliminate it altogether and allow product prices to align with (and be determined by) market forces, which could make turn-around of existing refineries and building new local refineries economically viable and competitive.

  3. Then enter into serious dialogue with civic organizations and labor unions on how to develop and administer direct-targeted pro-poor cash subventions to the most vulnerable citizens with oversight functions vested on various stakeholders.

  4. Encourage and actively support the states and local governments to quickly modernize and strengthen their financial management processes. As we have seen recently, it is not necessarily and only the quantum of funds accruing to the states that count, but how the funds are administered and deployed. Even with more money flowing to lower-tiers of government (from FAAC and internal generated sources), given how their fiscal systems are structured today it is unlikely that states and local governments can successfully meet all the developmental challenges confronting them.

The main impediment to achieving these results to my mind is first and foremost lack of political-will at the top-most level. Secondly, the inability to thwart the cabal and stop the feeding frenzy. The unfortunate reality is that if this doesn’t occur sooner than later in Nigeria, the social and economic backlash could become unbearable even for the high echelon.

Chamberlain is a New York based financial professional and member of Rivers State Economic Advisory Council.