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
…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
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
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
The unanswered questions bugging me therefore will be as follows:
- 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
- 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?
- 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?
- 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
…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:
- 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.
- 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.
- 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.
- 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.