The findings of the Committee are as follows:
The review of the Petroleum Support Fund (PSF) guidelines by the PPPRA ‘in 2010 included the following amendments to the eligibility criteria for oil marketing and trading companies: Removal of the requirement for the capacity to finance a minimum cargo size of 5,000MT of petroleum products Removal of the requirement for proof of ownership of retail outlets Amendment of the requirement for the proof of ownership of storage facilities with a minimum storage capacity of 5,000MT for the particular product to include a valid throughput agreement of storage facility with a minimum storage capacity of 5,000MT for the particular product
These changes in conjunction with the lack of adequate provisions for dealing with violations (including criminal activities) and of a deterrent to prevent oil marketing and trading companies from making false subsidy claims in the PSF guidelines and the inclusion by PPPRA of oil marketing and trading companies that did not meet the eligibility criteria (even after the above changes) in the PSF guidelines created significant opportunities for abuse of the subsidy process.
I These opportunities were clearly exploited by both the operators and the regulators of the process to the detriment of the country. Abuse of the due diligence process for applicants to the PSF scheme, lack of transparency in the process for import allocations, payment of subsidies to oil marketing and trading companies in spite of lapses in presented documentation and the inability of PPPRA to use effective vessel tracking tools to verify the status and location of the vessels supposedly used to import petroleum products and to compare such information with the details on presented bills of lading contributed to the creation of opportunities for abuse of the subsidy payment process.
The inability of PPPRA to use a transparent basis for the conversion factor from metric tonnes to litres used in the PPPRA template created opportunities for abuse in the determination of the volume of imported products for which subsidy should be paid.
Nigeria does not have a verifiable statistical basis for computing its daily consumption of petroleum products and the absence of this data opened up the determination of the nation’s requirement for imported petroleum products to abuse. This situation in conjunction with the absence of regulation of the amount of pet~uoleum products imported by NNPC led to uncontrolled importation beyond the country’s requirement.
There has been no consensus among the three tiers of Government (Federal, State and Local) to support the funding of the PSF since its creation in 2006. Funding from the States and Local Governments has not been forth-coming hence the PSF has remained under-funded. This was never sustainable and has led to a convoluted accounting process for cost recovery, with significant arrears of payment due to NNPC.
While the creation of Sovereign Debt Notes (SONs) partially addressed this challenge for private importers, it did not address NNPC’s subsidy claims. This led to a situation where the Federal Government agreed with NNPC to deduct its approved subsidy claims from its crude cost obligations. NNPC was therefore deducting the approved subsidy amounts for any given month before transferring the net amount to the Federation Account.
There was no documentary evidence that this process was duly authorised by law, by the PSF guidelines or by any duly designated Government agency and there is therefore no legitimate backing for the current practice.
There is an obvious need to regulate the roles of NNPC in the downstream sector in the import, refining, storage, supply, distribution and retailing of petroleum products.
The current lack of regulation has led to NNPC’s introduction of practices that are not permitted or recognised by the current PSF guidelines that if unchecked by NNPC’s internal control mechanisms may allow for significant leakages.
For example, in spite of a directive issued by President Yar’Adua on June 15, 2009 that NNPC should cease subsidy claims on kerosene, PPPRA resumed the processing of kerosene subsidy claims in June 2011 and NNPC resumed the deduction of kerosene subsidy claims to the tune of N331,547,318,068.06 in 2011. In addition, the distribution of DPK which was being imported solely by NNPC was skewed in favor of depot owners who have no retail outlets.
Two-thirds of the kerosene sold by NNPC between 2009 and 2011 was sold to depot owners and “middle men” who in turn sold the product to owners of retail outlets at inflated prices of between N115.00 and N125.00 per litre (compared to the ex-depot price of N40.90), leaving consumers to pay higher prices than the N50.00 per litre directed by Government.
For several years now, the country has been incurring huge subsidy bills for kerosene and its citizens are not receiving the benefit – instead the country has been financing “rent” for the middlemen. In order to correct this situation, the Government has to implement least one of the following options:
Allow both private importers who meet the eligibility requirements of the PSF guidelines and NNPC to import kerosene and pay kerosene subsidy under the PSF. The role of private importers in the distribution of the product should be monitored properly by PPPRA and DPR
Eliminate the current financing of rent for a few by restricting NNPC’s local distribution to only groups that own significant retail outlets – i.e. MOMAN, IPMAN and NNPC Retail at the approved ex-depot price.
While the Committee conducted detailed reviews of several aspects of the subsidy payment process, it is noted that the process for NNPC is significantly more it- complicated than the process for the private sector and would require a thorough forensic audit covering but not limited to the following:
Funding for subsidy paid to NNPC
Process for determination of products imported by NNPC
Documentation for NNPC’s transactions for imported petroleum products Verification of documentation with NNPC’s suppliers and other agencies involved in the discharge of petroleum products – e.g. DPR, PPPRA, Government auditors, independent inspectors, e.t.c. Review of documentation submitted to PPPRA by NNPC Review of PPPRA’s certification process for NNPC subsidy claims
Reconciliation of the deduction subsidy claims from the proceeds of crude oil sales by NNPC to the subsidy claims certified by PPPRA The Committee was unable to examine all the above to the extent required and therefore recommends that the Federal Government appoints consultants to carry out the forensic audit of the NNPC subsidy claim process. This is without prejudice to the Committee’s recommendations on the process from its high level review.
The Committee recommends that oil marketing and trading companies that failed to respond to its request for information and subsequent reminder and warning through newspaper adverts should be sanctioned appropriately by PPPRA.
The Committee recommends all the affected oil marketing and trading companies found to have violated vaHous aspects of the PSF guidelines as highlighted in this report should refund the subsidy payments for a total sum of N422,542,937,668.59 (four hundred and twenty-two billion, five hundred and forty-two million, nine hundred and thirty-seven thousand, six hundred and sixty-eight naira, fifty-nine kobo only) for the highlighted transactions to the Federal Government net of the charges they paid to the Petroleum Equalization Fund and PPPRA except where they are able to provide evidence contrary to the Committee’s findings. The Committee recommends that the eligibility criteria for oil marketing and trading companies in the PSF guidelines should be revised by PPPRA to include the following:
The reinstatement of the requirement for proof of ownership of retail outlets
The reinstatement of the requirement for capacity to finance a minimum cargo size of 5,000MT of petroleum products
The restriction the requirement for the use of a valid throughput agreement of storage facility with a minimum storage capacity of 5,000MT for the particular product to only oil marketing and trading companies that provide proof of ownership of retail outlets as stated in recommendation 3a. above
A requirement for the presentation of guarantees or performance bonds (issued by Nigerian banks) by oil marketing and trading companies participating in the scheme on a transactional basis as a mitigant against the presentation of false subsidy claims
The Committee recommends that PPPRA should create a template for quarterly capacity assessment of oil marketing and trading companies using various factors such as performance history on previous allocations, financial capacity, ownership of storage facilities and retail outlets, genuineness of previous subsidy claims, submission of bank guarantees, e.t.c. The outcome this quarterly capacity assessment must be used as a basis for import allocations to oil marketing and trading companies.
The Committee recommends that the PSF guidelines must be strengthened to make key participants (both operators and regulators) personally responsible for any violations of the guidelines, including criminal acts.
The Committee recommends that PPPRA suspends oil marketing and. trading companies that are unable to deliver their allocated quantity of products within the validity of the allocation from the PSF scheme to ensure that only companies with the proven capacity to deliver are given allocations.
The Committee recommends that PPPRA stop the payments of subsidy where violations of the PSF guidelines are detected. In addition, oil marketing and trading companies must comply with the guidelines going forward. The Committee recommends that only oil marketing and trading companies that meet the eligibility criteria set in the guidelines for the administration of the Petroleum Support Fund should be given allocation to import products by PPPRA.
The Committee recommends that PPPRA should use effective vessel tracking tools such as the L10yds intelligence list to verify the status and location of the vessels supposedly used to import petroleum products and to compare such information with the details on bills of lading presented by oil marketing and trading companies as part of the documentation for their subsidy claims
The Committee recommends that the Federal Government should appoint an independent expert to advise the country on which of the following methods to use as the basis of determining the conversion factor from metric tonnes to Iitres used to compute the volume of imported products for which subsidy is paid:
GOV – Gross Observed Volume
GSV – Gross Standard Value
A fixed conversion factor
The PSF Guidelines should be amended to compel the PPPRA to use the method determined above for computation of subsidy payments. Staff of all Government agencies and oil marketing and training companies involved in the discharge of products should be trained on the method determined above. This will eliminate manipulation of the volume of imported products for which subsidy should be paid.
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.
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 take appropriate steps to document and legalise the process for payment of NNPC’s subsidy claims in a transparent and unambiguous manner in view of the significant financial impact of the NNPC subsidy payment process on the finances of the nation.
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 nations’ daily consumption levels of petroleum products independent of the industry operators.
The Committee recommends that in line with the PSF guidelines, PPPRA should verify and keep records of evidence of sales and distribution of petroleum products within Nigeria by operators under the PSF scheme (private and public) .
The Committee recommends that NNPC’s roles in the downstream petroleum industry in the import, refining, storage, supply, distribution and retailing of petroleum products be regulated appropriately by the existing regulatory agencies in the industry i.e. PPPRA and DPR. Specifically, PPPRA must regulate and determine the quantity of products to be imported by NNPC in line with its mandate as stated in the PSF guidelines. All importation of products by NNPC (within or outside PPPRA approved quotas) must be approved by PPPRA. This will prevent a repeat of the uncontrolled importation of petroleum products beyond the country’s requirement that occurred in 2011.
The Committee recommends that in order to stop paying huge subsidies for kerosene \ that are financing “rent” for middlemen and not benefitting its citizens, the country must decide on at least one of the following options in the short run: Deregulate the local pricing of kerosene i.e. eliminate subsidy on kerosene Allow both private importers who meet the eligibility requirements of the PSF guidelines and NNPC to import kerosene and pay kerosene”subsidy under the PSF
(as currently obtains fot PMS) with the role of private importers in the dist~uibution of the product monitored properly by PPPRA and OPR
Restrict NNPC’s local distribution to only groups that own significant retail outlets i.e. MOMAN, IPMAN and NNPC Retail at the approved ex-depot price of N40.90.
In the long nom, 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 OPK in view of the extant presidential directive of June 15, 2009.
The Committee recommends that OMO, CBN, PPPRA and the OAGF should reconcile all outstanding SONs. In addition, all 4 agencies should set up a quarterly reconciliation process of their respective positions on outstanding SONs to eliminate the occurrence of “open” positions and to prevent abuse. The outcome of each reconciliation exercise should be submitted to the Federal Ministry of Finance, OMO, CBN PPPRA and the OAGF.
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 PPPRA should stop the practice whereby multiple mother vessels discharge into a stationary mother vessel before discharge to daughter vessels in Nigeria.
The Committee recommends that PPPRA should revert to using CBN rate plus 1 % (CBN commission) and 50kobo (maximum bank spread allowed by CBN) as the basis for exchange rate computation in its template. The excess payment of N14.021 billion r based on the use of 1 % instead of 50kobo as bank spread should be refunded by the (;-..affected oil marketing and trading companies (details in appendix 6). For oil marketing and trading companies that have genuine claims for exchange rate differentials, the excess funds paid to them can be used to offset such claims after verificati•on.
The Committee recommends that PPPRA should review and obtain appropriate approvals for the inclusion of the $10 “trader’s margin” in the computation of exchange rate in its template. The excess payment of N17.037billion based on the inclusion of I the $10 “trader’s margin” should be refunded by the affected oil marketing and trading companies. For oil marketing and trading companies that have genuine claims for
exchange rate differentials, the excess funds paid to them can be used to offset such claims after verification. The Committee recommends that a standard electronic archiving system should be installed by PPPRA to manage the large number of documents associated with the processing of subsidy payments.
The Committee recommends that PPPRA should collate an authorised signatory booklet containing the names and signatures of every person authorised by the various parties involved to sign all documents associated with the processing of subsidy for petroleum products. This will enable the authentication of these documents and confirmation that they were appropriately signed. The Committee recommends that PPPRA should build additional controls In the Analyzer and ensure that the identified key-man risk is mitigated.
The Committee recommends that PPPRA should place less reliance on the use of photocopies of documents for the processing of subsidy payments and where possible, PPPRA should insist on original documents. Given the huge sums involved, it is expedient that PPPRA should make payments only on the basis of original or authenticated documents to minimise losses due to operational and fraud risks . The Committee recommends that PPPRA should issue certificates of discharge to oil marketing and trading companies as controlled forms with serial reference numbers generated by PPPRA. This will be a mitigant to forgery .
. 28. The Committee recommends that going forward, PPPRA should compare the volume of products discharged as stated on the shore tank certificates with the stated volume on the DPR product certificates and payment of subsidy should be restricted to only instances where there is correlation between the discharged volumes of products on both certificates. The Federal Government should establish a regulation process for the industry that must include the documentation requirements at each stage of the various processes.
OIL MARKETING & TRADING COMPANIES’ VALUE CHAIN (IMPORT, SUPPLY AND DISTRIBUTION OF PETROLEUM PRODUCTS)
The oil marketing and trading companies are principally involved in importation, storage and retailing of petroleum products (e.g. PMS, DPK, AGO and others). A few years ago NNPC Retail joined in the retailing of petroleum products but neither NNPC nor the oil marketing and trading companies could meet the nation’s demand.
IPMAN members import and retail petroleum products. They have 23,026 retail outlets or about 85% of the total retail outlets nationwide, located mostly in the rural areas and less in the cities. Their share of storage infrastructure is insignificant and they import minimally.
MOMAN members also import and retail petroleum products. They own 2,453 retail outlets or about 9% of the retail outlets nationwide, located mostly in the cities. They have a reasonable market share of importation and own about 9% of the country’s storage capacity for petroleum products.
DAPPMA/JEFTON members own depots and jetties mostly in the coastal areas of the country and their sole role is supposed to be the storage of petroleum products from which they earn throughput fees. They own 1,200 retail outlets or about 4% of the retail outlets in the country and about 74% of the country’s storage capacity for petroleum products (NNPC owns 403 retail outlets or about 2% of the retail outlets and about 17% of the country’s storage capacity for petroleum products).
The process flow for subsidy verification and claims for oil marketing and trading companies (as presented by a representative of MOMAN) is as follows:
PPPRA provides quarterly import allocations to oil marketing and trading companies The oil marketing and trading company applies for and obtains import permit from DPR The oil marketing and trading company approaches a bank to approve form M and issue an LC
The cargo is booked with the supplier Notice of arrival of the vessel is declared to DPR, PPPRA, Federal Ministry of Finance, Nigerian Navy, Nigerian Customs Service, e.t.c.
The vessel arrives
Ship-to-ship transfer (STS) takes place if the vessel is bigger than the draft of the jetty (only 2 private sector jetties in Nigeria have the capacity to discharge a vessel of 30,000MT) The cargo is inspected by PPPRA, DPR, independent marine inspector, Federal Ministry of Finance (through Budget Office of the Federation) appointed auditors, Nigerian Navy, Nigerian Customs Service, e.t.c. Storage tanks are fiscalised before discharge Vessel discharges cargo into storage tanks Storage tanks are fiscalised after discharge to determine the quantity of the cargo Certificates of quantity and quality are issued and signed by all the parties involved in the inspection
Documentation is forwarded to PPPRA for subsidy claim PPPRA computes applicable subsidy in line with their template and deducts the applicable PEF and PPPRA administrative charges
PPPRA issues a Sovereign Debt Statement to the oil marketing and trading company (attaching PPPRA and PEF charges payable)
The oil marketing and trading company provides evidence of payment of PPPRA and PEF charges to DMO PPPRA transmits verified documents to Federal Ministry of Finance and advices the Federal Ministry of Finance to deduct applicable PEF and PPPRA administrative charges Federal Ministry of Finance (through Budget Office of the Fede~u~ution) appointed auditors verify the documentation
DMO issues SON
SON discounted or liquidated at maturity
The inclusion by PPPRA of oil marketing and trading companies that did not meet the eligibility criteria set in the guidelines for the administration of the Petroleum Support Fund in import allocations created opportunities for abuse of the process. This was also in conflict with the mandate of the PPPRA to prevent collusion and restrictive trade practices.
While the Committee notes that PPPRA was empowered to review the PSF guidelines from time to time, the revision of the eligibility criteria dropped the requirement for proof of ownership of retail outlets. This was a critical determinant of the capacity of the oil marketing and trading company to distribute the products locally within Nigeria and the removal of this requirement opened up participation in the scheme to entities who were clearly incapable of fulfilling the requirements of importation, supply and distribution and whose practices were clearly not consistent with the spirit and intent of the PSF scheme.
The current PSF guidelines do not make adequate provisions for dealing with criminal activities. In addition, key participants in the scheme have no personal responsibility for criminal actions – this is true for both importers and regulators despite the fact that abuse of the scheme clearly amounts to crimes against the Federal Republic of Nigeria (please see the Olaniwun Ajayi & Co.’s legal opinion in appendix 10)
There was no provision in the current PSF guidelines for oil marketing and trading companies to guarantee the validity of their subsidy claims to the Federal Government of Nigeria. This meant that there was no deterrent to prevent oil marketing and trading companies from making false subsidy claims.
The revision of the eligibility criteria for oil marketing and trading companies in the PSF guidelines by PPPRA removed the requirement for the capacity to finance a minimum cargo size of 5,OOOMT. This was an indication of the capacity of the oil marketing and trading company to deliver the allocated quantity of products and the removal of this requirement indirectly created the potential opportunity for companies without capital adequacy to be granted allocations to import products.
The revision of the eligibility criteria for oil marketing and trading companies in the PSF guidelines by PPPRA amended the requirement for the proof of ownership of storage facilities with a minimum storage capacity of 5,OOOMT for the particular product to include a valid throughput agreement of storage facility with a minimum storage capacity of 5,OOOMT for the particular product. This opened up opportunities for participation by companies with no investment in infrastructure relevant to the role on oil marketing and trading companies in the PSF scheme.
lot transparent. The inability of PPPRA to use a transparent basis of determining me ;onversion factor created opportunities for manipulation of the volume of imported )roducts for which subsidy was paid.
The Committee recommends that only oil marketing and trading companies that meet the eligibility criteria set in the guidelines for the administration of the Petroleum Support Fund should be given allocation to import products by PPPRA.
The Committee recommends that the requirement for proof of ownership of retail Qutlets be reinstated in the eligibility criteria for oil marketing and trading companies in the PSF guidelines by PPPRA. The Committee recommends that the PSF guidelines must be strengthened to make key participants personally responsible for any violations of the guidelines, including criminal acts.
The Committee recommends that the PSF guidelines be amended to include th presentation of guarantees or performance bonds (issued by Nigerian banks) by oi marketing and trading companies participating in the scheme on a transactional basis This shall be a deterrent against the presentation of false subsidy claims by oi marketing and trading companies and provide recourse to the banks if subsidy wa paid on the basis of false claims.
The Committee recommends that the requirement for capacity to finance a minimu cargo size of 5,OOOMT of petroleum products be reinstated in the eligibili requirements for oil marketing and trading companies in the PSF guidelines b PPPRA.
The Committee recommends that the eligibility requirements for oil marketing a trading companies in the PSF guidelines be amended to restrict the use of a val’ throughput agreement for a storage facility with a minimum capacity of 5,OOOMT f the particular product to only oil marketing and trading companies that provide proof ownership of retail outlets as stated in recommendation 2 above.
The Committee recommends that the determination of the conversion factor PPPRA be made transparent to eliminate manipulation of the volume of import products for which subsidy should be paid.
There was no evidence that PPPRA excluded any oil marketing and trading company from the PSF Scheme for 2 successive quarters or more as stated in the terms of the import permits from PPPRA in spite of the fact that there were various instances where oil marketing and trading companies did not import the allocated volume of petroleum products.
PPPRA approved subsidy payments to oil marketing and trading companies in instances of their non-compliance with requirements of the PSF guidelines that all deliveries to depots must be witnessed by representatives of PPPRA, DPR, Government auditors, marine inspectors, Nigerian Customs Service and the Nigerian Navy who must also sign the shore tank reports. The Committee recommends that PPPRA suspends oil marketing and trading companies that are unable to deliver their allocated quantity of products within the validity of the allocation from the PSF scheme to ensure that only companies with the proven capacity to deliver are given allocations.
2. The Committee recommends that PPPRA stop the payments of subsidy where I violations of the PSF guidelines are detected. In addition, oil marketing arid trading companies must comply with the guidelines going forward.
NNPC’S VALUE CHAIN (IMPORT, SUPPLY AND DISTRIBUTION OF PETROLEUM PRODUCTS)
The Nigeria National Petroleum Corporation was set up to manage both the downstream and upstream sectors of the oil industry. The Corporation’s role in the downstream sector involves ensuring that the country has optimal supply of petroleum products for consumers. Subsidy on petroleum products has been an issue since the 1970s when demand for petroleum products was met solely from local production.
At that time, the subsidy was paid based on the difference between the price at which NNPC sold to the marketing companies and the cost of crude oil refining. Prior to November 2003, domestic crude was sold to NNPC at a discount in terms of price as well as exchange rate. Strategic petroleum products were then sold at highly subsidised prices.
From October 2003 on the directive of Government, NNPC was allotted 445,000 barrels of crude daily for domestic consumption at the prevailing international market price. NNPC refined the crude oil and sold the derived petroleum products at controlled and highly subsidised prices approved by the Government. The imbalance created by the arrangement led to the introduction of the subsidy scheme in existence today.
The creation of the Petroleum Support Fund (PSF) in 2006 was therefore an effort at addressing the challenges in the subsidy scheme.
Imports
Refined petroleum products derived from the portion of the 445,000 barrels/pd meant for domestic consumption
The PSF scheme was under-funded and therefore the NNPC used a combination of proceeds from its subsidised collections from products sales at the depots and the subsidy claims approved by PPPRA to settle the gross amount for the cost of crude oil it purchased. NNPC despite being the largest player in the industry claims it is unable to generate enough revenue/cash flow from the subsidised ex-depot prices to settle the cost of crude it purchased from Government.
The role of NNPC as a supplier and distributor of petroleum products could be summarised as follows: The NNPC collects its daily allocation of 445,OOObarrels/pd and processes the crude into refined products
The refined petroleum products are evacuated from the plants. The evacuations are witnessed by PPPRA and DPR staff
Volumes produced and evacuated are verified and cleared in the presence of NNPC by representatives of PPPRA, DPR, the Nigerian Navy and independent inspectors The verified documents are forwarded to PPPRA for computation of applicable subsidy PPPRA if satisfied issues a certificate to NNPC which is submitted to the Federal Ministry of Finance appointed auditors for clearance The NNPC imports refined petroleum products The petroleum products are discharged at the jetties, SPM and depots, in the presence of representatives of PPPRA after obtaining clearance from the Nigerian Navy and the Nigeria Customs Service
Imported volumes are verified in the presence of representatives of PPPRA, DPR, NPA, the Nigerian Navy and independent inspectors appointed by PPPRA
Authenticated documents are forwarded to PPPRA for computation of applicable subsidy
The combined value on the certificates is applied against the crude cost due in a given month
NNPC advises the Federal Ministry of Finance to remit the certified equivalent sum to the Federation Account for full settlement of crude cost by NNPC
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.
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 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.
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. 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 =N=115.00 and =N=125.00 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 nations’ daily consumption levels of petroleum products independent of the industry operators.
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.
A review team made up of experienced bank auditors selected by the chairmen of th Committee of Chief Inspectors of Banks and Committee of Chief Compliance Officers 0 Banks to review the claims submitted by oil marketing & trading companies to the PPPRA and to conduct a review of the subsidy process at PPPRA. Performed due diligence on all oil marketing and trading companies Conducted transaction review of all 2011 subsidy payments Conducted transaction review of 2011 outstanding subsidy claims
Tracked the location of mother vessels with the L10yds List Intelligence to confirm their presence at the point of discharge into daughter vessels
Reviewed the multiplicity of functions of PPPRA to determine its effectiveness as a regulatory agency and a subsidy processing centre The legal opinion on the legitimacy of subsidy claims submitted to the Committee by Olaniwun Ajayi & Co.
Past audit reports
Newspaper publications on fuel subsidy
PPPRA staff presentations to the team on their processes
Reviewed the sovereign debt notes (SONs) issued by the Debt Management Office to oil marketing and trading companies vis-a-vis the external auditors’ confirmations of under-recoveries due. Also reviewed outstanding SONs at the date of the assignment.
Reviewed all oil marketing and trading companies’ petroleum products import transactions files with PPPRA for validity, accuracy and legitimacy of 2011 subsidy payments Reviewed all outstanding subsidy claims for 2011 for validity, accuracy and legitimacy
Tracked the position of the mother vessels that brought PMS to offshore Cotonou and/or offshore Lagos using the Lloyd’s List Intelligence and obtained confirmation from vessel tracking tools such as Shipspotting.com and Google.com. This was to ascertain the location of the mother vessels at the point of discharge of PMS into the daughter vessels
Confirmation of whether or not the daughter vessels which received PMS from the mother vessels discharged into the designated shore tanks in Nigeria Reviewed PPPRA’s subsidy settlement process controls to confirm compliance
Reviewed PPPRA’s internal processes to check compliance with the PSF Guidelines
Obtained the following documents submitted by all oil marketing and trading companies to the Committee:
Details of all 2011 subsidy claims due to oil marketing and trading companies from the Federal Government of Nigeria
A schedule detailing the banks through which oil marketing and trading companies processed the importation of cargoes for which subsidy claims are due The mode of sale of each cargo incluqing documentary evidence of sale (within Nigeria).
Reviewed PPPRA IT Application Systems for processing subsidy claims – liThe Analyzer” It relied fully on the documents provided by the PPPRA which were in most cases photocopies without independent verification It was unable to authenticate the other documents provided by other agencies such as DPR, the Nigerian Customs Service, NPA, external auditors and inspection agents
The findings of the team are as follows:
Below is a table showing 2011 PPPRA’s quarterly allocations to all oil marketing. and trading companies including NNPC: OIL MARKETING & TRADING COMPANIES
Q1 (MT) Q 2 (MT) Q3 (MT) Q4 (MT) TOTAL (MT) Total Allocation to Oil Majors 870,000.00 690,000.00 660,000.00 990,000.00 3,210,000.00
Total Allocation to Other Marketers 885,000.00 775,000.00 1,580,000.00 345,000.00 3,585,000.00
Total Allocation to Depot Owners 1,410,000.00 1,485,000.00 1,545,000.00 1,320,000.00 5,760,000.00
Total Allocation (excluding NNPC) 3,165,000.00 2,950,000.00 3,785,000.00 2,655,000.00 12,555,000.00
Allocation To NNPC 1,100,000,00 1,500,000.00 1,200,000.00 1,000,000.00 4,800,000.00
Total including NNPC 4,665,000.00 4,150,000.00 4,785,000.00 3,755,000.00 17,355,000.00
There was no transparent and systematic process for allocation of petroleum products import permits by the PPPRA (find enumerated in appendix 3 the 2011 quarterly allocation to each oil marketing and trading company).
This created allocation patterns with no relationship to the eligibility criteria for oil marketing and trading companies In the PSF guidelines or the terms of the agreements signed between PPPRA and the oil marketing and trading companies. These distortions created opportunities for abuse of the process by some operators and underperformance by others.
PPPRA had a formal process in place to compare performance against the allocation to oil marketing and trading companies. However, the outcome of this process was not reflected in the allocations of the last three quarters of 2011 in accordance with the terms of allocation stated in the approval letter to oil marketing and trading companies as follows:
“Non-performance for two (2) consecutive quarters shall attract suspension from participating in the Scheme for one year in addition to N20 million re-admission fee into the Agency’s account as administrative processing charge”.
PPPRA violated the above condition as it is evident that some oil marketing and trading companies who previously did not import the full allocated volumes were nonetheless granted permits in subsequent quarters and even with increased quarterly allocation. There is no evidence of payment of re-engagement fee neither were the defaulting oil marketing and trading companies excluded from the scheme.
The Debt Management Office issued SONs with respect to claims valued at =N=1,354,409,790,804.97 and redeemed =N=1 ,303,177,121,678.41 with a total of =N=51 ,232,669,126.56 outstanding as unredeemed SONs at the date of the report as shown below:
Year No. of Amount Issued =N= Amount Redeemed Amount Outstanding Batches =N=
=N=
2010 17 238,426,418,204.61 238,426,418,204.61
2011 26 856,644,330,947.51 827,746,027,752.56 28,898,303,194.95
2012 8 259,339,041,652.85 237,004,675,721.24 22,334,365,931.61
Total 1,354,409,790,804.97 1,303,177,121,678.41 51,232,669,126.56
Please refer to Debt Management Office’s summary of Sovereign Debt Notes (SONs) issued from 2010 to 2012 (appendix 4). Matured SONs that are not paid or unreconciled outstanding SONs create “open” position obligations for the Governmen1 that could ,be subject to abuse if not reconciled frequently. There were differences of N747,534,804.00 between the subsidies advised by PPPRA and subsequent verification by external auditors which were not recovered from oi marketing and trading companies.
