Can Nigeria’s President Buhari reform the unreformable NNPC?

July 10, 2015 | Field Case Studies

By Tijah Bolton-Akpan | –

It was Nigeria’s immediate past Minister of Finance and Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, that popularised the term “unreformable” in her memoirs ‘Reforming the Unreformable: Lessons from Nigeria’. In her book, she narrates her successes and frustrations as a reformist in the midst of people, systems and institutions that had long grown allergic to reform.

Of all Nigeria’s economic institutions, there is apparently none that typifies Okonjo-Iweala’s notion of “the unreformable” as much as the Nigerian National Petroleum Corporation. The corporation is the regulator of Nigeria’s oil and gas sector. It is also the operator of government’s interests in joint venture partnerships with oil multinationals. But the reality of Nigeria’s state oil company has been one of trans-generational rot. General perception of the NNPC has been of an unwieldy and rotten behemoth that had become a metaphor for public sector inefficiency and corruption.

It is no longer debatable that the NNPC in particular and Nigeria’s oil and gas sector in general, urgently need reform. Even if the NNPC were not corrupt, there is sufficient agreement on the need for far-reaching reform if only to address the contradictions and conflicts of interest occasioned by its dual (commercial and regulatory) role.

Another reason for which reforms have been advocated is the power of the corporation (under the NNPC Act of 1977) to deduct operating costs from its revenue before remitting funds to the treasury, in contravention of the constitution, appropriation law and the Fiscal Responsibility Act 2007. A recent figure puts revenues withheld in this way at N3.8 trillion for 2012 to May 2015. Over the years, this anachronistic law has worked at cross purposes with the need to run the NNPC as a commercially viable and competitive entity. It has also been an excuse for all sorts of shenanigans – empowering the corporation to run the show at whim, determining its own costs and what to remit to the federation account in an arbitrary fashion; the perfect cover for grand corruption. President Muhammadu Buhari’s directive last week that the NNPC and other revenue generating agencies like it must pay all their revenues into the Consolidated Revenue Fund gives hope that this ugly practice will be discontinued. But the NNPC law itself still needs to change.

So what appears to be in debate is not whether thorough reforms are needed at the NNPC but rather what should be the direction of such reforms? Many industry watchers were therefore excited with the release of the full report of the NNPC forensic audit in the twilight of the Goodluck Jonathan administration. Another look at that report is no doubt instructive on the challenge before Buhari and the direction the reforms should take.

The report by PricewaterhouseCoopers noted several irregularities bordering on the aforementioned structural and legal issues as well as outright fraud. It went on to recommend that “a minimum of $1.48 billion” owed by the NNPC to the federation account should be paid by the corporation. The amount comprised double payments for petrol and kerosene subsidy, subsidy computation errors, subsidy over-claims and claims on un-incurred costs, avoidable computation errors, vague claims and unsubstantiated costs all running into hundreds of millions of dollars. It also included unpaid signature bonuses for divested assets as well as unpaid taxes and royalties. Four months after the former petroleum minister, Diezani Alison-Madueke, ordered the NNPC to act on that recommendation, the amount remains unpaid.

The report also revealed that the NNPC undervalued the price of crude liftings resulting in a loss of $3.6bn to government, although that has since been amended and remitted. There were controversial payments for kerosene subsidy to the tune of $3.36bn in contravention of a presidential directive and without appropriation. While it was at that, the corporation found a “clever” way of calculating kerosene subsidy so that it charged marketers for a cost the government was already paying, pocketing $204m for itself. There were also several figures that could not be substantiated: $305.88m claimed to have been spent on pipeline maintenance contracts, $64.8m spent on demurrage and $250m port charges to the Nigerian Ports Authority, all without supporting documents. The case was the same for several other costs, some of them quite laughable.

The Nigerian Petroleum Development Corporation, a subsidiary of the NNPC has also earned a notoriety all its own. It calculates and determines what taxes it owes government, how much it should pay and how much it should keep. It was found that out of $1.85bn expected to be paid for eight licences it bought, NPDC paid only $100m. During the review period, NPDC inflated its payments to the Federal Inland Revenue Service to the tune of $26 million. NPDC virtually frustrated the audit by refusing to cooperate with the auditors. And for that reason, up until now no one (not even PwC) has a clear idea of revenue due to the CRF from NPDC crude liftings and divested multinational assets that it took up as operator, although the report puts the later at $5.1bn.

But in all, it is easy to see from the audit report that spending on subsidy alone accounted for over 43 per cent ($8.7bn) of the “explanation” found by PwC for the allegedly “missing” $20bn. This should, at least, give President Buhari an idea on the direction of needed reforms.

Did the PwC audit go far enough? No, it did not. The scope of the audit was limited to the specific questions posed by former Central Bank Governor Sanusi Lamido Sanusi and therefore covered a definite timeframe of 19 months. But at this point, any effort at investigating the NNPC must go beyond 19 months. That is why the Nasir el-Rufai Committee set up by President Buhari holds more promise as it looks at transactions covering a longer period of eight years.

Mr. President has to revisit the recommendations of the PwC report and the series of NEITI reports before it, among others. These recommendations have included the need to restructure the NNPC, review the NNPC Act and discontinue its “unsustainable model” which has it spending 46 per cent of domestic crude proceeds on operations and subsidies. They have also included strengthening the NNPC’s very weak accounting and reconciliation systems and the passage of the Petroleum Industry Bill.

With President Buhari’s scrapping of the Board of the NNPC and his declaration that the NNPC should henceforth pay its revenues directly into the CRF, it appears we can finally look forward to some real action in the days ahead.

But in my view, the biggest test of Mr. President’s commitment to “reforming the unreformable” will be in how he responds to the call for withdrawal of the PIB made recently by his party. The PIB may not be a silver bullet, but it remains, to date, the single most comprehensive and workable proposal at reforming Nigeria’s oil and gas sector, including its biggest headache, the NNPC. Will he will heed the voice of reform, or will political considerations take the day? We can only wait to see.

Bolton-Akpan, Head of Programmes, Policy Alert, Uyo, wrote in Article published originally in the PUNCH.