BusinessDay
Nigeria's leading finance and market intelligence news report.

How Nigeria bleeds N943bn from irrelevant petrol equalisation fund

The inability to maintain the equal price for petrol across the country despite the announced removal of subsidy means Nigerians wasted N943 billion under a deceptive system in 2020, a development that further questions the continued relevance of the multi-million Petroleum Equalisation Fund (PEF).

First established in 1975, the PEF is a special intervention put in place by the Nigerian government with the mandate of ensuring that petroleum products are sold at equal prices across the country by paying petroleum product marketers for every litre of fuel they sell within 100km to 450km of a depot.

Like other obsolete laws in the sector, fresh agitations have greeted the scheme, with marketers of the product and other stakeholders insisting that the fund is an unnecessary drainpipe in a liberalised downstream petroleum sector.
According to the Petroleum Products Pricing Regulatory Agency (PPPRA) pricing template for March 2021, for every litre of petrol bought across the country, a total of N7.51 that represents ‘bridging fund’ is paid into a fund managed by the PEF’s Management Board to ensure petrol prices are equal nationwide.

The payment feeds into a subsidy mechanism that is supposed to ensure that petrol is sold at regulated equal price across the 774 local government areas in Nigeria by reimbursing transportation costs incurred by petrol marketers.

In addition to this margin, the federal government appropriates public funds to run PEF’s operations and cover its financial shortfalls when equalisation claims exceed PEF’s income from marketers.

Read Als0: Pass PIB in April to end fuel subsidy and systemic corruption

To some, the PEF logic seems reasonable, as petrol and kerosene are important for economic activity, uniform prices should help to level the playing field for economic growth in all areas of the country.

As justified by the then government, bridging of transportation cost was introduced as a temporary measure, when Turnaround Maintenance (TAM) of the nation’s refineries was to be conducted.

However, the scheme seems to have outlived its usefulness as the pump price of petrol has hardly been uniform across the country, except, perhaps, Lagos and Abuja, where petrol sells at the official price; virtually, in all the other locations across Nigeria, petrol sells over and above the official price, notwithstanding that government spends billions annually in an attempt to bridge the price gap.

For instance, while the official pump price of petrol was N160 per litre, data provided by the National Bureau of Statistics (NBS) revealed that the country was unable to keep to uniform price as petrol was sold in Abia State for as high N173.75, Adamawa State for N166.25 and Gombe State for N165.83.

The development defeated the reasons for setting up PEF as NBS further disclosed that the products sold lower in states like Lagos for N160.75; Borno for N162.00; and Ekiti for N162.21.

“Allowing a government body to administer equalisation fund will create a rent-seeking opportunity for a gatekeeper which can easily lead to fraud, which is what we are seeing with PEF, ”Luqman Agboola, head of energy and Infrastructure at Sofidam Capital said.

He noted that the country could not pretend to deregulate and set the price at the same time, nor keep an equalisation agency, whose operational fundings are not transparent nor clear.

A look into Nigeria’s 2020 and 2021 budget documents showed that the budgetary releases for PEF’s operation remain hidden, sources at the agency say it presents its budget to the petroleum downstream committees of the Nigerian legislature and gets its budgetary allocation approved by the same committee.

Funds of PEF

An audited report by Nigerian Extractive Industries Transparency Initiatives (NEITI) on the operations of PEF from 2012 to 2016 showed the agency has received a total of N499 billion.

Source: NEITI audited report from 2012-2016

Findings based on an exclusive analysis of data on petrol prices in 2017 showed Nigerians pay a bridging fund of N10.71 while also consuming an average of 50.17 million liters of petrol each day, which means PEF gulped a total of N183 billion.

In 2018, the Department of Petroleum Resources (DPR) put Nigeria’s average daily petrol consumption at 38.2 million daily, with bridging fund reduced down to N7.51 per litre, PEF swallowed N104.7 billion in a single calendar year.

Nigerian Bureau of Statistics (NBS) citing verified data provided by PPPRA says Nigerians consumed an average of 57.2 million litres in 2019 while PPPRA charged N7.51k to ensure prices are sold equally nationwide, this development meant Nigerians pay N156.7 billion to keep the price of petrol equal.

Opportunity Cost of PEF wastage

The amount of billion naira Nigeria waste on the weak delusion of keeping the price of petrol is no longer news, but what is more infuriating is the opportunity cost forgone in a dying economy.

Primary health centre & Education

Based on Freedom of Information requests and analysis by transparency campaign group Public Private Development Centre, it would cost an estimated N28 million to build primary health care and N 17 million for 3-block classrooms.

This means N943 billion is capable of building at least 33,000 primary health centres or at least 55,000 each of three-block classrooms needed across Nigeria’s 774 local government.

Housing

The N943 billion is capable of building at least 62,000 mortgage homes valued at N15 million each, a development which can a big role in reducing Nigeria’s housing deficit projected at 20 million.

Water supply.

N943 billion can construct at least a 4.7million boreholes at N200,000 each across the country, this could have reduced the challenges of proper sanitation faced by acute water scarcity in the communities, especially rural areas.

How PIB plans to address PEF

The new Petroleum Industry Bill (PIB) amongst others seeks to scrap the PEF and PPPRA and replace them with a new agency to be known as Nigerian Midstream and Downstream Regulatory Authority (NMDRA) which shall be responsible for the technical and commercial regulation of midstream and upstream petroleum operations in the industry.

PIB indicated NMDRA will be responsible for the technical and commercial regulation of the midstream and the downstream petroleum operations in the petroleum industry.

On membership of the governing board, it said that appointments shall be made by the President and be subjected to confirmation by the senate, except for the appointment of ex-officio members.

It noted that the board would consist of one Non-Executive Chairman, two Non-Executive members, Chief Executive of the Authority, two other Executive Directors responsible for Finance and Account, and Transportation and Distribution Infrastructure.

“Such structural reforms create a clear separation between NNPC Limited’s operations as a commercial entity and the regulatory roles to be exercised by the regulatory authorities, allowing for more transparent oversight,” a 2021 report from New York-based Columbia Center on Sustainable Investment said.

What experts are saying

In a comprehensive blueprint by its chairman Tunji Oyebanji, Nigeria’s petroleum product marketers, under the aegis of Major Marketers Association of Nigeria (MOMAN) say PEF mechanism should be discontinued and its law repealed as the cost of administration of equalization has become too high and the unequal application of payments by marketers distorts the market and creates market inequities and unfair competition.

“PEF’s price-setting is not compatible with a liberalised downstream petroleum sector,” a source familiar with the matter says.

Independent Petroleum Marketers Association of Nigeria (IPMAN’s) National Public Relations Officer and Publicity Secretary Ukadike Chinedu called for the scrapping of PEF from Nigeria’s petroleum distribution chain, saying the agency is a cesspool of corruption and colossal waste.

He described the Fund as a colossal waste that serves as a conduit pipe and a pool for corruption in Nigeria’s Oil and Gas sector.

“When you scrap PEF, it means there is full-blown deregulation. The nearest the product is to all consumers, the better. That means the product will be everywhere in the country,” he added.

Support for this report was provided by the Premium Times Centre for Investigative Journalism (PTCIJ) through its Natural Resource and Extractive Programme.

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