By NBF News

There are three levels of high fraud that the removal of subsidy will tackle. The first is fraudulent payment on phoney import of PMS. The product is fraudulently certified as imported into Nigeria but is actually diverted to other countries in West Africa. Meanwhile, the documentation is perfected by criminal elements in Customs, Directorate of Petroleum Resources (DPR), Pipeline and Products Marketing Company (PPMC) and Petroleum Products Pricing and Regulatory Agency (PPPRA). They not only collect the subsidy (which actually is outright theft), they also connive to collect demurrage on product that really never entered the Nigerian market. The reality is that what we actually consume in Nigeria may not be up to half of what the records or statistics say we consume.

The second fraud is the Petroleum Equalisation Fund (PEF). PPMC used to have a network of pipelines and depots across the country. Supply envelopes were created around each depot in a way that ensured all parts of the country are covered. Each supply envelope is divided into zones. Actual transportation cost was calibrated according to zones within each supply envelope. The objective here was to ensure that products sell at the same price throughout each depotís supply envelope regardless of the distance of consumption from supply.

There was also Bridging, the system whereby products are moved by road across depots as may be permitted in what was meant to be exceptional cases such as when repair is being carried out on the pipeline or at a depot. Over time and driven by fraudulent intent, what was designed to augument became the routine practice. Products would be released from Atlas Cove in Lagos ostensibly for bridging to say Kano or Sokoto but would actually be sold at nearby stations while the documentation is ìperfectedî and bridging allowance is paid.

The products were also meant to be sold at equal prices at all locations nationwide. When the refineries were working and the pipeline/depots were also functional, the products were pumped through pipelines from the refineries to the various depots from where they were picked for distribution within the supply envelope covered by each depot. In principle, the Eastern axis was meant to be supplied by the now obsolete Port Harcourt Refinery 1. The Northern axis was meant to be supplied by the now thoroughly cannibalized Kaduna Refinery. The Midwest and Middle Belt were meant to be supplied by the also obsolete Warri Refinery while the Western axis was meant to be supplied by products shipped to Atlas Cove from Port Harcourt Refinery 2. This refinery was also meant to export products to West African countries.

All marketers were given a price structure by PPMC which routinely (and frankly unprofessionally) decided the marketersí margin and overhead allowance, the transportation allowance and the dealersí margin. Such a terrible system it was! The standard Transportation allowance was decided based on what was required to move products from the depot to Zone 3 within the depotís supply envelope. Transporters moving products to Zones 1 and 2 are paid less than the standard allowance while the balance was meant to be paid into PEF by the marketer. Transporters moving products to Zones 4 to 9 are paid the additional cost of transportation from PEF. Most of the consumption in around each depot occurs in Zones 1 to 3, usually up to 70%. The fraud: sell all products within Zones 1, 2 and 3 but collect PEF allowance as if almost all products were sold in the outer zones. This has been on for a very long time.

We can imagine why all the various adjustments and maladjustments occurred over the years especially during the military era when the fraud was mostly perpetraded, actively promoted and culturally institutionalized by high ranking Generals and Administrators. We can also see why all refineries eventually had to be crippled and pipeline network/depots of PPMC had to be paralysed.

Two things would immediately result from the removal of subsidy. The first is that Nigeria would actually pay only for what is consumed in Nigeria. If PEF and Bridging are removed completely from the equation and this must be the case, prices nationwide can no longer be the same. Another derived benefit would be that refineries can actually be located in Nigeria now based more on economics than political consideration. High price high volume would attract investment and eventually lead to low price high volume. This is simple supply economics.

Efficiency within the marketing companies would improve, so would competitiveness. Of course, there may intially be some retrenchment within the industry and safety may be compromised as marketeres would try to improve on their profitability. Ultimately, the system would stabilise and Nigerians would be the better for it. Professionalism should result in higher profitability. All these is conditioned on total withdrawal of subsidy, complete elimination of bridging allowances and dissolution of PEF. If any of those mechanisms are retained in the system, then removal of subsidy would be a meaningless exercise, one in futility.

The most compelling moral imperative is for the administration of Dr. Jonathan to arrest and prosecute the fraudsters. If this happens, hostility to the subsidy removal would diminish significantly. Meanwhile, the cartel will fight back, and viciously too. They have the money and other resources to sponsor social unrest. We are already seeing their hands. How much moral courage would a perhaps repentant (very doubtful!) IBB have to criticise subsidy removal when it was under his regime that fraud in the industry actually became institutionalized?

•Ben Oguntuase,
Former Customer Services Manager, National Oil (now Conoil)