When for the first time in decades it published the audited accounts of its subsidiaries recently, the Nigerian National Petroleum Corporation attracted a renewed scrutiny of its often-opaque operating template and reignited calls for radical reform. With the industry and the global economy in turmoil, the President, Major General Muhammadu Buhari (retd.), needs to fulfil his pledge to overhaul the state-owned enterprise to maximise the country’s full potential in the oil and gas resources and diversify the economy.
Some key stakeholders welcomed the move by the current Group Managing Director, Mele Kyari, as a sign of fresh breath in a company reckoned by the Natural Resource Governance Institute among NOCs where lack of scrutiny puts their countries’ economies at risk. The opening up began a few years ago with the publication of quarterly operating results when Ibe Kachikwu was the GMD. NEITI, an industry watchdog, as well as BudgIT, a transparency advocacy group, hoped it signposted a new era of openness in the company that is pivotal to the economy. While Kyari and Buhari can claim some credit for the NNPC’s tentative step-out of its iron curtain, the times demand a more radical reform.
The report, which covers the 2018 financial year, exposes shortcomings that reinforce the arguments for reform. For one, the company did not publish its consolidated accounts, releasing only the results of its subsidiaries, an omission it is yet to explain. Nor did it provide summaries of previous years. However, the return to profitability from a loss of N1.6 trillion in 2017, to N1.02 trillion profit in 2018 by NAPIMS and similar improvements by other units, may have encouraged Kyari. But the results bring home the corporation’s disastrous misadventure in the downstream sub-sector. Generating total revenue of only N3.45 billion, the four refineries, with combined installed capacity to refine 445,000 barrels per day, incurred N160.13 billion on salaries, 33.49 per cent of total expenses. During the year, the two refineries in Port Harcourt lost N45.59 billion; Warri lost N44.44 billion, while Kaduna dropped N64.34 billion, bringing losses by the four to N154.37 billion for the year.
The wackiness continued the following year and in the 10 months to October 2019, the refineries had cost the taxpayer another N213 billion in losses. While others operated epileptically, averaging less than 25 per cent capacity utilisation, Kaduna Refinery was idle throughout 2018. This scandal has to stop. Buhari needs to heed the wise counsel to sell off the refineries immediately. Every naira lost is money that could have gone into primary health care provision, roads, education, research, dams and power. While the refineries bleed the treasury, the country spent N1.13 trillion on petrol import in just nine months, January to September 2019, data from the National Bureau of Statistics, show.
With its dismal performance in the downstream, the NNPC’s ongoing plans to entrench itself in it should be halted. A company with a monopoly on refining but makes colossal losses cannot justify a new plan to establish a 200,000-barrel per day condensate refinery as Kyari announced recently, or the insistence on the false promise to “rehabilitate” the refineries and end refined products import by 2023. His touted strategy is unconvincing as every successive GMD since 1999 has similarly promised, and failed, to rehabilitate them. The corporation requested $1 billion in 2017 for this.
The economy will be better off if the crude oil Nigeria pumps is turned into petrol and diesel as well as plastics and other materials used in consumer goods. But this is better left to private investors. Brazil’s state-owned Petrobras is selling eight of its 13 domestic refineries with a combined 1.1mn b/d of refining capacity. Further liberalisation of Nigeria’s oil sector will attract investors to build refineries and provide healthy competition to the 650,000 bpd Dangote refinery nearing completion.
SOEs involvement in business has been a success in some countries, but it has been an epic failure in others, especially Nigeria and Russia. Even China, with its SOEs having 96 per cent share of the country’s top 10 firms, believes it is necessary to let go further. The spoils system based on hiring and promoting government employees not on their ability to perform a job, rather on their political or ethnic connections, has stifled all state-owned companies in Nigeria. In this polluted environment, managers of Nigeria’s SOEs are unlikely to act in the public’s interest. SOEs, says Steve Koch, Professor of Economics, University of Pretoria, are not generally needed to provide goods. Rather, they are needed to provide the foundation for a well-functioning economy and a healthy, well-informed populace.
To promote nimble economic growth, government intervention should be limited to the provision of safety and security; support for public health, education and research; the provision of water, sanitation, high-end communications, energy and transport infrastructure, and the development of regulations and enforcement agencies. The NNPC, as a holding company, which Buhari promised in 2015, will represent the government’s interest in the joint venture upstream and serve as an investment arm to plough profits into critical and profitable sectors of the economy. The reform will preclude the NNPC from running enterprises, limiting it to a minority equity holder along the lines of Nigeria LNG. For a company that has performed poorly in its area of core competence, it would be foolhardy to plunge headlong into an unfamiliar turf.
Getting it out of the retail end should also see it unload the NNPC Retail. The N2.28 billion profit it declared in 2018, when juxtaposed with the corporation’s monopoly on import of petrol and its over 500 outlets, is middling. This market segment is better left in the hands of private investors to encourage private enterprise, deepen entrepreneurial expertise and free public funds for infrastructure and social services. Profits and the public interest, argues Harvard Business Review, overlap best when the privatised service or asset is in a competitive market. It takes competition from other companies to discipline managerial behaviour.
The country had already missed a forecast by PwC that by 2019, it would become Africa’s largest petroleum refiner after Egypt with its 774,900 bpd and South Africa’s 545,000 bpd because the Dangote refinery missed its 2019 start date. Saudi Arabia plans to refine one-third of all its crude within a decade. With the advantages of population and as the continent’s largest crude producer, facilitating FDI in refining offers a winning formula to become Africa’s petroleum exporting hub. Singapore produces a meagre 20,170 barrels of crude per day, but it is Asia’s petroleum hub, refining 1.51 million bpd and earning $45.9 billion from its export in 2019, the world’s fourth largest. Only a private sector-led industry can create similar success in Nigeria, not a bogus NNPC.
Indeed, the IMF warns that as NOCs grapple with continued inefficiencies, mounting debts and an uncertain future, reforms, starting with accountability and openness, and privatisation, offer maximal returns for their countries. After its reform, Saudi oil giant, Aramco, in which investors now have an ownership stake, was named the world’s most profitable company with reported profits of $88.2 billion last year. In May, it appeared in the top five of the Forbes Global 2000 list, which ranks the world’s 2,000 largest companies, according to Arabnews.
What can the Buhari regime do to use oil resources to spur economic growth, boost jobs and revenues, and raise living standards more broadly? It should break NNPC into two major firms, one to hold JV interests and the other as an investment vehicle in strengthening critical public infrastructure and basic social services. But successful privatisation will require strong institutions, which the Buhari regime needs to promote now. The money generated from a reformed NNPC and privatised refineries should be used as the linchpin in funding investment in job generating sectors and the diversification of the economy.