Accountability, probity and transparency in Nigeria’s petroleum sector (3)

Last week, Friday, 23 March, 2012, we began the serialization of the Executive Summary Report of the Management Audit of the Nigerian National Petroleum Corporation (NNPC) carried out by World Bank (2000). Below, we continue from where we stopped last week.

Closing the performance gap at the level of the refineries would require, in addition to major improvements in operational management, substantial investments in plant and equipment of around $400 million ($100 million at Port Harcourt, $140 million at Kaduna, and $136 million at Warri).

Also of great concern are the ongoing losses incurred by NNPC’s Eleme Petro-chemical Co. Ltd (EPCL). In 1998, EPCL reported a loss of $93 million before interest, depreciation and taxes. Taking into account huge interest and depreciation charges which are clearly attributable to EPCL, but which are reported in NNPC’s head office account, EPCL’s net loss for 1998 would be around $284 million. Based on 1998 results, and assuming that petrochemical sales contribute $40 million dollars per year to debt service, the potential savings from closing EPCL would be at least $20 million per year after a provisional allowance of $10 million for annual cost of mothballing the plant.

Under the agreement covering the EPCL’s long term debt, the revenues from export sales are paid into an escrow account and to date all such revenues have gone towards debt service. In the absence of revenue from sales, EPCL depends on its parent company for the funds required to cover its operating costs. This situation would become unsustainable if NNPC’s refineries and pipelines were to be privatized.

NNPC’s performance is poor because it lacks the external and internal prerequisites to commercial behaviour. NNPC operates more like a government department than a commercial and profit-oriented enterprise. This situation exists even though several millions of dollars have been spent on management consultants retained to help transform NNPC into an efficient integrated oil company. As NNPC has no board of directors, it operates largely on the basis of government directives. This makes it difficult to hold NNPC management accountable for the performance of the corporation.

The refineries are operated as cost centres. There are no incentives in place to reward or sanction the management of NNPC according to their profit performance. Subsidiary business units are not adequately capitalized and budgets are often inadequate to perform even basic maintenance. Finally, a true market environment does not exist. Prices are badly distorted and so, consequently, are signals to appropriate investment.

The weaknesses of NNPC’s internal and external audit function are a matter of particular concern. Financial controls within are minimal even though NNPC’s turnover, valued at international prices, would be around $2.25 billion and could be significantly higher if the refineries were operated properly. There is no effective centralized control of the internal audit function. If such a function existed, there would be no internal audit committee of the board of directors to report to.

Instead, the internal audit units of the subsidiary business units (SBUs) report to the managers whose departments they are auditing, which calls into question the independence of internal auditors and the transparency of the audit process. Furthermore, NNPC lacks an adequate number of staff with adequate qualifications to act as internal auditors and the available staffs are not supported by appropriate computer technology.

While NNPC’s accounts and those of its SBUs are subject to annual external audits, different external auditors are retained for each of the SBUs. NNPC’s auditors carry out the audits of the corporation (head office) and then consolidate the audited financial statements of the individual SBUs with those of the corporation in order to present audited financial statements for the NNPC Group. This fragmentation of auditing responsibilities raises the question as to who is ultimately accountable for the overall quality of the external audit of NNPC.

Main Conclusions

In order to achieve efficient downstream operation, serious considerations should be given to the privatization, or at least partial privatization, of NNPC’s refineries, pipelines and other downstream assets, including EPCL. Lessons learned from previous unsuccessful efforts to reform NNPC suggest that another attempt at reform short of the privatization option would not produce the desired results.

Two caveats are in order. Firstly, major capital expenditures to fix up the refineries prior to privatization are not advisable. Lessons learned elsewhere have shown that such expenditures are seldom covered by the proceeds of privatization. Secondly, privatization must be paralleled by sector reforms including the liberalization of prices and adequate regulation of infrastructure such as pipelines and terminals.

Privatization of the shares of Eleme would be highly unlikely under the existing agreement covering its long-term debt. In the event this agreement cannot be renegotiated, Eleme should be placed in bankruptcy so that its assets could be sold to private investors. In the meantime, serious consideration needs to be given to the option of closing its plant in order to reduce the large losses now being incurred. (Next week, we shall continue with the Financial Performance Assessment of the Report).

Abubakar Nuhu Koko