Relevance Lost? The Petroleum Equalization Fund in Nigeria

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Relevance Lost? The Petroleum Equalization Fund in Nigeria Chibuike Uche (with Anthony Igwe and Chibueze Onyeke)


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Relevance Lost? The Petroleum Equalization Fund in Nigeria :

Relevance Lost? The Petroleum Equalization Fund in Nigeria Chibuike Uche (with Anthony Igwe and Chibueze Onyeke ) 8/18/2014 2 Chibuike Uche


Introduction 2012 PIB Bill has brought to the fore the debate on the future of Petroleum Equalization Fund PEF to be abolished after deregulation o the petroleum sector. s.100 Abolition contentious because PEF is an agent or subsidizing petroleum products Paper traces history of PEF PEF introduction more political than economic PEF an extension of sharing Nigerian oil rents across the country in the context of fiscal equalization 8/18/2014 3 Chibuike Uche

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PEF a subsidy Fund not an equalization Fund Resultant arbitrage has led to waste and corruption thus petroleum prices have never really been equalized Government subsidizing corruption PEF should be abolished Paper divided into four parts: theory of fiscal equalization; Nigerian oil industry; development of PEF and Conclusion 8/18/2014 4 Chibuike Uche

Concept of fiscal equalization:

Concept of fiscal equalization Fiscal equalization: transfer of fiscal resources across jurisdictions with the aim of offsetting differences in revenue raising capacity or public service cost. To allow sub-central governments to provide their citizens with similar sets of public services at a similar tax burden even if incomes differ across areas. Concept requires transfer of funds= contentious issue in public finance. FE is perhaps best appreciated in a federal state where a single political unit possessing financial authority contains smaller political units that also possess financial authority 8/18/2014 5 Chibuike Uche

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fiscal federalism has its origins in the need to improve the performance of the public sector. FE a necessary counterpart of decentralization, offsetting its tendency to create disparities among regions in the ability to provide public goods and services Up until 1950, focus was on vertical integration Buchanan’s 1950 thesis of equal treatment of equals Disadvantages: jeopardize budget stability and lead to rent seeking behavior and reduce tax and developpment efforts Nigeria revenue allocation and discovery of petroleum 8/18/2014 6 Chibuike Uche

Nigerian Petroleum Industry:

Nigerian Petroleum Industry Oil discovered in 1956 Oil export started in 1958 PH refinery became operational in 1965 In 1970 devt plan goal was to build refineries to export oil temp disruption during civil wat . 1969 petroleum decree vested control o oil industry on govt DPR and NNOC established ni 1970 and 1971 Both were ineffective and uncooperative thus their merger in 1977 to form NNPC 8/18/2014 7 Chibuike Uche

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NNPC remained ineffective and inneficient thus several reorganisations 4 Refineries unable to work, petroleum products heavily imported subsidy payments claimed by NNPC increased from N198 billion in 2009 to N416 billion in 2010 and 786 billion in 2011. This represented increases of 110 percent and 89 percent respectively. In 2011 subsidy = 30% o govt expenditure and 110% o capital budget 8/18/2014 8 Chibuike Uche

Petroleum Equalization Fund:

Petroleum Equalization Fund 1967: govt vested powers to determine petroleum prices on minister o mines and power Prior to the time, oil companies fixed prices In 1973 Gowon announced PEF at Lagos prices (lowest) PEF was more of a subsidy tool than an equalisation tool. Equalisation led to shortages and increased use. Equalization (subsidy) created arbitrage opportunities 1975 Oputa Commission : recommended storage facilities and extensive pipelines 8/18/2014 9 Chibuike Uche

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PEF Workings: country was divided into 26 marketing zones with price differentials established for each zone. Zones with average prices above set price draw from fund and those with averages below pay into the fund. For all the marketers, the sum of their claims and contributions in the 26 zones was supposed to “ zerorise ” in theory But subsidy schemes do not zerorize PEF also inefficient Has failed to equalize prices 8/18/2014 10 Chibuike Uche


Conclusion Calls for the sacking of the PEF board based on lack of understanding of structural nature of the problem. PEF should be abolished Will be the beginning of tackling the inefficiency and fraud widespread in petroleum products administration in Nigeria. 8/18/2014 11 Chibuike Uche

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8/18/2014 12 Chibuike Uche

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