How To Stop Fuel Scams In West Africa

As our investigative reports in the past two issues of African Business have demonstrated, fuel smuggling is a major element of organised crime in West Africa. It encourages piracy, undermines economic development and provides conduits for other forms of smuggling. Yet there is one measure that could be taken to counter the problem: the harmonisation of fuel prices across the region. Such a strategy could have the added benefit of injecting more impetus into the stalled process of economic integration within the Economic Community of West African States (Ecowas).

Poverty, corruption and underfunded police services: there are many causes for fuel theft and smuggling in West Africa. Yet huge differences in the price of diesel and petrol across the region provide convenient opportunities to make money from buying fuel in one country and selling it in another.

This in turn creates an open market in illicit motor fuel that can be used to distribute refined petroleum products seized by the pirate and illegal oil bunkering gangs that operate along the coasts of Nigeria and Benin.

As in most of Africa, diesel is the most popular motor fuel in West Africa and there has historically been a regular flow of smuggled diesel from Nigeria to other countries in the region.

As Figure 1 demonstrates, the price of fuel can be up to four times higher in some parts of West Africa than in Nigeria. As a major oil producer, Abuja has sought to placate popular opinion by subsidising fuel prices.

The IMF estimated as long ago as 1986 that smuggled oil and fuel from Nigeria comprised 20% of Benin’s consumption, rising to 68% by 1991. Also in 1991, 17% of Cameroon’s fuel consumption consisted of smuggled Nigerian petrol and diesel, despite the fact that the country was and remains a net oil exporter. Officially recorded sales of oil and oil products in Benin fell from 134,800 tonnes in 1986 to 63,300 tonnes by 2001, suggesting that the volume of smuggled product increased during the 1990s.

Although stolen oil and fuel products continue to be marketed in Benin, the flow of smuggled but legally refined Nigerian fuel products dried up for a period about three to four years ago. The explanation was not difficult to find.

The retail price of diesel averaged $1.03 a litre in Benin in 2008, lower than the $1.13/litre average in Nigeria. However, the pump price increased to $1.21/litre in Benin in 2010, much higher than Nigeria’s average of $0.77/litre for the year. This resulted in a resumption of cross-border diesel smuggling and also gave pirate gangs more incentive to market their fuel in Benin.

Even lower fuel prices in Nigeria during 2011 appear to have encouraged a resurgence in smuggling from Nigeria into Benin. The average price of diesel in Nigeria in December 2011 was just $0.40/litre.

Fluctuations in fuel prices are wider in sub-Saharan Africa than in most of the industrialised world because fuel is not taxed as heavily and so the price of crude oil comprises a greater overall proportion of fuel costs. In November 2011, Benin’s Ministry for Economic Affairs revealed that almost 80% of fuel consumed in Benin was smuggled into the country from Nigeria. Scientific analysis of fuel samples taken in Benin confirmed that it came from Nigeria.

Smuggling across the Nigerian-Beninois border has attracted international attention for good reason. It has traditionally concerned the illicit trafficking of otherwise licit goods, such as alcohol, cement, cars and refined petroleum products.

However, trade in illicit items has increased in recent years and there are certainly organised networks in Benin that can take advantage of new opportunities.

Benin ranks high in statistics as embarkation country on cocaine seizures at European airports, both in terms of drug volume and number of detected couriers. Major drug seizures have been reported in the Port of Cotonou or in transit to Cotonou, including 200kg of heroin in April 2011 and 450kg of cocaine in June 2011. These are huge consignments by global standards.

Reducing fuel price differentials

Successive Nigerian governments have sought to reduce fuel subsidies, although primarily in order to save money, rather than to tackle criminal activity. In each case, the plan is announced, triggering widespread strike action and other forms of popular protest, resulting in the government backing down and subsidies restored, until another attempt is made, perhaps two to three years later. The IMF has long urged Nigeria’s government to remove the subsidy and such a move seems attractive on several counts.

Apart from anything else, the annual cost of the government subsidy is estimated by Abuja itself at $8bn, which is a huge sum in comparison with a national budget that stood at $22bn in 2011.

Introducing a commercial rate would also curtail the black market trade in both licit and illicit fuel. The much-lauded governor of the Central Bank of Nigeria, Sanusi Lamido Sanusi, says: “Subsidies should be subsidies for production and not for consumption”.

Most recently, in January 2012, the government of President Goodluck Jonathan lifted the entire subsidy, effectively increasing diesel prices from $0.40/litre to $0.86/litre. In December, Abuja had attempted to soften up public opinion by releasing a list of those who benefit most from fuel subsidies through fuel imports. The list included some of the country’s richest people.

Although Nigeria’s four refineries have combined production capacity of 388,000 barrels a day (b/d), they have been partly or completely out of use for many years. Nigeria is the biggest oil producer in Africa but is in the ridiculous position of importing most of its fuel. It is often claimed that they have not been fully modernised or replaced precisely because of the vast profits to be made in importing fuel.

Abuja announced that it would divert the money saved from subsidies into health, education and power projects. As usual, the country’s active trades’ union movement, centred on the Nigeria Labour Congress (NLC) and the Trades Union Congress (TUC), called an indefinite national strike and organised mass protests, claiming – with some justification – that the money saved would go into the pockets of the wealthy. Many see cheap fuel as the only benefit that reaches the mass of the Nigerian population. The general strike resulted in clashes between the police and protestors. At least five people were killed and several hundred injured, while security forces fired live ammunition above the heads of protestors at one march.

After a week of protests, Jonathan announced that although the government would continue to pursue full deregulation the downstream market, “given the hardships being suffered by Nigerians, and after due consideration and consultations with state governors and the leadership of the National Assembly, government has approved the reduction of the pump price of petrol to N97 [60 US cents) per litre.”

Despite the financial benefits of removing subsidies, the manner in which successive governments have sought to reduce fuel price support seems badly judged, whether by intent or mismanagement. Rather than removing it in two, or as recently one, step, resulting in massive overnight price rises, Abuja would probably have more success if it attempted a slow, phased increase in prices over an extended period.

Justice at last?

One day after Nigeria’s national strike ended, officers of the anti-fraud Economic and Financial Crimes Commission (EFC    C) raided the Petroleum Products Pricing Regulatory Agency (PPPRA), which regulates the price of fuel in the country.

Then in April, the House of Representatives Committee published a detailed report into the scale of the fuel subsidy scams. It concluded that such scams had cost the country a staggering $6.8bn over the past two years alone. The report also argued that the government’s $8bn estimate of the cost of subsidies over two years was actually an underestimate: it put the figure at more than $17bn.

It called this a record “that can hardly be rivalled in the history of a warped budget management of any nation anywhere in the world. False claims were rampant.

The scheme became an avenue for all forms of patronage”.

There seems little doubt that there is widespread corruption in importing fuel: Nigerian fuel consumption stood at 35m litres last year yet the government paid subsidies on 59m litres.

Discussing the investigation, Farouk Lawan, the chairman of the House of Representatives Committee, said: “We were threatened several times in so many ways. We were told that we were not going to live long [enough] to even finish the exercise. They were death threats; very clearly death threats. Fortunately we are still around.”

The number of fuel importing companies increased from six in 2006 to 140 last year. In 2010, 15 fuel importers allegedly earned $300m in subsidy support for contracts that did not involve a single drop of oil or refined fuel. Many high-ranking officials have been named in the report.

However, Jonathan could undermine support from some within the powerful political elite, if all of those implicated are brought to justice. The speaker of the House of Representatives, Aminu Waziri Tambuwal, said: “We are fighting against entrenched interests whose infectious greed has decimated our people. Therefore, be mindful they will fight back and they normally do fight dirty.”

The EFCC has struggled to bring entrenched interests to justice in the past, so it will be interesting to see whether intense public outrage over the recent fuel scam report provides the judiciary with the determination to see that justice is done.

In the long term, however, smuggling and fuel scams will continue as long as there are such vast disparities in the cost of fuel across the region. It would be unwise to impose universal fuel prices across the region overnight but steadily bringing prices closer together would gradually reduce the level of crime.

Removing subsidies will also provide all Ecowas governments with the opportunity to divert subsidy monies into more worthwhile projects. This will only be achieved if the general public are convinced of their governments’ good intentions. Otherwise, it will merely result in the same kind of protests witnessed in Nigeria in January.