December 1, 2022

EDITORIAL: States Should Not Face Hard Time Over NNPC’s New Status

4 min read

According to the Guardian newspaper, it says that the Federal Government and the newly constituted Nigerian National Petroleum Company Limited (NNPC) may face legal action following the transition of the latter to a limited liability company.

Findings by the Guardian newspaper showed that the 36 states of the federation and the 774 local councils whose financial viability has been threatened by the development, as the new status of the NNPC means it would no longer contribute to the Federation Accounts Allocation Committee (FAAC), might seek reprieve in court.

The FAAC usually shared with the three tiers of government monthly, has been under threat lately following the huge payment of subsidies on the premium motor spirit (PMS), otherwise known as petrol, by the NNPC under the old order.

However, the transition of the NNPC to a limited liability company would henceforth permanently halt it from contributing to the FAAC.

We agreed with the explanation of a legal practitioner and former management staff at Shell Nigeria, Madaki Ameh, that says, “For accounting purposes, revenues accruing to the Federal Government from oil and gas activities carried out by the NNPC Ltd will still have to be shared in compliance with the provisions of the constitution, and this would include the NHT and CIT payable by NNPC Limited and other companies operating in the oil and gas industry.”

He insisted that the sub-national governments needed to look inwards and improve their internally generated revenue potential. He called on the Federal Government to devise ingenious ways to solve the subsidy quagmire, saying it has become unsustainable given dwindling revenues and increased debt service obligations.

According to him, dwindling revenues would have an expected negative impact on the ability of states to meet their obligations and also lead to renewed agitations for resource control.

“Defaults on payment of salaries, pensions, and delivery of basic services will increase unless the governors become innovative and think outside the box,” he said.

He said FAAC ought to have been stopped a long time ago, adding that it made states very lazy, indolent, and heavily dependent on contributions.

This is the time for the State to start sourcing other avenues of funds to increase their internally generated revenue

The no-business-as-usual realities have already created alarm bells for states to become innovative and encourage frugality, due process, and streamlining of operational costs.

The PIA also mandates the NNPC Ltd to conduct its affairs on a commercial basis in line with the Companies and Allied Matters Act. According to the law, the company will run on a commercial basis profitably and efficiently without recourse to government funds. It will pay dividends to shareholders and keep 20% of profits as retained earnings to grow the business.

The profits expected from NNPC Limited at the end of the year will still be shared by the Federating Units and if the company is not properly managed, there will be nothing to share.

There is no doubt that the poor states with lower IGR may not stay afloat outside the monthly allocations from the Federation Account due to a lack of initiatives for revenue generation coupled with arm-chair governance. Due to sociopolitical and economic crises such as insurgency, kidnapping, armed banditry, and herdsmen-farmer clashes, some states are unable to attract investors.

According to the Economic Confidential ASVI, only three states in the entire Northern region have an IGR greater than 20% in comparison to their respective allocations from the Federation Account. In that order, they are Kwara, Kaduna, and the Kano States.

Meanwhile, ten southern states had an IGR of more than 20% in 2019. Among them are Lagos, Ogun, Rivers, Enugu, Ondo, Edo, Delta, Anambra, Cross River, and the Delta States.

Only Bayelsa has lower internally generated revenue of less than 10% compared to the FAA in the South in 2019. The other poorest IGR states are in the North-East: Yobe, Gombe, Borno, and Taraba State; and two states from the North-West, namely Katsina and Kebbi.

Meanwhile, the IGR of the respective states can improve through aggressive diversification of the economy to productive sectors rather than relying on the monthly Federation Account revenues that largely come from the oil sector.

State and local governments should start thinking outside the box to generate revenue because the government can no longer have control over the staffing of the NNPC Limited. As a commercial entity, NNPC Limited is beholden to its shareholders. Competence and quality will determine recruitment.

It also means that Nigeria can no longer depend mainly on NNPC Limited for Federation Allocation. The Federal Government would be entitled strictly to returns on its shares. 

The State and Local Government should also be aware that, as a limited liability company, NNPC is responsible to its shareholders; any service it provides to the Federal Government will be for a fee; subsidy is the responsibility of the Federal Government, not the NNPC Limited; and NNPC Limited is committed to transparency, accountability, and accounting rules.

There is no doubt that the Mele Kyari-team will lay the foundation for a more far-reaching process. The new NNPC Limited is expected to do things differently to attract investment, promote innovation, eliminate corruption and inefficiency, and ensure clarity.

In all of these regards, NNPC’s transition into a commercial entity is a laudable development.

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