In the midst of dwindling revenues and skyrocketing subsidy costs,
Nigeria has taken a bold step by removing fuel subsidies, igniting controversy
and unrest among its population. Despite the opposition’s claims that subsidy
removal will disproportionately affect the poor, the government’s redirection
of funds towards crucial sectors such as health and education paints a
promising picture for Nigeria’s future. The recent World Bank loan of almost a
billion dollars for palliative measures may provide temporary relief, but it is
not seen a sustainable solution.
However, the fate of the much-anticipated Dangote Refinery,
meant to reduce Nigeria’s reliance on imported petroleum products, remains
uncertain as unforeseen technical difficulties delay its completion.
The Dangote Refinery, announced in 2013 with an initial
$3.3bn loan deal with local and foreign banks to fund the construction, was
expected to transform Nigeria’s reliance on imported petroleum products and
boost the country’s economy. With an initial completion date of 2018, the
refinery was planned to produce enough refined petroleum to meet domestic needs
and provide a surplus for export. However, the project has been plagued by
continuous delays, attributed to factors such as lack of technical expertise,
financial constraints, and poor project scoping.
Reports suggest that the Dangote Group is lobbying for an
additional $3 billion cash injection, which could add to Nigeria’s debt burden
and divert funds from more immediate solutions to the subsidy removal. Adding
to the concerns surrounding the Dangote Refinery is the agreement between the
Nigerian government and the Dangote Group. The Nigerian government in 2021
agreed to provide $2.7billion in cash-and-crude to the Dangote Group to fund
the construction of the refinery in return for 20% equity. On December 1, 2021,
the Federal Government through NNPC made a payment of $1.038billion in two
tranches of $519.5million each to Lekki Refinery Funding Limited account with
the beneficiary bank, representing the first cash portion of the deal, with the
balance to be paid by the government upon completion of the project. This money
was a loan from one of the international finance institutions to NNPC.
With the company missing out on interest payments due
January 2023 of 750million dollars which is still yet to be paid despite being
structured by the banks almost three times, the project is faced with a big
dilemma – and with it, Nigeria’s hopes for the refinery.
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As it stands, there is evidence to suggest that the Company
has exceeded its single obligor limit with local Nigerian banks and no
international bank is willing to extend funds to it. In addition, the company
will need at least 3 billion dollars in addition to its annual interest
payments of about 700million dollars to complete the project by 2025. Whilst
there are already talks for a backdoor arrangement being proposed with the CBN
to enable a commercial bank circumvent its single obligor limit to the company
in order for it to raise further cash for it to pay its interest obligation of
750million dollars which have fallen due, such a move has been viewed
cautiously by supporters and critics of the project alike.
These reports also suggest that the company unsuccessfully
approached the outgoing president Muhammadu Buhari administration to release
the remainder cash sum of 1.7billion dollars which was to have been paid upon
completion of the project. According to these reports, President Buhari
backtracked after further due diligence was done on the project which revealed
that the project would not be completed before 2025 unlike the December 2022
date the company had promised at the time of signing the agreement.
As a result, intense pressure is now being mounted on the
incoming government of Bola Tinubu to pay the remainder sum of $1.7billion
dollars upon taking office as well as approve a new cash injection of 3billion
dollars and crude for additional 20% equity in the project so the company can
raise sufficient cash in the short term to pay outstanding interest costs and
complete the project. This is premised on the fact that the new government has
declared it wants to plug revenue gaps by removing the subsidy but the company
has now given them the impression that the project will be completed by
mid-2024 – which is far from the case. The incoming government must therefore
be wary of yet another such lofty promise by the project owners as sources
close to the Chinese company brought in to salvage the refinery project say a
2024 date is not feasible.
Should the incoming government go this route, it does
nothing to solve the problems with the completion of the refinery, adds further
unnecessary debt burden to the country and its citizens, and takes away money
from critical and immediate solutions to the subsidy removal. Nigeria is
already over-leveraged to the Dangote refinery project.
Many commentators believe that rather than relying on the
uncertain completion of the Dangote Refinery, the Nigerian government should
focus on the ongoing refurbishing exercise of its existing refineries. This
strategy would not only provide a more reliable short-term palliative solution
but also pave the way for a smoother transition from imported petroleum
products. They should also encourage the modular refineries to ramp up
production.
In addition, the Nigerian government should explore
alternative strategies, such as investing in renewable energy sources, to
reduce the nation’s reliance on imported petroleum products. This approach
would provide long-term benefits to Nigeria’s economy and environment, while
also fostering self-sufficiency in fuel production.
The removal of fuel subsidies offers Nigeria a unique
opportunity to reassess its priorities and invest in a more sustainable future.
By rejecting the new investment proposal for the Dangote refinery which has
become an albatross whilst focusing on feasible alternative strategies, Nigeria
can emerge stronger and more resilient in the face of global challenges. Can
the incoming government afford to mortgage Nigeria’s scarce resources on a
false hope? With billions of dollars and the country’s economy at stake,
Nigeria cannot afford to pin all its hopes on the Dangote Refinery and even if
the new government were to invest further in the project, there must be proper
due diligence done before any investment is considered.
Sylvester Audu is a Writer and Social Justice Advocate
writing from Abuja
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