This Yam, This Goat, This Country: Pwc On NNPC – Part 2

No one has the right to retain money that should come to the federation account. Constitutionally, it should come and then , if expenses are legitimate, they should be presented transparently and properly approved. To even admit that you have withheld $10bn or $12bn and then say this is what I did with it is, frankly speaking, not even the beginning of an argument” – Sanusi Lamido Sanusi, speaking to Gavin Serkin, author of ‘Frontier

Part 1 is here if you missed it.

We now know the measurement of the yam ($69bn) that was left in the care of the NNPC goat. And we also know how much the goat handed back to the Nigerian treasury ($50bn). The debate now is what right the NNPC had to eat so much ($20bn) of the yam belonging to the Nigerian people, if it had the right to eat any at all.

A lot of the corruption and mismanagement and outright theft going on in NNPC is sickening and frankly, depressing. And it leaves Nigerians and especially the incoming government, who campaigned from Potiskum to Port Harcourt with the message of ‘Change’, with a question to ponder – What do we do with NNPC? Can NNPC change? Can it be reformed? How do we change it? If you prevent the theft or mismanagement of even $1bn, that is potentially 1,000MW of electricity you can add to the grid. The sums in question are not small.

I Have Good News

In 2010, Transparency International and Revenue Watch carried out assessments of 44 oil companies (private and state-owned) around the world, including NNPC. On the question of Organisational Disclosure, here’s how NNPC scored in their ranking:

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Yep, our own dear NNPC came last (or first from behind). TI and RW went on to describe NNPC as the world’s most secretive oil company. Nobody knew the size of the yam to begin with except the goat itself and it was never going to publish it in the newspapers. Any attempt at openness was always resisted.

Sanusi Lamido Sanusi, as CBN Governor, said he became ‘obsessed‘ with understanding how the oil industry worked and where the leakages were happening. People who are obsessed about something can be very useful indeed.

It is important to understand this point – SLS had no direct access to NNPC’s books. From his letter to President Jonathan dated September 2013, it is clear that he got no cooperation from NNPC. All the numbers he used were investigated and determined by his office.

And yet, he came very close. He calculated NNPC’s revenues in the period to be $65bn while PwC calculated it to be $69bn – he missed the target by 6%. Here we have the ‘world’s most secretive oil company’ but someone looking from the outside was able to, with a bit of hard work and ‘obsession’, come close to figuring out the numbers. (PwC had access to NNPC’s numbers and documented all the revenues with over 30 pages of calculations in their report).

This is the good news I have to share – It is now possible to know almost the exact size of the yam even if NNPC don’t want us to know. They can lie all they want, obfuscate all they want, pretend all they want – that will not stop a serious and determined person from knowing. The game where the goat repeatedly under reports the size of the yam or even tell us there was never any yam to begin with, is over.

How Much Yam Did The Goat Eat?

Now that we are able to determine the original measurement of the yam, independent of NNPC, the next step is to figure out how much of it has been eaten.

The even better news is that this one is easier to determine. If NNPC pays money into the federation account, many people will know about it. The account is at the CBN. The only other place NNPC can send money to is FIRS, the taxman. This was the cause of the initial discrepancy where SLS said the amount outstanding was $49bn – some of the money had apparently been sent to FIRS instead of CBN. No problem.

The important point here is that CBN and FIRS are outside of NNPC. If NNPC don’t cooperate, other people can.

This is the second leg of the equation – we can determine the amount of yam sent to the Nigerian treasury. This greatly reduces the challenge of dealing with an opaque organisation that refuses to cooperate.

And it means we can reduce the issue to a simple question that puts NNPC on the defensive – the original yam was $69bn, you have given us $50bn. Where is the rest of it and what did you do with it? Simple.

Before PwC There Was KPMG

In 2010, KPMG was hired by the Federal Government to investigate the usual NNPC shenanigans. It submitted its report in November 2010. Find it here.

Here’s what they were asked to investigate as part of their ‘Forensic Review of NNPC’ (that forensic word again eh?):

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It is not much different from what PwC were asked to do last year – determine the size of the yam and compare with what had been declared.

As usual, KPMG found NNPC up to their usual goat tricks and games. The one below was my favourite:

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They did not even bother to tell a plausible lie. This is the confidence of an armed robber in action. Of all the places to obtain an exchange rate for something so serious as remitting money to the federation accounts, these goats claimed they got it over the phone despite the fact that the CBN published the exchange rates on its website.

So many issues were identified with the way NNPC ran its operations. Subsidy issues featured prominently as you’d expect. Here’s another sample:

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The same goat games yet again. Every single failing identified came with a recommendation on how to fix it by KPMG. And what happened? It went in NNPC’s left ear and came out of the right ear immediately. In 2009, NNPC reported that it lost N8bn due to pipeline vandalism. KPMG recommended increased monitoring of pipelines and use of technology. Ok. By the time of the PwC report, they were spending $48m on ‘pipeline surveillance systems’. Alas, the amount reported as losses from pipeline vandalism has now transformed to $760m. Sebi you people said they should deploy technology? Ehen na.

In 2010, KPMG observed that they were using Sun Accounting Systems and noticed that the system was not robust enough for its needs given that the system was not fully integrated and excel was being used quite prominently. It recommended that SAP, a more robust system, be implemented as quickly as possible. No problem. By the time PwC did their work, they confirmed that NNPC was indeed using SAP. Yet, all that has happened is that a bigger piece of yam has disappeared.

See what KPMG said on their data management in 2010:

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Now compare with what PwC found last year:

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Dem no dey hear word. Goats.

Are We Here For Tea Party? 

Do we really have time for this merry-go-rounding where we will be carrying out a forensic exercise on NNPC every 4 years like it’s the olympics? And then the document is filed away and they pretend like nothing happened. I am not convinced that NNPC will suddenly come to a kind of enlightenment where they are able to look at the yam and leave it untouched.

In the meantime, there is a country in need of so much fixing that the problems are almost overwhelming. Every kobo counts and we can’t really afford a situation where people are making addition ‘mistakes’ costing $40m. We are not here for tea party as the intellectual Nigerian Minister, Musiliu Obanikoro, famously put it not too long ago.

There is something devious about NNPC and the way it seduces any government in power. Everybody ‘probes’ it but no one ever really reforms it. Obasanjo ‘temporarily’ made himself Petroleum Minister in 1999. He ended up doing the job for 8 years. NNPC enters the government like a virus and typically, when politicians are broke and looking for money, NNPC can produce the cash. This is how the corruption starts and typically, it can never be reversed.

A fundamental question must now be asked – is it really worth anyone’s time to embark on ‘reforms’ of NNPC? Are the chances of success for such reforms up to 10%, if not dead on arrival?

With Love From Mexico

In August 2014, Mexican President, Enrique Pena Nieto, signed a landmark energy reform bill into law. After 76 years, the law effectively turned Petroleos Mexicanos (PEMEX) into a private company. It will now need to be audited regularly and publish reports like any other private company.

Part of the problem with NNPC is that it gets too much time alone with the yam before anyone checks what is going on. So we are reduced to the roundabout games of ‘forensic audits’ every 4 years for something that should be done regularly. 4 years is a long time – long enough for a multitude of yams to disappear without trace. Certainly, if NNPC was forced to publish reports quarterly and being audited yearly (with a regular half-year audit), there will be less room for the kind of long standing problems we are seeing.

I don’t think privatising PEMEX was an easier job than for NNPC, and yet a President who was determined to do it before he ran out of steam, managed to get it done. What’s Nigeria’s excuse?

With Love From China

Western countries have typically privatised their national oil companies e.g BP in Britain. This has not stopped oil from flowing out of the North Sea. The government simply focuses on collecting the taxes. True, the Norwegians still have Statoil (67% owned by the government) but we can all agree that the Norwegians are outliers – they don’t even spend their oil money hence their mammoth sovereign wealth fund. Also worth noting that Statoil is not fundamentally different in structure from Petrobras in Brazil. Yet, they couldn’t be more different judging by the ongoing scandal in Brazil that has hobbled the President, Dilma Rousseff.

The Chinese take a different approach – instead of having just one national oil company, they have three – PetroChina, Sinopec and CNOOC – mighty ones which compete against each other in some ways and also go out into the world to gain business and expertise. Further, you can find the accounts for CNOOC, PetroChina and Sinopec on their websites. Go to NNPC’s website. If you can find any accounts there, I owe you goat meat pepper-soup.

This options means we break NNPC into say, 3 new companies that compete directly with each other. Some might say when you have a problem like NNPC, why do you want to multiply it into 3? Good question.

The point here is that there are several ways to achieve the same thing. There is absolutely nothing that says we should have this NNPC model and keep ‘reforming’ or threatening to ‘reform’ it every few years. Or we can vote for change just like we just did in the national elections.

Scatter The Place

There is however another option. The first thing to understand is that it is not by force to have a national oil company. The decision that gave birth to NNPC in the 1970s – a creation of Obasanjo – cannot be said to have been the correct one. Indeed, at the time Nigeria was going about nationalising things, the West and China were moving towards market economies. Since 1977 when it was established, the company has been a constant source of pain for the country. Much of what we are seeing today is not new.

My preference is for NNPC to be completely dismantled and the government moves to a tax based system. For it to cease to exist. For it to be completely neutered. We have had enough of this monster that no one is able to control anymore and which answers to its own rules. And now is the best time to deal it a decisive blow from which it will never recover. It has been exposed and is no longer able to be the secretive organisation it once was. If it lies, with a bit of investigation, we can find the truth. Nobody trusts a word it says anymore and the old trick of telling the public that we do not ‘understand how it works’ has now expired. We really do not even need to know. Once we know the original size of the yam and the amount it tendered, it will need to come up with an explanation for any differences.

What is needed now is political will to bring this goat to heel. It is all well and good making the right noise as President Buhari surely will. But the follow through is the koko. So many names are already being bandied about as possible petroleum ministers (mostly cowboys and charlatans so far). We are going to need someone who is determined and can zero in on a cause to smash this goat that corrupts a nation and its government to pieces. The person will need to have integrity in bundles. Ability to pray will be a bonus for we know there are demons in there.

Margaret Thatcher famously said that if you want something done, you should ask a woman. I know a woman who fits the bill for this job.

Her name is Obiageli Katryn Ezekwesili.

FF  

P.S I think it’s fairly obvious that people need to be severely punished for what has gone on in NNPC. But in case it’s not obvious that this is my position, I’m restating it. NNPC only gets away with what it is allowed to get away with. This must stop.

As someone said to me recently “I did not queue for hours on March 28th to vote for people to get soft landing”. President Buhari, be guided – People Must Go To Prison. No Ifs, no Buts. 

This Yam, This Goat, This Country: PwC on NNPC – Part 1

Friends and countrymen; I beseech you by the mercies of God that ye do whatsoever it is within thine powers to prevent a frolic between the yam and the goat. For, as surely as the rising and setting of the sun, such an enterprise yieldeth only corruption, nay a sad ending for the yam” – Goodluck The Jonathan, First of His Name

Finally, we get a chance to see what PwC, the auditors, saw when they looked into the black hole that is NNPC. The full report is here (200 pages). It is not pretty.

I am not an oil and gas expert and much of the industry and how it works confuses me. But the PwC report is written in English so let’s try to parse it.

Remember The King?

A quick recap of what started all of this – King Mohammed Sanusi II, in his former life as SLS, the Central Bank Governor, told the nation that, based on what he had calculated, NNPC sold $67bn worth of crude in the period from January 2012 to July 2013. He then said that as custodian of the nation’s purse, he had only received $47bn of this amount. In other words, up to $20bn of the money was not accounted for.

Contrary to popular perception, SLS never did say the money had been stolen and he certainly didn’t name any names in his 300 page report submitted to the National Assembly. His main issue at the time was that, as CBN Governor, his job was to manage the exchange rate and the nation’s reserves. If there was $20bn out there in the wild, then his job was being made a lot harder than it needed to be.

He identified 3 ways in which the country was losing money as follows

1. Strategic Partnership Agreements – In 2011, as part of the efforts to promote local content, Shell sold its shares in 5 oil fields where NNPC was the majority shareholder. Shell had been the operator of these oil wells but NNPC awarded the operator rights to its subsidiary NPDC i.e. it allowed Shell to sell its shares but not the rights to operate them as it previously did.

NPDC then signed an ‘agreement’ worth almost $7bn with Seven Energy (3 fields) and Atlantic  Energy (2 fields) for them to operate the fields. These companies of course had no clue how to operate the oil fields – Atlantic was registered as a company the day before it signed the agreement – so they sub-contracted the work to other companies. Seven Energy’s contract entitled it to 10% of the profits from the 3 fields while Atlantic was entitled to 30% of profits in its 2 fields.

SLS complaint was that these 2 companies were pointless and were just collecting money – that should have accrued to Nigeria – for doing nothing. Why didn’t NPDC just sub-contract the work by itself? The 2 companies also did not pay any taxes or royalties whatsoever to Nigeria.

2. Kerosene Subsidies – This one is fairly straightforward to understand. SLS did an analysis of kerosene prices in all 36 states of the federation in his report and found that prices ranged from N170 to N270 per litre.

Importers bring in kerosene and sell it to government at N140/litre. The government then sells it to local retailers at N40/litre with the understanding that they sell it to the ‘common man’ at N50/litre i.e government subsidises it by N100/litre. The retailers take the kerosene and sell it for what they like as stated above.

There is no sweeter corruption than this one. According to SLS, Nigeria was spending $100m per month on this pointless exercise. Not a single Nigerian anywhere bought kerosene for the ‘official’ N50/litre.

3. Swaps – Even with all the money going into NNPC, like a true apa, it is always broke. Due to the semi-dead refineries we have, NNPC of course has to import refined products (petrol and kerosene) but it often doesn’t have the money to pay importers in cash. So what it does it tell importers to import the refined products, then calculates the value of that product in crude oil and pays the importers with crude oil. This is how human beings traded before money was invented – by barter.

The problem here is that SLS said he had no idea how the amount of crude to be swapped for refined products was calculated. All he was able to find was that at one point, NNPC was ‘swapping’ 200,000 barrels of crude per day. That is a lot of crude. Did Nigeria get that much value in refined products? Who knows?

Enter PwC

The first thing to note is that PwC was asked to investigate all money due to the federation from crude sales to see what had been remitted and what, if any, was outstanding. It did NOT investigate the swaps or the Strategic Partnership Agreements as those were not part of its remit.

So what did it find? That the total revenues for the period in question were $69bn and not $67bn as stated by SLS. It had also remitted $50.8bn and not $47bn as initially thought. So, there was still a gap of roughly $20bn to be explained as before.

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Somehow NNPC managed to overpay $740m to the federation account if we accept its own numbers. As we shall see; NNPC cannot count, it cannot buy, it cannot sell.

Based on this, we can conclude that ‘no money is missing’ and close the case. Afterall, the numbers have been made to add up one way or the other – the $20bn that we thought was missing has been accounted for wan kain, as the outgoing President is wont to say.

But who or what gives NNPC the right to withhold nearly 30% of the money it receives on behalf of Nigeria and then spend it as it wishes? Here we have a goat locked in a room alone with a yam and no one to supervise what’s going on.

PwC’s opinion is that this practice of withholding money and then spending as it sees fit is highly dubious and that the NNPC act needs a legal opinion to determine whether it has the right to do this. What stops NNPC (the goat) from withholding 50% of revenues (the yam) and then telling us later that it spent it on one thing or the other? Based on this, nothing.

Kerosene Subsidy

From the chart above, we can see that the biggest expense in the accounting of the ‘missing’ $20bn is the petrol and kerosene subsidy at $8.7bn. Of this amount, NNPC claimed to have spent $3.38bn on kerosene subsidy. Yet, whether or not subsidy should have been paid was doubtful in the first place. Here’s the gist of what happened

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In other words – anyhowness. Between President Yar’Adua who cancelled the subsidy but did not gazette it (perhaps because he was trying to avoid a public outcry) and President Jonathan who ‘unlooked’ Yar’Adua’s cancellation, NNPC stuck its fingers in its ears and continued paying the subsidy. A lot of magic happened as a result.

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First, PwC found $40m of kerosene subsidy payments were duplicated (see above). That is, subsidy was paid to the same marketer twice or more for the exact same kerosene. This was apparently a ‘mistake’. But even if we accept this, there’s more.

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The table above shows how NNPC is supposed to calculate subsidy on kerosene. That N34.51 is what it costs to get it to Nigeria. In other words, NNPC is supposed to sell it to marketers at that price (N34.51) and the marketers then sell to consumers at N50 – the difference of N15.49 being used to cover all their costs and a profit margin.

Instead, NNPC sells the kerosene to marketers at N40.90 i.e. taking some of the profit margin for itself. Why it does this, is a mystery. Nevertheless, when NNPC was calculating subsidy to be deducted (remember the yam and the goat are together), it used the figure of N34.51 even though it sold it to marketers at N40.90. In other words, NNPC charged marketers for a cost and also charged Nigeria for the same cost. This overcharging of subsidy on kerosene came to a cool $204m in total.

Nobody Is Above Mistake

It’s not easy for NNPC. When you are counting so much money, you are bound to make one or two mistakes here and there. It is these ‘mistakes’ that yielded the $1.48bn PwC asked NNPC to pay back to the federation. Some of these errors are as simple as wrongly adding a column in excel. These addition errors came to $40m.

There was also the overclaim of subsidies on petrol and kerosene (as described above). As well as other monies that should have been paid to the federation and were not paid. The table below shows the breakdown of the $1.48bn.

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One must ask – if PwC hadn’t gone in to audit the place, would NNPC have just let a $40m addition error go on like its nothing? The mind boggles.

Money Wey No Get Receipt

As part of the accounting for the difference of $20bn between what was received and what was paid to the federation, NNPC submitted some other costs it claimed it had incurred as part of its operations. In total, these costs came to just $2.8bn as shown below

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As an auditor, when someone tells you they have spent this amount of money, what do you do? You guessed right, you ask for receipts.

A big chunk of the costs were for pipeline maintenance contracts. Anyway, NNPC could not provide any evidence for $305m of the money it claimed to have spent as the breakdown below shows

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Perhaps it thought PwC won’t ask for evidence. Some of it is quite hilarious (one must laugh when one cannot cry). In January and March 2012, it claimed to have paid salaries totalling $14m. No evidence to back it up. In November 2012, it claimed to have paid another $6m in salaries. Again, no evidence to back it up. Who was it paid to? Mr Who.

Almost $60m went on ‘charter hire’. To charter what? When you find out, tell me (Actually I know what this ‘charter’ is – it is the payment for the Petroleum Minister’s jet i.e. NNPC was paying for the cost of purchasing the jet on her behalf. But please don’t quote me). For January 2013, it entered a cost of $31m. But PwC found that this was the same cost it had claimed in 2012. When asked for the evidence for the January 2013 payment, it presented the same evidence as the one for January 2012. It claims to have spent $2.6m on buying cars. No evidence. $48m ‘right of way’ costs. No evidence. And so on and so forth.

Also, as you can see from above, in return for all the selfless and glorious work NNPC is doing for the country, it paid itself a total of $1.5bn in salaries for the 18 months in question that PwC looked into.

NPDC – Awon Bad Guys

When some people commit murder in broad daylight. They don’t run away. They light a cigar and sit down beside the dead body waiting for police to arrive. When the police arrive and ask who killed the person, they confidently say it was them. People like these are known as bad guys and NPDC is one of such people.

NPDC refused to cooperate with PwC for the audit. It did not submit any information or provide any help.

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PwC then had to obtain information from a variety of sources (including NPDC’s website) to try to ascertain how much exactly it should have paid to the federation.

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NPDC was summoned to the Senate sometime last year and they gave a presentation of their operations. The $6.815bn figure above in the NPDC column is what they claimed as the amount of oil they lifted. PwC also tried to verify this with the Department of Petroleum Resources (DPR) who gave them the $6.886bn figure. Finally, PwC tried to calculate the figures themselves and ended up with the $5.6bn figure.

Because they are bad guys, NPDC calculated their own tax and decided that the amount they owed to FIRS in taxes was $1.14bn. Out of this amount, they claimed they had graciously paid $863m to FIRS but do not yet feel like paying the rest. However, it was discovered that the actual amount  paid was $838m – the $26m difference being due to a ‘mistake’ in counting the same payment twice. Please don’t shout at them so they don’t get angry and refuse to pay the rest of the money.

All told, NPDC is holding on to $5.11bn that it has not remitted to NNPC (NNPC is the owner of NPDC so it should collect the money from NPDC and send to the federation account). This is PwC’s conservative estimate of what NPDC has withheld from Nigeria. Perhaps when the time comes for them to pay the money, in keeping with the goat and yam principle, they might tell us that they spent half of it on ‘costs’ and can only remit $2bn or something. We await that day.

Sorry For Your Loss

Other monies are missing. But what can we do? This is the tragedy of the goat and the yam. NNPC claims that crude oil theft and pipeline vandalism cost it $760m in the period in question. It is unfortunate. Sorry.

NNPC also holds strategic reserves of petroleum products for the country. It is not free to hold these things and so the holding costs amounted to $460m in the period in question. These costs are made up of demurrage costs ($207m) and charges by Nigerian Ports Authority ($252m). Of the demurrage costs, $64m could not be verified while the entire $252m claimed to have been paid to NPA could not be supported by a single document as backing evidence.

 #Forwards

The rest of the points raised are not things I understand very well so I have skipped them. But I think the above captures the gist of what has gone on.

So what can we do about this goat of a corporation? The rot in the place must be from ceiling to floor and you really cannot jail everybody there. A lot of the missing money will also never be recovered. So as much as people must be decisively punished for what has happened, how do we move ‘forwards’ and ensure this doesn’t happen again?

2,300 words is enough for one blog post so watch out for Part 2.

FF

Broke States

Osun State is in big trouble. If you’ve been paying attention to the news, you would have seen stories of how the state is owing its workers anywhere from 3 to 7 months salaries. So much so that the Ijesha North Diocese of the Methodist Church of Nigeria issued a communique at the end of its recent synod asking Ogbeni to pay up at his earliest convenience:

The synod wished that the state government should look into the payment of her workers’ salaries and retirees’ pensions as at when due in order to save their dependants from untold hardship and untimely death

Safe to say that when the Methodist Church is on your case like this, the garri has been inundated by a surfeit of water. Everyone on social media has a story to tell about someone they know (or perhaps they themselves) being owed their salaries.

The Governor himself has not offered any particularly deep insight beyond the obvious – he doesn’t have as much money as he used to so he can’t pay like he used to. The guys at Budgit have put it in more graphic form:

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Crude oil payments generally come in 3 months after the fact which means that in March, Nigeria started to receive the payments for the oil sold in December which is when oil prices really collapsed below $50. Roughly speaking, payments to states have dropped by around 30% from the average.

In December it was reported that 22 states were owing salaries (if you type ‘states owing’ into Google, it autocompletes it to ‘States owing salaries in Nigeria’ for you) for any given number of months. Some states have taken the ‘novel’ approach of paying what they can – in Kwara I hear 85% is being paid while in Kogi it was reported that only 6 out of 21 local governments could pay 60% of salaries with the rest paying 30% – 40%. I imagine most people will say 30% bread is better than no bread. This is perhaps what makes Osun the worst offender; it is not paying at all from what I have seen and heard.

***

When the issue of non-payment of salaries comes up, I find it frustrating how the debate (predictably) goes. People tend to take a fundamentalist view of things – if a state is owing people salaries, it must pay. It is against the Bible and Koran to owe civil servants their salaries and so on and so forth. Even people who don’t usually comment on other matters will typically weigh in with how the offending state should pay the salaries it owes with immediate effect.

Well, it is indeed unconscionable for a state to employ workers and not pay them. People build their lives around being paid their wages and denying them their salaries can be a massively disruptive event. Further, after the salaries have been paid, it is unlikely that the workers will become productive and happy, compounding the problem.

What is annoying, though, is that the debate stops once the salaries have been paid. If oil prices go back up to $80/barrel, the evil day gets postponed till further notice. This raises the status of the act of paying salaries to the level of a glorious achievement while at the same time encouraging Governors to do whatever they can to patch the situation while waiting for the bad wind to blow over.

The hard questions as to how states got themselves into this kind of mess in the first place always come second to ‘just pay the salaries’. By what standard of fairness is it ok for a state to spend 80% of its income on less than 5% of the population? I saw someone on twitter say that after Mr Lagbaja got sacked from the civil service some years ago, he had to suffer the ‘indignity’ of going to learn how to ride an Okada as a new source of income. This is fascinating to me because of what it suggests, perhaps unwittingly – that someone good enough to be a civil servant is only good enough to be an Okada rider in the real world? If, as some like to say, there is a ‘hidden benefit’ of paying people to not produce much in the civil service (the money takes care of their dependants), what is the cost? Benefits surely cannot be considered in isolation. It is telling that when the Osun Governor asked labour leaders to come up with ideas to resolve the salary problem, the people who don’t mind eating their seed corn suggested scrapping the free school meals for children. If the Governor ends up scrapping this programme to ensure payment of salaries, do we take this as an acceptable cost?

***

The Federal Government never owes salaries. Whenever there are such stories in the papers and you dig further, you will always find it has to do with a delay or glitch somewhere. But you will never hear the Federal Government is owing workers 3 months salaries or anything of the sort. And there is a good reason for this.

Here’s what Part X of the Fiscal Responsibility Act of 2007 says:

44.-(1) Any Government in the Federation or its agencies and corporations desirous of borrowing shall, specify the purpose for which the borrowing is intended and present a cost-benefit analysis, detailing the economic and social benefits of the purpose to which the intended borrowing is to be applied.

(2) Without prejudice to subsection (1) of this section, each borrowing shall comply with the following conditions-

(a) the existence of prior authorization in the Appropriation or other Act or Law for the purpose for which the borrowing is to be utilized; and

(b) the proceeds of such borrowing shall solely be applied towards long-term capital expenditures.

 We can all agree that the Federal Government breaks the (b) section of that law every 2 or 3 days. Officially the government’s domestic debt is somewhere around  the N10trn mark (my usually reliable sauces tell me the real figure is around the N20trn mark). Well, look around you -do you see N10trn worth of infrastructure anywhere? Exactly. Most of the FG’s borrowing, especially recently, has been to fund things like payment of salaries and paying interest on older debt (what Yorubas might call fikan rankan). By next year, the amount spent on servicing the national debt will almost certainly cross the N1trn mark.

The Federal Government can defy gravity in this way – if it needs to pay salaries, it can simply print the money to pay (this is the long and short of what happens). It is afterall a sovereign with its own fiat currency. States have no control over the currency so they have to stay within some financial limits. When a state goes to borrow money from the markets for example, most sensible lenders will only lend on the condition of a Sovereign Guarantee. In other words, the repayments are deducted at source before the money gets to the state at all. The pain of such an arrangement becomes really acute when allocations are reduced.

So what to do? I am not convinced that the structural problems that cause states to get themselves into a mess like Osun has can be solved by democracy as we know it. Politicians will always have an eye on the next election so taking a knife to a bloated civil service is a mug’s game. Campaigning against a Governor who has sacked workers is the easiest thing in the world. You can pretty much call him the love child of Hitler and Pol Pot and you will find an audience in the electorate – the former Governor of Osun State from 1999 – 2003, Bisi Akande, had the nerve to reduce the state civil service and was promptly defeated at the polls by Olagunsoye Oyinlola who then went on to reinstate most of the sacked workers.

***

Today ‘IGR’ has become like a magic or even fetish word. Everyone believes in it and wants more of it. This in turn means that you hardly ever see any analysis of what exactly it is makes up IGR from any state – everyone just runs with the headline figure and use it to compare how one state is doing against another. The reality is that most states are not actually generating any revenue. What they report as IGR is mostly PAYE that they deduct from workers salaries paid from federal allocations. Remove this PAYE ‘IGR’ and most states are generating absolutely nothing. If this sounds like an accounting ruse….well, me I didn’t go to school.

I can think of 3 possible solutions to this problem.

1. At the moment, the FG collects all corporation taxes while the states collect employee taxes (PAYE). What if we were to reverse this? As is painfully clear, states can only really generate revenues from where wealth is being created. This is why you see states behaving like parasites and gangsters shaking down any business for whatever they can extort from them.

Last year, it was reported how Osun State (inspired by Lagos State) was threatening to shut down MTN’s operations over non-payment of ‘right of way’ fees. This happens in almost every state where governments do everything they can to frustrate business until they can extract something from them.

Under this arrangement, states are not obliged to do much to establish the environment that makes it easier to do business. Indeed, they can be as hostile to business as they want. The job of attracting business to Nigeria mostly belongs to the FG. Meanwhile, the person who gets the blame for lack of jobs is the FG while the states collect the taxes on jobs.

Maybe if we let states collect company taxes while the FG collects employment taxes, incentives might be better aligned? It might also force states to think about the things to do to actually attract businesses or maybe even lead to competition on taxes between states. There are problems with this idea of course, but the current situation is hardly working.

2. Since the government is immune to this problem the states face, it might as well help out the states. That’s what friends do.

Let’s create a fund and call it the Pretend As You Were On Condition of Fiscal Rectitude Fund (PAYWOCFR). This fund will be like a smoothing fund for the bad days when oil prices drop off a cliff, as they have now.

So imagine State A – in a normal month it receives N5bn per month in federal allocations. Oil prices crash and its monthly allocation reduces to N3.5bn. It can then tap into the PAYWOCFOR for an extra N1.5bn to meet the shortfall. There will be a maximum a state can draw down based on say, the average it has received in the last 12 months. If oil prices bounce back up and the state’s allocation goes up to say, N7bn, the extra ontop can be deducted to repay into the fund.

The point of this PAYWOCFR is to allow states some stability so they can say with a measure of certainty, how much they will be getting each month, high or low oil prices.

The key with this is the pound of flesh that will be extracted from the states in exchange for allowing them tap into the fund. There are a whole bunch of conditions that can be attached to  allowing access to the money.

Feel free to think of all the things that could go wrong with this e.g when things go back to ‘normal’, will states be obliged to keep whatever commitments they agreed to when they were desperate?

3. You can read about the bankruptcy of the City of Detroit on the Wikipedia page. After years of mismanagement, bad luck and population decline, the city had had enough with debts of up to $20bn. Today, 2 years after, it has started the very long process of healing which includes things like the Blight Removal Task Force kicking down 200 abandoned properties every week.

But Detroit is merely the largest city to go bankrupt in America. It is not the first and certainly won’t be the last – about 13 municipalities have filed for bankruptcy since 2008. It’s a complicated process that is usually triggered by states owing salaries, pensions and everything else.

Here in the UK, it is very unlikely that councils would go bankrupt but councils that run into trouble (not just financial) can be placed in special measures which allows the central government to take over the running of all or parts of the council’s operations for a period of time.

Think of either option as a State of Emergency but triggered by an economic crisis as opposed to a breakdown of law and order as we are used to. And why not? It will be an opportunity to force through strong medicine to get a state back in financial shape.

There are no easy answers anywhere as far as I can see. Which means its more likely that things will continue as they are.

FF

Water and Economic Development

I don’t mean to flog a dead horse but I think there might be an economic lesson in the recent furore over the Oba of Lagos’ comments. In particular, I’d like to zero in on a rather popular view about Lagos that has been echoed by no less a person than Chimamanda Ngozi-Adichie in her recent piece on the matter:

But it is odd to pretend that Lagos is like any other city in Nigeria. It is not. The political history of Lagos and its development as the first national capital set it apart. Lagos is Nigeria’s metropolis

As the gist goes, Lagos is what it is today because it benefitted from being the Colonial and Federal capital. This is why it is more ‘developed’ than anywhere else in Nigeria. Indeed, that is what Ms Adichie is saying above – that it is the political history of Lagos that sets it apart and why it is like no other city in Nigeria.

Well, Lagos is certainly like no other city in Nigeria for sure. But is this because of its ‘political history’? That is, if Lagos was never the capital of Nigeria, would it still be Lagos as we know it? Would another city have developed further than Lagos if it had been chosen as the capital?

The best way to answer a question like this is to try to figure out why Lagos was chosen by the British as a capital in the first place. And the answer to that lies with geography. I try to avoid economic theories linked to geography as much as I can because it is too deterministic and people then focus on the problem and not the solution. But this is important.

Here’s a random Daily Mail story from 2008:

Hooked up to four powerful tugboats, the World War II aircraft carrier Intrepid began what could be its final cruise on Thursday – a return to the Manhattan pier where it has served for 24 years as a military and space museum.

Lines were cast off at a Staten Island naval pier, freeing the ship for the five-mile trek up New York Harbor and the Hudson River.

You can click on the link above to see some photos of the ship being tugged to the museum. The ship itself, USS Intrepid, has a Wikipedia page which tells us that it had the capability of carrying up to 100 aircraft and weighed almost 37,000 tonnes with a full load. It was also 266 metres in length and about 45 metres high. I think we can conclude it’s a pretty big ship.

Yet that giant of a ship was being towed into close to midtown Manhattan in New York. Can such a ship dock anywhere inside Africa? The answer is no. And it is not for lack of facilities or ports to handle its size.

In some ways Africa has been dealt a tragic hand by geography – more than half of the continent is at least 2,000 feet above sea level. Indeed, most of the continent is at least 1,000 feet above sea level. Of course, the higher above sea levels you are, the higher your waterfalls and cascades where rivers meet or drop into the seas and the oceans. This helps to explain why many of the rivers in Africa are not really navigable and the general scarcity of harbours. That is why you cant really get a ship the size of USS Intrepid to dock inside any harbour in Africa. Consider the River Niger – the longest river in Sub-Saharan Africa at 4,200km long – It starts in the Highlands of Guinea which is a dizzying 5,800 feet above sea level before entering the Atlantic Ocean, obviously at sea level. This is not an easy river to navigate and it confused the Oyinbo explorers for a long time.

***

All of this matters economically. Before humans came up with trains and aeroplanes, the only way to get around was by sea. It was what made a lot of trade possible as well as migration. Where rivers were treacherous and impossible to navigate, it meant that a lot of places were culturally isolated for a long time and were at great risk of coming under attacks as a result. It might also explain why a continent with around 15% of the world’s population has over 30% of the world’s languages.

You can still see examples of how difficult it is to navigate Africa’s geography for business till today. Take the Simandou Iron Ore deposit in Guinea – it is the richest quality iron ore in the world. But have a look at the map below (from The Economist) which shows the plan of how the ore is to be transported from mine to port:

Simandou

Obviously the most efficient route to the coast for the ore has to be through Liberia. But if you were a Guinean, would you agree to building a port in another country to transport your ore? Exactly. So this route through Guinea will cover 650km of railway lines with 35 bridges and 24km of tunnels at a total cost of $13bn (just for the infrastructure alone). When Guinea will start making money from that ore is anyone’s guess but it won’t be anytime soon.

Now, you are free to assume that the British were stupid for choosing Lagos or perhaps they drew lots and decided on which part of Nigeria to land in – no one will stop you from thinking that way. But these are the facts – the highest point in Nigeria is Chappal Waddi in Taraba State which stands at almost 8,000 feet above sea level. And the lowest point? Lagos Island at almost 1 foot below sea level (click-through the wiki link and have a look at the African countries on the list). Compared to today, there was no sophisticated shipping technology back then so the British naturally used the best access point from the river as their base. Lagos had a natural geographical advantage. Lokoja was a capital before Lagos but the difference in both cities today, tells us that economics trumps politics over the long term.

 ***

So where does this leave us? Is a natural geographical advantage the be all and end all of economic development? Absolutely not. Our purpose on earth is to defeat brute nature. Central heating has made it possible to live productively in certain countries in the world such as those in Scandinavia. Without air conditioning, the US South would seriously lag behind the rest of America today economically. In the time of the Tang Dynasty, China was so hot that an inventor named Ding Hua came up with an air conditioning system and an Emperor later had a ‘cool hall’ built in the imperial palace. Go to Miami today and you will lose count of the number of man-made islands there. Humans have learnt how to create lakes too and build whole cities out of the ground. In 1965, Singapore’s land size was 58,000 hectares. Today it is 71,000 hectares and it plans to add another 6,000 hectares by 2030. Much of this has been achieved by importing sand from other countries. The invention of the elevator made it possible to pack human beings more densely in cities which are much easier to administer and build infrastructure for. The list of places and situations where humans have beat brute nature is endless.

But is it to strange for a country to have a dominant city? Does this always happen at the expense of other parts of the country as is the narrative these days that Lagos was developed at the expense of other parts of Nigeria because it was the capital? The UK’s GDP is around $2.5trn. London alone accounts for close to $800bn of that. The biggest infrastructure project in Europe right now – Crossrail – is happening in London and the High Speed 2 train planned will link the rest of the country to London. It is not because Bristol or Manchester do not need new train networks but because building a country does not have to be zero sum and strong economic centres are not so easy to replicate. And often, the answer lies in history and economics and not politics.

Believing that a thriving economic centre can be created by politics is a journey that leads down the garden path. Reducing the importance of Lagos to a political creation is an economically illiterate and depressing argument to be having. Lagos does not exist at the expense of anywhere else. People make money in Lagos and go and spend it elsewhere in the country. People come to Lagos for opportunities daily – it’s a big market and its density means that infrastructural challenges are not a barrier to getting goods and services to people as they might be in other parts of the country where people are widely dispersed. Lagos is an advantage and benefit to Nigeria and it should be maximised as much as is humanly possible.

Oba Akiolu’s comments were deeply irresponsible and offensive. But Lagos is far better than his comments and it should not be reduced to his level. And certainly it should not be an excuse for people on both sides to bring out their prejudices in the sunshine.

There’s a country to be built and it certainly wont happen by half-baked theories used as a wrapper for people’s prejudices.

FF

 

P.S – I’m from Ondo. Last time I went there, it looked so depressing and hopeless to me. If you ask me the best way to develop the place, my answer will be to find a way to connect it to Lagos as quickly and efficiently as possible. Enough said.

 

 

 

 

‘On such a full sea are we now afloat…’ – A Letter to the President-Elect

Mr President,

I really don’t understand what it means to ‘stand on existing protocol’. Nevertheless, I will go ahead and stand on existing protocol.

1. On the day that Deng Xiaoping became leader of China in 1978, he was just under 75 years old. Between 1980 and 2010, China lifted 680 million people out of poverty. There can be no doubt about it — Deng Xiaoping’s reforms which opened up China’s economy played the biggest part in the stunning transformation of that country.

At a mere 72 years old; age cannot be an excuse for you. You’ve wanted this job for so long anyway. Now, it’s showtime

2. Between 1870 and 1910, over a million Swedes (around 20% of the country’s population at the time) abandoned Sweden for a new life in America. They left a country that was a pretty poor and dark place and suffering repeated crop failures, for the chance of a better life in America.

In 1870, Sweden had a GDP Per Capita of less than $1,500 — not far from where Nigeria was before our GDP rebasing. Today, their GDP per Capita is over $60,000. By the numbers, it has gone from a poor country to a very rich country in just over 100 years.

All of that transformation — from a country people were fleeing to a magnet for immigrants today — happened while Sweden has been a democracy. It is fashionable for people to yearn longingly for an authoritarian ruler in the fashion of Lee Kwan Yew who will drag his country to prosperity. But just as it is never reported on the news when aeroplanes land safely, no one really talks about countries that have gone from poverty to wealth while being democracies.

The excuse that being a democracy makes it hard or impossible for economic reform and development cannot be valid. It can be done. And you must stay within the powers granted you by the constitution – they are there for a reason, mainly to protect the people from the raw naked power of your office.

Nigeria has chosen the path of democracy. There is no longer room for any type other of government. This is what we have and it is what we will develop with, come hell or high water.

3. A few days after General Park Chung-hee took power in South Korea in 1961, he began to arrest a number of businessmen and crony capitalists under a law known as ‘Special Measure for the Control of Illicit Profiteering’. An old prison in Seodaemun which had been used by the Japanese during their occupation of South Korea, was converted to a special prison for crony capitalists and businessmen who had benefitted immensely from the previous government.

To all intents and purposes, it was an anti-corruption crackdown by General Park. But that was only half the story.

A few months after taking power, General Park published a book titled ‘Our Nation’s Path: Ideology of Social Reconstruction’. The book promised a ‘miracle on the Han River’ and building up South Korea into a ‘mammoth economic strength’.

Taken together, General Park did not launch an anti-corruption just for the sake of it. He did it to bully those who might otherwise have been enemies of progress, into supporting his vision of turning South Korea into a ‘mammoth economic power’. The threat of prison was enough to turn rent seekers into manufacturers and exporters in short order.

Yes, a big part of why you have been elected is to get a handle on the corruption which has decayed our country and now threatens to bring the whole structure down. But simply waging war against corruption without a vision of where the country should be going will become no more than a moral crusade. Being tough on corruption will give you a massive chance of pushing through the reforms needed to unleash the animal spirits of the Nigerian economy and put the country on the path to economic development.

General Park’s grand vision was to turn South Korea into an exporting economy. By the time he had finished dealing with the crony capitalists under the guise of anti-corruption, the results were good enough for him to declare, in 1964, every November 30th as ‘Korea National Export Day’. Today, there are few countries on earth you will visit where you won’t find Korean phones, electronics, cars or even ships. And General Park has been dead since 1979.

Chart a new course for this country so that the crooks you want to set straight (most of whom are much younger than you), simply don’t go and hide somewhere waiting for you to leave the scene so they can return the country to ‘business as usual’. If you punish a particular type of behaviour, you must promote an alternative that will be there long after you have left office.

4. The fact that an idea has been tried several times and failed woefully each time does not mean that someone will not attempt it again. Failure, after all, is relative – that something has failed millions of Nigerians does not mean that it has not been an unqualified success for the select few benefitting from that failure.

Between 1958 and 1961, around 36 million people died of hunger and physical abuse in China as a result of the Great Famine brought about by Chairman Mao’s ‘Great Leap Forward’. Partly to cover up the failure of the policies that led to that famine, Mao doubled down and launched the Cultural Revolution which ran from 1966 to 1976 and persecuted millions of real and perceived enemies.

Yet, after Mao died and Deng Xiaoping took over, there were still many many people who wanted to continue his failed policies perhaps because changing course would mean an admission that they had failed. It fell upon Deng to find reformers and back them with all his political will. Some felt the economic reforms were too radical, others felt they were too timid. Chen Yun was a respected economist that Deng could not afford to alienate – he fell into the former camp of those who were skeptical about reforms. But there was also Zhao Ziyang who was very critical of Mao’s policies and was a proponent of bold agricultural reforms. He received the backing of Deng and his agricultural reforms were so successful that Chinese people came up with a saying ‘yao chi liang, zhao Ziyang‘ translated as ‘If you want to eat, look for Ziyang’. The people who had previously starved to death under Mao, knew exactly what they were talking about.

In the end, the anti-reform crew got to Ziyang but by then it was too late to reverse his reforms.

Mr President, you must never run out of political will with which to back the Ziyangs in your government. The change we need in Nigeria goes beyond simply changing the government or ruling party. We desperately need reforms of our laws and how our government sets about tackling the issues plaguing the country. Reform will never be easy (an outgoing minister even reckons some things are unreformable in Nigeria), but you must try. And you must never stop. You must find and protect your Ziyangs before the enemies of progress get to them.

We must acknowledge that we are backward, that many of our ways of doing things are inappropriate and that we need to change

Those were the words of Deng on the day he took office. The result is there for all to see.

5.  You have wanted to be President since 2003. The problem is that, depending on how one looks at it, the problems you wanted to solve in 2003 are now bigger and more complex. It is now when the problems – of insecurity and corruption and economic mismanagement – have gotten out of hand, that Nigerians have, perhaps in desperation, called you.

There are several things this tells us. One is that as long as the problems were ‘manageable’, Nigerians did not need your services. People who behave in this way are likely to get impatient very quickly. It has only been about 2 weeks since Fulani herdsmen attacked a community in Benue State, killing 80 people. It is this same state that you, a Fulani man, just won in the election. Our country is desperate to do better and it has called on you to do the job.

The job is going to be incredibly difficult bordering on the impossible and frankly, it would have been better for you to have been elected in 2003 when some of these issues hadn’t compounded to where they are now.

And yet, as of today, there is nothing stopping you from ending your time in office as Nigeria’s greatest ever leader. The slate is currently blank.

Draw inspiration from another man who, by the time he had finished his 8 years in office as his country’s President, was freely being referred to as ‘the best President ever’ by his countrymen. He increased the average number of years each child spent in school from 5 to 8 years. The number of homes with a functioning and proper connection to the sewage system increased from 37% to 51% under his watch and the number of homes with washing machines went from 24% to 44% of the country’s total. The percentage of the population living in poverty dropped from 32% to 15% in his 8 years in office. That percentage drop translated to 20 million people who were able to move up out of the indignity of poverty and participate in the country’s economy.

Like you, he only won the presidential election at the 4th attempt in 2002 after trying and failing in 1989, 1994 and 1998.

His name of course is Luiz Inácio Lula da Silva.

There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.

***

Abū Ḥāmid Muḥammad ibn Muḥammad al-Ghazālī has been called the greatest Muslim scholar in history by very serious people. One of his most celebrated works was his ‘Book of Counsel for Kings‘ in the classic Arabian tradition of ‘mirrors for Princes’. Here’s a quote:

nothing is more damaging to the subjects and prejudicial and sinister to the King than royal inaccessibility and seclusion; and nothing impresses the hearts of the subjects and functionaries more than ease of access to the King. For when the subjects know the King is easily approachable, it will be impossible for the officials to oppress the subjects and for the subjects to oppress one another

In the same tradition, another Muslim scholar, Nizam al-Mulk wrote to the Sultan of Shah in 1091 describing how Persian monarchs ensured they did not deviate from the work of serving their people:

According to the books of our ancestors, Kings would hold court out of doors, seated on horseback atop a tall platform so as to distinguish from among all the people gathered in the plain those who were suffering oppression and to give them justice. The reason for this custom was that once a King retires to a residence where doors abound, and barriers and vestibules and hallways and gates, men of ill-will and perversity can bar people’s entrance and keep them from lodging complaints with him.

How you choose to govern such that you are not captured behind doors and vesitbules and hallways and gates, will require plenty of wisdom. But it must be done. Some say this is one of the main reasons you have just kicked Goodluck Jonathan out of office. It will be utterly depressing if you fall victim to the same disease.

***

I am not aware that it is possible to campaign in back to back elections on the theme of change. That is, though you have won the elections by campaigning for change, in 4 years time, you will be on the receiving end of the change message while you convince Nigerians of the need for continuity. ‘Twas ever thus, Mr President.

My friend Osita Nwoye – a believer long before I was one – and one of the most committed people to your cause I have ever met put it best a few days ago:

I got some ‘congratulatory’ messages too and all I did was tweet and make a few phone calls on your behalf.

Now that we have seen that it is possible to unseat a President from office for non-performance, I am afraid that this has put a limit on the amount of intellectual dishonesty that is possible in your defence even by your die-hard fans.

I wish you all the very best. ‘Life is to be entered upon with courage’ as Alexis de Tocqueville once said.

FF

Guest Post: Economic Management in Nigeria Post May 2015

 

The outcome of Nigeria’s March 28 2015 polls has significant consequences for Africa’s largest economy. The pace and quality of economic reforms, never sterling, have become patently mediocre under President Goodluck Jonathan. Pervasive perception of the Government’s incompetence and corruption has fed widespread disaffection. With the fall in international oil prices through which the country earns 95% of its foreign exchange and 70% of its revenues, the state’s capability to support consumption and growth is severely curtailed. More than ever, Nigeria needs to initiate and credibly implement economic and institutional reforms that will attract a scale of investment and unlock the quantum of growth sufficient to establish it as a diversified middle-income economy. This will have salubrious political effect as Nigeria’s economic policy weaknesses are closely related to the incapacities that threaten the Nigerian state.

Bye Bye to Goodluck?

The most credible opinion polls have either projected an election too close to call (e.g. ANAP Foundation’s) or clear victory for General Muhammad Buhari, candidate of the opposition All Progressive Congress (Eurasia’s). A Buhari win is potentially better for reforms and growth in Nigeria. The Jonathan administration will be unable to muster the institutional energy, discipline and coherence required to implement critical but controversial reforms (such as trimming and paying the civil service better). Intensified political opposition to a re-elected President Jonathan administration will transform the credibility gap it suffers to near illegitimacy, further rendering it unable to overcome the social opposition to reforms (which it has often managed in a shambolic manner).

Nonetheless, it cannot be taken for granted that a General Buhari Government automatically will launch Nigeria on the path of economic, institutional and political reform. The All Progress Congress (APC) has not shared any coherent economic policy plan that would enable Nigerians and investors predict the direction of economic policy after a likely APC victory on March 28. Predictions have to be based on an analysis of Nigeria’s political economy, especially historic and recent patterns of interactions between ethnic identity politics and economic policy.

Nigeria’s politics have bred poverty, waste and corruption principally because of poor policy choices that have favoured consumption over investment and ineffective state interventions over market provision. Nigerian political elites have been able to continue with these ruinous policy choices because of the absence of strong pro-reform domestic constituencies and modes of political mobilization centered on ethnic and religious identities rather than economic interests. The politics of the 2015 elections have not been different. Supporters’ (as well as some analysts’) expectations of improved governance and economic performance under Buhari rest exclusively on his (personal) probity. This emphasis on personal character is superficial given the fact the most consequential forms of corruption and Nigeria’s persistent failure to fulfill its economic potential have been rooted in poor policy and institutional choices.   General Buhari’s ability to turn Nigeria around should be judged more on the possibility of decisively altering the course of policy.

Awoism Federalised

The Eurasia Group Nigerian elections forecast notes a “vast policy gap” between the “pro-business” and “pro-liberalisation” southwestern wing of the APC and the more “statist and nationalist orientation” of the northern politicians around General Buhari and predicts that “the ascendant” southwesterners will dominate economic policy in an APC Federal Government. The Eurasia forecast underestimates the significance of the fact that social policies such as conditional cash transfers, rooted in Awoist “progressive” Yoruba politics, constitute the central economic platform of the APC manifesto. The lack of attention to urgent investment-stimulating and jobs-creating reforms is as worrying as the macroeconomic threat social welfarism pose in a world of half-price oil. The welfarist policies are likely to be partly pursued despite their onerous costs. They are partly principled beliefs and partly an electoral policy (rather than a coherent or sustainable development strategy) for Awoist political parties. The Princeton economic historian Atul Kohli wrote of the Action Group’s universal education policies of the post independence period “scarce resources were thus utilized ineffectively, mainly to satisfy the short-term political needs of the emerging leadership” (emphasis added). (Action Group’s welfarism was much more affordable as the cocoa export earnings of the Western Region, was four and seven times the earnings of the Eastern and Northern regions respectively). The utter silence over the frittering of about $ 5 billion of Nigeria’s foreign exchange reserves in futile defense of the Naira seems another evidence of the APC’s lack of policy capacity and/or the distance between its economic advisers and the more influential politicians.

The “pro-business” orientation of the dominant southwestern wing of the APC appears completely virtuous only when compared to the party’s Northern wing. The Peoples’ Democratic Party also isn’t anti-business but has been far from been a consistent promoter of free or transparent markets. The “pro-business” orientation is most clearly expressed as a procurement system which has also been a means to finance the party and for its leaders to dominate regional politics. This is also much in keeping with the Awoist tradition. This system somewhat benefits from more effective central control in APC Lagos than PDP Abuja. The way it is adapted to function at the federal level has substantial implications for infrastructure procurement, including through public-private partnerships and strategies to expand or create key industries. Will APC economic strategy aim to attract investments from international capital or will it favour indigenous crony capitalists? What will happen to policies such as the nepotism-riddled “land allocation” system and import waivers which largely have bled the treasury and failed to expand industries and create jobs?

There will be actors on both wings of the APC who will promote corruption-prone industrial policy and subsidies, falsely arguing that under General Buhari, the Government will have the discipline to implement them productively. As a military ruler, General Buhari’s instincts were clearly statist; his total lack of interest in and understanding of the economy has shone through four presidential campaigns. He will be far from being a competent umpire of squabbles over economic policy in the cabinet. Advocates of statist interventions and subsidies are likely to be more successful in getting General Buhari to back them.  The position of would-be reformers already is weakened, but not fatally or conclusively, because the party has not committed itself to or stated its positions on crucial economic policy issues during the campaign. One of the early signs of whether Buhari Government will represent inter-elite distributional politics as usual would be if it appoints the “constitutional” 36-person Federal Cabinet.

A New Kind of Coalition

The rollback of reforms by former President Yaradua’s government was presaged by an extraordinary declaration by its powerful secretary Baba-Gana Kingibe that “reforms are dead”. This was widely interpreted as an ethnic reaction against reforms under former President Obasanjo that had seen Northerners excluded in the acquisition of valuable state assets and licenses. But it seems more plausible that Yaradua’s advisers merely aligned to his ideological proclivities. He had been an avid Marxist in his lecturing days and later member of the socialist Peoples’ Redemption Party. (Aliyu Dangote, a Northerner whose business had been boosted by the Obasanjo Government’s patronage, was one of the major beneficiaries of the oil refineries sale that became the first targets of Yaradua’s strike against reforms).

While Buhari certainly isn’t an advocate of the free-market, he is unlikely to burden his Government with Marxist baggage like Yaradua. He will lack the political capacity to carve out a Northern anti-reform “kitchen cabinet”. A Buhari-led APC Government will have unique features for a Nigerian Federal Government which will confer more advantages than liabilities. Historically, successful Federal parties have been founded, crafted or controlled by politically dominant conservative Northerners who coopted bigwigs from other regions to help them secure enough votes to win federal elections. The only common purpose of these coalitions was to win power and keep it by sharing government positions and associated material resources as fairly as possible. Ruling party coalitions were not only unable to develop an economic strategy or development vision, they also lacked the capacity to execute policy no matter how poorly defined.

No doubt, power rather than policy solutions to Nigeria’s myriad economic and social problems have also been the primary preoccupation of APC coalition building. And the pursuit of wealth will continue to be a significant part of Nigeria’s political culture under an APC Government (General Buhari’s aides accused accomplished policy wonks who joined his 2011 campaign of wanting to hijack the Buhari brand they had been nurturing after “chopping” in the PDP). But an APC Federal Government will be politically resilient and have the confidence and capacity to implement those reforms it choses to initiate. It will enjoy the support of the politically powerful North, opposition from whom diminished considerably the political capital President Jonathan (would have) required to pursue reforms consistently. The APC’s southwestern bulwark and the region’s vigorous media will complement the Government’s northern support. Key political appointees will be less of overly independent ethnic power brokers or nominees of regional godfathers rewarded for participating in a successful electoral coalition and more of party people anchored in defined authority structures and hence more easily marshaled to execute policy.

General Buhari will not be an all-powerful president (like President Obasanjo) or be compelled to disruptively subdue opposition within the party (like President Jonathan). The influence the leaders of the southwestern wing of the APC will seek to exert on the Buhari Government will be overt, legitimate and institutional as opposed to the hold President Obasanjo unrealistically sought singly to exercise on successive regimes from his Otta farm. Policy decisions under an APC Federal Government is thus unlikely to be subjected to the whims of the President (or that of individual free-agent Ministers) and will thus be more sustainable. Squabbles within the ruling party, often ethnic-centered, though highly detrimental to the definition and implementation of economic policy, have been over power rather than policy itself. Nigeria is likely to get a breather from power squabbles at least for four years should the APC win the elections. The personal relationships forged as well as the understandings reached during four years of negotiating a (failed and then  successful) merger will be useful in averting disagreements (over the gains of power) strong enough to fracture the APC into its ethnic constituents. It would greatly help to formulate a semi-formal system of procurement, especially of private investment in and operation of public infrastructure, which meets the expectations of both APC wings and deepens Nigerian capitalism while not overburdening the populace.  Such must also be clean enough to attract international capital. President Jonathan’s power sector privatization has fallen short of many of these criteria.

There will also be the question of what a Buhari government has to deliver for the Northern talakawa that constitute his core political base and also Nigeria’s poorest citizens.  Any sustainable improvement to their plight will come through leaps in the quality of basic education, healthcare and agricultural extension services and security, stuff that can only be delivered through steady improvement in state capacities rather than a splurge on infrastructure or cash transfers.

The APC has touted General Buhari’s incorruptibility rather than advance a clear economic strategy and agenda for institutional reform. If it wins the March 28 elections, it will enjoy a short honeymoon within which it quickly needs to establish its reform credentials before investors and a reputation for competence and trustworthiness before Nigerians. This has to substantially supplant its welfarist plans. It could succeed if it exploits its political heft in appointing competent professionals (who can be found amongst people close to both the Buhari and the southwestern wings of the party) rather than reward regional political bigwigs with ministerial and other important appointments. This will be the decisive test of General Buhari’s incorruptibility. His Government needs to quickly package key reforms and clearly explain to Nigerians why they are critical to the goal of changing Nigeria from a corrupt and poverty-ridden country into a fairer and progressively richer society with a more competent and honest government. To have any chance of fulfilling even some of the aspirations of its teeming supporters, he must first and quickly let down the party men of various ranks who will be angling for gains of Nigerian politics as usual.

 

Dr. Agboluaje is a Lagos-based strategic communications and policy consultant

 

Did Dahiru Mangal Kill The Nigerian Textile Industry?

In the mid-1980s Nigeria had 175 textile mills. Over the quarter-century that followed, all but 25 shut down. Many of those that have struggled on do so only at a fraction of their capacity. Of the 350,000 people the industry employed in its heyday, making it comfortably Nigeria’s most important manufacturing sector, all but 25,000 have lost their jobs. Imports comprise 85 per cent of the market, despite the fact that importing textiles is illegal. The World Bank has estimated that textiles smuggled into Nigeria through Benin are worth $2.2bn a year, compared with local Nigerian production that has shrivelled to $40m annually. A team of experts working for the United Nations concluded in 2009, “The Nigerian textile industry is on the verge of a total collapse.” Given the power crisis, the near-impassable state of Nigeria’s roads and the deluge of counterfeit clothes, it is a wonder that the industry kept going as long as it did.

The knock-on effects of this collapse are hard to quantify but they ripple far into the Nigerian economy, especially in the north. About half of the million farmers who used to grow cotton to supply textile mills no longer do so, although some have switched to other crops. Formal jobs in Nigeria are scarce and precious. Each textile employee supports maybe half-a-dozen relatives. It is safe to say that the destruction of the Nigerian textile industry has blighted millions of lives.

I am currently reading Tom Burgis’ The Looting Machine from where I have taken the quote above. (Actually, the quote above is from an excerpt of the book published recently in the FT. Find it here). The author spent 9 years across Africa as a reporter and this book is the result of the things he learnt. So far, it’s quite a remarkable, if terribly depressing, read.

It is one thing for a country to lose an industry making say, compact disc players – at least you can say that technology rendered that product almost completely obsolete and killed demand for it along with the industry. But why lose a textile industry? It’s not as if clothes have gone out of fashion – the market is worth $2.2bn of illegal imports yearly!

Even more annoyingly, the textile industry remains one of the most labour intensive in the world today. It is also not very capital-intensive compared to other industries – an American study from some years ago estimated that oil and gas companies spend $3.2m per employee in terms of investments. In comparison, the textile industry spends around $13,000 per employee.

Markets are not easy to form. Jobs are not easy to create (they are costs). Who lets such an industry go to waste? There’s more:

And there was something that had accelerated the mill hands’ consignment to the trash can of globalisation. Shuffling their feet and looking warily around for anyone who might be eavesdropping, the men murmured a single word: “Mangal.”

I used to hear the name Dahiru Mangal especially during the Yar’Adua administration but the full-scale of his economic destruction only came to me while reading this book. To put it in Nigerian parlance – he is into smuggling. He denies this of course, saying he merely provides a logistics services.

In the shadier corners of the workshop of the world Mangal found the perfect business partners. “The Chinese attacked at the heart of the industry: the wax-print and African-print segment,” a consultant who has spent years investigating — and trying to reverse — the slow death of Nigerian textiles explained to me. During the 1990s Chinese factories began copying west African designs and opening their own distribution branches in the region. “This is 100 per cent illicit — but the locals do the smuggling,” the consultant went on. There are, he said, 16 factories in China dedicated to churning out textiles with a “Made in Nigeria” badge sewn into them. For a time the Chinese material was of a much lower quality than Nigerian originals, but that gap narrowed as Chinese standards rose. The Chinese began to take control of the market, in league with Nigerian vendors. Mangal acts as the facilitator, the conduit between manufacturer and distributor, managing a shadow economy that includes the border authorities and his political allies. Like many others who profit from the “resource curse”, he plies the hidden byways of the globalised economy.

From his base in Katsina, Mangal arranges the import of food, fuel and anything his wealthy Nigerian clients might desire. But the staple of his operation is the textiles that have helped kill off the local industry. The details of the alleged smuggling operation are drawn from interviews with northern Nigeria politicians, officials, businessmen and textiles consultants in Abuja, Katsina, Kano and Kaduna between 2009 and 2013. Mangal is said to charge a flat fee of N2m (about $13,000) per cargo, plus the cost of goods. In 2008 Mangal was estimated to be bringing about 100 40ft shipping containers across the frontier each month.

Mangal goes to China to buy materials, pays workers, produces clothes, puts them in a container, ships them to a neighbouring country, bribes customs officials, smuggles them across the Nigerian border and still gets it to the Nigerian customer at much cheaper prices than something produced on their doorstep. It’s a different thing when someone brings in something not produced in the country like iPhones. But to be so comprehensively attacked and destroyed at your own game in this way is quite sad and worth reflecting on.

***

The story of why this happened is fairly simple to understand. The knee jerk answer is always to blame epileptic power supply. It definitely does not help to have rubbish electricity but it cannot be the only reason. The author goes on to explain:

Dutch Disease is a pandemic whose symptoms, in many cases, include poverty and oppression. The disease enters a country through its currency. The dollars that pay for exported hydrocarbons, minerals, ores and gems push up the value of the local currency. Imports become cheaper relative to locally made products, undercutting homegrown enterprises. Arable land lies fallow as local farmers find that imported fare has displaced their produce. For countries that have started to industrialise, the process goes into reverse; those that aspire to industrialise are stymied. Processing natural commodities can multiply their value four hundredfold but, lacking industrial capacity, Africa’s resource states watch their oil and minerals sail away in raw form for that value to accrue elsewhere.

Once the oil money starts to enter a country, the local currency comes under pressure and starts to appreciate. Note, this does not mean that currency’s value visibly rises from say N2 to $1 to N1.50 to $1. Instead, the currency is always trading above its real value. So even if the exchange rate is N150 to $1, it might be the that the real value is actually N200 to $1.

Using those numbers, imagine that it costs $5 to make a t-shirt in China. It can sell for N750 in Nigeria at the overvalued exchange rate. But in reality, if the exchange rate was at its real level, it should sell for N1,000 which will obviously make it less competitive in the local market. Naturally, the Naira should be at its real level to at least make it harder for cheap imports to gain a foothold in the market. It also means that if Nigerian textile makers decide to export their products, they will get more Naira for it. This is obviously good as the local market is protected against cheap imports while making exports attractive at the same time.

But those dollars flowing into the economy from oil sales make it very hard to keep the currency at its real level or even undervalued. When the dollars come in, they need to be turned into Naira to be useful. Fighting this pressure on the Naira is by no means easy but neither is it impossible.

***

Everyone has heard of the famous Norwegian Sovereign Wealth Fund now worth almost $900bn. Here’s how the fund describes its life’s ambition:

The ministry regularly transfers petroleum revenue to the fund. The capital is invested abroad, to avoid overheating the Norwegian economy and to shield it from the effects of oil price fluctuations

Yorubas says that if you are not going to eat something, you shouldn’t bring it near your nose. If you don’t want the disease that this kind of money brings into an economy, best thing is to park it abroad.

You will agree that this is completely out of the question for Nigeria right now. We are so addicted to oil that grown men will burst into tears if their monthly allocation from the Federal Government is reduced. Worse, few states have any clue what to do to develop an economy that can pay its way via taxes as a recent CBN report showed – in aggregate, internally generated revenue across the states did not increase between 2013 and 2014.

But there is another way perhaps.

At any point during the last decade or so, it would have been impossible to go a few months without hearing the United States complain about China deliberately keeping its currency undervalued. Here’s a random Bloomberg story from 2010 as an example:

The U.S. pledged to monitor China’s “undervalued” yuan in the next three months for signs that Asia’s fastest-growing market is living up to its commitments to help rebalance the global economy.

China took a “significant step” last month when it ended its peg to the dollar and allowed markets to drive the currency higher, the Treasury Department said yesterday. The report, initially due April 15, concluded that no major U.S. trading partner manipulated its currency and said it’s not yet clear whether China’s policy shift will correct the yuan’s undervaluation. The Treasury promised another review in October.

“What matters is how far and how fast the renminbi appreciates,” Treasury Secretary Timothy F. Geithner said, using another name for China’s currency. “We will closely and regularly monitor the appreciation of the renminbi and will continue to work towards expanded U.S. export opportunities in China that support employment in the United States, in close consultation with Congress.”

 China sells a lot of stuff around the world and in America especially. They earn a lot of dollars from doing this. In theory, the effect should be the same i.e. as those dollars make their way back into the Chinese economy, the Yuan will start to rise which then reduces the competitiveness of their products against American producers. So how does China stop this from happening? From the same article:

China’s reserves rose to a record $2.447 trillion in the first quarter of 2010, according to the People’s Bank of China. Holdings jumped $22.5 billion in March, after gaining $9.4 billion in February and $16 billion in January, data posted on the central bank’s website in April showed.

They are doing pretty much the same thing the Norwegians are doing – re-routing the dollars into their reserves instead of the local economy and thereby keeping manufacturers and exporters competitive.

***

To paraphrase Winston Churchill – You can always count on Nigerians to do the right thing – after they have tried everything else. According to the book, Obasanjo dispatched Nasir El-Rufai  to try to stop Mangal’s smuggling. Mangal claimed he was merely providing a logistics service for people (illegally) importing clothes. Nothing came of it.

The next thing to do of course was to provide ‘intervention funds’ for the industry. Just before leaving office in 2007, Obasanjo ‘launched’ a N70bn Textile Development Fund. This was meant to revive the industry and create the usual 1 billion jobs bla bla. President Yar’Adua didn’t scrap or probe the fund (perhaps because it was merely launched under Obasanjo) but went ahead with it. He ‘appealed’ to Nigerians to be ‘patriotic’ and buy local textile as those industries were suffering due to ‘lack of demand’. He then went on to increase the size of the fund by an extra N30bn to N100bn.

In 2002, Obasanjo banned the import of textiles. By 2010, Goodluck Jonathan’s government decided it had had enough and lifted the ban. Clearly it hadn’t worked (except you were Mangal of course) and Aganga announced at the time that it was only encouraging corruption so the ban was to be replaced by tariffs.

Goodluck Jonathan continued with the Textile Development Fund and as at February 2013, 38 companies had benefited from the fund saving a massive 8,000 jobs and creating 5,000 new ones as a result. By the end of last year, the fund had disbursed N60bn in total and had even been renamed National Cotton Textile and Garment Policy (Aganga likes calling things ‘policy’). Of course, the military and government agencies were ‘directed’ to purchase made in Nigeria fabric as usual. Naturally, those who managed to benefit from the loan hailed the policy as the best thing to happen to textile in Nigeria, ever.

[As an aside, I often wonder how come an industry that has collapsed and isn’t producing anything still manages to have an association or something. What do they do in the meantime while waiting for government to bail them out?]

***

This is all very sad indeed. The funds have apparently been converted into equity by the government which means the industry does not have to worry too much about crippling interest rates. Yet, N60bn has been thrown at the problem to save 8,000 jobs.

The first and obvious lesson here is that prevention is better than cure – one shouldn’t really wait for an industry to die before then attempting to ‘revive’ it. Once those jobs go, bringing them back is very hard even when you have the sharpest policy makers running things (we don’t). No serious country should allow a guy like Mangal lay waste to a whole industry and livelihoods without so much as a response. Of all the things that damaged the textile industry, Mangal was almost certainly the easiest to deal with – just make it uneconomical for him to ship stuff halfway around the world and still make a profit.

Everything has now been tried – banning, unbanning, intervention funds, tariffs, mandating government purchase – without much success.

If the aim of what China and Norway have been doing is to stop their currencies from appreciating, then it becomes fairly obvious that keeping manufacturing competitive in Nigeria is as much a monetary policy issue as it is a fiscal policy one. What to do becomes fairly obvious.

But me I don’t want you people’s wahala so it is not from my mouth you will hear that the Naira needs to be deva…oh look at this big red elephant!

FF

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