National Carrier: Bad Ideas Die Hard In Nigeria

 

I like President Buhari. I remain a fan of the man. That said, for someone like me who believes in smaller government, I have always known that supporting Buhari carried the risk of supporting dirigisme. Whatever – politics is like a christmas hamper anyway; it is not everything inside the hamper you will like or find useful.

But even at that, hearing that Nigeria wants to ‘launch’ an airline (again) just makes you shake your head. The first part of the comments attributed to the President make all the sense in the world:

Our airports are the windows through which people see our country. Anybody coming into the country will likely come through the airports.

“If we cannot secure and maintain our infrastructure, it will reflect very badly on us

Nobody can disagree with the above – our airports, especially MMIA, are truly terrible. The bar is very low – all we have to do is make sure that the airports are not glorified zoos and we would have achieved something in life.

But then the second part of the story, attributed to the Perm Sec in the aviation ministry is where it all goes messy:

The President is quite concern about lack of national carrier for now and he has directed the ministry to look into the possibility of having a national carrier as soon as possible.

Oh dear. This bad idea never goes away. There are always people who get excited at the thought of a ‘national carrier’. What exactly it is about a guaranteed waste of money that excites people remains a mystery to me. Why not just fold the money into paper planes and throw them in the air? Or burn it? The overall effect will be the same.

***

Whenever the debate comes up, people are quick to point to countries that appear to have successful airlines – Ethiopia, Singapore etc – and ask why Nigeria too cannot do it. The numerous failures from around the world are never mentioned. The chances of failure are far higher than success. One should not reason from an outlier.

The video above is of Lee Kuan Yew addressing a Singapore Airlines pilots strike in 1980. The man (LKY) almost single-handedly built Singapore Airlines from scratch and made it what it is today. And he had good reasons – Singapore had no choice but to be open to the world as an entrepôt. The airline was just one part of this plan. The second part was building Changi Airport at a cost of $1.2bn plus shutting down the old airport which had cost over $600m to build. It is said that when he visited America and landed at Boston’s Logan airport, he noticed that most of the approach of the plane was over water i.e. planes flying over people’s homes was minimal. Expanding the old airport would have meant flying over people’s homes to get to it. So he shut it down and built Changi near the edge of the city. He is on record as saying the money he spent building Changi is one of the best investments he ever made.

 You will not find any quote attributed to LKY about his ‘concern at a lack of a national carrier’ motivating him to set up Singapore Airlines. It was always a business decision for him from day one and in the early years he was always threatening to shut down the airline if they made losses. You can understand why he was irritated in that video.

All this was classic LKY – going around the world and copying the best ideas he could find then ruthlessly and honestly implementing them in Singapore. It also tells us what it takes to have a successful airline especially when you look at the Gulf carriers as well – you need to spend huge sums on having a hub airport as well for the airline to have any serious chance of being a useful investment.

When you ask Nigerians why they want a national carrier, it is always about ‘pride’ or how the sky feels empty without any aircraft flying Nigerian livery. Or it is about how Nigeria is ‘losing’ billions of naira yearly to foreign airlines. This money can always be given to a Nigerian airline so that it can create 500,000 jobs in Nigeria (it’s always 500,000 jobs).

But what is the problem being solved here? There is none. There is no scarcity of seats on planes for people who want to travel out of the country. You might not like the price of the ticket but that is another matter entirely – I like the Aston Martin DB7 but I do not like the price they are asking for it. There is not much I or Aston Martin can do about this for now.  But if you want to travel out of Nigeria today, you will find tickets to buy and go anywhere you want to go, subject to the visas in your passport.

If you’re burning with patriotism so much that it makes you hate foreign airlines, Arik is also a choice for you as long as you do not mind flying in tears. With the eye watering amount of money it owes to the Nigerian government via AMCON, it is effectively a national carrier anyway. There is no problem whatsoever crying out to be solved here. Solutions abound already. 

Yes, the Ethiopians seem to be doing it (with airlines, what you see is not always what you get), but what about the South African Airways which has lost almost $300m in the last 2 years? Or Kenya Airways which announced the biggest corporate loss in the country’s history last week of $257m? Or Air India that is losing money on every route where it is flying the Dreamliner and had to be bailed out with $5.8bn in 2012? For every ‘success’ you find among national carriers, you will 5 or more utter failures and money pits.

***

Let’s talk to ourselves as Nigerians – what is it you have seen in the history of your country that makes you think it can successfully run an airline without bankrupting the country in the process? We are not Singapore, no point lying to ourselves. Ordinary joint venture with Virgin the last time around, the Nigerian directors attended board meetings for one reason only – to demand free tickets for their wives and girlfriends. And that is not even half the story.

A national carrier will need plenty of government subsidies for a number of years for it to get off the ground. The way Nigerians approach such things is that the subsidies then become the incentive of the whole game i.e. they will avoid making profits so as to ensure the subsidies are never withdrawn. If you don’t believe me, look at Nigerian Railways and the ridiculous pricing of their tickets. What they tell you is that the tickets are priced low for the sake of ‘the masses’. But these prices guarantee that the whole enterprise is unsustainable so government allocations continue to flow every year.

But there is something even more sinister at play here. Who is asking for a national carrier? Or who are the people likely to loudly support this idea? It is definitely not the market woman hustling to get by daily or the farmer facing an uncertain harvest. It is the Nigerian middle classes who are experts at capturing government for themselves. This played out very vividly 4 years ago when the then Aviation minister, Stella Oduah, was fighting the foreign airlines for cheaper business and first class tickets. The richer you are in Nigeria, the better your chances of capturing government to hand you subsidies. Indeed, until the recent introduction of ‘luxury taxes’ in the dying days of the Jonathan government, business and first class flyers paid lower taxes on their tickets than those flying in economy.

And we have not even talked about those who will steal the place dry. Yes, we are hopefully entering an era where stealing stupidly and with impunity will be greatly reduced. But why risk such an experiment? It is better not to find out if Nigerians are now able to stay in the same room with money that does not belong to them without the money disappearing. Maybe some day in future but I doubt if that day has arrived yet.

Given the depressing challenges facing Nigeria at the moment, do we really want our President running after some petty thieves who will be looking for ways to fly their girlfriends for free at the expense of the rest of us? I think not.

Let us bury this bad idea once and for all and spend our time thinking about policies that actually make life better for Nigerians. Bad ideas suck out life from the space where serious issues are being debated. They are a sideshow and end up wasting everyone’s time.

Mr President, if you are looking for ideas that can transform people’s lives and start the hard task of beating back poverty from our shores, Professors Abhijit Banerjee, Esther Duflo and several others have a truly exciting idea that they have tested in 6 countries with very very encouraging results.

Their paper is here

Thank you for listening. Don’t give in to the devil. Airline business is bad market.

FF

Alhaji Putin and The Nigerian Government: Here We Go Again

Apologies if you do not share my irritation at this madness but this shit makes my blood boil.

I have all the respect in the world for Prof Osinbajo for his intellect and his person. But this Dangote matter is deeply offensive and it speaks to who we are as a country and why we are the way we are. It also tells us why Nigerians instinctively hate ‘capitalism’, something that has been the most powerful anti-poverty system known to man in history.

This brand of whatever it is that is being practiced in Nigeria is NOT capitalism and it is not morally defensible on any level. In many cases, it is economic terrorism against the Nigerian people sanctioned by the Nigerian government itself.

What Is Capitalism?

People often think capitalism is about ‘capital’. No it isn’t. It is knowledge upon knowledge upon knowledge. That is how it improves people’s lives around the world.

My son who is almost 6 years old only knows that toothpaste comes in rubber tubes. It makes sense that way because it is less messy and toothpaste tube can have lots of nice designs on it to make brushing more appealing to children.

But it was not always so. 20 years or so ago, toothpaste regularly came in aluminium tubes. And it had all sorts of problems. Getting out the final 10% of toothpaste in the tube was a headache – by the time you rolled and squeezed it, it would cut open at the sides and could give you cuts if you were not careful. The design on the tube also faded after a while especially if the tube had been stressed to get it all out.

The knowledge of everything wrong with aluminium toothpaste tubes is contained inside rubber tubes today. We arrived at rubber tubes after finding out that aluminium is not the best way to sell it. My son cannot see this but I can.

Even better, as this improvement in toothpaste has happened, its cost has not gone up and millions of people who used to use sticks and herbs to brush their teeth now use toothpaste instead. Toothpaste is now at the point where we can conveniently take it for granted.

The next step in this journey of getting the toothpaste out of the tube perfectly is the development of something known as Liquiglide. You might not know that this problem exists yet, but when the solution arrives on the market, you will appreciate it. A more efficient toothpaste tube will help the toothpaste makers make more money and be able to lower prices in future.

If people think about capitalism in this way, they will come to appreciate it and demand more of it. An iPhone today that costs $750 would have cost $3,000 to put together in 1990. We can now do so much more with our lives because of the way that capitalism improves products and makes life better. We are also more knowledgeable and can pack more of such knowledge into our lives – Prof Ricardo Hausmann makes the point that a bachelor’s degree at Harvard has always taken 4 years to complete for centuries now and yet we know for a fact that people today know far far more than people knew in the 17th century.

Nigeria Turns Things On Its Head

I have written several times about how Aliko Dangote manipulates the media and the government in a way that allows him transfer wealth from the Nigerian people to himself.

The most annoying response I get is when people try to compare him to Rockefeller or the other ‘robber barons’ (who did not rob anybody). The most obvious answer to people who make this ridiculous claim is that Rockefeller, Ford, Carnegie, Walton all made money by bringing prices DOWN – I repeat DOWN. Things that were previously unaffordable to millions of people were made mainstream by these guys. Ford was motivated by a desire to make cars mass market and he was successful. Even when Rockefeller was tried for anti-trust, there was not a single person who made the argument that he was bad for consumers. This was why, after the American government broke up his companies, he got richer – again I repeat, richer. He had created so much value that was locked inside his companies such that if money was his sole motivation, he would definitely have broken himself up before the government did.

What is this thing that we are doing in Nigeria in the name of capitalism?

The Conspiracy To Rob Nigerians

Last year I sat in a session at the World Economic Forum with my mouth wide open in amazement as President Jonathan said ‘Look at Dangote who is the richest man in Africa, without our policies, he would not be as rich today’.

Imagine my surprise at discovering that the Nigerian government had a policy of creating billionaires and I did not know about it.

This is how the Nigerian government helps to guarantee that capitalism will not work in the way that it should. The government might is used to protect rich people against poor people and ensuring that the wealth transfer from poor to rich continues unhindered. I thought we had reached ‘Peak Dangote’ under the last government but with the way things are starting under the Buhari, we are on our way to the same depressing shit.

At no point does anyone in the government stop and ask themselves the question – what does this guy (and his friends) do for the Nigerian economy exactly? Are they a net positive or negative? Further, those who have been expensively educated in Nigeria and abroad, capitulate like a pack of dominoes and toe the Dangote line, ascribing to him what he is patently not. Where questions ought to be asked, praise is given instead. Where capitalism and all the wonderful things it can do to improve lives should be ‘louded’, its evil twin – crony capitalism – is passed off as the real thing. And we wonder why Nigerians continue to reject things that can make their lives better.

‘Posers’

If the Vice-President of the Federal Republic of Nigeria, duly elected by the citizens and consumers of Nigeria thinks it is ok to go all the way to Zambia to commission a Dangote cement plant (a few weeks ago, the CBN governor and sundry others went to Ethiopia to commission another cement plant), then questions, or posers as Nigerians like to call it will suffice

1. Which other country in the world where a lot of construction is going on has a guy who sells cement on their top 5 richest people list?

If you go to Dubai and wait 2 years before going back, you will see a visible difference there in terms of construction. They are using cement to do what cement is supposed to be used for i.e build things that everyone can see. So why don’t they have a ‘cement magnate’ on their rich list?

Same thing goes for China where the pace of building things is frankly breathtaking. Where is the ‘cement magnate’ in China?

What you will find instead is people who add value to cement among the richest people in those countries e.g Emaar, Nakheel, Dalian Wanda. To put it another way – it is like going to a country where a lot of cars are manufactured and the guy selling sand is the richest person in town because sand is used to make glass. There is still so much more value to be added – steel, design, architecture, wood, urban planning, finance etc – to cement before it can be useful to anybody or society.

So why is all the value in Nigeria being captured at this stage?

2. Can Alhaji Dangote build and sell 1,000 houses in Nigeria today? It’s a useful test to carry out. He makes the cement and sells it with obscene margins so why not ask him to build just 1,000 homes in Nigeria today and sell each one at a profit within a year?

I am confident that he cannot pull it off. But I will be happy to be proved wrong

3. All the major infrastructure in Nigeria was built when we were importing cement. All the bridges in Lagos including 3rd Mainland and bridges across the country were built with foreign cement.

The biggest infrastructural achievement of any Nigerian government in my lifetime is Abuja. It was built with imported cement.

So the question is this – since Nigeria started being ‘self sufficient’ in poverty, sorry cement, what has been built with it? It is pointless to have all this cement just ‘for show’ and to stop some imaginary jobs being shipped abroad. Cement is not for drinking garri – it is for building things which cannot be hidden.

4. At the very least – we should be asking how much tax Dangote pays to the country that has given him so much. Things have been banned for him. Policies have been written in his name. Waivers have been granted to him and many other businesses have been ruined for his sake.

So what exactly has Nigeria and Nigerians got out of the deal? Is it the 20,000 jobs he has created (half of which are ‘casual’ staff?). Is that the extent of our ambition as a nation?

The biggest beneficiary of Dangote Cement is Dangote himself. So why is the Nigerian government going to commission his plant for him in a foreign country? What is the business of the people who elected a government to serve them with a man who is making as much money as he can get away with at their expense?

5. What has been the contribution of Dangote Cement to the global body of knowledge of cement manufacturing? Has anyone come to Nigeria to learn how to make cement. Dangote Cement is by FAR the most profitable cement company in the world.

What is the secret sauce? Who has copied it? And why is it that this profitability goes side by side with eye watering cement prices that are padded with margins as high as 70%. What did Dangote Cement invent that brought about these kind of wonderful profits?

 

***

Capitalism is a moral thing, at least to me. It is pointless otherwise. It is a powerful tool to fight the indignity of poverty that consigns people to a miserable existence. Yes, people get rich out of it but they have to do this by giving consumers what they want.

This process breaks down when a pretend capitalist is able to team up with the government in a way that allows him/her to give people what they do not want and make a fortune while at it e.g cement.

The Nigerian government, elected by the people, should stop insulting its citizens with the irritating and ceaseless exaltation of Dangote as the physical manifestation of destiny. Let him make his money, he already has enough of it. But leave the Nigerian government out of it. A new government elected on a change mandate should not be succumbing to the Dangote virus so easily.

What is the worst thing that can happen if Nigeria starts importing cement again? Prices will come down and more things will get built creating thousands of jobs in the process. And Dangote will get poorer.

I know what I will choose if that package was on offer.

FF

*I’ve written this in a lot of irritation and I cannot be bothered to edit for grammar. Any errors are regretted.

 

CBN vs The Economist

In this week’s edition of The Economist, the magazine dared to say what many people have been saying for a while now – Godwin Emefiele, Nigeria’s Central Bank Governor does not inspire confidence in anybody.

As anyone who has been paying attention would have noticed – the CBN Governor has a magnificent obsession with Nigeria’s foreign exchange rate. At the beginning of this year he was defending the Naira with billions of dollars. That (unsustainable) strategy has since been abandoned. There is a new strategy every week these days.

The latest one however has to do with banning the use of the official foreign exchange market if the purpose is to import a list of 40 items ranging from toothpicks to Indian incense.  It didn’t stop there – it went further to say import of those items cannot be funded by buying forex from Bureau de Change or proceeds from exports i.e. if you sell your goods abroad, you can’t use the forex you earn to import any one of those banned items.

In short, the only way to fund the import of those items is by sourcing dollars from the black market. You can go through the recent press releases from the CBN and the message is clear – it is cracking down on use of forex for anything it does not like.

Why is the CBN doing this? It is trying to ‘defend’ the value of the Naira. It feels that the demand for forex is too much and as such is trying to reduce the demand. The way to buy dollars in Nigeria is of course to exchange it for Naira. The point of trade is that you give up something less valuable to you in exchange for something you consider more valuable. All the people demanding dollars have Naira which at that point in time, is not very valuable to them. The more people do this, the higher the value of the thing they want which in turn reduces the value of the thing they are willing to give up for it.

The moral of the story here is that the CBN’s actions clearly show that it is determined to stop the devaluation of the Naira. By denying people dollars to buy toothpicks from South Africa, it is telling them to use their Naira to set up a toothpick manufacturing plant in Nigeria instead.

And so we come to the gist of what The Economist said in its article – this is a very strange way of stopping the import of items you feel can be produced locally:

Economists find the policy baffling. Central banks usually prop up their currencies if they are worried about inflation, or allow them to devalue to depress imports and stimulate exports. Nigeria, by contrast, appears to be set on achieving both an uncompetitive exchange rate and higher inflation

We know that toothpicks can be produced in Nigeria. The technology is not complicated to the point that Nigerians cannot do it. The reason why it is being imported is that it is obviously cheaper to do so.

Imagine that the exchange rate is N200 = $1. Now, due to poor infrastructure, insecurity, police harassment and of course high cost of generating power, it costs N1,000 to produce a box of toothpicks in Nigeria i.e. $5. But in America where the roads are good, there is 24/7 electricity, policemen don’t demand bribes on the highway and the technology has advanced to very efficient levels, you can produce a box of toothpicks for $2. Add another $1.50 for shipping the toothpicks to Nigeria and clearing it at Apapa Port. By the time you add a profit element, it is still possible to sell the toothpicks in Nigeria for $4.50 i.e less than it will cost you to produce it in Nigeria. If you’re a businessman, this is a no-brainer. Manufacturing is stressful and Nigeria can be very unpredictable. You don’t have to be ‘unpatriotic’ to opt to import instead of manufacturing – it makes business sense.

But remember that the businessman who is importing the toothpicks can only sell them in Nigeria in Naira. Using the above exchange rate, a box will be sold for N900 ($4.50 * 200) as opposed to the N1,000 it would have cost to produce it locally.

You can see where this is going – the ability to import toothpicks for cheaper than it costs to produce locally relies on that N200 to $1 exchange rate. If the Naira loses value against the dollar and drops to N230 to $1, all of a sudden it will now cost you N1,035 to import that box of toothpicks. It becomes cheaper to produce it locally (for the sake of this simple argument, we assume that everything required to produce the toothpicks is available locally). If you agree that the reason anyone will import toothpicks in the first place is because it is cheaper to do so, it follows that when it is no longer cheaper to import, the person will stop doing it. And if the demand for toothpick remains (people are unlikely to switch to using their fingernails), then there will be money to be made by supplying it to them.

This is not some untested economic theory by the way – as I wrote previously here, devaluing a currency and keeping it undervalued is a tried and tested strategy for industrialisation. The most recent example of this is China who for decades has kept its currency undervalued (combined with massive infrastructure spending) to keep its producers competitive.

But what the CBN is trying to do is keep the exchange rate at N200 to $1 (in the example above) and then telling people to simply stop importing. It wants them to be ‘patriotic’ and instead manufacture and sell in Nigeria for N1,000 – an 11% increase on the N900 people are paying for the imported ones (the inflation part of The Economist’s argument). There are very few places in the world where such an approach makes ‘sense’. Nigeria is one of them.

***

Amazingly, in 24hrs, the CBN has responded to the Economist’s article via a press release. It is never a good sign when the response is longer than the original article itself. By the end, we still do not really understand why the CBN is trying to strengthen the Naira at the same as it is claiming to be discouraging imports:

The CBN believes that Nigeria cannot attain its full potentials by importing anything and everything. For far too long, this trend has significantly weakened the operating capacities of our industries, but now is a good opportunity to begin a reversal. Although the article hastily derides this idea as lacking in economic foundations, it is the same principles upon which many other countries do not allow importation of certain products.

Once you believe that ‘the devil is abroad’, it will determine how you react to the situation. The CBN continues to ‘believe’ that importing is what is killing our industries. It follows then, that reducing or banning imports will resuscitate the industries. The question of why people choose to import in the first place is always conveniently ‘unlooked’. Importing simply happens because Nigerians are ‘unpatriotic’.

They say no one deceives themselves like the woman who has only child but when asked how the child is, she replies ‘which one of them?’. The problems are hard and will take a long time to tackle but the best time to start is now. It is sensible to import into Nigeria today. You need to be mad to try to produce most things in the country. That is why people collect all the ‘intervention funds’ provided by the government and buy Range Rover Autobiography with it.

Interestingly, the same Economist addressed the underlying issues about a month ago (emphasis mine):

FOR Muhammadu Abubakar, life is an uphill struggle. Farming in Nigeria is tricky at the best of times. Only the brave or the downright crazy would think of dealing in a perishable product like milk.

On his ranch on the dusty fringes of Kano, the biggest city in Nigeria’s north, he faces a daunting array of problems. The electricity grid is hopeless. So, at the gateway, two generators splutter away 24 hours a day. Diesel sets Mr Abubakar back about 1m naira ($5,100) a month. “We’ve had two hours of power in three days,” he says. “There’s no option.”

There are no good cows for sale nearby, so Mr Abubakar’s company, L&Z Integrated Farms, plans to start importing its own. There are no good seeds for fodder; he brought in cuttings on a commercial flight from Kenya. There is no mains water, so he must drill boreholes to irrigate his fields. Fertile land has a tendency to turn to dust. He has to train his own staff to use complicated machinery. Plenty of batches get spoilt along the way. By the time it is processed, a litre of milk has already cost about 320 naira (£1) to produce.

Then the milk has to get to market. “Three or four years ago we used to fly our milk down to Lagos,” he says. “It cost a fortune. The milk would spoil sitting in the airport. We had to pay off customs. It was a nightmare.” Nowadays, the firm uses costly refrigerated trucks instead. Drivers must brave day-long journeys on disintegrating roads. Each truck requires about 200,000 naira ($1,000) in opaque licence fees every month. Even when those are paid, local authorities send thugs out to get more.

“They make you buy new paperwork,” one trucker says. “We probably pay 3,000-4,000 naira (roughly $15-$20) every journey. ”When the milk finally arrives on supermarket shelves, it costs around three times what it would in Europe. Cheap long-life imports sell for less than half the price of local milk. Nigeria spends roughly $1m a day on imported milk powder, according to Sahel Capital, a private equity group which recently invested the same amount into Mr Abubakar’s business in the hope of changing that.

Other types of farming are equally fraught. Nestlé finds it cheaper to bring starch in than to buy it locally. Olam, a Singapore-listed agribusiness, says that processing costs up to 30% more than in other countries. Mukul Mathur, who heads its Nigerian business, says that moving a container from Kano to Lagos costs as much as from Lagos to Osaka, though the distance to Japan is 13 times greater.

Of course the CBN did not respond to this one.

FF

 

P.S This November 2014 article by Professor Ricardo Hausmann cannot get old. I share it with everyone I know – it addresses the issues currently afflicting Nigeria. 

P.P.S If you want something more technical, here’s a 2007 paper by Professor Dani Rodrik where he argues that an undervalued currency is associated with rapid economic growth in developing countries. 

Anonymous Sauces Explain The N7trn Deficit

“Weapon no be groundnut, but deficit fit turn to debt” –

Goodluck The Jonathan, First of His Name

Preamble

Let us assume Omo Baba Olowo (OBO) earns N10m annually. He plans to spend N5m on a new car; N2m on rent; and wants to spend N1m per month on small things like buying champagne at Sip, presents for his supermodel girlfriend (Baby Girl), food, petrol in his car and other normal expenses. Since he budgets an income of N10m and an expenditure of N19m, you can say the budget has a deficit of N9m. Now, OBO needs to find N9m from somewhere, so he asks his father Baba Olowo for an advance on his inheritance and gets N5m, But the money is still not complete, so he goes to a bank and borrows N4m.

All is well, so OBO is calm and happy.  In this case, OBO runs a budget deficit of N9m but carries a debt burden of N4m.

The following year, OBO now earns N20m, but since he doesn’t need a car, he moves to a bigger place that costs N4m and buys his baby Girl a N3m engagement ring. He still spends N1m per month so he can drink at Sip and post pictures on Instagram, and also spent N1m repaying part of the bank loan he took.

You can see that earning more money cannot be a bad thing; OBO now has a zero deficit budget, but owes N3m.

Now how does this affect the price of fish in the market? The Chairman of the APC Transition Committee, Ahmed Joda, suggested in an interview with Daily Trust over the weekend that the Federal Government is carrying a deficit of N7 trillion and not the N911 billion contained in the 2015 budget:

We were told at the beginning of the exercise that the government was in deficit of at least N1.3 trillion and by the end people were talking about N7 trillion

According to the previous government, the FGN expected to earn N3.7 trillion in 2015 and spend N4.6 trillion; like OBO, this means it needed to borrow N900 billion to fund the deficit. However, the government is already owing N11 trillion, so the additional deficit of N900 billion will now take the government’s debt to N12 trillion.

How Did We Get To N7trn?

It all seems fairly simple, so where did the N7trn come from? According to the handover notes received from the outgoing government, the Chairman of the APC Transition Committee is suggesting the previous government suppressed the level of debt it carried and has now transferred those rotten tomatoes to the Buhari Government. He didn’t provide a breakdown, but my friend was a waiter serving drinks at the hotel where the committee met and he gave me some interesting details:

Deficit

Ministries can duplicate costs, especially with the Finance Ministry.At first glance, you can see contractor payments account for over 50% of the total amount. Interestingly, the widely circulated interim report of the Transition Committee estimated N800bn was owed to contractors. However, as my sauce says this estimate was revised, using numbers submitted by the ministries in their handover notes.

He was kind enough to share an interesting breakdown of the numbers with me (at great risk to his life). I have reproduced it without editing:

Gbese on Fleek

Points to note on the figures above:

  1. These were the numbers submitted to the Transition Committee in the handover notes. The outgoing government did not provide any ageing on the debts. That is, it is not yet known how old these liabilities are. This will determine how contractors are paid e.g being issued bonds to receive their payments in 24-36 months time when Nigeria’s finances are hopefully healthier.
  2. A detailed list of the contracts was also NOT provided so it is possible that there is some double counting going on in the above numbers.
  3. Some of the balances may also be disputed and some contracts may be cancelled or terminated. No documentation was supplied to show whether the contracts were executed to specification.
Debt or Deficit?

So, now we know where the figures have come from, we need to answer the second question; is this debt or deficit?

The position of the Government seems to lean towards an urgent need to clear these obligations within one budgeting period for a number of reasons. I heard one contractor laid 4,000 casual staff off, because he was being owed billions of Naira and unable to pay salaries. Therefore, the government believes paying contractors will not only keep people in jobs, it will reflate the economy, and ensure outstanding projects are completed.

Also, paying outstanding cash calls to oil companies is important if Nigeria wants to develop new fields, especially for the much-needed boost in gas supply. The other issues like salary payment, subsidy arrears and the North East redevelopment plan are immediate needs that need to be funded.

This means the FG will probably ask its Finance Ministry to prepare a supplementary budget that will look like this:

Deficit Final

 

 

Remember, the country already owes N11trn and if we need to borrow N7trn more, it will take our total debt exposure to N18trn – roughly 18% of GDP.

So, to answer the second question, the APC Transition Committee is suggesting if the FG writes a new budget today, it will show a deficit of N7trn, which could increase Nigeria’s debt to N18trn, depending on how the deficit is financed.

While our debt/GDP ratio is not bad compared to similar countries, the real problem might occur when we work out how to pay these debts. Currently Nigeria spends over 20% of its income servicing debts; if we add another N7trn in fresh debt, this could mean we will spend over 30% of our revenues paying creditors.

Now, imagine OBO spending 30% of his next year’s income to pay his debts, it means things like champagne at Sip and that fancy apartment must be removed from his expenses. For Nigeria it means a lot of non-essential expense lines must disappear: fuel subsidy, huge legislative costs, bloated workforce etc.

If the three things noted in the caveat to the contractor debts above happen, the FG might reduce contractor debts from N4trn to N1.5trn (nothing suggests this is possible, but we are allowed to hope and pray a little).

If this happens, the deficit will drop to N4.4trn. Not bad, but still needs some work.

This is where yesterday’s post on Mr Wang is very useful. Imagine we have our own Mr Wang, who can either get corrupt people to lose their ill-gotten wealth through a transparent legal process or just come to submit those assets after being shown what a prison cell looks like.

If our version of Mr Wang does a great job, he might raise another N2trn for the government, leading to this type of budget:

Deficit New

If we end up with this type of deficit, then hope springs eternal. It means the government can now finance this using a number of available options:

BUDGET SUPPORT FACILITY: The government can take the planned budget support facility from the World Bank and African Development to shore up its funding gap. This facility was originated by the previous government, but I was told the lenders stalled on disbursement till the new Government was in place.

Result: $2bn or N400bn

NLNG Dividend: The NNPC claims the committee working on the alleged unremitted dividend from the Nigerian Liquefied Natural Gas Company.  The Inter Ministerial Task Team has operated like a cross-breed between a tortoise and snail up till now, maybe the arrival of a new sheriff will quicken this reconciliation.

Result: $11bn or N2.2trn

Securitization: The government can release cash by pledging a portion of future payments from guaranteed revenue sources. For example, the government could pledge a share of guaranteed revenues from annual operational levy paid by GSM operators; dividend and taxes from NLNG; and a percentage of NNPC’s share of crude oil sales (remember those 445,000 barrels sent to domestic refineries?). Since these are guaranteed revenue streams, lenders will be quite pleased to provide debt upfront.

Result: $5bn or N1trn

Sale of Equity in Selected Assets: I’m no expert but those who know suggest NNPC/NPDC stake in those JV assets might be worth about $30 billion. The Government can sell 20% of its stake to investors and host communities to raise immediate revenues and also reduce the FG’s future cash call burden on these assets.

Result: $6bn or N1.2trn

Fiscal Responsibility Act: Section 21 Section 21 of the FRA states that: “Notwithstanding the provisions of any written law governing the corporation, each corporation shall establish a general reserve fund and shall allocate thereto at the end of each financial year, one-fifth of its operating surplus for the year.” Of course, most of the MDAs pretend this Act was never passed and continue to keep their surpluses in Ghana Must Go bags. If enforced, MDAs like CBN, NIMASA, BOI, NPA, TETFUND, FAAN, JAMB and WAEC can add some “change” to Government’s coffers.

Result: $1bn or N200bn

Conclusion

The options above can yield N5trn. But then, this is all on paper and reality will be far harder.

I certainly don’t envy Muhammadu Buhari, but if you’re his friend, perhaps you can whisper the words of Guiseppe Garibaldi in his ears; “a bold onset is half the battle.”

***

The above was sent to me by a mysterious sauce. I don’t even know how they got my email address but here we are. It’s a useful summary of where Nigeria currently is financially and where it needs to go.

As usual on aguntasolo.com, we like to thank people who contribute wisdom for the edification of the body politic (what does this even mean?), so join me in thanking them

FF

What If Mr. Wang of The CCDI Comes For Your Daddy?

Mr. Wang Qishan is a member of China’s seven man Politburo Standing Committee – sort of their equivalent of Nigeria’s FEC. He is also the Secretary of the Central Commission for Discipline Inspection (CCDI) – think of this as China’s EFCC.

Given that China has only one party, everyone in government from civil servants to ministers to the President – is a member of the 80 million member strong Communist Party. What this means is that from the time you sign up as a member of the party, you are subject to the rules and regulations as enforced by the CCDI; take it or leave it. The CCDI is supposed to be a way by which the Communist Party cleans itself and prevents decay.

But as with all things, it ends up depending on the leadership of the country and how seriously they want to deal with corruption. China is deeply corrupt although not as visible as Nigeria (policemen don’t take bribes on the highway) and certainly their corruption is of a higher quality than the variety you find in Nigeria as I tried to explain in a previous piece here.

Enter President Xi Jinping – or Xi Big Big (习大大) as Chinese people have taken to calling him. In January 2013, a couple of months after taking office, he declared that his government would go after ‘flies’ (low ranking civil servants) and ‘tigers’ (ministers and big boys). Nothing new there as every Chinese leader always declares war on corruption. He said:

We must uphold the fighting of tigers and flies at the same time, resolutely investigating law-breaking cases of leading officials and also earnestly resolving the unhealthy tendencies and corruption problems which happen all around people.

The style in which you work is no small matter, and if we don’t redress unhealthy tendencies and allow them to develop, it will be like putting up a wall between our party and the people, and we will lose our roots, our lifeblood and our strength

If President Xi was serious about this, it was going to be a big job for Wang Qishan. So more than 2 years after the Tigers and Flies campaign started, how has it fared? Here are some highlights

1. Previously, there was an unspoken rule in China that members of the Politburo Standing Committee do not get investigated for corruption. Zhou Yongkang became the first Tiger to fall to Mr. Wang’s campaign. When you consider that China is a police state, someone who was in charge of the entire internal security apparatus must be an extremely powerful person. He also previously headed the China National Petroleum Corporation, the world’s largest employer (currently 3.2m people).

Last week, Mr Zhou was sentenced to life in prison after having assets worth $14bn seized from him.

2. In September 2013, the much publicised trial of Bo Xilai came to an end and he was sentenced to life imprisonment. He had previously been a Minister and then Governor of one of China’s fastest growing provinces, Chonqing, and had ambitions to make it to the Politburo Standing Committee someday. He was charged with taking bribes of $3.5m and had all his assets seized (including a $7m villa in France) upon his conviction.

3. What about the flies? Boy oh boy…Mr Wang has gone after them relentlessly. Each year breaks the record of the previous one in terms of convictions and investigations. This is how he started his job in 2012

One story goes that at a meeting of the party’s Central Commission for Discipline Inspection (CCDI), convened after Mr Wang took charge of it in November 2012, senior members—themselves among the most feared officials in the party—were presented with dossiers of their own sins. Mr Wang’s aim, it appeared, was to terrorise the enforcers themselves. Failure to uncover high-level graft, he has warned them, would be “dereliction of duty”

In 2014, 200 of the CCDI’s own investigators were punished. In 2014, the CCDI had investigated and punished 232,000 civil servants at all levels – both federal and state. This was 30% more than the numbers punished in 2013. The campaign has been intensifying rather than waning as the chart below from the FT shows

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4. An interesting effect of Mr Wang’s crackdown on the civil service is that it has reduced the desirability of those jobs:

For the most recent annual exam for the national civil service, held on November 30th, there were 1.4m applicants, 110,000 fewer than the previous year. Of those, more than one-third failed to show up. There were 40 test-takers for each available position, the lowest ratio in nine years. As recently as 2010 it stood at 59:1. Recent opinion polls have found respondents born in the 1990s to be much less keen on civil-service careers than their elders.

And this:

A Chinese job-search website, Zhaopin.com, reported that in the three weeks after the lunar new-year holiday in February more than 10,000 government workers quit their jobs to seek greener pastures, mainly in the finance, property and technology industries—an increase of nearly one-third over the same period in 2014. The company attributed this to a new emphasis on frugality in government work. Lavish meals are now banned (much to the chagrin of restaurants, which have suffered falls in profits). Governments are no longer allowed to build fancy offices for themselves. Stricter controls have been imposed on the size of ministers’ offices and temperature settings in government buildings. The receiving of gifts and donations of cash, once common features of bureaucratic life, has become far riskier

Future corruption is even being reduced as those who wanted to go into the civil service to steal money are now abandoning the idea.

Mr. Wang apparently organises ‘prison tours’ where he takes serving civil servants (along with their wives) to visit their former colleagues who have been convicted. The message is of course clear – e fit be you o.

Nearly 70 civil servants have committed suicide since the beginning of 2013, usually after they were placed under investigation. More than 60 people at Minister rank have also been convicted.

5. China’s ‘private sector’ is more or less an arm of government. As my previous post showed, Mr Wang’s CCDI went after Lunatic Liu at the Railways Ministry. He has also relentlessly gone after the Chinese version of the NNPC – the CNPC. In fact, the CCDI’s investigations have now been built into the operation of the CNPC:

At China National Petroleum Co, the state-owned parent of listed PetroChina, so many senior executives have been detained that the company has established a reporting system in which top officials check in with department heads daily, according to Chinese media reports.

If any of them drop out of contact they are assumed to have been detained by the CCDI and are replaced the following day by a preapproved successor.

This arrangement reflects the extraordinary power wielded by the CCDI, a highly secretive extralegal body that has no formal right to arrest or press charges but which can investigate and indefinitely detain any of China’s 87m Communist party members.

Once a CEO of a private company disappears, the shares of the company tank as people assume the CDDI has picked the person up. A funny example of this happened a couple of weeks ago to a company called Hanergy Thin Film Power had $18bn of its value wiped off the stock market in about 30 minutes when the Chinese billionaire owner of the firm, Li Hejun failed to turn up at its AGM. 

It turned out he had been merely engaged elsewhere but no one was waiting to find that out.

6. The giant Chinese pig industry has not been spared. One way corruption is carried out in China is by wining and dining government officials with very expensive meals which always contain pork. As Mr Wang and the CCDI have cracked down on corruption, these expensive meals have lost their appeal as the risk of being caught in a restaurant while stuffing your face has greatly increased.

In a recent newsletter, China’s leading pork industry analyst explained why hog prices are still depressed in that country after two years of shrinking animal inventories.

In his Soozhu.com newsletter, analyst Feng Yonghui observes that Chinese hog producers are confused as to why prices have not bounced back after two years of declining hog numbers. Feng describes the downsizing as a structural response to the anticorruption campaign and economic downturn that have roiled markets in China over the past two years.

Feng estimates that the anticorruption campaign (launched December 2012) popped a bubble equal to 10% of pork consumption. He estimates that before the anticorruption campaign, 7 out of 10 pigs were consumed on family dinner tables, and the other 3 pigs were supplied to restaurants and cafeterias. He estimates that the anticorruption campaign eliminated 1 of the latter 3 pigs. In other words, it popped a bubble equal to 10 percent of demand for pork.

While the bandits and economic parasites (who are ‘into oil and gas’) in Nigeria continue to buy private jets for themselves, their wives and their girlfriends, here’s what’s happening in China:

Yet a government crackdown on corruption and a creeping anti-luxury climate under Chinese President Xi Jinping may be changing that.

Underscoring the risk to suppliers, the Chongqing Youth Daily, citing unnamed industry sources, reported yesterday that 30% of outstanding orders for private jets have recently been canceled as part of a “chain reaction” tied to a government crackdown on corruption.

It’s not just second-thoughts among new buyers that may affect the market in 2015.  Existing owners of private jets are also less willing to hold pricey symbols of wealth at a time when government leaders are emphasizing frugality in everything from architecture to salaries at state-owned companies.   As a result, as much as 20% of China’s existing fleet of private jets — including corporate jets — could be for sale, one industry executive recently told Forbes.

Luxury goods too:

All of this news is likely worrisome to luxury companies, which have seen a significant slowdown since the start of the anti-graft campaign. Bain & Company reported a negative 1 percent growthrate for the China luxury market in 2014,  marking a third year of the industry’s slowdown after the market grew by 2.5 percent in 2013 and 7 percent in 2012 (a significant decline from 30 percent growth in 2011). 

The crackdown hasn’t affected all sectors equally, however—luxury items associated with graft such as high-end spirits and watches have fared the worst, while “affordable luxury” brands geared toward China’s middle class have still seen significant growth.

Since the crackdown doesn’t seem likely to end anytime soon, luxury companies are taking a variety of measures to cope. Some are taking a cue from the success of masstige labels such as Coach and Michael Kors by going more mid-range in order to tap into the growing spending power of China’s upper middle-class consumers. This is especially true for high-end hotels and restaurants hurting from a lack of fancy official banquets,  as well as brands producing luxury versions of the Chinese spirit baijiu as sellers slash bottle prices.

Gold:

Gold demand on the mainland shrank for a third quarter as slumping prices failed to boost the purchases of bars, coins and jewellery and officials pressed on with an anti-corruption campaign.

Buying dropped 37 per cent year on year in the third quarter to 182.7 tonnes as last year’s price-driven surge in demand was not repeated, the World Gold Council said in a report yesterday

Mink:

The price of mink has more than halved in the past year after retailers in China and other big fur markets were left with surplus stocks after the bursting of the Chinese fur bubble.

Prices at last month’s auction by Denmark’s Kopenhagen Fur, the world’s biggest fur auctioneer, fell 55% to 258 kroner (£27.19) from a year earlier when Chinese demand sent prices to a record. Saga Furs in Finland said prices at its auctions also halved for mink furs. More than 30 animals are required to make a mink coat.

Salla Tuomivaara, of the Finnish animal welfare group Animalia, said: “The reason for the price drop is most probably the anti-corruption campaign initiated by the Chinese government, which discourages public servants … to accept luxury gifts.”

You might wonder at the damage all this is doing to the economy. Well, President Xi has called it ‘The New Normal‘. Make of that what you will.

7. What about corruption in the Chinese military? Mr. Wang has gone there too. Before he fell, General Xu Caihon was the highest ranking officer in China’s armed forces.

When investigators raided his house, they needed 12 lorries to carry away all the cash and precious stones he had stashed away (one problem in China is that the highest currency denomination is RMB100 so lots of cash is needed to hide loot). He had so much cash that it was reported that he gave so much to his maid and driver who in turn built houses while working for him. When the maid’s house was searched, stacks of cash were found there too.

General Xu was in charge of promotions in the armed forces so it’s not hard to see how he would have made a fortune from bribes with 2.3 million members in the forces. His trial for corruption was going on when he died of bladder cancer in March this year.

In January of this year, the People’s Liberation Army (PLA) revealed that 15 senior Generals were under investigation for corruption:

On January 15, Chinese officials announced on China Military Online the names of 16 senior military officers of the People’s Liberation Army (PLA) who were under investigation for “seriously violating party discipline,” a euphemism for accusations of graft. The Global Timesnotes that the officers under investigation are at the corps level and above and include one general, four lieutenant generals, nine major generals, and one senior colonel.

 ***

You can find plenty more on the Tigers and Flies campaign all over the internet. This blog post can’t do justice to it at all. If Mr. Wang was in Nigeria, then our people would say ‘Mr Wang is working, CCDI is working’. The campaign has been vicious and it has been relentless.

And yet this is a country that has lifted 600 million out of poverty in 30 years and where development and progress is visible to the naked eye (Please go through the photos in this article Here. Ignore the Russian text). Corruption has not held back development per se.

Observe, as a random example, the ongoing corruption scandal at the Bureau for Public Enterprises (BPE):

Investigations by TheCable have uncovered retrospective payments of insurance premiums totalling N27 billion for “cover” not provided to the defunct Power Holding Company of Nigeria (PHCN). In insurance parlance of “no premium, no cover”, there can be no insurance cover if premium is not paid ab initio, but the BPE and the ministry of power may have succeeded in developing a new practice in which premium is paid years after cover is provided.

A director at the ministry said: “Cover starts the day premium is made. How can you make payment for cover that was not provided? How can you ask for premiums to be paid when PHCN has already been liquidated? The conspirators engineered memos to their principals which were quickly approved and monies disbursed.

What is this shit? A country that cannot engineer bridges or roads is now ‘engineering memos’ to facilitate the transportation of public funds into private pockets. When you have this kind of theft going on, it is clear that people are not even thinking again.

President Buhari has a very big decision to make. As much as he needs competent hands to push his policies, he also needs a Mr. Wang to drive a serious anti-corruption campaign. Nigeria is of course a democracy so things possible in China will not be possible there. But this should by no means diminish the scale of the ambition required for the fight.

Corruption is absolutely killing Nigeria. Nothing serious can get done as things are. No matter how good a policy is, it will be suffocated if thrown into this system. And we have to be honest with ourselves that we have become a people who desperately need to change our ways, to put it mildly.

I have heard the name of one ‘mad man’ as a possible head of EFCC. A guy apparently so crazy he still drives a Peugeot 504 in 2015. Maybe he can be our Mr. Wang. That said, it is interesting to note that nothing in Wang Qishan’s history made him out to be an anti-corruption crusader – his private sector career was in banking.

But ultimately, the job belongs to Nigerians. A crackdown on corruption when Nigerians themselves remain comfortable with the culprits is unlikely to last long. These people live among us – they are people’s Daddies and Mummies.

Professor Deirdre McCloskey said it better than I ever can:

Indignation on the ground, if pervasive, stops corruption

The first step is to stop celebrating corruption, even if the person is your Daddy.

FF

Guest Post: Agenda For The Next Petroleum Minister

The Nigerian petroleum industry has suffered equally from what was left undone – PIB, Gas reforms, regulatory effectiveness, as much as what was done – scandals. It is therefore important that the Minister appreciate what really matters – the core industry challenges, opportunities and options. We would like to help.

Increased Revenue Generation

Dwindling Nigerian Crude Oil Sales: Stop the beauty pageant – Nigerian crude oil is faced with a ‘double whammy’. Prices are generally low but structural changes in refining hubs and a glut of light sweet crude oil is eroding quickly the historical advantages Nigerian crude enjoys. Nigerian crude used to be in high demand but these days, much of it now linger on the market pushing price differentials down by over 60% in over two years. Current June market data estimate that about 80 Million barrels of Nigerian crude are stranded and looking for buyers. Reforming the archaic, opaque and detrimental crude oil sales mechanism adopted over the years is overdue.

The Bern Declaration report on the trading of crude oil in Nigeria (See here) described the current process as a ‘beauty pageant’, riddled with ‘monumental corruption and intense uncertainty’. In the current arrangement, NNPC does not sell most of the Nation’s crude oil entitlements directly to customers as many countries do but through middlemen (largely traders and briefcase companies) who naturally make a margin and are motivated to corrupt the system. In a buyer’s market, this is a deeply flawed strategy.

The new Minister must urgently establish measures to ensure that Nigeria sells most of its crude oil directly to customers – refineries, traders, National Oil Companies in our major markets. There is no alternative. Furthermore, a robust crude oil marketing strategy that confers advantage to Nigerian blends over rival light sweet crude oil even in a buyer’s market is a necessity. Angola’s ingenuity in marketing its crude oil sales is a good example. The country has established bilateral agreements with some of its major markets effectively eliminating rival crude in some instances. The Angola – Chilean crude oil bilateral agreement secured Angola a lion share of the medium sour demand knocking off Ekofisk and other crude that competed for the Chilean market. Nigeria’s major targets for bilateral crude sales agreement should include India, Brazil, South Africa, Indonesia etc. It might be prudent to ascertain what the impact of the EU – ECOWAS Free trade deal (EPA) might have on our crude oil sales to the European Union in analyzing the nation’s strategy.

Pioneer Status: Cronyism or an essential incentive? – Utilising a provision in the Industrial Development (Tax Relief) Act, many indigenous oil and gas companies in Nigeria have been granted zero tax, ‘pioneer  status’ by the Nigerian Investment Promotion Commission, a non oil industry actor, resulting in enormous revenue losses for the Federal, States and Local Governments. This piece (See Here) provides granular insight into the dynamics and impact of the awarded pioneer taxes on Nigeria’s revenue. Different estimates of lost revenue to Pioneer Status have ranged from about $1Billion – 5Billion over the last 10 years.

The new minister must intervene. First, the provision in the IDA that confers pioneer status on companies in the petroleum industry must be eliminated and all pending applications rejected. There are incentives already enshrined in the Petroleum Profit Taxation Act and available for indigenous/new companies. Furthermore, the illegal approval of a straightforward 5 years zero tax in flagrant contravention of the extant law should be reversed. The IDA provides only for an initial 3 years zero tax status plus a possibility of renewal for another two years. We suggest that existing approvals should not be totally reversed but a limit of 3 years as provided by the law be adhered to.

OML Relinquishment/Retention Fees: The devil is in the details  – Schedule 1, Section 12 of the Petroleum Act states that

Ten years after the grant of an oil mining lease, one half of the area of the lease shall be relinquished

This provision of the law was aimed at dissuading companies from hoarding undeveloped assets in their portfolio and ensuring rapid development of reserves. Companies that have been granted mining leases (OMLs) are expected to relinquish 50% of their acreage. The relinquished acreage are then expected to be resold to interested parties even though there is a case for the relinquishing parties to have Right of first refusals on the relinquished areas.

As at today, this provision is rarely implemented but that needs to change. The Minister must aggressively pursue the implementation of the legal provision by ensuring that all qualifying companies relinquish or take up their ROFR option on the acreage. Though the potential revenue from implementing this provision may be constrained by the participation of NNPC in the Joint ventures but the anticipated revenue from qualifying assets are still substantial.

Bid Rounds: The lost decade?  – The last oil licensing bid round in Nigeria was conducted in 2007. We consider this a ‘lost decade’ of opportunities, revenue and capacity for a resource rich country.  We suggest that the new minister conduct a transparent bid round for the marginal fields and oil prospecting licenses in the nearest future – within a year.

The 2002/2003 bid rounds have been adjudged the most transparent and rewarding in Nigeria’s oil history. The Minister might want to borrow some ideas from stakeholders who participated.

Pipeline Vandalism: Sai Baba and the oil thieves  – Nigeria loses and defers about 400,000 barrels per day to pipeline vandalism and crude theft leaving the refineries idle, revenue depleted and armed gangs enriched. It’s noteworthy that these losses/deferments are more than the total daily production of the middle east quartet – Brunei, Yemen, Uzbekistan and Bahrain. Recent governments adopted light-touch, incentive only strategies hence the proliferation of crude theft and in some instances sabotage by locals seeking for collateral damages. But with the impact of pipeline losses/deferments on revenues and the fiscal crisis in all the tiers of government, addressing these illicit activities have become critical.

There is no silver bullet for pipeline vandalism and sabotage but solutions would always involve a delicate balance of consistent force, incentives, education and surveillance. One of our recommended solutions would be the establishment and fortification of permanent multi-functional team focused on tackling economic sabotage around the country. This team could mirror the likes of UK Centre for the Protection of National Infrastructure or its American counterpart, the Federal Protective Service. The Minister could also influence the listing of major arterial pipelines such as Trans Niger Pipeline, Trans Forcados Pipeline as ‘National Strategic Infrastructure’ whom by their significance are expected to enjoy enhanced protective resources.

Drones anybody?

Industry Regulation and Fiscal Efficiency

Ministerial Consents: When dealers apply to you, consent thou quickly  – The wave of divestment and mergers/acquisitions in the last half a decade are characteristic of mature basins where old and new players in the industry recalibrate their portfolio. The usual trend of smaller players snapping up IOC divestment has redefined the Nigerian landscape, promoting industry efficiency and capacity.

However, the discretionary interventions by government in the recent M & A deals in the industry have become a principal risk and encumbrance.

The administration of the ministerial consents to M & A and divestment deals should be reformed.  Certainly, government must have the opportunity to intervene in the industry for strategic reasons but such interventions must consider the efficiency and growth of the industry. We recommend that new minister publish regulations and guidance on the process for receiving ministerial consents in M & A deals amongst others. The guidance must provide timelines and reconsideration/appeal options that extend beyond the sole discretion of the Minister.

Certainty and transparency is key for industry growth and efficiency.

JV Funding & Fiscal Uncertainties: Good soups cost money – Finding an enduring solution to the Joint venture funding deficits is germane to Nigeria’s oil and gas aspirations as the lack of funding for the government’s equity over the years has severely constrained production and stunted the growth of the industry. About $5 Billion is reportedly been owed to the JV partners. Rig count in the country has dropped by about 50% in the last five years. Production has never returned to the pre 2006 peak. This is clearly unsustainable.

Various options have been advised in the past with the most radical been the total sale of government equity in the JV assets. We consider that an extreme and ill-thought option. Government’s equity in assets especially in developing countries are essential for strategic reasons.  What happened to the Incorporated Joint Venture model being used by the NLNG? Would the Modified Carry Arrangements be a better long-term option? Ring-fence assets and raise bonds?

Many options for the new minister to consider but only one result is essential – perennial funding deficits must be addressed.

Subsidies: No longer at ease – Fuel subsidies have become an albatross on Nigeria’s petroleum downstream sector. It has discouraged  necessary investments and incentivized retail corruption in the downstream sector. The resources needed to address the corruption in the determination and applications of subsidies are too prohibitive. A reset is the only alternative. Thankfully, the debate around the issue is inadvertently reducing the possibility of a strong reaction if the new government implements it.

As a first step, the minister must gazette the removal of the subsidy on kerosene as anticipated by earlier governments.  To limit the impact on the Nigerians, the kerosene conversion programme (see LPG) must be aggressively implemented. For petrol, the debate is centered mostly on the most appropriate timing for the removal of subsidies. Would a shock therapy suffice? Maybe the option of allowing a gradual revival of internal capacity before removal?

 

Gas Reforms

Gas Pricing: Follow the Money – Nigeria produces over 6bscf/day but only a fraction gets supplied to the domestic market. About 40% is exported through LNG, 35% reinjected, with about 12-15% been sold in the country. Sobering facts but it’s an indication that gas production in Nigeria over the years have simply ‘followed the money”.

As at 2011, domestic gas prices was pegged by government at a measly $0.40 mscf/d while LNG inlet gas prices hovered above $2.00/mscf/d -a 500% premium. Investments by the IOCs/NNPC naturally were biased towards the export projects – NLNG, WAGP, GTL etc.

Low gas prices and a fragile gas commercial framework have seriously stymied the development of the domestic gas market. That is changing though. The recent administration has correctly identified this challenge, allowing an upward rise in gas prices and providing policy support to strengthen the commercial domestic gas value chain. What the new minister would be expected to do is ensure proper, official communication of these gas prices as there are still some confusion in the value chain about the effectiveness of the new prices and also resist attempts by non-oil and gas agencies to takeover the regulation of gas prices.

Removing commercial uncertainties in the gas sector would be a big fillip for the industry’s growth.

Gas Infrastructure: He who lays the pipe dictates the tune – Nigeria has a gas infrastructure problem, not a gas supply one. Poor and shortsighted policies have constrained investments in domestic gas infrastructure leaving available gas resources that would have been used in-country stranded. Typically, gas infrastructure attracts gas supplies beyond the ‘anchor’ projects as the Escravos Lagos Pipeline System has proven.

What Nigeria needs now are policies and measures that can accelerate gas infrastructure projects in the major demand hubs. Critical pipeline projects like the Oben – Obiafru/Obrikom  (OB3) pipeline project, Northern Option Pipeline (NOPL), Trans-Nigeria pipeline project must be actively pursued and monitored by the Minister.

Without these gas infrastructure projects, the countries domestic gas consumption ambitions might remain a pipe dream.

LPG Consumption in Nigeria: Cooking with strange fire – Biggest gas reserves in Africa but our usage of LPG (cooking gas) can only be compared to that of conflict-ridden countries. On per capita consumption basis, Senegal, Ghana, Benin Republic, Libya utilise more LPG than Nigeria. How we have failed to reinforce the utilisation of an available, cleaner and cheaper (on energy basis) cooking fuel remains a mystery.

 

LPG Per Capita

But it was never like this. LPG usage as cooking fuel is underpinned by constant supply and affordability and until the early 1990’s supply was constant as the sole sources then, the refineries were in good shape. The degradation of the refineries later on meant that supply disappeared and most of the other sources were designed for export.

The country now has a good opportunity to restore LPG usage as the preferred cooking fuel of choice. A LPG revolution must be a priority for the minister as it is beneficial to the economy and also politically rewarding. The key issues to address are supply certainty and safety regulations. It would be in order for government to impose ‘domestic supply obligations’ on Mobil (Oso), Chevron (Escravos) and encourage the likes of NLNG who have been supplying in recent years. The various LPG projects been delayed around the country also needs to be keenly monitored and pursued.

The hugely successful kerosene conversion programmes in peer countries like Indonesia and Brazil also offer a template for Nigeria. In Indonesia, the government’s programme, decreased kerosene use from 9.89million litres to 1.72mill Litres in 5years, saved about $6.9billion on subsidy, LPG storage expanded from 136,000MT to 349,000MT, 54 million households benefited and converted to LPG, about 60 million cylinders in 54 million homes ( 95% kero conversion achieved) and 38,000 new jobs were created through the kero to LPG conversion programme. For a government who have proclaimed its centre-left credentials , we consider a robust LPG programme as a win-win.

Will we see ‘Buhari cooking gas’ anywhere soon?

Institutional Reforms

NNPC Reforms: Reforming the unreformable – NNPC needs a reset and for us this means:

  • Determining the true financial state of the corporation. Considering the depth and breadth of the corporation, it may take eon and lots of resources. Quick option is to focus on priority subsidiaries – PPMC, NAPIMS, NPDC and COMD.
  • Stripping and transferring its numerous regulatory/representative functions to the Ministry and Inspectorates.
  • Fully commercializing and partly privatizing its subsidiaries – refineries, NPDC, NGC.

The Petroleum Industry BIll addresses many of the reforms anticipated for NNPC to perform efficiently and serve the nation hence the new administration must doggedly pursue the passage of the bill. If the political dimension of the bill continues to constrain its passage, it might be necessary to split the bill as been proposed by many stakeholders. The level of success recorded with reforming NNPC would largely determine the legacies of the new Minister.

DPR: The reluctant regulator – NNPC has acquired much power and influence in the oil industry largely because the regulator, DPR has been less than stellar in performing its duties. The regulator’s perennial reluctance to take the lead meant past governments relied on NNPC even for matters that should naturally be under the purview of DPR. We have now built a all-powerful, labyrinth monster that needs to be tamed.

The petroleum industry can no longer afford a lackluster and incapable DPR hence the need for reforms especially in capacity building, revenue collection, price monitoring, local content, petroleum information and data, frontier exploration, acreage management etc.

Sequitur

The array of issues highlighted above underscores the breadth of work awaiting the Minister. We posit that the country may not be able to afford the idea for the President to handle the petroleum industry as handling the oil industry demands more than integrity. There still exist within the industry those with right balance of integrity, capability and audaciousness. It is the President’s job to find them.

We wish him best of luck.

Oloibiri Advisory. Oloibiri.advisory@consultant.com

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The author prefers to remain anonymous. I’m the first to admit that I don’t know too much about this industry but one can see further and better by standing on tall people’s shoulders.

I thank the author and you should too

FF