Section 68: How To Eat Your Cake and Have It

My policy on cake is pro-having it and pro-eating it – Boris Johnson, Mayor of London

Another day another constitutional ‘crisis’ brought about by a dubious section of the Nigerian constitution, which itself is a dubious document. Invariably, there are now two ‘strong’ interpretations to the section depending on which side of the political divide you stand on.

This has of course been triggered by the defection of the Speaker of the House of Representatives, Aminu Waziri Tambuwal from the PDP to the APC. The PDP contends that by virtue of the constitution, his seat has become vacant…or something like that. Tambuwal of course timed his defection to coincide with the House going on a 6 week recess, which suggests that perhaps, he knows he is standing on constitutionally shaky ground.

Here’s the offending section of the constitution:

Section 68(1): A member of the Senate or of the House of Representatives shall vacate his seat in the House of which he is a member if –

(g) being a person whose election to the House was sponsored by a political party, he becomes a member of another political party before the expiration of the period for which that House was elected; Provided that his membership of the latter political party is not as a result of a division in the political party of which he was previously a member or of a merger of two or more political parties or factions by one of which he was previously sponsored.

God forbid I pretend to be a lawyer or constitutional expert and then make a fool of myself in trying to interpret the constitution. My concern here is more about how we make laws in Nigeria and how an avoidable mess is created.

Why is that (g) paragraph included in the section at all? Thinking through the matter – if someone is elected on the platform of one party and then defects to another party, we can consider it a joint effort. The person probably campaigned well and the people liked him/her over the alternatives. So it would be unfair to simply say the people should leave the office they have been elected to. I think this much is uncontroversial.

Therefore, the simple solution to the matter would be for that ‘joint effort’ to be renewed. The candidate resigns the office, a by-election is triggered and he/she can return to the office if the voters agree. I think this is fair and honourable. And I am certain that our lawmakers thought about this option when drafting that section of the constitution. The trouble is that Nigeria intervened.

Given that none of the lawmakers drafting that amendment are bound to their political parties by ideology or for that matter, honour, they must have known that in the short, medium or long term, this might come to affect them. Simply not greeting the governor of your state properly at a function might cause him to try to replace you at the party primaries, leaving you with ‘no choice’ but to defect to the nearest party. Or you might even be minding your business in Abuja and your state party will be split in two because of 2 competing egos, forcing you to make a choice. That is to say, to paraphrase the famous danfo dictum – nobody is above defection.

And so, what ought to be a straightforward constitutional clause – defect and trigger a by-election – becomes complicated. Our politicians are risk averse so no one wants to risk going back to the electorate to renew a mandate especially if you are defecting away from the PDP – facing their machinery can be a hopeless task in many states. This then leads to lawmakers adding all sorts of escape valves, hatches, clauses and backdoors in the constitution. This is why the (g) section is in that clause – to allow people eat their cake and have it.

Proving that there is division in a political party in Nigeria can be incredibly easy. Indeed, a politician who is planning to defect can ‘sponsor’ such a division in advance. It is no harder than holding a rival meeting in a different location on the same day that the main party is holding theirs. You will always have followers. Or you can sponsor thugs to ‘storm’ the venue of the main party’s meeting and break a few bottles or throw some charms here and there. The courts will never be able to agree on what ‘division’ is in this context – human behaviour is far more complex than what can be codified in a document in this manner.

And this brings me to the point of this post. This is one of the biggest threats to our democracy and guarantees that as a nation we will continue to jog on the spot for a long time. Eating your cake and having it is not a very useful policy when it comes to nation building. And this behaviour is rampant. Consider how the government passes laws to raise tax revenues and then proceeds to exempt its friends with all sorts of waivers and abuse of the ‘pioneer status’ as an example. In the end, such tax laws make a mockery of the whole enterprise to say nothing of the fact that badly needed revenue goes uncollected.

That our politicians have no moral spine or honourable bone in their body is not news. But there is more to the problem – the inability to suspend, even for five minutes, that selfish behaviour is not just frustrating but incredibly dangerous. You begin to get the picture when you look at all the exemptions in our laws and loopholes either through deliberate dubious wording or outright insidiousness. Political factions are a fact of life in practically any democracy in the world – In the UK, the Labour party still has its Blairites and Brownites while the Conservatives continue to be split into some form of Wets and Dries that has plagued the party since Mrs Thatcher’s days.

But to then start writing factions into the constitution as justification or excuses for one thing or the other…that is unpardonable. And from lawmakers whom we pay a fortune.

Bring back the guillotine.



Man of System

Been a while Aganga was bashed on this blog. Thankfully he has supplied fresh material. Going through the papers today, this caught my eye:

Concerned by the low level export of quality goods and services from Nigeria and in a desperate move to remove all barriers militating against export of goods and services, the Federal Government has inaugurated a National Accreditation Committee.

Minister of Trade&Investment, Olusegun Aganga

The committee was empowered to issue certificates of conformity which verify that management systems, product manufacturers, service providers and personnel have complied with best practice for quality, fitness for use and continued safety in operations.

This further ensures that buyers, users and consumers of products and services can pay for goods and services with confidence in the fact that their wellbeing is protected.

While inaugurating the committee in Abuja, yesterday, the Minister of Industry, Trade and Investment (FMITI), Mr. Olusegun Aganga, regretted: “The level of export from this country has been very low and the level of rejection outside this country has been very high.

“The efforts of the Standard Organisation of Nigeria (SON) to set standards and improve quality of products through mobilisation and education of stakeholders is commendable.  However, the initiative under the National Quality Infrastructure will be more encompassing and address the gaps of the erstwhile arrangement.

“The benefit of an accreditation environment have been well recognised all over the world. Accreditation will among other benefits help to significantly reduce the barriers while facilitating export of high quality goods through product testing and certification. Efficiency levels will increase in organizations that are certified, it will enhance consumer satisfaction and stimulate industrial capacity utilization as goods and services will not be of low quality.”

I continue to be baffled that our friend is in charge of actually making business happen in Nigeria. And it is the main reason why I believe the government is either not serious about the things it says or has no strategy and is just winging it and hoping for the best.

First of all, he wants to remove ‘all barriers militating against exports of goods and services’. This is a noble thing – the government even admits that there are barriers in place which is the first step of solving the problem. So how does it plan to solve the problem? A committee!

Can it be that the current reason why we are not exporting enough goods is that we lack a committee to make this happen? Now, we have created a committee that will determine whether or not your product is good enough for export to a foreign country and then give you a licence. This committee will figure out what people in other countries want by sitting in Nigeria. Before you can send a product to say, Cambodia, a group of Nigerians will say ‘no, you can’t send this to Cambodia because Cambodians will not like it’.

Friends, cast your mind back to the 1980s. What kind of product did ‘Made in Taiwan’? signify? Yep, cheap and low quality. I grew up hearing my parents and Uncles deriding Taiwanese made products. But friends, today, Taiwan makes HTC phones and Asus computers – products which most Nigerians can no longer afford. Indeed, Taiwan is now so rich that its citizens no longer require visas to enter the United States.

So I ask you – how were those obviously cheap and poor quality products escaping from Taiwan and entering into Nigeria? Did they not have a committee to accredit their exports before sending them out so that the ‘wellbeing of Nigerians could be protected’? Or perhaps it was deliberate and Nigerians were used to fine tune these products till they got to the stage where they are now?

How about China? In 2013, it exported $2.21trn worth of goods and services. If there is a committee ‘accrediting’ all these exports, I am sure many Nigerians who have bought Made in China products will query its effectiveness. The Nigerians who acted as the guinea pigs for the first set of Chinese smartphones sold in Nigeria probably might not be able to afford the new ones like OnePlus – a firm which does not volunteer to its buyers that it is even Chinese:

Another local firm on the move is OnePlus. Reviewers in developed markets have been raving about its clever handsets, which offer top-notch performance and features for around $300—less than half the list price of the latest iPhone. Carl Pei of OnePlus argues that unlike its rivals, his firm was “born a global company”. Since its founding late last year, it has targeted 16 countries—including such challenging markets as America and Britain. “It helps that a lot of people don’t know that we are a Chinese firm,” he confides

I have also previously written about how the South Koreans used Nigerians to fine tune their Hyundais in the 1970s by sending us cars where the roofs ‘peeled off’ while washing:

Screen Shot 2014-01-01 at 12.41.07

Did the Koreans not have a committee to test if the roofs of their cars peeled off like a banana before exporting? Or did they deliberately sell them to us – with the bait of making them as cheap as possible – and then waiting for complaints to come in so they could refine the products based on those complaints?

There is a guaranteed system of achieving all those things that Aganga wants to achieve for Nigerian exports. It is called a market. There are various ways of entering and competing in a market – you can use quality or you can use low prices. For a country like Nigeria that does not have advanced skills, the best option is to compete on price and get the market to improve our products for us. There is no need for a committee to accredit any export. Send it out there, when they send it back, you will know what is wrong with it. The priority for any serious government must be to get those products out there as cheaply and quickly as possible. Because even if this so-called committee ‘accredits’ the products for exports, what is the guarantee that anyone will buy them? Will a buyer in Peru look at a product from Nigeria and say ‘Oh it’s got a certificate of conformity from the National Accreditation Committee…must be a lovely product, I must buy it‘. Surely they are not being exported into a vacuum? There is plenty of competition out there already.

The mistake being made here is in thinking that goods of low quality are beneath a country like Nigeria with our shiny new GDP. In fact, that is what we need to be doing and doing lots of it and it is evidenced by the high rejection of our products. If they are being rejected, price it until they accept it! using government subsidies if possible – Chinese manufacturers compete with subsidised electricity (if the Taiwanese had priced their goods at Western prices for us in the 1980s, we too would have rejected them). By setting up a committee, the only possible outcome will be that the volume of exports will reduce – the committee’s work will be to reduce the number of goods that make it out in the first place.

So why does Aganga like to waste his and Nigeria’s time with all these policies? I have only one explanation – he is a man of system as described by Adam Smith. Something must replace something. There must be a plan. Government knows it all. Ergo, when barriers are removed, you have to replace it with a committee. As if a committee is some kind of thoroughfare.

When a cancerous tumour is found in the body, it is removed. It is not replaced with a non-cancerous tumour, if ever there was such a thing.

We are well rid of evil.




Something Ventured

What makes America so great? There has to be more than one answer to this…assuming it’s even possible to answer the question.

Earlier this year I was in Las Vegas for the first time. Driving down the strip one day, I was amazed at the sheer size of some of the hotels there. From the designs of the buildings and even the decor inside some of them, you could tell many of them were built many many years ago – Caesar’s Palace opened in 1966 with 680 rooms. And the Strip is covered with possibly hundreds of hotels. One question I kept asking myself – where did the people find the nerve to build such things? What if people simply don’t come to Las Vegas? What happens to the hotels?

Whatever the answer to those questions, is the one I tend to prefer as the thing that has made America great.

A random post on Quora led me to a documentary called Something Ventured (It’s on Netflix as well). See trailer below.

It’s the story of the people who started what is today known as ‘venture capital’. For the most part they were a bunch of guys who had a basic to decent understanding of how finance worked and how to raise some money. They certainly didn’t go to University to study ‘venture capital’ – they just had an understanding and appreciation of risk. The one thing they all had in common was that they wanted to make money and plenty of it. Interestingly, these days a number of the guys are now doing all kinds of social and charitable investments which might be an indication of whether or not the chicken should come before the egg in these things.

Usually they backed businesses that banks simply wont fund for being too risky or outright insane. You hear some of the guys in the documentary say things like ‘we decided to raise the $3m and build the business to see if it would make money‘. On the face of it, that sounds truly crazy – why do you have to spend $3m before figuring out if something would make money or not?

And yet, it’s that incredible appetite for risk taking that makes certain things happen. It’s amazing to see how Venture Capital today – certainly in Nigeria – has become something so ‘technical’ that only people who go to expensive schools can do. Having been through a business school myself, I’m certain that the number of investments I would have attempted before my education reduced greatly once I had obtained my degree. You definitely learn a lot about risk and various models and theories that (allegedly) teach you to how not to lose money. Is this a good thing?

The example of how Kleiner Perkins invested $250,000 in Genentech in 1976 is a useful example. At the time, the idea being backed was no more than something that sounded interested. The chances of failure were probably 99.9%. Yet, Genentech was sold to Roche in 2009 for $47bn.

Venture Capital firms regularly lose money of course – some have a success rate of even 1 in 20. Most investments they make are lost completely and returns vary very very wildly. But the interesting thing about the Venture Capital industry is that rarely loses money. That is, more often than not, when you take all the VC firms in the (American) economy, they generally make money. In other words, the industry is good for the economy – value is created more often than it is lost. It’s an industry worth having in an economy.

And it’s just not those who call themselves venture capital firms. The whole VC thing is almost like an attitude. Surely there are fraudsters in the American economy too? Surely there are people who talk a good game and turn out to be a waste of time once they have been given money? Certainly, these are borne out by the fact of the number of investments that go wrong as stated above.

But VC needs doing. The Securities and Exchange Commission of Nigeria’s website lists 6 registered Venture Capital firms in Nigeria. The list hasn’t been updated since 2010 so is definitely out of date. But the fact that the SEC website is happy to leave 4-year-old information on its website tells its own story. Today, most of the VC investment in Nigeria comes from America or Sweden or Germany. It’s definitely better than nothing.

One thing the documentary didn’t really focus on was how the money the VCs deployed was raised. But this happens differently in different economies. Take this example from a story in The Economist about China from 3 years ago (the whole thing is worth reading):

A Wenzhou businessman reckons that there are 100,000 people in his city who could each raise up to 1 billion yuan within 48 hours. So liquid is the system that, unlike private-equity groups in the West, Chinese partnerships often do not raise money before seeking prospective investments; investments are found and then partnerships are formed in short order

As long as the money can be raised like this, stuff will get done.

This post is not about ideas or solutions but just discussing something I always think about. Why do people take such huge risks? How does an investment of $250,000 turn a company into a $47bn one especially when the market for whatever it is you are investing in does not even exist at the time?

Back to Las Vegas and Caesar’s Palace. It’s not hard to notice that the thing that made Las Vegas its name – casinos and gambling – is losing its appeal there. Macau had gambling revenues of $38bn in 2012 compared to around $6bn for Las Vegas. If investors put money in Vegas hotels on the basis of gambling revenues, then those models will need to be torn up and rewritten now. Even American casinos are now investing in Macau.

So what does a hotel do when its casino lunch is being eaten right before its eyes? In 2012, Caesars Palace opened its Bacchanal Buffet. It cost $17m to build and covers 25,000 square feet with 500 dishes on offer starting at $19.99 for breakfast. We can agree that the buffet market is rather different from the casino market – I doubt that gamblers take long breaks from the casino to go and sample dishes at the buffet. In other words, the hotel was betting on families being attracted to the premises to replace the gamblers who had run off to Macau. And it’s a big bet as you will need to sell a lot of $20 plates to recoup $17m before accounting for the cost of the food and chefs.

So you start by attracting gamblers and then move on to attracting families. And then you stay in business. The answer is never one thing.

Watch the documentary if you can. It’s 3 years old but there’s still an education in it.



Taxes of Bow-Tie

Special taxes should be introduced on luxury items so that there will be more revenue to provide goods and services for the generality of the people.

And to cater for those who are not gainfully employed in terms of making sure that every child in Nigeria attends schools.

The statement above was credited to Dr. Abraham Nwankwo, Director General of Nigeria’s Debt Management Office (DMO) and the quiet member of the trifecta in the Nigerian government that used to be the Axis of Bow-Tie (SLS has since left government leaving only Akin Adesina and Nwankwo).
Whenever I hear someone is trying to raise taxes, my ears perk up – I’m a low tax kinda guy and I prefer that taxes must be justified and actually bring in revenue. I even proposed a PJ-BAD tax on private jets a couple of years ago, a Pigouvian Tax.
By floating the idea of a tax on luxury items, Dr. Nwankwo guarantees that the tax will be popular among Nigerians, most of whom don’t buy luxury items anyway. The problem comes with the second part of his statement – that the taxes will be used to do all sorts of wonderful things like unemployment benefits and sending kids to school (never mind that we already have an education tax in Nigeria).
I’m afraid I have not so good news for Dr. Nwankwo – if this is how anyone is planning to fund education or a social welfare programme, then it means kids are not going to go to school. The simple reason for this is that a tax on luxury items is a tax on behaviour and if you tax behaviour, behaviour will change. Of course, if the purpose of the tax is to change behaviour, then by all means tax that behaviour until people change. A good example of this is taxing petrol to get people to drive less in order to reduce pollution.
So, you tax luxury items because you think there’s a need to reduce that kind of consumption if it causes negative externalities in society. That is fine. If you set the tax high enough, the offending behaviour will disappear along with the tax revenues.
But people in government never stop getting excited at the prospect of taxing something to raise revenues. Indeed Dr. Nwankwo hints at this as well:
But the emphasis is that we do not have more borrowing space because GDP has increased; we do not service debts with GDP, but with revenue and revenue is suffering some setbacks in terms of its sizeability to the GDP
The government desperately wants to borrow more money to meet revenue shortfalls but to do this it has to find more tax revenues fast to be able to service the debts. Things are starting to get hairy and there’s a limit to borrowing to pay back borrowing. It’s also embarrassing that we call ourselves Africa’s largest economy and we barely raise any taxes.
Back in 1990, America decided to implement a luxury tax to balance the budget under George H.W Bush. Things like jewellery, yachts, fur coats, private jets and fast cars were going to be taxed. So what happened?

In 1990 the Joint Committee on Taxation projected that the 1991 revenue yield from luxury taxes would be $31 million. It was $16.6 million. Why? Because (surprise!) the taxation changed behavior: Fewer people bought the taxed products. Demand went down when prices went up. Washington was amazed. People bought yachts overseas. Who would have thought it?

According to a study done for the Joint Economic Committee, the tax destroyed 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry and 7,600 in the boating industry. The job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. So the net effect of the taxes was a loss of $7.6 million in fiscal 1991, which means the government projection was off by $38.6 million.

It was such a failure that the tax was repealed in 2 years. America went from a next exporter of yachts to a net importer since the taxes made it cheaper to buy boats abroad and even leave them there.
It’s going to be interesting to see what kind of revenue generating taxes the government will cook up in the coming days, especially after the elections. But if its stuff like this, then it’s a waste of time. Most of the owners of private jets in Nigeria for example, already use all sorts of sophisticated ownership structures to avoid the jets being traced back to them. Beating taxes like this will be a walk in the park for them. Unless the definition of what is classified is ‘luxury’ is constantly changing, there is no way for such a tax to raise money sustainably.
So how should the government raise taxes? The answer is staring them in the face (see here) and the fact that this is not even being talked about suggests to me that the avoidance is deliberate. Almost all the local content companies in Nigeria do not pay any taxes due to them having ‘pioneer status’. The Task Force set up by the President on the petroleum industry (headed by Nuhu Ribadu), specifically flagged this problem (Page 19):
The Task Force was informed that at least five companies:
Allied Energy, Midwestern Oil & Gas, Brittania Oil Nigeria
Limited, Suntrust Oil Company Nigeria Limited; and Niger
Delta Petroleum Resources Limited have been granted
pioneer status by the Nigerian Investment Promotion
Commission (with others pending or undetected) for their
exploration and production activities.
The Task Force finds that the granting of pioneer status to oil
operators for an activity that is well established for over 40
years inappropriate. The loss of revenue from the grant of
pioneer status to oil operators is an avoidable loss and it is
recommended that any such further consideration be stopped
forthwith and the current ones set aside and or revoked.

That report was submitted in 2012 and since then there have been more companies with ‘local content’ assets.

This debate on taxes has only just started and it’s going to be very interesting to see how the government approaches the issue.

We continue to observe


Buhari The Ascetic

General Buhari has unwittingly kickstarted a debate about how to fund campaigns in Nigeria. To pay the N27.5m cost of the APC’s presidential nomination form, he revealed he had reached some kind of overdraft arrangement with his bank:

N27 million is a big sum, thankfully I have personal relationship with the manager of my bank in Kaduna and early this morning, I put an early call (and) I told him that very soon the forms are coming, so, whether I am on red, or green or even black please honour it, otherwise I may lose the nomination

The bigger issue here is not that he’s come to this kind of arrangement but that he seems to have left it till the last minute. He’s always known he was going to run for President so before declaring, he should have tied up this loose end with his bankers. Or perhaps he is only making the story public to let people know how he is funding the form-buying given how there have been so many stories of people offering to pay for him.

But surely Buhari has friends who can come up with N27.5m for him? And clearly, if N27.5m is a struggle, then a campaign that will cost probably N1bn is going to be an impossible task. The reason for this appears to be a simple one as he explained himself:

But I felt heavily sorry for myself because I don’t want to go and ask somebody to pay for my nomination forms, because I always try to pay myself, at least for the nomination

Ok fair enough – maybe he knows he is going to have to rely on people to fund his campaign proper and he’s trying to preserve some pride or honour by paying for the form himself; the very least he can do.

All of this brings us to another ‘What Exactly Do Nigerians Want?’ debate. I suspect that a decent chunk of the criticism of Buhari’s approach to funding his form-buying is coming from people who want to justify why they will vote for the current government to continue in 2015. Such people tend to spend an inordinate amount of time criticising every possible candidate that is lined up against the incumbent. We are approaching the amusing situation where the same people will criticise one candidate for being a thief and another one for not having money. This is all a welcome form of political entertainment.

We can find some interesting lessons from Indonesia where a man, Joko Widodo, from very humble origins has just been elected President, defeating Prabowo Subianto, the establishment candidate whose brother, Hashim Djojohadikusumo, is one of Indonesia’s richest men.

So how did Jokowi manage to raise more money than Prabowo? The chart below helps:


40,000 people is still quite small in a country like Indonesia with a population of over 250 million but clearly it was an achievement both in comparison to Prabowo and the novelty of it. Indeed, Prabowo himself initially mocked the idea of raising money from ordinary people:

Jakarta. After vocally criticizing Indonesian Democratic Party of Struggle (PDI-P) presidential candidate Joko Widodo for accepting campaign donations from the general public, Great Indonesia Movement (Gerindra) Party candidate Prabowo Subianto has begun doing the exact same thing.

“Prabowo and [his running mate] Hatta [Rajasa] harshly criticized the public donation scheme at first, but now, without a clear argument, they are doing the same thing,” Indonesian Civic Network (Lima) head Ray Rangkuti said on Saturday.

Joko and his running mate, Jusuf Kalla, have made Rp 40 billion ($3.38 million) since opening three bank accounts in their own names on May 29 for the purpose of receiving donations, becoming the first candidates in Indonesian history to do so.

Some 30,000 supporters have contributed so far, with the campaign taking in an average of Rp 2 billion per day.

Joko-Kalla campaign official Dolfie OFP said that Prabowo’s about-face indicated lack of a clear vision.

“This is inconsistency, they used to criticize Joko-Kalla when they opened the accounts, and now they did the same thing,” he said.

At the time, the Prabowo campaign maintained that the solicitation of public donations was an undignified approach to politics.

“[Joko-Kalla] claimed they wished to make Indonesia prosperous but instead they make their supporters suffer,” Prabowo-Hatta campaign legal affairs head Ahmad Yani said.

The campaign implied that a viable candidate should be wealthy enough to fund his own bid.

“The presidential candidate should be rich so his constituents won’t have to beg for money on the street, this is a social anomaly that lowers human dignity,” campaign official Suryo Prabowo said. “Why ask people to beg?”

But on Friday, the campaign announced that it would begin taking donations nonetheless.

Typical. People first say something is impossible until they see it is successful and then they start copying it. In the end, Jokowi raised 2.5 times more than Prabowo did (at least officially) to finish at around $3m raised directly from the public. The vast majority of that being small amounts of $100.

Not having money in Nigeria has never been a full barrier to political office in Nigeria. A few days ago, I sat with a friend who narrated to me how Aliyu Mu’azu became Governor of Niger state – a hilarious story of how the power brokers in the state couldn’t decide between themselves on a successor to Abdulkadir Kure and ended up with Mu’azu as the compromise candidate. It is unlikely he had much money at the time as he was apparently a civil servant. Of course today, he can probably afford to sponsor someone for the Presidency.

This is the way it has always been done in Nigeria – the Prabowo way. It is thus hard to understand why anyone will criticise Buhari for at least bucking this trend albeit in an uninspiring way.

And this brings us to the real issue with Buhari himself and his campaign – a lack of inspiration. He is undoubtedly popular and is by all accounts a decent man. But his inability to fully maximise his base and then broaden his coalition is a recurring theme of his campaigns so far. And this is a message for those around him. Even if he doesnt win (as is almost guaranteed), he can change Nigerian politics and campaign finance in a way that leaves a lasting legacy.

People often ask why Buhari has never groomed someone as a leader or successor. That is a somewhat harsh but valid question. But if he manages to run a truly people funded campaign, then he will have groomed thousands of successors all over the country who might be inspired to try the same thing.


Lau Lau Fiscal Policy

The boom, not the slump, is the right time for austerity at the Treasury – John Maynard Keynes, 1937

Money is sweet to spend, especially when it’s other people’s money or it has ‘no owner’. A couple of months ago, I wrote about how Nigeria has been in Boom Time for the last 4 years with oil prices consistently above $100 per barrel since the current government came into office.

Given that Nigeria really has no say in the global oil markets – we cant really deliberately affect prices to our own benefit – the time was bound to come when the party music would stop. It appears that time has now come.

Here’s what the story of oil prices in the last 1 year looks like:

Crude Oil

It’s not yet a disaster of course; in theory it’s still above the price we based our budgets on this year ($79), assuming you believe the difference is being saved somewhere. The reasons for this fall in oil prices are numerous and beyond the pay grade of this blog but we can take one useful one:

(Reuters) – Saudi Arabia is quietly telling oil market participants that Riyadh is comfortable with markedly lower oil prices for an extended period, a sharp shift in policy that may be aimed at slowing the expansion of rival producers including those in the U.S. shale patch.

Some OPEC members including Venezuela are clamoring for urgent production cuts to push global oil prices back up above $100 a barrel. But Saudi officials have telegraphed a different message in private meetings with oil market investors and analysts recently: the kingdom, OPEC’s largest producer, is ready to accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.

The discussions, some of which took place in New York over the past week, offer the clearest sign yet that the kingdom is setting aside its longstanding de facto strategy of holding prices at around $100 a barrel for Brent crude in favor of retaining market share in years to come.

The Saudis now appear to be betting that a period of lower prices – which could strain the finances of some members of the Organization of the Petroleum Exporting Countries – will be necessary to pave the way for higher revenue in the medium term, by curbing new investment and further increases in supply from places like the U.S. shale patch or ultra-deepwater, according to the sources, who declined to be identified due to the private nature of the discussions.

All the Saudis need to do to make that happen is to ignore OPEC and pump more oil until prices drop to the level they want. This is a high stakes game and the Saudis are battling for their own future. Aside from Shale Oil in America which threatens them, there are other long term problems they are trying to avoid as well:

After plunging below $35 during the 2008-09 recession, the price of Brent had recovered to $128 a barrel by spring 2012. The oil firms responded by pouring cash into all sorts of projects, from American shale to deepwater fields in the tropics. Analysts at EY, a consulting firm, estimate that the world’s energy companies are currently bankrolling 163 upstream “megaprojects”—those costing more than $1 billion apiece—worth a combined $1.1 trillion dollars. The majority, EY found, are over budget and behind schedule. Most big projects have been planned around the assumption that oil would stay above $100—a notion that in recent years has become an article of faith in the industry

My favourite economist, Thomas Sowell (as you may have guessed), likes to say that the amount of oil available in the world is determined by the ‘cost of knowing’. If the price of oil is high enough, people will go to the strangest places to look for it – the oil in Kurdistan is obviously a lot easier to pump from the ground than the one in Canada’s Tar Sands. Because prices have been so high for so long, people have been emboldened to go out and spend insane amounts of money looking for oil – the Kashagan oil field in Kazakhstan has so far cost $43bn (original budget was $13bn) and the oil hasn’t started flowing yet. If and when all these investments start to pump oil, then the Saudis would be in big trouble. This is what they are guarding against – they are trying to raise the ‘cost of knowing’ as high as possible so no one is crazy enough to go and start looking for oil in strange places.

This game is not for little children as you’d imagine. But what has Nigeria been doing all this while? Well, we know there’s hardly been any new investment in Nigerian oil for a while now due to uncertainty over non passage of the PIB and general persistent anyhowness.

We have also been spending the money in a Lau Lau manner. None of this is new of course, which is what makes it even more depressing.

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I took the chart above from the excellent book – The Oil Curse by Professor Michael Ross. From 1969 to 1977, the price of oil increased by just under 400% while the amount of crude oil Nigeria produced in that same period increased by 380%. In dollar terms, Nigeria’s revenues went from $4.9bn to $21.5bn, adjusted for inflation. And yet, you can see how the government was growing faster than the economy in that same period from the above chart – government share of the economy more than doubled in the period.

One of the lovely things we did with the money in that period was the Udoji Awards. All that money was coming in and no one knew what to do with it, so we did the tried and tested thing – salary increases for everyone!:

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We have a long history of Lau Lau fiscal policy in Nigeria, so one might expect that any government today would try to avoid toeing the same path. Listen to what Ngozi Okonjo-Iweala said last year in November:

The finance minister noted the factors that contribute to the rise in recurring expenses to include the very high salary increase that was agreed for public servants in 2010.

“A very high salary increase was agreed at 53 percent for public office holders. This singular act raised salary figures from about N800 billion to about N1.7 trillion,” she said

Right at the start of the oil boom, we were already spending the money. Part of the reason for that astronomical increase in recurrent expenditure was the minimum wage increase from N5,500 to N18,000 in early 2011. It’s easy to think that this was just about minimum wage but the clever thing that the NLC did was to get Goodluck Jonathan (who wanted to get elected) to agree to maintain the gap between the bands after the minimum wage increase. Say you were earning N16,500 when the minimum wage was N5,500. After the increase, your salary went up to N54,000. Everybody got a pay rise not just the lowest paid.

And the spending on salaries has not stopped. Everyone demands and gets something. Take this gem from earlier this year as another example:

Pension stipends received by professors and permanent secretaries will be augmented by the Federal Government when the new Pension Reform Act is eventually passed into law, investigation has revealed.

This development will enable them to continue to earn their full salaries in retirement even when they don’t have enough funds in their Retirement Savings Accounts, unlike other retirees under the Contributory Pension Scheme.

To be fair, GEJ will be enjoying his retirement in Otuoke by the time the full bill for this one comes in but it’s the little things that add up.

All of this brings us to where we are today. Heavy domestic borrowing with so much of government spending being financed ‘off balance sheet’ through grants and cheap Chinese loans. Major infrastructure projects are also being financed with private sector borrowing. The government does not seem able to ‘shake body’ and drop $1bn on a project. Jonathanism – the ideology which posits that it is possible to describe a bungalow as a skyscraper – is now going to be seriously tested.

Over the weekend the Finance Minister made the following statement in Washington DC (emphasis mine):

She however said government will definitely not borrow to finance its expenditure. “There are three ways we can manage this; you can either go outside and look for resource, but we are not planning to do that. So I just want to make that clear. That is the pride we have. Ever since we have been managing the economy, we have not done that.
“What else we have to look at is our revenue and expenditure side to see how we are prepared. There are already some good news, because we are already ahead in trying to bring out some extra help from FIRS, we gave a target of half a billion dollars (N750bn).  I’m happy to announce to you that they have already hit N800 billion as at the end of the July.
“So we have to go back and encourage them even more, that is one of the measures to take. The other ways are on the expenditure side and this is where we have to plead; this is not a situation created by any one of us but all Nigerians should see openly, something that the DG Budget and I have been saying for quite some time is we have to be very careful to build up what we call a buffer. All of you know the buffer we have as excess crude account. We have to build it up so that if we experience any shock we can now use it.

I always remember being in church and Dr. Okey Onuzo preaching that anytime you open your mouth to make a strong vow, all the demons that were previously bored and fast asleep suddenly wake up excited at finding someone to test. Saying you ‘definitely’ wont borrow is a strong vow to make indeed. I also like her use of the word ‘encourage’ when what she really means is that we are going to send FIRS after Nigerians and businesses to collect as much tax as possible so we can continue to pay it to civil servants. And is it now that oil prices are crashing that you want to ‘build up’ the reserves?

This is the story of how so many countries become ‘customers’ of the IMF – they ignore Keynes and spend like there’s no tomorrow. Well, tomorrow is almost here.

And I did not mention corruption at all.