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

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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

df763a0c-1be4-11e4-9db1-00144feabdc0.img

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

Guest Post: International Arbitration and Economic Growth in Nigeria

Introduction

The thesis of the article is that arbitration has become the preferred mechanism for resolving both commercial and investment disputes and an important area, to which Nigeria must turn in its effort to attract foreign investments and stimulate economic expansion.

The World Bank Ease of Doing Business Report provides quantitative indicators on business regulations and the protection of property rights across multiple jurisdictions. The Report measures regulations affecting 11 areas of the life of a business such as starting a business, dealing with construction permits, getting electricity, registering property, getting credit, and enforcing contracts among others. Of the 189 countries surveyed in the in its 2015, Nigeria is listed in 170th position just ahead of Zimbabwe, Bangladesh and Liberia in 171st, 173rd and 174th respectively.

Poor contract enforcement mechanism, which includes dispute resolution is one of the reason why Nigeria is not one of the easiest countries to carry on business. Court congestion leading to trial delays, inefficiency of the judicial system, corruption, and lack of expertise to deal with disputes arising from complex and transnational business transactions are some of the reasons responsible for making contract enforcement difficult in Nigeria. In order to substantially increase the inflow of investments and stimulate rapid economic development, the country must create an efficient, flexible and neutral mechanism enforcing contracts and resolving disputes. It is in this sense that international arbitration becomes an inevitable and preferred option.

What Is Arbitration?

Arbitration is process whereby parties consensually submit a dispute to a non-governmental decision-maker, selected by or for the parties, to render a binding decision resolving a dispute in accordance with neutral, adjudicatory procedure allowing each party an opportunity to present its case.

The decision of the arbitrator or tribunal as the case may be is known as an award. Typically, because voluntary compliance is rare, the award is taken to court and enforced as the judgment of the court. Thus, an award, which is rendered by a non-governmental decision-maker, invokes the coercive power of the state once it is enforced as the judgment of the court and opens the judgment debtor to various liabilities including attachment of property and contempt.

Why Does International Arbitration Matter?

There are number of reasons why international arbitration has become an efficient and the preferred method for resolving international disputes whether commercial or investment.

First, it provides parties with a neutral forum that is detached from the parties and their respective home-state governments. Quite often, as Gary Born noted, parties begin to negotiate dispute resolution mechanisms with the objective of ensuring that disputes are resolved in the forum they perceive to be the most favorable to them – often the local courts in that party’s principal place of business.

These courts will be convenient and familiar to the home-town party. However, the characteristics that make one party’s local courts attractive to it will often make them unacceptable to counter-parties. As a consequence, outside of lending and similar transactions, it is often impossible for either party to obtain agreement to dispute resolution in its local courts. Thus by agreeing to resolve their disputes through arbitration, parties remove the so-called “home-boy” advantage. This feature is particularly important in the case of Nigeria because of the high incidence of corruption and the perception that judicial corruption is pervasive in Nigeria.

Second, arbitration agreements and awards are enforceable. One of the objectives of contemporary legal regimes for international arbitration is facilitating the enforcement of arbitration agreements and awards. In particular, both international arbitration conventions (particularly New York Convention) and arbitration legislation (particularly, the UNCITRAL – United Nations Commission on International Trade Law – Model Law) ensure that international arbitration agreements are more readily, expeditiously enforced and more broadly interpreted than forum selection clauses. This is consistently cited as a key benefit of international arbitration.

A Simple Working Illustration

Consider this simplistic hypothetical – party A, an Indian company entered into a joint venture with parties B and C, a Delaware and Nigerian Companies respectively for the construction of hydro-electric power station in Lagos Nigeria. The project is financed by a syndicated loan arranged by JP Morgan Chase (a London-based investment bank) and First Bank PLC (a Nigerian bank).

A dispute arose regarding the obligations of the parties under the joint venture – the Nigerian company alleges that both the Indian and Delaware companies have defaulted in their obligations under the joint venture. Let’s assume that the JV has no dispute clause. The Nigerian company institutes an action before the Lagos High Court. If both the Indian and Delaware companies, does not challenge the jurisdiction of the Court (as rarely is the case) and judgment is given in favor of the Nigerian party and against the two foreign parties, how will the Nigerian party enforce its judgment against the assets of the parties?

Remember, these parties and their assets are in their respective home countries. Unless Nigeria has entered into foreign judgments (reciprocal enforcement) treaties with both India and United States, the Nigerian company must institute court action against the parties in their respective countries – this is not an easy proposition as it sounds considering that there are jurisdictional hurdles that it must satisfy with the attendant huge cost of litigating in multiple jurisdictions over the same subject matter. In any case, nothing stops the foreign parties, upon hearing of the judgment of the Nigerian Court, from dissipating, transferring or disposing their assets in order to ensure that they are not available to satisfy the judgment of the Court.

Contrast this with a situation where there is a dispute clause in the JV stating that parties agree to submit any dispute arising from or relating to the JV to arbitration seated in Lagos. The New York Convention, with 150 contracting states including Nigeria guarantees the enforceability of both the arbitration clause in the JV and the award that may result from the arbitration.

Simplistically, the New York Convention allows the Nigerian company to take the arbitral award to both India and United States and be enforced as judgments of the courts of both countries with only minimal scrutiny to ensure there are no due process violations and for public policy, thus saving parties the huge cost arising from multiple litigations.

That is the magic of international arbitration!

Bringing It Home

International arbitration is finally gaining traction in Nigeria as more and more judges are coming to terms with the fact that private dispute resolution mechanisms are not impermissible intrusion into the sphere of exclusive jurisdictional competence of national courts but a means of facilitating trade and investments and even advancing national policy.

As a result of federalism, the Federal Arbitration and Conciliation Act, which is based on the 1985 UNCITRAL Model Law applies throughout the federation. The Act domesticated Nigeria’s treaty obligations arising under the New York Convention on the Recognition and Enforcement of Foreign Arbitral awards 1958. However, because arbitration is not listed under both the exclusive and legislative lists of the 1999 Constitution (as amended) – thus bringing it within the legislative competence of states, Lagos State has taken the lead by passing its own arbitration law which came into force on May 18, 2009.

The Lagos Arbitration Law is by far superior to the Federal Arbitration Act in content as it incorporates modern trends in the practice of international arbitration. The Law also sets up the Lagos Court of Arbitration, as an independent, not-for-profit entity comparable to the London Court of International Arbitration, for the purpose of delivering world-class arbitration and ADR services in Lagos. To signify its strategic intent, the Lagos State Government under Babatunde Fashola SAN donated a purpose-built International Arbitration Center at Remi Olowude Street, in Lekki Phase 1 to the LCA to aid its operations. The steps taken by Lagos State Government, which unfortunately did not make the headlines, yet are important to making Lagos and indeed Nigeria the investment destination and dispute resolution hub of Africa.

Conclusion And Recommendation

International arbitration can no longer be ignored by any economy that is interested in attracting foreign investments and stimulating economic expansion. Outside traditional jurisdictions like France, England and United States, in recent years, other jurisdictions such as Singapore and Hong Kong have embarked on extensive reform aimed at making the practice of international arbitration in their respective countries more efficient in order to attract foreign investments. It is therefore not surprising that Paris, London, New York and Singapore generate substantial revenue from international arbitration.

Because of its unique location and the size of its economy, Lagos can become the hub for dispute resolution in Africa with the right reforms. Mauritius is already positioning itself to becoming the dispute resolution hub of Africa by embarking on a comprehensive reform and have partnered with the London Court of International Arbitration to form the Mauritius International Arbitration Center known as the LCIA-MIAC. Lagos and indeed Nigeria cannot afford to take the back seat in this regard.

The Nigerian National Assembly must amend the outdated Federal Arbitration Act to bring “in sync” with modern practice. It must also amend the 1999 Constitution in order to list arbitration as an item on the concurrent list. The Federal and State governments must embark on comprehensive judicial reform in order to effectively support the arbitral process and enforce its outcome. Finally, judicial officers must be trained on the importance of international arbitration and the need to limit their review of arbitral awards to fundamental due process violations and public policy.

Tolu Obamuroh is a lawyer who has worked in Nigeria, the UK and the United States. He is currently in the middle of a PhD on International Arbitration. Follow him on twitter – @toluwabisi

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This is an edited version of the piece sent to me by Tolu. We caught up a couple of weeks ago – safe to say I’ve never met anyone so passionate about arbitration (and the law in general) and knowledgeable as well. Anyway, my ears perked up when he went into the economic benefits of arbitration including boosting the hotel and tourism industry. 

So I asked him to write a primer and he obliged. 

You must join me in thanking him.

FF