Dr. Emmanuel O. Ojameruaye is Vice-President for Research & Program Development with the International Foundation for Education and Self-Help (IFESH), an NGO based in Scottsdale, Arizona State. He joined IFESH in 2002, first on loan from Shell International Oil Company until 2008 when he retired from Shell. He worked for the with Shell Petroleum Development Company of Nigeria (SPDC) from 1992 to 2002, as Head Community Development (Western Division) from 1997 to 2002, Head Community and Environmental Issues Management (1995-96) and Head Government and Community Affairs in the Lagos Office. Before joining Shell, he was a National Consultant (appointed by the UNDP) for Nigeria’s National Data Bank Project in the Federal Ministry of Budget and Planning in Lagos (1989-1992) and a Lecturer in Economics and Statistics at the University of Benin in Nigeria (1982-1989). He was also the National Secretary of the Nigerian Economic Society (1986-1990). He holds a PhD degree in economics and has several publications to his credit including three books, Political Economy of Oil and other Topical Issues in Nigeria, A First Course in Econometrics and A Second Course in Econometrics (both coauthored), and several articles on energy economics and community development in the Niger Delta region of Nigeria. He is married with five children.
In my previous article on the controversy between Mrs. Obiageli Ezekwesili and the reputation managers of the federal government over an offending sentence in Mrs. Ezekwesili’s UNN Convocation on January 24, 2013, I pointed out some errors or mistakes made by Mrs. Ezekewesili and then emphasized that they are not usual among economists and in public policy. I also noted that the offending sentence does not warrant the attack on the person of Mrs. Ezekwesili by Mr. Maku and Dr. Okupe. Clearly, the controversy has overshadowed the central messages of the lecture and the lessons the current administration and all Nigerians must take from it. In this follow up article, I will summarize these and how we can to use Nigeria’s oil wealth to reduce poverty and restore the country’s dignity.
Mrs. Ezekwesili’s lecture was on the topic “The Wealth and Poverty of a Nation: Who will restore the dignity of Nigeria”. From the penultimate paragraph of the lecture, it is clear that her goal was to motivate and empower the graduating class to leave the university with a determination to “walk and work as a part of the Turning Point Generation that courageously dares to restore the dignity of Nigeria”. The intermediate objectives of the lecture were: a) to stir up their collective effective angst at the indignity of their inheritance–massive oil wealth, profligacy and pervasive poverty; b) to raise their determination to free Nigeria from the oil trap and see tertiary education as a tool to move Nigeria up the economic development ladder; and c) to sensitize them to join in the crusade to redefine and build a New Nigeria. In other words, the lecture was not intended as an attack on the federal government but to appeal to our youths to stand for good governance. In order to achieve her goal and intermediate objectives, Mrs. Ezekewsili delivered some very important messages which have largely been ignored by the media. Therefore, in the interest of those who have not read and digested the rather lengthy lecture, I have summarized the key messages into 10 points which I have christened “Ezekwesili’s epistle on oil wealth, profligacy, poverty and restoration of Nigeria’s dignity”. They are as follows:
Whilst some people may chastise Mrs. Ezekwesili for the offending sentence in her lecture, I do not think that anybody who is knowledgeable about the political economy of Nigeria vis-à-vis those of her peers at independence and other oil exporting countries will question her epistle. However, while the current youth generation has a critical role to play in the restoration of Nigeria’s dignity, the task is for all Nigerians, particularly the political leaders who must improve governance, reduce corruption, promote accountability and transparency in the use of the country’s oil and other revenues, and invest prudently in areas that benefit the poor. This is how we can ensure a significant, sustainable and measurable reduction in the incidence, depth and severity of poverty in Nigeria within the next decade, and reverse the failures of the past five decades. It is hearth-breaking and degrading that with its vast oil wealth, about 64% of Nigerian still live below the poverty line (on less than $1.25 or N200 a day) and the country is still list in the group of “low human development” countries and “failed” countries (i.e. those in “alert” group) - Nigeria ranks 31/187 in terms of human development and 14/177 in terms of degree of state failure. There is no doubt that our dignity in the international arena has plummeted over the past 30 years. The restoration of the lost dignity is a task that must be done. This is the essence of Mrs. Ezekwesili’s epistle.
On January 24th, 2013, Mrs. Obiageli Ezekwesili, the former World Bank Vice President for Africa Region and former Minister of Education under President Obasanjo (OBJ), delivered a thought-provoking Convocation Lecture at her alma mater, the University of Nigeria, Nsukka, on the topic “The Wealth and Poverty of a Nation: Who will restore the dignity of Nigeria?” Unfortunately, the key messages of the lecture have been overshadowed by one sentence: “Furthermore, it is happening back to back with the squandering of the significant sum of $45 Billion in foreign reserve account and another $22Billion in the Excess Crude Account…that the Obasanjo administration handed over to the successor government in 2007”.
The reputation managers of the Jonathan (GEJ) administration wasted no time in firing back at what they perceived as an attack from an Amazon of the OBJ administration at a time of frosty relationship between OBJ and GEJ. In a statement issued three days after the lecture, the Minister of Information, Mr. Labaran Maku, stated that “The recent statements by Mrs. Obiageli Ezekwesili … betray a surprisingly limited understanding of government finances…The statement…that the governments of Presidents Musa Yar'adua (YA) and Goodluck Jonathan (GEJ) have squandered $67 billion in reserves …left by the Obasanjo Administration at the end of May 2007 is factually incorrect. At the end of May 2007, Nigeria's gross reserves stood at $43.13 billion - comprising the CBN's external reserves of $31.5 billion, $9.43 billion in the Excess Crude Account, and $2.18 billion in the Federal Government's savings… The figure of $67 billion alleged in her statement is therefore clearly fictitious”. He went further to question Mrs Ezekwesili’s record as Education Minister and concluded by painting a rosy picture of the macro-economic performance of the GEJ administration.
Two days later, in an oblique response to Mrs. Ezekwesili’s claim, the Minister of Finance, Dr. Ngozi Okonjo-Iweala, disclosed to the Meeting of the Convergence Council of Ministers and Governors of Central Banks of the West African Monetary Zone in Abuja that “on the back of greater efficiency in the management of our resources, our foreign reserves soared from US$32.6 billion at the end of 2011 to about US$44.6 billion now…the Excess Crude Account, balance has also improved from $4.57billion in August 2011 to about $9 billion now”. The same day, the Senior Special Assistant to the President Jonathan on Public Affairs, Dr Doyin Okupe addressed a press conference on the same issue and reiterated Mr. Maku’s earlier claim that Mrs. Ezekwesili lied about the amount of external reserves OBJ bequeathed to the Yar’Adua/Jonathan administration. Quoting from documents and statistics published by the CBN, he stated that “at no time did the nation’s external reserve rise up to $67 billion, let alone the government have such to misuse. He then called on Mrs. Ezekwesili “to disclose the source of her figures or retract her statement and apologise to the government and people of Nigeria” or else “she should be regarded by all as a wilfully perjured individual not worthy of any respect or recognition whatsoever.”
I simply cannot understand why the reputation managers of the GEJ administration decided to impugn the integrity of a woman who clearly belongs to the best and brightest of economic managers Nigeria has ever produced, and who has represented Nigeria well abroad as a Vice President of World Bank and a Director of Transparency International. In this article, I will examine the errors or mistakes of Mrs. Ezekwesili’s “offending sentence” and the unwarranted attacks by Messrs Maku and Okupe, the reputation managers of the GEJ administration. I would like to state upfront that there is nothing unusual about the errors or mistakes I will be discussing. They are common errors that professional economists make very often. The fact is that economists are not trained as “clinicians” as noted by Prof. Jeffery Sachs (2005).
For a start, it is important to point out that Mrs. Ezekwesili never used the figure $67 billion which is a “straw number” created by Messrs Maku and Okupe by adding the two numbers in Mrs. Ezekwesili’s sentence. Her phrase was “$45 Billion in foreign reserve account and another $22Billion in the Excess Crude Account”. She did not add both numbers. It appears that she thought that Nigeria’s excess crude account (ECA) is different or separate from its foreign (or external) reserve account (FRA). My guess is that not many economists know that Nigeria’s FRA is defined to include the ECA because the definition of Nigeria’s FRA is somehow weird and confusing. According to the CBN, “Nigeria’s external reserves comprise of three components namely, the federation, the federal government and the Central Bank of Nigeria portions. The Federation component consists of sterilized funds (unmonetized) held in the excess crude and PPT/Royalty accounts at the CBN belonging to the three tiers of government. This portion has not yet been monetized for sharing by the federating units. It is sometimes ignorantly referred to as the reserves of the country. The Federal Government component consists of funds belonging to some government agencies such as the NNPC… etc. The CBN portion consists of funds that have been monetized and shared…”. It is a fact that the ECA has been a subject of controversy and legal tussle between the federal government (FG) and the State Governors. Some economists believe that the ECA should not be a component of the FRA. Like many other economists, Mrs. Ezekwesili may have thought that the ECA is separate from the FRA. If this is the case, it does not in any way “betray a surprisingly limited understanding of government finances” as stated by Mr. Maku. I will not be surprised if neither Mr. Maku nor Dr. Okupe was aware of the difference between the FRA and the ECA before this controversy. If Mrs Ezekwesili was aware that that the ECA is part of the FRA, she would have said “$45 Billion in foreign reserve account including $22Billion in the Excess Crude Account”. By treating the ECA as separate from the FRA, she committed an error of “double counting” which is not uncommon among professional economists and in public policy.
Mrs. Ezekewsili’s second error is one of approximation and/or data source. From the CBN data quoted by Mr. Maku and paraded by Dr. Okupe, we know that the level of the FRA as of the time OBJ left office was in fact $43.13 billion, including $9.43 billion in the ECA, as against the sum of $45 billion and $20 billion, respectively, alleged by Mrs. Ezekwesili. Clearly, the difference between $45 billion and $43.13 billion for the FRA is not statistically significant but the difference between $20 billion and $9.43 billion for the ECA is significant. The likely explanation of the differences between Mrs Ezekwesili’s numbers and those of the CBN could be due to the fact that she may have obtained her figures from non-CBN sources or from past “provisional” CBN statistics which are different from actuals. However, I do not think she needs to disclose her sources or apologise as Dr. Okupe has demanded. Most researchers know that there are many government official publications that contain wrong or inaccurate data, and nobody has called on the publishers to apologise. With regards to the ECA data, it must be pointed out that there have been issues of accountability and transparency with that account and data series.
Mrs Ezekwesili’s third error or mistake is the use of the word “squandering”. The word appears is inappropriate in the offending sentence, and she clearly misspoke. While some funds in the FRA bequeathed by OBJ to the YA/GEJ administration may not have been spent in a rational manner, not all of it was squandered because some of the funds may have been used rationally. The way Mrs. Ezekwesili framed her statement gives the impression that the YA/GEJ administration reduced the FRA and FCA to zero but we know that there was never a time when these accounts were zero since May 2007. In fact, the FRA reached its highest level ever ($62.1 billion) in September 2008 and the average monthly level has remained relatively high since 2007 thanks to higher prices of crude oil and higher crude oil production levels than under the OBJ administration. The average monthly level of the FRA increased from $5.31 billion in 1999 to $8.59 billion in 2003, then to $45.39 billion in 2007, $53.47 billion in 2008. Thereafter it declined to $44.7 billion in 2009, $37.36 billion in 2010, $32.58 in 2011 and stood at $43.83 as of December 2012 – almost the same level as of May 2007.
Mrs. Ezekwesili fourth mistake was the use of a decline in the level of FRA as an indicator of profligacy. FRA is a “stock variable” and its level is determined by many short-term and volatile factors, especially the price of crude oil and output levels. I do not think “profligacy” or “squandermania” is a strong explanatory variable for the monthly or annual fluctuations in the level of the FRA. I think she should have used a “flow variable” such as oil revenue received over a period of time, recurrent expenditure, expenditure of the national assembly, presidency, oil subsidy and other non-productive expenditure as a percentage of total expenditure. In order to determine whether funds were “squandered”, it is important to examine the spending details and results of the spending and then pin-point the exact amount that was “squandered” and on what. However, if you take a close look at the FG budget details and actual spending, it is safe to say that at least 30% of FG spending qualifies as “squandering” as evidenced by the substantial overpayments for fuel subsidy, inflated contracts, the bloated federal executive, the excessive cost of government, wasteful and unproductive expenditures such as the N14 billion for the construction of the Vice President’s house, N2.2 billion for the construction of a banquet hall in the presidential villa, the reported GEJ’s 22 overseas trips in 2012 that gulped N3.3 billion, the N4 billion for Africa First Ladies House in Abuja and a host of similar expenses. Having gone through the FG budget details published on the FMF website, I have no doubt that there are a host of spurious items that can be eliminated or reduced drastically without affecting the performance of government and its agencies.
Mrs. Ezekwesili fifth mistake was that her statement implied that she was comparing OBJ’s performance in economic management with that of Yar’Adua and GEJ. To be fair, if one looks at the context of the offending statement, it is clear that her aim was not to compare the three or two administrations. Her aim was to show that Nigeria has always failed to take advantage of the opportunities offered by commodity boom cycles to transform the economy – an irrefutable fact. Even the two OBJ administrations (1976-1979 and 1999-2007) failed on this score! The sentence preceding the offending statement reads as follows: “I have known at least five cycles of commodity booms that offered us rare opportunities to use revenues generated from oil to transform our economy. Sadly, each cycle ended up sliding us farther down the productivity ladder. The present cycle of boom of the 2010s is however much more vexing than the other four that happened in the 70s, 80s, 90s and 2000s. This is because we are still caught up in it even as I speak today and it is more egregious than the other periods in revealing that we learned absolutely nothing from the previous massive failures” No one can deny this fact. Perhaps, Mrs. Ezekwesili would have framed the next sentence in a way that would not have given the impression that she was trying to compare OBJ and GEJ. Unfortunately, after the offending sentence, she stated that “Six years after the administration I served handed over such humongous national wealth to another one; most Nigerians but especially the poor continue to suffer the effects of failing public health and education systems as well as decrepit infrastructure and battered institutions. One cannot but ask, what exactly does Nigeria seek to symbolize and convey with this level of brazen misappropriation of public resources? Where did all that money go? This could be interpreted as a comparison of both administrations and a castigation of the GEJ administration. If indeed her intention was to compare both administrations – and I see nothing wrong with that - she should have used some “flow variables” as I indicated previously. It may be too early to compare the OBJ administration with that of GEJ since the latter has about five more years to equate OBJ’s eight-year rule.
Having looked at the offending statement of Mrs. Ezekwesili, it is only fair to look at the mistakes of Messrs Maku and Okupe. First, their reaction was appalling, “unstatesmanly” and disproportionate to the error/mistakes of Mrs. Ezekwesili’s offending sentence. This was a situation where “silence is golden”. What point were they trying to make? To prove that the GEJ administration is not guilty of profligacy or “squandermania”? As I write, pictures of Nigeria women protesting against the N4billion First Ladies Mission House as a “wasteful allocation” have flooded the internet for the world to see. Ironically, the reaction of Messrs Maku and Okupe has attracted more attention to the profligacy of not only the GEJ administration but also those of the state and local governments, which is good!
Secondly, Messrs Maku and Okupe focused on only one errant sentence and ignored its context as well the messages and unassailable truths of the lecture. In fact, one can say that they were intellectually dishonest. No person who reads the entire lecture will conclude that it was aimed at discrediting the current administration or comparing it that of OBJ under which Mrs. Ezekwesili served. She clearly stated the purpose of her lecture in the penultimate paragraph is a very poetic and inspiring manner, by stating that “I have spoken to you today to stir up your collective effective angst at the indignity of your inheritance. If I have succeeded in raising your determination to free our nation from the trap of oil, then my coming is worthy. If I have succeeded in helping you see how continuous education not more extraction of oil will help you outperform and take Nigeria up the economic development ladder, then my coming worthy... If I have deposited in you a deep seethed contempt for poor governance, then my coming is worthy. … Above all, if I have succeeded in getting you motivated and empowered enough to walk out of this hall seeing ready to walk and work as a part of the Turning Point Generation that courageously dares to restore the dignity of Nigeria then is my BEING truly worth it!”. No one who reads the entire the lecture can say that she did not focus on this purpose, even if in doing so she stepped on the toes of the current and past administrations.
In conclusion, the reputation managers of the GEJ administration should learn to be tolerant of criticisms, especially from professionals like Mrs. Ezekwesili, even if they see them as opponents. More importantly, our governments and their representatives must develop a capacity to listen to, and take criticisms in good faith.
Dr. Emmanuel Ojameruaye
14th February, 2014
The plan by the Federal Government (FG) to subsidize mobile phones for poor rural farmers has elicited a controversy. It started immediately President Jonathan delivered his 2013 Budget Speech to a Joint Session of the National Assembly on October 10th, 2012, during which he said: “The Ministry of Agriculture, for example, will work with the Ministry of Communication Technology to ensure that 5 million women farmers and agricultural entrepreneurs receive mobile phones to be able to access information on agro-inputs through an e-wallet scheme”.
In response to the controversy generated by the statement, the Federal Minister of Agriculture and Rural Development, Dr. Akinwumi Adesina, had a press conference with State House correspondents on Monday, January 14, 2014, during which he stated, among other things that the decision is based on based on the fact that the majority of rural farmers do not have mobile phones because they are poor and that the mobile phones will facilitate access of rural farmers to improved seeds and fertilizers. He reaffirmed that the FG was determined to go ahead with the plan. Three days later, the minister told the visiting Administrator of the United States Agency for International Development (USAID), Mr. Rajiv Shah, that mobile phones “have been used to effectively tackle corruption in the agricultural sector of the country”, ostensibly as a further justification for the planned subsidy of mobile phones for farmer.
Both the press conference and press release by the ministry following Mr. Shah’s visit raised more questions than answers. Given the experience of fuel and fertilizer subsidies in Nigeria, concerned Nigerians see the planned mobile phones subsidy as another ploy by government officials and mobile phones importers/distributors to loot the national treasury. This article examines some of the questions and contradictions inherent in the Minister’s statements and highlights some of the ways FG can use mobile technology to enhance agricultural production in Nigeria.
Firstly, according to the minister, the decision to subsidize cell phones for farmers is based on an analysis of “a large sample of 426,000 farmers from various local government areas in 13 states” which showed that “71 percent of farmers sampled did not have cell phones”, and therefore “many of our farmers in rural areas are quite poor and are excluded from the benefits of the mobile phone revolution going on in Nigeria”. The ministry’s analysis did not show or establish causation between access to mobile phones and the level of poverty of farmers or between access to mobile phones and agricultural productivity among the farmers surveyed. It is therefore unscientific and simplistic to conclude that farmers do not have access to phones simply because they are poor. While poverty may account for why some farmers do not have cell phones, there are probably other more important reasons such as illiteracy, lack of electricity to charge the batteries of the phones, lack of awareness of the utility of cell phones to rural farmers and scale of preference or prioritized needs of farmers.. Of what use is a cell phone to an illiterate cassava farmer in a village that has no access to electricity or has epileptic power supply? Why should an illiterate farmer spend N10, 000 to buy a cell phone (and incur a recurring cost of recharge cards) when the phone is of little or lesser value to him compared to other needs? Most farmers are rationale thinkers and unless they see evidence that the benefit-cost ratio of cell phones exceeds one, they will not invest in cell phones, not even in subsidized phones. If the FG provides subsidized mobiles to poor farmers, will it also provide subsidized recharge cards or electricity to charge the batteries or will they provide solar-powered phones? Therefore, instead of planning to foist subsidized mobile phones on “poor” rural farmers, the FG should first identify and address the underlying factors responsible for low mobile phone penetration rate among rural farmers. Once this is done, the “poor” farmers will buy phones at market rates.
Secondly, the minister stated that the cell phones will facilitate the provision of improved seeds and fertilizers to farmers. According him, “The mobile phones will be used to scale up the access of farmers to improved seeds and fertilizers to millions of farmers, directly. The Federal Government succeeded in 2012 in getting seeds and fertilizers to farmers, via the GES, which uses mobile phones to reach farmers with subsidized inputs”. It is not clear how mobile phones were used to move seeds and fertilizers to farmers, because mobile phones are not means of transportation. Perhaps, with the mobile phones extension officers could call the farmers to come to nearest seed/fertilizer depot to collect seeds/fertilizers rather than taking the seeds/fertilizers directly to the farmers in their remote villages. If this is the case, then it is hardly one of “scaling up”. As a former Head of Shell’s Western Division Community Development Program which included an agricultural extension services unit, I know that one of the problems in rural agriculture is the lack of motorable (access) roads to many agricultural settlements and villages. This makes it difficult (and expensive) to move seeds and fertilizers to farmers, and for farmers to transport their produce to the markets. Many of the rural “earth” roads constructed under the program of the Directorate for Food and Rural Infrastructure (DFRRI) in the 1980s have either disappeared or are no longer motorable due to lack of maintenance. For instance, even though we provided our extension officers in Shell with Toyota Hilux Pickup trucks to take seedlings and fertilizers to farmers in our target communities, they could not reach many communities due to bad roads or no roads at all. There were no federal government extension officers and the few state government extension officers had no vehicles to reach rural farmers. In fact, Shell was the only source of extension services to most farmers in our target communities. I do think the situation has changed and I wonder how mobile phones have scaled up the movement of FG-provided seeds and fertilizers directly to the farmers in the remote villages.
Thirdly, the minister stated that no specific amount has yet been earmarked by the FG for the subsidy and that the type of mobile phones and mode of its distribution to farmers have not yet been determined. He emphasized that the FG will not directly purchase the cell phones but will only subsidize the phones through a partnership involving telephone service operators, Ministry of Communications Technology and other stakeholders. Why did the President include this “initiative” in his budget speech if no money has been earmarked and the whole scheme is still hazy? To verify this, I actually went through the 2013 FG budget details as posted on the Federal Ministry of Finance website and I could not see any allocation (line item) for farmers’ mobile phones subsidy anywhere in the budget which means that the minister may be right. Perhaps, the phone subsidy will be funded under a “supplementary” budget during the course of the year as the FG does for additional fuel subsidy. However, some analysts have hinted that the FG intends to spend N60 billion in 2013 for the phone subsidy. If this is correct and if we take the President’s target of providing the subsidized phones to 5 million farmers, then the subsidy rate will amount to N12, 000 per phone (i.e. N60 billion divided by 5 million phones) which is more than the cost of most phones used by “poor” people in Nigeria. If we take the minister’s target of 10 million farmers - which ironically is different from the President’s target - the subsidy rate will be N6, 000 per phone which is also high.
Fourthly, it is not clear how the FG intends to distribute the phones among the farmers and the allocation criteria since the target (5 million or 10 million?) is less than the number of rural poor farmers, estimated to be over 40 million. For a government that is very inept at distributing “scarce commodities” and has confessed that its distribution of subsidized fertilizers to farmers has been inefficient and riddled with corruption, one wonders how it will chose one out of every four or eight farmers to receive the subsidized phones. You can rest assured that the distribution will be characterized by favoritism, corruption and complaints.
Fifthly, it is not quite clear whether the initiative is in the making or has taken off. On the on hand, during the press conference, the minister stated that “the type of mobile phones that would be purchased and the mode of its distribution had not yet been determined” implying that the initiative is still in the making. On the other hand, during his meeting with Mr. Shah, the minister said that “deploying the mobile phone to deliver agro-inputs to farmers through the e-Wallet has ended 40 years of corruption in the procurement and distribution of fertilizers by the Federal Government… the mobile phone has boosted the productivity of small-holder farmers in the country by delivering improved seeds and much-needed fertilizers to them and contributed in the economic revival of rural areas...The e-Wallet is working and the mobile phone is the most powerful tool in fighting corruption in the agricultural sector”. This implies that the initiative was actually implemented in 2012, but it is not clear if the phones used by the framers in 2012 were subsidized or not. If the phones were not subsidized, and the ministry had such a spectacular result as the minister claimed, what then is the rationale to subsidize phones for other farmers? Why not simply raise awareness of farmers about the benefits of the phones and allow them to decide to procure the phones at market rates, even if it means borrowing from their successful peers? I think there are very few farmers who are so poor that they cannot afford to buy the cheapest mobile phone in the market if they needed to.
It is clear from the above that the FG needs to have a rethink of the plan to subsidize mobile phones for poor rural farmers. It is not the most effective way to assist such farmers. But this does not mean that mobile phones cannot be used to improve agricultural productivity among rural farmers in Nigeria. I am aware that several studies from various parts of the developing world show that mobile phones can significantly improve efficiency and productivity in many sectors of the economy, including agriculture. According to the 2012 World Bank Report, Information and Communications for Development: Maximizing Mobile, “Mobile phones and other mobile devices are changing the ways stakeholders across the agricultural value chain make decisions on inputs, production, marketing, processing, and distribution which have led to greater efficiencies, reduced transaction costs, and increased incomes". Among other things, the report notes that “A study on grain traders in Niger found that access to cell phones allowed traders to obtain better information about grain prices across the country without incurring the high cost of having to travel to different markets. On average grain traders with cell phones had 29 percent higher profits than those without".
We know that the FG has woefully failed to manage any form of subsidy, including fuel subsidy and fertilizer subsidies, which have become avenues of grand corruption. There is no reason to believe that the situation will be different in the case of the phone subsidy. At the end of the say, it is government officials in charge of managing the scheme and the mobile phone "cabal" (importers and distributors) that will benefit immensely from the scheme while most of the poor farmers who are lucky to receive the "subsidized" phones may end up selling the phones to make paltry profits in a manner that is similar to the young boys selling "subsidized" fuel along Nigerian highways and street corners.
Just giving a cell phone to a poor illiterate farmer will not improve his or her productivity. If farmers are aware of and see the benefits of mobile phones for their business, they will find ways and means to buy such phones at the market rates. The money that the FG will spend to subsidize the cell phones can be more productively applied to other types of assistance to farmers that are not prone to abuse/corruption like subsidy. For instance, the FG can invest more in extension services to reach more poor rural farmers, improve rural infrastructure, storage and post-harvest facilities to reduce post harvest losses. With regards to mobile technology, the World Bank report cited above provides many case studies of how mobile technology is being used to improve agriculture in many countries by: a) increasing access and affordability of financial services tailored for agricultural purposes through mobile payment, micro-insurance and micro-lending systems; b) Delivering information relevant to farmers, such as agricultural techniques, commodity prices, and weather forecasts; c) Optimizing supply-chain management across the sector, and delivering efficiency improvements for transportation logistics through smart logistics, traceability and tracking system, mobile management of supplier networks, and mobile management of distribution networks; and d) Enhancing the link between commodity exchanges traders, buyers, and sellers of agricultural produce. The report did not recommend subsidizing mobile phones for any category of farmers because subsidy is inherently an inefficient economic tool.
The problem that the FG should be addressing is how to use mobile technology in agriculture in Nigeria in cost-effective ways that will deliver verifiable results. It is doubtful if subsidizing mobile phones to some poor rural farmers is the best way to do so.
Dr. Emmanuel Ojameruaye
January 27, 2013
One of the sad characteristics of the leaders and governments in Nigeria is that they never learn from tragedies. This is why preventable tragedies such as the recent Augusta 109 Helicopter crash reoccur frequently, often with greater intensity and costs. Therefore, to minimize the likelihood of re-occurrence of similar tragedies we must discuss the lessons from this recent accident and take appropriate corrective actions. The helicopter accident that claimed the lives of six Nigerians including General Azazi, the former National Security Adviser, and Mr. Yakowa, the Governor of Kaduna state, should trigger a national dialogue of some critical issues relating to funerals and aviation safety in Nigeria. In this article, I will discuss four lessons from the accident.
The first lesson is that we must move away from the culture of conspicuous and extravagant funerals in many parts of the country, particularly in the South-South geopolitical zone. Rather than being solemn and private events, funerals have become occasions for the nouveau riche, especially politicians, to show off their wealth and “connections”. In some cases, people keep the corpses of their dead parents or relatives in mortuaries for a very long time while they prepare for what they call a “befitting” burial. Due to lack of well-maintained public cemeteries, most burials now take place at homes or family compounds. People go out of their way to build new homes where the dead are buried, even when the deceased never slept in such homes during their life time. Our newspapers, radio stations and TV channels have literally been overtaken by obituaries, condolence messages, and funeral announcements. Funerals now look like feasts with friends and associates of the “mourners” travelling from far and near to “grace” the occasion. Top government officials abandon their jobs and travel very long distances to attend funerals. The societal expectation of “high profile” funerals puts financial and emotional pressure on the family of the deceased. The direct and indirect costs of funerals in Nigeria are unimaginable and may rank among the highest in the world in relative terms.
Many deaths would have been avoided if we had a culture of “low profile” funerals. To the families of the deceased, when people die as result of attending the funeral of their loved ones, a "celebration of life" event turns to one of sadness and infamy. Take for instance the emotional burden and guilt Mr. Oronto Douglas and members of his family and community are now carrying because of the helicopter accident that occurred as a result of the funeral of Pa Douglas. They would wish these officials had not come to grace the occasion. In a sense, Saturday, 15 December 2012 has become a "Day of Infamy" for the family and the community. Now therefore is the time for various socio-cultural organizations to start a movement to return us to an era of “low profile” funerals. Government can support this movement in various ways. For instance, our leaders can lead by preventing or limiting the number of government officials attending funerals and by stopping condolence messages in media. The state and local governments, private entrepreneurs, socio-cultural organizations and community-based organizations can work collaboratively to build and maintain modern public cemeteries and funeral homes in all towns and villages to reduce the incidence of burials and funeral ceremonies at homes.
The second lesson is to stop the practice of the using public resources for the funerals (and weddings) of top government officials and their relations (parents, children and even extended family members), except for a few elected and appointed leaders such as the President, Vice President, the Speaker, the Senate President, the Governors and Chief Justice of the Federation. The concept of “state funeral” has been abused by all tiers of government in Nigeria. It has become a common practice to use government vehicles and other public assets for not only the funerals of middle to top government officials and their close relations but also of some other influential members of the public. Government officials travel in government vehicles and collect travel allowances to attend private funerals in “official capacity”. These trips put these officials and members of the public at risk in view of the hazards of our transportation system. What is the intrinsic benefit or value of having so many government officials attend funerals? Is it not vain glory and medicine after death? Will it bring the dead back again? Does it really comfort the families of the deceased or add to their sorrow and grief? Why can't these officials simply send flowers or token gifts to the bereaved family to assist with funeral expenses or to support a community project to honor the deceased, as is the practice in many other countries? Sometimes, government provides "financial assistance" for the funeral of top government officials or their relations as well as some other influential persons. These practices are symptomatic of "bad governance" and are illegitimate in most countries of the world. We need to find ways of taming this practice and save the nation of not only the billions of naira governments spend on funerals annually but also to reduce the deaths associated with travels to funerals.
The third lesson is the urgent need to improve public transportation in the country with focus on road, rail and water transportation as against the increased preference for air transportation by government and the wealthy. The latter is evidenced by the proliferation of airports, helipads and government-owned and private aircrafts even as the country lacks the maintenance culture, discipline and resources to cope with the requirements for aviation safety. For instance, the Nigerian Presidency probably has the more aircrafts in its feet than any other Presidency in the world. The federal and state governments continue to establish new unviable airports throughout the country even as conditions of roads continue to deteriorate. The location of an airport in or near the capital city of a state or other major towns is now seen as a status symbol even when such an airport is not commercially viable. Of the 22 airports in the country, only four are known to be commercially viable. In other words, most of the airports are white elephants. In fact, it is doubtful if cost-benefit analyses of proposed airports are ever conducted before final investment decisions are made. This is why many airports are less than 150 kilometres apart. Take the example of the new airport approved by the federal government for Bayelsa state about two years ago even though Yenagoa is less than 120 kilometers away from both the Port Harcourt and Osubi-Warri airports and the East-West road has remained uncompleted and in a state of disrepair. If we had good interstate expressways (German autobahns), high-speed railways/trains, and safe and comfortable water ferries as in most developed and middle-income countries, the demand for unviable airports, air travel, private jets and use of helicopters will decline considerably. As the helicopter and other recent air crashes have shown, the air is not safe for the rich and top government officials who are running away from the bad and unsafe roads and waterways. In other words, there is no substitute for a good and safe road, rail and water transport system within the country.
The fourth lesson is the need to faithfully implement the recommendations of the investigations of air accidents, and to comply with safety requirements of aircrafts. There is no doubt that Nigeria has one of the worst records of air accidents in the world. The list and human cost of air accidents in the country is terrifying. Here are a few examples: On 22 January 1973, a Boeing 707 aircraft chartered by Nigeria Airways to fly pilgrims crashed while attempting to land at Kano International Airport killing 176 passengers and crew. On 7 November 1996, 143 people were killed when an ADC’s Boeing 727 aircraft crashed at Ejirin near Lagos. About ten year later, on 29 October 2006, another ADC’s Boeing 737 plane (flight 53) crashed in Abuja immediately after takeoff killing 95 people including the Sultan of Sokoto (Muhammadu Maccido), his son (Senator Badamasi Maccido), Abdulrahman Shehu Shagari (son of former president Shehu Shagari) and Dr Nnennia Mgbor, the first ever female West African E.N.T. Surgeon. On 10 December 2005, Sosoliso’s MD DC-9 aircraft (flight 1145) crashed at the Port Harcourt International Airport killing 108 people including 61 secondary school students from Loyola Jesuit College in Abuja. It is important to note that Loyola Jesuit College students from Port Harcourt used to travel to and from Abuja by buses but the bad and unsafe condition of the roads made parents to opt to use Sosoliso Airlines to convey their children. On 3 June, 2012, Dana’s MD-83 aircraft (flight 992) crashed into a building in Iju-Ishaga area of Lagos killing all153 people on board and six persons on the ground, including NNPC’s Public Affairs Group General Manager (Dr. Levi Ajuonuma) and Alhaji Ibrahim Damcida, the Under-Secretary of Ministry of Industries. There have also been countless helicopter crashes.
Investigations are normally carried out after each accident and recommendations are made to avert similar accidents in future. However, there are strong indications that most of the recommendations are hardly implemented. There are also doubts about the thoroughness, credibility and objectivity of the investigations. This may explain why the governors have demanded to hire the services of an independent consultant and play a role in the investigation of the Navy Augusta 190 Helicopter accident. Furthermore, it is also a fact that some of these air tragedies can be traced to non-adherence of safety requirements. Some aircrafts are overused far beyond their mechanical limit. For instance, it has been reported that the Augusta 190 helicopter was on its 15th trip of the day it crashed. It means that the helicopter was being used as a “taxi” that day, and possibly the previous day. It is doubtful if the helicopter was designed to be used in that manner. In many cases, a pilot is compelled to fly an aircraft because of “orders” from above even when he knows it may be unsafe to do so. Therefore, as demanded by the Senate, it is very important for the government to make public past aircraft accident investigations reports and actions taken by government to address the recommendations. Furthermore, pilots should be protected from loosing their jobs if they choose to disobey orders to fly on technical or health grounds.
In conclusion, the recent Nigeria’s Navy Augusta 109 Helicopter accident must serve as a wake-up call for a national discourse of, and corrective action on, some critical issues relating to the “conspicuous-consumption” nature of funerals, use and abuse of government resources for private funerals, the focus of investment in modes of transportation and the investigations of air crashes in Nigeria. We must follow the example of the recent Sandy Hook School shooting in the United States that claimed the lives of six teachers and 20 children. This incident has ignited the much-avoided gun-control debate and President Obama is already poised to take on concrete actions to reduce shooting incidents in public places throughout in the United States. Therefore, the best tribute we can pay to victims of the helicopter accident is to take concrete corrective actions to prevent or minimize a reoccurrence of similar accidents in future. For instance, the National Assembly should develop a bill named after the victims of the helicopter crash to minimize the involvement of government officials in private funerals and the use of government resources in funerals. We should also return to a culture of solemn and low-key funerals which will save lives of people killed on their way to and from funerals.
As we approach the beginning of a new financial year, Nigerians are again witnessing conflicting signals from the government about whether or not the subsidy on petroleum products will be removed or reduced. Firstly, the report of the Dr. Kalu-led National Refineries Special Task Force submitted to the President on November 2, 2012 noted that “…the uniform and regulated pricing policy for petroleum products .. is one the most widely adduced reasons…for lack of investment in new refineries in Nigeria… also believed to be substantially responsible for waste, distortions and corrupt practices in the industry”. The task force therefore recommended that “It will therefore be necessary to fully deregulate prices in the Downstream Sector prior to the completion of the privatization process”.
Secondly, while receiving the report of the graduating participants of the Senior Executive Course of the National Institute of Policy and Strategic Studies on November 15, 2012, President Jonathan stated categorically that his government was bent on getting rid of the subsidy. In a moment of candour and as if to echo the report of the Task Force, the President stated: “Why is it that people are not building refineries in Nigeria despite that it is a big business? It is because of the policy of subsidy, and that is why we want to get out of it” (emphasis mine). However, in a swift reaction the next day, on November 16, the President of the Nigerian Labour Congress (NLC), Abdulwahid Omar, fired back at President Jonathan, saying “Such a statement coming from... the President is highly disturbing and we want to believe that he will not toy with the tempers of Nigerians…coming at this time of the year, when many see the current fuel scarcity being experienced in most parts of the country as being artificially created”. This was a signal that the NLC will resist any move to remove or reduce the subsidy as it did in early January this year.
Thirdly, in what appears to be a response to the threat of the NLC President, during his media chat aired on NTA on November 18, President Goodluck stated that the government does not plan to remove the subsidy in 2013 because “the government has already accommodated fuel subsidy in the 2013 budget”. He went further to state that the his prior statement to the effect that his administration was going to remove the fuel subsidy was taken out of context by the media, and that he was only comparing the Nigerian situation with that of Canada and that he was only trying to emphasize that unless Nigeria deregulate her oil sector, necessary investment will not take place.
So, what are we to believe? If the event of January 1, 2012 - when the government announced the removal of the subsidy, but later “reduced” the subsidy after about two week due to massive protest - is anything to go by, one cannot swallow the President’s latest assurance hook, line and sinker. The fact that there is a provision for fuel subsidy in the 2013 budget is no guarantee that subsidy will not be removed or reduced, either of which will result in an increase in the price of petroleum products. As was the case in January this year, the government can reduce the level of subsidy while still maintaining the subsidy – a situation that will not contradict the President’s promise not to “remove subsidy in 2013”. If the government is known for one thing, it is poor budget compliance. Furthermore, what if the amount set aside for the fuel subsidy in the 2013 budget - N971 billion compared to N888 billion in 2012 and N1,700 billion actually spent in 2011 - proves to be inadequate due to soaring prices and increased volume of imported petroleum products? Will the government reduce the level of subsidy (i.e. increase the regulated price of petroleum products) in order not to exceed the allocated amount in the budget?
While the President’s assurance that subsidy will not be removed in 2013 may be intended to calm the situation and reduce hoarding of petroleum products and price escalation in anticipation of the removal or reduction in fuel subsidy, there is no doubt that the federal government must sooner or later take the bull by the horns by tackling the subsidy issue. Kicking the bucket down the road will only postpone the evil day. If the President is unwilling and unable to tackle the subsidy problem in 2013, he is less likely to do so in 2014 or 2015 given his unannounced plan to run again for the Presidency in 2015. Thus, the best time for the President to resolve the subsidy issue is 2013 so that the issue will be laid to rest by mid 2014 and he can boast of achieving what other Presidents failed to do. That is what President Obama did with the Affordable Healthcare law (otherwise known as Obamacare) in the United States. The question therefore is how the President should go about resolving the subsidy issue in 2013 while avoiding a backlash by organized labour and civil society similar to what happened in early January 2012?
The President has two options: Either remove the subsidy in one fell swoop in 2013 or 2014 or reduce it gradually and consistently beginning in 2013 until it is eliminated by mid 2014. The solution lies in working with organized labour and civil society to first convince them that it is the rich and well-connected (the ‘cabal”) who are benefiting most from the current subsidy regime and that it is in the best long-run interest of the country to remove the subsidy. All parties can then agree on the best option. Personally, I believe that a gradual reduction of the subsidy over a 12 to 18 month period is the best option in order to cushion the “shock effect”. Although it appears cynical, the gradual approach is also based on a psychological fable: “if you plunge a frog into boiling water, it will immediately jump out. But if you place the frog into cool water and slowly heat it to boiling, the frog won’t notice and will slowly cook to death”. For instance, under the gradual approach, the price of petrol (PMS) can be increased from N97 per litre to N110 per litre around March, 2013, then to N120 per litre around July 2013, N130 around October, 2013, N140 around February 2014 and the subsidy will be eliminated completely by June 2014 or earlier. Note that the “zero-subsidy” price of PMS for November 2012 according to PPPRA’s pricing template is N147 per litre. A similar price increase (subsidy reduction) schedule can be formulated for kerosene (HHK). In fact, if President Jonathan had adopted the gradual approach to reducing the subsidy after the January 2012 price hike we would have been approaching a “zero-subsidy” state by now.
Finally, while I agree with Mr. Ribadu that that “with a clean and sanitized oil and gas sector, there will not be any need to remove subsidy on oil”, the fact is that it is almost impossible to completely “clean” and “sanitize” the Nigerian oil industry in a way that will remove all the corrupt practices and distortions that have characterized the petroleum products market. Mr. Ribadu knows this very well from his EFCC experience. Besides, most economists agree that in the long-run fuel subsidies are inefficient in an open economy with porous borders like Nigeria. This is why I with agree with the fearless governor of the Central Bank of Nigeria, Mr. Sanusi who recently again called for the removal of the fuel subsidy. It will be recalled that during the fuel subsidy debate last year, the governor made a strong and compelling case for the removal of the subsidy. He showed that the much feared inflationary impact of subsidy removal is grossly overstated as evidenced by the relatively low rate of inflation that has followed the increase in the price of PMS from N65 per litre to N97 in January 2012. Ironically, by resisting the removal of the subsidy, the NLC and other opponents now have the same position with the fuel-importing “cabal” and those who are fleecing the economy in the name of fuel subsidy.
December 1, 2012
On August 22, 2012, President Jonathan summoned his ministers to Aso Rock (the Presidential Villa) to sign performance contracts with him. The contracts were prepared by the National Planning Commission (NPC) and they apparently contained benchmark performance indicators by which each minister will be monitored, assessed and evaluated in respect of the implementation of the President’s Transformational Agenda. Throughout the month of September the heads of departments and agencies under each ministry also signed portions of the performance contract with their ministers. The process is expected to cascade downwards. It is however not clear if the State Governments will follow suit.
Those who are upbeat about the performance contracts contend that the process will enhance public service delivery because it will keep the heads of ministries, departments and agencies (MDAs) on their toes. In fact, at the signing ceremony, the President noted that the occasion was “momentous” and “the first of its kind in the history of our democracy”. He further stated that the contracts were aimed at “improving performance and delivering quality and timely services to the citizenry, improving productivity and instilling a greater sense of accountability for effective service delivery”, and that exercise is a “reminder of our commitment to service delivery for the common good of Nigerians”. He concluded that “I expect the process will serve as an instrument towards the realization of the objectives of Government as enumerated in the Vision 20:2020 document as well as our Administration’s Transformation Agenda... by the year 2015”. Despite the rosy picture painted by the President and supporters of the performance contract initiative (PCI), some observers are skeptical. They doubt the sincerity of the administration in improving service delivery and do not think that the goal of the initiative will be achieved. In this article, I will examine some of the reasons for concern and how the administration can ensure that the initiative is successful.
In the first place, the use of the term “contract” is a misnomer. By definition, a contract is “an agreement with the intention of creating a legal obligation…The remedy for breach of contract can be "damages" or compensation of money”. In fact, “performance contracts” are usually used to manage physical projects rather than personnel performance. For instance, the government may sign a performance contract with a private company that has been engaged to manage a tollgate or a government-owned hotel or to provide specific services or products (e.g. petroleum products) at a fee. Although the details of the “performance contracts” of the MDAs have not been made public, they are not likely to qualify as “contracts” because the ministers and heads of MDAs are not legally obliged to deliver all the “performance benchmarks” or targets in the contracts. Furthermore, in Nigerian parlance, the term “contract” evokes “compulsion”, “settlement” and corruption. Perhaps this is what the President had in mind when he remarked that the performance contracts were “not meant to witch-hunt anybody”. I therefore suggest that the term contract should be replaced with “appraisal” which is the term used in personnel performance management.
Secondly, a personnel performance management system without accountability in terms of reward for good performance and penalty for poor performance is not likely to achieve the objective of improved performance or service delivery. It is not clear if the performance contracts have rewards and penalties built into them. The public does not know the metrics that will be used to appraise the performance of the MDAs. It is important that each appraisee is assigned specific, measurable, achievable, realistic and time-bound (SMART) targets which will be assessed at the end of each reporting period by specific scales such as “Exceeded or Surpassed”, “Met all”, “Met most”, “Did not met”, “Unable to assess”, etc. In addition, the targets should be made public. It is also important to include rewards and penalties for good and poor performance. For instance, a minister or officer who performs very well (i.e. exceeded or surpassed his/her tasks/targets) should be given a pay raise (of say 10%) or be promoted if he/she has spent three years on the same job. On the other hand an officer who performs poorly (i.e. “did not meet” his/her targets) should have a salary reduction (of say 5%) and should not be eligible for promotion in that year. An officer who performs poorly (“Did not meet”) in two consecutive years should be fired or be redeployed to another department where he/she is most likely to perform better.
Thirdly, since the MDAs are public institutions, the performance management system must be transparent. To this end, and in the spirit of the 2007 Fiscal Responsibility Act (FRA) and the Freedom of Information Act (FOIA), the performance contracts, the targets and appraisal reports should be made public through online posting at the websites of the federal government, the national assembly, the national planning commission and the respectively ministries. Furthermore, the appraisal system must be devoid of favoritism. To this end, it is important to adopt a 360 degree appraisal system whereby each officer (appraisee) will be assessed by: a) his/her immediate superior (boss); b) at least 3 of his/her peers; c) at least 3 of his/her subordinates; and d) at least 3 of his/her customers/clients or members of the public or beneficiaries of the services he/she renders.
In addition, a “citizens’ report card system” should be adopted to provide citizens an opportunity to assess or rate the services provided by various MDAs. In a democracy, citizens must have a way to express their “voice” on public service delivery in order to promote transparency and accountability. The Citizens Report Card system (CRC) is a tested “best practice” approach of achieving this objective. It was initiated by a small group of citizens in Bengalore (India) in 1993 and has since been replicated in many regions of India and throughout the world. An independent assessment of the impact of the CRCs in India for the World Bank noted that “the progression in the influence of the report card can be seen to move from limited impact (with dissemination of feedback) to more impact (with dialogue and public pressure for change) to greater (with advice on reform) corresponding to the reactive, proactive and reformist roles over a period of time.” In 2011, the European Union sponsored the Niger Delta Professionals for Development (NIPRODEV) to conduct the “Niger Delta Citizen Report Card on public services, good governance and development from 120 Niger Delta communities” – one of the first CRC report ever produced in Nigeria. The Federal Government should engage reputable opinion survey companies and/or NGOs to conduct CRC surveys periodically and use the results as part of the MDAs performance appraisal system.
Fourthly, the periodicity of the appraisal of the ministers and officers is not clear. Will it be done quarterly, semi-annually or annually? At what months of the year will the results of the appraisal be made public? The timing of the launching of the exercise –August and September – is an indication that no serious thought may have been given to the periodicity of the appraisals. Ideally, the “benchmarks”/targets in the “contracts” should be tied to the annual budget/plans of the various MDAs so that the appraisal system can be an instrument of ensuring effective plan/budget implementation. For instance, if the Ministry of Works is allocated N300 billion in the 2013 budget for the construction of 2,000 km of new roads and rehabilitation of 3,000 of existing roads, then these targets must be included the minister’s performance contract for 2013. If the performance contracts are tied to the budget, the appropriate time to sign the contracts or the effective start date of each contract should be the beginning of the financial year, i.e., January 1st. The “contracts” should be annual with quarterly targets.
Fifthly, the targets in the contracts should be in both physical and financial terms such as “ spend 20% of your budget by end of first quarter, 45% by end of second quarter, 75% by end of third quarter and 100% by end of fourth quarter”; “complete 100 km of PHC-Warri road by end of second quarter”, “complete rehabilitation of 100 km of Abuja–Lokoja Road by end of fourth quarter”, “increase power generating capacity to 6,000 MW by the end of the year, increase reliability of power from 0.6 to 0.7 national wide by end of third quarter”.
Sixthly, the performance contract initiative should build on the “service delivery programme” (SDP) initiated by President Obasanjo in 2004. It will be recalled SDP was launched at the end the Presidential Retreat in March 2004 when the Federal Executive Council entered into a “Service Compact with all Nigerians (ERVICOM]”. In the compact, the ministers and heads of departments and agencies affirmed as follows: “We dedicate ourselves to providing the basic services to which citizens are entitled, timely, fairly, honestly, effectively and transparently”. Under the SERVICOM, it was also agreed that all MDAs will prepare and publish their SERVICOM Charters whose provisions will include: “a) quality services designed around the requirements of their customers and served by staff sensitive to the needs of their clients, b) set out the entitlements of the citizens clearly and in ways they can readily understand, list of fees payable (if any) and prohibit the demand for any additional payments; c) commitment to the provision of services (including the processing of applications and the answering of correspondence) within realistic set time-frames; d) details of agencies and officials to whom complaints about service failures may be addressed; e) publish these details in conspicuous places accessible to the public; and f) periodically conduct and publish surveys to determine levels of customer satisfaction”
Under the SERVICOM, all government departments were expected to display their SERVICOM charters by July 24, 2004. A SERVICOM Office was also established within the Presidency and empowered to: “a) Coordinate the formulation and operation of SERVICOM charters; b) Monitor and report to the President on the progress made by Ministries and Agencies in performing their obligations under SERVICOM; c) Carry out independent surveys of the services provided to citizens by the Ministries and Government Departments, their adequacy, their timeliness and customer satisfaction; and d) Conduct SERVICOM Compliance Evaluation of services provided by Government Departments”. The Office still exists but it is not clear if it still effective and if it played any significant role in the performance contract initiative spearheaded by the National Planning Commission. There is no point re-inventing the wheel. At the signing ceremony, the President did not refer to SDP. It is important to link the PCI to the SDP.
Finally, it is important to establish an independent body to tract the performance of the MDAs and report to both the President and National Assembly. The National Planning Commission and the SERVICOM Office as currently constituted are not autonomous or sufficiently empowered to monitor the performance of all MDA and ensure remedial actions. A body similar to the General Accountability Office (GAO) in the United States should be set up to play this role. The GAO is “an independent, nonpartisan agency that works for United States Congress. Often called the congressional watchdog, the GAO investigates how the federal government spends taxpayer dollars. The head of GAO, the Comptroller General of the United States, is appointed to a 15-year term by the President from a slate of candidates Congress proposes” The GAO support congressional oversight by “a) auditing agency operations to determine whether federal funds are being spent efficiently and effectively; b) investigating allegations of illegal and improper activities; c) reporting on how well government programs and policies are meeting their objectives; d) performing policy analyses and outlining options for congressional consideration; and e) issuing legal decisions and opinions, such as bid protest rulings and reports on agency rules. In order to improve the performance of MDAs in Nigeria, it is high time to establish a body similar to the GAO.
Dr. Emmanuel Ojameruaye writes from Phoenix, Arizona State, USA.
Sunday, November 11, 2012.
One of the highlights of the revised Petroleum Industry Bill (PIB) which President Goodluck Jonathan re-submitted on July 17, 2012 to the National Assembly is the inclusion of the establishment of a Petroleum Host Community Fund (PHCF). According section 116 the revised PIB, “There is established a fund to be known as the Petroleum Host Communities Fund”. Section 117 states that the “fund shall be utilized for the development of the economic and social infrastructure of the communities within the petroleum producing area”. While this attempt to establish a fund for petroleum producing communities is commendable, the design of the PHCF has left much to be desired. The bill should therefore be amended to ensure that the PHCF is effective, efficient and meets the expectations of the intended beneficiaries. In this write-up, I will point out some of the pitfalls of the PHCF and propose some necessary amendments.
A. Nomenclature: The term “petroleum host community” appears absurd and degrading to petroleum producing communities. Although it refers to “communities within the petroleum producing areas” as per section 117 of the bill, it would have been more appropriate to use the term “petroleum producing communities (PPC)”. The term “petroleum host communities” (PHC) implies that the communities are “hosting” petroleum. A community hosts something that is alien to it or brought to the area. For instance, Aladja community is hosting the Delta Steel Company and Bonny community is hosting the NLNG Company. A community does not host a mineral or agricultural product that is produced from its soil. How does it sound if we use the phrase “coal host community” or “gold host community” or “cocoa host community”? It sounds absurd! On the contrary, we can talk of gold producing community or area” and “cocoa producing community or area”. The fact that some oil companies erroneously use the phrase “host communities” instead of “petroleum producing communities” is no excuse to carry over this error into the PIB. As a former staff of an oil company, I have always questioned the use of the phrase “host community” in reference to petroleum because it implies an “alienation” of petroleum from the communities. Therefore, the term “petroleum host community fund” should be amended to read “petroleum producing communities’ fund” (PPCF).
B. Purpose: The purpose of the fund as stipulated in section 117 of the bill is restrictive. Why should the fund be used for “infrastructural development” only? In addition to infrastructure, there are other critical needs which must be addressed in order to reduce poverty and raise living standards in the PPC. Thus the fund should be used for both economic and physical infrastructure (the “hardware” of development) and other requirements of development (the “software” of development) such as microfinance for small-scale entrepreneurs, loan guarantees for local medium and large-scale entrepreneurs, agricultural support, educational supplies for school, health supplies for hospitals, human resource development and institutional capacity building. It is an open secret that the provision of infrastructure in Nigeria is laden with massive abuse and corruption. More that 50% of the funds used for infrastructure is consumed by the “corruption monster” and over 80% of the funds passes through the hands of contractors who are not from the areas where the projects are sited.
Furthermore, the funds invested in infrastructure do not create sustainable jobs in the area. The “multiplier” effect of investment in infrastructure has been very small. This is why the petroleum producing areas remain impoverished despite the several billions of naira that have been “invested” in social and economic infrastructure by OMPADEC, NDDC, oil companies and the federal and state governments in the region over the past 30 years. On the other hand, naira-for-naira, investment in the “software” of development has far greater multiplier and poverty-reducing effects. In addition to their high costs, there is also the problem of lumpiness or indivisibility of infrastructure which makes it difficult to allocate infrastructure equitably in accordance with the volume of oil production by the communities. The result is that while many high-producing communities have little or no infrastructure, some low-producing and non-producing communities have benefitted disproportionately from infrastructural projects provided with petroleum revenue.
C. Funding: The title of section 118 of the bill (“Beneficial entitlements to the communities”) is confusing and the contents of the sub-sections do not reflect the title. According to section 118 (1), “Every upstream petroleum producing company shall remit on monthly basis ten per cent of its net profit as follows: (a) for profit derived from operations in onshore areas and in the offshore and shallow water areas, all of such remittances shall be made directly into the PHCF, and (b) for profit derived from operations in deepwater areas, all of the remittance directly in to the Fund for the benefit of the petroleum producing littoral States”. This has nothing to do with “beneficial entitlements”. It has to do with the funding of the PHCF. The title of section 118 should be changed to “Contributions to the Fund” or “Funding of the PHCF”.
It is important to stress that requiring upstream companies to contribute 10% of their net profits to the PHCF will effectively raise the current petroleum profit tax (PPT) rate from 85% to 95% or increase the proposed Nigerian Hydrocarbon Tax (NHT), which will replace the PPT, from 50% to 60%. This is in to the proposed Companies Income Tax (CIT) which is set at 30%, the 10% withholding tax on dividends and the 2% education tax. Did the drafters of the bill overlook the implication of the increased tax rate for investment in the oil industry?
Furthermore, subsections 118.1(a) and (b) not only retained the controversial “onshore/offshore dichotomy”, but in fact expanded it to a “trichotomy” (onshore/shallow water/deepwater). Since term “offshore” covers both shallow water and deepwater, the inclusion of “offshore” in subsection (a) must be a mistake. Furthermore, given the geology of Nigeria’s offshore, it is usually difficult to distinguish between petroleum produced from shallow water offshore (less than 100 meters deep) from petroleum produced from deepwater offshore (above 100 meters deep). It is also not clear if the intention of the drafters of the bill is that 10% of the net profit from “onshore/shallow water” petroleum will be for the benefit of the communities (not the states) as indicated sub-section (a) above while the 10% of the net profit from deep water petroleum will be disbursed directly to the littoral state governments as implied in sub-section (b). I would therefore like to suggest that in order to avoid confusion, subsection (b) should be deleted and “shallow water” should be deleted from subsection (a). Furthermore, it will be more effective for companies to make their contributions quarterly rather than monthly. Thus section 118(1) should read “All upstream petroleum producing companies shall remit on quarterly basis ten per cent of its net profit derived from onshore and offshore operations directly into the PHCF”.
However, the definition of “net profit” is subsection 118 (2) appears clumsy and unnecessarily complicated. It is important to have simplified laws. Therefore, I would like to suggest that the “net profit” should be replaced by “petroleum profit” and the rate should be reduced from 10% to say 3%. This will effectively increase the current petroleum profit tax (PPT) from 85% to 88% or the proposed NHT from 50% to 53%. Alternatively, and preferably, the 10% surcharge should be imposed on the royalties paid by oil companies rather than on “net profit”. The will instill a greater sense of partial “ownership” of petroleum by the communities because royalty is “compensation or payment to an owner for use of property or natural resource”. Since royalty rate on onshore petroleum is higher than the rate on offshore petroleum and the rate decreases with depth, funding the PHCF from royalty payment will dampen the argument against the abolition of the onshore/offshore dichotomy. Furthermore, since the amount of royalties paid by oil companies has historically been between 20% and 40% of the PPT, a 10% surcharge on the amount of royalties will be almost equal to about 3% increase in the PPT. With this amendment, subsections 118 (3) and 118 (4) can be deleted.
Furthermore, subsection 118 (5) states that “Where an act of vandalism, sabotage or civil unrest occurs that causes damage to any petroleum facility with a host community, the cost of repair of such facility shall be paid from the PHCF entitlement unless it is established that no member of the community is responsible”. The rationale for this provision is to reduce the incidence of vandalism and sabotage of oil facilities. However, implementing this provision will be difficult because: (a) The bill does not state that funds will be allocated to communities based on oil production and/or value of petroleum facilities or assets (such pipelines, flow stations, gas plants, terminals, etc) located the communities. This means that communities will not know their “entitlements” from the PHCF. On what basis therefore will the “cost of repair” of damaged facilities be deducted from the “PHCF entitlements” of communities?; (b) In most cases, it is difficult to determine whether the person(s) responsible for an act of vandalism or sabotage is from the community where the facility is located because most communities do not have a record of their inhabitants. Even then, in most cases, the persons are never known or caught; (c) It offends natural justice to punish a whole community for the selfish act or crime of one or few members of the community.
The implication of subsection 118(5) is the federal government is outsourcing the policing and protection of oil facilities to “host communities”. What about the N6 billion contracts awarded to some former militants to do the same job? I think it is wrong to hold petroleum producing communities hostage or accountable for the protection of oil facilities through this PHCF. The federal government and oil companies should devise alternative ways of protecting and securing oil facilities through contracts to local security companies and use of modern security technology including CCTV and drones.
Allocation of Funds and Projects: The bill does not specify how and the criteria for the allocation of funds and projects funded under the PHCF among the petroleum producing communities. It is important to include a section titled “Allocation of Funds and Projects” in the bill which will clearly spell out how projects and funds will be allocated. Leaving this responsibility to the Minister of Petroleum Resources as provided in sub-section 118 (6) is an invitation to arbitrariness and corruption.
Given that there are over 3,000 petroleum producing communities and hundreds of other communities hosting oil facilities, the allocation of projects among the communities will be fraught with difficulties and controversies, especially as some boundaries are disputed and not well-defined defined. There are three ways of dealing with this challenge. The first approach is to group the communities into fairly homogenous community clusters (HCC) subject to a maximum of, say, 100 HCC. The second is to use the existing local government area (LGA) as community clusters. This will yield between 100 and 150 petroleum producing LGA community clusters (LGACC).
The third approach is to use to group the communities around each oil/gas field as a cluster. This will yield about 160 oil/gas field community clusters (OFCC). This is an attractive approach because NNPC publishes data on oil and gas production by oil fields regularly. However, some fields are very small while some are located offshore. In other to shield the PHCF from the control of local government councils and the state governments and to tie it to petroleum production, I would prefer the OFCC approach. The funds from the PHCF can then be allocated to each OFCC based on their share in current oil and gas production (for the last quarter), cumulative historical production (as of the penultimate quarter) and value of petroleum facilities/assets in the oil field. Current oil production (COP) can be given a weight of 30%, current gas production (CGP) a weight of 10%, historical/cumulative oil production (HOP) a weight of 30% also, historical gas production (HGP) a weight of 10% also, and the value of current petroleum assets (CPA) a weight of 20%. Thus, if an OFCC (say Bonny) accounts for 5% of COP, 10% of CGP, 2% of HGP, 8% of HGP and 15% of CPA, and if the total amount paid to the PHCF in a given quarter is N10 billion, then the Bonny OFCC will receive (5%x30% + 10%x10% + 2%x30% + 8%x10% + 15%x20%) xN10billion = N0.69 billion = N690 million for development projects for that quarter. Each OFCC should therefore be required to form an OFCC Petroleum Fund Management Committee (OFCCPFMC) to oversee the utilization of the OFCC Fund. The OFCCPFMC should be made up of 10 representatives from various communities in the OFCC and they should be elected by the communities they represent for a single term of 2 years with a possibility of re-election six years later.
Role of Minister: Sub-section 118(6) of the bill states that “The Minister (of Petroleum Resources) shall…make regulations on entitlements, governance and management structure with respect to the PHCF”. This means that the proposed PHCF will be an appendage of the Ministry of Petroleum Resources. Thus, the petroleum producing communities will have little or nothing to say about how the fund is managed. In fact, the PHCF as conceived in the PIB will turn out to be a duplicate of NDDC which is controlled by the Presidency. Worse still, unlike the NDDC that has a Board made up of representatives of petroleum producing the states, the PHCF will be under the sole control of the Minister. The PHCF cannot function effectively and efficiently if it is controlled from Abuja or by the State Governors. The funds of the PHCF should be allocated by the Federal Ministry of Finance directly to the OFCCPFMC to manage as they deem fit without any interference from the Federal or State Governments. For instance, some OFCCPFMC may decide to use part of their allocations to set up “community-managed trust funds” or “future generation’s savings funds” such as the Nunavut Trust Fund in Canada (www.tunngavik.com ). Alternatively, groups of OFCCPFMC within a state can set up “state” petroleum trust funds similar to the Alaska (Petroleum) Permanent Fund in the United States or the Alberta’s (Petroleum) Heritage Fund in Canada.
The PHCF and NDDC: The bill does not mention the Niger Delta Development Commission (NDDC) or how the PHCF relates to the NDDC as well as the various state oil producing areas development committees (Sate PADECS). Perhaps, it is the intention of the drafters that the PHCF will replace the NDDC but this is not clear. As indicated above, the PHCF as proposed in the PIB looks like a duplicate of the NDCC. However, if the PHCF is structured along the lines I have suggested above, it will be significantly different from and can operate pari passu with the NDDC and the State PADECS. However, there is need for the OFCCPMHC to coordinate their activities with the NDDC and State PADECs to avoid duplication of projects.
In conclusion, it is crystal clear from the above review that the PHCF as crafted in the PIB needs to be redesigned to ensure that it does not go the way of the largely unsuccessful NDDC (and its predecessor, OMPADEC) and the state PADEC. I have outlined the amendments that need to be made to ensure that the fund is effective, efficient and meet the aspirations of the intended beneficiaries. It is my hope and prayer that the National Assembly will use the ideas contained in this paper to amend the PHCF section of the PIB.
Dr. Emmanuel Ojameruaye
September1 6, 2012
On July 23, 2012, the Federal Government reportedly approved a fine of $5 billion imposed on the Shell Nigeria Exploration and Production Company (SNEPCO) by the National Oil Spill Detection and Remediation Agency (NOSDRA) for the December 20, 2011 oil spill in SNEPCO’s Bonga deepwater oil platform. According to the Vanguard of July 24, 2012), the Director General of NOSDRA affirmed that that: “The recommendation we made that Shell should pay $5billion was approved by Mr. President…the fine had nothing to do with third party shoreline contamination, as being speculated but on account of the impact of the spill on the sea and aquatic life. We agree that the sample tests show that the spill did not affect the shorelines… But looking into the sea, the 30,000 barrels oil spill impacted about 950 square kilometres beneath the sea bed … this administrative fine is different from compensation, because investigations are still ongoing, and Shell may also pay compensations if we determine more damages”.
The “approval” of the fine by the President came is less than two weeks after the Director-General of NOSDRA first announced that his agency “would recommend an administrative fine of $5 billion to Government”at a hearing on the Bonga oil spill held by the House of Representatives Committee on Environment on July 16, 2012. The approval of the fine raises several fundamental questions, including the following: Does NOSDRA have the legal authority to impose or recommend an “administrative fine” on oil companies? Why should the imposition of the fine come before the compensation of the victims of the spill? Is the fine amount justified or appropriate? What are the implications of the fine?
On the first question, an examination of the law establishing NOSDRA and other laws governing the oil industry in Nigeria –including the revised PIB now before the National Assembly- clearly shows that NOSDRA is not vested with the legal power to impose fines on oil companies for oil spills or to make recommendations on same to the Presidency for approval. Furthermore, there is nowhere in Nigerian laws where the President is required to approve “administrative” fines for oil spills or other forms of pollution.
NOSDRA was established in 2006 by an Act of the National Assembly “with responsibility for preparedness, detection and response to all oil spillages in Nigeria” (Part I, section 1 of the Act.). The objectives, functions and special functions of the Agency are clearly stated in Part III of the Act. There is no provision in the Act that empowers the Agency to impose or recommend fines for oil spills. The only power vested on NOSDRA is to impose “penalty” on oil companies for failure to report oil spills on a timely basis and clean up of the impacted area, as provided in Section III.6 (2) of the Act (Penalties), to wit: “An oil spiller is by this Act to report an oil spill to the Agency in writing not later than 24 hours after the occurrence of an oil spill, in default of which the failure to report shall attract a penalty in the sum of five hundred thousand naira (N5OO,OOO) for each day of failure to report the occurrence. The failure to clean up the impacted site, to all practical extent including remediation, shall attract a further fine of one million naira. Such notice in writing is deemed to have been made, if delivered at the nearest zonal office closer to the impacted site, and of the Agency, the National Control and Response Centre within the stipulated time”.
Therefore, in legal parlance, the action of NOSDRA in imposing an administrative (punitive) fine on SNEPCO is ultra vires ("beyond the powers"). In other words, the fine will amount to a nullity if challenged in the court of law. By recommending or imposing a punitive fine for the Bonga oil spill, NOSDRA has arrogated to itself a power it does not have. In fact, it has usurped the power vested on the Department of Petroleum Resources and the Courts. NOSDRA is not intended to be an “environmental protection agency” or a “regulator” of the oil industry. In the case of Nigeria, it is the Department of Petroleum Resources (DPR) – the regulator of the oil industry – or the Federal Environmental Protection Agency (FEPA) that can initiate legal action for administrative fine against SNEPCO over the Bonga oil spill. As per the Act establishing it, NOSDRA is “an oil spill emergency agency” established to “prepare for, respond to, and recover from oil spill disasters” as in other oil producing countries. In fact, vesting NOSDRA with the power to impose fines on oil companies will divert the Agency from its prime responsibility of responding to oil spills and turn it into a “policeman” that will intimidate and demand “settlements” from oil companies. Why did NOSDRA arrogate to itself the power of imposing the fine on SNEPCO? Why did it encroach on the powers of DPR and why did the Presidency approve the recommendation without a thorough analysis of the legality of the action and the implications? Where are the Minister of Petroleum Resources, the Director of DPR, and the legal advisers to the President, the NNPC, DPR and NOSDRA in this charade?
The second intriguing question is why NOSDRA and the Presidency rushed to impose a whopping $5 billion administrative fine on SNEPCO “on account of the impact of the spill on the sea and aquatic life” when the issue of compensation for the human victims has not been settled. According to NOSDRA, “investigations are still ongoing”. By “placing the cart before the horse”, NOSDRA has inadvertently shown that “sea and aquatic life” is more important than human life and livelihood affected by the spill. So far, NOSDRA, the Federal Government and SNEPCO seemed to have paid a deaf ear to the 55 coastal communities that have alleged that the Bonga oil spill affected their livelihoods. Elsewhere in the world, the initial focus of an “emergency response agency” is on clean up and compensation for human life and livelihood. It is only after the clean up and compensation issues have been resolved, and a detailed technical report of the incident is finalized that the authorized government regulatory agency and the justice ministry will proceed to initiate legal proceedings against the oil spiller company in accordance with existing pollution laws.
For instance, in the United States, following the Gulf of Mexico (Deepwater Horizon) oil spill in April, 2010, the initial focus was on clean up and compensation of the victims of the incident. Within two months of the spill, following a meeting between President Obama and executives of British Petroleum (BP) on June 16, 2010, the company agreed to set up a $20 billion fund to pay compensation to persons directly affected by the spill - $3 billion in third quarter of 2010, $2 billion in fourth quarter, and $1.25 billion per subsequent quarter until it reaches $20 billion. As of July 2011, i.e. within a year after the fund was set up, a total of $4.7 billion had been disbursed to 198,475 claimants/victims, and the fund has continued processing payments since then. It was not until March 2012, that the US Department of Justice initiated legal action against BP (and the other responsible companies) under the US Clean Water Act and the Oil Pollution Act for “punitive damages” following the publication of the final investigative report on the accident in September 2011.The trail in the court is set to start in February 2013 and the case may drag on for years! For instance, the case of “punitive damage” against Exxon Mobil over the 1989 Exxon Valdez oil spill in Alaska was finally resolved by the US Supreme Court on February 27, 2008 after several appeals by Exxon Mobil, and long after Exxon Mobil had spent $2 billion on clean up and $1 billion on compensation for victims of the spill.
The third question is whether the amount of the fine is justified. Before answering this question, let me make it clear that I believe polluters should be held accountable for their actions by making them pay fines or penalty, especially for proven acts of negligence. Imposing fines on polluters will force companies to adhere to the highest standards of environmental management. Be that as it may, oil spills and other forms of environmental pollution are almost inevitable in the oil industry even with the best technology. Oil spills occur in every country or place where oil is explored, produced and transported throughout the world. It is also true that Nigeria, particularly, the Niger Delta region has suffered from the worst forms of oil-related pollution during the past 55 years. For instance, according to the UNDP, there were 6,800 oil spill incidents in the Niger Delta region between 1976 and 2001 and about 3 million barrels of crude oil was spilled into the environment as a result of these incidents. It is estimated that the cumulative volume of oil spilled in the region over the past 55 years is about 14 million barrels which is equivalent to about 51 times the volume of the Exxon Valdez oil spill in Alaska in 1989 (270,000 barrels) and about three times the 2010 Gulf of Mexico oil (4.76 million barrels). Oil companies in Nigeria have been accused of applying double-standard in environmental management. There are however, indications that the companies have made significant improvement in containing and abating oil pollution during the past 15 years which has resulted in significant reduction in the number and volume of oil spills and other forms of pollution.
Most oil experts agree that by international standards, the $5 billion administrative fine imposed on SNEPCO for the 30,000 barrels of oil spilled is arbitrary and excessive. It amounts to about $167,000 per barrel compared to the current crude oil price of about $100 per barrel. Even if we take the initial estimate of 40,000 barrels of oil spilled, it still amounts to $125,000 per barrel! According to the Telegraph of London, “The fine would be the largest Shell has ever received in Nigeria and amount to about $125,000 for each barrel of oil split in the Bonga field. By contrast, BP is facing a maximum fine of $4,300 per barrel in the US following the Gulf of Mexico”. To put the fine into perspective, SNEPCO produces about 200,000 barrels a day which amounts to about $7 billion a year. In order words, the fine is almost equal to the market value of the total oil produced by SNEPCO in a year without removing the cost of production! The 30,000 Bonga oil spill occurred some 120 kilometres offshore and it has probably done minimal damage to the Nigerian environment and people’s livelihood along the coast when compared to 4,761,905 barrels of the Gulf of Mexico spill or the 271,000 barrels of the Exxon Valdez spill or other (onshore) oil spills in Nigeria such as the 570,000 barrels of the Forcados terminal oil spill in 1979, the 400,000 barrels of the Funiwa No. 5 oil spill in 1980, the 40,000 barrels of the Idoho oil spill in 1998 and other spills for which the polluting companies were not fined.
There is simply no empirical basis to justify the $5 billion fine, especially as there is no law in Nigeria governing the rates for “punitive damages” for oil spills. In the United States, under the Clean Water Act (CWA), the base punitive fine is $1,100 per barrel of oil spilled but it can be increased to a maximum of $4,300 per barrel if the polluter is found guilty of gross negligence by the presiding judge. Thus, under US law, the maximum fine that can be imposed on SNEPCO for the 30,000 barrels oil spill is $129 million and the minimum if $33 million as against the $5 billion imposed by NOSDRA and approved by the President – almost 40 to 150 times more! The expected punitive fine from the Gulf of Mexico oil spill is estimated at between $5 billion and $20 billion but there is no guarantee that Supreme Court will even approve $5 billion if BP decides to appeal to the Supreme after the lower court judgment. Case in point, after the Exxon Valdez incident, an Anchorage/Alaska jury imposed a punitive fine of $5 billion on Exxon. The company appealed to the 9th Circuit court which reduced the fine to $2.5 billion in 2006. Still not satisfied, the company appealed to the US Supreme Court which decided that the $2.5 billion was “excessive with respect to maritime common law” and reduced the fine further to $507.5 million.
The fourth question is the long-term implication of the fine for the Nigerian oil industry. While it may put pressure on oil companies to improve environmental management, such an excessive and arbitrary fine will discourage investment in the oil industry, especially in offshore oil drilling which is highly technical. Given the dwindling onshore oil production and community interruptions of onshore oil production in Niger Delta region, the future Nigeria’s oil industry – the mainstay of the economy – lies in offshore oil production. The NNPC and Nigerian indigenous oil companies do not have the technology and resources required for safe and extensive offshore oil exploration and production. No foreign or even indigenous company will want to invest in oil exploration and production in Nigeria if it faces such excessive and arbitrary fines as recently imposed by NOSDRA. Such fines can cripple any company and amount to “killing the goose that lays the golden egg”.
In conclusion, I think the SNEPCO spokesman had a point when he said “We do not believe there is any basis in law for such a fine…Neither do we believe that Shell has committed any infraction of Nigerian law to warrant such a fine." NOSDRA and the Presidency must follow the existing law and due process in attempting to impose any punitive fine on SNEPCO or any company as a result of oil spills. This means that it is the regulating agency of government that should work with the justice ministry to take oil polluters to the court of law after a detailed investigative report has been published and the issues of clean up and compensation have been settled. The amount of fine imposed by the courts must be justified and based on existing laws that minimizes arbitrariness. The courts should also take into consideration other spills that have occurred and will continue to occur in the region as well as the long-term implications of imposing “excessive fines” not only on oil spillers but also on other oil and non-oil polluters of the Nigerian environment including the refineries that are owned by the federal government. In this regard, it is important to include in the revised PIB clear provisions (such as such as minimum and maximum rates for spilled oil) for the management of both onshore and offshore oil spills and other forms of environmental pollution including gas flaring and disposal/dumping of drilling wastes. The law should also state how the fines will be utilized. For instance, a minimum punitive fine of $200 per barrel and a maximum fine of $1,000 per barrel can be stipulated and at least 20% of the amount paid can be used for clean up, 30% for compensation to victims (in addition to the compensation fund to be established by the polluter), 30% to the affected state governments and 20% to the affected local governments to carry out development project s in the affected areas. For example, the US Senate has passed a bill which stipulates that 80% of the punitive fines that will be paid by BP and the other companies as a result of the Gulf of Mexico oil spill will be divided among the affected coastal states – Louisiana, Mississippi, Alabama, Florida and Texas- while the balance will be used for further clean up, coastal restoration and job creation in the area. It is my hope that NOSDRA, DPR, NNPC, the National Assembly and the Presidency will learn from best practices in oil spills management from other countries.
Dr. Emmanuel Ojameruaye
Monday, August 20, 2012
A recent report reveals an ongoing controversy between the Federal Ministry of Finance (FMF) on the one hand and and the Petroleum Products Pricing Regulatory Agency (PPPRA) and the Nigerian National Petroleum Corporation (NNPC) on the other hand over the projected quantity of fuel consumption used for the determination of subsidy requirements for 2012. The report indicates that the FMF is insisting on 19 million litres a day while the PPPRA and NNPC are insisting on 33 million litres a day (Aderinokun & Alike, Thisday, May 28, 2012). Responding to the difference, the Senior Special Assistant to the Minister of Finance stated that “the issue of underestimation does not arise because the NNPC and PPPRA which had the responsibility did not provide any basis for estimation of consumption. They both gave very different estimates which could not sustain scrutiny. The ministry did the best thing in the circumstance which was to use an economic estimation method to arrive at the projected amount of subsidy for 2012 based on growth in income and growth in demand. This amount was based on the consumption for 2008 which was adjudged as a good base year from an assessment of various relevant factors”. He further revealed that the FMF has “commissioned the globally respected consulting firm, Mckenzie, to use their worldwide resources to help us estimate the consumption… to provide the authentic figures”.
In their response, a spokesman of the NNPC stated that “the Ministry of Finance was about to plunge the country into fuel crisis by misleading the government on the daily consumption of petrol… How can anybody say that Nigeria with a population of 167 million consumes 19 million litres of PMS daily? The Ministry of Finance made provision for subsidy based on 19 million litres pay day, instead of over 33 million litres, which the country is consuming”.
This controversy between the FMF and the PPPRA/NNPC over the projected fuel consumption level reveals a fundamental problem that has bedeviled energy planning in Nigeria. This problem is the estimation of the demand for various forms of energy, particularly electricity and petroleum products, under conditions of disequilibrium and imperfection. It is known fact that both the electricity market and the petroleum product market are characterized by chronic disequilibrium as evidenced by frequent electric power outages and load shedding or rationing, and frequent fuel scarcity resulting in long queues at the filing stations. In the case of petroleum products, there are also problems of smuggling, adulteration, over-invoicing and round-tripping. In the case of electricity, there are also the problems of illegal tapping of electricity, the use of private generators and use of “estimates” by PHCN in the billing of many customers who do not have electric meters due to the shortage of meters or the long time it takes to provide meters to consumers. Under such conditions of disequilibrium, there is usually a significant difference between the consumption and “ex-ante” demand - the quantity that consumers are willing and able to pay for at a given price. When there is shortage or rationing, the actual (metered) consumption is usually less than “ex ante demand” because some consumers are forced to do without the product or to use alternatives. For planning purposes, it is ex-ante demand that matters.
As a matter of fact, using raw consumption data (which is essentially the supply or energy sales) as a proxy for demand in the process of planning when the past is characterized by disequilibrium will result in perpetual or chronic disequilibrium. Unfortunately, this appears to have been the situation in Nigeria over the years because in making consumption or demand projections the planners of electricity supply and petroleum products supply have always failed to take into consideration the disequilibrium and imperfections in the markets. For instance, the PHCN uses metered consumption (electricity sold) as the basis for making projections of future demand or consumption of electricity. Similarly, the NNPC/PPPRA uses metered consumption (petroleum products sold at filling stations/outlets or domestic production + quantity imported) as the basis for making projection of future demand and fuel subsidy requirements. Such a crude approach will perpetuate disequilibrium by making the future a mirror image of the past. Furthermore, both the NNPC/PPPRA and the PHCN use simple time trend in projecting future consumption, i.e. they assume that consumption is a linear function of time, instead structural econometric models that specify demand or consumption as function of several “explanatory” variables such as disposable income, industrial production, number of consumers or population, unit price of the product, price of substitutes, and stock of energy-consuming equipment or machines.
Under conditions of disequilibrium, an “econometric disequilibrium” approach is the gold standard for projecting future demand for planning purpose. The econometric disequilibrium approach is based on the theory that “in the absence of an equilibrium condition, the ex-ante demand and supply quantities cannot in general be equated to the observed quantity traded in the market. The observed quantity is then equal to minimum of ex ante demand and supply quantities. Thus in attempting to estimate the supply and demand schedules, the sample should be separated into demand and supply regimes..Alternatively, the observed quantity should be adjusted for the effects of rationing and then both supply and demand supply schedules fitted over the entire period using the adjusted quantities” (Fair & Jaffe: Methods of estimation for markets in disequilibrium. Econometrica, Vol. 40: 497-514, 1972)
With respect to the Nigerian electricity market, about 30 years ago, a leading Nigerian energy economist noted that “Effective planning requires a good knowledge of the future level of the pattern of demand…Underestimation of demand in an environment of relatively high growth often leads to underinvestment, and consequently, an in-built disequilibrium between demand and supply. This situation has been characteristic of Nigeria’s power situation (Iwayemi, A: Planning in the electric power sector in Nigeria, in Development Economics and Planning. Unibadan Publishing Consultants, 1982). Also in 1984, another Nigerian energy economist also recommended that “NEPA must have an established index of reliability and all planning must be towards meeting this index” (Chuku, A. Electric power supply adequacy in Nigeria outlook for the 1980s and beyond. Journal of Issues in Development. Vol. 1 (1): 82-94, 1984). At about the same time, I constructed and estimated an econometric disequilibrium model of the Nigerian electricity market which I used to estimate the future demand for electricity (from 1983 to 1990) and to determine the “optimal” unit prices of electricity (Ojameruaye, E: An econometric disequilibrium model for electric power system planning in Nigeria. OPEC Review. Winter, 1988). In the model, I demonstrated that because of the disequilibrium that characterizes the electricity market, D = C/R where D = demand, C = metered consumption, R – power reliability index, defined as the ratio of the duration of time during which there was no power outage to the total accounting time. For instance, if we are using annual data, R = (8760 – Z)/8760 = 1 – Z/8760, where 8760 is the number of hours in a year, Z = the number of hours during the year when there was power outage.
For instance, if during the course of the year, the duration of power outages add up to 438 hours or 18.5day, the reliability index R = 1 – 485/8760 = 1 – 0.05 = 0.95 = 95%, which means that consumers on the average had power supply 95% of the time. If the metered consumption (quantity of electricity sold to consumers) is that year is 20,000 GWH (20 billion kWh), then the estimate of “ex-ante demand will be 20,000/0.95 = 21,053 GWH. I used NEPA (now PHCN) power outages/rationing data and a sample of residential electricity consumption and billing records to estimate R which yielded about 0.95 in the mid 1980s. I then divided past consumption data by 0.95 to obtain estimates of “ex-ante” demand which I then regressed on some explanatory variables such as national disposable income at constant price, industrial production, five-year cumulative capital formation in machinery and equipment, number of customers and unit price of electricity. I estimated separate demand functions for residential, commercial and industrial customers of NEPA. The results were very interesting and I was able to simulate the model to study the impact of changes in the unit price of electricity on the “equilibrium” condition of the market and the profit/loss account of NEPA as well as in making long-term forecast of electricity demand and the capacity investment requirements.
Given the disequilibrium and imperfect conditions of the petroleum products market in Nigeria, an econometric disequilibrium approach is the best method for projecting future demand for and optimal prices of petroleum products. The first step in this approach is to adjust the “metered” consumption (supply) data to obtain estimates of ex-ante demand. The second step is to regress the ex-ante demand data on explanatory variables that determine the demand for each type of petroleum product. The major challenge is how to adjust the consumption data. Unlike the electricity market, we do not have estimates of reliability index for petroleum products supply.
The way to estimate the ex-ante demand (D) would be to use extraneous information from surveys to estimate the impact of scarcity (disequilibrium) on the quantity consumed during an accounting period (Cd) and add this to the metered consumption (C) and then subtract estimates of the quantity smuggled out of the country, round-tripped and over-invoiced (Cs) and then add the quantity produced/supplied by illegal refineries (Ci). In order words, D = C + Cd – Cs + Ci. It may also be necessary to compare the per capita estimated D data with those of other countries at same level of development or with similar demand partners as Nigeria (e.g. Indonesia, Pakistan, Iran, Ghana and Egypt) and make further adjustments. The final D can then be regressed on appropriate explanatory variables for each product. For instance the demand for (petrol) PMS can be regressed on disposable income, population, the price of PMS, the price of substitutes, the number of registered vehicles, estimates of the number of other PMS-consuming machinery such as small generators, etc. Similarly functions can be formulated for the demand for kerosene (HHK), diesel (AGO), liquefied petroleum gas (LPG) and other products. Other functions can be specified including those for supply and subsidy, and the model can be simulated to determine the level of subsidy associated with different price levels and the price level required to establish equilibrium over time.
Finally, I must say that it is shameful that the FMF has engaged a foreign consulting firm to estimate the consumption of petroleum products in Nigeria in order to have “authentic figures” for planning purpose. What has happened to Nigerian energy economists and econometricians at home and abroad, who can do the same job, and even better? The FMF cannot claim that it is not aware of Nigerians who can do this job at a far lower cost. The situation reminds me of my experience in 1987 after completing my econometric disequilibrium study of the Nigerian electricity market. I approached the top management of NEPA and gave them a copy of the paper and request to sponsor my trip to Japan to participate in the Energy Conference to present it. NEPA refused to sponsor my trip and I was unable to attend the conference. However, the organizers were gracious enough to include my paper in the post-conference proceedings because of the seminal nature of the paper. I am sure NEPA would have been more than willing to pay 100 times the cost of my trip to a foreign consultant to conduct a similar study for them. Needless to say, NEPA was not interested in my work and they did not even invite me to discuss it, even though the Statistical Department of NEA provided me with much of the data I used in the study. Elsewhere in the world, government agencies issue requests for applications/proposal for local research organizations to apply for grants to conduct studies and implement program that support such agencies’ objectives. I think now is the time for NNPC, PPPRA, FMF and other government agencies to devise ways of utilizing the wealth of experience and expertise of Nigerians in addressing some of the planning and implementation challenges they face rather than turning to foreign consultants.
Dr. Emmanuel Ojameruaye
In his presentation on “100 Days of Promising Less and Delivering More: The Jonathan Transformation Agenda” about nine months ago, in September 2011, the Special Assistant to President Jonathan on Media and Publicity, Dr. Reuben Abati stated that the establishment of the Nigeria Sovereign Investment Authority (NSIA) is one of the signature achievements of the first 100 days of the President’s new administration. According to Dr. Abati, “With the establishment of the NSIA, the President facilitated direct investments into infrastructure with the priority areas being power and roads”. Nine months later, and as the President celebrates his 366 days of his new administration, the NSIA is yet to take off, not less to make any investment on power and roads. This because of the legal tussle between the Federal Government (FG) and the 36 State Governments (SGs) over the constitutionality of the Excess Crude Oil Account (ECA), the predecessor of the NSIA, and the legality of withdrawing funds from the ECA to start the NSIA.After the latest hearing of the case by the Chief Justice of the Federation (CJN) on May 21, 2012, he decided to adjourn the case to September 25, 2012 for what may be the final decision on the case. Most analysts believe that the Supreme Court will eventually declare the ECA unconstitutional thereby killing it and the NSIA as currently established by an Act of the National Assembly. At that point, Dr. Abati would realize that he jumped the gun when he boasted about the NSIA some nine months ago. What then can the Presidency do to prevent this looming embarrassment?In other words, what can the Presidency do to resolve the ECA/NSIA debacle?
It will be recalled that President Obasanjo unilaterally established the ECA in 2004 without consultation with, and approval of, the State Governors and the National Assembly. Since then, there has been a raging controversy between the FG and the 36 SGs over the constitutionality of the ECA . In 2008, the 36 SGs went to court to compel the FG to stop operating the ECA and to transfer the funds in it to the Federation Account (FA) for sharing among the three tiers of government. While the case was still pending in court, President Jonathan compounded the problem by replacing the ECA with the Nigeria Sovereign Investment Authority (NSIA), otherwise known as the Nigeria Sovereign Wealth Fund (NSWF) in May, 2011, again amid opposition by the governors, some constitutional lawyers, some political parties and some members of the National Assembly. In fact, there were reports that some members of the National Assembly were either bribed or cajoled to pass the NSIA bill post haste and was promptly signed into law by the President on May 26, 2011, just three days before he was sworn in for his second term.On October 2011, the 36 SGs went back to the court to stop the FG from withdrawing $1 billion from the ECA to the NSIA as “seed” money to start the operation of the NSIA. After failing to force the SGs from withdrawing the case from the court, the FG decided to pursue it in the court. However, when the case came up for hearing at the Supreme Court in March 2012, the FG pleaded with the court to allow it to seek an out-of-court settlement with the SGs. Meanwhile, the FG continued to operate the ECA by paying “excess oil revenue” into it while depleting it at the same time. The FG also continued with plans to start operating the NSIA in May, 2012, one year after the NSIA was signed into law by President.
Amid fears that the FG was planning to withdraw another $2 billion from the ECA to the NSIA, the 36 SGs returned to the Supreme Court on May 21, 2012 to restrain the FG. This time around, the FG decided to challenge the jurisdiction of the Supreme Court to rule on the case. The CJN, Justice Musdapher, decided to adjourn the case till September 25, 2012 for a definite hearing while conceding to the request by the governors that their originating summons be heard alongside the preliminary objection that was filed by the FG. Most legal analysts agree the ECA and NSIA as established, are unconstitutional because they contravene section 162(1, 2 and 3) of the 1999 Constitution which states that
(1) The Federation shall maintain a special account to be called "the Federation Account" into which shall be paid all revenues collected by the Government of the Federation, except the proceeds from the personal income tax of the personnel of the armed forces of the Federation, the Nigeria Police Force, the Ministry or department of government charged with responsibility for Foreign Affairs and the residents of the Federal Capital Territory,Abuja.
(2) The President, upon the receipt of advice from the Revenue Mobilisation Allocation and Fiscal Commission, shall table before the National Assembly proposals for revenue allocation from the Federation Account, and in determining the formula, the National Assembly shall take into account, the allocation principles especially those of population, equality of States, internal revenue generation, land mass, terrain as well as population density; Provided that the principle of derivation shall be constantly reflected in any approved formula as being not less than thirteen per cent of the revenue accruing to the Federation Account directly from any natural resources.
(3) Any amount standing to the credit of the Federation Account shall be distributed among the Federal and State Governments and the local government councils in each State on such terms and in such manner as may be prescribed by the National Assembly.
The ECA violates the above section of the constitution because: a) the FG pays the “excess oil revenue” collected on behalf of the Federation to the ECA rather than to the Federation Account (FA); b) While the amount paid into the FA is to be shared (instantaneously) among the three tiers of government in accordance with the subsisting revenue allocation formula, the “excess oil revenue” paid into the ECA is not available for sharing, at least not immediately, even if it argued that the “excess oil revenue” is actually paid into the FA; c) By not sharing all the “excess oil revenue” among the three tiers of government, at least instantaneously, the “excess oil revenue” is akin to a “withdrawal” or a “first-line charge” on the FA which the Supreme Court declared unconstitutional in its 2002 judgment on the offshore/onshore oil dichotomy case; d) While it can be argued that under the ECA, the “excess oil revenue” will be available for sharing when the actual export price of oil falls below the budget price, under the NSIA most of the “excess oil revenue” will never be available for sharing in accordance with the revenue allocation formula. This is because under the NSIA Act a minimum of 20% of the “excess oil revenue” will be allocated to each of the three funds that make up the NSIA (i.e., the Future Generations Fund, the Nigeria Infrastructure Fund and the Stabilization Fund). Thus only a maximum of 60% of the excess oil revenue (paid to the Stabilization Fund) may be available for sharing in accordance with the revenue allocation formula.
The ECA and NSIA also offend the principles of true federalism because it is the FG only that determines the level of “excess oil revenue” during the preparation of federal (central) government budget and the FG is the de-facto manager of the ECA/NSIA with the state and local governments playing more or less a passive role. For instance, the FG may decide to use $70 per barrel as the budget price of oil at a time when leading indicators would suggest a higher level such as $90 per barrel which most SGs would prefer. There have also been accusations of unilateral withdrawal of funds from the ECA by the FG in addition to charges of lack of transparency, accountability and disclosures in the management of the ECA. Furthermore, the ECA/NSIA also violates the oil derivation principle because payment of “excess oil revenue” to the NSIA will result in a significant loss of revenue to the oil producing states since the derivation principle may not be applied to “excess oil revenue”. For instance, if the budget price of oil is $70 per barrel and the budgeted oil revenue is N6,500 billion in a year but the actual oil price turned out to be $100 per barrel resulting in actual oil revenue of about N9,000 billion, the 13% oil derivation revenue accruable to the oil producing states will remain N845b (13% of N6,500) instead N1,170 b (13% of N9,000), which means a loss ofN325 billion by the oil producing states because the “excess oil revenue” of N2,500 billion (N9,000 – N6,500) will be paid to the NSIA for the benefit of the “whole country”.
It is clear from the above that unless the FG is expecting a miracle to happen before September 25, there is every reason to expect the Supreme Court to declare the ECA/NSIA unconstitutional and lay the controversy to rest. Hint: During the March 26, 2012 hearing of the case, the CJN asked rhetorically that “If states and the Federal Government are not ready to uphold the sanctity of the Constitution, who will?” Translation: the ECA and NSWF are unconstitutional. In the application to the Court, the 36 SGs made it clear that “It is in the interest of justice, preservation of integrity of the Supreme Court and the Rule of Law that this application be granted”.If the Supreme Court decides otherwise or if the case is further adjourned, cynics will say the Presidency has “settled” the court.
Therefore, now is the time for the FG to look for an alternative solution to the controversy by abolishing the ECA and amending the NSWF Act.If the FG fails to do so, there is a very high likelihood that it will be embarrassed by the Supreme Court decision. All the Presidency needs to do is to forward a bill to the National Assembly to amend NSIA Act as follows: a) Delete “State Government, Federal Capital Territory, Local Government and Area Councils” from the preamble and from various parts/sections of the Act leaving “Federal Government” only. In other words, the NSWF is “to receive, manage and invest a diversified portfolio of medium and long-term of the Federal Government” only; b) Amend part III (Financial Provision) of the Act in such a way that the funds for the NSIA will come from the FG’s receipts from the Federation Account. This means that if the FG budget is based on, say $70 per barrel for crude oil, and the budgeted FG revenue for a year is, say, N4.8 trillion (or N400 billion a month), and if the price of crude oil for a month is $100 and the FG revenue for that monthis N570 billion, then the FG can transfer the “excess revenue” or “residual funds above budgetary smoothing amount” (which is the N130b, i.e. N570b –N440b) to the NSWF account. If the price of oil drops to say $60 per barrel in another month and the FG revenue for that month is N340b, then the FG can withdraw the budget shortfall (N400b – N340b = N60 b)from the NSWF (the Stabilization component of it) to fund FG operations for that month.
The above suggested amendment to the NSIA Act will ensure that all tiers of government (FG, SGs and LGs) get their full share of the federation account in accordance with the constitution and the subsisting revenue allocation formula. This amendment will not only ensure that the Constitution is not violated but will also ensure budget discipline by the FG.Furthermore, each state or a group or states (on regional/zonal basis) as well as each LG or group of LGs can establish its own sovereign wealth fund (or a stabilization fund or a future generation fund or infrastructure fund or any combination of these). This will promote true federalism as against the current one-size-fits-all controversial NSIA which promotes centralization.
A less preferred alternative solution is to amend the NSIA in such a way as to make the federal, state and local governments to contribute voluntarily to the NSIA from their allocation of excess oil revenue allocation and their “share-holding” in the NSIA will be in accordance with their contributions. Put differently, NSIA should be treated as a “government corporation” and each government in the federation (federal, state or local) can acquire shares voluntarily from their excess oil revenue. Then the allocation of funds or “dividends” to the “share holders” from Stabilization and Future Generation funds at a future date will be in accordance with the number shares each entity is holding. Under this arrangement, there “excess oil revenue” will be paid into the federation account and shared among the three tiers of government in accordance with the revenue allocation formula. Then each government entity will decide if it wants to purchase the NSIA “shares” and the quantity it wants to hold. The Nigeria Infrastructure fund will be removed from the NSIA under this arrangement because of the “lumpiness” and limited “indivisibility” of infrastructure as well as the issue of ensuring equity and fairness in the location and allocation infrastructure among the shareholders.
Finally, Nigeria may learn from other countries. In the United States there is no national sovereign wealth fund (SWF) but each state is free to set up its own SWF. For instance, State of Alaska has the Alaska Permanent Fund (oil-based SFW), the State of Wyoming has the Wyoming Mineral Trust Fund (a mineral-based SWF) and the State of New Mexico has the New Mexico State Investment Trust (a non-commodity SWF).Also, Canada does not have a national SFW, but Alberta Province has the Alberta Heritage Fund (oil-based SFW) while the Quebec Province has the Caisse de Depot Placement du Quebec (non-commodity SWF). In most countries that have a “national” SWF such as Indonesia, Malaysia, Libya, Russia, Iran, Venezuela and Australia, the funds for the SWF come from the “central” government; state, regional, provincial or local governments are not forced or required to contribute to the national SWF. If the Nigerian federal (central) government is unwilling or unable to fund the NSWF from its share of the federation account, it should scrap it and allow states to establish their own SWF from their own resources if they so desire. In my article of the recently concluded Second South-South Economic Summit, I recommended that the South-South (Niger Delta) states should consider establishing their own South-South Petroleum Fund which will comprise of an Investment Corporation, Future Saving Account and a Capital Projects Funds. The other geographical zones in the country can also do the same if they have the resources and political will to do so.