Emmanuel Ojameruaye Ph.D

Emmanuel Ojameruaye Ph.D

Dr. Emmanuel O. Ojameruaye is President/CEO of Capacity Development International, LLC based in Phoenix, Arizona State, USA. He was Vice-Resident for Research & Program Development with the International Foundation for Education and Self-Help (IFESH), an NGO based in Scottsdale, Arizona State until 2013 when that organization closed its operations. 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.

By Dr. Emmanuel Ojameruaye, This email address is being protected from spambots. You need JavaScript enabled to view it.

Over the past seven months, the federal government through its regulatory agencies has imposed extraordinary and controversial fines on at least three multinational corporations operating in the country. The first case was a fine of $5.2 billion (N1trillion) imposed on MTN, the South African telecommunication company, in October 2015 by the National Communication Commission (NCC) imposed a for "not meeting the deadline set by the Mobile Network Operators for disconnecting the Subscribers Identification Modules (SIM) with improper registration". The NCC alleged that during the compliance audit it carried out on MTN network it discovered that 5.2 million unregistered customers' lines were not deactivated by MTN. This lead NCC to impose a fine of $1,000 for each of the 5.2 million unregistered SIMs which amounted to the $5.2 billion.  Following a meeting between President Zuma of the South Africa and President Buhari, the fine was reduced to $3.2 billion. However MTN was not satisfied and went to court claiming that NCC does not have the constitutional power to impose the fine. According to MTN, "NCC, being a regulator, cannot assume all the functions of the state on its own, considering that it made the regulation, prescribed the penalty and imposed the fine, payable to the commission and not to the federal government". MTN further averred that it was not afforded its constitutional right to a fair hearing before a court of competent jurisdiction and had not been found guilty of any offence that would warrant it to pay such an outrageous fine. However, MTN eventually paid $250 million on 24 February 2016 "as advance payment" towards out-of-court settlement. The company is unlikely to pay any additional amount and this may very well be the end of the case. It has succeeded in reducing the fine $5,200 million to $250 million which shows the absurdity of the initial fine. Come to face it, if each of the 5.2 million unregistered subscribers spends about N30,000 buying MTN recharge cards in a year and if you factor in the cost of servicing the lines, it may take over 20 years for the company to recoup the $5.2 billion fine. Therefore it is foolhardy to expect MTN to pay the fine of $5.2 billion.

The second case is a fine of another N1 trillion imposed on Guinness Nigeria Plc, an affiliate of Diageo Plc, the British multinational alcoholic and non-alcoholic company, in November 2015 by NAFDAC for "administrative charges for various clandestine violations of NAFDAC rules, regulations and enactments over a long period of time". NAFDAC claimed that Guinness had been revalidating its expired products without the authorisation and supervision of NAFDAC. It also claimed that the company failed to secure the gate of its warehouse and that its raw materials were permanently opened and exposed to the elements and rodents.  In its response, Guinness Nigeria stated that it "does not fully understand the basis for the computation of the administrative charges nor the particular regulations alleged to have been infringed". The company also stated that it has operating in Nigeria for over 65 years and has conducted its business in accordance with all relevant laws and regulations of the country and Diageo's global policies and procedures relating to good manufacturing practice. Accordingly, Guinness has refused to pay the fine and has dragged NAFDAC to court claiming that its right to fair hearing was violated by NAFDAC. The company is urging the court to restrain NAFDAC from imposing any sanction on it. The case may eventually be settled out of court with Guinness paying a token fine.

In the third case, on May 3, 2016 NOSDRA imposed a fine of N1.3 trillion ($6.5 billion) on SNEPCO for the Bonga oil spill that occurred about 120 kilometres off the Nigerian coast in December 2011. This fine is almost equal to the market value of the crude oil produced by SNEPCO in two years. If you remove the cost of product and taxes and other payments accruing to the federal government, my guess is that the fine will be more than net income of SNEPCO over a period of five years! The case is ludicrous because the previous administration of President Jonathan under whose watch the spill occurred attempted but failed to get SNEPCO to pay the initial fine of $5 billion and allowed the matter to die quietly. As I argued when fine was first imposed in 2012, it was premature and extraordinarily excessive.  One wonders why the Buhari's administration has decided to resurrect this case which it cannot win. Perhaps they hope that SNEPCO paying a token fine for an out-of-court settlement like MTN.

It is interesting that in all the three cases described above, the amount of the fine is almost the same and they are all extraordinarily excessive by any standard. It appears that the regulatory agencies and the federal government did not do their homework or research before imposing the fines or going to court. It also appears that the regulators are competing to impose fines on the companies they are regulating. This begs the question, what is the motive behind these punitive fines? If the fines are enforced, all three companies will be crippled. Therefore, the need for accountability is probably not the motive. Cynics would say the regulators are either out to cripple these companies or are out to intimidate and extort money from them. The most plausible motive is to generate revenue for the government. In fact, some analysts see the hefty fines as act of "financial desperation" by the administration to generate money to fund the unprecedented N2 trillion deficit in the 2016 FG budget. But unbeknownst to the promoters and supporters of these hefty fines, they are creating "hysteria" among international investors at a time when the Buhari administration is trying to attract foreign investment as evidenced by the frequent overseas trips of the President. The fines also plays into the narrative that Nigeria is a lawless and unpredictable country.   One wonders if the President and the Attorney General of the Federal seriously considered the appropriateness and implications of these fines and challenged the regulators before approving them or were they blind-sighted by the desire to raise money to fund the budget deficit.

The Presidency and the regulatory agencies must follow existing laws, due process and best practices in imposing fines on companies for their actions or inactions that cause damages to individuals, communities and the environment. To remove arbitrariness, the regulatory laws should be amended to include maximum and minimum rates for fines in respect of violations or damages caused by proven negligent acts of companies based on international standards such as the Clean Water Act in the United States. For instance, the minimum fine for onshore oil spills can be fixed at the price of crude oil on the date of the spill multiplied by the quantity of oil spilled while the maximum fine can be three times the minimum amount. For offshore oil spill the maximum can be two times the minimum fine. Furthermore, the laws should stipulate how the amount paid by polluters should be distributed or used. For instance, 20% of the amount paid can be used for clean up, 50% for compensation to affected individuals and 10% to the affected state governments, 10% to the affected local governments and 10% to federal government with the proviso that these governments will use these funds to carry out development projects in the affected areas. At our level of development, we will be cutting our nose to spite our face if we have tougher laws and higher fines than other countries.  Let us learn from China, India and some other emerging economies. With our poor infrastructure and security challenges, the last things we need are excessive and arbitrary fines and regulations, and regulators who intimidate and extort investors in the country.

May 17, 2016

Four months into the 2016 financial year, the Federal Government of Nigeria still does not have an approved Budget. So, the government has been spending funds that have not been appropriated and the capital projects planned for this year are yet to take off. Clearly, the 2016 Budget impasse is an indication of the urgent need for reform of the federal budgeting process in order to improve effectiveness, efficiency, transparency and accountability in public spending. Therefore, President Buhari must initiate the reform process by setting up a committee to examine the relevant sections of the Constitution and the Fiscal Responsibility Act (FRA) of 2007 and submit a bill to the National Assembly (NASS) for the needed changes.  Based on international best practices, I would recommend the following changes to the federal government budgeting process in Nigeria. 

In the first place, the budgeting process must be adequately sequenced and timed to ensure that the budget for a financial year t is approved and signed into law by the President before the start of that financial year, i.e., by the 1st of January of the year t. A situation where the Appropriation Act is enacted months into the financial year is a sign of planlessness and a recipe for economic anarchy and retardation. In most countries, the time span from the start of the preparation of budget proposals by government agencies (MDAs) to the enactment of the Appropriation Act before the beginning of the financial year takes at least 12 months and there are defined time limits for each of the milestones in the budgeting process. Unfortunately, this is not currently the case in Nigeria. 

For instance, in the United States of America, government agencies begin to prepare their budget proposals about 24 months before the start of the financial year in question, and submit their proposals to the Office of Management and Budget (Nigeria’s equivalent of the Budget Office) about 12 months before the start of the financial year. That is, the agencies spend about 12 months (between October and September of the penultimate year, t-2) to prepare their budget proposals. Thereafter, between October and January, the OMB collates and reviews the agencies’ budget proposals and consolidates them into the President’s Budget Proposal. As required by the law, the President submits his Budget Proposal (Budget Release) to Congress by the first Monday in February for the financial year beginning on October 1.  The Congress thus has about eight months (February to September) to review the President’s Budget Proposal, call for hearings and defense by the various agencies, make necessary adjustments and reconcile any differences with the President.  The Budget is signed into law by the President by the end of September, before the financial year starting October 1. Thus, in the United States, there are usually three budgets in play at each point in time – the Agencies executing the approved budget for the current fiscal year (t); Congress reviewing/amending the budget for the coming fiscal year (t+1); and the Agencies planning/preparing  their budget proposals for year t+2. 

 On the other hand, in Nigeria, section 81 of the 1999 Constitution simply states that:

The President shall cause to be prepared and laid before each House of the National Assembly at any time in each financial year estimates of the revenues and expenditure of the Federation for the next following financial year”.

In other words, the President can present his Budget Proposal to the NASS a month or a week or even a day before beginning of the financial year. It is therefore not surprising that President Buhari presented his 2016 Budget Proposal to the NASS on December 22, 2015, i.e., nine days before the beginning of the 2016 financial year. It is therefore not surprising that 4 months into the financial year we do not have an Appropriation Act! Therefore, section 81 the Constitution must be amended to compel the President to present his Budget to the NASS not later than four months (by September 1) before the beginning of the financial year, and the NASS must submit its amended Budget to the President for assent not later than 6 weeks (by November 15) before the beginning of the financial year starting January 1. This will give enough room for reconciliation in case there is a disagreement between the executive and the legislature. 

Furthermore, the Fiscal Responsibility Act (FRA) of 2007 that guides the budgeting process is unwieldy and clumsy to say the least. The 24-page document needs to be amended to remove ambiguities, redundancies, ensure clarity and give adequate time for budget preparation, review and approval. For instance, section 11 of the FRA states that

“(1) The Federal Government after consultation with the States shall not later than four months before the commencement of the next financial year, cause to be prepared a Medium-Term Expenditure Framework for the next three financial years, (2) The frame-work so laid shall be considered for approval with such modifications if any, as the National Assembly finds appropriate by a resolution of each House of the National Assembly. (3) The Medium-Term Expenditure Framework shall contain: (a) a Macro-economic Framework setting out the macro-economic projections, for the next three financial years, the underlying assumptions for those projections and an evaluation and analysis of the macroeconomic projections for the preceding three financial years; (b) a Fiscal Strategy Paper”.

Furthermore, section 18 states that:

“… the Medium-Term Expenditure Framework shall: (1) be the basis for the preparation of the estimates of revenue and expenditure required to be prepared and laid before the National Assembly under section 81 (1) of the Constitution. (2) The sectoral and compositional distribution of the estimates of expenditure …shall be consistent with the medium term developmental priorities set out in the Medium Term expenditure Framework.

Section 19 further states that:

The estimates of revenue and expenditure (in this Act referred to as the "Annual Budget') shall be accompanied by: (a) a copy of the underlying revenue and expenditure profile for the next two years; (b) a report setting out actual and budgeted revenue and expenditure and detailed analysis of the performance of' the budget for the 18 months up to June of the preceding financial year.

However, section 21(2) of the Act states that each Agency

“Shall submit to the Minister (of Finance/National Planning) not later than the end of August in each financial year: (a) an annual budget derived from the estimates submitted in pursuance of subsection (1) of this section… (3) The Minister shall cause the estimates submitted in pursuance of subsection (2) of this section to be attached as part of the draft Appropriation Bill to be submitted to the National Assembly”.  

From the above, the contradiction is clear. While the President will “cause” the MTEF to be prepared not later than 4 months before the commencement of the next financial year, the Act is not clear on when the MTEF should be submitted to the NASS for review/approval and by what date it has to be approved by the NASS. In other words, the President can submit the MTEF at any time before the commencement of the financial year and the NASS can approve the MTEF at any time. Furthermore if the MTEF is supposed to be the basis for the preparation of the Annual Budget as implied in sections 18 and 19 of the Act, then the MTEF should first be approved before the budget can be prepared. However, section 21(2) indicates that the Agencies are required to submit their budget proposals derived from estimates of the MTEF to the minister (of budget) by the end of August, i.e., four months before the commencement of the financial year which is the same time the President is required to “cause the MTEP to be prepared” before it is submitted to NASS. 

To ensure proper sequencing and adequate timing for the various activities in the budgeting process, I would like to propose the following sequence and timing for Budget of the financial year t

  • Jan- Feb of year t-1: Preparation/update of MTEF for next three years, i.e., year t, t+1 and t+2 by the Ministry of Budget & National Planning (FMBP). Submission of MTEF by the President to the NASS on or before Feb. 28.
  • March: Review/amendment of MTEF by NASS. Reconciliation of differences. Reconciled MTEF jointly approved by the NASS and President on or before March 31.
  • April – May: Issuance of Budget Call and Guidelines to all MDAs by April 5. Preparation and submission of agencies’ budget proposals by MDAs to FMBP (Budget Office) by May 31.
  • June-July: Defense of budget proposals by MDAs and consolidation of Budget into Draft President’s Budget by July 31.
  • August: Review/Approval of President’s Budget Proposal (Appropriation Bill) by the President and his Team of Economic Advisers and Federal Executive Council. Submission of Appropriation Bill to NASS by August 31.
  • Sept 1 – Nov 15: Review of Appropriation Bill by NASS, Defense by MDAs and Public Hearings. Submission of Revised/Amended Budget to President for his assent/signature
  • Nov 16- Dec 30: Review of Amended Budget, Reconciliation of differences and signing into law by President on or before December 30. 

The second proposed change in the budgeting process is for Nigeria to return to the concept of national development planning practiced in the 1960s through early 1980s. In other words, Four-year Rolling National Development Plans (NDP) should replace the MTEF which currently forms the basis of the Annual Budget.  Given the state of the Nigerian economy and the need long-range infrastructural development planning and poverty reduction, a NDP is a superior economic planning vehicle than the MTEF which focuses on financial projections with little emphasis on specific projects and programs. Once the NDP is formulated, the Annual Budget derived from the NDP becomes the instrument for the annual implementation plan of the NDP. Capital-intensive projects that require long gestation periods such the Lagos-Calabar rail project, new power plants, new refineries, interstate highways, airports and seaports upgrading that require assured funding over the medium to long-terms can be captured in the NDP as against the MTEF. Once these projects are contained in the NDP, they cannot be easily dropped or abandoned during the annual budgeting process. Thus national development planning will ensure that capital projects are completed over a long period of time. When a new government comes into power, its first NDP will reflect its development agenda over its 4-year term. 

The third needed change is to clarify the roles of the legislature and the executive in the budgeting process in both the Constitution and FAR of 2007 in order to avoid or minimize tensions and disagreements.  It is known fact that the power to control the “government purse” has always been a source of conflict between the executive and the legislature in many democracies. This tension can be minimized by ensuring that the “rules of the game” are clear and strictly adhered to. The simple rule is that “The Executive (president) proposes, while the congress/national assembly/parliament (legislature) disposes”. The legislature cannot propose and dispose at the same time, just as the executive cannot propose and dispose at the same time. This means that the role of the legislature is to scrutinize the President’s budget and make adjustments where necessary without adding new projects (i.e., not proposing) and then submit the amended budget to the President for his assent. If the President has objections to the changes made by the legislature, representatives of both executive and legislature will meet to reconcile the disagreements after which the President will sign the amended budget into law. During the budget review by the NASS, the legislators can remove any project or reduce the cost of any project that is questionable or which the executive cannot defend satisfactorily, but they must not insert any new project. They can also reduce the overall budget and the deficit but they cannot increase it. 

Furthermore, in order to minimize the tension between the executive and the legislature, constitutional limits should be imposed on the budget allocation to the NASS. I believe that allocating 1% of the total budget to cover the recurrent and capital expenses of the NASS is about right. This means that if the total budget is N5,000 billion, then the budget of the NASS cannot exceed N50 billion. To ensure transparency and accountability, the NASS Budget Office will prepare the budget proposals for the NASS and submit same to FMBP for inclusion in the President’s Budget. Like other MDAs, the NASS Budget Office will also have to defend the budget of the NASS. 

The fourth needed change in the budgeting process has to do with the insertion or smuggling of projects into the President’s Budget by members of the NASS during the review/amendment process. A situation where members of the legislature, especially the Chairmen of the Appropriation Committees and other leaders of the legislature can unilaterally replace projects in President’s Budget with their own projects (largely for their constituencies) and insert new projects is an abuse of legislative power for private gain (corruption). It is a recipe for anarchy and inefficiency, and results in the introduction of “pork barrel” projects (or simply called “porks” in the USA) into the budget. A pork barrel project is the appropriation of government spending for localized projects secured primarily to bring money to a representative’s district or constituency. Although it is the practice in some countries for legislators to insert projects in the budgets submitted by the executive to the legislature, many countries have either stopped this practice or introduced strict guidelines to regulate it. It is usually assumed that the projects in the Budget Proposal submitted by the executive to the legislature have been challenged and defended but one cannot say the same for projects inserted by legislators. 

 In most cases, projects inserted by the legislators are dubious, localized and fall outside the responsibility of the federal government.  For instance, most of the projects inserted by NASS members in the amended 2016 Budget are projects that ordinarily should be left for state and local governments.  Take the example of the "construction and rehabilitation of the works centre, N100m; construction of town hall, N100m; rehabilitation of Sharada - Kwanar Dogara road, N1.445bn; solar street lights, N300m; drainage, N20m; rehabilitation of Gwarzo Kiru, Kwanar Maiyaki road, N180m;.. and construction of pedestrian bridges, N200m" smuggled into the President’s Budget by some members of the NASS. These highlighted projects and the roads which are "non-federal" roads, are the responsibility of state and local governments. Smuggling of projects into the President’s Budget also raises equity issues among the states and the various constituencies because of the uneven distribution of the constituency projects smuggled into the Budget by leaders of the NASS. 

For instance, most of the projects inserted into the 2016 Budget are located in the North, particularly in constituencies of the Chairmen of the Appropriation Committees of the Senate and the House, both of whom are from the North. Either by acts of omission or commission, as they inserted these new projects they dropped the more important “federal” Lagos-Calabar rail project for which N60 billion was allocated in the revised budget submitted by the Minister of Transportation to the Appropriation Committee during the review session. The Minister of Agriculture also reported that 360 new projects were inserted in his ministry’s budget by the NASS, and many of the inserted projects are outside the scope or jurisdiction of the agencies under which they were inserted. 

Justifying the insertion of the new projects, the Chairman of the House Appropriation Committee Rep Abdulmumin Jibril, who allocated 22 new projects totaling N4.169 billion to his constituency alone, said:

“It is true that there are projects allocated to my constituency just like other members did. Just because I’m the chairman of the appropriation committee, my constituents should not get projects? Are my constituents not Nigerians? Every member has one project or the other in his constituency, so I don’t think I did anything wrong by having some projects in my constituency. I think people should be fair to me please.”

My goodness! If each of the 360 federal constituencies were to be allocated projects totaling N4.196 billion, then  a total amount of  N1.5 trillion or about 25% of the total budget will be required for “constituency projects” which are highly susceptible to corruption. This will obviously crowd out needed investment in “truck A” (inter-state) roads, railways, electricity, higher education, security, energy and other much-needed national projects that are outside the purview and ability of state and local governments.    

In view of the above, the fifth needed change in the budgeting process is to either abolish the concept of constituency projects in the federal budget OR establish strict guidelines for the inclusion of such projects in the budget. Since a strong case can be made for the inclusion of constituency projects in the federal budget – to ensure “federal presence” in each constituency and to pilot or ensure that special national program reach all constituencies – I will option for establishing strict guidelines for constituency projects, including following: a) The total allocation for constituency project must not exceed 4% of the total budget; b) The total amount should be allocated evenly among all the constituencies.  Since there are 360 federal constituencies, each constituency shall be allocated 1/360 (= 0.00278) of the 4% of the budget. For instance, if the total budget is N5,000 billion, the total allocation for constituency projects will 4% of N5,000 b = N200 billion and the allocation to each constituency will 0.00278xN200 billion = N0.556billion = N556 million; c) Each year, there should be a limited range of projects to choose from for the constituency projects. These projects will be determine by the FMBP based on the needs of the constituencies and developmental objectives of the federal government at the local level; d) The legislators representing the each constituency (Senator and Representative)  will work with the state government, local government and local CBOs to choose specific projects for the constituencies from the list of eligible projects. They will also determine the exact location of the project and prepare the project document detailing the need for the project, purpose, objectives, drawings, cost estimates, implementation timeline and strategy; e) The NASS Budget Office will collate and review all the constituency projects and submit to the FMBP for inclusion in the President’s Budget before presentation to the NASS. f) The contracts for the execution of the projects shall be awarded by the state government tender boards through a competitive process to only local (state) contractors who will in no way associated with the legislators; g) In the event that the cost of the project exceeds the amount allocation to constituency, the state government will be responsible to cover the difference; and h) The legislators and state government will monitor the execution on the projects and submit a completion report to the FMBP which will verify project completion and functionality. A negative report by the FMBP will prevent the constituency from receiving an allocation in a subsequent year until the project of the previous year is successfully completed and put into good use. 

The sixth needed change is to reclassify the FMBP as the Office of Budget and Planning (OBP) within the Presidency and establish a NASS Budget Office similar to the Congressional Budget Office in the United States. 

Finally, civil society groups, leaders of the private businesses and ordinary citizens should be given a voice at both the budget preparation and budget review/amendment stages. As in the case of the Philippines, each MDA should be tasked to partner with appropriate CSO, businesses and other citizens/stakeholders when preparing their agency budget proposals by calling for memoranda/suggestions from the public and holding at least one town hall. During the budget review/amendment stage, the Appropriation Committees should also have special sessions for CSO, business leaders and other citizens/stakeholders to comment and offer their suggestions on the President’s Budget. This way, the budget will reflect the voice and views of a wider cross-section of the Nigerian society. 

I believe that if the above suggestions are implemented, the federal budgeting process in Nigeria will witness significant improvement which will result in reducing waste and corruption and improving efficiency, effectiveness, transparency and accountability in public spending in the country.


Long Live Nigeria!

 

Dr. Emmanuel Ojameruaye

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Phoenix, USA. April 29, 2016

In the first part of this article, I examined some of the criticisms and weakness of the 2016 FGN Budget presented by President Buhari to the National Assembly on Dec. 22, 2016 which is currently being debated in the National Assembly prior to approval and passage into law as the 2016 Appropriation Act. In this second part, I will make some recommendations to inform the amendment of the Budget and to improve future budgets and the budgeting process. It is my hope that the National Assembly and the Presidency will consider these recommendations as part of Citizens’ input into the budgeting process – a useful element of a democratic dispensation.

  1. A government budget is the short-term (one-year) plan and financial instrument to implement the policies of the government. It sends signals to its citizens, the bureaucracy, the public sector, the private sector, private and foreign investors, the donor community, foreign governments and international organizations. These signals shape the behavior and attitudes of these stakeholders to the government.
  2. The Presidency and the National Assembly must see the budget as a very important document that requires careful and professional preparation. It is not just numbers or tables aimed at satisfying a constitutional requirement. In the past and in the current budget, the approach appears to have been rather lackadaisical as evidenced by the quality of budgets, poor implementation and performance monitoring.
  3. The 2016 Budget presented to the National Assembly falls very short of expectation and does not adequately capture the “change mantra” of the administration. Furthermore, it does not reflect a significant departure from the past. It has a lot of provisions that are not only dubious but smack of cronyism and cover for grand corruption. Therefore the National Assembly must amend the budget in a significant way by addressing the weaknesses, criticisms and concerns that have been raised.
  4.  One of the hallmarks of democracy is the checks and balances system which requires that the Executive will present a draft budget to the National Assembly which has the responsibility to review, amend and approve the final budget which is then signed into law by the President. This system enables the legislature to control the spending behavior of the Executive and to ensure that the approved budget reflects a wide variety of competing interests as opposed to the draft budget presented by the Executive which tends to reflect the objectives and policies of the Executive and the ruling party and which is also heavily influenced by civil servants who tend to maintain the status quo.
  5. Irrespective of political affiliations, members of the National Assembly must take an objective view of the budget during the debate and come up with sound and justified amendments.   The National Assembly should not be in a rush to approve the budget until significant amendments have been made. If necessary, they can approve a temporary (continuing resolution) budget for two to three months to give them enough time put the budget right. In spite of the weaknesses that have been identified by many analysts, the National Assembly should not reject the draft budget or send it back to the Executive to come up with a revised budget. Rather, it should do its job by amending the draft. In the process, it can summon the Director of the Budget Office and heads of the various MDAs with questionable allocations to appear before the Appropriation Committees to defend them.  It can also seek professional support from appropriate independent experts.
  6.  The Administration must get its first Budget and first Medium-term Expenditure Framework (MTEF) right; otherwise the country may “float” in misery in the next four years. To paraphrase Shakespeare, “there is a tide in the affairs of nations, which taken leads to fortune, Omitted leads to misery”. The first budget of the new administration provides the opportunity (“the tide”) to put the country on the path to fortune. A poor or bad budget will be a missed opportunity which can lead to increased misery.
  7.  The revenue estimates of the budget must be realistic and the budget should be balanced, That is, total revenue estimate must be equal to total expenditure estimate, and there should be no deficit. This will mark a remarkable departure from the past, a true change that ensures the government “cuts its coat according to its cloth”. The idea that deficit financing is not bad and may be necessary for growth is predicated on the assumption that the deficit financing (loans) will be used to fund investments that will lead to capital accumulation that will increase the productive capacity of the economy and lead to increased growth and revenues in that will be used in future to service and pay off the debts. Deficit financing is supported and propagated by financial institutions and lenders who want to earn returns (interest payments) from governments on a continuous basis. Deficit financing could be damaging, especially to future government and future generations. This is why some countries (e.g. Germany, Austria, Spain, Poland, and Switzerland) and some states in the United States have some form of balanced budget legislation.  
  8. The N2,222 billion deficit in the 2016 FGN Budget is outrageous and unconscionable because it is more that the projected capital expenditure of N1,845 billion. In other words, part of the loan to fund the deficit will be used to fund recurrent expenditure, i.e. consumption! Furthermore, a careful look at the items in capital expenditure category in the budget shows that over 50% of the amount may not increase the productive capacity of the economy or future revenue stream of the government. So how does the government intend to service the loan? Borrow more in future? It makes no economic sense.  In fact, the deficit is likely to more than the N2.2 trillion projected because it is predicated on an assumed oil price of $38 per barrel which is too optimistic given the fact the oil prices tumbled to below $30 per barrel within three weeks after the budget was announced. The deficit will add another N2.2 trillion (US$11.3 billion) to the country’s N12.6 trillion ($65.4billion) public debt stock as of December 31, 2015 which has already reached an “unsustainable” level. This will be the highest annual addition to the public debt stock in recent years and it will dwarf the record of the last administration during which period the national debt stock increased from $35 billion in 2010 to $63.8 billion as of June 2015 in spite of high oil prices during the period – the average price of Nigeria’s crude oil was about $92 per barrel between 2010 and June 2015! Contrast this to the Obasanjo’s administration during which time Nigeria’s total public debt stock decreased from $39.1 billion in 2000 to $36.2 billion in 2007 (external debt component decreased from $30.3 billion to $3.4 billion, while domestic debt component increased from $8.7 billion to $32.8 billion) despite the fact that the average price of crude oil was about $40 per barrel during the period. The fact that the assumed price of oil is $38 per barrel in the 2016 budget is no reason to add $11 billion to the public debt stock in one year when oil prices are likely to remain depressed in the medium term.
  9.  By carefully going through the budget item by item and applying fiscal restraint, it is possible to reduce the total expenditure to the level of projected revenue, and thus ensure a balanced budget. The process should begin by looking at the revenue projections and coming up with realistic revenue estimates. Thereafter, the debt service obligations should be examined and opportunities for rescheduling payment and negotiating for debt forgiveness and reduction should be explored to ensure that no more than 30% of the revenue is devoted to debt service. Thereafter, the recurrent expenditure items should be reviewed and reduced so that total recurrent (non-debt) expenditure is not more 50% of the total revenue. Finally, the capital expenditure items should be examined and reduced through a ranking process so total capital expenditure is not less than 20% of the total revenue.
  10.  With regards to revenue projection, oil revenue estimate should be based on $30 per barrel, oil production should remain at 2.2 mbpd and the exchange rate should be “increased” to N225 to the US dollar (see recommendation 12 below). Under these assumptions, and if the government can block some of the gushing leakages of oil revenue by NNPC and oil companies, the FGN share of oil revenue would amount to about N800 billion (down from the N820 billion in the budget). With regards to non-oil revenue, as I argued in part 1 of this article, the estimate of N1,454 billion for non-oil revenue is also on the high side given the fact that of the N1,214 billion projected in the 2015 Budget only N606 billion (less than 50%) was realized as of the end of September 2015 (i.e. 75% of the time). Therefore, I will recommend N1,200 billion for non-oil revenue on the assumption that government will plug loopholes and leakages in the collection of corporate taxes, VAT, excise taxes and duties. I also indicated that the estimate of N1,505 billion for FGN Independent Revenue is also on the high side because of the N489 billion projected for 2015, only N401 billion as realized as at the end of September 2015.  Therefore, I propose an estimate of N1,000 billion as FGN independent revenue on the assumption that the government will intensify the collection of “independent” revenue and plug leakages.  Therefore the total projected revenue of the FG in the amended budget should be about N3,000 billion.
  11. With regards to the broad expenditure categories, the debt service should be reduced from the current level of N1,475 billion to N1,000 billion through negotiations and debt payment rescheduling. “Statutory” allocations should be reduced from N351 billion to N200 billion with the National Assembly taking the lead by reducing its own allocation from N115 billion to N60 billion, then INEC from N45 billion to N30 billion, NJC from N70 billion to N40billion, NDDC from N41 billion to N29 billion, UBE from N71 billion to N40 billion, PCC from N2 billion to N0.6 billion and NHRC from N1.2 billion N0.4 billion.  Tough times call for sacrifices!   Recurrent expenditure (non-debt) should be reduced from N2,647 billion to N1,200 billion by identifying, reducing or eliminating all inflated and unnecessary allocations as well as closing down or consolidating many of the unproductive agencies and institutions that are spread all over the country. For instance, the Federal Ministry of Science and Technology has about 95 institutions and centres, including the bioresource centers and technology business incubator centres spread all over the 36 states of the country, probably for the sake of “federal character”. The same is true of many other ministries. Capital expenditure should be reduced from N1,845 billion to N600 billion, and the government should compile a supplementary list of “would-like-to-have” capital projects in ranked order which will be funded by any “surplus” revenue during the course of the year (see recommendation 15 below). Having browsed through all the 1810 pages of the Budget details, I strongly believe that the above reductions can be made without significant impact on government operations or mass retrenchment of civil servants.
  12.  Although the President has expressed his opposition to the devaluation of the naira exchange rate, given the strength of the US dollar and the fact that most other currencies (the British pound, the Euro, the Canadian dollar, etc) have depreciated significantly against the dollar over the past six months, I think the President and CBN governor should face economic reality and allow the naira to depreciate to about N225 to the dollar or a more “realistic” level, and come up with an exchange rate policy that will bring down the parallel market rate close to that level. This will reduce “arbitrage”, round-tripping and other forms of corrupt practices in the foreign exchange market but the inflationary impact will be minimal since domestic market prices of imported goods are already adjusting to the parallel market rate. Besides, it will “increase” the naira amount of oil revenue and some other export-related revenues. I will offer some recommendations for improving the foreign exchange market in my subsequent article.
  13.  During the course of the year, the government can increase its “take” of oil revenue per barrel of crude oil produced in the country through a comprehensive review of existing contractual arrangements in the oil industry (JVC, PSC. AF, service contracts, independents/sole risk, marginal fields) as well as restructuring of NNPC operations including “liftings” and “utilization” of crude oil and plugging of all loopholes/leakages within NNPC and those being exploited by oil companies. Nigeria’s government “take” per barrel in oil revenue is probably far less than that of many other OPEC and other oil-producing countries due mainly to faulty contractual arrangements/fiscal regimes, gross inefficiencies and massive corruption in the oil industry.
  14.  Government should also consider reducing or eliminating the 4% “collection costs” retained by Federal Inland Revenue Service (FIRS) and the 7% collection costs retained by Nigeria Customs Service (NCS) because they were probably fixed arbitrarily and have become sources of grand corruption and inefficiency within both agencies. Nobody knows what these two government agencies do with the money they retain, and they are neither transparent nor accountable in their operations. They should be funded as “statutory agencies” or directly from the Federation Account and be made to pay all monies collected to the federation account. If government insists on allowing these agencies to retain some collection costs, then collection targets must be established and graduated “rewards and penalty” system must be established to guide their operations.
  15.  All “stolen funds” recovered under the ongoing anti-corruption crusade should first be paid into the Federation Account (FA) and should not be shared immediately shared but transferred to a “Surplus Revenue Account (SRA)” into which should also be paid any “surplus” or excess revenue over the projected amount (as per the revised MTEF) of oil and non-oil revenue accruing to the FA. The SRA should  be used for stabilization purposes only and if the amount in the account exceeds a certain threshold, say N1 trillion, the “surplus” should be shared among the three tiers of government during the monthly FAAC meetings in accordance with the vertical and horizontal allocation formulas and federal government (as well  as the state and local governments) can use their share of such funds to finance their ranked “would-like-to-have” capital projects as described in recommendation 11 above. If and when the actual revenue in a given month is less than the projected revenue, the shortfall can be funded from the SRA.
  16. The proposed SRA should replace the Excess Crude Account (ECA). Furthermore, under no condition should funds be moved from the SRA to the Nigerian Sovereign Wealth Fund (NSWF). Established in 2011 by the Jonathan administration with $1 billion drawn from the ECA, the NSWF should be restructured by abolishing its Stabilization Fund component which will become unnecessary in view of the SRA as described in recommendation 15 above. The Future Generations Fund component should be replaced by a Financial Investment Fund (70%) while Capital Infrastructure Fund (30%) should remain. The Financial Investment Fund should invest in short, medium and long-term domestic and international financial assets that will yield a steady income stream. Part of the income stream (at most 20%) should be used to fund the operations of the NSWF, while 30% should be re-invested and 50% paid into the federation account as dividends. The Capital Infrastructure Fund should invest in long-term income-yielding infrastructure such as expressways and bridges with toll gates, airport facilities, electricity and public water supply systems in way that will not only ensure both capital repayment and interest income. Overall, the NSFW should be given a target of achieving at least 3% return on investment (i.e. about $30 million per annum) net of operating expenses.
  17.  As I indicated in part 1 of the article, the Budget needs to have a robust Narrative explaining the policy objectives, key economic messages, strategies, programs, implementation schedules, performance indicators, targets and how they will be achieved as well as how they are reflected in the budgetary allocations. Most of stated policy objectives of the 2016 FGN Budget as contained in the President’s Speech and the MTEF are not SMART and it is not clear how they can be achieved through the budgetary allocations. In drafting the Budget Narrative, the Budget Office could borrow a leaf from the 88-page Narrative of the 2016 United States Budget which essentially describes the “political economy” of the Obama Administration for 2016  reflected in the budget, It includes “middle class economics”, helping middle class families to get along, helping Americans to upgrade their skills, high quality and affordable education, improving healthcare through the ACA and additional reforms, keeping Americans safe at home and abroad, building 21st century infrastructure, investing in jobs and economic growth, Wall Street reform, tax reform that promotes growth and opportunity, fixing American’s broken immigration system, achieving fiscal sustainability and promoting sustainable growth, and creating a government for the future with focus on effectiveness, efficiency, people and culture, improving results, cuts and consolidation.
  18.  The task of reviewing and amending the Budget by National Assembly requires professional support. This cannot be left to the members of the National Assembly or the Appropriation Committees alone.   Therefore the National Assembly should establish an independent “National Assembly Budget Office” (NABO) similar to the US Congressional Budget Office (www.cbo.gov). The NABO should be made up of small group of experts (maximum five) and a few support staff. Like the US Congressional Budget Office (CBO) established in 1975, the NABO should be strictly nonpartisan and should be responsible for conducting objective and independent/impartial analyses of budgetary and economic issues and produce reports and estimates to support the National Assembly budget review and amendment process.
  19.  The FG should continue with its plan to implement the zero-based budgeting (ZBB) in subsequent budgets. To do this effectively, all head/directors the MDA must be trained on ZBB using a training of trainers (TOT) approach. This training should start as soon as April, 2016 and should be concluded by the end of August. Then the preparation of the 2017 Budget should commence by August and completed by the end of October. The President can then present the Budget and MTEF to the National Assembly by mid November, and the National Assembly will have about five weeks to debate, amend and approve the Budget by December 24, so that the Appropriation Bill can be signed by the President by December 30.
  20.   Finally, with due respect and apology to the current Director of the Budget Office and his team – I do not know them or their backgrounds which ought to be posted on the Office’s website as in the case of some other countries -  I think the President should appoint and “outsider” (a non-civil servant) to lead the Budget team and empower him to always challenge and amend budget proposals from various MDAs and conduct on-the-spot sporadic and quarterly monitoring of budget implementation by all the MDAs.

 

Dr. Emmanuel Ojameruaye

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February 9, 2016

A Review of the 2016 FGN Budget and Recommendations for Improvement: Part 1

By Dr. Emmanuel Ojameruaye

The objectives of this article are to analyze the 2016 Budget (Appropriation Bill) of the Federal Government of Nigeria (FGN) and` offer recommendations for improvement. In this first part of the article, I will examine some of the weaknesses of the Budget, while in the second part I will make recommendations for amending the Budget before it is approved and signed into law as the 2016 Appropriation Act.

Introduction:

The 2016 Budget got off to a very rough start. The journey began with the 2016-2018 Medium Term Expenditure Framework (MTEF) which was presented to the National Assembly on December 8, 2015 by the Presidency. Although the MTEF received very little attention, it formed the basis of the 2016 Budget which has come under severe criticisms. Thus, any significant amendment to the Budget will require changes to the MTEF. On December 22, 2015, the President presented the 2016 Budget (Appropriation Bill) to the National Assembly (NA). Soon after that the Budget Office posted the 2016 Appropriation Bill on its website[i] and it became a public document for all who have access to the internet. Soon after the Budget presentation, the National Assembly went on Christmas/New Year recess and did not bother to post the Bill on its website or make hardcopies for its members, not even those serving on the Appropriation Committees of the House and Senate. Even as of the time of writing this paper (Jan. 25, 2015) the National Assembly has yet to post the Bill on its website. The latest Bill on its website is that of 2014! Even the 2015 Appropriation Bill and Act are “missing” of the NA website. It appears that members of the National Assembly “went to sleep” during the holiday, while interested members of the public visited the Budget Office website to download and analyze the Budget.  

Some analysts who read the Budget were disappointed and wrote scathing reviews/articles on the Budget in the newspapers.  For instance, in its editorial of Sunday, January 3, 2016 on the Budget titled “Curious Figures”, The Nation  Newspaper noted that “some of the extravagances in the presidency’s budget are stunningly indefensible ...Curiously enough, President Buhari’s first budget estimates after rising to power on a promise of change have familiar ingredients associated with the old discredited order. Details of the 2016 budget proposal reflect astonishing similarities with the immediate past, prompting questions about the meaning of change…To start with, the interest in acquiring a fleet of new high-end luxury cars for the Presidency bespeaks flawed prioritization. A vote of N3.6b for BMW saloon cars for principal officers is certainly on the high side, considering that the cars are not essential for good governance. Furthermore, the number of the cars is unspecified, leaving room for possible corruption-related manipulation…The Buhari government cannot afford such a stain at this time when it is trying to get the public to appreciate its claim that it met a vastly depleted treasury… It is unclear how the Presidency arrived at these figures, but they are unsettling reminders of the Jonathan presidential era when public expenditures seemed to be padded, and were actually inflated to enrich private pockets. … Here and there in the budget are suspect figures that signal not only the possibility of inflation, but also the possibility of wastefulness… As far as government is considered a continuum, it is expected that an administration which is out to correct mismanagement of public funds would not conduct itself in a way that suggests it may not be substantially different after all”.  

Amid a plethora of similar criticisms, it was reported in the media in the first week of January that the Presidency was planning to withdraw the Budget and correct the “curious figures”. However, rather than formally writing to the National Assembly to withdraw the Budget, officials of the Presidency surreptitiously withdrew the copies of the Budget from the National Assembly in order to replace them with an amended or corrected version. However, when National Assembly returned from its recess in the second week of January, some member could not find copies of the Budget and they then declared that the Budget was “missing”. Amid the furor over the “missing” budget, on Jan. 14, 2016 the Senate resolved to work on the original copy of the 2016 Budget (Appropriation Bill) which President Buhari presented to the National Assembly on December 22, 2015. However, on January 17, 2016, the President formally wrote to the National Assembly to withdraw the original Budget and replaced it with a “revised” budget. Although details of the revisions have not been made public - it is the “old” version that is still on the Budget Office website - there are indications that the changes were “cosmetic” and did not affect the underlying assumptions as well as the total revenue and total expenditure. According to Senator E. Abaribe, “We were told that in the revised budget there was an adjustment due to error, we agree but what has happened is that the money up to N7 billion were moved from buying vehicles to being spread in offices. It also increases the spending that is due to renovations within the Villa; they are going to renovate the Villa with N3.9bn”[ii]. Thus, this review is based on the old version of the Budget.

Criticisms and Weaknesses:  To be sure, there is no perfect Budget. In a democracy, the Budget will always be criticized, especially by the opposition, sometimes dishonestly. However, some of the criticisms are constructive and point to the weaknesses of the Budget. Such criticisms should therefore be given due attention in seeking to amend the Budget before passage into law (an Act).  In what follows, I will focus only on some of the “constructive” criticisms.

The first criticism is that the Budget does not reflect the “Change” mantra or slogan of the Buhari’s administration.  Although it is tagged “The Budget of Change” many analysts contend that there is very little manifestation of “change” in the Budget. They say that it is almost déjà vu all over, i.e. business as usual.  For instance, there is inadequate attention given to the anticorruption campaign in the President’s Speech or the MTEF and there are no estimates of stolen funds that will be recovered and paid into the federation account to or retained by the federal government and how they will be utilized. Perhaps one of the few items the administration has claimed to represent  “change” in the Budget is the N300 billion for “FGN Special Intervention Programme” which will be used for the proposed Conditional Cash Transfer, Home Grown School Feeding, post NYSC Entrepreneurial Development and Microcredit programs. However these initiatives do not amount to a significant change. In fact, the amount allocated for these programmes is almost equal to the previous annual allocations for SURE-P (about N270 billion) which has been removed from the 2016 Budget. In other words, it is like old wine in a new bottle. I think that the reason why the Budget has not captured the change mantra is because the administration has yet to come out with a well-articulated Change Plan with SMART[iii] targets as I recommended in my article of June 4, 2015.[iv]

The second criticism, which is actually an extension of the first, is that the Budget is very similar to that of the previous administration (of President Jonathan). A former Governor of the CBN, Prof. C. Soludo went as far as implying that the 2015 Budget is a “carbon copy” of previous budget.  Speaking at the 13th Daily Trust Dialogue in Abuja on January 14, 2016, Prof. Soludo said that “The present (2016) budget is more of the same to the previous ones… on the scale of GDP, it is almost the same with the previous government…To craft the new agenda, we must defeat the old agenda. We cannot make progress in the country with the tools and agenda of the old”. While I agree that there are some striking similarities between the 2016 Budget and those of the recent past, it is an overstatement to claim or even infer that the 2016 Budget is carbon copy of previous budgets, even on “the scale of GDP”, whatever that means!  For instance, there have been some “structural changes” such as the transfer of the Budget Office from the Ministry of Finance to the National Planning Commission to form the new Ministry of Budget and National Planning and the merging of the three separate ministries of Works, Power and Housing into one Ministry of Works, Power and Housing. More importantly, if you compare the assumptions and allocations by ministries, departments and agencies (MDA) in the 2016 Budget to those of the 2014 and 2015 (see tables 1 and 2 for sample comparison) you will find that the differences are significant at a reasonable probability level (say p˂0.10) even on per capita, per GDP or “constant prices” basis. However the absolute differences do not amount to a significant “change” or “departure” from the past.

The third criticism is that Budget is not “zero-based” as indicated in the MTEF and President’s Speech. In the MTEF it is noted that “to enhance efficiency in resource allocation while optimizing the impact of public expenditure, government has adopted the implementation of a zero-based budgeting (ZBB) system beginning with the 2016 Budget. This is with a view to ensuring cost justification, and that only projects/programmes which are development policy complaint and are of utmost benefit to the Nigerian economy at the lowest cost are accepted into the FGN Budget”. The President reiterated this in his Speech when he stated that “We are determined to ensure that our resources are managed prudently and utilized solely for the public good. To set the proper tone, one of our early decisions was the adoption of a zero based budgeting approach, which ensures that resources are aligned with Government’s priorities and allocated efficiently. This budgeting method, a clear departure from previous budgeting activities, will optimize the impact of public expenditure”.  But was this the case? As the saying goes, the proof (or taste) of the pudding is in the eating, so in order to confirm if indeed the ZBB approach was adopted in the preparation of the 2016 Budget, we have to examine the Budget vis-a-vis the definition of ZBB.

According to Investopedia[v], ZBB is “a method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a ‘zero base’ and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one”. Unlike the traditional (incremental) approach to budgeting in which managers or department heads justify only differences or variances between the proposed allocation and the allocation in the previous period (“the baseline”), under ZBB each line item of the budget, rather than only changes, must be justified and approved. Under ZBB, all budget requests must be re-evaluated thoroughly starting from the zero base which means that the budget must be prepared fresh each year without reference to previous budgets irrespective of whether the total budget or specific line items are increasing or decreasing. In general, ZBB results in lowering costs by avoiding blanket increases or decreases to a prior period's budget. The advantages of ZBB include the following:

  • It forces department heads/managers to identify their mission and their relationship to overall goals of the parent organization. It also forces them to find the most cost effective ways to conduct and improve their operations, thereby leading to reduced costs efficient allocation of resources in the organization
  • It helps to detect inflated budgets and to identify/eliminate wasteful, useless, unnecessary and obsolete operations, activities, offices, etc
  • It helps to identify opportunities for outsourcing.

On the other hand, the disadvantages include the following:

  • It requires specific training, due to increased complexity vis- a-vis traditional incremental budgeting.
  • It is time-consuming and requires large amount of information to back up the budgeting process than incremental budgeting.
  • It could be problematic to justify every line item in departments with intangible outputs.

It is important to stress that the practice of ZBB in the public sector is different from the private sector. For instance, in the United States, ZBB was adopted by the federal government in the 1970s under the Presidency of Jimmy Carter with focus was on optimizing accomplishments available at alternative budgetary levels. Under the USG ZBB budgeting system, budget requests for each decision unit were prepared by their managers, who would (a) identify alternative approaches to achieving the unit’s objectives, (b) identify several alternative funding levels, including a “minimum” level normally below current funding, (b) prepare “decision packages” according to a prescribed format for each unit, including budget and performance information, and (b) rank the decision packages against each other.  Elements ZBB budgeting process remained in effect through the Reagan, Bush and early Clinton administrations in the United States before it was eliminated in 1994.

In a subsequent article, I will discuss ZBB in the public sector in greater detail as well as modalities for the application of ZBB in the public sector in Nigeria. However, based on a careful analysis of the 2016 Budget in light of the above definition and description of ZBB, it is difficult to accept the claim that the ZBB approach was used in the preparation of the 2016 FGN Budget. Maybe it was used in a few MDAs or to prepare a few components of the budget but it very doubtful if it was adopted wholesale in view of the similarities of many of the provisions of the budget to previous budget provisions and the many inflated and wasteful allocations which are not complaint with the policy objectives of the Budget and which are also are not of “utmost benefit to the Nigeria economy at the lowest price”.  The heads/directors/managers of the various MDAs are in a better position to confirm if they indeed adopted the ZBB approach but I will not be surprised if many of them have not been trained in ZBB.  It is also doubtful if most of the amounts in the Budget were challenged and adequately justified as required under ZBB. It is likely that the President was deceived into believing that the budget is zero-based.  If the President himself had challenged the budget of the State House Headquarters, he would not have approved most of the items and allocations which have been very embarrassing and have smeared the “change” and “anti-corruption” mantra of his administration.

The fourth criticism is that there are very many dubious, unnecessary and inflated allocations which will provide a fertile ground and cover for corruption and cronyism, as in the previous administration. Some analysts have highlighted some of these allocations[vi]. Table 3 shows examples of such “curious” allocations in the Presidency/State House Headquarters budget.  There are similar dubious allocations in virtually all the MDAs. For instance, Budget Office has the following allocations among other things:

  • N1 billion for National Assembly Clinics (apart from the N115 billion allocated to the National Assembly)
  • N60 billion for Special intervention/Constituency projects
  • N1.58 billion for Sustainable Development Goals M&E (apart from the N124million allocated to the Office of Senior Special Assistant to the President on MDGs)
  • N4 billion for National Jobs Creation Scheme (apart from the N300 billion FGN Special Intervention Program which contains a jobs creation component, and N5.9 billion allocated to the National Directorate of Employment (NDE) which includes N864 million for Research & Development!)
  • N170 million for purchase of new vehicles, N7.5 million for construction of underground fuel dump, N7.4 million for refreshment 7 meals, N45 million for human capacity development, N45 million for R&D, N12 million for computer software and N100 million for budget preparation!

It is mind-boggling that the Budget Office whose raison d’etre is to prepare budget will still have to spend another N100 million to prepare its own budget. The Bureau of Public Procurement (BPP) has the following outrageous allocations:

  • N559.2m for Development /deployment of public procurement software and defence procurement/forecast for the Bureau
  • N102 million for the establishment of 2 Public Procurement Research Centers at UNILAG and ABU
  • N116.4 million for direct purchase of vehicles and N45 million for direct purchase of furniture.

The Bureau of Public Enterprises has N293.6m for post privatization monitoring amongst other things. Even the Fiscal Responsibility Commission (FRC), a very small agency, has the following outrageous allocations, amongst others:

  • N44.2 million for purchase of vehicles
  • N4.3 million for motor vehicle fuel cost and N5.5 million for maintenance of vehicles
  • N8.8 million for cleaning and fumigation services
  • N5.5 million for printing of documents
  • N3.3 million for telephone charges and N2.2 million for internet charges
  • N5.2 million for financial consulting and N4.2 million for IT consulting
  • N10.28m for honorarium and sitting allowances and N13.8 million for “welfare packages”

The list of outrageous allocations is endless. Worst still, virtually all the MDAs have curious allocations for such items as budget preparation, software acquisition, financial consulting, and IT consulting. 

The fifth criticism is that the revenue projection is unrealistic (over optimistic) while the expenditure is too high, resulting in excessive deficit which will escalate Nigeria’s public debt. On the revenue side, the assumed crude oil price of $38 per barrel used to make the projection of the FGN share of oil revenue (N718 billion in the MTEF but N820 billion in the President’s Speech) is on the high side given the crude oil market dynamics and forecasts for 2016 and the fact that crude oil prices have fallen below $30 per barrel already.  I think a more realistic assumption should be $30 per barrel. Furthermore, the assumed exchange rate of N197 to the $ is also unrealistic given developments in parallel market. With regards to non-oil revenue (FG share), I  believe that the estimate of N1,454.69 billion is also on the high side given the fact that of the N1,214.69 billion projected in the 2015 Budget only N606.12 billion (less than 50%) was realized as at the end of September 20165 (i.e. 75% of the time) as indicated in the MTEF. However, it may be possible to realize the amount provided the government will be able to plug loopholes and leakages in the collection of corporate taxes, VAT, excise taxes and duties. Furthermore, the estimate of N1,505 billion for FGN Independent Revenue (FNIR) also appears to be on the high side because of the N489 billion projected for 2015, only N401 billion as realized as at the end of September 2015.  There is no breakdown or narrative for the N1,505 billion to identify and analyze the sources, but a more realistic target be in the order of N900 billion to N1,000 billion if the government is able to intensify the collection of “independent” revenue.  Perhaps, the amount includes what the government expects to realize from “stolen funds” under the anti-corruption crusade. If so, such funds should not be classified under “independent revenue” but should be paid into the “Non-Oil Revenue” component of the Federation Account.

On the expenditure side, there appears to a ground swell of opinion that the total projected expenditure of N6,078 billion is troublesome. This includes N1,336.58 billion for Debt Service up from N953.62 billion in the 2015 Budget,  N2,348.62 billion in Recurrent Expenditure (Non-Debt) slightly down from N2,593.21 in the 2015 Budget, and N1,602.38 billion for Capital Expenditure which is more than double the N722.2 billion in the 2015 Budget.  As I have indicated earlier, there is scope for significant reduction in all the categories of expenditure. Finally, the deficit of N2,221 billion as against N1,041 billion  in the 2015 Budget and N1,043 as of the end of Sept 2015) is uncautionable and unsustainable given the fact that it is more than the capital expenditure , most of which are not quite productive in the first place! Although the deficit represents only 2.16% of the projected GDP – which is less than in many countries, see table 4 in part 2 of the article for the US – it is nonetheless the highest in recent Nigerian history and it is unnecessary. It will only compound the economic difficulties of the administration in the next three years as the public debt service increases.  The deficit must be eliminated by reducing the total spending.     

Finally, in my view, the sixth weakness of the Budget is that there appears to be no strong “economic message or theory” behind it. In other words, the theoretical foundation is weak as reflected in the skimpy budget narrative. What that passes as a narrative for the Budget is pages 3 to 9 (7 pages) of the President’s Speech and pages 6 to 18 (13 pages) of the MTEF.  Other than these, the 1,810 pages of the Budget tables have no other narrative or explanatory notes that link the allocations to specific policies. Contrast this with the 150-page 2016 United States Budget which consists of only 52 pages of summary tables and 88 pages of narratives including the Budget Message of the President and descriptions/narratives of the various policies in the budget[vii].  In fact, most of stated policy objectives of the 2016 FGN Budget as contained in the President’s Speech and the MTEF are not SMART and it is not clear how they can be achieved through the budgetary allocations. The policy objectives include “efficiency in resource allocation, optimizing the impact of public expenditure, job creation and social inclusion, infrastructural development, improving governance, fiscal stability, improving non-oil sector competitiveness, attaining lower  levels of inflation and competitive exchange rate, fiscal transparency, improved tax and custom administration, supporting private sector leadership in employment generation, and  management of external and domestic debt to increase confidence building through negotiation and consultation in aggregate debt levels and servicing costs”.  

In conclusion, one must admit that the 2016 Budget leaves much to be desired. One wonders if it was reviewed by the President, the Minister of Budget & Planning and Minister of Finance, the CBN Governor and the Chief Economic Adviser to the President.  Given that this is the first Budget to be prepared by the Buhari administration, it should have been prepared with greater professionalism and scrutiny.  In part 2 of this article, I will make some recommendations to the National Assembly and the Presidency not only on ways to address the above criticisms and weaknesses before the enactment of the 2016 Appropriation Bill but also to improve the budgetary process in general.

Dr. Emmanuel Ojameruaye

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January 31, 2016. 

 

Appendix 

Table 1: Some Key Assumptions and Estimates of the FGN Budgets for 2014, 2015 and 2016

 

Units

2014

2015*

2016

Benchmark Crude Oil Price

US$ per barrel

77.5

53

38

Crude Oil Production

Million barrels a day

2.388

2.2782

2.2

Exchange Rate 

N : $

160

190

197

GDP Growth Rate

 %

6.75

3.3

3.76

JV Cash Call

N'Billion

859

1,020

1,094

Federal Govt Aggregrate Revenue

N'Billion

3,731

3,452

3,856

     Oil Revenue

N'Billion

2,115

1,638

820

     Non-Oil Revenue

N'Billion

1,021

1,215

1,450

     FG Independent Revenue

 N’Billion

452

489

1,505

Federal Govt Aggregate Expenditure

N'Billion

4,643

4,493

6,078

     Recurrent(non-Debt) Expenditure

N'Billion

2,431

2,593

2,349

    Captal Expenditure

N'Billion

1,100

557

1,760

    Debt Service

N'Billion

712

951

909

Deficit

N'Billion

912

1,041

2,222

Deficit as % of GDP

 %

1.90

1.09

2.16

FG Revenue as % of GDP

 %

0.08

0.04

0.04

FG Expenditure as % of GDP

 %

0.10

0.05

0.06

GDP

N'Billion

48,066

95,505

102,868

* Approved Budget

    

Source: Budget Office and CBN Websites

    

  

Table 2: Comparison of some Budget Allocations to MDAs

   

N'million

 

 

MDAs

2014

2015

2016

1

Presidency

33,407

20,086

39,125

2

National Assembly

150,000

120,000

115,000

3

Office of the SGF

63,187

48,399

62,359

4

National Security Adviser

110,725

62,227

90,350

5

Federal Ministry of Defence

340,332

338,797

429,098

6

Interior*

450,660

461,608

498,453

7

Education, incl UBEC

422,988

392,364

483,666

8

Health

262,742

237,076

257,382

9

Transport****

37,501

9,260

215,797

10

Works, Power & Housing

209,609

35,298

467,645

11

Petroleum Resources

61,928

58,274

62,115

12

Niger Delta

49,193

2,134

67,383

13

Finance**

728,251

966,513

1,486,512

14

Budget &  National Planning***

8,187

6,720

1,156,332

14

Sub-Total

2,928,710

2,758,756

5,431,217

16

Others

1,714,250

1,734,608

646,463

19

AGGREGATE BUDGET

4,642,960

4,493,364

6,077,680

 

* Includes Police Affairs and Police Formations and Commands

 
 

** includes public debt charges

   
 

*** The Budget Office was moved from the FMF to the National Planning Commission in Oct 2015 to form the new Federal Ministry of Budget & National Planning. The 2016 Allocation includes N1,486,512 million for "service wide charge" which includes N300,000 million for FGN Special Intervention Programs

 

**** includes N90,043million for construction/provision of railways, N52,750 million for construction/provision of waterways, and N17,616 million for construction/provision  airports

 Table 3: Examples Some"Curious" Allocations

                                                                                                   N’Million

 

PRESIDENCY - State House HQRTS

2014 A

2015 A

2016 B

1

Electricity Charges

68

37

50

2

Telephone Charges

42

22

31

3

Water Rates

28

15

21

4

Office Stationeries/computer consumables

188

101

109

5

Drugs & Medical Supplies

208

112

203

6

Food Stuff and Catering Supplies

201

108

103

7

Maintenance of motor vehicle/transport equipment

139

75

20

8

Purchase of Motor Vehicles

0

0

509

9

Purchase of Buses & Trucks

132

0

278

10

Purchase of Office Furniture and Fittings

24

0

67

11

Purchase of Computers

80

14

28

12

Purchase of Canteen/Kitchen Equipment

131

237

89

13

Purchase of Recreational Facilities

24

14

39

14

Rehabilitation/Repairs - Electricity

150

0

1,833

15

Rehabilitation/Repairs  of Office Buildings*

1,650

1,127

3,914

16

Wildlife Conservation

37

25

116

17

Computer Software Acquisition

101

19

269

18

Upgrade of internet infrastructure

0

0

111

19

Purchase of active devises for SH network

0

0

100

20

Sub-Total

3,203

1,906

7,890

 

* Annual routine maintenance of villa facilities by JBN

A= Approve, B=Budget/Proposed

  

Endnotes/References


In the first part of this paper, I described the new concept of modulation of the prices of petroleum products based on the statements of the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu. As I was about to publish the paper in the morning of December 30, the news broke out that the Petroleum Products Pricing and Regulatory Agency (PPPRA) had “modulated” the price of PMS at N86 per litre in NNPC filling stations and N86.5 per litre in non-NNPC filling stations for January to March 2016. I was almost thrown off balance by the news because I was expecting monthly or weekly modulation or adjustment of the pump price of all the major petroleum products (petrol, diesel and kerosene). Then on December 31, it was made official and the new pricing templates for PMS (premium motor spirit or gasoline or petrol), AGO (automotive gas oil or diesel) and LPFO (low pour fuel oil) were posted on PPPRA website. Two new pricing templates were posted for PMS – one for NNPC (NNPC retail outlets) and the other for “OMC” which I assume stands for “other marketing companies” (non-NNPC retail outlets). The template for HHK (household kerosene) was blank with the words “update coming soon”. In this second part of the paper, I will analyze the new pricing template for PMS and suggest ways the new pricing policy (“price modulation”) can be managed to avoid or minimize the pitfalls of the past subsidy regime. 

Before commenting on the new pricing template, I would like to congratulate the minister and the PPPRA for mustering up the courage to announce the new modulated price of PMS which eliminated subsidies on PMS, at least for now. The timing of the announcement was also very good, not only because it is the beginning of a new (and financial) year but more importantly because it is was done when the prices of imported petroleum products are at their lowest level in recent times. So long as the price of crude oil and import prices of petroleum products remain low (at less than about N65 per litre) and the naira exchange rate remains stable at about N200 to 1US$, the modulated price of PMS can remain at N86.5 per litre and there will be no subsidy!

An examination of the published templates showed that: a) The modulation of prices applies to PMS only, at least for now; b) PPPRA is yet to decide whether to modulate the price of kerosene or not; and c) The price of AGO (diesel) remains deregulated (not subject to modulation) because the template shows “maximum indicative benchmark open market price” and there is no retail price unlike that for PMS. In other words, retailers are free to sell diesel at any price they choose.

In order to identify the changes made in the PPPRA pricing template for PMS, I have shown in table 1 in the appendix the components of the pricing templates for PMS posted on December 24 and 31 respectively. The following are some of my observations, questions and conclusions arising from an analysis of the table:

  1.         I.            The “elimination” of subsidy in the December 31 template was due largely to the reduction in the “other landing costs” items which was achieved administratively. The import price of PMS decline marginally from N67.34 per litre to N65.5 per litre (i.e., by N1.84 per litre) during the one week period[i] while the “other landing costs” was reduced from N10.62 to N4.98 per litre (i.e. by N5.35) and the distribution margin was reduced from N15.49 to N14.3 pr litre (i.e. by N1.16). (See Chart 1 in the Appendix). Thus, the reduction in “other landing costs” accounted for about 64% of elimination of the N6.45 “under-recovery” (subsidy) and generation of N1.40 “over-recovery” (tax) in the December 31 template. The fall in import price and reduction in distribution margins accounted for 22% and 14% respectively. Is there scope for further reduction or outright elimination of some of “other landing cost” items and the distribution margin items in order to achieve a lower pump price or higher “over-recovery”? This is a question that calls for a detailed unbiased analysis and audit.
  2.      II.            The traders’ margin of N1.46 per litre in the December 24 template was eliminated in the December 31 template. Why was this margin included in the template in the past and why is it now so easy to eliminate it? Are these traders not the same dealers who are paid N1.75 per litre under the Distribution Margin section? This could very well be a case of double counting or predatory pricing or gouging. Imagine the amount of money the federal government paid out on account of this “traders’ margin” in the previous years! If we assume daily import of 30 million litres of petroleum products, it amounts to almost N16 billion annually!
  3.    III.            Lightering expenses have been reduced from N4.7 to N2.02 per litre, storage fees from N3 to N2 per litre, Jetty Depot thru’Put charge from N0.8 to N0.4 per litre. What was the basis for the previous rates, and what is the basis for the new rates? Why has it taken this long to review and bring down these rates?
  4.   IV.            The December 31 template shows an increase in the margins for retailers (from N4.6 to N5 per litre), dealers (from N1.75 to N1.95 per litre) and transporters (from N2.99 to N3.05 per litre). What is the rationale for the increase in these margins? Are these not the same retailers, dealers and transporters who have been hoarding petroleum products and gouging consumers? Is the increase meant to compensate them for the loss of subsidy payments or is it “token subsidy” through the back door? I think that in order to build trust and confidence in the price modulation, the government needs to explain the rationale for the increase in these margins when other components of the expected open market price have been reduced.
  5.      V.            We note that the official exchange rate of N197 to 1US$ was used in both templates to compute the import price even when the parallel market rate was hovering between N240 and N280 to the $ at the same time. In economics we know that in an economy like ours, the official exchange rate is not a true measure of the real value (or shadow price or opportunity cost) of the currency. In fact, the “real” value of the currency is closer to or equal to the parallel market rate. Thus it can be argued that the import price computed at the official rate is not the “real” cost, hence the expected open market price (EOMP) is not the “real cost” to the economy of a litre of PMS. To obtain the real cost (equilibrium price which can clear the market), we must use the average parallel market rate. Let us assume that the average parallel market rate as of December 31 was N250 to 1US$. Using this rate will yield an import price of N83.12 per litre, which is N17.62 more that what is stated in the table (N66.5). Assuming that the other landing costs and distribution margins remain unchanged, the “true” EOMP for PMS (OMC) will be N85.1 + N17.62 =N102.72 per litre. In order words, if we want to be technical, the modulated retail price should be about N103 per litre which will mean an increase of about N16 above previous regulated price of N87 per litre, but still less than the N120 to N180 most consumers were and are still paying in many filling stations. Of course, if the government can bring down the parallel market rate, then the “true” EOMP will drop.
  6.   VI.            It is difficult to justify the two prices for PMS by retail outlets. The only difference between the NNPC and OMC templates is the N0.31 per litre finance charge “awarded” to OMC but denied NNPC. Even if the government decides not to grant the N0.31 per litre financing charge to NNPC, the table shows that the total cost (EOMP) of PMS for OMC is N85.10, thus they can sell at the same price of N86 per litre as NNPC and still pay an “over-recovery” of N0.9 per litre to government instead of the N1.22 per litre in the table. Allowing the OMC to sell at a higher price than NNPC stations is like awarding another subsidy of N0.5 per litre to them. You can trust that they will not pay the full “over-recovery” of N1.22 per litre to government. The differential is clearly unnecessary and can be seen as another so “subsidy” to placate the OMCs. Having two regulated retail prices for the same product will no doubt lead to distortions and encourage arbitrage and other sharp practices. Even though NNPC is a public enterprise, it should operate as a profit center and pay dividends to the federation account. Accordingly, the playing field must be level for NNPC and the OMCs. NNPC retail outlets should sell at the same price as those of the OMCs.
  7. It is unclear whether the government represented by the minister/NNPC/PPPRA consulted with key stakeholders, especially labour union leaders, during the process of computing the modulated prices and before the announcement. However, given the fact that the Trade Union Congress (TUC) and some interest groups have complained and called on the minister to clarify the concept of price modulation, one can safely conclude that there was little or no consultation. It is also not clear whether the government consulted with the importers, traders, shippers, NPA, owners of jetties, dealers, transporters and retailers before adjusting their charges and margins in the new pricing template. It is important to have wide consultation during the price modulation process to avoid any backlash and attempts to thwart the policy.

Having compared the new PPPRA pricing template for PMS with the “old” one, I will now make the following recommendations to improve the efficiency and effectiveness of the system and avoid the pitfalls of the old subsidy regime.

  1. The price modulation policy currently applies to PMS only. The minister’s statements have focused on PMS only and the new PPPRA templates for AGO and LPFO indicate that the prices of AGO and LPFO will not be modulated, at least not yet. There is no new template for kerosene yet, so we cannot say if kerosene price will be modulated, at least not yet. The December 24 template for HHK (kerosene) indicates that the EOMP is N90.27 while the retail (pump) price is fixed at N50 per litre while the under-recovery (subsidy) is N40.27 per litre. In the absence of a new template for HHK, we can assume that the December 24 template is the one currently in operation, although most consumers buy kerosene at filling stations at prices far higher than the N50 in the PPPRA template. NNPC/PPPRA needs to clarify if the price of kerosene will be modulated like that of PMS or whether the government will continue to pay the hefty subsidy on kerosene with the “inflated” distribution margins and “other landing costs”. It is my candid opinion that to ensure effectiveness and efficiency, the prices of all petroleum products should be modulated because the products are not independent – that is, the products are produced “jointly” (i.e. have joint costs) and have varying degree of “substitutionality”. Under such a situation, economic theory recommends an integrated pricing system such as the Ramsey’s pricing rule which is the “second-best” pricing policy[ii].   A situation where the prices of some products are “modulated” while others are highly subsidized and/or deregulated is a recipe for chaos and inefficiency.
  1. It appears that the frequency of modulation will be quarterly, at least for now, because the new pricing template will apply for the period January to March 2016. It is not clear if the template will be adjusted within the three months if there are significant changes in the import price of PMS or other components of the EOMP. Given the volatility of the spot market prices (hence import price) of petroleum products (see Chart 2 in the Appendix) it is possible to have significant differential between the modulated price (EOMP in the template) and the import price during the course of a quarter. Wide variations can lead to significant distortions, sharp practices and excessive subsidy or tax. In order to minimize such variations and distortions, a shorter frequency for price modulation is recommended.  For instance, NNPC can start with monthly modulation for the first six months, then biweekly for the next three months, and then weekly for another three months and then terminate with complete deregulation of prices within a year.
  2. As I have stated previously, the “dualization” of the price of PMS (NNPC and OMC) is unnecessary and will be counterproductive in the end. Accordingly, the price dichotomy between NNPC and OMC retail outlets should be abolished so that there is a uniform modulated retail price.
  3. It is not clear for how long the modulation process will continue. In my view, the price modulation should not be seen as an end but as a means to an end, the end being a completely deregulated (subsidy-free) petroleum products market. The price modulation policy should be seen is a “half-way house” between the subsidy regime and a deregulated market. Like the subsidy regime, price modulation is not economically efficient, although if properly managed it will be superior or better than the subsidy regime. In fact, we cannot expect price modulation as currently conceived to cure all the ills of the subsidy regime but it can minimize the pitfalls. The most economically efficient system is a deregulated (subsidy-free) market. However, given the potential for market failures in the Nigerian petroleum products market due in part to the oligopolistic nature of the market, the government can step in by establishing “maximum indicative benchmark open market prices” or open market price bands for various products and monitoring the retail outlets to ensure compliance as well as for product quality control and imposing stiff penalties for violations.
  4. It is doubtful if NNPC and DPR will be able to enforce the modulated prices. There are already reports that many filling stations throughout the country have ignored the N86.6 per litre announced by PPPRA and are still selling PMS at between N100 to N180 per litre. Many OMCs will try to game the system by selling at a higher price than the modulated prices and by bribing DPR/NNPC officials and law enforcement agents who may be deployed to monitor the stations. Some unscrupulous monitors may engage in sharp practices such as “commandeering” filling stations and confiscating their fuel. It is therefore important to involve civil society organizations and labour unions in monitoring filling stations and reporting erring stations to “consumer protection offices” that will deploy special “incorruptible” officers to investigate reported cases, and impose stiff penalties.
  5.  NNPC should be the sole importer of all petroleum products, at least during the first year of price modulation (2016). This will reduce the landing cost and allow for better management of imports. It will also help to avoid a situation where the private importers can use their oligopolistic powers to hold the government and consumers to ransom. The marketers can then buy fuel from NNPC at the depots in the ports or at the inland depots throughout the country. This will make it easier to “punish” marketers found to be involved in sharp practices including product adulteration, hoarding and gouging by denying them the opportunity to buy products from the depots. Furthermore, if private markets are allowed to import fuel they are likely to use the parallel market rate in determining their import price, and hence the retail price.
  6. The federal government must take immediate steps to increase domestic production of petroleum products. In this regard, the ongoing rehabilitation of existing refineries is commendation as well as efforts by the private investors to start private refineries. However, the government must identify the bottlenecks and address them immediately. It is a fact that the subsidy regime has been a major obstacle, which is why all forms of fuel subsidies must be abolished as soon as possible to provide a level playing field for investors. Investor want to know when the existing subsidies will be abolished to enable them plan when to complete their refineries and start production. Therefore, the federal government must announce a date when all forms of subsidies will be removed. I believe that all forms of subsidy can be abolished by the end of this year through stepwise price modulation process that will prevent “shocks”.
  7.    IX.            I am not unmindful of the political risk of announcing that the subsidies will be abolished by the end of the year because of the “emotive nature” of the subsidy issue. Luckily, the current low prices of crude oil and petroleum products in the world market provides a perfect opportunity to eliminate the subsidies with little or no inflationary impact, if the government is able to prevent a significant depreciation of the exchange rate and minimize the difference between the official and parallel market rates. In this regard, the government must consult with the labour unions and other groups opposed the removal of fuel subsidies and embark on a massive public awareness campaign to explain the rationale and benefits of removing the subsidies. In any case, most consumers have not been benefiting from the subsidies because they pay prices far higher than the regulated (official) pump price and in some cases above the EOMP.
  8.       X.            The government must take appropriate measures to ensure exchange rate stability and minimize the differential between the official exchange rate and the parallel market rate despite the drop in oil revenues due to the fall in oil prices. The differential should not be more than N10, i.e. if the official exchange rate is N200 to 1$, the parallel market rate should not be more than N210 to 1US. This will help to prevent smuggling of petroleum products for the purpose of “round-tripping” and some other sharp practices in the petroleum products market such as diversion of funds obtain at official rate to import fuel into the parallel market.
  9.    XI.            Finally, the federal government must abolish the petroleum equalization fund (PEF) and consequently the “bridging fund” component in the pricing template. The PEF was established in 1975 to equalize the cost of transporting petroleum products from depots to filling stations and ensure that petroleum products are made available at uniform prices throughout country. In a modern market economy like the type we are trying to build in Nigeria, there is no place for a fund like the PEF as it will only lead to distortions, inefficiency and cross-subsidization. It is an unnecessary bureaucracy! We cannot mandate the same price for a commodity throughout the country irrespective of distance from source. Why must petroleum products me treated differently from other products? All other products in the country do not have uniform prices and there is no equalization fund to ensure that other products are sold at uniform prices throughout the country. The prices of other products in the various cities and villages are determined by the interplay of market forces and transportation costs. Even the price of electricity now varies by location and type of consumer throughout the country. Market forces (including transportation/delivery cost) should be allowed to determine prices of all commodities, including petroleum products, in all locations. In most developed and emerging market economies, prices of petroleum products vary from one city or location to another, and even from one filling station (retail outlet) to another within the same city or location but usually the differential is so small that most consumers can afford ignore it.  For instance, if PEF is abolished and if the price of PMS in Port Harcourt (where there is a refinery) is N86, it is unlikely that it will be more than N88 in Enugu, or N87 in Kaduna (where there is a refinery but crude has to be pumped there) or N88 in Sokoto or N89 in Maiduguri.

 

Dr. Emmanuel Ojameruaye

This email address is being protected from spambots. You need JavaScript enabled to view it.

Phoenix, Arizona State, USA

January 3, 2016

Appendix

 

Chart 1: Composition of the Expected Open Market Price (Total Cost) of Petrol

  

Table 1: PPPRA Pricing Template for PMS, December 24 and December 31, 2015

S/N

Cost Element

Dec. 24, 2015 N/Litre

Dec. 31, 2015 (NNPC)

Dec. 31, 2015 (OMC)

1

Import Price (C+F)

67.34

65.5

65.5

2

Trader's Margin

1.47

0.00

0.00

3

Lightering Expenses (SVH)

4.07

2.02

2.02

4

NPA

0.77

0.36

0.36

5

Financing (SVH)

0.51

0.00

0.31

6

Jetty Depot Thru'Put Charge

0.80

0.60

0.60

7

Storage

3.00

2.00

2.00

8

Landing Cost

77.96

70.48

70.8

9

Distribution Margins

 

 

 

10

   Retailers

4.60

5.00

5.00

11

   Transporters

2.99

3.05

3.05

12

   Dealers

1.75

1.95

1.95

13

   Bridging Fund

5.85

4.00

4.00

14

   Marine Transport Average (MTA)

0.15

0.15

0.15

15

   Admin Charge

0.15

0.15

0.15

16

Subtotal Margins

15.49

14.3

14.3

17

Taxes

 

 

 

18

   High Maintenance

0

0

0

19

   Government Tax

0

0

0

20

   Import Tax

0

0

0

21

   Fuel Tax

0

0

0

22

Subtotal Taxes

0

0

0

23

Total Cost

93.45

84.78

85.10

24

Ex-Depot (for Collection)

77.66

76.50

77.00

25

Under/Over Recovery

6.45

-1.22

-1.40

26

Retail Price

87.00

86.00

86.5

27

Expected Open Market Price

93.45

84.78

85.1

Note: Exchange rate used is N197 = 1US$. Conversion rate used is 1MT = 1,341 litres

Source: PPPRA website.

  

Chart 2: Price of Petroleum Products, North European Market, Spot Barges, fob Rotterdam                                                                  US$/Litre

 

Source: OPEC Bulletin November 2015. Original data in US$/Barrel converted to US$ per litre by dividing by 42 (I barrel = 42 litres)

  

Endnotes



[i]  OPEC crude oil basket price also declined from $32.13 per barrel to $31.45 per barrel during the same period.

[ii] See Ojameruaye, E (2013) A Second-Best Framework for Petroleum Products Pricing in Nigeria. Nigerian Journal of Social and Economic Studies. Vol. 55 No. 1, 2013: 191- 195.

By Dr. Emmanuel Ojameruaye

The purpose of this article is to examine the concept of "modulation of the prices of petroleum products" as recently espoused by the Minister of State for Petroleum Resources, and to offer some suggestions on how the process can be managed to ensure adequate supply of petroleum products at reasonable prices and on a sustainable basis while avoiding the pitfalls of the subsidy regime.  In this first part, I discuss the concept of price modulation as I see it. In the second part, I will compare price modulation with the pricing under the subsidy regime and removal of subsidies, and then suggest how the price modulation process can be managed effectively and efficiently.

After over 30 years of subsidizing petroleum products by the federal government, most economists and many other professionals now agree that the policy has been a dismal failure. The subsidy regime or policy has been ineffective and inefficient, and has been characterized by frequent shortages and hoarding of petroleum products, selling of products at prices that are far higher than the official pump prices, corruption and sharp practices such as smuggling, round-tripping and adulteration of products. It has also significantly reduced revenue allocation to all tiers of government due to mounting subsidy payment which is first-line charge on the federation account. This has in turn reduced investment in critical social infrastructure. Furthermore, the subsidy regime has been responsible for the dismal functioning of the existing local refineries and has discouraged new public and private investment in local refining.  In fact, the costs of the policy have far outweighed its benefits (see my Chapters 2 and 5 in The Politics of Subsidizing Petroleum Products in Nigeria, Edited by Jideofor Adibe, Adonis & Abbey Publishers Ltd, 2013).

In view of the above, many economists and observers expected that the Buhari administration would use its political capital to eliminate the existing fuel subsidies within the first six months of the administration as part of its Change Agenda, even though President Buhari did not promise to do so during his electioneering campaign. In fact, while some members of the administration and some leaders of the ruling APC have been advocating for the removal of the subsidies, the President and some other members of his administration have been very reticent on the issue because of the likely inflationary impact and the backlash from labour unions and the "subsidy cabal" that has been benefiting massively from the subsidy payments. The fact, however, is that for most part of past six months, consumers of petroleum products have been experiencing severe scarcity of the products and have been paying prices far higher than the regulated prices and "expected open market" prices.   It is against this background that one must commend the recent statements by the Minister of State for Petroleum Resources and Group Managing Director of the NNPC, Dr. Emmmauel Ibe Kachikwu, that effective January, 2016, the prices of petroleum products in Nigeria will be "modulated" to ensure efficiency and availability of the products.  However, the minister appears to have been vague and incoherent as to the true meaning of "price modulation" and how it relates to the vexed issue of removal of subsidies. It is also not clear how the "price modulation" will stop the ills that have plagued the Nigerian petroleum products market over the past 30 years.

From the statements credited to the minister, it is clear that he does not equate price modulation with the deregulation of petroleum prices or removal of subsidy. What then is price modulation? Before answering this question, let us look at the evolution of the concept by the minister. The minister first came up with concept of price modulation when he addressed newsmen on Thursday, December 17, 2015 in Abuja. He stated that the Federal Government would focus on price modulation of petroleum products to ensure efficiency and provision of the products and he noted that the price modulation has nothing to do with the removal or existence of subsidy. According to him, "There is too much emotion around subsidy issue, but our focus is that the Federal Government should not spend as much as it spends every year on subsidy". He further said that the NNPC would review the template of the Petroleum Products Pricing Regulatory Agency (PPPRA) and achieve reduction in the cost for clearing petroleum products. He stated that "If we take this analysis, we can deliver products today with the price of oil where it is...It is not that we have removed subsidy but the application of market forces will enable you to sell products as close to the prices we have today". He also said for the purpose of the modulation a band had been approved between N87 and N97 per litre but the price would no longer be fixed and that the price of crude would continue to determine what the price of product would be.

Later during his tour of the Port Harcourt Refinery on December 26, the minister told journalists that the Federal Government would soon release the new price template of the Petroleum Product Pricing Regulation Agency (PPPRA) and that he had approved a new price template for the agency. He stated that "we have done a modulation calculation and it is showing us below N87...I signed off on it (a new pricing template) yesterday (Thursday). I imagined that in the next couple of days the marketers would get advice on that". He then stated that from the application market realities for the pricing modulation, government has discovered that petrol would sell for either N85 or N86 per litre. He also indicated that the federal government has decided to scrap the Petroleum Support Fund (oil subsidy) because government can no longer afford to subsidize the product following the fraud that has attended its operation.

Then on December 27, 2015 during an inspection tour of the Kaduna Refinery and Petrochemical Company (KRPC) he made what seemed like a "clarification" of his earlier statement. Contrary to the perception created on in Port Harcourt that the price of petrol would be reduced to N85 per litre effective January 1, the minister stated a new official price of petrol "will be adjusted within the modulating band of N87 per litre to N97 per litre in accordance with the international price of crude oil".  He further stated that the price of petrol could go either way noting that "it may be increased above the current selling price or may be reduced below the current selling price all things being equal...If there is an increase or decrease in the price of crude oil, we will make the necessary adjustment, so in January 2016, we will announce the new price of petrol in accordance with trends in the market." He further stated that "Today, there is no subsidy, we are selling products at N87. In January, we will look at what the trend is and we will announce prices, if that is less than N87, we will announce it and if it is more than that, we will have to announce it...But we are not going to be adjusting prices on a day-to-day basis, we are going to take like an average price and I think that today when you look at prices, we have no subsidy."

It is evident from the above that the minister has not given a precise definition of the concept of price modulation and how the process will work. Neither has the concept and process been explained on NNPC or PPPRA website. Therefore, in what follows, I will attempt to propound my own theory of price modulation on the basis of my inferences from the minister's statements.

The term price modulation is rarely used in economics. In fact, it appears to be new in Nigerian economics lexicon and some analyst have referred to it as a "petrolese" term. I am not aware of any precise definition of the term or the process, but one can infer what it means by examining the meaning of "modulation" which is a term used mainly in music, electronics and telecommunication.  In music, modulation is "the act or process of changing from one key to another". In electronics and telecommunication, modulation is "the addition of information to an electronic or optical carrier signal" or "the process of varying one or more properties of a periodic waveform, called the carrier signal, with a modulating signal that typically contains information to be transmitted".  On the other hand, modulation is generally defined as "regulating according to measure or proportion". (Online Merriam Webster dictionary). Therefore, modulation is synonymous with "regulation" and "control" and it is safe to state that "price modulation" is a form of price control or price regulation. It is therefore different from price deregulation which is the outcome of the removal of subsidies.

Under subsidy regime, the pump price of each petroleum product is fixed for a long period of time irrespective of the "expected open market price" (EOMP) of the product which changes with changes in the import (spot market) price of the product or the "real" cost of producing the product locally. For instance, based on the PPPRA pricing template, the EOMP of petrol has been N87 per litre since 2012 while that of kerosene has been N50 per litre. This is in spite of the daily/weekly/monthly fluctuations (changes) in the import price of the products.  Under price modulation, the pump price of each product will not be fixed for a long period of time; it will "modulated" or changed based on changes in the import price of the products and other determinants of the EOMP. However, the change in the pump prices will not necessarily be equal to the changes in the import price, and the pump price will not necessarily be equal to the EOMP. So under price modulation, there could still be subsidy if government decides that the modulated pump price should be less than the EOMP. If the EOMP is low due to low import prices, the government can also decide to add a tax (such as highway tax) to the pump price, in which case the pump price will be greater than the EOMP. The idea behind price modulation is to ensure that the pump price of each product reflects market conditions to a large extent, but not completely. In order words, the pump price will be a "stochastic" function of the import price (and/or real cost of producing the products locally), but not necessarily equal to the import price plus industry margin plus tax which will be the case when subsidies are removed. I will return to this later after examining an alternative definition that was recently posted by Dr. Izielen Agbon (see http://www.chidoonumah.com/fuel-subsidy-removal-and-fuel-price-increase-by-imf-price-modulation)

In the above referenced article Dr. Agbon posited that:

"The New Subsidy Removal or Fuel Price Increase by Price Modulation is an updated IMF strategy aimed at imposing fuel price deregulation on the Nigerian masses. The updated IMF strategy called for using the present low price regime to remove fuel subsidy and deregulate fuel prices. The strategy recommended an automatic price change mechanism that changes price slowly. Price modulation means that government will ensure initial slow price increases by regulating the components of fuel price such as taxes, freight, margins, transport, storage and bridging. The slow fuel price increase will reduce immediate mobilization and opposition. There will be no direct government regulation of fuel prices. Rather, the marketers and traders will fix the final fuel price. Price modulation fixes the bottom commodity price in a market by tweaking price components. PPPRA will fix the minimum fuel price and the fuel cabal/marketers can sell at whatever price the customer will pay... Price modulation ignores corrupt practices and allows the fuel cabal to pass the cost of corruption to the masses".

Dr. Agbon went further to state that "the new subsidy removal or fuel price increase by price modulation" is the outcome of the meetings held in Abuja and Lagos in December 2014 by IMF staff and officials of the Nigerian government (Jonathan's administration). The report of the meeting stated among other things, that "Lower oil prices provide an opportunity to phase out fuel subsidies. The recent drop in crude oil prices (and lower petrol and kerosene prices) could facilitate the completion of the subsidy reform, which started in 2012. (IMF) Staff recommends introducing an independent price-setting mechanism to smoothly pass through international price changes to domestic prices and gradually eliminate fuel subsidies....", The report further states that the officials of Nigerian government (Jonathan administration) "expressed their commitment to subsidy reform, and indicated they were considering options, timing, and modalities of implementing these reforms in light of the decline in oil prices."  (See IMF Country Report No. 15/84, Nigeria 2014 Article IV Consultation – Staff Report, Press Release and Statement by the Executive Director of Nigeria, March). In other words, if Dr. Jonathan had been re-elected, he would have removed the subsidies sooner or later.  It is however important to note that that the IMF report referenced above did not contain the words "price modulation" or "new subsidy removal or fuel price increase by price modulation", as inferred by Dr. Agbon. Furthermore, there is no indication that the Buhari administration has accepted the IMF report referenced above or if the minister's statements on price modulation are based on the IMF report or recommendations.  Although the minister has not yet elucidated the proposed price modulation, reading in between the lines of his statements, I think it is different from the definition and description offered by Dr. Agbon above.

In my opinion, the proposed price modulation will or should work as follows. Using the PPPRA pricing template, we can state that:

EOMP = LC + DM = MP + TM + LE + NP + FN + JD + ST + RM + TM + LM + BF + MT + AM

LC = MP + TM + LE + NP + FN + JD + ST

DM = RM + TM + LM + BF + MT + AM

PP = EOMP – S + T

where EOMP = expected open market price), PP = retail (pump) price,  MP = cost plus freight (i.e. import price of product offshore Nigeria), TM = trader's margin, LE = lithering expenses, NP = Nigerian Ports Authority charges, FN = financing charge, JD – jetty depot thru'put charge, ST = storage charge, RM = retailers' margin, TM = transporters' margin, LM = dealers' margin, BF = bridging fund charge, MT = marine transport average, AM = administrative charge. S = under recovery (subsidy), T= Taxes, LC = landing cost, DM = distribution margin

Equations 1, 2 and 3 show the composition of the expected open market price (EOMP), landing cost (LC) and distribution margin (DM) of each product.  Equation 4 states that the pump (retail) price is EOMP less subsidy plus taxes. If there is no tax (i.e. T = 0, as is currently the case), PP = EOMP – S or S = EOMP – PP.  If subsidy is removed, PP =EOMP. If government decides to remove subsidy (S=0) and impose tax (per litre), PP = EOMP +T.

The major component of EOMP is import price MP (cost and freight). In the latest PPPRA pricing template for gasoline (PMS) published on December 24, 2015, MP was N67.34 which was 73% of the EOMP (N93.45). The other components of landing cost N10.62 or 11% of the EOMP, while distribution margin was N15 or 16% of the EOMP. Apart from the import price (MP) which fluctuates daily/weekly/monthly depending on the forces of demand and supply in the global petroleum products market, all the other components of the EOMP are administratively determined, and can therefore be "modulated" within certain ranges. For instance, government can reduce the lithering expenses, storage charge, the retailers' margin, the transporters margin, the dealers' margin and the bridging fund charge. As I have argued in the past (see Ojameruaye, E.O., 2013. A Second-Best Framework for Petroleum Products Pricing in Nigeria. Nigerian Journal of Social and Economic Studies. Vol. 55 No. 1, 2013: 191- 195), most of these charges are "overpriced" at levels that are exceptionally favorable to the "service providers", thus resulting in predatory pricing and excessive subsidy payment. For instance, assuming that the other components of landing cost can be reduced from N10.62 per litre to N7.66 per litre and the distribution margin from N15 per litre to N11 per litre, then EOMP of PMS will be N86 per litre. Perhaps, this is close to what the minister and his team have done under the so-called price modulation process which has not only effectively eliminated subsidy for the month of January if import prices remain at the December level but has in fact imposed a tax of N1 per litre if the PP is fixed at N86 per litre in January. However, if the import price changes, the pump price can be modulated accordingly, say on a monthly basis using the average monthly import price or the median monthly price (i.e. price on the 15th of the month) in the previous month. For instance, if the average import price in January (or the price on the 15th of the month) is N60 per litre (down from N67.34 in December), then the EOMP in February will be N60 + N7.66 + N10 = N77.66 per litre, and the government may decide to fix or modulate PP at N80 per litre thus retaining a tax of N2.34 per litre. On the other hand, if the average price is January is N80 per litre (up from N67.34), then the EOMP will be N80 + N7.66 + N10 = N97.66, and the government may decide to fix or modulate PP at N95 per litre, thus making a subsidy of N2.66 per litre or the government may decide to fix PP at N97.66 and avoid subsidizing. Of course, the modulation can be done on a daily or weekly to avoid sharp changes in PP, but for a start, a monthly modulation may be preferred.  The government may choose to do the modulation on a quarterly basis. However, the longer the period in between two modulations, the larger will be the difference between pump price and the expected open market price, and hence, the greater the market distortion.

In view of the above, we can conclude that price modulation of petroleum is not synonymous with removal of subsidy. It is not a "new subsidy removal". Prices can be modulated by government in a way that retains small amount or subsidy or taxes or removes subsidy. It depends on the import prices of petroleum products (or the cost of producing the products by local refineries). If import price is low (or below a certain threshold), the government may decide to reduce or retain the pump price while imposing a small tax so that the pump price will be greater than the EOMP. On the other hand if the import price is high (or higher than a threshold), the government may decide to increase or retain the pump price (at level below the EOMP) and provide a small subsidy. The bottom line of price modulation is to ensure that the pump price of each product moves in the direction of the import price (or cost of production by local refineries), although not necessarily proportionately.

Having described what I think price modulation means, we must address three questions. The first is whether price modulation is better than the removal of subsidy or the current subsidy regime. Secondly, can price modulation cure the ills of the subsidy regime? Thirdly, how can the price modulation process be managed to ensure availability of petroleum products on a sustainable basis at reasonable prices throughout the country? We will answer these questions in part 2 of this paper. Stay tuned.

Dr. Emmanuel Ojameruaye

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December 29, 2015

Postscript: As I was about to post this article, I read the breaking news that the Petroleum Products Pricing Regulatory Agency (PPPRA) has announced that a new "modulated" price of N86 per litre for petrol in NNPC retail outlets (filling stations) and N86.5 in non-NNPC retail outlets through the country from January 1 till March 31, under a revised pricing template. Curiously the announcement is silent on other petroleum products. I will also discuss the implications of this announcement in part 2 of this article.

Given the manner the Nigerian economy unraveled at the twilight of the Jonathan administration it became obvious that the greatest loser of the presidential election was Dr. Ngozi Okonjo-Iweala, the ex-Minister of Finance and Coordinating Minister of the Economy (CME) who built her reputation on reforming the "unreformable" Nigerian economy. This was evident at the Senate hearing on the fuel crisis on May 25 when the minister, almost in tears, alleged that "there is a deliberate attempt to sabotage the economy and bring it to a halt...some of the things that happen in this country are inexplicable...I do not want to be part of any accusation of fraud". While hear boss, ex-President Jonathan was being praised and called a "hero of democracy" for accepting defeat, she was being vilified and blamed, sometimes unfairly, for the fuel and electricity crises, the inability of some state governments to pay salaries and the near collapse of the economy. For example, about 2,000 Nigerians petitioned Yale University for awarding an honorary doctorate degree to Dr. Okonjo-Iweala on May 12, 2015 because of her alleged poor performance as CME. On the other hand, in his inaugural address, President Buhari praised ex-President Jonathan for "his display of statesmanship in setting a precedent for us that has now made our people proud to be Nigerians wherever they are". In fact, while ex-President Jonathan has earned a noble place in the Nigerian Democracy hall of fame, Dr. Okonjo-Iweala may be remembered as the "Super Minister" who failed in her much-trumpeted effort to reform the Nigerian economy.

Ostensibly in preparation for her "Second Coming" as Finance Minister, Dr. Okonjo-Iweala wrote a book titled "Reforming the Unreformable" which was published by MIT Press in September, 2012, just a year after she reported for duty as the Minister of Finance and Coordinating Minister of the Economy, a very powerful position which is close to that of a Prime Minister. In the book she narrated the efforts of the economic team under her leadership to reform the Nigerian economy during her "First Coming" as Finance Minister from July, 2003 to June, 2006 under the Obasanjo administration. She began the book by re-echoing what cynics say about Nigeria. According to her,

"Corrupt, mismanaged, and seemingly hopeless: that's how the international community viewed Nigeria in the early 2000s. Then Nigeria implemented a sweeping set of economic and political changes and began to reform the unreformable. This book tells the story of how a dedicated and politically committed team of reformers set out to fix a series of broken institutions, and in the process repositioned Nigeria's economy in ways that helped create a more diversified springboard for steadier long-term growth".

In the book, she gave the impression that as a result of the efforts and policies implemented by her team, the "unreformable" Nigeria was on course to being reformed as at the time she left the Obasanjo administration in August 2006. In an endorsement of the book, the 2001 Nobel laureate in Economic Sciences, Joseph E. Stieglitz, praised Dr. Okonjo-Iweala, noting that "This insider's account of the valiant attempt to reform Nigeria's economy will inspire anyone committed to changing the course of their country". However, Nicolas van de Walle was not so generous in his review of the book. According to him, Dr. Okonjo-Iweala "helped persuade the country's creditors to cancel 60 percent of the debt, making good use of her personal connections within the international financial community. But her attempts to enact economic reforms were less successful, at least in part because of the ambivalence of much of the Nigerian government. Fiscal ... Nigeria has made very little progress on other pressing problems, from its woeful infrastructure, to its dysfunctional agricultural sector, to its growing social inequality and persistent poverty. Those issues receive only passing references in Okonjo-Iweala's upbeat account".

Dr. Okono-Iweala knew that the work of reforming the "unreformable" Nigerian economy was not complete by the time she was literally forced to leave the Obasanjo's administration in August 2006 to join the Brookings Institution as a Distinguished Fellow. Even though she later became one of the Managing Directors of the World Bank from October 2007 to July 2011, she apparently looked for another opportunity to complete her unfinished agenda of reforming the "unreformable" Nigerian economy. This opportunity came in July 2011 when she was appointed as the Minister of Finance and CME. Some analysts wondered why she abandoned her prestigious job as a Managing Director of the World Bank given her experience under Obasanjo administration, but it appears that her patriotism and urge to complete her unfinished reform agenda trumped whatever ill-feeling or disappointments she had under Obasanjo. She was apparently encouraged by the additional portfolio of "Coordinating Minister of the Economy" which made her a "super minister" and gave her more controlling power. Some analysts saw this as a stepping stone to becoming the first female Vice-President or even President of Nigeria in the near future. I think she initially saw her mission under the Jonathan administration as one of completing her unfinished agenda of reforming the "unreformable" Nigerian economy. Thus, one of her first major reform effort was to encourage President Jonathan to remove the notorious fuel subsidy in January, 2012 which failed due to mass protest.

When her book was released, many analysts hoped that by the end of the Jonathan's tenure on May 29, 2015, the "unfinished agenda" would have been completed. But this did not happen. As at the time Dr. Okonjo-Iweala left office with ex-President Jonathan, the Nigerian economy was almost at a standstill with public electricity supply at its lowest level in recent history despite the Roadmap for Power Sector Reform launched in August 2010 and the billions of dollars spent on the power sector since then; fuel shortage and queues reached an unprecedented level; the fuel subsidy regime was still very much alive; corruption was still endemic and worsening; and the naira exchange rate had depreciated from about N150 in 2011 to about N200 to the US dollar. In fact, it appeared that the so-called "transformation agenda" of the Jonathan administration did not result in any significant transformation or reform of the economy. Thus, the "Change" mantra of the APC party gained traction leading to the crushing defeat of the ruling PDP.

Dr. Okonjo-Iweala was painfully aware that her reputation and legacy would be adversely affected by the poor performance of the economy, especially during the last months of the Jonathan administration. She became very defensive, sometimes combative, and made every effort to respond to critics of the economic policies of the administration. She insisted that the "fundamentals of the economy were sound". In the heat of the presidential campaign and even after the defeat of President Jonathan, she labored hard to list the achievements of the administration. For instance, speaking to journalists on May 10, 2015, she reiterated that that the Jonathan administration would be leaving "some solid economic legacies" for the Buhari administration and insisted that the allegation that the economy was in ruins was "absolutely untrue". She said:

"We cannot take away the fact that the Jonathan administration in spite of the challenges caused by 50 per cent decline in the price of oil has made a clear and measurable difference in many important areas and anyone who says nothing has been done and nothing is being left behind is being very unfair to facts and to history...Attempts to rewrite history will not stand. You cannot just wipe the slate clean for political reasons. We are not perfect but no one can take away the fact that we are leaving some good legacies behind."

She then gave a laundry list of achievements of the Jonathan administration during the last four years to include: a) increase in food production with attendant positive effect on food prices; b) the National Industrial Revolution scheme and the Automotive Policy whose implementation has led to the opening of factories for car manufacturing and assembly for the first time in the country; c) the impressive rise in the cement production due to positive government policies with Nigeria now as a net exporter of cement; d) the creation of about 1.4 million jobs a year out of the 1.8m needed; and f) support for the creative industries, which has helped to strengthen the capacity of script writers, producers, directors and other professionals in the motion picture industry and led, in turn, to the production of higher quality films, and creation of more jobs. She also took the opportunity to advise politicians and opinion leaders "not to talk down the economy because negative and unfactual comments on the economy can have negative impact the economy, the exchange rate and the stock market and reduced investor confidence".

Some of the above-listed "achievements" have been challenged by Prof. Soludo and other analysts. Interestingly, the minister did not address the so called "transformation agenda" of the Jonathan administration point by point or some of the most important areas of reform where the people expected positive changes and where the administration failed. These include dealing with the recurrent fuel scarcity and burgeoning fuel subsidy, growing insecurity, continuing inadequate and unreliable power supply, reform of the oil industry and the NNPC (including failure of the administration to get the National Assembly to pass the Petroleum Industry Bill), worsening grand corruption, high "cost of governance" – a euphemism for the high proportion of (unproductive) recurrent and overhead expensive in total public spending and the crowding out of (productive) capital spending, uncontrolled leakages in public finance and "missing" funds, growing impunity and continuing lack of or inadequate accountability and transparency in government.

D. Okonjo-Iweala resorted to "history will be the judge" on her record and that of the Jonathan administration. Unfortunately, economic historians are likely to conclude that Dr. Ngozi Okonjo-Iweala failed in her mission to reform the "reformable" Nigerian economy, if the Bukhara administration succeeds in the areas where the Jonathan administration failed. Therefore, it will be very instructive if she can write another book where she can highlight some of the achievements of her "Second Coming" and explain why she failed in her mission to reform the Nigerian economy, especially in the critical areas of fuel subsidy, electric power, corruption and governance. The reasons for the failures will no doubt serve as lessons for the economic team of the Buhari administration. While we await her book on this subject – if she will be courageous enough to write such a book - I will highlight some of those reasons which she may not admit to.

Firstly, it appears that she did not believe that the Nigerian economy was reformable. She hoped it was reformable but "hope" is not believing and is not a strategy. This is evident in the title of her book and the first chapter. Conviction and optimism matter in life as well as in leadership and reform management just as names matter in many African cultures. If you name your child "Smart", he is likely to be smart; if you name him "Slave", he is likely to behave like a slave. Dr. Okonjo-Iweala's use of the term "unreformable" in her book was a subconscious acceptance of the hypothesis that Nigeria is unreformable, just as some analysts thought that France was unreformable in the mid 1990s and early 2000s due to resistance to changes, street protests and hostility to the market. But Nigeria is not France, where a journalist said that President Chirac was "traumatised by street revolts, and ended up convinced that France is not able to tolerate any major reform" (See Special Report in The Economist of 26th October 2006). You cannot reform an entity which you believe is unreformable because rather than pursuing the reform, you will be looking for reasons why the entity or system cannot be reformed. Perhaps this is why she gave up on the removal of subsidy after the January 2012 debacle, and this is why she attributed the most recent fuel scarcity to "sabotage" by the oil marketers and "inexplicability" of certain things that happen in Nigeria. An effective reformer must believe that his or her mission is achievable and that the system is reformable. There is no system or country that cannot be reformed, including Nigeria. Because of her "lack of faith" in the Nigerian economy and Nigerians, Dr. Okonjo-Iweala was not bold and courageous enough in her pursuit of the needed reforms. In the Bible, Jesus told his disciples that "if you have faith as small as a mustard seed, you can say to this mountain, 'Move from here to there,' and it will move. Nothing will be impossible for you." (Matt. 17: 20). Nigeria is a movable mountain as the Buhari/Idiagbon regime demonstrated during their 18-month rule in 1984/85.

Secondly, Dr. Okonjo-Iweala appeared to have a low tolerance level for criticisms and had a tendency to shift blame for her shortcomings or failures to others. In responding to the minister's response to his paper on the Nigerian economy under President Jonathan, Prof. Soludo noted that "It is not a virtue when you are quick to appropriate all the credit when things are going well, but shift the blame when they go wrong". In fact, Dr. Okonjo-Iweala appeared very willing to appropriate credit for all good things and shift blame for all bad things. For instance, she takes credit for debt relief (of $30 billion, including $18 billion in outright cancellation) granted Nigeria by the Paris Club under the Obasanjo's administration in 2004, even though it was a team effort. According to Prof. Soludo:

"Nigeria would have secured debt relief under anyone as Minister of Finance. President Obasanjo secured debt relief for Nigeria... With the groundswell of political support and Nigeria meeting all the 'conditionalities', debt relief was assured... Nigeria should have gotten far better terms than you (Okonjo-Iweala) negotiated. Of course, with your eyes on returning to the World Bank after office, I did not expect you to boldly stand up to the donor community in defence of Nigeria ... By the way, can you tell Nigerians why you were eased out as Finance Minister and you cried like a baby begging OBJ to still allow you remain in the Economic Management team barely few weeks after the debt relief? Why were you eventually also removed from the economic management team if you were so important? Ironically, President Jonathan has recycled you, with a bigger title and greater responsibilities. But the difference is that the team that did the actual work is no longer there, and the world has seen that the king is naked".

Dr. Okonjo-Iweala also claimed credit when Nigeria "emerged" as the "largest economy in Africa and the 26th largest in the world", due to the rebasing (or recalculation) of the national accounts which she orchestrated. Following the recalculation, announced on April 4, 2014, Nigeria's GDP was revised to $509.9 billion in 2013 up from $285.56 billion (based on the "old methodology), an increase of 89.2% in the same year while GDP per capita has almost doubled from $1,437 to $2,688. This is how Nigeria overtook South Africa without producing more goods and services.

However, when the then Vice-President elect, Professor Osibanjo stated that the Buhari administration will inherit a debt of $60 billion from the Jonathan administration, Dr. Okonjo-Iweala responded by saying that it was wrong to "to characterise the Jonathan administration as leaving $63 billion debt since the country's debt stock was accumulated over a long time by several administrations". She further explained that the Jonathan administration incurred only $21.8 billion of $63 billion national debt and that the increase in the debt profile between 2012 and 2015 was triggered off by the 53 per cent wage increase implemented by the late Umaru Yar'Adua administration in a fell swoop. She also stated that at the time of the salary increase, she was still with the World Bank, and she wrote and warned on the consequences of acquiescing to such a huge increase. Furthermore, she said Nigeria still has one of the lowest fiscal deficits in the world with debt to GDP ratio of about 1.5 per cent of the budget. On the lingering fuel scarcity, she blamed the oil marketers who she claimed were blackmailing the government. She then called on Nigerians to rise up and ask why the marketers have reneged on their promise after they openly told the entire country that they were going to end the scarcity. She refused to blame the problem on the failure of the Jonathan administration to eliminate the fuel subsidy between 2012 and 2014, even when oil prices (and price of petroleum products on the spot market) plunged by more than 50% between June 2013 and Dec. 2014. Because of her intolerance to criticism, she responded rather angrily and abusively to any attempt to "blow the whistle" on the economy, even when done in good faith, by former colleagues and subordinates including former CBN governors Prof. Soludo and Mr. Sanusi – who as the incumbent governor raised the issue of the missing "$20 billion" for which he was fired by President Jonathan. The "media war of attrition" she waged with former colleagues and some state governors did not help her image as a reformer.

Thirdly, and related to her low tolerance of criticism, some critics say that she had a tendency to manufacture or exaggerate success. A reform that is based on manufactured or exaggerated success in the face of glaring failures or problems is bound to fail as evidenced from reforms in the then socialist/communist countries of Eastern Europe and the Soviet Union. Two examples of this tendency are the rebasing or recalculation of Nigeria's GDP from 1990 to 2013 and the recalculation of Nigeria's poverty ratios which she apparently orchestrated. When the rebased GDP data were released in April 2014, the minister remarked that "the information provides us with much more scope to know what the structure of the economy is". But it was more than that. Since then, Nigerians, especially members of the Jonathan administration, have been suffering from "GDP illusion" or some form of "economic megalomania" even as the price of crude oil plunged and the electricity generating capacity of the country of about 180 people remained at only 10% of the electricity generating capacity of South Africa with a population of only 54 million. On the revised poverty rates, in his diatribe with the minister, Prof. Soludo said,

"What worries me is that this government is the first in our history to attempt to manipulate our national statistics under Okonjo-Iweala. When NBS published the poverty figures in 2011, she felt indicted and incensed. She called upon the World Bank to come and examine the 'methodology' and get NBS to 'review' its numbers. Oby Ezekwesili (as VP Africa Region) rejected the call to try to tamper with a country's statistics). Once Oby left, the 'World Bank' started talking about 'new figures', without conducting any new surveys... I cautioned that it was a dangerous gamble that would damage the credibility of the NBS. .. No government in our history has tried it: even Sani Abacha allowed a poverty survey that put poverty at 67% under his regime. At this rate, who will believe statistics coming from the Nigerian government again? Is it now the World Bank that sits in Washington and allocates poverty numbers to Nigeria? Something smells here!"... Now that you decide which economic statistics published by NBS to accept and which ones to 'change the methodology' to give favourable figures, you can keep feeding your manipulated figures to your international media circus for the vain glorious awards to sustain an empty hype, while Nigerians groan under hardship. We can actually ask Nigerians whether they are getting better off now contrary to your bogus figures".

With this type of "cloud of suspicion" hanging over some of the economic data under the Jonathan administration, measuring the success and failure of the reforms of the administration may prove difficult and polemic.

In spite of her shortcomings and glaring failure to reform the Nigerian economy, Dr. Ngozi Okonjo-Iweala will always be a great Nigerian who wanted the best for the country. Even in the face of her controversial performance in Nigeria, she was listed among the world's 50 greatest leaders by the American magazine, Fortune, in its 2015 ranking of world leaders issued in early April, before the Nigerian presidential election. The magazine described Dr. Okonjo-Iweala, as "a fearless promoter of sound economic policies" and singled her out for "working hard to usher in a decade in which Nigeria's gross domestic products trebled" (sic). She was recognized alongside such world leaders as the Liberian President, Ellen Johnson-Sirleaf, Pope Francis, Chinese President Xi Jinping, Indian Prime Minister, Narendra Modi, U.S. billionaire, Bill Gates, Facebook Founder, Mark Zuckerberg, and Apple Chief Executive Officer, Tom Cook. A graduate of two prestigious American universities, Harvard and MIT, she rose through the ranks to become one of the World Bank's Managing Directors, and was a strong contender for the presidency of the World Bank in 2012. She received numerous honors and recognitions during her "First" and "Second" coming as Nigerian Finance Minister. She has become the proverbial prophet who is not honoured or recognized in her own country. Although she has not said what her future work will be, I think she needs a break and time to write a new book titled "Failing to Reform the Reformable – Lessons from my Second Economic Adventure in Nigeria".

Dr. Emmanuel Ojameruaye

Phoenix, USA

This email address is being protected from spambots. You need JavaScript enabled to view it. . June 13, 2015

Speaking to the Financial Times of London after the recent Presidential Elections in Nigeria, the Governor of the Central Bank of Nigeria (CBN) advised the incoming administration of Mr. Buhari to give serious thoughts to scaling down the Government’s majority shares in the Joint Ventures (JVs) with major multinational oil companies operating in the country (The Street Journal, April 23, 2015). According to the reports, the highlights of the CBN governor’s proposal are as follows:

  • The government should shed at least 25 per cent of its equity in the JV oil companies to raise emergency funds for infrastructure development in key sectors of the economy.
  • The government may realize about $75 billion (N14.93 trillion) if it cuts its JV equity to only 30 per cent.
  • CBN officials have been directed to evaluate the prospects of the proposal. The outcome of the study will be presented to Mr. Buhari when he assumes office on May 29.
  • Private equity companies can be encouraged to take over the relinquished government equity.
  • Part of the proceeds from the equity sale could be invested in transport and energy developments projects to grow the economy and create jobs.
  •  Government could adjust upwards, petroleum profit tax payable by the oil companies, to compensate for the reduction in government’s equity.
  • The equity cut back is one of the most attractive options available in view of the drastic drop in revenue due to falling oil prices and the need to avoid piling up more debts.

The CBN governor acknowledged that the proposal could meet stiff resistance from oil firms, politicians and their allies who depend on oil resources for patronage. However, it should be welcomed by those who support the unbundling of the NNPC and curbing corruption by increasing private participation in the oil sector. Some observers believe that the proposal is a response to Mr. Buhari’s promise during the presidential campaign that his party would “break up the NNPC but the ultimate answer may well be to divest the whole thing”. However, he noted that the immediate priority of his administration would be to stop leakages in the oil industry so that revenues that belong to the people get into the federation account. The governor’s proposal requires careful analysis because it raises some fundamental questions that must be addressed.

Firstly, why did the Governor not offer the same advice to outgoing President Jonathan who appointed him? After all, oil revenue started crashing almost a year ago when the price of Nigerian crude oil declined from about $114 a barrel in June 2014 to $48.57 a barrel in January 2015, although it has increased to $65 a barrel as of May 6, 2015.  One can assume that either this idea just occurred to governor or that he decided not to advise President Jonathan about it because he knew that his advice would be ignored because of interests vested in retaining Nigeria’s majority shareholding in the JV oil companies to guarantee the political patronage and revenue “siphoning” it provides. Perhaps, the governor thought that the slump in oil prices was a temporary phenomenon that would not lead to serious financial hardship for the government as we are now witnessing. Secondly, what is the overarching reason for the advice? Is there a hidden agenda? Is the governor fronting for the private equity companies who are waiting in the wings to grab the lucrative government stakes in the JV oil companies and deep their hands further into the pockets of the Nigerian oil industry? Is the governor offering this advice  altruistically and genuinely to solve the financial crunch the incoming administration will face in trying to meet the expectations of Nigerians for improved economic performance? I have no reason to doubt the governor is sincere about his advice and believes it is in the best interest of the government and people of the country. Thirdly, why has the governor recommended only a partial divestment, i.e. why reduce government stake to 30% and not to zero or convert the JVs to other forms of contractual arrangements such as production sharing contracts (PSC) or service contracts? I think the governor believes that it is critical for the government to continue to have an important stake in the oil industry in order to maintain some modicum of control of the “commanding heights of the economy”.

Fourthly, what is the benefits-costs ratio (BCR)? In other words, is proposal profitable to the government and people on Nigeria? Admittedly, it is almost impossible to come up with a BCR because some of the benefits and costs are non-quantifiable and cannot be ‘shadow-priced’. However, we can estimate the major quantifiable benefits and costs. The immediate reaction by some people to the proposal would be to dismiss it as dangerous and unprofitable because it could reduce future revenue stream into the federation account due to the reduction in  “equity oil” sales which may not be compensated by any reasonable increase in petroleum profit tax (PPT), royalties, rents, etc. As an empirical economist, I decided to conduct a quick “back-of-the-envelope” analysis of the proposal through the use of a simple economic model to estimate the likely loss in oil revenue, the possibility of realizing the $75 billion the governor expects the government to make from reducing its equity holding in the JV oil companies to 30% and the PPT rate at which government oil revenue will not fall if it decides to accept the proposal. In the remaining part of this paper, I will discuss the model, the simulation results and conclude with some recommendations for the incoming Buhari's administration.

The model I have developed to analyze the governor’s proposal (call it the OJV model) is made up of the following equations:

  1. G =  aQP –aC
  2. J = (1-a)QP – (1-a)C
  3. R = G + tJ
  4. A = J -  tJ  = (1- t) J

Where:

G= Revenue of the Government from crude oil sales (of its share/”liftings”)

Q = Total crude oil produced by the JV oil companies in a year in million barrels. We will assume Q =420 million in model simulation which is about quantity of crude oil produced under the JV arrangements in 2013.

P = Average price of Nigerian crude oil during the course of the year, in US$ per barrel

a= Average ratio/proportion of government share holding (stake) in the JV oil companies (SPDC, Chevron, Mobil, Agip, Total and Texaco), currently about 0.57 (i.e. 57%)

t = PPT rate, currently 0.85 (85%)

C = Total cost of the JV companies (CAPEX and OPEX) in the year which must be funded by government and the JV partners in proportion to their share holding. We will assume C = $5,000 which is about the average annual JV cost between 2011 and 2013.

J = Revenue of the private JV partners from crude oil sales (of their share/liftings) = Pre-tax profits of the private JV partners

R = Total Government Revenue from crude oil sales and Petroleum Profit Tax

A = After-Tax Profit of the private JV partners

 

Equation 1 states that government net revenue from its crude oil sales (liftings) in a year (G) is the product of its equity holding ratio (a), quantity of crude oil produced by the JV operators (Q) and average export price of Nigerian crude oil (P) less the government’s JV cash call obligation (aC) which is the product of its equity holding ratio and the agreed cost of production by JV operators (C). Equation 2 states that the other JV partners’ pre-tax revenue (J) is the product of their joint  equity holding ratio (1- a), quantity of crude oil produced by the JV operators (Q) and average export price of Nigerian crude oil (P) less their cash call obligation. Equation 3 states that the total government revenue (R) is the sum of the net revenue from crude oil sales (R ) and petroleum profit tax paid the other JV partners which is the product of the PPT rate (t) and their pre-tax revenue (J). Equation 4 states that the after-tax revenue (profit) of the other JV partners (A) is their pre-tax revenue (J) less the PPT paid to the government (tJ).

 

Of course, like in most economic modeling exercises, we have made some simplifying assumptions. For instance we have excluded gas sales and other sources of oil revenue such as royalties and rents. However, the relaxation of these assumptions will not significantly change the results and inferences from the model. Using the above model, and assuming that Q =420 million barrels (1.15 million barrels a day) and C = $5,000 million (=$5 billion), we computed the values of G, J, R and A based on three crude oil price levels ( P = $50, $75 and $100) and three government equity holding ratios (a = 0.57 or 57%, 0.30 or 30% and 0.0 or 0%). Table 1 below (shaded area) shows the results of our computation.

 

Table 1: Computed Value of Government Revenue and other JV Partners Revenue from JV Operations based on three Crude Oil Price Levels and Three Government Equity Holding Ratios                                                                           

                                                                                                           US $m

 

Q

P

C

A

t

C

G

J

R

A

1

420

50

5,000

0.57

0.85

5,000

9,120

6,880

14,968

1,032

2

420

50

5,000

0.30

0.85

5,000

4,800

11,200

14,320

1,680

3

420

50

5,000

0.00

0.85

5,000

0

16,000

13,600

2,400

4

420

75

5,000

0.57

0.85

5,000

15,105

11,395

24,791

1,709

5

420

75

5,000

0.30

0.85

5,000

7,950

18,550

23,718

2,783

6

420

75

5,000

0.00

0.85

5,000

0

26,500

22,525

3,975

7

420

100

5,000

0.57

0.85

5,000

21,090

15,910

34,614

2,387

8

420

100

5,000

0.30

0.85

5,000

11,100

25,900

33,115

3,885

9

420

100

5,000

0.00

0.85

5,000

0

37,000

31,450

5,550

 

For example, row 1 indicates that at 57% average equity holding in the JVs and at P= $50 per barrel and at the current 85% (0.85) tax rate, government revenue from JV operations (R ) will be $14,968 million (or $14.968 billion or about N2.9 trillion) but when the equity holding is reduced to 30% (0.3) as proposed by the CBN governor (row 2), R will drop to $14,320million – a drop of 4.3% or a loss of about $648 million a year.  If the government decides to relinquish all its equity holding (row 3), R will decline further to $13,600 million– all coming from PPT. At P =$75 per barrel, R will be at $24,791 at 57% equity holding (row 4) but drop to $23,713million at 30% equity holding (row 5) – a drop of $1,073million or 4.3% also. At  P =$100 per barrel, R will be at $34,604million at 57% equity holding (row 7) but drop to $33,115million at 30% equity holding (row 5) – a drop of $1,499million or 4.3% also. Notice that the drop in government revenue from JV operations as a result of the reduction in its equity holding ratio is accompanied by an equal increase in the after-tax revenue of the other JV partners if the PPT tax rate remains unchanged. Also note that the magnitude of drop (loss) in government revenue is a function of the price of oil (P) – the higher the price the larger the loss. In fact, the model results indicate that for each $1 increase in the average price of crude oil, R will drop by about $17 million. Figure 1 illustrates the net government revenue from oil (R ) based on the three levels of equity holding and three crude oil price levels.

Figure 1: Net Government Oil Revenue from JV Operations based on different Oil Price Levels and FG Equity Holding

 

From the above, it is clear that while the drop in government oil revenue (R ) appears small in relative terms (about 4.3%) , it is nonetheless large in absolute terms ($648 million at P=$50, and $1,073 at P=$75)  if government equity holding is reduced from  57% to 30% as proposed by the CBN governor. To prevent such as drop, the governor advocated for an increase in the petroleum profit tax rate (t) but he did not indicate the percentage point increase. The question therefore is to what level should the PPT rate be increased to prevent a drop in government future oil revenue stream? To answer this question, I simulated the model using different tax rates from 0.85 (85%) to 0.95 (95%) to determine where oil revenue at 57% government equity holding (R0.57) equals revenue at 30% equity holding (R0.30). Table 2 and figure 2 show the simulation results for PPT rates of 85%, 90%, 91% and 92%.  I have also shown the corresponding after-tax revenue of the private JV partners (A) and the results when government equity holding is reduced to zero.

Table 2: Government Revenue from JV Oil Operations at $75 per barrel based on different PPT rates and equity holding ratio

 

    

         t=0.85

 

t =0.90

 

t=0.91

 

t=0.92

 

 

Q

P

C

a

R

A

R

A

R

A

R

A

1

420

50

5,000

0.57

14,968

1,032

15,312

688

15,381

619

15,450

550

2

420

50

5,000

0.30

14,320

1,680

14,880

1,120

14,992

1,008

15,104

896

3

420

50

5,000

0.00

13,600

2,400

14,400

1,600

14,560

1,440

14,720

1,280

4

420

75

5,000

0.57

24,791

1,709

25,361

1,140

25,474

1,026

25,588

912

5

420

75

5,000

0.30

23,718

2,783

24,645

1,855

24,831

1,669

25,016

1,484

6

420

75

5,000

0.00

22,525

3,975

23,850

2,650

24,115

2,385

24,380

2,120

7

420

100

5,000

0.57

34,614

2,387

35,409

1,591

35,568

1,432

35,727

1,272

8

420

100

5,000

0.30

33,115

3,885

34,410

2,590

34,669

2,331

34,928

2,072

9

420

100

5,000

0.00

31,450

5,550

33,300

3,700

33,670

3,330

34,040

2,960

                 

 

The results show that in order for the government to receive the same level of oil revenue (R ) after reducing its equity holding from 57% to 30%, the PPT rate must be increased from 85% to between 90% and 91% (90.6% to be precise) as shown by the highlighted numbers in the table.  For example, at P = $75 and “a”= 57%, R = $24,791 million, but when “a” is reduced to 30%, R falls to $23,718million. In order to prevent this fall (that is, maintain R at or very close $24,791), t must be set at between 0.90 and 0.91 (precisely at 0.906). But will the government be able to find equity investors who will be willing to buy the 25% equity for $75 billion when the PPT rate is raised from the current level of 85% to 90.6%? In my opinion, this is very unlikely.

Fig. 2: Government Net Oil Revenue (R) from JV Operations at P = $75 per barrel and at four different levels of PPT Tax Rate and three Equity Holding Ratios

The CBN governor did not reveal how he arrived at the $75 billion which he expects the government to rake from private investors who will acquire the equity that the government will relinquish. The governor and his team may have conducted a valuation of Nigeria’s equity in the JV oil companies to arrive at this amount but the results of my model indicate that this may be very difficult to achieve. If the sale of 25% of government equity will yield $75 billion, as the governor has indicated, one can assume that 1% will yield $3 billion. Will private investors pay $3 billion to acquire 1% equity in the JVs? Let us go back to our model to see what the private investors can expect to make as after-tax profit (A) if they acquire the equity the government will relinquish. The model simulation results indicate that at P = $50 per barrel, the private investors who will acquire the 27% equity from the government (57% to 30%) will reap $648million as after-tax profit in a year. This translates to about $24 million for 1% equity acquired. At P = $75, the after-tax profit translates to about $40million for 1% equity while at P = $100, it translates to about $55million for 1% equity. Thus, assuming zero inflation rate, it will take between 55 and 130 years for the equity investors to recover the funds invested to acquire the equity if they decide to buy the 27% for $75 billion. The “recovery period” will in fact be much longer because of inflation, and if the government decides to increase the PPT rate (to mitigate the loss in oil revenue) as suggested by the governor. If the private equity investors do their due diligence (homework) it is very unlikely that they will be willing to pay a whopping $75 billion to acquire 27%, much less 25%, of government stake in the JV companies as suggested by the governor. In my view, based on the model, the amount the government is likely to realize from the sale of 25% of its stake will be much less in view of the likely increase in PPT rate as suggested by the governor, declining JV oil production and declining share of JV oil in total oil production.

Finally, let us assume that government can rake the $75 billion by not increasing the PPT rate in order to incentivize the private equity investors to acquire the equity. Let us further assume that government will use all the proceeds for infrastructural development and job creation as suggested by the CBN governor. Will the resulting “infrastructural development” and job creation bolster the federation account enough to compensate for the loss of revenue due to the reduction in government equity holding? Given Nigeria’s experience with infrastructural development/capital projects (e.g. in electricity, roads, railways) it is unlikely that these projects can generate additional $1,000 million in revenue each year (using the $75 per barrel estimate) into the federation account to make for the loss in oil revenue. The result is that all the tiers of government will face a reduction in allocation from the federation account. It is also important to point out that as in the case of the sovereign wealth fund, the federal government will be  challenged by some state governments over the sale of the government equity in the JV oil companies to private investors because the equity belongs to the “federation”, not the federal government only.

From the above analysis, we can conclude as follows:

  1. The proposal by the CBN governor to the incoming administration to sell 25% of government  stake in the JV oil companies operating in Nigeria to raise $75 billion for infrastructural development of key sectors of the economy deserve a careful analytical study. It should not be dismissed outright nor accepted hook-line-and-sinker without an independent study (in addition to the study by the CBN team) of the short and long-term costs and benefits, especially of its impact on the federation account.
  2. The sale of the 25% stake is unlikely to generate as much as $75 billion given the outlook of crude oil prices, decline in crude oil production by JV companies, decline in the share of JV oil production in total production, the likely increase in tax rates and the likely low rates of return on the equity. The sale will reduce revenue accruing to the federation account by between $600 million and $1.5 billion a year depending on crude oil prices. In order to avoid this loss of revenue, the government may have to increase the PPT rate substantially, from its current level of 85% to about 91%.   
  3. The sale may result in the loss of control of the oil industry – the “commanding height of the economy - by the government and this will mean a major change in Nigeria’s post-independence economic policy.
  4. The sale of government equity in the JV oil companies to raise funds for infrastructural development is a controversial policy at best. If the government is able to raise the $75 billion within a short period of time, managing the funds will be a very challenging task due to absorption issues and high corruption risk. The incoming administration should first put in place effective anticorruption measures before thinking of such a massive capital investment program. In any case, through proper management of its resources and reduction of its bloated recurrent and overhead expenses, the government can generate adequate funds internally for the needed infrastructural development without selling some of its stakes in the JV oil companies. The government can also explore other sources of generating revenue such as improved tax administration and gradual elimination of fuel subsidies.
  5. The management of the government’s portion of the JV oil operations has left much to be desired, but a partial or total sale of government equity is not the solution to the problem with the JVs. The NNPC must be unbundled and restructured as soon as possible. For instance, it should be relieved of the responsibility of lifting and selling the government equity crude oil. The JV operators should sell all the oil they produce directly, deduct the agreed “cash calls” and remit the government’s net oil revenue and their taxes, royalties, rents and other payments directly to the federation account. The local refineries should be made to purchase crude oil directly from the oil operators at market/international rates. Most of the current subsidiaries of NNPC such as the NPDC should become independent of NNPC and operate like private companies without any preferential treatment or support from government, and should be made to pay agreed profits to the federation account. The Boards and Management Teams of the companies should be given annual financial targets (with in-built reward and penalties including loss of appointment) by the Ministry of Petroleum Resources in conjunction with the Ministry of Finance.  

Finally, what I have done in this paper is more or less a “back of the envelope” analysis. It was conducted within a short time, but the results are very instructive. Given the critical nature and long-term impact of the CBN governor’s proposal, the incoming Buhari’s administration needs to engage an independent group of experts like yours truly -yes, I must market myself! - to conduct a more detailed analysis of the proposal and compare the results with those of the CBN team that has set up by the governor, before making a final decision on the matter and the whole issue of what to do with NNPC and the management of the oil industry in Nigeria .

Dr. Emmanuel Ojameruaye

President, Capacity Development International, LLC (www.capdevinternational.us)

Phoenix AZ, USA.    May 20, 2015.

The Political Economy of Change: Lessons from America for the Buhari’s Administration in Nigeria

By Dr. Emmanuel Ojameruaye

Introduction:

In a democracy, a general election is a referendum on the status quo. The incumbent says that things are okay or getting better and we need to stay on course. The opposition says that things are not okay and we need a change or changes so that things can get better. When things are not okay or when the incumbent and his team are seen to be performing well, the tendency is that the opposition will win. Thus, opposition politicians usually campaign on the platform of “change” or some variant of it. It works in many cases when most voters find the status quo undesirable. This is what happened on March 28, 2015 and April 11, 2015 when the APC not only won the presidency but also took control of both the Senate and House of Representatives as well as xx out of 36 States of the Federation, thus ending the 16-year rule and domination by the PDP and its dream to rule Nigeria for 50 years! The daunting task before the APC now is how to implement the “Change” it promised and satisfy the electorate, so that it can retain control after its current 4-year mandate. The party and the new President have been inundated with suggestions on what changes to implement and how to implement them. However, most of the suggestions have not been based on the theory, experience and best practices of socio-economic and political change management. Cynics have argued that there is very little that Buhari can do to change Nigeria and that he is doomed to fail because he will be operating under a democracy where there are checks and balances, and because Nigeria is essentially “unreformable”. With determined and effective leadership change is possibly and happens under democratic governments. In fact, political history is replete with “democratic Revolutionaries” who have implemented fundamental changes or “democratic revolutions” in their countries even within the constraints of democracy. In this open letter to the President Buhari and the APC leadership, I will proffer some suggestions for the effective management of the Change Agenda in the next four years based on lessons from the United States, specifically from the presidencies of Franklin D. Roosevelt (1933 – 1945), Ronald Reagan (1981-1989) and Barrack Obama (2009-2017). My choice of the United States (US) is based on the fact that it is one of the “best practice” cases and greatest advocate of democratic governance. It is my hope that the lessons from the US will assist in shaping and managing the Buhari Revolution in Nigeria. I will begin by looking at the concept of change in the context of the results of an election. Then I will briefly look at some of the changes implemented by the three US Presidents mentioned above and some of the challenges they faced as well as lessons from their presidencies. Finally, I will present my suggestions for the Buhari administration.

Change

The term change is both a noun and a verb. As a verb, change means “to become different” or “to become something else” or “to become transformed or modified”. As a noun, it means “an act or process or result of changing” or “a transformation or modification or alteration”. Thus, when a politician promises “change” during an election, it means that he is going to do certain things differently or he is going to transform or modify or alter certain things and the end result will be better than the status quo.  The change process involves transitioning from a state or position A (status quo) to state B (ideal/target) and the difference (B – A) is the change. Moving from A to B will obviously take some time and will require planning, resources and several steps. It is also important to track, monitor and evaluate the movement or transition by using specific performance indicators (metrics) to ensure that the transition is progressing well. It is also important for the results to be sustainable. That is, once state B is achieved it must be maintained or improved upon so that the system does not slide back to state A.

The promised “Change” is normally made up of many changes. A politician will not win an election if he promises only one change. Voters expect several changes as part of the Change platform. For instance, the Nigerian voters expect the incoming President to significantly reduce corruption,  significantly improve security (i.e., reduce kidnappings and armed robberies, and eliminate Boko Haram and other insurgencies), end the perennial fuel scarcity, improve public governance (transparency, accountability, performance, effectiveness and efficiency), significantly improve the reliability of public electricity supply, and improve public infrastructure – roads, water supply, sanitation, etc. All these and more should form part of a comprehensive Change Agenda. Each of these elements of the Agenda will require several implementation steps. The various changes cannot be implemented in one fell swoop or simultaneously without “overheating” the economy and polity. Therefore, sequencing of the changes is required. In order words, the change agenda must effectively managed. Change management deal with the identification of the various changes that have to be made and the steps involved in each, how these changes will be implemented, the sequencing of the changes and steps, harmonization of the changes, identification of the resources for implementing the changes, behavioural change communication during the process, monitoring and evaluation of the changes taking place, and ensuring that positive and sustainable results are achieved at the end. A “Change Czar” reporting to the President may be required to coordinate the changes and overall management process.

Democratic Changes or Revolutions in the United States

The history of the United States (US) is replete with Presidents who have implemented fundamental changes –which I will call “democratic revolutions” – in the country and overseas. In this section, I will describe some of the significant changes that occurred in the US following some general elections in which the opposition party won the presidency. I will discuss three spectacular cases and draw some lessons from them for the Buhari administration. The first case is that of Franklin D. Roosevelt (FDR), the 32nd President of the US who won a record four presidential elections ruling from March 1993 to April 1945 when he died in office. Even though he had lost the use of his legs due to polio in 1921, FDR won the Democratic Party presidential ticket to contest the 1932 elections. In his acceptance speech, he laid the foundation for his Change Agenda when he stated that “I pledge you, I pledge myself to a New Deal for the American people... This is more than a political campaign”.  He went on to defeat the incumbent Republican President Herbert Hoover in the November 1932 election at the depth of the Great Depression. The voters expected him to deliver changes that will pull the country out the Depression and improve their lives. After he was sworn into office in March 1933, FDR and the Democratic Party formed the New Deal coalition by mobilizing the poor as well as organized labor, ethnic minorities, urbanites, and Southern whites. During his first 100 days in office, FDR spearheaded major legislations and issued several executive orders that instituted the New Deal which included several programs designed to produce relief (government jobs for the unemployed), recovery (economic growth), and reform (through regulation of Wall Street, banks and transportation). He also created numerous programs to support the unemployed and farmers, and to encourage labour union growth.  He worked with Congress to repeal the Prohibition and this added to his popularity and helped him to win reelection by a landslide in 1936. The US economy improved rapidly from 1933 to 1937, but then relapsed into a deep recession in 1937–38. Of course, he had opposition to his New Deal, both from his own Democratic Party and the Republican Party. The bipartisan Conservative Coalition that was formed in 1937 blocked all his proposals for major liberal legislation (apart from a minimum wage law), and abolished many of the relief programs when unemployment practically vanished during World War II. However, most of the regulations on business continued until they ended between 1975–1985, except for the regulation of Wall through by the still existing Security and Exchange Commission. The Federal Deposit Insurance Corporation and Social Security and several smaller programs which he established are still alive till today. FDR appointed powerful men to top positions but he made all the major decisions, regardless of delays, inefficiency or resentment.  On FDR’s administrative style, the historian James M. Burns concluded that:

“The president stayed in charge of his administration...by drawing fully on his formal and informal powers as Chief Executive; by raising goals, creating momentum, inspiring a personal loyalty, getting the best out of people...by deliberately fostering among his aides a sense of competition and a clash of wills that led to disarray, heartbreak, and anger but also set off pulses of executive energy and sparks of creativity...by handing out one job to several men and several jobs to one man, thus strengthening his own position as a court of appeals, as a depository of information, and as a tool of co-ordination; by ignoring or bypassing collective decision-making agencies, such as the Cabinet...and always by persuading, flattering, juggling, improvising, reshuffling, harmonizing, conciliating, manipulating.”

The second case is President Ronald Reagan who also implemented significant and enduring changes during his tenure as the 40th President of the United States (1981-1989). Amid a weak economy and the Iran hostage crisis that called for stronger leadership, Ronald Regan, the Republican Party presidential candidate, defeated incumbent President Jimmy Carter of the Democratic Party in the US presidential election on November 4, 1980. Although Reagan did not use the “Change” mantra, it was clear from his campaign promises that he planned to turn things around when elected. In his campaign he stressed lower taxes to stimulate the economy, less government interference in people's lives, states’ rights and a strong national defense. Desirous for a change, Americans voted massively for Reagan. He received 50.7% of the popular vote as against 41 % for Carter, carried 44 states (out of 50), and secured 489 electoral colleges to 49 for Carter. The Republicans also captured the Senate for the first time since 1952, and gained 34 seats in the House of Representative which however remained under the control of the Democratic Party. In his inaugural address, on January 20, 1981, Reagan dwelt on the country's economic problems and argued that "In this present crisis, government is not the solution to our problems; government is the problem”. Immediately he was sworn into office, he sprang into action to implement policies that reflected his belief in individual freedom, liberalized economy, expanded military, and termination of communism. He implemented several economic initiatives including the so-called supply side economics, dubbed Reaganomics, which is based on tax rate reduction to spur economic growth, control of the money supply to curb inflation, economic deregulation, and reduced government spending. The economic policies led to a reduction of inflation from 12.5% to 4.4%, and an average annual growth of GDP of 7.91%. During his presidency, federal income tax rates dropped significantly with the signing of the Economic Recovery Tax Act of 1981, which lowered the top marginal tax bracket from 70% to 50% and the lowest bracket from 14% to 11%. In 1982 he signed the Job Training Partnership Act in support of his job creation program which initiated one of the first public-private partnerships in the United States resulting in the creation of 16 million new jobs. He also announced the “War on Drugs” in 1982 to curb the increasing “crack epidemic” in the US. He ended the price controls on domestic oil which had contributed to energy crises in the early 1970s. The price of oil subsequently dropped, and the 1980s did not see the fuel shortages that the 1970s had. His policy of “peace through strength” resulted in a record peacetime defense buildup including a 40% real increase in defense spending between 1981 and 1985. In his famous address on June 8, 1982, to the British Parliament, he said, "the forward march of freedom and democracy will leave Marxism-Leninism on the ash-heap of history” and on March 3, 1983, he predicted the collapse of communism, stating, "Communism is another sad, bizarre chapter in human history whose last pages even now are being written".   The same month, he called the Soviet Union "an evil empire”.

During his reelection bid in 1984, Reagan campaigned on the notion that it was “Morning again in America” implying that more positive changes are in the offing. Because of his good performance and positive results of the changes introduced during his first term, he won a landslide with the largest electoral college victory in American history. Foreign affairs dominated his second term, including ending of the Cold War between the US and Soviet Union.  Reagan recognized and took advantage of the change in the direction of the Soviet Union under Mikhail Gorbachev, and shifted to diplomacy, to encourage the Soviet leader to pursue substantial arms agreements and persuade him to allow for more democracy and free speech that would lead to reform and the end of Communism. He reached a nuclear disarmament agreement with Gorbachev. Speaking at the Berlin Wall on June 12, 1987, Reagan challenged Gorbachev, saying “if you seek peace, if you seek prosperity for the Soviet Union and Eastern Europe, if you seek liberalization, come here to this gate! Mr. Gorbachev, open this gate! Mr. Gorbachev, tear down this wall”.  Due to Reagan’s efforts and his positive engagement with Gorbachev, the Berlin Wall was torn down in November 1989, ten months after Reagan left office, and the Cold War was officially declared over at the Malta Summit on December 3, 1989. Two years later, on December 26, 1991, the Soviet Union was dissolved and its 15 constituent “republics” (Russia, Ukraine, Georgia, Armenia, Estonia, Belarus, Moldova, Azerbaijan, Uzbekistan, etc) were “liberated” to form their own independent countries. The East European countries also regained their “freedom” from the strangle-hold of the Soviet Union.

Reagan also implemented several domestic initiatives. For instance, in 1986, he signed the Immigration Reform and Control Act to deal with the immigration problems in the US. The act made it illegal to knowingly hire or recruit illegal immigrants and granted amnesty to some three million illegal immigrants who entered the United States before January 1, 1982, and had lived in the country continuously.   In order to cover the federal budget deficits, his administration borrowed heavily both domestically and abroad, raising the national debt from $997 billion to $2.85 trillion.  Reagan described the increase in national debt as the "greatest disappointment" of his presidency. Nonetheless, Reagan held an approval rating of 78% when he left office, matching those of FDR and later Bill Clinton, the highest ratings for departing presidents in the modern era. Reagan has since become an icon among Republicans and ranks highly in public and critical opinion of US Presidents.

Several factors contributed to the success of the so-called “Reagan revolution” – the set of his political and economic initiatives - which apostles of change must learn to follow.  Firstly, he was a great communicator. Secondly, he was a great alliance builder, a great “engager” and a great negotiator.  He built alliances with other world leaders, especially with Margaret Thatcher of the United Kingdom. He engaged his political base and Republican leaders in the US as well as Democratic leaders in Congress and foreign leaders, especially Mikhail Gorbachev. Thirdly, he was a firm but friendly and jovial leader. Even his “enemies” and opponents admired. Fourthly, although he was a dogged leader, he was willing to adjust his strategies and views.  For instance, during his visit to Moscow in 1988, a journalist asked him if he still considered the Soviet Union an “evil empire”, he replied "No. I was talking about another time, another era".

The third case is that of President Barrack Obama, the 44th President of the US, and the first African American to occupy the White House. He announced his candidacy for the President of the US on February 10, 2007, using the “Hope and Change” mantra and with emphasis on rapidly ending the Iraq War, increasing US energy independence and reforming the healthcare system. He defeated Hilary Clinton in 2008 to become the Democratic Party presidential candidate. He then went on to defeat the Republican Party candidate, John McCain, whom he portrayed as a man of the status quo and a mirror image of outgoing President George Bush, a Republican. Obama won the presidential election on November 4, 2008 with 365 electoral college votes compared to 173 for McCain, and 52.9 percent of the popular vote compared to 45.7per cent for McCain. In his first few days in office, Obama issued executive orders and presidential memoranda directing the U.S. military to develop plans to withdraw troops from Iraq and ordered the closing of the Guantanamo Bay detention camp (Gitmo). However, Congress prevented the closure of the camp by refusing to appropriate the required funds and preventing moving any Gitmo detainee into the U.S. or to other countries. On his 9th day in office he signed the Lilly Ledbetter Fair Pay Act of 2009 which relaxed the statute of limitation for equal-pay lawsuits, thus finally prohibiting gender-based wage discrimination. Five days later, he signed the reauthorization of the State Children's Health Insurance Program (SCHIP) to cover an additional 4 million uninsured children. In March 2009, he reversed a Bush-era policy which had limited funding of embryonic stem cell research.

During his first two years in office, Obama take several far-reaching actions and implemented many initiatives including the following: a) He signed into law the economic stimulus legislation (called the American Recovery and Reinvestment Act of 2009) and the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010 to overcome with the Great Recession; b) After much controversy, he signed into law the Patient Protection and Affordable Care Act of 2010  (often referred to as Affordable Care Act or  "Obamacare") aimed at increasing the quality and affordability of health insurance, lowering the uninsured rate by expanding public and private insurance coverage, and reducing the costs of healthcare for individuals and the government. The law also introduced mechanisms like mandates, subsidies, and insurance exchanges and requires insurance companies to cover all applicants within new minimum standards and offer the same rates regardless of pre-existing conditions or sex; c) He signed the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 which brought the most significant changes to financial regulations in the US since the regulatory reform that followed the Great Depression of the 1930s; d) He also signed the Don't Ask, Don't Tell Repeal Act of 2010 which established a process that allows gays, lesbians, and bisexuals to serve openly in the U.S. Armed Forces by ending a policy in place since 1993 that allowed them to serve only if they kept their sexual orientation secret and the military did not learn of their sexual orientation; e) He appointed two women to serve on the Supreme Court in the first two years of his Presidency, including the first Hispanic Supreme Court Justice, bringing the number of women sitting simultaneously on the Court to three, for the first time in American history; f) He ended US military occupation of Iraq by bring all her troops home. He however increased US troop levels in Afghanistan; g) He ordered the military operation that killed America’s most-wanted, Osama bin Laden and also increased the use of drones to eliminate several Al Qaeda leaders; h) He signed a new START arms control treaty with Russia and tried to “reset” US-Russia relationship;

Unfortunately, during the mid-term Congressional election in November 2010, the Republican Party regained control of the US House of Representatives as the Democratic Party lost a total of 63 seats. Obama said the result of the election was "humbling" and a "shellacking" and he acknowledged that it was in part due to the fact not enough Americans had felt the effects of the economic recovery and other initiatives he had introduced during his first two years in office. On April 4, 2011, Obama announced his reelection campaign for 2012 and thanks to keeping fate with some of his promised changes, he was reelected in November 2012, defeating the Republican candidate, Mitt Romney, who campaigned on reversing or gutting some of the changes Obama had introduced during his first term. Obama won 332 electoral college votes and 51.1 percent of the popular vote, thus becoming the first Democratic president since FDR to twice win the majority of the popular vote. He was sworn in for a second term on January 20, 2013.

During his second term, Obama promoted domestic policies related to gun control and immigration reform. Frustrated by the unwillingness of the US Congress to come up with a legislation to fix the country’s immigration problem and in fulfillment of one of his outstanding campaign promises, he decided to issue an Executive Order on November 19, 2014 to address some aspects of the immigration problem while waiting on Congress to act. Among other things, the Executive Action: a) “offers a legal reprieve to the undocumented parents of U.S. citizens and permanent residents who've resided in the country for at least five years, and removes the constant threat of deportation; b) “expands the 2012 Deferred Action for Childhood Arrivals (DACA) program that allowed young immigrants, under 30 years old, who arrived as children, to apply for a deportation deferral” and to remain in the US legally. In foreign policy, he has ordered US military re-involvement in Iraq in response to the threat by ISIS “terrorist” group and has initiated a process to end US combat operations in Afghanistan. He has also taken the first steps to normalize relationships with Cuba.

The verdict is still out on the Obama Revolution and on whether his initiatives have been successful or will outlive his tenure. One thing that is clear is that he has faced more opposition to his change initiatives than FDR and Reagan, and this was reflected in the decline in his approval rating over time, and the loss of control, by his party, of the House of Representatives in the 2010 election, and of the Senate in the 2014 election. All these have not only blunted the impact and speed of implementation of his change agenda but also called into question the sustainability of the changes when he leaves office in 2017. Despite the setbacks and opposition, President Obama has remained faithful to his program of change, and has earned a place in the pantheon or hall of fame of democratic revolutionaries. There is no doubt that latent or overt racism may have accounted for some of the opposition to his change program and his person. For some people, it is akin to a situation where their hatred for the messenger overrides their love for the message.

However, there is no doubt that there are certain things he should have done to increase the acceptability of his initiatives. Firstly, he has not been a very effective communicator of the benefits of the changes to the American people. The opposition (Republicans) seemed to have been more effective in communicating the “negatives” and alleged dangers and failures of some of the initiatives. For instance, rather than call the president’s health care program by the official  name (Patient Protection and Affordable Health Care, which is positive), they decided to call it  “Obamacare” - in a rather negative and derogatory sense – which masks the “protection” and “affordability” elements of the law. Unfortunately, President, his party and the public have embarrassed the name imposed on the program by the Republicans. It is not surprising therefore to see an uninformed voter saying that he hates Obamacare but loves the Affordable Healthcare. In fact, the Obama’s case illustrates the difference between oratory and effective communication in the theory of change. While most people agree that Obama is a very good orator, many think that he is not an effective communicator. Oratory can help to win an election, but you need effective communication and leadership skills to sell and successfully implement your change agenda.

Secondly, it has been alleged that President Obama did not adequately engage the Republicans and other groups who may be adversely affected by his change agenda before the enabling laws were and during the implementation. In a democracy, it is important to give the opposition (minority) a “voice” even though the majority will ultimately have its way.  Thirdly, it appears that the changes are too many and are not optimally sequenced.  For instance, given the controversy and opposition to the Affordable Act (ACA), Obama should not have made it a priority during the first two years of his administration or he should not have allowed it to become law without the support of a single Republican lawmaker. Signing such landmark legislation at the beginning of his administration without a single Republican support created “bad blood” that has devilled that law, and has led to various legal challenges to it. Perhaps, instead of the “omnibus” ACA. The President should have adopted a “piecemeal” or “gradualist” approach in reforming the healthcare system beginning with the generally acceptable components of the ACA and moving the controversial components to his second term. Fourthly, the President was over-optimistic about the preparedness of America for change.  He underestimated the power of inertia in people, organizations and systems.  For instance, at the University of Cairo in 2009, he called for a “New Beginning” in the relationship between the US and Islamic countries and the promotion of Middle East peace. Six years on, these have remained elusive. Ditto the promised closure of the Gitmo prison camp.  Notwithstanding the challenges and upsets Obama has faced in implementing his Change initiatives, history will show that many of the changes were necessary and that he did his best to improve the American and the World, and thus deserved the Nobel Peace Prize he was awarded in 2009.

 

Lessons for the Buhari Administration:

In addition to some of the lessons that have been highlighted in the above review of the “Change” agenda of three great US Presidents, the following are some additional lessons for the Buhari Administration as it embarks on its mission to cure the ills of the country and make the country truly great through its Change Agenda.

  1. Unanimity is almost impossible in a democracy. There will always be opposition to any proposed change. Although some people want a change, others may resist it. The “apostle” of Change must try to address some of the concerns of those who will resist the changes he is intending to make; otherwise they can become a wrench in the wheel of change, and can ultimately scuttle the change. As a minimum, the opposition should be allowed to have their say if they cannot have their way. Therefore, the Buhari administration  should be mindful of the fact that that many of the people benefitting from the status quo,  including some members of APC, the oil “cabal”, etc,  will oppose some of the proposed changes and will stop at nothing to thwart the changes.  The administration must therefore devise a clever way of communicating or engaging with them, and to assuage their fears without compromising the changes.
  2. In a democracy, the powers of the President are limited. Even though he can use “executive orders” to effect some changes, it should be as a last resort on a temporary basis. All major changes must be approved by the legislature and backed by an enabling legislation, ideally with the support of some members of the opposition or other (non-ruling) parties. Thus, the Buhari administration must guard against changes that are “unconstitutional” or not backed by legislation or a “temporary” executive order. To this end, the first order of the Change Agenda of the administration should be to catalogue the first set of changes/initiatives it intends to implement and verify if they are constitutional or consistent with existing legislation. If not, the administration should prepare appropriate enabling bills and send to the National Assembly for debate and approval, and ultimate signing into law before the implementation. Where the debate is taking too long (as in the case of the Petroleum Industry Bill), the President can sign executive orders to implement some aspects of the proposed changes as President Obama has done in the case of the immigration problem in the U.S.
  3. The Buhari Administration needs to form a Change Coalition by mobilizing the poor, farmers, labour unions, student unions, and civil society organizations, religious and ethnic groups from various parts of the country to support the change initiatives similar to what FDR did in the U.S. If those opposed to the changes know that there is popular support for the changes they will be less likely try to disrupt or sabotage the changes.
  4. People do not like cosmetic changes or old wine in new bottles. People want and expect real changes or innovations. Therefore the Buhari administration must demonstrate that the proposed changes are real through verifiable results.
  5. The actions of the administration during its first 100 days are very critical and will indicate its sincerity and capability for change. The administration must therefore identify and take some concrete actions that will deliver visible changes (so called “low-hanging fruits”) during the first 100 days and set the tone for subsequent changes. Such actions should focus on some of the areas that of immediate concern to most Nigerians now, namely fuel crisis (scarcity of petroleum products), electric power supply, corruption and insecurity. For instance, on the fuel crisis, the administration should free the economy from the strangle-hold of the private importers of petroleum products by taking advantage of the low price of petroleum products in the world market to abolish any form of fuel subsidy, monitoring the activities of the importers and marketers to prevent price gouging by imposing stiff penalties including withdrawal of licenses of offenders, importation by PPMC (to bridge gap and compete with private importers) and increasing domestic refining of petroleum products.  For each of the areas of change, a short-term program of action (activities) with deliverables/targets should be worked out.   
  6. All the promised changes cannot be implemented in one fell swoop or simultaneously. Thus, it is important to prioritize and sequence the changes and the steps. The APC Manifesto posted the party’s website (www.apc.com.ng ) lists well over 100 activities or actions in 26 sectors or areas the party intends to carry out if they win the presidency. The 26 sectors/areas span virtually all the sectors/areas of the economy including agriculture and food security, war against corruption and national orientation, transportation, power supply, education, healthcare, Niger Delta, politics and governance, code of conduct, etc. However, on the same website, the APC “Roadmap to a New Nigeria” document lists several targets and sub-activities under ten program areas/key activities, namely create job; fight corruption; free relevant quality education; restore agriculture; housing plan; healthcare for children and adult; social welfare and plan for the less advantaged; roads, power and infrastructure; management of natural resources; and peace, security and foreign policy. In a strict sense of the word, both the Manifesto and the Roadmap are not plans but campaign documents. The administration now needs to harmonize both documents and transform them into a four-year National Development Plan (NDP) that will span all the sectors/areas of the economy and a smaller four-year Change Plan (CP) that will focus on the real changes the administration plans to undertake and want to see happen by the end of its first term. Both a listing of all activities and sub-activities, implementation schedule, resources required for execution, performance indicators, targets and means of verification.  Of course, the CP is different from, but constitutes an integral part of the broader NDP. While the NDP covers all the sectors of the economy, the CP focuses on planned changes. The Annual Budgets will be derived from both the NDP and the CP. In this way the Annual Budget will become the instrument for allocating resources to implement the CP and NDP.
  7. Change is measurable, and should be monitored and evaluated periodically. This means that performance indicators should be identified for all the desired changes and realistic time-bound targets set. For instance,   reliability of power supply is one of the indicators of power supply, average wait time at gas stations is good indicator for fuel supply, corruption perception index is good indicator for corruption, security perception index and number of security-related incidents are indicators for security and citizens’ report card scores and policy and institution assessment index are indicators for governance. Of course, more indicators can be identified and tracked. The “baselines” of these indicators should be measured within the first 100 days of this administration and future values should be measured on a quarterly or annual basis – depending on the indicator- and the results should be published or posted the federal government website.  An independent monitoring and evaluation group should be contracted evaluate and make recommendations on the changes taken place, and publish their results online at regular intervals.  
  8. The President must identify knowledgeable men of integrity who are true “agents of change” and who share his vision to occupy the positions of his administration. However, like FDR in the U.S., he must be in charge – the buck must stop with him – and he must make or approve all the major decisions even if this may cause delays, inefficiency or resentment. However, to assist him, the President can appoint a “Change Czar” to coordinate the changes. The president must also institute an effective system of performance management (with “carrots and sticks” – rewards and punishment) for ministers and other top government officials who should do same for the subordinates and down the line.

In conclusion, I believe Nigeria, like other countries of the world, is reformable. I reject the notion that Nigeria is unreformable (apology, Dr. Ngozi Okonjo-Iweala, the Coordinating Minister of the Economy under the immediate past administration) as if to say Nigerians were created on a separate day from the rest of mankind. All that is required to reform or change Nigeria is strong, effective and visionary leadership. This is what Nigerians expect from the Buhari administration. Like the President in his inaugural address, I will end by paraphrasing Shakespeare again:  There is a tide in the affairs of nations which when taken leads to fortune, and when omitted leads to further misery. The March 28, 2015 election produced such a tide in Nigeria…and we are now afloat. May we follow the current and may it lead to fortune for all.

Dr. Emmanuel Ojameruaye

President, Capacity Development International, LLC, Phoenix, Arizona State, USA.

This email address is being protected from spambots. You need JavaScript enabled to view it. www.capdevinternational.com, June 4, 2015

By Dr. Emmanuel Ojameruaye, This email address is being protected from spambots. You need JavaScript enabled to view it.

The first part of this open letter focused on the issues of form of government and political restructuring. In this second part, I will focus on the issues of fiscal federalism, revenue allocation and resource control.

1. Fiscal Federalism

One of the most contentious issues that the conference is grappling with is fiscal federalism – the assignment of revenue collection/taxing and spending powers between the federal and state governments. This includes include the revenue allocation formula and the so-called “resource control” question. According to R. A. Musgrave and P.B. Musgrave, “Whereas a unitary government need not have its taxing and spending powers specified in the constitution, a federation by necessity must have them so specified. Indeed, fiscal arrangements – assignment of taxing and spending powers – are at the very core o the contract between the constituent governments which combine to form the federation.  While the central government necessarily must fiscal powers, the comprising units retain a sovereign right to conduct fiscal transactions of their own”.[i]

Ideally, under a federation, each tier of government (federal, provincial/state, and district/local) should have assigned taxing powers to raise enough revenue to conduct its operations – administration and provision of public services – and no government should rely on another government for a significant portion of its revenue. The problem with Nigeria’s federalism is that most states governments (SGs) and local governments (LGs) rely heavily on revenue allocated from the federation account, i.e. revenue collected by the federal government (FG) on behalf of the federation. To cure this anomaly, the taxing or revenue collecting power of the FG must be “devolved” in a way that reduces dependency of the sub-national units on the revenue collected by the federal government. The devolution of the fiscal power will ensure that the state/provincial and local/district government will be able to collect enough revenue on their own to perform their constitutional responsibilities. The challenge is to determine which taxing powers of the FG should be devolved to the state and local governments. Ultimately, the “federation account” should be abolished so that each tier of government can rely on the revenue it collects, but this is not possible in the short to medium terms because it may lead to instability and could cripple many states/provinces and LGs/districts. Therefore, as a first step, the federation account should be reduced by transferring some of the revenue currently collected by the federal government to the state and local governments. As a second step, the revenue allocation formula should be amended in a way that better reflects the “spirit” of federalism and ultimately leads to the demise of the federation account in the long-term as the state and LGs become more financially self-reliant.

In order to transfer some of the revenue-collecting power of the FG to the SGs and LGs, we must take a critical look at the key components of the federation account and determine which of the components the FG should collect and which ones should be devolved to the sub-national units in a “completely developed federation” based on best practices from other federations. The table below shows some of the key components of the current federation account revenue (i.e., federally collected revenue) and my proposed allocation of taxing or revenue collecting powers between the FG and the SGs/LGs in the “new Nigeria”.

Table 6: Proposed Devolution of the Taxing/Revenue Collecting Power of the Components of the current Federation Account (FA)

Some Key Components of the current Federally Collected Revenue

Amount as per 2011 Approved Budget            N Billion

Proposed Taxing/Revenue Collecting Power

Oil Revenue (Gross)

                        6815.4                     

 

Government Crude Oil Sales

3819.9

FG

Government Gas Sales

352.6

FG

Petroleum Profit Tax

1927.5

FG

Gas Tax

74.3

FG

Royalties on Oil and Gas

634.5

SGs where oil and gas is produced

Rent

0.5

SGs

Gas Flared Penalty

4.1

LGs where the gas is flared

Miscellaneous, Pipeline fees,    Permits

2.0

FG

Signature Bonuses for Oil Blocks Allocated

4.3

FG for deep offshore blocks, SGs for onshore and shallow offshore

Non-Oil Revenue (Gross)

2403.3

 

Levies on Imported Vehicles, Cocoa, Rice Import, Wines & Spirit, Sanitary Wares, etc

10.0

FG

Import Duties

405.0

FG

Excise Duties/Tax

40.5

SG where the taxable goods are produced. Remove from FA

Export Supervision (NESS)

1.2

FG

Fees

4.5

FG

Companies Income Tax (Corporate or Company Tax)

684.7

FG (x%) and SGs (y%) based on income generated in the state by the companies. Remove from FA

Stamp Duties

15.0

FG. Move to FG independent revenue.

Capital Gains Tax

2.5

FG (x%) and SG (y%) based on where the “gains” were made. Remove from FA

Value Added Tax

770.1

SG

Education Tax

97.2

SG

NITD Fund

8.72

SG

Total Revenue (Gross)

9218.8

 

Source: Columns 1 and 2 are from the Budget Office of the Federation website (www.budgetofice.gov.ng)  

The “devolution” of revenue collecting power as proposed above will result in the transfer of substantial revenues to the SGs and reduce their dependency on the federally collected revenue. However, it will require companies to keep accurate record of the income they generate in each state and file tax returns in each of the state where they operate, in addition to a federal tax return. While the SGs may have the right to establish their own tax rates, it is important for the federal government to impose a “uniformity rule” for certain rates[ii] or bands (lower and upper limits) to allow for competition among the states to attract companies. 

In addition to the above, I would like to suggest as follows:

  • Although the SGs are currently empowered to collect individual (personal) income tax from residents of their states (with the FG collecting income tax of residents of the FCT as part of independent revenue source), the FG should also collect personal income tax from all the citizens of the country as in the United States. This will foster a greater sense of “ownership” of the federal government by the citizens of the country and greater accountability and transparency by the federal government to the people. In this regards, the FG personal income tax rate (FITR) could range progressively from 1% to 10% of the taxable incomes of citizens while the SG personal income tax rate (SITR) can range from 1% to 20%. All employers of labour should collect payroll withholding taxes for both the FG and SGs (where the employees reside) and remit same to the FG and SGs on a monthly basis. Not later than the end of April in each year, each citizen - whether they are employed, self-employed or unemployed- must file both federal and state tax returns for the preceding year and be issued tax clearance certificate.
  • The local governments (LG) should be better empowered to collect property taxes based on the fair property values in their areas. On their part, the LGs should be required to adopt a structured and accountable approach in place of the arbitrariness that characterizes the collection of “tenement rates” in many parts of the country.
  • SGs should be empowered to collect estate and gift taxes on property inheritance and donations in a structured, transparent and accountable manner.
  • SGs should be empowered to expand the value added tax (VAT) or introduce sales tax on some commodities that are not currently subject to VAT provided it is done in a transparent and accountable manner.     

2. Revenue Allocation

With regards to a new Revenue Allocation Formula (from the Federation Account), I will suggest as follows:

  • In addition to collecting revenue on behalf of the federation into the federation account (FA) based on the items in table 6 above, the FG should continue to collect its “independent revenue” (IR).
  • The FG should explore alterative and more efficient ways of funding its JV operations rather than the current approach of using NNPC to collect its share of crude oil, selling it and using part of the proceeds to pay its “cash call” and fund other petroleum-related activities such as “frontier exploration services”, gas development, and payment of fuel subsidy, which deplete the “distributable revenue” - the funds available for sharing or allocation to the FG, SG and LG for the discharge of their constitutional responsibilities.  
  • The NNPC should be dismantled or structured in a fundamental way to make it more transparent, accountable, efficient and effective. Most of its current subsidiaries or holding companies such as NPDC, NGC, Duke Oil, PPMC, KPRC, WRPC, PHRC and IDSL should be extricated from the Group to form independent public companies with the FG having a maximum of 20% and each SG having between 0 and  of 10% and the private sector owning the rest.
  • The Excess Crude Oil Fund and Nigerian Sovereign Wealth Fund (Investment Authority) should either be abolished or re-structured as a FG entity and funded from the FG’s share of the federation account and its independent revenue. Each state should be empowered to establish its own sovereign wealth fund like the Alaska Permanent Fund, the Texas Permanent School Fund, North Dakota Legacy Fund and Alabama Trust Fund, all in the United States and Alberta’s Heritage Fund in Canada.
  • Local Governments should not directly participate in the allocation of revenue from the federation account. However, the SG should be required by law to allocate a fixed portion of their federal allocation (and internally generated/independent revenue) to their LGs.
  • Based on the proposed “devolution” of the FA in table 6, a differential-incremental derivation revenue allocation model[iii] should be adopted based on the following equations:
    1.             GOR   = COS + GS + PPT + GT + SGF + MS
    2.             COS    = COSN + COSS + COSF
    3.             GS       = GSN + GSS + GSF
    4.             PPT     = PPTN + PPTS + PPTF
    5.             GT       = GTN  + GTS + GTF
    6.             SB       = SBN + SBS + SBF
    7.             GNOR = MD + NESS + LEV
    8.             NNOR = GNOR – CNOR
    9.             FAR    = GOR + GNOR
    10.             CGOR = aGOR
    11.             NOR   = GOR – CGOR = (1 – a) GOR
    12.             DON   = b(COSN + GSN + PPTN + GTN + SBN)
    13.             DOS    = c(COSS  + GSS  + PPTS  + GTS +SBS)
    14.             DR       = GOR – CGOR – DON – DOS + NNOR
    15.             FGSDR = dDR
    16.             SGSDR = eDR
    17.             SGSDR(i) = Pi/P(gSGSDR) + 1/n(hSGSDR)
    18.             FGR = FGSDR + CGOR + CNOR + FGIR

Where GOR = gross oil revenue, COS – total government crude oil sales, COSN = govt oil sales (onshore oil), COSS = govt oil sales (shallow offshore oil), COSF = govt oil sales (deep offshore oil), GS = total gas sales, GSN = gas sales (onshore gas), GSS = gas sales (shallow offshore gas), GSF = gas sales (deep offshore gas), PPT = total petroleum profits tax, PPTN = total petroleum profits tax (from onshore oil), PPTS = petroleum profits tax (from shallow offshore oil), PPTF =  petroleum profits tax (from deep offshore oil), GT = total gas tax,  GTN = gas tax (from onshore gas), GTS = gas tax (from shallow offshore gas), GTF = gas tax (from deep offshore gas), SB = total signature bonus, SBN= signature bonus (from onshore oil blocks), SBS= signature bonus (from shallow offshore oil blocks) SBF= signature bonus (from onshore oil blocks), GNOR = gross non-oil revenue, MD = import duties, NESS = Nigerian export supervision scheme (and/or export duties), LEV = various levies such as levy on rice import and levy on imported vehicles, CNOR = cost of collection of non-oil revenue, FAR = federation account revenue (gross), CGOR = “first line” charges on gross oil revenue such as JV cash calls, frontier exploration services and fuel subsidy, NOR = net oil revenue, DON = derivation fund for onshore oil and gas  production; DOS =derivation fund for shallow offshore oil and gas production; DR = Distributable Revenue, FGSDR = federal government share in the distributable revenue, SGSDR = state governments’ share in the distributable revenue, SGSDR(i) = “i” state government share in the DR (i.e. amount allocated to state i), Pi = population of state i, n = number of states, FGR = federal government revenue, FGIR = federal government independent revenue, and a, b, c, d, e, f, g  and h are parameters that can be determined and changed over time by the National Assembly. 

In the above model, in order to address the vexed issue of onshore/offshore dichotomy, I have divided oil and gas operations into three categories – onshore, shallow offshore (which I will define as less than 10 nautical miles from the shore of the littoral states) and deep offshore (more than 10 nautical miles from the shoreline). Although the above equations are self-explanatory, I would like to shed more light on some of them. Equation x states that the first line charge on the gross oil revenue should be fixed as a fraction of gross oil revenue and allocated to the FG (see equation xvii) to cover the related costs. Based on recent data, the first line charge hovers around 20%, so we can assume that a= 0.2 but this should be made to decline over time with the elimination of subsidies and restructuring of oil and gas operations. In equations xii, the derivation fund for onshore oil and gas is taken as a proportion (b) of the gross crude oil and gas sale as well as signature bonus from onshore oil blocks.  This proportion is fixed at “not less than 13%” in section 162 (2) of the 1999 Constitution. However, the 2005 National Political Reform Conference recommended “an increase in the level of derivation from the present 13% to 17%, in the interim pending the report of the expert commission…Having regard to national unity, peace and stability, they (the South-South delegates) agreed to accept, in the interim, 25% derivation with a gradual increase to attain 50% over a period of five years”.[iv] I will therefore suggest that the proportion be fixed at 15% (b = 0.15) and should be increased gradually by 2% point every until it reaches 50% - the percentage in the 1963 Constitution.

In equation xviii the derivation fund for shallow offshore oil and gas is also taken as a proportion (c) of gross crude oil and gas sale as well as signature bonus from shallow offshore oil blocks. Given the fact that the impact of oil and gas production in the shallow offshore oil blocks on littoral communities is less than in the onshore oil blocks, it can be argued that a smaller proportion of oil and gas revenue from shallow offshore blocks should accrue to littoral states, i.e., c should be less than b.   I will therefore suggest that c should be fixed at 10% which is less than the 13% stipulated in the offshore/onshore dichotomy abolition act of 2004 which provides among other things that “The 200 metre water depth isobath contiguous to a state of the federation shall be deemed to a part of that state for the purposes of computing the revenue accruing to the federation account from the state, pursuant to the provisions of the Constitution of the Federal Republic of Nigeria (1999) or any other enactment”[v]. In the model, oil and gas revenue from deep offshore operations (i.e. COSF + GSF + PPTF + SBF)  - i.e., from beyond “200 metre water depth isobath” - is not to be subjected to derivation and should be paid in full to the distributable revenue (equation xv). The rationale for this is based on President Obasanjo’s letter of 5 February 2004 to the National Assembly on his proposed Offshore/Onshore Dichotomy Bill in which he stated that “all existing producing oil fields are located within 200 metre water depth isobath…virtually all deep offshore commercial oil discoveries are located in less than 1,000 metre of water depth beyond which the quest for derivation cannot be justified…the impact of environmental pollution to coastline is at this distance considerably reduced…this contour also marks the limit of routine fishing activities”.[vi]  There are however several practical challenges in distinguishing or drawing the contour dividing the shallow offshore (less than 200 metre water depth isobath)  from deep offshore. Based on the assumption that on average the depth of the ocean increases by about 1.3m over 100 m distance, I have estimated that the average depth of 200m will be reached at about 10 nautical miles (about 16.7 km). Therefore rather than using the 200m water depth isobath, I am suggesting that a distance of 10 nautical miles from shoreline should be used to demarcate shallow offshore from deep offshore for the purpose of applying the above model. I believe that excluding deep offshore from derivation (i.e. making the derivation coefficient = 0), reducing the derivation coefficient for shallow offshore (c) below 13% and increasing the derivation coefficient for onshore (b) above 13% is an acceptable compromise between those who are agitating for an increase in the derivation percentage and those advocating for its reduction.

Equations xv and xvi represent the “vertical allocation” formula. Equation xv is used to compute FG’s share in the distributable revenue, with coefficient d representing that share. Equation xvi gives the state governments’ share in the distributable revenue with the coefficient e representing that share. Since the local governments will not participate in the sharing, d + e = 1.  For the “sharing coefficients”, I will recommend d = 0.4 and e = 0.6. That is, 40% of the distributable revenue should accrue to the FG (which is slightly less than the current 48.5%) and 60% of the distributable revenue should accrue to all the state governments combined (which is significantly more that the combined 44.4% that currently accrues to the SGs (24%) and LGs (20%)). However in order to avoid a situation where some state governments may starve their LGs of funds or show preferential treatment to some LGs, the federal constitution should require each SG to allocate 60% of the revenue it receives from the DR to its LGs and keep only 40%.  Notice that current Special Funds account (7.5%) has been excluded because I believe that the items funded under the “special funds” should be the responsibility of FG and should funded from its revenue (FGR).

Equation xvii represents the horizontal allocation formula. It states that the allocation to a particular state “i” from the state governments’ share in the distributable revenue (SGSDR) should be based on only two factors – population and “equality” with population assigned a coefficient or weight of g and equality assigned a coefficient of h, such that g + h = 1.  What this means is that SGSDR will be divided into two components – a “population component” (gSGSDR) and an “equality” component (hSGSDR) - using the coefficients g and h. The allocation to a state “i” from “population component” is proportional to the share of the state’s population (Pi) in the total population of the country (P), i.e. Pi/P. However, the equality component will be divided by n, the number of states (federating units) and each state will get an equal portion, i.e. hSGSDR/n. I would suggest that g be fixed at 0.6 and h at 0.4, i.e., population should be given a weight of 60% and equality a weight of 40%. Notice that under this recommendation, we limited the factors for horizontal allocation to the first two stated in section 162(2) of the 1999 constitution and have excluded the other factors – internal revenue generation, land mass and terrain- which are contentious and not unnecessary in my judgment.

I would also suggest that the computation and allocation of funds from the federation account should be conducted quarterly rather than the current monthly ritual. In between the quarterly allocation, the Central Bank can advance funds to both the federal and state governments if required and the loaned funds can be deducted “at source” during the next allocation.

To illustrate the above vertical and horizontal allocations, if the DR in a quarter is N1,000 billion and there are 10 states (federating units or provinces), and the population of Nigeria is 150 million as per the last census while the population of state “A” is 10 million and that of another state B is 25million, then:

  • The FG share of DR, i.e. FGSDR = dDR = 0.4x1,000 = 400 billion
  • All the SGs share in the DR, SGSDR = eDR = 0.6x1,000 = 600 billion
  • The population component of SGSDR will be gSGSDR = 0.6x600 = 360 billion while the equality component will be hSGSDR = 0.4x600 = N240 billion
  • State A’s share in SGSDR will be SGSDR(A) = 10/150 x360 + 1/10x240 = N48 billion
  • State B’ s share in SGSDR will be SGSDR(B) = 25/150 x360 + 1/10x240 = N84 billion
  •  State A will keep 40% of its allocation (i.e. 0.4 x 48 =N19.2 billion) and allocate the other 60% (i.e., N28.8 billion) to all its LGs using population(60%) and equality (40%) as the factor for sharing the N28.8 billion among the LGs. 

I strongly believe the above suggested revenue allocation formula is smarter and more “federation-friendly” than the current formula.

3. Resource Control

With regards to the vexed issue of (oil) resource control, I would like to make the following points. Firstly, the proponents are not quite clear about what they want. While some are pressing for an increase in the oil derivation percentage from its current level of 13% to 50% over the long-term, others are calling for a total control of “oil resources”, including oil and gas revenue by the oil-bearing state and/or local governments or ethnic nationalities. For instance, the authors of the 1990 Ogoni Bills of Right called for the right of the Ogoni people – a minority ethnic group of less than 1 million people in an area of about 1,000 square miles- in Rivers State, to “the control and use of a fair proportion of Ogoni economic resources for Ogoni development…the right to protect the Ogoni environment and ecology from further degradation” (by oil exploration and production)[vii]. The unanswered question is what is a fair proportion?  On the other hand, the authors of the 1998 Kaiama Declaration stated that “all land and natural resources within Ijaw territory as belong to the Ijaw communities …because they are our basis of survival… (Ijaw) peoples and communities (have) right to ownership and control of our lives and resources”.[viii] Again, the unanswered question is what does ownership and control of oil resources mean in practice? Does it mean that the “people” (individuals) or communities should be responsible for issuing permits and licenses for oil exploration or become shareholders or JV partners, collect and sell crude and receive payments of rents and taxes directly from oil companies? To add to the confusion, at their 2001 meeting in Benin City on the Resource Control issue, the Governors of the South-South Political Zone defined resource control as “The practice of true federalism and natural law in which the federating units express their rights to primarily control the natural resources within their borders and make agreed contribution towards maintenance of common services of sovereign nation state; the federating units are the 36 states and the Sovereign nation is the Federal Republic of Nigeria”.[ix] Obviously, the governors want to control the oil business in their state which would include issuing licenses and permits, and collecting all forms of oil and gas revenue and then paying an “agreed” amount or tax to the federal government. However, contrary to their statement, this is applicable to a confederation, not a federation as I have described under the forms of government in section 1 of this paper. In other words, the governors were unwittingly calling for the transformation of Nigeria into a confederation which is untenable.

Secondly, the opponents of resource control believe that if the FG is denied the bulk of oil revenue by the oil-producing states, the FG and non-oil producing states, especially those in the North will not survive and there will be increased inequality in the country. Therefore they want the past and current addiction to oil revenue by all the levels of government in the country to continue. However, the fact is that the profile of oil and gas will decline in Nigeria in the long-term as the oil and gas wells dry up and the various governments are able to exploit other sources of revenue. Therefore, it is important to have a revenue collection and allocation system that reduces dependency on a natural resource that is found and produced only in a few parts of the country. Furthermore, the federating units in all federations usually enjoy a “comparative advantage” from the natural resources found in their territories. 

Thirdly, the concept of resource control must not be restricted to oil and gas only; it must cover all mineral resources. Thus, while the rate of taxation and method of control may vary from mineral to mineral, the principle of control should remain virtually the same. For instance, if we all agree that the FG should control oil and gas, the FG should also control all other mineral including tin, gold, coal, marble, bitumen, etc. For instance, the revenue allocation formula proposed above should be applicable to all minerals, including oil and gas. You cannot have a local Igbeti Marble formula in the South West states which favors the communities while oil producing communities do not enjoy similar benefits as provided under the Igbeti Marble formula.

Fourthly, given the current state of the Nigerian federation and the need to ensure some degree of uniformity in the “control” of mineral resources, I think such control should rest with the federal government. However, the federating units as well as local governments (which represent the communities) where minerals are found and produced should enjoy a greater share of the benefits, especially revenue, arising from such mineral resources. If this is done, the demand for resource control will abate. I strongly believe that the revenue allocation formula I have proposed above will ensure that the federal government continues to control mineral resources while the mineral-bearing and producing states enjoy an increasing share of the benefits from such minerals.

10. Conclusion

I will conclude by reiterating that the National Conference offers a unique opportunity to create a new Nigeria for the 21st Century. We cannot continue business as usual otherwise we may either not survive this century as one country or we may continue to be a country marred  in constant tensions and crisis that will continue to prevent us from being “one nation bound in freedom, peace and unity” and from attaining the “great lofty heights” envisaged in our national anthem.  In this letter, I have offered far-reaching and ground-breaking proposals that will propel Nigeria forward as a “completely developed federation” for the 21st Century. I urge the conference to seriously consider the proposals.

 

Thank you.

 

Dr. Emmanuel Ojameruaye

Phoenix, May 25, 2014

 

Endnotes



[i]  Musgrave, R,A & Musgrave, P.B. (1984  ),  Public Finance in Theory and Practice. McGraw_hill, New York, p.32

[ii] The uniformity rule in the United States (Article 1, section 8) requires that “all duties, imposts and excises shall be uniform throughout the United States”, see Musgrave & Musgrave (1984), p. 33.

[iii] For a description of the concept of differential-increment derivation model, see my book,  Ojameruaye, E.O (2006), Political Economy of Oil and Other Topical Issues in Nigeria, Xlibris, p. 111- 118. 

[iv] See Ojameruaye, E.O(2006), p. 112-113

[v] Ibid., p. 24

[vi] Ibid., p. 18-19

[vii] Ibid., p. 123

[viii] Ibid., p. 124.

[ix] Ibid., p. 126

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