Thursday, 31 May 2012 05:25

Resolving The Nigeria Sovereign Wealth Fund Debacle

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In his presentation on “100 Days of Promising Less and Delivering More: The Jonathan Transformation Agenda” about nine months ago, in September 2011, the Special Assistant to President Jonathan on Media and Publicity, Dr. Reuben Abati stated that the establishment of the Nigeria Sovereign Investment Authority (NSIA) is one of the signature achievements of the first 100 days of the President’s new administration. According to Dr. Abati, “With the establishment of the NSIA, the President facilitated direct investments into infrastructure with the priority areas being power and roads”. Nine months later, and as the President celebrates his 366 days of his new administration, the NSIA is yet to take off, not less to make any investment on power and roads. This because of the legal tussle between the Federal Government (FG) and the 36 State Governments (SGs) over the constitutionality of the Excess Crude Oil Account (ECA), the predecessor of the NSIA, and the legality of withdrawing funds from the ECA to start the NSIA.After the latest hearing of the case by the Chief Justice of the Federation (CJN) on May 21, 2012, he decided to adjourn the case to September 25, 2012 for what may be the final decision on the case. Most analysts believe that the Supreme Court will eventually declare the ECA unconstitutional thereby killing it and the NSIA as currently established by an Act of the National Assembly. At that point, Dr. Abati would realize that he jumped the gun when he boasted about the NSIA some nine months ago. What then can the Presidency do to prevent this looming embarrassment?In other words, what can the Presidency do to resolve the ECA/NSIA debacle?

It will be recalled that President Obasanjo unilaterally established the ECA in 2004 without consultation with, and approval of, the State Governors and the National Assembly. Since then, there has been a raging controversy between the FG and the 36 SGs over the constitutionality of the ECA . In 2008, the 36 SGs went to court to compel the FG to stop operating the ECA and to transfer the funds in it to the Federation Account (FA) for sharing among the three tiers of government. While the case was still pending in court, President Jonathan compounded the problem by replacing the ECA with the Nigeria Sovereign Investment Authority (NSIA), otherwise known as the Nigeria Sovereign Wealth Fund (NSWF) in May, 2011, again amid opposition by the governors, some constitutional lawyers, some political parties and some members of the National Assembly. In fact, there were reports that some members of the National Assembly were either bribed or cajoled to pass the NSIA bill post haste and was promptly signed into law by the President on May 26, 2011, just three days before he was sworn in for his second term.On October 2011, the 36 SGs went back to the court to stop the FG from withdrawing $1 billion from the ECA to the NSIA as “seed” money to start the operation of the NSIA. After failing to force the SGs from withdrawing the case from the court, the FG decided to pursue it in the court. However, when the case came up for hearing at the Supreme Court in March 2012, the FG pleaded with the court to allow it to seek an out-of-court settlement with the SGs. Meanwhile, the FG continued to operate the ECA by paying “excess oil revenue” into it while depleting it at the same time. The FG also continued with plans to start operating the NSIA in May, 2012, one year after the NSIA was signed into law by President.

Amid fears that the FG was planning to withdraw another $2 billion from the ECA to the NSIA, the 36 SGs returned to the Supreme Court on May 21, 2012 to restrain the FG. This time around, the FG decided to challenge the jurisdiction of the Supreme Court to rule on the case. The CJN, Justice Musdapher, decided to adjourn the case till September 25, 2012 for a definite hearing while conceding to the request by the governors that their originating summons be heard alongside the preliminary objection that was filed by the FG. Most legal analysts agree the ECA and NSIA as established, are unconstitutional because they contravene section 162(1, 2 and 3) of the 1999 Constitution which states that

(1) The Federation shall maintain a special account to be called "the Federation Account" into which shall be paid all revenues collected by the Government of the Federation, except the proceeds from the personal income tax of the personnel of the armed forces of the Federation, the Nigeria Police Force, the Ministry or department of government charged with responsibility for Foreign Affairs and the residents of the Federal Capital Territory,Abuja.

(2) The President, upon the receipt of advice from the Revenue Mobilisation Allocation and Fiscal Commission, shall table before the National Assembly proposals for revenue allocation from the Federation Account, and in determining the formula, the National Assembly shall take into account, the allocation principles especially those of population, equality of States, internal revenue generation, land mass, terrain as well as population density; Provided that the principle of derivation shall be constantly reflected in any approved formula as being not less than thirteen per cent of the revenue accruing to the Federation Account directly from any natural resources.

(3) Any amount standing to the credit of the Federation Account shall be distributed among the Federal and State Governments and the local government councils in each State on such terms and in such manner as may be prescribed by the National Assembly.

The ECA violates the above section of the constitution because: a) the FG pays the “excess oil revenue” collected on behalf of the Federation to the ECA rather than to the Federation Account (FA); b) While the amount paid into the FA is to be shared (instantaneously) among the three tiers of government in accordance with the subsisting revenue allocation formula, the “excess oil revenue” paid into the ECA is not available for sharing, at least not immediately, even if it argued that the “excess oil revenue” is actually paid into the FA; c) By not sharing all the “excess oil revenue” among the three tiers of government, at least instantaneously, the “excess oil revenue” is akin to a “withdrawal” or a “first-line charge” on the FA which the Supreme Court declared unconstitutional in its 2002 judgment on the offshore/onshore oil dichotomy case; d) While it can be argued that under the ECA, the “excess oil revenue” will be available for sharing when the actual export price of oil falls below the budget price, under the NSIA most of the “excess oil revenue” will never be available for sharing in accordance with the revenue allocation formula. This is because under the NSIA Act a minimum of 20% of the “excess oil revenue” will be allocated to each of the three funds that make up the NSIA (i.e., the Future Generations Fund, the Nigeria Infrastructure Fund and the Stabilization Fund). Thus only a maximum of 60% of the excess oil revenue (paid to the Stabilization Fund) may be available for sharing in accordance with the revenue allocation formula.

The ECA and NSIA also offend the principles of true federalism because it is the FG only that determines the level of “excess oil revenue” during the preparation of federal (central) government budget and the FG is the de-facto manager of the ECA/NSIA with the state and local governments playing more or less a passive role. For instance, the FG may decide to use $70 per barrel as the budget price of oil at a time when leading indicators would suggest a higher level such as $90 per barrel which most SGs would prefer. There have also been accusations of unilateral withdrawal of funds from the ECA by the FG in addition to charges of lack of transparency, accountability and disclosures in the management of the ECA. Furthermore, the ECA/NSIA also violates the oil derivation principle because payment of “excess oil revenue” to the NSIA will result in a significant loss of revenue to the oil producing states since the derivation principle may not be applied to “excess oil revenue”. For instance, if the budget price of oil is $70 per barrel and the budgeted oil revenue is N6,500 billion in a year but the actual oil price turned out to be $100 per barrel resulting in actual oil revenue of about N9,000 billion, the 13% oil derivation revenue accruable to the oil producing states will remain N845b (13% of N6,500) instead N1,170 b (13% of N9,000), which means a loss ofN325 billion by the oil producing states because the “excess oil revenue” of N2,500 billion (N9,000 – N6,500) will be paid to the NSIA for the benefit of the “whole country”.

It is clear from the above that unless the FG is expecting a miracle to happen before September 25, there is every reason to expect the Supreme Court to declare the ECA/NSIA unconstitutional and lay the controversy to rest. Hint: During the March 26, 2012 hearing of the case, the CJN asked rhetorically that “If states and the Federal Government are not ready to uphold the sanctity of the Constitution, who will?” Translation: the ECA and NSWF are unconstitutional. In the application to the Court, the 36 SGs made it clear that “It is in the interest of justice, preservation of integrity of the Supreme Court and the Rule of Law that this application be granted”.If the Supreme Court decides otherwise or if the case is further adjourned, cynics will say the Presidency has “settled” the court.

Therefore, now is the time for the FG to look for an alternative solution to the controversy by abolishing the ECA and amending the NSWF Act.If the FG fails to do so, there is a very high likelihood that it will be embarrassed by the Supreme Court decision. All the Presidency needs to do is to forward a bill to the National Assembly to amend NSIA Act as follows: a) Delete “State Government, Federal Capital Territory, Local Government and Area Councils” from the preamble and from various parts/sections of the Act leaving “Federal Government” only. In other words, the NSWF is “to receive, manage and invest a diversified portfolio of medium and long-term of the Federal Government” only; b) Amend part III (Financial Provision) of the Act in such a way that the funds for the NSIA will come from the FG’s receipts from the Federation Account. This means that if the FG budget is based on, say $70 per barrel for crude oil, and the budgeted FG revenue for a year is, say, N4.8 trillion (or N400 billion a month), and if the price of crude oil for a month is $100 and the FG revenue for that monthis N570 billion, then the FG can transfer the “excess revenue” or “residual funds above budgetary smoothing amount” (which is the N130b, i.e. N570b –N440b) to the NSWF account. If the price of oil drops to say $60 per barrel in another month and the FG revenue for that month is N340b, then the FG can withdraw the budget shortfall (N400b – N340b = N60 b)from the NSWF (the Stabilization component of it) to fund FG operations for that month.

The above suggested amendment to the NSIA Act will ensure that all tiers of government (FG, SGs and LGs) get their full share of the federation account in accordance with the constitution and the subsisting revenue allocation formula. This amendment will not only ensure that the Constitution is not violated but will also ensure budget discipline by the FG.Furthermore, each state or a group or states (on regional/zonal basis) as well as each LG or group of LGs can establish its own sovereign wealth fund (or a stabilization fund or a future generation fund or infrastructure fund or any combination of these). This will promote true federalism as against the current one-size-fits-all controversial NSIA which promotes centralization.

A less preferred alternative solution is to amend the NSIA in such a way as to make the federal, state and local governments to contribute voluntarily to the NSIA from their allocation of excess oil revenue allocation and their “share-holding” in the NSIA will be in accordance with their contributions. Put differently, NSIA should be treated as a “government corporation” and each government in the federation (federal, state or local) can acquire shares voluntarily from their excess oil revenue. Then the allocation of funds or “dividends” to the “share holders” from Stabilization and Future Generation funds at a future date will be in accordance with the number shares each entity is holding. Under this arrangement, there “excess oil revenue” will be paid into the federation account and shared among the three tiers of government in accordance with the revenue allocation formula. Then each government entity will decide if it wants to purchase the NSIA “shares” and the quantity it wants to hold. The Nigeria Infrastructure fund will be removed from the NSIA under this arrangement because of the “lumpiness” and limited “indivisibility” of infrastructure as well as the issue of ensuring equity and fairness in the location and allocation infrastructure among the shareholders.

Finally, Nigeria may learn from other countries. In the United States there is no national sovereign wealth fund (SWF) but each state is free to set up its own SWF. For instance, State of Alaska has the Alaska Permanent Fund (oil-based SFW), the State of Wyoming has the Wyoming Mineral Trust Fund (a mineral-based SWF) and the State of New Mexico has the New Mexico State Investment Trust (a non-commodity SWF).Also, Canada does not have a national SFW, but Alberta Province has the Alberta Heritage Fund (oil-based SFW) while the Quebec Province has the Caisse de Depot Placement du Quebec (non-commodity SWF). In most countries that have a “national” SWF such as Indonesia, Malaysia, Libya, Russia, Iran, Venezuela and Australia, the funds for the SWF come from the “central” government; state, regional, provincial or local governments are not forced or required to contribute to the national SWF. If the Nigerian federal (central) government is unwilling or unable to fund the NSWF from its share of the federation account, it should scrap it and allow states to establish their own SWF from their own resources if they so desire. In my article of the recently concluded Second South-South Economic Summit, I recommended that the South-South (Niger Delta) states should consider establishing their own South-South Petroleum Fund which will comprise of an Investment Corporation, Future Saving Account and a Capital Projects Funds. The other geographical zones in the country can also do the same if they have the resources and political will to do so.

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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.