Resetting the Economy

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Business/ECONOMY PAGE

With the announcements last week of global major businesses from aviation pharmaceuticals, oil and gas weighing the sale of their gas fields and seeking to close their business operations in Nigeria, there is no better time than now for the country to restructure the economy by enhancing local refining capacity through state government-owned refineries and major infrastructure concession. Adedayo Adejobi reports

Nigeria’s economic history since its independence in 1960 has been largely characterised by inconsistency, increasing unemployment, poverty, inadequate social facilities, poor health care delivery, to mention but a few. This situation has, for the past several years, engaged the attention of scholars who have shared their views on these negative trends which prove too complicated for a successful holistic analysis.

The long years of military rule, which were virtually void of democratic values and principles, had a devastating effect on the economy. Planning was haphazard, policies were distorted and implementation processes were undermined. More so, corruption, fraud, dishonesty, gross indiscipline and general mismanagement went unabated. These have dealt a blow on the economy. Experts make an attempt to unravel the past and the present state of the economy with emphasis on the inevitability of moral values and virtues in the pursuit of economic development.

The Buhari-led administration is almost concluding its four-year tenure without a clear-cut economic roadmap. The questions on the lips of every truly concerned Nigerian, right now, on the premise of the present administration’s first-term assessment are: What major evident economic progress have been made in the years under Buhari? Are Nigerians really better off now than in 2015?

With the shaky health of the leader intricately intertwined with the economic health, it is more so in a delicately fragile union of the nation called Nigeria.

In a country, where its citizens voted out the incumbent on the premise of frustration resulting from the administration’s lack-lustre attitude towards governance, nothing demonstrates the lack of preparedness for leadership better than the Economic Recovery Growth Programme (ERGP), launched twice by Vice President Yemi Osinbajo and his principal a year and nine months late. Till date, the effect of the programme has not been felt.

Going down memory lane, in 2007, former President, Chief Olusegun Obasanjo offloaded the financial sink holes called refineries in Nigeria. The decision was prelude to getting the private sector to totally take over the downstream Petroleum Sector so that the federal government will loosen itself off the noose called subsidy payments.

Late President Umaru Musa Yar’Adua, on assumption of office in 2009, promptly reversed the sales on political sentimental conundrum against sound economic strategic reasoning. Since that unfortunate error by the late President Yar’Adua, Nigeria has wasted over N10 trillion on subsidy. Had the refinery disposal been allowed to stand, not only would Nigeria have saved the trillions of naira wasted in subsidy payments, but even bigger billions of dollars used in importing petroleum products would have been retained in the economy to do innumerable beneficial things for the people.

Years after, the pump price has risen astronomically and later on, Independent Petroleum Marketers Association of Nigeria caused the government to increase fuel price from an inconvenient N87 per litre to its present harrowing N145 per litre.

Chronicling companies who have left the shores of Nigeria and the ones putting finishing touches to sell off their assets and leave, notably, Virgin Atlantic, Cadbury, ExxonMobil which has valued its oil and gas fields for up to $3billion tops the list. The pharmaceutical giant, GlaxoSmithKline, also plans to close its huge Agbara plant.

Groaning under harsh operating environment, and global economic crunch, over 20 big shipping firms have left Nigeria over low business resulting crucially from government policy summersault.

Some of the companies that have already made their exit include Mitsui O.S.K Line, Nippon Yusen Kasha, Taiwan’s Evergreen Line, Messina Line, Hapag-Lloyd and Gold Star Line (GSL). They were forced to withdraw from the West Africa route due to growing losses as a result of declining volumes. The gloomy economic climate has seen dockworkers groan under threats of $7billion cash call, deficient import policies, whilst over 300 workers have been sacked, and the shipping giant, Maersk reducing its crew by 400. In 2006, the massive retrenchment came on the heels of the inability of the federal government to meet its joint venture obligation with the international oil companies that are major partners with the marine logistic companies.

Nigeria, as an import-dependent country, cannot suddenly ban the importation of the principal goods being generally consumed in the country. Hence, the government policy on importation though with the best intention seems to have wreaked more havoc on the economy and ought to be reviewed.

According to reports by NACCIMA, over 800 companies shut down in three years. The current situation of the “surviving” industries poses a great threat to the survival of the manufacturing industry, as the capacity utilisation in industries hovers around 30 per cent and 45 per cent on the average, with 100 per cent overhead costs.

The continued decline in the manufacturing sector has been blamed on “political and economic factors’’, with poor infrastructure and epileptic power supply, high interest rates, policy inconsistency, poor patronage of locally manufactured products, poor supporting infrastructure, among others.

The economy is still confronted by serious challenges, structural imbalance and lack of diversification, whilst the current government policies targeted at the real sector (manufacturing) are also inadequate.

While some of the affected manufacturers have relocated to neighbouring countries, according to Manufacturers Association of Nigeria, as at 2016, at least 222 small-scale businesses have closed shops, leading to 180,000 job losses. It is however unthinkable what the figures would be now, if an audit was done.

Oil, the mainstay of the economy, is dwindling, thus hitting hard at the nation’s dependence on the black gold. With the unsustainable foreign exchange paid in importation, subsidy payment plan, the nation’s purse had bled profusely, thereby debasing the value of the currency. With this in continuum, it might get worse.

In his view, economic analyst and financial expert, Benjamin Obialor Ojiegbe, noted: ‘‘The Nigerian economy cannot support these subsidy pay-outs for much longer. No matter the monbojombo, wuzzle buzzle the Central Bank may come up with in terms of management of foreign exchange and the value of our local currency, unless and until the importation of petroleum products is stopped, the value of the Naira will continue to fall in perpetuity. Even if you make it N1,000 to $1 today, it will still continue to fall until Nigeria stops importation of petroleum products in the volume that we currently do.”

“This is where the bemusement manifests, the federal government of Nigeria and in fact, state government can and should be making money from the downstream petroleum sector activities rather than bleeding the economy to extinction,” he added.

Immediate diagnosis of the continued importation of refined petroleum products includes exporting hundreds of thousands of lucrative refining employment opportunities, by keeping the foreign refineries busy, massive amounts of money wasted monthly on fuel subsidy payments, scarcity of petrol every now and then, causing unwarranted hardship on Nigerians, and waste of valuable manpower resources.

With these attendant problems related and centered on the inadequacy of local refining capacity in Nigeria, the solution to these problems would require the political will and resolution of the government, given the grave economic consequences of inaction in the present circumstances.

Shedding light on possible solutions, Ojiegbe suggested the federal government should immediately advertise for private sector concessionaires to take over and run the National Refineries and pay royalties to the government.

“The federal government should not listen to any civil servant who comes and says, give me this and that, and they will make the refineries work. Nigeria has wasted enough money in this, that we should now become very weary of this kind of talk. The federal government should also support state governments, especially the oil producing states, to build and operate their own refineries in conjunction with some private sector concessionaires.

The involvement of the private sector concessionaires will bring in the needed capital as well as the expertise in efficient operation and management devoid of corruption, politics, favouritism, nepotism and other such tendencies associated with public sector approach to business.

“It will relieve the government of burden of heavy budgetary allocations and waste that characterise government contracts while ensuring that projects are implemented on time, to specified standards, continuity and efficiency of services. This is also recommended by major development finance institutions across the world as most cost-effective and reliable approach to infrastructure development the world over. The state governments, together with the concessionaires should procure modular refineries of various capacities to be approved for each of them. A sovereign guarantee of the government is all that is required, and using such guarantees, the private sector operator concessionaires selected through a thorough competitive bidding process, will source financing and establish the refineries,” he said.

“Within 12 to 18 months from the date of the investment decision, the refineries can be assembled and fully operational (It takes less than 12 months to assemble a modular refinery of capacities up to 36,000bpd). Importantly, the refineries will pay for themselves. The federal government, using the domestic crude supply obligation and increasing it slightly to accommodate the aggregate established capacity of all the refineries, will supply crude oil to all the refineries daily through existing pipeline networks and barges.

“The federal government in agreements with the participating states would deduct cash payment for the supplied crude from the federal allocations of the states. The federal government should discount the crude oil supplied to the states refineries by removing taxes, transportation costs, clearing and forwarding charges, handling charges, amongst others,” he added.

Ojiegbe believed each state government, together with their concessionaires/operators will decide how much they will sell the products of their own refineries within their state, regulated by the federal government to determine the maximum refining margins allowed. “The federal government will not be part of the pricing decision and will not subsidise any of the refineries,” he noted.

“In essence, the income of the governments from the refineries shall be two-fold: the cost of the crude oil, to be paid to the government (by the concessionaires/operators), profit sharing with the concessionaires/operators from the sale of refined products. When this is done, it is expected that the cost of PMS per litre will fall below N50.00 to a litre seeing a public private partnership Concession approach in building, operating and managing the refineries as the concessionaires/operators assume performance and revenue risks,” he explained.

Using this approach, Nigeria can acquire significant refining capacity to meet the local demand within a short time. The refineries can be allowed to export excess refined product to earn foreign exchange as long as they do not export crude oil.

The benefits of this approach are immense, as fuel shortage will permanently be eliminated due to the proliferation of refineries across the country and with the passage of time, grow capacity to compete in the international market.

Product pricing strategy will ultimately reduce the price of petroleum products in Nigeria and open up the export market especially within the West African sub-region. Since there will be a number of plants producing at the same time, this will introduce a healthy competition among them leading to price reduction, just as has been experienced in the telecommunications industry.

The biggest component of Nigeria’s import bill is the payment for refined petroleum products. This then is the most important pressure on the value of the Naira. When this pressure is lifted by the elimination of the importation of refined petroleum products, foreign exchange hitherto committed to the payment for the importation of petroleum products will be conserved, thus strengthening the value of the local currency substantially.

Since a number of refineries will be producing more products than can be consumed locally, the federal government will no longer be required to subsidise any of the refineries nor make equalisation payments anymore. The huge savings would be ploughed into other socio-economic development initiatives. The establishment of these refineries would promote development of other industries dependent of petroleum products as feedstock for operation, thus engendering massive infrastructure development in the various locations of the refineries across the country.

It is established that refineries could be integrated with power generation, as the heavy fuel in the product slate is important feedstock for low RPM power generators. A 12,000bpd modular refinery could be integrated with a 30MW power plant, ensuring that electricity production is closer to the markets and consequently, reducing investment cost in transmission and elimination of investment cost in long distances of gas pipelines for feedstock supply.

Millions of high profile jobs will be created all over the Federation along the entire product value chain. The multiplier effect in the Nigerian economy will be unquantifiable, tremendously boosting the GDP, setting the part for accelerated growth.

With doubled income accruing to participating states, through the recovery of crude cost, sharing of refining margin, states are armed with financial capacity to embark on massive infrastructure development and thereby setting the stage for Nigerians to have the full benefit of an oil producing country.

It has since become obvious that it is not possible for local private individuals to establish and run private refineries in Nigeria, except where such individuals also have oil wells. This is because financiers do not believe that such individuals will have access to crude oil feedstock locally. Even when NNPC has given a supply guarantee because of entrenched interests in the system therefore the veritable solution is the involvement of State Governments in Nigeria

In most developed climes, major infrastructure projects and utility services are concessioned to private sector operators. The Government determines the infrastructure to be developed, sometimes, the Government goes ahead to design the project and is then handed over to a properly selected private sector concessionaire who has the capacity to finance, build, own operate and transfer. With the support of the Government, the Concessionaire is able to raise the required investment funds from the money/capital market. This relives the Government of the burden of pumping huge funds into infrastructure development with very little success mostly because of lack of continuity and sustainability of operations.

In most of the cases, the federal government has gone borrowing from countries like China, and has become heavily indebted to them. A case is question is the recent threats by China vowing to take over Nigeria’s main assets over unpaid loans.

Away from the norm of the government going a borrowing, to creating opportunities for corruption through contract inflations, mismanagement of revenue collection systems, hopefully this government with a firm resolve, can eliminate subsidy without hurting and seriously destabilising the already traumatised populace. The president, who presently coordinates the controversial ministry of petroleum, stands the chance to re-engineer the Nigerian economy setting it on the part of greatness, creating massive employment opportunities, infrastructure explosion, double digit GDP growth and much more, as opposed to playing to the gallery of the cabal who feed fat on Nigeria’s gold mine.