The Federal Government of Nigeria (FGN) has reintroduced a request to the National Assembly to borrow up to $22.74 billion from the international markets.
The government’s case has many merits which we can summarize as follows:
The Federal Government’s organic cash flow is exceptionally weak
Bloomberg reported that since 2015, the fiscal revenues flowing to the FGN has underperformed by 45%. The FGN crude oil and gas revenues, make up about 45% of the total revenues but 70% of foreign exchange earnings; however, the obligations of the FGN, including mandatory obligations e.g. Salaries and Debt Service, have eaten up 100% of the crude oil revenues. The FGN thus must run a deficit budget to fund capital projects and other obligations; the 2020 annual budget, for instance, is budgeted at N2.18 trillion deficit financing.
The FGN tax collection is also very weak
The GDP to tax revenues ratio of the FGN, according to the Organization for Economic Co-operation and Development (OECD), a grouping of the world’s leading market economies, was put at 6% as at 2016 (The World Bank measures at 3.4%). Compared to Kenya and Ghana at 18% each, and South Africa at 29%. This leaves the government with borrowing as the only real solution to raise revenues.
Why borrow externally in foreign currency?
The FGN has been financing her fiscal deficits by issuing Treasury Bills for shorter durations and Bonds for longer durations. These instruments have interest costs from 9% for Treasury Bills to almost 15% for long-dated bonds. The FGN, however, has issued Eurobonds at much lower interest cost, e.g. the 2025 Euro bond was issued at a coupon of 7.62% but payable in USD not Naira, thus incurring foreign exchange risk. However, the FGN is also looking at concessionary and bilateral loans which are not issued at commercial rates.
To summarize, the FGN needs to borrow for capital projects, because her tax revenues are low and oil revenues are already spoken for. The FGN also seeks to borrow in foreign currency because cost of foreign currency obligations is lower than locally issued debt instruments. Good so far.
So, the FGN borrowing of $22b is justified? Not quite.
Questioning the amount and cost of the loan is the wrong debate. The real debate is why the FGN should be borrowing on her balance-sheet to build a railway. The debate is should the FGN own and maintain railways, or should the private sector? If you agree that the FGN should build, own and operate railways then sure, the $22 billion borrowing is apt. However, if you take the view that railways can be built, owned and operated by the private sector, with strong government support, then there is no need to add $22 billion to the FGN balance sheet.
Nigeria has a corruption problem, but I posit that a bigger problem Nigeria has is the entry of the FGN into commercial business. You will struggle to find an asset owned by the FGN or State Government that is being successfully run.
Examples abound. Let’s look at Nigeria’s number one forex earner, crude oil and gas. Consider the Nigerian National Petroleum Corporation (NNPC) and Nigerian Liquified Natural Gas Company (NLNG). The latter is 49% owned by the FGN, thus FG is a minority shareholder. The FG does not manage NLNG, which, in a strong show of financial strength, offered the FGN N60 billion as “contribution” to build a road in Bonny.
However, NNPC is owned and managed 100% by the Nigerian Federation. In June 2019, NNPC reported Group operating revenue of N518.18b with a trading surplus of just ₦3.92 billion, that’s a net position of just 0.75%, (less than 1%).
Let’s talk about steel, which is essential for industrial development. Quantity of steel produced is an indication of national strength. Nigeria has about two million metric tons of iron ore reserves, the second-largest iron ore deposits in Africa and 12th largest in the world (iron Ore is used to make steel). So how have we fared with making steel? The Federation built the Ajaokuta Steel, the Delta Steel and three steel rolling mills in Jos, Katsina and Oshogbo… they were all dead when owned by the Federation.
Yet, a Nigerian owned company, Kamwire Industries Ltd, has built a cold steel mill in Kwara. African Foundries Ltd, a flagship of the African Steel Mill group, commissioned in 2011 and located in Ogijo, Ogun state is a steel complex. That complex began export of about 5,000 metric tons of TMT rebar to Ghana in 2013. Dana Steel bought the moribund Katsina Steel rolling mill and turned it around.
I can go on and speak about the Eleme petrochemical plant, or the ports in Lagos recently concessioned to private operators both now with improved efficiency and productivity, paying taxes to the FGN. The point is simple, the federation has not managed the oil industry, steel or ports, this is the economy of Nigeria. But there’s more… the Federation has not been able to stop cholera or conduct a census without controversy. It cannot even maintain its own national stadium. The Federation has shown repeatedly that it is incapable of delivering results.
Now, does it mean all privatized assets managed by the private sector have been successful? No! Air Nigeria comes to mind. But you can’t point at any federally owned asset, company or enterprise, that is delivering as planned. That is telling.
What to do? It’s simple
The Federation should lay off business …the business of government is not business. How can we do this? Models already exist. I like the model we currently have in the pension industry, with the private sector as the OWNER and OPERATOR, and the government as REGULATOR.
Such a model applied to the loan will see the FGN simply put out proposals to the private sector to enter partnerships to develop these projects on Public-Private Partnerships. This means only projects that have a revenue basis will be approved. Loans may come, but not on the FGN balance sheet.
Repricing of yields reduces activity level in January
For foreign investors, outflows fell to N30.8bn (US$78.3m) compared with N48.8bn (US$124.5m) in December.
Based on the data released by the NSE on Domestic & Foreign Portfolio Investments for January 2021, total value fell 13.7% m/m to N232.5bn (US$590.8m) from N269.2bn (US$687.1m) in December 2020. Furthermore, total value declined 1.27% y/y to N232.5bn (US$590.8m) in January 2021 from N235.5bn (US$600.8M) in January 2020.
Activity level among domestic investors decreased 7.2% m/m to N184.9bn (US$470.0m) while foreign investor transactions also took a dip, down 32.0% m/m to N47.52bn (US$120.78m). Domestic investors still retained dominance of trading activities on the local bourse as their share of total transactions in January stood at 79.6%.
On the domestic front, transactions were dominated by institutional investors who traded N117.5bn (US$298.6m) while retail investors executed transactions worth N67.4bn (US$171.4m). Notably, the volume of transactions declined 14.9% m/m at the institutional level contrary to an increase of 10.16% m/m at the retail level.
For foreign investors, outflows fell to N30.8bn (US$78.3m) compared with N48.8bn (US$124.5m) in December. In the same vein, foreign inflows decreased to N16.7bn (US$42.5m) in January from N21.1bn (US$53.9m) in December, resulting in a net outflow of N14.1bn (US35.7m) compared with a net outflow of N27.6 (US$70.5m) in December.
Looking ahead, for as long as yields in the fixed income space continue to rise, the equities market will continue to take a hit in our view. In the near term, we believe good corporate earnings and dividend announcements will support some stocks in the equities market. We, however, expect FPIs to retain apathy towards the Nigerian market in the short term, though the inability to source FX for repatriation may continue to force reinvestments.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
Nigeria’s biggest oligopolies: Who are the real beneficiaries?
Backward Integration policies have only worked to help a few people boost their already fat pockets.
First came Sugar… then Cement… now, petroleum refining. The cycle of seeking protectionist Backward Integration Policies to protect a few players in limited industries keeps repeating itself. Only in this case, what should strengthen our collective economy is protecting a few big businesses and shutting out others, therefore holding Nigerians to ransom.
Let us say it as it is: We have seen this before, with all sorts of ventures in various sectors. One of Nigeria’s biggest businessmen sets out to enter a new industry in a big way. Government pulls out all the stops to support the actualization of that dream with several incentives because presumably, “it will support the economy and make the products/commodity more accessible and affordable.”
What has always happened next is that the government-backed backward integration plan is championed by this same player who is almost always a first mover in the private sector. What follows is a systemic closure of the operating space to others starts to occur, amid as well as a gradual increase in price. This is despite local production of a said commodity going up. Why then does Nigeria keep granting such policies to favor a few despite the benefits not trickling down as promised? Have these so-called backward integration programmes ever helped or done so sustainably?
Let us take a look at the Nigerian Sugar Industry – a glaring example of the success and failures of a protectionist Backward Integration Policy (BIP). Twenty years ago, during the then President Olusegun Obasanjo-led administration, the Backward Integration Policy of the Nigerian Sugar Industry was championed to ensure that the “big three” Sugar refineries – Dangote, BUA, and Flour Mills developed sugar plantations and were able to use homegrown sugar to substitute imported raw sugar. This was intended to bring down the price of locally available sugar as well as deepen the Nigerian sugar industry. Has it worked so far? Is sugar cheaper? Is the market more accessible for smaller players?
Twenty years ago, Dangote Group took over Savannah Sugar after acquiring it in the privatization process. How have they fared? Many suggest Savannah Sugar may be poorer for it. Asides from marginal investments in new sugar fields, nothing else appears to have been done. To date, the plantation has received no major upgrade and still cannot produce white sugar because it has no sugar refinery on site. About five years later, Flour mills of Nigeria, producers of the Golden Sugar brand, took over their own Sunti BIP site. Despite receiving over a 40billion Naira in FG intervention funds, their Sunti backward integration site still cannot produce edible sugar and only has a sugar mill similar to the one at the Dangote’s Savannah Plantation. The third producer, BUA is hardly any different. BUA took over its own Lafiagi site 10 years ago and didn’t start on time in developing the site. They claimed it was due to the government not handing over the land and associated infrastructure till 2014. Till date, work on their Sugar refinery and ethanol plant on-site in addition to its plantation is still some way behind – just like the Dangote and Flour Mills, on delivering on their agreed BIP deliverables. Which serious companies take one to two decades to put the right things in place?
What has this led to? Prices of sugar have grown astronomically since the BIP programme started, even hitting NGN25,000 per bag during the COVID pandemic. It took a public outcry and the intervention of the government for prices to be reduced. Word on the street is that there may be another price increase towards the Muslim fasting period. Why is it that sugar is always expensive at this time of the year? Who shall successfully regulate these all-powerful oligarchs? New players are finding it difficult to break into the industry and those who try to are summarily pushed out.
To make matters worse, it seems there is also oppression among our oppressors. Any of the players who try to break ranks is ganged up against by the others, as possibly demonstrated by the recent debacle on BUA’s new export-focused sugar refinery in the Bundu Free Zone in Port Harcourt. A recently leaked memo written by the two other players to the Minister of Trade urged the Minister to shut down BUA’s operations in Port Harcourt, despite the fact that increased operations would potentially solve supply-side issues and by extension bring down the price of the finished commodity – issues – even when necessary duties are paid to bring the sugar into mainland Nigeria. To put it in simpler terms – imagine a sugar company unable to meet its target fighting for the shutdown of another, even when revenue is being expended to import sugar into mainland Nigeria. What hope then exists for the smaller producer or the consumers, who bear the brunt of these machinations?
It doesn’t end with sugar; Nigerians have witnessed the same thing with the Cement Industry, with the same cast of characters. Despite a series of waivers, pioneer status incentives, and a backward integration policy championed initially by Dangote Cement and later enjoyed by Lafarge and BUA – the two other players in the Nigerian Cement Industry, retail prices of cement have grown astronomically in a way that makes everyday Nigerians question the benefits of Backward Integration in the Cement Industry. In a recent interview, BUA Chairman Abdul Samad Rabiu who is a part and beneficiary of this system, ironically admitted that Nigerians are paying the highest for cement in most of Africa. His peers have not considered Nigerians worthy of hearing such truth, preferring to keep mum.
I must say, a Backwards Integration Policy should not create more unwieldy, extremely profitable monopolistic enterprises that somehow end up holding Nigerians by the pocket and therefore by the jugular. Rather, such policies should engender a more open, competitive industry, giving opportunities to all comers without the fear of the system and a few players frustrating them.
At a briefing over the weekend, Nigerians were shocked to learn again that one of these same players who is building a 600,000barrels per day petroleum refinery, is actively pushing for purchases of Crude in Naira as well as a new backward integration policy for refineries. This was more or less confirmed by the recent visit of the Senate Committee visit to the Dangote Refinery last week.
Here’s the clincher – the same company which has benefited immensely in other sectors to the detriment of Nigerian consumers are now requesting that this policy should only be extended to those who have ACTIVE refining licenses. What this means – just like in Sugar and cement, is that only these companies with active licenses will be able to import these products into Nigeria. This will effectively narrow the market for Dangote’s 600,00barrels per day refinery. In view of their current plans, the Dangote Group will be the only ones to enjoy the benefits of this policy and possibly, BUA, when its own 200,000 barrels per day refinery comes up in 2024.
What is baffling, however, is that this policy if instituted, will ensure that only the usual elite group will be able to import petroleum products, just like we have seen in Sugar and Cement. It will also ensure that even our dear own NNPC will be forced to buy its refined petroleum products from these companies, ensuring unsustainable profits and arbitrary price-fixing which is detrimental to Nigerians. Crude oil across the world is sold in dollars. Why will they pay for our crude in Naira and then sell it back to Nigeria in dollars? The same thing will likely apply to BUA and these two companies may as well be controlling over one-third of our GDP.
Here’s the clincher – the same company which has benefited immensely in other sectors to the detriment of Nigerian consumers is now requesting that this policy should only be extended to those who have ACTIVE refining licenses. What this means – just like in Sugar and cement, is that only these companies with active licenses will be able to import these products into Nigeria. This will effectively narrow the market for Dangote’s 600,00barrels per day refinery. In view of their current plans, the Dangote Group will be the only ones to enjoy the benefits of this policy and possibly, BUA, when its own 200,000 barrels per day refinery comes up in 2024.
What is baffling, however, is that this policy if instituted, will ensure that only the usual elite group will be able to import petroleum products, just like we have seen in Sugar and Cement. It will also ensure that even the NNPC will be forced to buy its refined petroleum products from the companies, ensuring unsustainable profits and arbitrary price-fixing which is detrimental to Nigerians. Crude oil across the world is sold in dollars. Why will they pay four of our crude in Naira and then sell back to Nigeria in dollars? The same thing will likely apply to BUA and these two companies may as well be controlling over one-third of our GDP.
To rescue our country, the Government must do away with the true backwardness of these Backward Integration Policies, except it guarantees truly free markets. It has never worked for Nigerians. Rather, it has only worked to help a few people boost their already fat pockets. At this rate and if left to subsist, Nigerians could likely end up paying triple for petrol as has happened in Sugar and Cement. The Policy of backward integration as implemented thus far has only enabled a monopoly that strangles the country’s chances at sustainably developing its commodities market and we must not mortgage our oil in this manner. The government must force these oligarchs to sit down and renegotiate all terms in these core industries as is being done in other countries like Senegal, for example.
Bottom line is, Nigerians and their stake in the oil industry appears to be heading towards a precarious end. So I ask again: BACKWARD INTEGRATION IN SUGAR, CEMENT AND NOW, PETROLEUM: WHO ARE THE REAL BENEFICIARIES? Certainly not Nigerians
‘Tayo Irantiola writes from Lagos Nigeria.
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