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Columnists

Nigeria and its long standing fuel subsidies

We are in a country where the subsidy on petrol prices is seen as the only source of social security.

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IPMAN, PPPRA, NNPC, Reduce funding oil subsidy - IMF to Nigeria , Oil marketers, PENGASSAN call for subsidy removal 

Recently, the Nigerian National Petroleum Corporation (NNPC) in a press release said there was no plan to increase the ex-depot price of Premium Motor Spirit (PMS) in March 2021.

Since the increase in the global price of crude oil, there have been expectations that the retail pump price of petrol would rise following an increase in the landing cost of petrol and claims of full deregulation of the sector by the government.

In September 2020, the Minister of State for Petroleum Resources, Timipre Sylva, announced that the government will take a backseat in the regulation of the price of petrol, noting that market forces and crude oil price would continue to determine the cost of the product.

READ: Should Nigerians expect a possible increase in the price of petrol?

So far, in 2021, crude oil prices have continued to rise, implying an increase in the landing cost of PMS. Currently, the landing cost of PMS is estimated at c.N190/Litre compared to the current market price at N165-N170, implying subsidy is back.

However, the Managing Director of the NNPC, Mele Kyari, insists there is no allocation for fuel subsidies in the 2021 budget. In a Reuters report, the chairman of the Major Oil Marketers Association, Tunji Oyebanji was reported to have said the NNPC was losing at least N30 ($0.08) per litre on gasoline as of early February, based on the international fuel price and the publicly available dollar exchange rate. This comes to c.N1.2bn (US$3.15m) per day assuming daily consumption of c.40 million litres

There have been attempts in the past to remove the fuel subsidy but these have not been without resistance from the populace. On May 11, 2016, petrol pump prices were hiked by around 68% from N87/litre to N145/litre and many assumed this signalled a full deregulation. This wasn’t the case however as the subsidy regime was still in place.

READ: NNPC cautions depot owners against illegal increment in petrol price

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The exchange rate factored into the landing cost of fuel was between N280 and N285/US$1. A steep devaluation in the currency and an increase in crude prices in the international market implied an increase in the landing cost which necessitated the continuation of the subsidy regime, which was now booked as under-recovery losses in the books of NNPC.

In 2020, a steep decline in global crude prices triggered by the global pandemic completely wiped out the subsidy via significantly lower landing costs, paving the way for a reduction in the pump price of Petrol in mid-March and paved the way for talks of deregulation.

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The PPPRA announced a reduction in ex-depot price to N113/litre and official pump price to N125/litre. Between June and November 2020, the price of petrol was revised four times, rising from N121.50–N123.50 per litre in June to N140.80-N143.80 in July, N148-N150 in August, N158-N162 in September and N165-N170 in November.

READ: DAPPMAN commends FG’s commitment to downstream sector, urges full deregulation

We note that deregulation of the oil sector remains a politically sensitive discourse. Deregulating the downstream sector which would many times involve raising the pump price of petrol is always a challenge in a country where the subsidy on petrol prices is seen as the only source of social security and in many cases is resisted by the populace.

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We have always expressed concerns that the current timing may be inopportune and the government be forced to return to the subsidy regime given the effects of the pandemic and recent hike in electricity tariffs on the already squeezed Nigerian consumer.


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.

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Columnists

Biden tax opportunity for Nigeria

Nigeria should create a fiscal “Delaware” where any foreign incorporated company can open an office and pay zero taxes on imported capital, no need to be present in Nigeria.

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Biden's election is a reminder that democracy is the best form of government - Buhari

America is a nation of 50 states? No. America is a State with 50 nations.

Each of those nations has its fiscal policies and rules. Forty-five states in America charge a Sales Tax. Colorado has the lowest State Sales Tax at 2.9%, California has the highest States Sales Tax at 7.25%. The State with the highest tax burden to the taxpayer is New York which charges a total tax of 12.79%. The lowest tax burden State is Alaska.

These tax rates that differ from state to state creates opportunities for legislation to be created by US State Houses of Assemblies to target and attract businesses to their state. Take Delaware, 66.8% of all Fortune 500 companies incorporate in Delarewe. Google and Coca-Cola are incorporated in Delaware, why? First, you don’t need to be resident in Delaware to incorporate a corporation in the State. Delaware will also not impose a state tax if you do not conduct business in the state.

Texas Vs California

The former Governor of Texas, Rick Perry conducted many “Business Recruitment Trips” to the State of California to lure jobs to Texas. Texas State ran radio ads in California to market Texas as a business destination. Chuck DeVore of the Texas Public Policy Foundation states, “job growth has been running 80% stronger in low tax states than in high tax states since the passage of the tax cuts Act of 2017. For California, the lost opportunity adds up to 153,000 positions since December 2017.” Elon Musk and Joe Rogan have all left California and moved to Texas. Apple, the largest company in America by capitalization is building a new campus in Austin Texas.

In 2020, For the first time, California has posted a population loss.

What about nations?

The data is not so direct when looking at nations.

Companies make decisions based on maximizing shareholder return on equity. If taxes are higher in one nation, then the cash will flow from that nation to another. When the US passed the tax cut legislation in 2017, it eliminated the tax obligation on repatriation of foreign profits. In response, more than $1 trillion flowed from foreign subsidiaries to their US HQ. These funds flowed from low-tax nations of Bermuda, Netherlands, and Ireland, according to the Wall Street Journal.

Biden Tax Proposal

President Biden seeks to raise taxes on American taxpayers to pay for a $3 trillion infrastructure plan. In summary, the plan will raise the corporate income tax from 21% to 28%. With a 15% corporate global tax on companies posting incomes above $100 million.

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President Biden knows that when taxes are hiked, American business will simply leave the profits earned outside the tax jurisdiction of the United States, e.g., Exxon Mobil will simply leave the cash it makes from the Nigerian Qua Iboe oil fields in banks in Ireland, rather than send them to banks in the US.

Hence the plan B for Biden is a global minimum tax that will tax all companies including US companies that do business globally. The Biden administration’s plan is simple, if the global tax equals or is less than what US companies pay in Ireland, then they will simply repatriate that cash back to the US and pay a lower tax.

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However there is one problem, why will Indonesia or Ireland tax ExxonMobil and lose revenues like California? They will not, thus Ireland will become the new Texas, as more American firms will site “international operations” HQ in Ireland, book profits, and accumulate cash offshore.

What should Nigeria do?

Nigeria should create a fiscal “Delaware” where any foreign incorporated company can open an office and pay zero taxes on imported capital, no need to be present in Nigeria. Nigeria can create and offer special $Eurobonds targeting liquidity. ExxonMobil can invest her crude oil sales JV profits with NNPC in $ denominated bonds held by Nigerian banks, shielded and excluded from all taxes and mandates from the CBN.

There will be American firms seeking to set up a manufacturing base outside the American continent (GE is already in Calabar). How about making that State a Special Economic Zone for only US business, no taxes, no import duties, no levies? What about the Yaba IT cluster? Mack Zuckerberg of Facebook and Jack Dorsey were also in Yaba, can Nigeria create an IT economic zone for services? China is far away and, in conflict with America’s geopolitical interest, Vietnam and the other Asian tigers have seen their wages rise, they are becoming uncompetitive in wage terms.

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Nigeria still has low wages and an English-speaking young population. This is a good time to fiscally reform. It will not be easy, Nigeria must change many rules, it must be more open, more transparent, and protective of international property rights, but this is an opportunity.

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Columnists

A typical football viewing centre experience in Nigeria

The centres are stadium-like atmosphere with banter, laughter, pre-match and post-match analysis that sometimes become heated.

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Nigerian Bars are killing the viewing centre business, further threatening MultiChoice 

It’s a hot Saturday afternoon in Lagos and as you drive down the narrow street lined with cars to attend the naming ceremony of your colleague’s newborn son, a horde of young men come rushing onto the street from a nondescript building at the corner.

Your first reaction is to slow down and watch their next move, another part of you wants to quickly get out of the way to avoid any untoward occurrence. There is a brief and palpable fear inside the car as you scan the faces of the crowd passing by, trying to make out their words and expressions. Suddenly, your eyes light up. Alas! The furore is a simple football banter.

Scenes such as the one described above are a regular occurrence in Lagos and most parts of Nigeria; welcome to the weekend ritual and the allure of the Football Viewing Centre.

From mid-day on weekends and some midweek evenings during the European football season, you will find young men crammed into halls, rooms, makeshift theatres, sports lounges and every available space to watch football, mainly the English Premier League (which is the most popular league), the Spanish La Liga and the UEFA Champions League. It is a thriving multi-million naira industry born of the love Nigerians have for football and the widely available broadcasts from Multichoice (DSTV) in Nigeria.

The public viewing of football matches taps into the communal nature of Nigerians that makes viewing matches alone uninteresting and very ‘unNigerian.’ The period of DSTV’s entry into Nigeria coincided with the peak of Nigerian football when the Super Eagles were African Champions and qualified for their first World Cup. Stadium attendance was very high. The public viewing centres became an extension of the Stadiums and sprung up in locations all over the nation.

A typical viewing centre is a bungalow-like structure or shed with rows of wooden benches arranged to face the different tv screens showing the matches on offer. Outside, a handwritten display on a chalkboard shows the scheduled matches and their viewing times for the information of the prospective attendees. To keep out the prying eyes of those who want to watch matches for free, a tarpaulin cover is installed around the structure to ensure only paying customers can watch the matches.

Consequently, giant fans are provided to ease the inevitable heat from a mass of bodies all crammed together. These days, UPS and Inverters are installed to keep the decoder running before the generator is put on; when the inevitable power cut occurs. This ensures the audience does not miss out on any exciting moments of the match while the decoder reboots after a power cut.

Payment is made at the entrance of the hall, most times per match but regular patrons are allowed to make payment ahead for the total number of matches they might wish to view. Patrons are handed a ticket as proof of payment and the cost of viewing a match on average is N100, while N200 is charged for matches showing simultaneously. Average occupancy is between 50 – 100 patrons and for eagerly anticipated matches, viewership can be even beyond the original occupancy levels of the centre. A typical Saturday line up in the EPL has the games scheduled one after the other and patrons are encouraged to pay a flat rate of N200 for 3 games in a row or pay N100 for each individual game. At the end of each game, the centre is emptied out and paid customers let back in before the commencement of a new game.

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Viewing centres have evolved over time from single-screen locations in the early 2000s to multi-screen locations, with some of them offering other forms of entertainment such as snooker tables and video games like PES and FIFA to maintain patronage. In the age of sports betting, many viewing centres have also incorporated betting shops as one of their offerings. People place their bets and are encouraged to stay behind to watch the games and see the progression of their betting tickets.

Once the patron has made the requisite payment and is allowed entry, he gets to sit in one of a row of seats (mostly wooden as rowdy fans have been known to occasionally destroy plastic chairs), usually seating up to 5 persons. The screens are arranged in a way to create the impression of being able to watch multiple matches at the same time; though, in time, the patron finds out that it is easier to focus on one match.

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It is a raucous, stadium-like atmosphere with banter, laughter, pre-match and post-match analysis that sometimes become heated. As is typical of any place where young Nigerians are gathered, there is always the inevitable shift to politics and other burning national issues.

Viewing centres do not sell alcoholic beverages but sell other kinds of drinks to provide refreshment to the patrons and act as a source of additional income for the owners. On a typical weekend in the thick of the Football Season, a regular-sized viewing centre that can sit between 50 – 100 people showing an average of 4 matches per day can rake in upwards of N56,000 over a busy weekend before deducting expenses and exclusive of income from drinks and other refreshments.

In most middle income / affluent neighbourhoods, sports lounges have emerged as both an alternative and another form of the viewing centre. The sports lounge is basically a watering hole that encompasses drinks, food and other edibles in a cool and comfortable environment. Here, the patrons do not have to pay an entry fee but are required to purchase drinks or food.

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The typical patron is a young, urbane and upwardly mobile professional looking for fun and an alternate way to unwind. The attraction for patrons is the ambience, comfort and the ability to mingle with friends while watching their favourite team play. Due to the availability of space, the arrangement of a sports lounge is markedly different from that of a viewing centre. The seats are plush and more comfortable and are arranged around tables in small clusters with a TV screen as a focal point.

The drinks are usually pricy with alcoholic beverages starting at N1000 per bottle and high-end spirits selling from as much as N16,000 per bottle. Due to the absence of a gate fee, the onus is on the operators of the sports lounge to find new innovative ways to attract more patronage and to increase the sale of their different offerings.

The key expenses for both the viewing centre and the sports lounge are the cost of subscription for DSTV, generator costs and rent. These costs differ substantially based on the location, availability of public power supply and any ancillary cost peculiar to the establishment. Power is an ever-present cost for any business operating in Nigeria and consists of both the cost of powering and maintaining a generator (either diesel or petrol) and payment for public power consumed (prepaid or postpaid).

All in all, the viewing centre business, though a cyclical one dependent on the Football season in Europe, is a lucrative one if well run and managed.

 

KEYSER SOZE…

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