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Cpanel

16October2018

Delay in passage of the Bill: An impediment to Investment inflows

The high uncertainty that pervades the oil industry about the outcome of the PIB with apparent divergent interest amongst various stakeholders is currently preventing investment inflow into the industry. One of the consequences of the delayed passage of the PIB is the combination of a lull in new investment in the sector and divestment from domestic oil assets (especially on-shore assets) by existing and potential investors as they await the outcome of the reform process. The Nigerian National Petroleum Corporation (NNPC) reported that Nigeria loses over US$287m from Production Sharing Contracts (PSC) monthly due to the non-passage of the PIB. On the aggregate, the sector may be losing an estimated US$18 billion in annual investment due to this constraint as International Oil Companies (IOCs) continue to divest from on-shore assets in favour of off-shore assets pending the outcome of the PIB among other factors. 

It is also believed that the delay in the passage of the Petroleum Industry Bill  has caused the IOCs operating in Nigeria to hold back on their proposed investment in the oil industry estimated at N17.2 trillion ($109 billion). Furthermore, planned investment estimated at $33 billion over the next five years by operators might be in jeopardy as the fiscal terms of the PIB are believed to be unfavourable. In other words, except the PIB is passed into law to reverse this trend, declining oil and gas investment would further worsen the nation’s FDI inflows, which declined from $8.9 billion in 2011 to $7.0 billion in 2012( due to national insecurity and a weak global economy).  

 

Local participation would increase when the PIB is passed into law 

Developing local capacity will ensure that indigenous companies benefit from the multi-billion dollar investments expected to flow into the country after the passage of the Petroleum Industry Bill. The PIB makes adequate provision for the sufficient localization of the servicing and manufacturing ends of the industry’s operations.

Nigerian companies are expected to benefit extensively from the reforms in the industry as they are to be given first priority in the award of oil blocks, oil field licences, oil lifting licences and in all project awards. Indigenous service sectors and companies in petroleum engineering and engineering support services, engineering designs, fabrication, manufacturing and installation, seismic data processing, drilling and exploration services, maintenance services, finance and insurance, health, safety and environment etc. would also be direct beneficiaries of the reforms in the oil industry via the Local Content Act. These provisions should ensure steady growth in Nigerians’ participation in the industry, increase local capacity and industry knowledge and expertise, and boost job creation. It has been estimated that over 3 million jobs could be delivered in the first 5 years of the implementation of the law.

Therefore, as concerted efforts are being made to entrench Nigerian content on the journey to a post-PIB oil industry for the benefit of the local economy, there is a need to launch a vehement campaign on human capacity building to forestall the challenges and opportunities that its implementation would throw up.

 

Diversification is the solution in the long run

While the long-run hedge against the impending oil market glut is the substantial diversification of the economy away from oil to non-oil sectors, particularly government finances and external trade positions, this is only achievable in the medium to long term. In the short term however, enacting a competitive, inward looking Petroleum Sector Act that factors in the evolving global oil scenario is the ideal solution.

While we note that the passage and implementation of the PIB will not eliminate the problem, it would expand investment in the sector while increasing indigenous companies’ participation. This is expected to result in the domestication of a significant portion of revenue, including taxes to government, on the oil and gas value chain. In this regard, we advocate for the conscious creation of a domestic market for crude oil as an extant action to the PIB to facilitate local trading in the commodity on different scales. It is also important to fully deregulate the refining subsector and allow multi-level participation provided the final end products meet the standards required by the government agency/regulator. This way, the existing illegal refineries in the country can be licenced to operate legally.

It is now very important that an investor-friendly Petroleum Industry Bill is passed into law in good time as its delay is holding back investment and is impacting negatively on the Nigerian Economy. Meanwhile, in the face of the comatose start of nations’ refineries in spite of previous efforts made by the Government to revive and maintain them, the PIB must provide an enabling environment to encourage investors to build and maintain new refineries in Nigeria. It is also imperative for Government to diversify the economy from being solely oil dependent, to other streams of income generation such as Agriculture and solid minerals, otherwise the ripple effect of our over-reliance on crude exports to the US, will be devastating to the economy.

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Nigeria’s education and health sectors can benefit from the Bolsa Família Model

Nigeria is a classic case of the paradox of growth without development. The record of sustained higher than peers GDP growth rates over the last ten years alongside a high incidence of poverty and unemployment, and dire health indicators and education statistics, is incongruous. Public allocated resources, in terms of budgetary and extra budgetary allocations to these critical sectors have been adjudged reasonable in most quarters even though they may be below international benchmarks.

Despite the high poverty in the land, the few government programmes that benefit the poor such as fertiliser and fuel subsidies are being threatened by fraud and corrupt practices and the debate as to whether there should be a welfare system for the public has come to the fore.

Poor health statistics compared to the average in Africa and other emerging economies

At 138 out of 1,000 births, the under-five mortality rate in Nigeria is higher than the African average of 127, similarly, 27% of children under five are underweight compared to the 20% African average. At 840 deaths per 100,000 births, the maternal mortality rate for Nigeria is substantially higher than the African average of 620 and Brazil’s 58. The proportion of births attended to by skilled personnel is 39% compared to an average of 57% for Africa. Due to the inadequacy of public health infrastructure and low affordability among the populace, many seek cheaper alternative methods.

Recent survey suggests that the Universal Basic Education programme is not achieving its objective

While the overall primary school enrolment and completion rates are impressive at 83% and 74% respectively, the statistics have been supported by data that is skewed to regions that are educationally advantaged. The most recent statistics suggest that over 4 million school age children are out of school in Nigeria and/or are engaged in one form of child labour or the other to support themselves and/or their families. This is despite the compulsory Universal Basic Education (UBE) programme which mandates compulsory first 9 years of schooling for all school age Nigerians. UBE receives statutory transfer status in the government’s annual budgetary allocation. 

Nigerian Poverty Incidence- hunger amidst plenty

Nigeria’s incidence of poverty is put at 57.61% on the average across four poverty measures. According to the National Bureau of Statistics (NBS) data, 40.63% of Nigerians are food poor, consuming an inadequate amount of calories per day; 60.48% are absolutely poor; 69% are relatively poor, spending less than two third of the total household expenditure; and 61% live on less than a dollar a day. This is compounded by an unemployment rate of 23.9% (2011) which also explains the high level of inequality in the country as indicated by the Gini coefficient of 0.447 in 2011. Gini coefficient is a measure of inequality in a country on a scale of 0 - 1 with 1 representing perfect inequality in terms of access to economic resources.

Addressing the poverty issue in Nigeria may require adopting the Brazilian Bolsa Familia model or a variant of it

There have been several attempts at providing social safety programmes in Nigeria in the form of pro-poor, women and/or employment programmes. Some notable ones that draw direct funding from the public budget include the National Directorate of Employment (NDE), Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), National Poverty Eradication Programme (NAPEP), and in recent times YouWin and other women and child health related components of the Subsidy Reinvestment programme (SURE-P). A major concern however is the extent to which these programmes have produced the desired effects of employment generation, poverty eradication, and improved health for women and children in relation to the resources allocated to them each year.

Addressing this conundrum, in a country without a clear social security system that supports the poor and unemployed, requires an intelligent approach, especially in an environment where corruption is rife. In this regard, there have been suggestions that the ingenious approach developed and adopted by Brazil or a variant to suit the domestic situation could be adopted in Nigeria. The programme named Bolsa Família Programme (BFP) or family grant has been adjudged one of the most efficient social security systems globally by the World Bank. It is currently being recommended to other countries and has been adopted by the United States in New York's Opportunity NYC programme.

The Bolsa Familia Programme grants limited monthly income based on meeting specific conditions

The Bolsa Família Programme (BFP) was created in October 2003, through the merger of four pre-existing cash transfer programmes, in an effort to improve the efficiency and coherence of the social safety net and to scale up assistance to provide universal coverage of Brazil’s poor. The programme provides transfers ranging from 15 to 95 Brazilian Reals (R$) (US$7-45) per month to poor families. BFP is a conditional cash transfer programme that seeks to help reduce current poverty and inequality by providing a minimum level of income for extremely poor families, and break the inter-generational transmission of poverty. Eligibility for the transfers is based on beneficiaries’ compliance with three specific human capital requirements.

First, for a family to qualify for cash payments every month, children must stay in school until age 17, and attendance must be at least 85% up to age 14 and 75% thereafter. Secondly, children must get the full set of vaccinations in their first five years. And finally, mothers must attend pre and post natal care. The BFP programme targets poor and extremely poor families throughout the country. The adopted income ceilings for eligibility were set at a fixed monthly per capita family income of R$100 (US$48) for moderately poor families and R$50 (US$25) for extremely poor families.

The amount of transfer is basic; preventing recipients from making a substantial living on it

In setting the monthly amount, a number of factors were considered and the adopted value was set to ensure that the resulting benefits are simple to administer, favour the extremely poor, favour families with children – but with limits to avoid promoting fertility, and prevent eligible beneficiaries of the old programmes from losing out on the new programme. The BFP provides two types of benefits: basic and variable, according to family composition and income. All families in extreme poverty get the basic benefit regardless of demographic composition. Both extremely poor and moderately poor families receive a variable benefit based on the number of children in the family with a maximum of coverage for three and whether the mother is pregnant or breast-feeding.

Although the assistance unit is defined as the family as a whole, payments are made preferentially to the woman in each family as the legally-responsible beneficiary, as established by the BFP law. Hence, 93% of legally responsible beneficiaries are women. This preference reflects international experience that suggests that women are more likely to invest additional income in improving the education, health and welfare of their family, particularly their children, than men. 

Implementation of the BFP leads to improvement in Brazil’s economy and welfare status

The level of support is low, as it is designed to supplement income from jobs; however studies have shown that the injection of this cash into particularly poor communities is helping stimulate the local economy. According to the Fundaçao Getulio Vargas (FGV), a university in Brazil, the number of Brazilians with incomes below R$800 (US$440) a month has fallen more than 8% every year since 2003. The Gini index, a measure of income inequality, fell from 0.58 to 0.54, a significant fall by this measure.

Studies have also shown that the bulk of the money is spent on necessities such as food, school supplies, clothing and shoes. This is in contrast to the anti-cash transfer arguments that if you gave money to the poor, they wouldsimply spend it on alcohol. While only an 8% poverty reduction can be attributed to BFP benefits, the impact on the poverty gap and the severity of poverty has been stronger, and these have fallen 18% and 22% respectively. FGV and the World Bank argued that the BFP has also been efficient considering it has similar impact on poverty with the public pension scheme but at far lower cost.  On the broad indicators of education and health which form the core of the conditionalities in the BFP, Brazil parades one of the most impressive figures globally, especially on health.

Nigeria can benefit immensely by adopting the Bolsa Familia model

Nigeria may need to urgently review the myriads of poverty and employment programmes that benefit only a few, which currently run, and consider revising them into only one or a few effective ones that benefit many. Since Nigeria’s rank on the health and education performance scale is at the lower rung of the table and there is currently no social safety net to direct transfers to the poor, adopting a model similar to BFP could be hugely beneficial.

However, it must be noted that a transparent national identity database must precede any form of implementation of this programme as a functional requirement so as to minimise the likelihood of benefits ending up in the wrong hands. 

  • Written by The Analyst
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