02 Dec

The week ahead – Our regulators need to take a chill pill

The Senate says it will prosecute officials responsible for the negotiation of the concessioning of Murtala Mohammed Airport Terminal Two to Bi-Courtney Limited. Its Committee on Privatization led by Senator Ben Murray Bruce made the pledge when members of the committed toured facilities at the airport. The committee frowned at the failure of the federal government to implement the agreement reached with Bi-Courtney, saying it would summon the Minister of State for Aviation, Senator Hadi Sirika, to explain to federal lawmakers all issues relating to the concession. Bruce also told reporters that the Senate would halt the proposed concession of four airports until all the knotty issues with the MMA2 concession are resolved, saying that while the proposed concession of four major airports is a fantastic idea, the Build, Operate and Transfer agreement reached with Bi-Courtney must be addressed.

The NCC said it has suspended any further action on the directive to reintroduce a data price floor beginning today. Spokesman Tony Ojobo, said that the decision to suspend the directive was taken after due consultation with industry stakeholders and the general complaints by consumers across the country, adding that the commission had weighed all of these and asked all operators to maintain the status quo until the conclusion of a study to determine retail prices for broadband and data services in the country. According to him, the decision to have a price floor is primarily to promote a level playing field for all operators in the industry, encourage small operators and new entrants. “The price floor in 2014 was ₦3.11k/MB but was removed in 2015. The price floor that was supposed to flag off on December 1, 2016, was ₦0.90k/MB.

The chairman of the Federal Internal Revenue Service, Babatunde Fowler, on Monday said soon Nigerians might begin to show evidence of tax payment before obtaining their passports. Fowler, who made the declaration at the 136th meeting of the Joint Tax Board, said, “We did take a position and I believe it would be implemented in the very near future that before you get any services from the immigration department: renewal of passports etc, you’d have to show that you are a tax payer. These things are normal all over the world, In an effort to serve Nigerians and Nigeria better.” Fowler said the FIRS set a target to increase the individual taxpayer data base by 10 million by December 31.

Nigeria, Iran and Libya got special concessions Wednesday, as OPEC reached a much-sought consensus to cut oil production by 1.2 million barrels per day, effective January 1, 2017. The cut, which is the first after eight previous attempts since 2008, is considered a massive boost to efforts by the global oil cartel to shore up oil prices and end a record glut that has paralysed economies. It is also seen as a major achievement by OPEC’s Secretary General, Nigeria’s Mohammad Barkindo, whose diplomatic shuttles since assuming office in August, led to the “Algiers Accord” that sought to stabilise the market and boost prices. OPEC President, Mohammed Al-Sada, who announced the resolution on Wednesday at the end of the body’s 171st meeting in Vienna, Austria, said the adjustment in output would be shared among all members of the group, to bring their ceiling to 52.5 million barrels per day. The cut is subject to a review after six months, with a possible rollover for another six months on the recommendation of a ministerial monitoring committee of three OPEC countries, namely Kuwait, Venezuela and Algeria. Nigeria was recommended for exemption to enable it recover from the negative impact of incessant attacks on its oil facilities by armed militant groups in the Niger Delta region, which resulted in a massive cut in its production and export capacities.

An estimated $1 billion would be required to construct the proposed 1,000-kilometre crude oil pipeline from Agadem in Niger Republic to Nigeria’s Kaduna Refinery and Petrochemical Company. The standard cost for laying a pipeline is $1 million per kilometre, while distance and terrain are key determinants in cost, said Dolapo Oni, head of energy research at Ecobank. Experts add that the cost of feasibility studies and other ancillary activities could further take the cost of the pipeline to $2 billion, should the Federal Government see through the proposal. Attacks on the pipelines which supply the refinery prompted the NNPC to halt crude flows to its refineries in Kaduna, Port Harcourt and Warri. Nigeria’s crude production, which was 2.1 million barrels per day at the start of 2016, fell by around a third in the summer, following a series of attacks, since January, by Niger-Delta militants who want a greater share of the country’s energy wealth to go to the impoverished southern oil-producing region. In spite of the nation’s declining economic fortunes, Nigeria spent ₦595.5 billion on the importation of fuel in the first six months of 2016, rising by ₦34.3 billion from the amount spent in the last six months of 2015.

Suggestions:

  • While the Senate is well within its rights to question the Bi-Courtney concession, we do not think halting the concession of the four other airports is the way to go. We believe that the correct approach is for the senate to create a proper framework for concessioning, public/private partnerships and other such government collaborations with the private sector for infrastructure growth. This will provide the much needed certainty which has hampered the PPP/BOT arrangements and created the environment that engendered the confusion the senate wants to probe.
  • The debate over the NCC data price floor policy has been couched in flowery language on both sides and viewed primarily from a prism of regulatory overreach and conspiracy on the part of telcos. It is a mostly unhelpful way of understanding the real issues. The numbers, if the NCC is to be believed, show that the industry average for data prices by the dominant operators including MTN, Etisalat and Airtel is ₦0.53k/MB. In real terms, Etisalat offers ₦0.94k/MB, Airtel ₦0.52k/MB, MTN ₦0.45k/MB and Globacom ₦0.21k/MB. For the smaller operators/new entrants, ostensibly the beneficial recipients of the now suspended policy, the charges are as follows: Smile Communications: ₦0.84k/MB, Spectranet: ₦0.58k/MB and NATCOM (Ntel) ₦0.72k/MB. Price caps are necessary in markets where there are wide disparities in market shares to encourage competition, not only on price but also quality of service, among players that ultimately benefit the consumer. However, for it to work, the industry regulator must have accurate data about the market’s structure and dynamics. The NCC has no independent mechanism for verifying the data it receives from the telcos, thus compromising the effectiveness of this strategy. In fact, the NCC’s inability to do this was a major factor in the speculative regulatory pricing that led to the implementation of the price floor in the first place in 2013, which was discontinued in October 2015. To start with, two of the major telcos, MTN and Globacom own much of the super-architecture on which they and the other players route their services. Then again, the NCC has through the licence fee it charges, made the barriers of entry into the market so high that, coupled with regulatory flip-flops and the wider economic insecurities that come with doing business in Nigeria, any player, let alone small players do not have incentives to invest in the infrastructure necessary to offer data, voice and other value added services, a situation that will unleash real innovation in the country’s telecoms space. There is also the issue of the bad optics that the policy introduction signified, coming at a time when Nigerians can ill afford and least tolerate yet another hike in what has fast become an essential service. In the end, addressing these systemic issues should be the NCC’s ultimate focus, not the distracting small pimple that is a managed price regime.
  • The renewed effort by the Muhammadu Buhari administration to diversify the economy, coming in the face of shrinking revenue flows from traditional sources (read: crude oil) has been widely lauded. The only catch has been its modus operandi. First, the problem: According to the FIRS, less than 10% of Nigerians pay any form of direct tax, 46% of whom are registered in Lagos alone. There also appears to be a substantial tax gap between the tax that is theoretically collectable from economically active persons in Nigeria and the tax that is actually collected. Last year, the federal tax man logged in ₦3.7 trillion in 2015, according to data on its website, the lowest figure since 2010. It seems the FIRS is so focused on reaching its ₦5 trillion target for 2016 (which it admitted in September that it probably won’t) that any hare-brained idea to get to that mark is being entertained. Mr Fowler’s thinking is that receiving a passport is a ‘value added service,’ thus making it, at least in theory, an activity chargeable under the Value Added Tax Act. This thinking is flawed. The segment of Nigerians that contribute the most to the nation’s tax pot is already suffocating under a house load of taxes, charges, levies and other ancillary fees. Broadening the tax base beyond them has to be, and is the only solution. May we state the obvious here: any Nigerian who can afford a foreign trip and bothers to apply for a passport probably already pays his fair share of government receipts anyway.
  • From a political standpoint, the OPEC decision should be a stark reality check on where we are in terms of our oil industry. We contribute a small percentage of OPEC’s output, and can’t even meet up to that, such that the agreed cuts in quotas do not have to involve us. It is time to change the conversation. Doing that will require bold decisions that break the current spiral we are in. It involves a new deal for the Niger Delta. From an economic standpoint, oil prices are bound to rise and likely to stay above $50 for the short term, which will be a boost for the Nigerian government. It is also good news because it means that Nigeria is free to ramp up oil production to as high as possible in the short- to medium term. However, the bad news is that we are in a race against time for various reasons. Firstly, the US shale producers who suspended exploration activities are likely to go back into business and since they are bespoke private institutions. They will respond to this news quicker than the likes of Nigeria or Libya. Secondly, the truce between Saudi Arabia and Iran that led to the deal is not likely to last. Thirdly, non-OPEC producers like Russia who also agreed to production cuts will pull out of the deal if they sense that the Saudi-Iran rift is coming to a fore. If any of the above happens, the market will become over-saturated in a matter of months thus reversing any oil price gains. There is also the commensurate rise in landing costs for refined products which will in turn drive the open market price of fuel up. This means that the government will either have to increase pump price of fuel or increase its subsidy bill to accommodate the rise of the difference between expected open market price and the regulated pump price.
  • At this point Nigeria can simply not afford to build this pipeline. This appears to be a bad idea for two reasons. First, the return on investment in this pipeline will not be attractive to any investor. $1 billion on a pipeline that will pass through territory that is plagued by at least two insurgent groups, one of which has been a pain to the China Nuclear Engineering and Construction Corporation, will not be attractive to anyone. The same problems we are running away from in the Niger Delta, exist in the Toubou tribal lands of Niger Republic, and the Toubou, have largely come to the same conclusion as the Niger Delta, that militancy is the way forward. Almost as importantly, the crude oil production of Niger Republic currently stands at 20,000 barrels per day. Niger has a refinery at Zinder, half the distance to Kaduna, which has a refining capacity of 20,000 barrels of oil per day, and if Le Sahel, the press office of the Nigerien government is to be believed, all of the country’s crude oil goes to the Zinder facility, and then, the equivalent of 6,000 barrels per day is used in-country, while the rest is exported to Benin, Burkina Faso, Mali, and outside the continent, via Cameroon. No, we simply do not see how the Nigeriens will go along with this plan, unless we intend to buy the crude from them at very above market rates, something we are certain Nigeria does not have the foreign exchange to afford. Rather than focus on easy ways out, we urge the Nigerian government to buckle down and resolve the Niger Delta problem. As we have repeatedly reiterated, the current approach of all out force is clearly not working.