Deregulation of downstream sector will attract $100Bn investments in 5 years – REIF President

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* Act now or Nigeria sinks back to recession in months

(Published first in BD Sunday)

 Introduction:

Nigeria seems to be at crossroads with its fuel pricing system which requires about N800Bn at the moment on subsidy every year, an amount very difficult to sustain. Worse, the scenario has made the downstream sector of the oil sector, the section that is actually the job spinner and creator of the small and medium enterprises (SME) in massive scale, to wobble and decline on a steady basis. Add this to the hidden subsidy in the power sector of about N15Bn per month or about N180Bn per year instead market-adjusted tariff, the bleeding becomes unsustainable for the Nigerian economy and continues to scare away investors in these critical sectors that ought to push other sectors.

The problem is that the masses seem to be spoon-fed so much that any attempt to suddenly withdraw the fuel subsidy could lead to uprising. This must be why investors and economic analysts think that Nigeria missed an important moment to escape from subsidy when oil prices crashed to as low as below $30 per barrel. Now, the time seems to present itself again. The logic is that if it is withdrawn now, fuel could crash to as low as N90 per litre. If crude oil prices recover, the market would continue to adjust itself. The major gain would be the attraction of investors into the downstream sector.

REIF

The Rivers Entrepreneurs and Investors Forum (REIF) is a group of deep-pocket investors and entrepreneurs in Rivers State (initially, now nationwide) that share same ideology in business. They have limited membership in their zeal to remain credible and apolitical. They command the respect of, and close collaboration with, the European, the UK, USA, China, etc. Some of their members are international investors in the expatriate community in Port Harcourt and Niger Delta who often to not speak in the press.

Their present is an UBU-trained engineer who is now into construction and tractor manufacturer, IBIFIRI BOBMANUEL, who has very strong and highly respected voice in Nigeria’s economy. He has the ears of most ministers over the years.

(The minister of state for petroleum has just said subsidy has ended. Many want this as a definite declaration by the Federal Executive Council, and that government would not be fixing prices) Read the full interview.

Interview

In an exclusive interview with BD Sunday, the Rivers-born expert and investor interpreted the scenario based on his deep connections worldwide and urged the FG to strike now that the iron is hot.

Deregulate now or sink soon

Q:How do you react to the recent fuel price reduction by the federal government of Nigeria; do we see this as mere price modulation on full deregulation?

Thank you! Last week, I granted BusinessDay an interview on what was expected of the FG especially at such a trying time. I had observed that this is the best time to deregulate and thus urged the FG to carry out full deregulation of the downstream sector of the oil/gas sector. My take was to clearly call on the FG to see the opportunity and strike. I said it cannot be any better than now. It is simple, as we speak, the petroleum pump price is at its lowest ebbs worldwide. So, if the FG decides to take its hands off the till and allow the private sector to import fuel and sell to the people, it will sell at less than N100 per litre. If you look at the difference in crude oil price when we pegged it at N145, you will see what the price should be now. So, let the FG deregulate the downstream sector completely. The FG should take its hands off and allow market forces to determine how much petroleum products will sell in the market. That is how it is done everywhere.

From the early days of our history, the problem with FG from has always been that they seem to want to do everything for the people and end up doing nothing. They want to do subsidy on petroleum, power, roads, etc. You cannot subsidise everything and remain the same. We do not have the financial resources to do so. We do not even have the organisation (and discipline) to do that as a country. We are not wired to do it. We as a people do not practise socialism like in China where government provides everything for the citizen. Yet, China has handed over some sectors to the private sector. As long as the FG of Nigeria continues to run subsidy, there will never be good space for the private sector.

Look at what Dangote Group is doing in Lagos, where he is pumping $22Bn into three major plants; petrochemical, fertilizer, and refinery. The FG cannot try such huge investment or project today. So, government should leave it to those who can do it.

Any moment the FG decides to deregulate, things will happen. The market is there for Nigeria because Nigeria feeds the West and Central Africa. Our petroleum comes too cheap and even cheaper than the one they buy from their governments. That is why smuggling is taking place across the borders at the expense of the average Nigerian. These are series of largesse that were created to provide degrees of comfort but we do not have the capacity to manage it. The best solution is to stop the bleeding of our economy.

If you deregulate, automatically, the big elephant in the house (Nigeria) today is fuel subsidy because the FG spends the biggest chunk in it and we end up subsiding for half of Africa. We are just hurting ourselves.

So, we at the Rivers Entrepreneurs and Investors Forum (REIF) hereby urge the FG to go the full hog. They have done well by bringing the price down but they need to take their hands off the matter. They should allow the likes of Dangote to do the investing.

Space, not money, is the key; $100Bn waiting to come in

We have always known we could get investors into the modular refinery market because the amount is not very high, but the space is not encouraging. They have not given enough incentives to attract private funds for modular refineries. For instance, if you produce from modular refinery and you go to sell in the same market with the FG subsidized products, you can’t sell. FG has given licenses to companies but when you go to look for financiers or partners, they will ask you, look, if we invest say $3Bn, is your government going to stop subsidy? The answer is no. Immediately subsidy is removed over $100Bn will flow into Nigeria’s downstream sub=sector.

The first rule is that money follows the market. Why is the money not following the Nigerian market? It is so because the climate is not there. The moment we deregulate, massive jobs will emerge. If the fear is that prices will go up, this would have been during peak crude price time. Currently, crude is at its lowest point. This is when you need to act.

Act now

For starters, fuel will sell below N100 this time if we deregulated. This gives an opportunity to export fuel. The market will reorganise itself and different players would play in different areas; exporting, investing in refineries, etc. It will create a gamut of market. This is why we think the FG should please stop drowning itself. Nigerians need to come together and encourage the FG to act now.

Fuel in most other countries with oil is more expensive because they have taken their hands off it and Nigeria is subsidising for them. Now, I see this as a golden opportunity that will make the Nigerian economy bounce back bigger. If we wait for oil to start to peak again, regulating at that point will come with bigger pains to Nigerians and investors.

We received this news of reduction in price with a lot of excitement because everybody seems to commend the FG, but if they go by our suggestion, it means they need to go a step further; complete deregulation. It will not just be modulation which only means that government is still adjusting prices. You are still subsidising fuel. What we ask them to do is please take off your hand completely. You will even generate more money and goodwill by just regulating the space. It’s a win-win for the FG; that why we at the REIF keep asking why the FG is still staying on that streak.

Equalisation issues

Q:

There is this silent subsidy called equalization, which enables the FG to pay for transportation carrying fuel to far locations so as to make fuel sell at same price all over Nigeria. How does the FG handle this type of subsidy if they are to deregulate fully?

My take is that the FG should back out of the entire space and allow the private sector to invest so that Government can only regulate the space. Government can do this by checking to see that all indices are taken into account to allow the market move smoothly. This would mean making licenses for refineries going to the north or far locations cheaper. Investors have their peculiar reasons to invest in any place. Dangote group has reason for choosing Lekki in Lagos while I may have a different reason to invest in Rivers.

 

The investor going to the north would have his reasons. So, costs will not be the same. The whole idea is to create seamlessness for investors. They will decide where to invest. Cheaper licenses may be the attraction they need, etc.

Private investors will not go about it like the FG does like in the issue of laying pipes from the east to the far north. They have better technologies like piping to convey your products to the north. Pipeline vandalism can be handled by advanced technologies. Dangote is piping to Lagos yet nobody will get to where the pipes are deep in the water. The private sector has the flexibility.

The difference between the two is that the government thinks about four years term and would want to deliver many immediate projects otherwise the masses would revolt. The private sector sees it as a long haul of over 10 years to recoup. The market is readily available. For the politician, he must work on a given time. That is why government is always not the right place to handle businesses. If government frees the space, huge money will come in and they will plough it back to other areas.

Power sector, too

This formula will work even in the power sector. Government has been strapping their hands at the bank. If you strap any investor’s hands at the back, it makes it difficult for the investor to even spend his money. So, create an environment where the private sector person sees big returns on investment as in humongous profit. See what happened in the telecommunications sector where it went from per minute to per second billing due to competition. It started with N250 per minute and N45,000 to buy a line with phone. Later, more players came in and one of them said no more status billing (time-barred duration for a card) but per second billing. Everybody rushed to them and the former one joined the per-second method and things changed. At a point, they began to woo callers and some gave free midnight calls. Boom came; and they expanded the space, the capabilities and the clientele. The masses benefited the most. Now, there is some degree of parity in that space. That is what we need to do in the other sectors: power, petroleum, and infrastructure.

Funds always look for market

A lot of people call on the FG to spend xyz amounts on infrastructure. I say yes, they need to spend even more, but it must not come from government coffers. The FG has no business to go cap in hand borrowing money to fix railways and roads. Make those sectors attractive for investors to borrow the money and come and do them and pay back. You do not have to be the debtor. Just make it attractive. Funds would always look for the market. It will find its way to where it will get profit. The FG responsibility is to manage the amount of profit that is being made from that sector.

If we do not change our approach, in the next quarter, Nigeria will slide back into recession, whether we like it or not. The policies will decide. If the policies come with rethinking, we would even come out stronger.

Q:Still on the economic turbulence and deregulation, is there any other thing that could be done especially in the face of the N3.5 trillion stimulation?

It does not stop at giving N3.5 trillion. As a people, we should desist from throwing money at every problem. It has never worked and will never work. For instance, how are we applying the money? From hindsight, it never goes well. We should be using this opportunity to push e-Commerce forward. As we ask schools and churches to shut down, we should also be pushing up another while we shut down a sector. There should be one sector at least. I think the e-Commerce sector should be the one, by leaps and bounds. The likes of Jumia and Konga online shops should be made to take over through incentives and tax rebates to promote the new channel. The rebate would encourage more people to shop through them and reduce human activities in markets. It means the markets will not shut down fully because of e-shopping. This will stop people from going to the market massively and spread the virus. We need to think outside the box to meet our needs at this time. These are the basic things the CBN and economic team should be considering.

As a people, we must begin to believe in ourselves. No economy can over-perform its yardsticks without believing in home-grown industries, even if production lines are not yet where they ought to be. We must begin to carry those investments as national priority. Wherever the president goes outside Nigeria, he must think of how many sales he can win. He should be able to carry leading investors on the trip. But, when our presidents travel, they come back with demands from their host countries without putting their own demands other than asking them to buy our oil.

Look, you could make more money than oil. That is why we need deregulation. If this is done, what the FG would do is to tap into the resilience of the private sector and ride on it. The potentials of Nigeria’s economy would have been obvious for all to see. If you step into the US, it is clear what Donald Trump will tell you is you buy agric products. So, what do you demand from him? Ask him to buy certain things other than oil. That is how international trade works. It is trade by barter.

In our scenario, we have a misdirected focus and our ambassadors are mere political appointees seen as compensation. Ambassadors should be business frontline people, in fact, a business army. We should give them targets to say, you have to move our trade from this point to such a level. If you put all that into a pool, at the end of the year, the gross domestic product (GDP) would move up. We must imbibe the business approach in governance.

Q:

Are there any lessons to learn from China, even on COVID-19?

 China needed to act fast to save the economy

China is a country with sharp focus and resilience. Talking about Coronavirus, China saw the danger of not handling it to mean a collapse of their economy. Factories had all shut down. Nobody was travelling; even Chinese in other countries were being stigmatised. They needed to act fast. They acted with all they had. Today, they do not have it except those imported into the country. We must recognise danger and act to stop it.

Compared with China, we were slow. They were very swift the moment they realised it was a major problem. They quarantined areas as big as one region in Nigeria. An entire province was shut down. With the numbers coming out of the epidemics, they knew they needed to curb it. If not, it would have finished their economy which had already hit the bottom before it started bouncing back. We need to learn a lot, but we commend the federal and state governments for efforts so far. But, they should do more?

Q:

What is the update in the tractor loan deal between Nigeria and Brazil?

$1.1Bn tractor loan deal with Brazil is not good

It has been slow for sometime now, especially because of the distractions going on now. More meetings are coming up, though. Look, it was this administration that encouraged local manufacture of tractors in recent time past. It is ludicrous to take a whopping $1.1bn even as a loan to import tractors. Nobody does that. It is to simply kill your local efforts. If you spend that amount at home, you would have impacted many local lines and persons to do more.  Even $500m for local tractor boost is great. The sector will acquire capacity to even export.

We must create capacity to satisfy both the Nigerian and the African markets. Government’s major objective should be to push for export. Why the naira is always weak is because it always chases the Dollars. When we begin to export items, different currencies will look for Naira and this would bolster it. It is a simple thing; forces of demand and supply. It is no rocke science.

Nigeria could bring back the power of the Naira as it was in the far past by allowing the economy to be private sector-driven. The past minister of Agriculture (Audu Ogbe) was the one who encouraged that kind of focus.

These are the flip-flops on the corridor of governance that we think should be retooled.

(By Ignatius Chukwu)