Monday, October 17, 2011

GEJ: Instead of removing subsidy...Do This

This talk of deregulation is nonsense in so far as the President’s aides keep missing the larger point. That the cause of the corruption in the subsidy scheme they’re purportedly scrapping is not the subsidy itself, but the very essence that an importation cabal has held the nation hostage. It is this cabal that has determined to ensure they skim off the top of the nation woes, while ensuring that a better system to replace what we have now never emerges.

Just like PHCN and our electric grid is in the grip of the generator mafia, the petroleum import leeches have essential declared war on our capability to refine locally, and they were the sponsors of the President at the last election!

Take for instance, in the fiscal year 2011 the total budget for petroleum subsidy was 240 billion naira, roughly $1.70 billion. To date, 931 billion naira have already been spent! Yes, you read that right: Nigeria have expended $6 billion on the economic hit that have been let loose on our nation. They live in sleek palaces across the country, smiling to the banks while the rest of us exist in absolute penury. These are the President’s men, and now they want us not the government to line their pockets.

NOTE: Nations subsidize products that are deemed essential to the national economy. In the United States, gas and food are heavily subsidized to ensure folks can ride out winter, and keep poverty to the minimum. Billions are spent in the capital of capitalism on ethanol subsidy to keep the midwest economy humming. Read, unlike you've been indoctrinated: THERE IS NOTHING WRONG WITH SUBSIDIES. Targeted subsidies are in fact a smart way to run and win in an inter-capitalistic world where you're going against heavily subsidized Chinese and American players. Petroleum is essential in the Nigerian economy where it cooks our food (Kerosene), powers our industries (thanks to PHCN) and drives our vehicles. If the price goes up, inflation will nearly triple imposing invisible taxes on production and ensuring the economy crashes.

Nigeria is a low-income earning country that happens to be blessed with oil. Our citizens should not be paying the same price as an American. For one, they cannot afford it. This obsession by the PDP government with deregulation will destroy our local economy and companies already groaning under the weight of fueling vehicles and generators, it will be the last straw to break their back when the government should rather be stimulating the economy. America, China and Europe are stimulating theirs, why should we be killing ours? This policy will destroy employment, threaten our social fabric, lead to spiraling inflation and could very well lead to a revolution. The President is playing with fire.

I cannot believe the President is simply clueless (or maybe I can); clearly this man cannot be possibly impotent in the face of the cabal (or maybe he is). The solution to the corruption in the subsidy system cannot possibly be transferring the burden of paying that subsidy to the pockets of long suffering Nigerians from the coffers of their ever-leaking non-existent government! Pray tell, how many new refineries can be build with the subsidy the government of Goodluck Jonathan have paid to his sponsors in 2011 only?

Here are few policy steps, just in case his advisors are reading that can take Nigeria from almost 6 billion dollars paid to charlatans to total self-sufficiency in three years, by the end of his term:

  • Commercialize the existing four refineries as separate companies. This will basically involve cleaning shop on management level (hire HR firms to do this), while taking them public (offering 49% control at the IPO, devoting the raised capital to capital expansion to increase production)
  • Continue the practice of selling crude oil to the refineries at below international market rate i.e. indirect subsidy, which allows the refinery turn profit; while putting a lid on the domestic pump price through a regulated system of tariffs similar to electricity.
  • Allocate excess refine products demand to the four operators: allowing them to organize importers to meet this demand beyond what they produce, while disbursing subsidy directly to them to meet the regulated pump price.
  • At the same time, the new regulatory regime should not allow these operators to import directly or through any subsidiary or joint venture, rather they’re to source their imports from the open market, paying market price for such while bridging this with government paid subsidy.

This system essentially means that as a commercial operator, they’re giving up certain margins to the middlemen importers in so far they don’t produce domestically; encouraging them to eliminate these middlemen quickly. Also, the fewer players feeding at the government trough of subsidies will also mean less corruption. As public companies responsible to shareholders, these companies will only act in self interest to continue to expand production to meet local demand and eliminate the middle men.

At the same time, government incentives for new refinery builders including tax holidays, a capital expansion fund that provide up to 51% equity funding or loan guarantees to these builders at the Central Bank will be a more efficient way to spend $6billion than giving it to the President’s buddies. Of course one of these incentives might be a bite at the juicy oil blocs that the majors always want: no refinery no, crude oil concession, no deal. It is called negotiation.

Stop being a coward Mr. President. Where is the Petroleum Industry Bill when we need it anyway?

Sunday, October 16, 2011

Money News that is just a bit new: YouWIN, the misunderstood subsidy, Naira to strengthen, and the World bank cares.

At least the administration is listening. There is a government plan to tackle unemployment through entrepreneurial development. It has a name: YouWIN - Youth Enterprise With Innovation In Nigeria.
Will it have teeth? I need money now, actually like 6 months ago for my "business" - my new book. How can I WIN?
I've witnessed a business plan program similar to the one proposed by YouWIN - it featured a week of all-day classes at a Lagos Business School affiliate, then a business plan competition. It was tastefully sponsored by people of NLI. They kept it simple, and awarded capital - yeah baby - to three top business plans. (all about the NLI Business Plan Competition here)

Since the best academic writers don't always have the most business sense, a program like YouWIN may not reliably create strong businesses directly from the winning business plans.
However, it will indirectly create a culture of enterprise: as ideas meet, good people partner, add focused training, serve seed money to help people TRY.  Yes, they will likely, and crucially, fail. But it is still very good to spend money in this way - people will start devoting their time and energy to good business, and this builds their business/entrepreneurship muscles.
The secret of Stanford (a university and frequent high-tech incubator) is not more than that. 

My advice on YouWIN: Keep it simple.  Use good people (like me; pay me so I can make small money to produce my new book) not people who will mess up the whole thing by being backward and greedy.  Also keep this as the big book version but let us create the "illiterate" version that can reach more people. Oya, let me go and apply.

The Petroleum Subsidy Brouhaha
The reason to remove the subsidy is to remove the perverse incentive to import and deal in oil; and hopefully to create incentives to produce and trade in better things.
The subsidy will be removed if we must move forward.  This is not to trivialize what a political minefield it is to suddenly raise living costs on the majority of people.  Such would be bad for society and the economy as well.  What is the plan to
1. cushion any shocks and unintended consequences e.g. high food, fuel, and transport prices
2. communicate love and care to the masses who will feel cheated and abandoned?

Clearly, the idea of shaping the incentive function (I'm an engineer/math person) is not one that the masses would easily wrap their minds around.  Nduka Obiagbena and Wale Tinubu, among the business leaders supporting the removal of the subsidy, support it for the wrong reason because they are not very analytical.   Aliko Dangote, who also supports removing the subsidy, shows why he is more intelligent than many business leaders in Nigeria.  He understands that it is not the spending on subsidy that is the problem, but the system this creates.

In the grand scheme of things, the amount spent on the subsidy is paltry.  James Ibori alone could pay it for a few years from his loot, not voluntarily of course.  The subsidy should go, but not because of the money spent on it, not even because of the alternative uses that money could be spent on, but because it entrenches a system of importing oil products.  When you subsidize something, it means you are trying to make more of it.  When you subsidize oil imports, it means you are assisting the business of oil importers to make it stronger.  This is why we can not have electricity (we need generators to continue to consume the diesel) and why we can not have trains (we need more cars to continue to burn petrol.)  

My advice on petroleum subsidy: Understand if/why the subsidy must be removed.  Explain this to people.  Devote ten times more money to another new people-oriented program and communicate what the disappeared subsidy money was spent on.  Proceed with caution, even if you think you are right. 

Sanusi believes the Naira will strengthen
In other news, the Naira still manages to weaken against the US dollar.  How is it possible that even with the US in recession and crisis, their currency is still beating ours up?

Money for Power
The World Bank and the International Finance Corporation are to organize an Alternative Energy Expo to find a way forward for energy/electricity in Nigeria. This is new. I'd never heard of our electricity being "their" problem before.
What this forum - Lighting Africa - is doing is to try and make the latest lighting technology accessible to the hundreds of millions in Africa's un-electrified rural communities and replace kerosene as a lighting source by solar and other clean sources."
Abeg, come and invest.

Advertisement: Read my books.

Monday, October 10, 2011

What is cooler than a career fair?

The Wharton Africa Business Forum.  November 4-6, at U.Penn, in Philadelphia, PA.
Check out the speakers: financiers and fund managers, experts in infrastucture and agribusiness and telecomms and microbanking from Africa and elsewhere.
Discounted registration available for students, who can also learn how to apply to Wharton.
Go!  And let me know how it goes. 

Previously on UpNaira