Niger Delta: Before The Oil Runs Dry (2)

Niger Delta: Before The Oil Runs Dry (2)

Posted by Sylvester on Thursday, December 18, 2014 0

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One of the key assumptions of our theory is that states will adopt a judicious application of FAAC allocations in the years ahead to develop infrastructure and consequently attract investments. This should be done by gradually scaling back the burgeoning public sector and investing FAAC allocations into hard and soft infrastructure that will support the expansion of private sector activities.

Why is this required? Besides the increasing global awareness for the need to develop alternative sources of energy, we also consider that, according to the Department for Petroleum Resources, Nigeria’s crude oil would not last beyond 25 years at the current rate of depletion. In addition, the oil-producing Niger Delta region of the country remains a flash point as seen by the recent resurgence in militancy in the region, regardless of the government’s amnesty plan. Therefore, in the long term, a state’s viability within the polity rests on its ability to generate internal revenues to sustain growth and development and financial independence.

The Lagos State example

To this end, Lagos State of Nigeria has demonstrated the feasibility of this theory following the accelerated growth of its IGR since 2004. Overall, Lagos State’s funding model underscores our point as it highlights the fact that there is a strong positive correlation between a state’s sustained revenue generation ability and its infrastructural development.

In our analysis of Lagos state’s finances between 2004 and 2013, IGR increased from N34 billion in 2004 to N236 billion in 2013 indicating a 24.0-percent compound annual growth rate (CAGR). Also, statutory allocation as a percentage of total receipts dropped from 40 percent in 2004 to 19 percent in 2013, as a result of the increase in IGR over the years.

Our analysis further revealed that statutory allocation to the state is significantly less than recurrent expenditure, which is an average of c. N115 billion per annum and would have resulted in an average annual shortfall of N70 billion. However, the state’s strong IGR sustains much of the growth in total receipts and investments in infrastructure.

Using the Lagos State as a benchmark, it is evidently possible for states to generate at least 1x the size of their respective statutory allocation received from the federal purse. It has also become obvious that increased investments in infrastructural development will result in an increase in IGR as the state continues to attract new investments whilst existing companies/institutions thrive.

Consequently, states should adopt the doctrine: “if I don’t attract the right form of businesses to my state, I will not have any revenues” – such revenues to the state by way of taxes and levies. With this doctrine imbibed, states will then aggressively seek to increase their IGRs and invest in infrastructural development… and the cycle will evolve.

Is the current allocation mechanism optimal for incentivising the states, economic and infrastructural development? This has to be assessed against the backdrop of the possible elimination of state and private sector incentive compatibility as states continue to rely solely on the federal purse for revenue generation.
The 80-20 rule (Pareto principle) is indirectly operating in Nigeria as approximately 12 percent of the land mass generates 67 percent of federal revenues. At present, the nine oil producing states in Nigeria have a land mass of c. 111,937sq. kilometres which accounts for 12 percent of Nigeria’s total land mass of 923,768sq. kilometres. The states are Abia, 6,320sq. km.; Akwa Ibom, 7,081sq. km.; Bayelsa, 10,773sq. km.; Cross River, 20,156sq. km.; Delta, 17,698sq. km.; Edo, 17,802sq. km.; Imo, 5,530sq. km.; Ondo, 15,500sq. km., and Rivers, 11,077sq. km.

According to the Central Bank of Nigeria’s economic report for August 2014, oil revenues from these states have accounted for 67 percent of federal revenues whilst non-oil revenues have contributed 33 percent.

In this case, our theory compares a country to a company where all divisions are expected to contribute to group revenues. Any other practice would suggest an imbalance in the company’s revenue generation strategy and that certain divisions are not viable thereby hindering overall company growth.
To address this imbalance, each division will need to add to the revenue of the company or country. This we believe can be dealt with by re-directing FAAC allocations into infrastructure development to create jobs and private sector opportunities; at the same time adjusting the size of the public sector to a more manageable level.

Oil revenues: RES IPSA Loquitur

In our analysis of Nigeria’s oil revenues over the last 34 years, it was deduced that the country’s real oil proceeds per capita declined by c. 54 percent to $1.45 in 2013 from $3.13 in 1980, indicating an effective drop in the nation’s real wealth regardless of the increase in nominal oil revenues over the years.

For our analysis, we considered data on the spot prices of Nigeria’s crude oil over the last 30 years which indicates that in 1980 the country sold its prime commodity at $36.98/barrel with production levels at c. 2.059 million barrels per day (mbpd) resulting in revenues of c. $76.14 million per day. As at December 2013, Nigeria’s crude was sold at c. $111.95/barrel whilst production levels were at c. 2.322mbpd leading to revenues of c. $259.88 million per day.

Sonnie Ayere and Tola Odukoya work for Dunn Loren Merrifield, a full-service investment house headquartered in Lagos…
Continues next week