–Professor Omowumi O. Iledare
1.0. PREAMBLE
That the state of the economy of Nigeria leaves much to be desired is an understatement as key macroeconomic performance indicators keep running against the traffic. The cumulative average real GDP growth rate is -2% per quarter over the last five quarters. Of course, it is easy to rationalize and blame COVID-19 pandemic and perhaps, the persistent insecurity across the land. Total foreign investment flow remains extremely low relative to 2016, averaging just about 1 billion dollars per year. Some have argued, particularly, the Nigeria Economic Summit Group, that the key hurdles facing the economy of Nigeria in terms of foreign investment flow include, but not limited to, macro-economic instability, fiscal and monetary policy inconsistencies, inadequate infrastructure, insecurity, and business environment that is egregiously unfriendly. I cannot but agree with the group’s assessment in 2021.
Further, the inability of the country to manage petroleum revenue pragmatically, over the years, has become quite consequential. The highly Nigerian skilled young adults are emigrating, even as more than 95 percent of youth in the 18-24-year-old bracket have expressed some disillusionment that the country is going in the wrong direction. It is not unusual for the idealism and the value system of a society to weaken as the economy spiral through the business circle that just refused to come out of the valley with misery index, persisting. The public perception of what oil money did in the 1970s, after the civil war, comes to mind readily, when effective oil money management transformed the economy of Nigeria through national development plans that were dutifully executed using petroleum revenue.
The aim of this June 2022 op-ed is to proffer logical and rational strategy to management of petroleum revenue for posterity and perhaps offer a pedagogical perspective to enlighten the incoming political elites to complement the Finance Act 2021, the Petroleum Industry Act 2021, and Fiscal Responsibility Act with Petroleum Revenue Management Act by 2024. In other words, the time is now to replace the Revenue Mobilization and Allocation Act with Petroleum Revenue Management (PRM) Act for completeness.
2.0. Rationale for Petroleum Revenue Management Act for Posterity
Access of government to petroleum revenue in Nigeria has been majorly through the general fiscal elements of the old Petroleum Act of 1969 and the Petroleum Profit Tax Act of 1959. To a large extent, the 2021 Petroleum Industry Act consolidated these Acts with referencing to the Company Tax Acts for upstream businesses. PIA 2021 defines clearly the key sources of revenue to government from upstream petroleum extraction, including bonuses, royalty, taxes, and special levies; and in the downstream, the key source of revenue for the federation is corporate income tax. However, the laws in Nigeria had always been how to make and share more petroleum revenue and never did we, as a country, make any law on how to manage petroleum revenue, if my recollection serves me well.
Regrettably, and I alluded to it in the past, revenue accruing to the federation account may be grossly affected in quantity, quality and timing, because of PIA 2021. First equity revenue receipts from NNPC may become dividend based in terms of JV petroleum and PSC profit petroleum. Second, the deep-water royalty may not compensate adequately for the exclusion of deep-water assets from paying the severance or resource tax NHT. Thirdly, there is also reduction in the PPT rate because of the introduction of the hydrocarbon tax. Ironically, the component states in the federation with autonomous political governance structure refused to covet autonomous economic structure and celebrating the collective refusal to be fiscally responsible most often than not. The premise, of course, being that petroleum belongs to the federation and must be shared accordingly, as state executives readily invoked the Revenue Mobilization and Allocation Act (RMA) to buttress their points. It is all about petroleum rent-seeking, rent sharing, and not rent management.
In fact, when the Joint National Assembly Technical Advisory Team on Petroleum Industry reform was assembled in 2016, Petroleum Revenue Management Bill was to have been the fifth component of the disaggregated Petroleum Bill. The team in its first meeting debated the splitting of the historical regulatory reform bill into five separate bills for easy legislative process because of the diminishing revenue base for the federation and the increasing burden the federal government was bearing with its share of allocation. It had the Petroleum Governance Bill, which was enacted in 2018, but it did not become an Act. There was the Petroleum Host Community Bill 2018, the Petroleum Administration Bill 2018, the Petroleum Host Community Bill 2018, and the Petroleum Fiscal Bill 2018 as well. But there was no Petroleum Revenue Management Bill, perhaps, because it was perceived as a no-go-area based on erroneous and uncontested interpretation of the 1999 Constitution. In a way, political expediency killed the idea then.
Of course, I am not a learned friend when it comes to interpreting the 1979 Constitution, but I am very sure there is no place in the constitution that says petroleum revenue must be mismanaged. I venture to say, however, that the persistency of prebendalism is the absence of fiscal federalism. The latter is antithetical to a unitary system of government. Unitary system of government on the other hand is anchored basically on petroleum revenue sharing rather than revenue management for posterity. Proficient management of petroleum can be extremely beneficial. It makes petroleum resource extraction a blessing rather than a curse. I hasten to say that marginal social cost of the Revenue Mobilization and Allocation Act (RMA) Act has been far greater than the marginal social benefit of the Act. It is fair to say that the Act has made the state indolent to explore and unlock potential opportunities for internally generated revenue.
Additionally, nearly all the states are inefficient in the disbursement of petroleum revenue allocation from the federation account. Accountability and transparency remain elusive at the state level with claims that the Federal Fiscal Responsibility Act does not apply. I also stand corrected, if I am wrong, but my understanding is that the allocation formula inherited from the military regimes must be revisited periodically by NASS. Has NASS done that despite the fact that this Act was really a decree transferred from the military regimes in 1998? Are the state Assemblies holding the Executives responsible for revenue mismanagement? There is just the feelings in Nigeria that oil and gas revenues can be spend inequitably in this generation with disregard for the welfare of future generations. This mindset has to be disabused and it must be stopped. The only way to stop this idiocy is to define how petroleum revenue can be disbursed equitably and ethically with efficacy and intergenerational precisions.
Pragmatically speaking, and knowing what ought to be so well, the fact that oil and gas is exhaustible, meaning one barrel of oil and one thousand cubic feet of natural gas extracted in this generation is not available to the next generation, has generational implications. Thus, allowing revenue accruing from petroleum in one generation to be used carelessly is foolhardy, making what ought to have been a blessing to become a generational curse because of oil and gas revenue mismanagement. Whenever a country-rich in natural resources fails to experience outstanding economic development relative to resource-poor countries, such countries consequently become infected with “Dutch Disease,” a condition that arises when the discovery of petroleum resources or natural resources, for that matter, leads to the collapse of other sectors of the economy due mostly to inefficient management of revenue generated from the development of the resources.
The way to cure the disease is to have an Act detailing how to manage petroleum revenue with mitigations for risk and uncertainty. Honestly, if Nigeria had done what Ghana did in 2011, just a year after oil production started in the country, the current disillusionment of the youth in Nigeria, might have been averted. That the Advisory Team jettisoned the revenue management component of the reform process bills in 2016 continues to boggle my mind, till date. Spending over 50 % of the national budget on petroleum subsidy would have been a criminal act, had it been it was part of the Petroleum Act 2021. It was a lost opportunity but one can be hopeful that the incoming 2023 political elites would recognize the inevitability and urgency of enacting a Petroleum Revenue Management Act by 2024.
3.0. Petroleum Revenue Management: Lessons from Ghana*
Ghana discovered oil and natural gas in 2007 and began production in 2010 and 2014, respectively. Having learned from the experiences of other resource-rich countries, the country, Ghana, enacted the Petroleum Revenue Management Act (PRMA 2021) in 2011 to among others promote transparency and accountability in the collection, allocation and management of petroleum revenues in a sustainable manner to optimize the social wellbeing of its citizens. The key word to note is sustainability because, as often stated by analysts “petroleum revenue is a good servant but can be a bad master too, depending on how it is handled. Any country that is sensitive to revenue mobilization and optimization of petroleum earnings has to take strategic steps to ensure that revenue from petroleum remains a blessing rather than a curse.”
The Ghana revenue management model is made up of a Petroleum Holding Fund (PHF) at the Bank of Ghana, which receives all petroleum revenues including but not limited to Government’s participating interest, taxes and royalties. Distributions are made from the PHF into three principal funds namely The Ghana National Petroleum Corporation (GNPC), the Annual Budget Funding Amount (ABFA) and the Ghana Petroleum Funds (GPF). From these principal Funds, allocations/withdrawals are further made to other specific accounts for stipulated purposes in accordance with the dictates of the Act. Figure 1 depicts the Ghana’s PRMA framework with its components. Thus, all allocations and disbursements are made from the Fund. In some instances, if the government opts to receive payments in kind instead of in cash, then the Ghana Revenue Authority (GRA) has the mandate to record and assess the value of the petroleum received by government on the specific date received because petroleum prices fluctuate on a daily basis.
The GNPC, as established in 1983 by the PNDC Law 64, is the National Oil Company for Ghana and as a result represent the state/government in all upstream petroleum agreements/contracts/activities (The GNPC Law, 1983). The operations of GNPC are approved by Parliament and financed mainly from the PHF where not more than 55% of the carried and participating interest goes to GNPC after deduction of equity financing costs. The interest of GNPC is technically the interest of Ghana. Payments from the PHF to GNPC are to cater for financing its activities in relation to the interest it holds in petroleum agreements. This transfer is subject to a parliamentary review every three years.
Annual Budgetary Fund Amount (ABFA) from the petroleum revenue shall not be more than 70% of the Benchmark Revenue. The ABFA is part of the national budget, and its use and expenditure are subject to the same budgetary processes that are necessary to ensure efficient allocation, responsible use and effective monitoring of expenditure. The PRMA also stipulates that the ABFA be used as a collateral for debts and other liabilities of Government for a period of not more than ten years after the commencement of the Act – 2021 for that matter. Revenues accrued to the ABFA is further distributed between the priority areas, the Ghana Infrastructure Investment Fund (GIIF) and the Public Interest and Accountability Committee (PIAC).
Ghana PRMA makes provision for situations “where the long-term national development plan approved by parliament is not in place, the spending of petroleum revenue within the budget shall give priority to, but not limited to program of activities relating to” 12 key priority areas listed in the Figure 1. The government must however not prioritize more than four (4) areas when submitting the outline of activities for the use of the petroleum revenue. This will ensure that the government tackles the most ‘important’ areas of the economy to avoid ineffective use of the fund. Out of the about 70% allocations to the ABFA, a minimum of 25% is allocated for public investments expenditure, which is aligned with an infrastructure developmental objective and it shall be included in the national budget. It is important to note that this component of the model was added after the PRMA was amended in 2015.
Revenues allocated to the Ghana Petroleum Funds are shared between the Ghana Stabilization Fund (GSF) and the Ghana Heritage Fund (GHF). The two are mechanisms through which surplus petroleum revenues are deposited for savings and investments. The PRMA, requires that not less than 30% of the benchmark revenue in any year to be paid into the Ghana Petroleum Funds. The stabilization fund is defined as a fiscal instrument to save and set aside a certain amount of revenues for future when they are needed for purposes of economic stabilization. Within one year after petroleum reserves have been exhausted, the moneys held in both the Ghana Stabilization Fund and the Ghana Heritage Fund must be consolidated into a single Fund, to be known as the Ghana Petroleum Wealth Fund.
Finally, the PRMA establishes an Investment Advisory Committee to advise the Minister on the general performance monitoring of the management of the Ghana Petroleum Fund. The PRMA enjoins the government to invest the Sovereign Funds (GSF and GHF) in qualifying instruments as may be advised by an Investment Advisory Committee (IAC). This is the Ghana model, though, not perfect but it has enabled inter-generation connection with priority projects and savings for the reining days and the future.
4.0. CONCLUDING REMARKS AND OBSERVATION
The fragility of the national economy, in my opinion, can be traced to the tendency to mismanage petroleum revenue in the time of plenty and the inability to reduce spending because of economic populism. To a large extent, economic populism, which was recently described, on the pages of newspaper, as an alternative economic model has no theoretical or empirical foundation beyond transfer payment sentiments. I hasten also to say, that despite the obvious gap between Federal Government revenue and its expenditure in the more recent years, economic populism makes the economic situation very fuzzy. Petroleum revenue leakages cater much more for institutional, political elite, and administrative capture through the prebendalistic reward system.
Unfortunately though the solutions to address the growing federation deficits are obvious, proffering them are much more complicated, perhaps because of stomach infrastructure deficiency of the masses intertwined with economic populism and prebendalistic mindset of the elites. More so, it is impossible to trust the agents benefiting from a prebendalistic system to change the system for the benefit of the masses who are also riddled with Esau’s mindset. “Give me the porridge today, and tomorrow will take care of itself” is the mantra. Public perception of petroleum makes the intertwined mindsets to continue to permeate the society; and changing that mindset requires a transformation leadership mindset, which one hopes the 2023 political elites have the potential to grasp.
The key rationale for petroleum revenue management is sustainability because, as often stated by analysts “petroleum revenue is a good servant but can easily become a bad master too, depending on how it is handled. Whenever a country-rich in natural resources fails to experience outstanding economic development relative to resource poor countries, such countries consequently become infected with “Dutch Disease,” a condition that arises when the discovery of petroleum resources or natural resources, for that matter, leads to the collapse of other sectors of the economy due mostly to inefficient management of revenue generated from the development of the resources. Thus, any country that is sensitive to revenue mobilization and optimization of petroleum earnings has to take strategic steps to ensure that revenue from petroleum remains a blessing rather than a curse.”
Proficient management of petroleum can be extremely beneficial making petroleum resource extraction a blessing rather than a curse and it is difficult for me to see how such a law can be at variance with a 1999 Constitution.
*I acknowledge GODFRED KWAKU ENNIN of UCC Institute for Oil and Gas Studies for providing the report summarised in this section.