Deregulating Nigeria’s Oil Industry Could Unlock up to $50billion of FDI —Ike Chioke

The Group Managing Director, Afrinvest West Africa Limited, Mr. Ike Chioke, has noted that Nigeria has moved from an oil producing economy to human resource producing economy, as according to him, recent statistics show that the country now earns more income from its diaspora population than from crude oil.
Mr. Chioke who stated this in this interview with BusinessHallmark’s editor, Mr. Okey Onyenweaku and Obinna Ezugwu, noted that in 2018, Nigeria earned a total of $18billion from oil, but the same year, total remittances from Nigerians living in the Diaspora was $25billion. He also spoke on other issues that affect the economy and proffered solutions. Excerpts:

Afrinvest appears to be doing quite well despite the economic challenges in the country, how have you managed to achieve such feat?
Well, like every other company in Nigeria we are a victim of the environment. It’s like a ship in the sea. If the sea is calm and benign you can sail more swiftly. And you can get to your destination quicker. But if the sea is rough and turbulent, you would be struggling to move. You are afloat but you may not be moving or making much gain. So, I think Afrinvest, like many other companies in Nigeria, is suffering from the general slower-than-normal economic growth rate. I mean, our GDP growth rate for last year was 1.9 percent on a base of $224.6 billion. But our population is growing at more than 2.6 percent. So, clearly, we are creating poorer people every year because we have more mouths to feed than our income can support.
But assuming that we could even resolve that, you then find out that the structure of our economy is not one that has, in my view, allocated the limited resources we have in the right places. As a consequence, we are further propagating poverty and insecurity. Poverty means that the quality of your human capital is reduced. They are not healthy and they are not educated. Therefore, they are getting poorer, such that you have masses of poor people. The challenge it has visited on us is becoming more apparent. The incidents of armed robbery, kidnapping, terrorism have become regular occurrences. These days, if you are travelling on a highway, armed robbers can shoot indiscriminately and stop everybody.
When there is massive insecurity, companies you think are not affected might find out that their distribution lines are cut. They can no longer go to areas they used to. That means there will be reduction in their income. Consequentially, when that income reduces, the money being aggregated in the banks is reducing. And of course, for capital market operators, the money available for us to invest or manage is much reduced. So, we are all feeling the impact of a difficult economy.

What would you pin the difficult economy specifically to?
I think that historically, Nigeria has been committing several “sins” as a country. The fact that we have refused to stop fuel subsidy is a major sinful act. Think about it. Would you prefer to buy fuel at a lower cost or have schools and hospitals where your child can get quality education and comprehensive healthcare? Won’t you just rather pay a higher cost for fuel in order to ensure that your child is educated? If you know that the real price of the cheap petrol is having millions of children roaming the streets with no education, no healthcare delivery and insecurity everywhere, would you rather have those ills than cheap fuel in today’s Nigeria? That is the question. I would say that my life is more important to me than cheap fuel. I would rather I paid the actual cost of fuel than risk being shot on the highway. It is better for me to have all Nigerian children get the opportunity of going to decent primary and secondary schools instead of the present a situation where it is only the children of the elite that go to decent schools. Without education, it is extremely difficult for an average Nigerian child to come from nowhere and become somebody. That was the advantage I had. My father was a mid-level civil servant while my mother was a trader. But I had the opportunity to go to a decent primary school and a decent secondary school. Today’s Nigeria does not create enough of such opportunities. We must recognize that our biggest resources are human beings, whom if healthy and educated, become human capital. When they are not healthy or they are not educated, they go into other areas. They become the underbelly for some of the social problems that we are having. So, fuel subsidy is one sin.
You are talking about the economy. I think that for a country that recognises that oil is the main stay of its economy, it is strange that we are not even investing in the oil industry that we have. The amount of Foreign Direct Investment in Nigeria last year was $1.8billion.We have to deregulate the oil sector in order to attract massive investment into the sector that is our principal source of income and foreign exchange. It accounted for 14.1 percent of total foreign exchange earnings in 2018. But we refuse to deregulate it because we want to be the ones to control how people get into the industry. However, the big international companies need to know what they are getting into before they make investments. And they are saying, if you deregulate, we will invest. We could easily unlock between $25billion and perhaps as much as $50billion of trapped investment opportunities in the oil sector if we deregulate the industry in a transparent manner. We have a situation where there are people ready to invest but they cannot because of bureaucratic inertia. Yet, we are saying we want to attract investment. We are not serious. That’s the second sin, unwillingness to deregulate the oil and gas sector.
The third one is corruption. Of course, it is tied to those two. The inability to deregulate the oil sector and the fact that you are doing fuel subsidy. Today, we say we consume more than 50million litres of fuel per day. It is not possible. Are we drinking the petrol? I think there are about 12 million cars in Nigeria, so it is not possible for us to be consuming that much petrol. In addition, majority of these cars are owned by the elite. So, we are effectively subsidizing fuel for the elite! But the official angle is that subsidy makes transportation cheaper for the masses. My view is that the savings from subsidy should be used for education, healthcare and infrastructure upgrade and expansion. If we fix our terrible roads, transportation will be cheaper because it is far more expensive to fix a broken suspension or other mechanical problems in a car than to pay for fuel. Between fuel subsidy, inability to deregulate the oil sector and corruption, you have taken three of the big sins.
The obvious next sin is power. We have partially privatized the sector. But you then tell us, ‘Oh! No! We are not going to deregulate the tariff structure.’ To deregulate the tariff structure means that you increase the price customers pay so that it is consistent with the economic cost of delivering the power. Which restaurant owner will cough out N1000 to cook for you and you tell her to sell for N400? How long will she stay in business? Remember she also has a shop. She is paying rent. She has staff to pay. She is paying electricity bill. She is paying local government for the signage. She has to add those things to the cost of the food. That’s why, if it cost her N1200 to cook the meal, she may charge you N2500. Because all those other costs have to be factored into it.
In our electricity sector today, we are at a point where we don’t have a cost reflective tariff structure. As a result of that, there is massive imbalance. Sure, there are other industry issues such as the overly leveraged balance sheets of many of the privatized Discos and Gencos. But lack of a cost reflective tariff structure was a fundamental problem ab-initio. That was why many international investors who realized that the cost of delivering electricity was not optimal declined to participate in the privatization exercise in 2013.

You released a report before the election which you called “On the Precipice.” You said whoever wins the election will have to hit the ground running if he wants to rescue the economy. Buhari has won. What are the specific things he must do?

In the report, I painted three scenarios. One was an optimistic case scenario. In which case, there is a change in leadership at the centre and therefore there is new energy being injected into the system. And the momentum of the new energy injection could mean that we have a chance to reset all the variables and move forward. Clearly, that did not happen.
The other scenario was that there was a very negative outcome after the elections. This scenario assumes that the election was not free and fair and its results cause a lot of social unrest. That was our downside scenario. So, you can see, both the optimistic case and the pessimistic case of our report did not happen. We are presently in the outcome where we anticipated we would be which is our base case scenario. In this scenario, Buhari wins or is declared as the winner, we continue as normal and we continue to grow at our usual anaemic pace of sub 3.0% per annum.
The fact is that if Nigeria’s GDP is not growing at 6 percent per annum at least, we are not going anywhere. We have to be growing at double the rate of our population growth. Come May 29, what can Buhari do to change things? I think the one key thing he can do to change things is to be a more assertive leader; to show us that he is actually the Commander-in-Chief. And that he will not stand for impunity; that he will not stand for government agencies counteracting each other’s actions. Remember when the DSS wrote to the Senate not to confirm Ibrahim Magu as EFCC chairman? How can the president’s own DSS write negative report against an appointee of the president? I don’t know whether the allegations are true or not, but it shows me that there is an internal misalignment. That’s just one instance. This scenario replicates itself across different sectors. From my vantage point as a stakeholder in the investment sector, I see what appears to be similar face-offs between government agencies happening between CBN, Finance Ministry, office of the Vice President who is in charge of the economy, Trade and Investment Ministry. It is such that one arm of government says one thing and wants to to push it forward, another arm of the same government takes actions that effectively say over my dead body. These are major issues. When he comes back on May 29, he has to be a more assertive president. He has to show that he has a vision of where he wants to take us. He has to assert his full authority over his ministers and other heads of agencies by insisting that it is his way or the highway. He ran a whole three and a half years and did not sack any minister while some of them were clearly underperforming and misbehaving.
But it’s not that the ministers are not talented. I won’t say he should go and hire smart people. Because if the coach of a team is not able to direct the players, even if they are all Lionel Messi, they will mess up the team. They will be fighting one another. That’s essentially the situation we have. We have a decent team of ministers. We have a lot of special advisers that are intelligent. But when I look at it from what they are doing, it appears like there is not much team cohesion.
The reason people sound despondent is that there is no direction. Even if things are difficult, but people can see that there is a direction, they will be encouraged. So, we need a president who understands most of the issues and can articulate them and drive the engine of state in a direction that is sensible and logical. There are a lot of things that we are doing that are not sensible and are not logical. You say for instance, let us do cattle colony or ranches in the South where people don’t rear cows. Or let us go and look for oil in the North where there is no oil. That’s misalignment of policy. Why don’t we say if you know you are good in this area, focus on it and do it to the highest level of proficiency. Before you know it, you have become a billionaire doing that. It is true because there are ranchers in Brazil and Argentina who have thousands of cows and are supplying meat all over the world. That’s how it’s done. By the time a cow walks from Yola to Lagos, there is not much meat left on it to eat.

Is there a lack of sincerity of purpose in the way we map out our policies?

A simpler way to say this might be, are they lying to us? I cannot say whether anyone is lying to us or not because I don’t have all the facts. But if for instance, you need to do 132KVA high tension line to carry electricity from say, Ogbomosho towards the East and to Port Harcourt. If you then decide that you are not going to drop a line to service Benin City, the folks from there will obviously wonder what crime they have committed for electricity to pass over their heads but they cannot use it. Won’t they be saying there is lack of sincerity of purpose? So, clearly, it’s not for lack of resources. We are talking about train lines to ease the congestion at Apapa Port. If you do a good train line, as soon as container gets to Apapa, put it on the train, send it to Shagamu or Ore, build a big inland port there. It will ease the congestion in Apapa and Apapa can become the beautiful residential and business neighbourhood it once used to be. However, they say they don’t have money. But they are building trainline I think from Katsina or Kano to Niger Republic. I rest my case.

Could this be the reason why owners of companies like the Oriental Hotel are planning to sell and leave?

I can’t say why the owners of Oriental Hotel are planning to sell but foreign investors are at liberty to sell their business and pack up and leave. You and I are from Nigeria. We have no other country to go to but Nigeria? However, a lot of Nigerians are also fed up of the challenges of Nigeria and are moving to other countries like Canada. Others are trekking across the desert to Europe. Yet others travel abroad on a valid visas and refuse to come back. But if you are a foreigner living in Nigeria, you will always look at Nigeria from the point of view that you can put your money here or take it to another country. From my desk, I can find out about the investment climate in other countries. There are some companies that have shut down operations in Nigeria, moved to Ghana for instance, set up a new factory and told Nigerians, if you want, you can come to Accra and buy. There are many companies like that. Some are in Benin Republic. And we know how to solve these environmental house-keeping problems because most of them are self-inflicted. We can solve it, but we deliberately refuse to do so. There are systems and technologies today that can clean them out. But the most important thing is that we must be disciplined as a people and follow the laws we have written. We can’t write a law and when it doesn’t favour us, we breach it and damn the consequences. When you do that multiple times, you engender a culture of impunity.

They say that politics thumps economics. And part of the problem we have is that we haven’t gotten our politics right. They say for instance, that the structure of the country is not conducive to development. Would you lend your voice to the restructuring debate?
I’m not a politician. But as an economic observer and from my experience in the market, and seeing how we execute complex mergers and acquisitions transactions , I’m not totally sure that the issue with Nigeria today is restructuring. While restructuring could help streamline resources and capabilities more efficiently, I think that the body of rules and regulations we have under the constitution and all the other subsidiary documents are quite sufficient to run the country decently. The main issue with those rules , to use your very elegant words, is a lack of sincerity of purpose.
Let me put it more starkly: dishonesty, outright abuse of the process, greed, avarice, grand larceny; where somebody will lie to the public from the platform/pedestal of a government position to extort the public and get away with it. Can you imagine someone apparently willfully mismanaging pension funds for police and yet he is running around free? In which other country in the world will the person not end up in jail together with his accomplices? Yes, you may have a law that says all the minerals in the ground are the exclusive preserve of the federal government to regulate, but the president of the country can also issue a directive to decentralize decision making for mineral exploitation under the same law.
Well, look at fuel subsidy as I have narrated before. You can say we don’t have good schools for our children. We don’t have good hospitals for our people. We can’t police the country. I mean, policing should clearly be decentralized. Everywhere in the world, the policemen on the beat know all the people that live in their street or neighborhood. Not this system where policemen are constantly being transferred – those from the south are sent to the north, those from the east to the west, and vice versa. You end up in a situation where the police do not know the history, culture and interrelationships of the people they are policing.
Again, what is stopping us from saying, look, Lagos is congested; why is it taking three months to clear a container in Apapa? We have Warri, Calabar and Port Harcourt ports, let’s open them up. The billions of naira we lose in opportunity cost is massive. It costs more to remove a container from Apapa and bring it to Ikoyi than it costs to ship it from China to Apapa. It is insane. Yes, restructuring, as elegant as it is, may sound like the panacea, but it is not. The challenge is the courage of the people in authority to use the existing laws to act with integrity and sincerity of purpose.

Coming back to banking. I heard somebody say the other day that there are no banks in Nigeria. Meaning that although there are big, medium and small banks, the real sector is in trouble?
For banking, we have to look at cause and effect. If the government goes borrowing money all the time, and the bank knows that lending to government is guaranteed, why would they lend to a manufacturing company? Look at the 2019 budget they are proposing for instance. It is to be partly funded by deficit financing, 50-50. Half from abroad, half from Nigeria. As such, the government is going to borrow trillions of naira in the form of treasury bills, FGN Bonds and Eurobonds in order to finance the budget. As a bank, I know that buying into FGN Bonds is a tax free investment. As such, if I buy an instrument that is paying 15 percent, on a tax adjusted basis, I’m earning almost 20 percent guaranteed. Why then go to the trouble of lending to an entrepreneur even at 25 percent? No matter how beautiful the company’s business plan is, what is the guarantee that they will pay back? Meanwhile, my FGN bonds are guaranteed. That is part of the problem. So, how do I reduce government borrowing? We have to reduce borrowing by stopping government from paying for things that citizens can pay for themselves. Why should government spend $5billion on fuel subsidy and then go and borrow $6billion to fund capital expenditure? If government spends its $5bn first on capital expenditure and borrows only an additional $1bn, then it has reduced its borrowing by $5bn. When you reduce that government borrowing, Nigerian banks will begin to look for companies to lend money to in order to remain in business. And before too long, that 25 percent they are charging will fall to 15 percent due to competition. That way, we can begin our journey towards a sustainable single digit interest rate environment.

You seemed to acknowledge in your paper that Nigeria is number eight oil producing country in the world. But you later disclaimed it by saying that Nigeria is not an oil producing country, but a human capital producing country?
That came from a paper I presented where I showed that in 2018, Nigeria’s total revenue receipts from oil came to $18billion. But that same year, total remittances from Nigerians living in the Diaspora was $25billion. For years, we have accepted that 90 percent of Nigeria’s foreign currency income comes from oil which was $18billion. It is clear now that if it was only that $18billion that we were all relying on, then this place would have been worse than Afghanistan. The reason we are surviving is that there is another $25billion that came in from Nigerians living abroad. That additional cash injection has become our social security safety net. My paper indicated that about 70 percent of diaspora remittances is consumed on education, healthcare, weddings, chieftaincy, burial ceremonies., etc. While the remaining 30 percent is invested often in real estate, many times these are non-income yielding homes located in rural towns and villages. But it is that additional $25billion of remittances that tells me that we have come to a precarious crossroad as a country. That crossroad is one in which the country offers an unfavorable environment for people to live and work which then forces many of our best brains to emigrate. This large emigrant population then find good jobs or establish businesses abroad. Luckily for us here, most of them do not forget their motherland. They continue to send money home to support their family and friends. We estimate that there are 17 million Nigerians living abroad who make up the contributors of the $25billion we received in remittances last year. So, that is why I said that Nigeria is a human capital exporting country because the money we are making from oil is actually less than what we are getting from our Diaspora brothers and sisters.