Cheta Nwanze, Lead Partner, SBM Intelligence
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Subjects of Interest
- Fiscal Policy
- Geopolitical Analysis
NNPC, Dangote Refinery and personalisation of government 18 Aug 2021
The Petroleum Industry Bill (PIB) is the closest it has ever been to becoming law. Last month, the bill that has been in the work since 2008 was passed by both chambers of the National Assembly and is now awaiting presidential assent. However, the PIB, which has been controversially delayed for years before its passing, may become an equally controversial piece of legislation.
According to Section 205 (1) of the bill, “wholesale and retail prices of petroleum products shall be based on unrestricted free-market pricing conditions.” But Section 317 (8) of the same PIB, also says: “(1) The Authority shall apply the Backward Integration Policy in the downstream petroleum sector to encourage investment in local refining. (2) To support this, a licence to import any product shortfalls shall be assigned only to companies with active local refining licences. (3) Import volume to be allocated between participants based on their respective products in the preceding quarter. (4) Such imports to be done under the NNPC Limited Direct Sale/Direct Purchase (DSDP) scheme.”
This egregious contradiction should be unexpected in a legislation that was more than 12 years in the making. However, certain pointers indicate that this is not a product of inattention. On February 28, 2021, some members of the National Assembly’s Joint Committee on the PIB made a working visit to the construction site of Dangote Refinery. In his speech during the visit, Aliyu Suleiman, the Group Chief Strategy Officer for Dangote Industries Limited, asked that importation rights for petrol should be restricted to licensed and active refineries in the country.
It was an outrageous request to make, given its implication for a major state-owned establishment. For over three years now, the national oil company, Nigerian National Petroleum Corporation (NNPC), has been the sole importer of petrol in the country. NNPC’s four refineries are moribund. As such, the policy proposal that was made by Dangote’s strategist seeks to dislodge the state monopoly and replace it with a private one, or a cartel, at its most generous.
Monopolies and cartels are known fixtures in the Nigerian economy. Importation of cement into the country has been banned for years in favour of local production. The manufacture of this consumer product which is vital to the housing and construction industry is, however, dominated by three producers. In a recent reaction to the negative impacts of the cartel, six senators of the Federal Republic sponsored a motion on the rising prices of cement, criticising the dominance of Dangote Cement, Lafarge and BUA Cement in the market. The lawmakers called for the liberalisation of the sector.
In the sugar industry, the backward integration policy under the National Sugar Master Plan (NSMP) has also resulted in another set of overlapping monopolies. According to the USDA Foreign Agricultural Service, Nigeria’s annual sugar cane production is only 75,000 – 80,000 metric tons, compared to a demand for between 1.6 – 1.7 million metric tons (MMTs). To make up for the huge supply gap, the Central Bank of Nigeria (CBN) recently granted the monopolies for the product, Dangote, BUA and Flour Mills exclusive rights to import sugar into the country.
The situation with rice is similar. Local production at 2.3 MMTs remains far behind domestic demand for rice at 6.3 MMTs. This is in spite of the inclusion of rice on the list of items that are not eligible for access to foreign exchange in the official market controlled by CBN, since 2015. And despite the efforts of the apex bank to incentivize a dramatic increase in domestic rice production through the Anchor Borrowers Programme, CBN’s import restriction has fueled higher prices of rice, with food inflation rising above 20 per cent.
These untoward market policy outcomes notwithstanding, government officials have continued to double down on failed policies that enrich a small number of producers, discourage new market entrants, and hurt the teeming consumers that are growing poorer. Dangote Refinery is the latest beneficiary of the awkward market policymaking that seems to feature the same market participant across multiple industries.
The Dangote Refinery has been receiving moral and financial support from the government and market regulators. The refinery is seen to be the path out of Nigeria’s petroleum importation, therefore justifying the state support. But since its construction began in 2016, the completion date for the refinery has been shifting. With a new completion date sometime in 2022, NNPC suddenly announced last month that it would be acquiring a 20 per cent stake in the refinery that is going to be its direct competition and one aiming to strip it of its petrol importation business. This is not a deal that would be similar to Facebook’s acquisition of WhatsApp on mainly a competitive move.
The proposed acquisition by NNPC smacks of intrigues. Not least is the valuation of the refinery which suddenly rose to $19 billion, for a project that attracted much less valuation until recently. Cash strapped NNPC proposes to raise debt financing for its equity acquisition. Of concern is the risk that the complot poses to Nigerians, although Dangote has been a very successful brand for many years.
The Nigerian state has always tried to pick winners in the marketplace. The monopolies the government set up in the power, telecommunication, aviation, maritime and other sectors have all collapsed. Those it has propped in the private sector are doing well for themselves today and stretching their market power to capture the state and underserve the market. But such corporate behemoths may not be sustainable businesses under different market scenarios.
Only 51 companies currently in the Fortune 500 have been there since 1955. In 1964, the average lifespan of companies on the S&P 500 was 33 years, and 24 years by 2016. The forecast is that the number of years will shrink to just 12 years by 2027. Some of Nigeria’s market-dominating monopolies have not experienced a leadership transition to prove they can be independent of the executive influence of their founders. But one certainly wishes these businesses would continue to survive and thrive, albeit in a different situation of unfettered market competition, innovation and high productivity.
The more pertinent point is that government should be impersonal. Ensuring that policies and laws represent a balanced and adequate range of interests is vital for long-term market performance. However, we have the subsisting situation where ‘Lady Justice’ in Nigeria wears the blindfold as a bandanna and takes selfies with certain individuals at every opportunity. The personalisation of government policy brings all the backlashes that have since characterized the Nigerian market: high inflation, lack of innovation, rent-seeking, weak job creation and rising poverty.
It is high time the government shifted from policies and practices that limit market competition. Market incentives should target industries and not individuals. State resources should benefit many market players, and no one should have more than a fair share. As the PIB is still pending the assent of the President, there remains an opportunity to review its sections and clauses that run counter to the free market principle and ensure the legislation is fit for purpose.
Cheta Nwanze is Lead Partner at SBM Intelligence.