Weak oil prices present business case for eliminating fuel subsidy

The current oil price volatility that has seen the price of crude oil in the international market drop to $78 per barrel, presents Nigeria a rare opportunity to remove the entire controversial and highly abused fuel subsidy regime in the country. This was part of the emerging consensus among over 150 participants at a BusinessDay conference in Lagos yesterday.

The conference discussed the impact of falling oil price on the Nigerian economy. Imo Itsueli, former NNPC chairman, was the moderator, while speakers included Bismark Rewane, CEO of Financial Derivatives, Ayo Teriba, CEO of Economic Associates and Mansur Ahmed, a director with Dangote Group. Others were Muda Yusuf, director-general of the Lagos Chamber of Commerce and Industry (LCCI), Obafemi Olawore, executive secretary of Major Oil Marketers Association of Nigeria (MOMAN) and Laoye Jaiyeola, supervising director, Nigerian Economic Summit Group (NESG).

Participants marshalled evidence to demonstrate that at the current world market price of $78 per barrel, the subsidy element associated with Nigeria’s regulated price of N97 per litre of premium motor spirit(PMS) is about N20 per litre (not the N12.43 reported by BusinessDay yesterday).

As BusinessDay pointed out in an editorial of July 8 2014, titled “Towards a private oil refinery market in Nigeria”, Nigeria, Africa’s largest crude oil producer, is arguably the biggest importer of refined petroleum products on the continent, creating a lucrative market for refineries particularly in Europe and the United States (US).

Africa’s largest economy and home to over 170 million people imports more than 80 percent of its refined petroleum products for the servicing its economy because of inadequate domestic refining capacity.

With fuel needs put at 35 million litres daily, equivalent to 279,000 barrels per day (bpd) while crude oil production averages about 2 million bpd, Nigeria’s four refineries with a combined capacity of about 445,000 bpd have for long been operating far below their installed capacity, as they are in various states of disrepair.

The four refineries operated at an average of 31.1 percent of capacity in 2012 according to data from the Central Bank of Nigeria. However, data from the national oil company, NNPC showed that the situation deteriorated further in June 2014 when the country’s refineries operated at an average of 10.46 per cent of their combined nameplate capacity of 445,000 barrels per day.

Industry sources yesterday told BusinessDay that any petroleum refinery producing at less than 70 percent of installed capacity is destroying value. Besides, corruption has played a role in the poor state of the refineries because billions of dollars, have been wasted by successive administrations on several rounds of turnaround maintenance (TAM).

Even more worrisome, analysts said, is the fact that the subsidy structure of fuel sales incentivises the import of premium motor spirit (PMS) from EU refineries, which oversupply the European market.

While Nigeria continues to fritter a fortune on importing petroleum products and TAM on the refineries, attempts by government to sell off the existing refineries to competent private investors, remain hampered by misguided policies, corruption and the lack of political will to confront entrenched, short-term interests.

A number of private companies have expressed readiness to step in to build and operate their own refineries, but their efforts have often been delayed or cancelled, partly due to uncertainties around the government’s plans to deregulate the downstream sector.

Stakeholders commend Aliko Dangote, Africa’s richest man and business mogul, for taking concrete steps to build a $9 billion refinery/petrochemical/fertiliser complex in Nigeria but urge government to privatise all the refineries and end the subsidy regime. As some analysts pointed out, the N2trn that Nigerian spends on subsidy per year, can build new modular refineries. Also, they said, rural dwellers continue to pay more for fuel, way above the regulated prices.

CBN directive takes toll on investors as healthcare cost up by 20%

The Central Bank of Nigeria (CBN) circular TED/FEM/FPC/GEN/01/022 dated 6th of November 2014 which excludes finished products, along with four other import categories from accessing foreign exchange at the official exchange (RDAS forex window), is negatively impacting healthcare business, leading to an almost 20 percent addition in cost to healthcare investors.

With practically all medical equipment for clinical diagnosis (dialysis machines, CT scan, MRI, etc.) life-saving vaccines, drugs and most medical consumables being imported and considered as finished products, analysts say that patients would likely bear a geater burden to access healthcare.

Clare Omatseye, managing director, JNC International Limited, an equipment solutions firm, said that although the CBN may not have intended for the policy to hit healthcare, in view of the nature of the sector and need to encourage investments there, its impact is hard hitting, as many healthcare projects that are on-going/planned upgrades, will not be able to go ahead as planned, given the huge cost difference.

Omatseye, who is also president, Healthcare Federation of Nigeria (HFN), an umbrella of private sector players in the health sector, noted that while the association has written a formal letter to the governor of the CBN, reminding him of his commitment to unlock the potential of the private health sector, as reiterated in his address upon assuming office, it seeks to ask that CBN to cause another circular, expressly excluding healthcare from the exemption list for all medical equipment, consumables and life-saving pharmaceutical and vaccines, from the initial circular dated November 6th, 2014.

Speaking with BusinessDay, Omatseye said, “The dollar was available to healthcare at the official rate of N155 as against the interbank rate of N178 (14.84 percent additional cost). With the recent devaluation of the naira, this will now be at an official rate of N168 as against the interbank rate of N177.40 (additional 5.6 percent difference).

“As a result of this circular, many healthcare projects, (both new builds and on-going/planned upgrades), will not be able to go ahead as planned.

“The CBN should adopt the VAT Exemption Model and same level of priority given to the exemption of Medical (equipment, devices, consumables & diagnostic kits) and Pharmaceutical Products from the list of Finished Products excluded from the RDAS Forex Window”.

She continued “Taking the social, political and economic development of Nigeria into consideration, section 3 of the VAT Act, exempts the under-listed goods and services listed in the Schedule, which is divided into two parts: Goods and Services-– Good Exempt. These include all medical and pharmaceutical products, baby products, plant, machinery and equipment purchased for utilisation of gas in downstream petroleum operations, etc.

Omatseye added that medical and pharmaceutical products were at the very top of the list of products that were granted VAT exemption, hence it is that same high level of priority exemption that HFN is pushing for in this RDAS Forex window policy.

Lending his view, Okey Akpa, managing director, SKG Pharma, revealed that the cost of drugs in the country is likely to rise astronomically, following this new CBN directive. With Nigerian pharmaceutical companies planning their budgets ahead of the 2015 financial year. Akpa, who is also chairman, Pharmaceutical Manufacturers of Nigeria, Manufacturers Association of Nigeria (PMG-MAN) noted that this recent CBN directive would force Nigerian pharma firms to re-plan their budgets, bearing in mind this latest development.

BusinessDay investigations reveal that hospitals are set to review their costs for clinical diagnosis, as drug manufactures in the country foresee an astronomical rise in the price of drugs for medicare.

The depreciation of the naira at the interbank and Bureaux de Change (BDCs) segments, reflects recent demand pressures rising from the continued decline in crude oil prices globally and dwindling external reserves.

In its bid to save the naira, the CBN in two recent circulars, excluded certain import items from the RDAS window. Despite the tight measures, the high demand for foreign exchange has continued unabated, This demand does not seem to have any bearing on the genuine foreign exchange needs of the country, which the bank stands ready and has the capacity to meet.

Ford Motors cautiously upbeat about plant in Nigeria

The ongoing Nigeria Automotive Industrial Development Plan (NAIDP) geared at stimulating the growth of local automotive assembly plants is generating interest, as Ford Motor Co. Of the US plans to expand its manufacturing plants in Africa, with searchlight on Nigeria.

Bill Ford Jnr, global chairman of Ford Motor Co, responding to BusinesssDay’s questions on the likelihood of setting up an assembly plant in Nigeria, at the unveiling of the new Ford Mustang, last week in Dubai, said the US automaker considers Nigeria a strategic market that is difficult to ignore by any serious global player, including Ford.

Bill Ford further said: “For the Nigerian market, it is not a decision that Ford is going to take immediately, but we are currently engaged in genuine conversation with the Nigerian government and we are looking very closely at that market, to determine the best way for us to participate.

“All I can tell you is that it would be probably possible to talk to you about the prospects of that (setting up assembly plant in Nigeria)  happening in the near future, but we at Ford cannot say anything today”.

He added, “Everything is pointing toward a surge in the African economy and for large population size like Nigeria, we are not ruling out the possibility. We are really focused on this region like never before  and this will form part of our expansion plans looking at industry wide sales forecast that will grow 40 percent by 2020. ”

Corroborating what the FMC chairman, Jim Benintende , Ford’s president and CEO for Middle East and Africa, said: “It is going to be a rocky road for a bit of time, “But you’ve got to take the long-term view in places like Nigeria. It’s the biggest economy in Africa. You can’t ignore that. It’s got abundant natural resources, it’s got a burgeoning middle class. There’s a lot of real good reasons to look at Nigeria for future investment.”

Benintende stated that the federal government must seriously re-order its priorities on industrial policy, infrastructural deficit, the country’s component parts supply and value chain, including the negative threats to locally assembled vehicles by the uncontrolled influx of grey imports and used vehicles coming to Nigeria.

Defining  Africa’s vehicle market as accelerating rapidly, but a very difficult one, Jim Benintende said Ford projects that industry wide sales would grow to 2.1 million vehicles over the next six years, from 1.5 million in 2013. Africa’s driving-age population is projected to soar 55 percent to 840 million people by 2023, from 540 million last year, Ford has said.

He said the African continent, with Nigeria accounting for the highest population size, remains a difficult place to do business, citing the Ebola virus outbreak in Liberia and Sierra Leone and civil unrest in Nigeria, where Boko Haram rebels have been causing instability in the polity.

Benintende, a Ford veteran, appointed to run the regional operation this year, is formulating an Africa growth strategy for Mark Fields, who took over as CEO July 1 after Alan Mulally retired. The plan is to increase Ford’s factories in Africa beyond its two plants in South Africa, with Nigeria being considered as an option, he said.

Commenting on the new optimism from Ford, Dabor Kpamana, a Diaspora Nigerian resident in Abu Dhabi, told our reporter that the coming of more players to set up local auto assembly  plants would lead to the revival of local component manufacturers in areas such as automotive batteries, lubricants, windscreens, clutch cables, mudguards, wiper blades, brake pads, automobile paints, components for tyres, etc.

Kpamana added that it would also bring about the possible creation of new spin-offs, encourage small and big foundries, as well as the nation’s iron and steel industry, and ultimately lead to the creation of thousands of jobs, many of them for several previously disengaged skilled workers.

BusinessDay had earlier reported that the proposed investments in assembly operations by top automobile dealerships in Nigeria, through their principal automakers were expected to push up the local manufacturing sector’s contribution to Gross Domestic Product (GDP).

The implication, according to the report, was that motor vehicles and assembly’s current contribution of 0.8 percent to the manufacturing sector would increase significantly, going by the volume of ongoing and proposed investments in the sub-sector.

This would consequently push up the manufacturing sector’s current GDP contribution of 9 percent, which represents about $46 billion of Nigeria’s $510 billion GDP.

Property market anticipates slide in office space prices in 18 months

Expectation is high in the property market that in the next 12 to 18 months when a good number of pipeline prime office space projects would have been completed, competition for tenants will be keen, leading to downward adjustment of rental prices.

Rising demand has prompted a surge in the development of top quality office buildings, some of which will be completed by the end of this year. These include the Rose of Sharon Tower, NIPOST Tower, Kanti Tower, etc in Lagos. These will be bringing about 56,000 square metres of rental space to the market.

Presently, prime office space prices are quite high, attracting $1,000 and above per square metre, in high-brow neighbourhoods, especially the central business district (CBD) of Victoria Island in Lagos.

Gbenga Olaniyan, Chairman/CEO, Estate Links Limited, confirmed to BusinessDay that 2016 would see many of the pipeline office space projects hitting the market.

Olaniyan adds that competition for tenants would be there, but price adjustment might not be much.

Thus far, investment interest in real estate, especially the commercial segment of the sector remains strong, despite plummeting oil prices which have set the economy and its managers on edge.

In a recent report on the performance of this sector in the third quarter of the year, Broll Property Services quoted the director of the IMF African Department as downplaying fears and assuring investors/stakeholders that the real estate market outlook in Nigeria still appeared “robust” especially because some 50 percent of its GDP was now generated from the services sector.

The report, which focused on the development of office properties in outlying areas outside mature up-market locations, noted however, that the traditional core office markets continue to experience a flurry of activity with various prime developments in Victoria Island nearing completion and entering the market imminently—a development which the report expected would alleviate the current lack of quality office properties in the market.

Bolaji Edun, Broll Nigeria’s CEO, disclosed to BusinessDay that about 6,720 square metres of office space was transacted on in the last quarter, pointing out that 60 percent of this space was located in Ikeja, Lagos state, at the new Landmark House, adding that P&G unveiled this location as its new administrative headquarters, along with AC Nielsen, Robert Bosch and Spur, which also took up residence at the Landmark House, giving a boost to the Ikeja office market.

“Another significant transaction which accounted for the remaining 40 percent of transactions in the quarter was the unveiling of the Architects Place in Victoria Island, which already boasts 50 percent occupancy rate, with one of its twin wings fully occupied”, he said in the report released recently.

BusinessDay had earlier reported Munachi Okoye, the CEO of MCO Real Estate Limited, as saying that “the re-basing of Nigeria’s GDP leading to its identification as the largest economy in Africa has put the country on the map as the foremost investment destination for international capital seeking exposure to the African markets, which has led to increased interest from international real estate developers seeking to gain entry to the market”.

Okoye, who spoke in a Q3 report on the real estate market, noted that in the commercial segment of the market, institutional investors’ interest has remained very strong in the office space, retail and the hospitality sectors, adding that prime rents in these sectors were as high as US$1,000 per square metre for commercial office, about US$900 per square metre for retail space, while room rates for prime hotels ranged from $300 to $500 per night.

Employers bemoan regulators seen squeezing business

Nigerian employers who deal daily with inadequate infrastructure which raise business costs in Africa’s largest economy, now have the added burden of regulators whom they claim hurt companies already battered by decades of unfriendly business practices.

Coca Cola Nigeria Limited and NBC are currently facing prosecution for allegedly violating the orders of the Consumer Protection Council (CPC), which were given to ensure compliance with laid-down safety standards and regulations and enhanced consumers’ welfare.

This was after an administrative panel set up to investigate a consumer complaint found them culpable, regarding two half-empty cans of Sprite manufactured by NBC Limited, under the licence and authority of Coca Cola Nigeria Limited. 

“The Consumer Protection Council, in its bid to survive in a dispensation of tight fiscal policy and diminishing budgetary funding, has resorted to sleazy and untoward methods that are inimical to the sustenance of the real sector of the economy,” said the Nigerian Employers Consultative Association (NECA), the umbrella organisation of employers in the Organised Private Sector of Nigeria, in a statement released on Thursday.

The Consumer Protection Council, imposed a civil penalty of N100 million (including a whopping N60 million cost of investigations) on Coca-Cola bottling company, as the outcome of its investigation.

BusinessDay’s review of the CPC act shows a N50, 000 fine as the highest penalty such an infraction should attract.

While the regulatory environment for Nigerian entrepreneurs is improving, considerable challenges remain.

According to the World Bank, Nigerian businesses spend valuable time and resources trying to comply with myriad local regulations.

“Removing burdensome regulations is an essential step toward a stronger private sector,” said Rita Ramalho, 2015 Doing Business report lead author, World Bank Group.

“Although Nigerian enterprises face regulatory obstacles, implementing business-friendly reforms will allow local entrepreneurs to use their time and resources more efficiently and thus become more competitive,” Ramalho said.

Entrepreneurs and executives say businesses are being squeezed by multiple taxes and increasing red tape as many state governments in Nigeria struggle to shore up internally generated revenues (IGR).

Oil revenues account for up to 75 percent of the federal budget. However in some states, it goes as high as 97 percent.

This comes as the government faces an economy that would need all the investments it can attract as the 35 percent slump in crude in 2014 leads to investor exodus from the Nigerian financial markets and plans for an austerity budget next year.

Analysts say Nigeria’s economic managers must recognise that as oil prices fall, the need to do the right things with regard reforming the economy and easing burdens on businesses become more imperative.

“Things are different now. The government has to respond and know that fiscal buffers are gone. It is not a temporary thing as the Minister of State for Finance alluded,” said Bismarck Rewane, CEO of Financial Derivatives Company, at the Business Day Energy Summit held last week.

“This mental adjustment is more difficult for Nigeria, than fiscal or monetary adjustments,” Rewane said.

Businesses are also contending with inefficiencies at the ports and Corporate affairs Commission (CAC), whose website BusinessDay learnt, has been offline for months, with requests for business names piling up.

The Lagos Chamber of Commerce and Industry (LCCI) reckons that the activities of regulatory agencies have the capacity to overburden companies growth,which are critical to job creation in the economy.

“Regulatory agencies and government bureaucracy now operate as toll roads and view businesses as cash cows to be milked,” said the CEO of a company whose application for a license has been stuck with one of the regulators in Abuja.

“The problem is that these regulators go to conferences and mouth-off about trying to create jobs and grow businesses, without having a clue of how to do so.”

Education jobs rising amidst concerns over falling standards

The education sector, particularly the private segment, dominated economic activity, generating most of the jobs in Nigeria’s formal sector in the first nine months of the year, but this comes amid widening concerns on the declining standards of learning across the country and the spill-over of poorly skilled manpower in the markeplace.

The Education and Manufacturing sectors generated the most jobs in both the first and second quarters of 2014, figures from the National Bureau of Statistics show.

Education came first, with 23,643 jobs or 31.10% of the total in Q1, increasing by 5,417 or 22.91% to 29,060 new jobs in the second quarter, 36.90% of the total,

In the third quarter, 21,154 additional jobs were generated in the sector, also showing dominance in economic activity.

The NBS figures further show that as at the first quarter of 2014, the education sector had about 1,573,082 employees, making up 49.64 percent of the total employed during the period. The numbers increased marginally in the second quarter by 0.43 percent or 6,771 employees, to reach 1,579,854 or 50.13 percent of the total.

But despite growing education employments, standards continue to fall at an alarming rate.

The May/June result of the West African Senior Secondary Certificate Examination shows that less than 32 per cent of candidates obtained credit passes in five subjects, including English Language and Mathematics.

Of the 1,692,435 candidates, 529,425 obtained credits in five subjects, including English Language and Mathematics, to qualify to study at the tertiary level.

Stakeholders blame this poor performance on poor teacher quality, poor reading habits, parents’ lack of interest, and the emergence of Information Communication Technology (ICT).

Marie Francoise Marie-Nelly, World Bank Country Director in Nigeria, told BusinessDay at the weekend that the problem is quite significant, noting that one would naturally expect that access and quality would improve, especially with expanding economic activity. But she is concerned that 4 out of 10 Nigerian children still do not seem to be able to read and write, even after grade 4.

Marie-Nelly is worried that the enrollment rate is not increasing and particularly by the growing regional variations and disparities.

“You need to address these disparities and secondly, we need to ensure that the children are actually learning because we found out that in every society, the fundamental education, primary education is really the one that positions children for their future,” she stated.

“Whether they go to higher education or the vocational stream but it is important to have this solid foundations.”

Marie-Nelly said she would like to see a situation where there is a solid commitment coming from all parties, to tackle this problem in a very effective way.

She said apart from enrollment, there is the need to revisit the curriculum, and the assessment system.

She said the World Bank is already assisting the government in this area, especially in three states, Ekiti, Anambra and Bauchi, where they have a programme that looks at the quality of education at the primary level but in a very consistent manner, by improving the quality of teachers, reviewing the curriculum and having a proper assessment system.

The World Bank envoy suggested this strategy could change the picture if extended to the entire country.”So you need to work on the quality and access.

“And one element is to improve the quality of teachers. Secondly is reviewing the curriculum. Thirdly is to involve the parents,” she recommended.

Renowned economist, Bismark Rewane raised concerns that a lot of educational institutions exist in the country, which still do not deliver quality.

Rewane observed that the number of universities in Nigeria was rising but lamented that there was no correlation between quantum and the quality of education.

“I want us to be extremely cautious about this because there is a pipeline of education that is delivering quantity rather than quality.

Rewane said every industry has an equilibrium number of players that gives it maximum output.

“When there are too many players, they just destroy the whole thing,” he stated.

“I think that in jumping on the bandwagon of competition, we should also know that there is what is called optimal size of an industry and optimal size of activity,” he added.