Utomi: Nigeria Remains One of the Most Difficult Places to do Business

Founder/CEO at Centre for Values in Leadership and a professor at Lagos Business School, Prof. Pat Utomi, spoke to Eromosele Abiodun on recent developments in the Nigerian economy, the devaluation of the naira, the country’s rating on the ease of doing business as well as the crisis between Coca-Cola/NBC and the Consumer Protection Council. Excerpts:

Sir I will be doing our readers a disservice if I come across someone like you and don’t ask your opinion about recent developments in the global and Nigerian econonies.  First, let me ask about recent happenings that you are very familiar with which include declining revenue for government due to dwindling oil prices. The government has announced palliatives to cushion the effects of the falling oil prices. What is your opinion on these?

Well, I’m not so sure that I am in complete agreement with the way that whole matter has been managed, for a simple reason: oil prices have traditionally been volatile. One of the challenges of managing an economy is learning and as a result of learning, have strategies in place to prevent certain challenges from surprising you. There’ll always be elements of uncertainties in a rapidly changing environment. However the whole business of managing is to reduce uncertainties. In the 1980s and 90s, the spikes in oil prices were fairly frequent. I recall in 1980, I was on my way to Nigeria from the U.S. where I was in graduate school and I got into John .F. Kennedy airport and I saw both editions of Newsweek and Time magazine – it was the first time in living memory; I could remember the cover of both magazines having the same headline, “World Over a Barrel.” That was when oil prices hit $40 as a result of the Iranian revolution. People were aghast, oil prices hitting $40? But by 1982, when I was returning home, Nigeria did not sell one barrel for two weeks – oil prices had crashed. Now how can a people experience this for so long and still get caught by surprise by such a thing? The only thing that happened is that we experienced extraordinary “good fortune” as a result of china and India rising and the voracious appetite for fossil fuels and so the usual cycle in oil pricing became broadened and we all relaxed – which is very wrong. As far back as 15 years ago, I began to suggest a strategy for managing this. In fact I recall clearly that when joseph Stieglitz, the Nobel prize-winning economist came to visit Nigeria for the first time and he spoke at the Lagos business school and I made a presentation and talked about this – and interestingly and ironically, the then-finance minister, Dr. Ngozi Okonjo-Iwealla, was seating in the audience that day and I repeated my now well-worn idea that revenues from mineral wealth like crude oil should be shared along three lines, three different accounts or three ports, three accounts for oil revenues. That with history in mind, we should never escalate the amount of money that goes into the distributable pool fund now known as the FAC account beyond numbers like  $40 or $50 a barrel – our budgets should not be above $40 a barrel. Even when oil prices go up so high, we can raise it to say okay, $50. If revenues rise past something like $70, all the revenues between $40 or $50 – depending on how we choose to move, should go into what is called a stabilisation fund. In that account, we invest the money to be yielding something but it is going to be near-money instruments, so if oil prices crash to $20 or $10 dollars, as happened in 1998, we will immediately be able to draw from the stabilisation fund and ensure that the budget is always funded at that $40 or $50, no matter what the oil price is– that is the purpose of the stabilisation fund and then thirdly, if it was above that $75, the excess should go into a future fund. But we have set up a small one called the sovereign wealth fund. The logic of it is very simple; you see mineral resources or mineral revenue are a gift from God for all generations. If one generation should finish and do not invest in something that future generations can profit from, it is a criminal offence – it is the only moral law I know of in economics. It is just like in tax law in taxation, you should not tax a generation for something that they will not get benefits from – it is an extension of that same moral law in using of natural resources. So, a portion of what comes from oil must either go into infrastructure that will be used and available to literally every generation of Nigerians coming. Through such instrumentalities the Kuwaitis have done a pretty good job of it over the years through the Kuwaiti Investment Corporation. Even the Malaysians and all of these Asian countries have done well with such instrumentality. Norway is another great example – they have built up all these sovereign wealth funds. In fact, Ngozi acknowledged that day that I was right but she’s even struggling to get the small excess crude account, that she was having so much trouble. My attitude to that, with all respect to her, the reason why we’re professionals or technocrats is that when politicians are behaving inappropriately, we quit, or generate a national debate on how politicians should behave because this is the correct thing in the interest of the country. Even, my friends, I took them on. When my friend, Wale Edun was commissioner for finance in Lagos, one of the first times that Obasanjo tried to keep back some of these things, as the excess crude account (ECA), the state were making noise…I remember clearly it was a Tribune Newspaper event – the paper was giving awards to some people amongst whom I was included, I don’t know whether it was 2001 or 2000, I saw Wale and said, “Wale, c’mon, you know better than this.” He was arguing, “States’ rights, the Constitution…”  Yes, the Constitution says we can share but when you have a Sovereign Wealth Fund or Stabilisation Fund, it doesn’t take you away from sharing. You can hold the proportion of the amount of money just like you have a mutual fund. Okay, “the Stabilisation Fund is now $20 billion – this $20 billion is owned x% by Ogun State and y% by Imo. The money is not owned by the Federal Government but those who are meant to be sharing. The governance structure would include the States, Local Governments, whoever is supposed to profit, so they know what the money is being done with and they’ll get their portion of it eventually whether it’s in dividends that come from investments abroad or whatever. So, nothing at all says that you have not shared because you have a Stabilisation Fund and yet you manage the economy more responsibly.

But because our Political Class – let me use the word and I have no apologies – have been irresponsible, all they want is “let’s get this money!” One excuse that they make is that, “They say it is for the ‘rainy day’? – it’s raining already! Torrents are coming down, Floods everywhere” Flooding over what, flooding to where? Paying salaries, going to Dubai with girlfriends – that’s flood!  In 1998, General Sani Abacha ran Nigeria with crude oil prices at less than $10 a barrel - why can’t we run Nigeria with $50 a barrel of oil? You see, when there was hardly any crude oil at all, Nigeria was very effectively run such that – I remember – in 1964, Dr. Michael Opara, as Premier of Eastern region, boasted that if you excised Eastern region from Nigeria, it would be the fastest growing economy in the World – this at a time when the first crude oil was just seeping in but it had nothing to do with the growing economy it was. But, today, what do Governors do – do they create the atmosphere to attract investment? No. In the U.S., Local Governments are competing with each other to attract investment such that the typical Local Government has what is called a TIFA Fund. These Future Tax Investments as they are enables a Local Government to give Grants to a Businessman – “You see, this your area, just bush everywhere. I want to come and build a Mall here.”  They will project and say, “Wait, in 20 years that means $10 million worth of taxes will be coming to us as a result of this Mall being located here. Please, take $5 million dollars as our contribution – not equity, not loan – this is our Grant to you. In addition, here are loan guarantees, if you want the banks to give you loans; we guarantee so much of it – not bank holiday – so that we can get in 10 years, these tax possibilities from our area. If this is done in the ultimate capitalist economy, what are our Subnational governments doing? They have become totally ineffective; they are just places for money to be shared and are the major crisis of the Nigerian Economy today.  So, we need different kinds of people serving as governors – that’s why I look at some this primaries and I just feel sad for Nigeria because many of the characters who are emerging as candidates can’t run households and you’re asking them to run States.

Talking about the attitude of the subnational governments or state government as we call it in our clime, a former Minister of State for Finance once alleged that as soon as the monthly federal allocation is shared, the value of green back goes up. The CBN has spent billions of Dollars defending the Naira, now it has as a result of the declining oil prices devalued the Naira. What purpose in your opinion, does this devaluation serve?

I think we, first of all, need to define currency value. There is a certain discussion of currency value in Nigeria that is difficult because of misunderstanding of exchange rates. Many years ago, in the when Japan was growing and expanding rapidly in the 70s as an Economy, the value of the Yen was 200 plus to a Dollar. When it begin appreciate and strengthen, the Japanese people will get worried because they know that the cheaper the Yen was, the more they are likely to export  because the goods will be cheaper for consumers abroad.  So when a people begin to be obsessed with keeping their currency strong, it means they don’t have a productive economy, they don’t produce things that others want to buy. Therein lies the fundamental problem of the Nigerian economy, we are not a producing economy.  Then it becomes a rationalisation for us, “when we are not producing anything why should we make the exchange rate high and just make life difficult for people.” That is the truth. But it makes life more difficult for the consumption class. Unfortunately, because we have mismanaged the economy everybody is now in the consumption class. The way to understand and determine the Exchange rate is a very simple one, the economist has one of the best quotients in the world, it is called the hamburger quotient-the concept of purchasing power parity. What this means is that if a McDonald’s hamburger is the same anywhere in the world, is it a quarter pound in New York and Demark?  Then they look at what it costs to produce in different countries that is the exchange rate or purchasing power parity. Because we have managed our economy so badly, when once source of revenue is hammered and prices go down, automatically our ability to continue to pay for our imports is threatened. Because it is threatened, the only way to prevent us from continues importing widely is to devalue our currency. Ideally, the market should just take care of that, you don’t need a central bank or government to do anything.

However, if you have a strategy, your central bank may have to defend your currency for purpose of certain things not going in the direction that might make the burden too high for whatever the country wants to achieve.  But currency have blocked currencies as was the case with Nigeria with the second tier forex market, what tends to happen is that the central bank keep struggling with every Dollar it has to defend the naira and it gets to a point where people who has the naira who knows what they are doing know that it is an artificial scenario and they begin to get their money out as fast as possible because they know that it can go on for a while but not forever. When it comes to a point where you can’t any more, you have what happened to Nigeria in 1986 when the currency crashed. All the people who brought in their money a week before to make investments, their investments are completely useless! That is why you need to begin to move your currency as soon as it is challenged by foreign exchange earnings. So, should any one blame the central Bank? No! I think we have allowed the central bank to carry too much of a burden. Aside monetary policy, it is burdened by fiscal loads. So what has happened in Nigeria is that those who have money here produce nothing, they just collect economic rent from government and put in their pocket. Where are the jobs? What you hear is this man has private jet, how many people is he employing? Nobody! The real story is this should force us to have a national strategy that will really passionately back the diversification of the Nigerian economy that we have been talking about for over 30 years. For so many years we have been talking about petroleum subsidy, who is subsidising who? It is the people subsidising government in a manner of speaking. I don’t agree that there should be subsidy on anything except the government is trying to use it as a strategy to achieve growth in the economy. When the government they subsidising the same people who buy water higher than petrol is in comprehensible. What are they really paying for? They are paying for the games between the Nigerian National Petroleum Corporation (NNPC) and the marketers. Those who have studied the value chains in fusil fuels know the basic logics. When crude oil prices are high the production companies makes a lot of money, the refining companies get into trouble because the margins they can pass on is very limited. When crude oil prices crashes the retailing companies makes more money. This is the tradition of that value chain. Typically, the margins of the marketing companies are very small. It is so small that many of the majors are subsidising their marketing divisions from upstream gains. One of the miracles that happened in Mobil before they were acquired by Exxon was that Mobil wanted to understand what their problems were because they were doing fairly badly.

They applied a methodology that was developed by two Harvard professors called balanced score card. They realised that when you are in the petroleum marketing business you are virtually more a real estate firm, the margin is from the real estate, the margins of selling petrol is not enough to cover the real estate. So, they began to build mini marts. Most of them make more money from those things you came to buy when you visit their stations than from selling petrol. Here in Nigeria you run into an oil marketer and everybody says he is a rich man when his company does nothing but just sell petrol. It is because there is a scam going on; the fact that you sell petrol does not make you a rich man. I have told them severally even those of them who are my friends agree and admit. The real reason that they have all the money they have is that they are virtually defrauding the Nigerian people and government. That is where the subsidy is. If there is a real subsidy now that oil prices have crashed petroleum prices should crash.

Sir let us digress a little. A recent report released by the World Bank on the ease of doing business around the world showed that Nigeria has improved on the ease of doing business. Do you think the current issue involving Coca Cola, Nigerian Bottling Company and the Consumer Protection Council (CPC) over two half-filled cans of Sprite gives credence to this report?

There can be statements about the ease of doing business in Nigeria improving – it depends on what you are looking at in the basket, there are many things that affect how you do Business. In my experience, Nigeria remains one of the most difficult places to do business in the world – and I’m talking about my experience as an entrepreneur. If I had tried a third of what I’ve tried in Nigeria in Ghana, I’d be such a rich man today. One of the biggest problems in doing business is Government. I will give you an example. There is an incomplete Project, some Pillars, next to the OPIC Plaza in Lagos – that is my Project. We were trying to set up a Fruits and Vegetables Market with South African partners and found a great location in the OPIC place. We approached OPIC and they went through their approval process for a Build, Operate and Transfer, that we will run it for a number of years then it would revert to being OPIC’s. Activities commenced and over N200 million expended. The money for the first 12 years was paid upfront to OPIC. Then there was a change of Governors and the new Governor decided to investigate everything the old Governor did. So, “what is the problem?” “Oh, we’re just looking at all the people but there is no problem with your project!” A year passed. As we speak, OPIC is yet to write if there’s a problem. But the Governor had given a directive, all projects must be stopped! And in Nigeria, you don’t want to quarrel with Government – if you go to Court, you will be there for 30 years! Whenever I called the Governor, he never failed to pick – “Oh, talk to so-and-so!” Four years have passed. I have accumulated tens of millions of Naira in just interests on that Project. When I was talking to one of my friends, Professor Oshibajo, who incidentally is from Ogun state, he said, “Pat, if they can do this to you, imagine what they doing to people who don’t have your voice”. And if you call the Governor now and ask him why the Project is stalled, he won’t be able to give you a genuine reason – and we have a genuine legal contract with Ogun State! So, Nigeria is a real problem to do Business in.

Now, on the specific example of Coca Cola – I’m one of those who say we need strong Consumer Rights Advocacy because in this world, people respond to consequence. If we don’t have good advocacy, people would just do whatever they can get away with. This is why in the oil industry, for example, there are a lot of externalities that is caused on the environment and society because we don’t have a strong protection effort that is properly organised. But when you put a Protection in place, everything should be appropriate to scale – you cannot say they did not fill a can of sprite to the right level and you are going impose such a fine for doing that or that you’re going to compensate the complainant with N50, 000 but that you spent N60, 000,000 to arrive at that result! These are case studies if you use in serious Business Schools around the world, people would just die of laughter! But we have to deal with many of these kinds of things. I think the civil society should pressure public servants to be more accountable to their stakeholders – their stakeholders include Nigerian tax payers, the people who are producing in the economy because they pay taxes and provide jobs. We should have very fair standard operating procedures that put boundaries to acceptable conduct.

Prof I want you to take a critical look at this matter. Is it morally right to impose a fine of N40 million and claim N60 million as cost of investigation for two half-filled cans of Sprite?
I think if you get a weighing instrument and you put a full can and a half filled can side by side, you will be able to tell the difference and it would cost you nothing especially if you already own the instrument. But to tell the truth the cost of running government in the country is frightening. There are So many spurious activities that we get hammered for and been charged on but you see that is the point I was making about civil society, government would not change its ways until newspapers are writing everyday about those things and citizens groups are marching everyday on the streets against those sort of practices. Until we have budget policy monitoring groups that sit in on the reporting of government expenditures, we are going to continue having this kind of abuse.

Given your experience with OPIC and the current CPC rascality if you are to advice the government today on how to further improve on the ease of doing business what would your advice be?
Every 10 years or so the World Bank group puts together to do what they call private sector assessment (PSA) of the country. I have been on the board twice. You cannot imagine what it means or the price you have to pay to as a private sector business. Too many bottlenecks and these have been very restrictive of growth of the Nigerian economy. I think that if you can create an association of concerned social entrepreneurs, concerned media owners who keep pointing these things out the government will respond most appropriately and there can be growth. There is the company set up by some Harvard professors some years ago they call the monitor company-it is essentially a competitiveness company. If you see what they have been able to achieve around the world you will marvel. For example, they helped a country like Saudi Arabia to jump about 30 places on the competiveness index. What they did was to help the country identify the many bureaucracies that makes the country unattractive to private capital and when they did that the situation changed. Nigeria should be able to do that kind of analysis to debottleneck the process.

I read one of Ola Rotimi’s book titled, “Holding Talks,” there he talked about a Nigeria where people just talk and nothing is ever done. Given this sir, how can Nigeria attract and retain foreign investors?
Nigeria can attract and retain foreign investors in so many ways. There has to be a concerted effort to come to terms that government is not just job for the boys. That in critical area, only the best professionals in the world are given charge and that they are not accountable to some politicians manipulating things because everything is not about politics. Get the right people in the area of doing business, empower them, things will turn around immediately. You are all witnesses to the embarrassment of the poorest airports report. Nigeria’s three airports flagship airports, Lagos Port-Harcourt and Abuja were among the worst 10 airports in Africa not in the world. Who is going to do a business in a country where the airport is obsolete, where Custom officials begin with a view that you are a target for extortion? Government can change the customs attitude by putting cameras at the airport with a stern warning to all of them that anybody found wanting is out of the service. They are supposed to be Nigeria’s first contact with foreigners and its public relation officer.
Now with the impunity being perpetrated by the regulatory agencies, don’t you think they are sending wrong signals to potential investors?

Because there is that poor understanding of the meaning of regulation, anybody who is doing a risk analysis of the market will know that one of the risk that is very high in developing economies, especially fragile states and Nigeria is a fragile state,  is the risk of regulation. If regulators act like Cowboys, we have seen with the CBN and we are seeing it here with the CPC, the way that politicians and civil servants see authority is that it makes you a bully. The uniform is something to be feared in Nigeria. There is a poor understanding a regulation here. Let me ask you, how are we going to create the economic expansion we crave for that will absorb millions of young people being turned out every day?  I am afraid if we continue to run our economy the way we are and continue to provide millions of unemployed young people, we may end up on the road to Somalia where warlords and militias rule the day.

Culled from: http://www.thisdaylive.com