An economist and former Deputy Governor of the Central Bank of Nigeria, Dr Obadiah Mailafia, in this interview with AMARACHI ORJIUDE, examines critical issues arising from the signing of the Petroleum Industry Act as well as the new judgment on the administration of Value Added Tax in the country
The President, Major General Muhammadu Buhari (retd.), has signed the Petroleum Industry Bill into law, what’s your impression about the new legislation?
On Monday August 16, 2021, Major General Muhammadu Buhari (retd.) finally assented to the PIB, which has now fully become a law. It is in many ways a milestone in the history of our legislative affairs. Too many interests had repeatedly scuttled it over the years. Previous attempts in 2009, 2012 and 2018 failed due to factors ranging from ownership, interest misalignments between the National Assembly and the Executive, alleged erosion of ministerial powers, stiff opposition by host communities and pushback by investors due to the alleged uncompetitive provisions in earlier versions of the bill.
The industry has undergone profound transformations since oil was first discovered in Oloibiri, Bayelsa State, in 1956. Novel exploration techniques and new technologies, such as fracking, have brought in new players. There has been a tendency for supply to outstrip demand with OPEC’s cartel power being eroded. Competition for market share has further driven down prices. At the peak of the COVID-19 lockdown, oil prices fell to an unprecedented $12 per barrel. North America even registered -$37 per barrel.
Under the laws of probability, the novel coronavirus is a Black Swan event. When I was a member of the Boy Scout, our motto was and still is, ‘Be Prepared’. This has always shaped my attitude and mindset with regards to public finance and economic policy management. We must prepare for a world in which oil is no longer the harbinger of the gilded age that we once dreamt of. I, therefore, welcome the commercialisation and unbundling of the NNPC and the general thrust of the reforms accompanying the new PIA.
The Act is aimed at bringing regulatory and fiscal stability to the oil sector, thereby driving increased investments and boosting revenue generation. Do you think the current structure of the PIA can meet these expectations?
As you would expect, prolonged uncertainty has imposed unconscionably high costs in terms of lost income and foregone investments. Of the $70bn of FDI that went into the oil and gas sector in Africa between 2015 and 2019, a mere four per cent came to Nigeria despite the fact that Nigeria remains the largest producer on the continent. According to the NBS, of the total FDI of $9.680bn that flowed into Nigeria in 2020, a paltry $53.5m or 0.55 per cent went into oil and gas.
Potential investors have stayed action as would be expected of rational economic actors under conditions of extreme uncertainty. And we have been the worst for it. So, clearly, having successfully passed the bill into a law is an achievement in itself without prejudice to some of the contentious political issues, which are unlikely to go away any time soon. Let’s also be realistic enough to own up to the fact that the PIA on its own is not likely to be the magic bullet that will take our oil and gas sector to the stratosphere. The devil, as always, lies in the nitty-gritty of implementation.
One of the provisions of PIA is to turn the NNPC into a holding company under CAMA, do you think this can make the corporation more profitable considering the fact that those currently working there will be retained as the Federal Government has assured them of job security?
Yes, I think that is the wave of the future. Ever since its establishment, the NNPC has operated as an opaque Byzantine bureaucracy that is vastly corrupt and inefficient. If you look at companies such as Saudi Aramco and Petronas of Malaysia, they are operated on commercial principles with all the discipline and rigour of corporate governance and accountability as you will find in any multinational business. So, we welcome the prospects of the NNPC’s commercialisation.
I will expect that there will have to be implications in terms of corporate structure, organisation, method and human resources. The NNPC will have to behave like the oil majors – Shell, ExxonMobil, Total and the rest – that recruit world-class staff members. The quality of leadership and management will also have to be upgraded. There will have to be performance targets. Those who fail to meet their targets should be shown the door.
Under the Act, the host communities are to be given three per cent of the capital expenditure for each year; to what extent do you think this will scale up development in these host communities?
Ordinarily, I will consider the three per cent to the host communities rather low. But then, the host communities themselves will have to justify any increase. What we have seen with the NNDC does not give any comfort. We need a different model of how such resources are managed. Succeeding leaderships of the NNDC have been grandly corrupt. They have pillaged most of the funds and left their people in penury and grief. I will only urge an increase over the three per cent if there is evidence that the funds will truly be used in the general interest of the host communities rather than on greedy pigs among the political and bureaucratic elites.
In recent times, the remittances of the NNPC to the Federation Account have been declining and there are arguments that the 30 per cent Frontier Fund and the three per cent to the host communities will further deplete the inflows, do you share this opinion?
For much of the 1970s up to the 1990s, oil accounted for as much as 50 per cent of our national GDP. Following the 2014 GDP rebasing, it now accounts for a mere 10 per cent. But oil still accounts for 60 per cent of government revenue and a staggering 92 per cent of foreign exchange earnings. The hydrocarbon industrial civilisation that we have known for more than a century is in retreat, thanks to recent global protocols on climate change. Advanced industrial nations have given deadlines to their auto manufacturers to transition from petrol to electric vehicles. This is true of Daimler-Benz as it is of Volkswagen, Nissan, Toyota, Renault, Peugeot and Tata. Automobiles account for 70 per cent of the market for oil.
The writing on the wall is clear. Globally, oil will continue to be important for another decade or two. But its sun has well gone past its zenith. The ambitions of the Federal Government are to attain 40 billion barrels of reserves and production levels of four million barrels per day. Despite these ambitions, the truth of the matter is that global prices are unlikely to rise significantly very soon. The prescription of 30 per cent to be devoted to exploration of the so-called frontier basins will also reduce the surplus available to the government across the three tiers. The amount going to the host communities, at three per cent, is rather low. I would have expected something in the order of 10 per cent.
There are those who are pointing out that all the money going to the NNDC has not been expended in a manner anyone could be proud of. That agency has become a pork barrel and cesspool of staggering corruption. If the NNDC funds are not being used judiciously, why on earth will the oil-bearing states be expecting more? These are legitimate concerns and nobody should dismiss them. I will say more should go to the host states, but only on the basis that the funds will be used more judiciously. But this is more a matter of hope than of reality.
Do you think there is a need for states to focus on generating sufficient internal revenue instead of depending largely on allocations from the Federation Account?
It goes without saying of course. One of the cardinal principles of federalism is that the federating units ought to be financially and economically viable. A feeding-bottle federalism is unworthy of being called a federal system. In terms of internally-generated revenue, only a few states can stand on their own feed from a financial viewpoint. These are: Lagos, Ogun, Oyo, Kano, Kaduna, Rivers and Akwa Ibom. States like Jigawa, Yobe, Zamfara, Kebbi and Katsina can hardly survive without handouts from the Federal Government. It is, therefore, obvious that generating more internal revenue is essential to creating a strong and vibrant union.
A dynamic and productive economy is vital to generating revenue. But a vital and productive economy is not possible without a vibrant business ecosystem. And a vibrant business eco-system cannot exist in an environment of chaos and insecurity. Tackling insecurity, violence and endemic criminality is, therefore, key to building a long-term economic and political future.
The governors are also concerned that they have not been given stakes in the ownership structure of the NNPC as it will now be owned by the Ministry of Finance Incorporated, is this arrangement right considering the fact that the three tiers of government once had rights to the corporation before the passage of the law?
Yes, indeed, this is a yawning gap in the PIA. The issue of ownership from the viewpoint of the federating units is critical. Another yawning gap is the absence of any reference between the PIA and the Nigerian Sovereign Investment Fund. At one stage or the other, these issues are likely to come up. It is the task of the political leadership to address adequately and to ensure there is a harmonious outcome that meets the expectations of concerned stakeholders.
A Rivers State court stopped the FIRS from collecting VAT and gave the states the powers to do so. What’s your take on the judgment?
Yes, indeed, the news came to my attention when earlier this month, a Federal High Court in Port Harcourt issued an order restraining the FIRS from collecting Value Added Tax and Personal Income Tax in Rivers State. In that ruling, the principle was laid that states, rather than the Federal Government, should directly engage in tax collection within the jurisdiction of the states. The Rivers State Government had filed a case demanding a restraining order jointly against the FIRS and the Attorney-General of the Federation. It was over demands, threats and intimidation of Rivers residents to pay the PIT and VAT by the FIRS.
Justice Stephen Pam had dismissed the preliminary objections filed by the FIRS on the grounds that the court lacked jurisdiction to entertain the case and that it ought to be transferred to the Court of Appeal for interpretation. In his ruling, the judge opined that there was no constitutional basis for the FIRS to directly demand VAT, withholding tax, education tax and technology levy from Rivers State, or, indeed, from any other state of the federation. Well, as you know, the FIRS has appealed the ruling and has warned that all taxpayers must continue paying up to the FIRS until the judicial position is finally determined.
If we lived in a genuine federal system, the ruling would make sense. The jurisdictional autonomy in tax and other sectors for federating units must be respected in any federal system of government. Unfortunately, Nigeria is not that kind of federalism. The tax offices of the states do not give me any confidence. On this matter, I am inclined to be more sympathetic to the FIRS.
Some industry experts posit that the judgment will negatively affect the revenue of most states and hamper the ease of doing business in the country, do you share this view?
Those who entertain such fears are probably right. There are many other issues that are wrong with our tax administration in this country. Those issues ought to be properly addressed on their own merit. I, unfortunately, have more faith in the FIRS than in state-level tax administrators. We need more training and more professional tax administrators in this country, both at the federal and state levels. We need tax administration that is professional, competent and less grasping than what currently obtains.
So, what are your recommendations to the states?
It is just like I have said before; the states need to desperately reform their own tax regimes. I know of a multinational subsidiary, which had a factory in one of the states. The head of the tax administration used to insist that all the taxes accruable from that factory should be paid directly into her private account. When she began to raise hell because the company would not oblige her, the directors quietly took a decision to close down the factory. Thousands of workers lost their jobs and the state government lost considerable revenue and local producers of raw materials lost business, because they were no longer part of the value chain. All because of one greedy tax official. State governments need to overhaul and professionalise their tax administration. More training and more skills are also needed.
All rights reserved. This material, and other digital content on this website, may not be reproduced, published, broadcast, rewritten or redistributed in whole or in part without prior express written permission from PUNCH.
Contact: [email protected]