Archive | April, 2015

Bureaucratic Inefficiency Limiting Effectiveness of Trade Ministry

14 Apr

David O. Kuranga, Ph.D. The author is the Managing Director and Principal of Kuranga and Associates, a full-service investment, political and economic risk consultancy, and asset management firm that specializes in Africa. He is also the author of The Power of Interdependence with Palgrave Macmillan Press.

In addition to their lapse in export promotion, completely neglecting the central importance of financial services as an export-oriented industry, the relatively newly created Ministry of Trade and Investment in Nigeria suffers from a degree of bureaucratic inefficiency. Before the existence of the Ministry of Trade and Investment, the newly created portfolio was the prerogative of the Ministry of Foreign Affairs. The advantage of this was that the Foreign Ministry had at its disposal all the nations embassies and consulates throughout the world to assist in reaching out to foreign investors and those interested in doing business in Nigeria. Nigeria’s foreign missions all have an economic and trade desk, where a diplomatic attaché would handle all trade and investment related matters in the posting country as well as reach out to the Nigerians in diaspora that have invested heavily in the country.

Since the advent of the trade ministry there has been a severe disconnect in promoting trade and investment in Nigeria. The Ministry of Foreign Affairs still controls the Nigerian trade and economic desks throughout the world but their ministry back home in the capital is stripped of that responsibility and does very little with facilitating investment. Accordingly the Ministry of Trade functions as a ministry without arms and legs, because their arms and legs are still attached to Foreign Affairs. This has made the Trade Ministry highly inaccessible to ordinary Nigerians in diaspora and other small an medium-scale investors who form the majority of Nigeria’s potential global capital investors. The only investors that the ministry of trade handles and/or even bothers to pay attention to, are the large-scale multi-national corporate investors. I know personally of capital investors that have invested 100’s of millions of capital in Nigeria in a myriad of smaller multi-million dollar projects over the past decade who have said that “it is a waste of time to reach out to the ministry of trade”, because of the unresponsiveness of the ministry to even medium-scale multi-million dollar investments in the country.

The Minister of Trade, claims to have an “open door” policy, but this is only in words, not in action or practice. In order for the ministry to truly have an open door policy, their doors would have to be open in every country that Nigeria has representation, as well as in Abuja and Lagos. Without their arms and legs, they remain a talk-shop touting the investment opportunities in Nigeria at conferences and trade summits, while for the most part ignoring the primary grass-root task of assisting investors of all shapes and sizes in executing their investment initiatives and programmes. As it sits now, the ministry serves as a fancy talk-shop, formulating investment policy at the executive level, and working with major capital projects and developments. At the same time, the economic affairs officers at Nigeria’s embassies and missions are left without much utility. While their desk should be among the busiest desks at any foreign mission, they actually accomplish very little. Many of the officers leave their desks altogether and are very difficult to find even at some of the countries most-prominent foreign missions. When one does get in contact, the officers are not very knowledgeable and lack the capacity to assist investors. Periodically the officers write useless reports and send them back to Abuja as a way of justifying their existence, but its seldom for them to ever actually facilitate or support the investment of an individual or company in any concrete way. Since their ministry back home was stripped of that major role there is no real pressure on those officers to achieve anything of merit, so they sit around for years in the country of their posting doing very little in terms of actual productivity.

When you look at successful countries that facilitate high-levels of trade and investment, things are done drastically differently than the regime currently being run by the trade ministry and foreign affairs in Nigeria. Successful countries take every form of investment and trade seriously and have established roads and avenues to support interested investors throughout the world and guide them in achieving their objectives. The way things are currently set-up, many smaller investors get discouraged, and those that persevere do so on their own with no support whatsoever from the institutions of government that are mandated to support them. The only investors and institutions that the Trade Ministry truly supports are the large-scale investors and multi-national corporations that do not need the assistance of the ministry at all and in many cases did not even solicit their support. All these large-scale projects would receive the support of government whether or not the trade ministry even existed. Accordingly, it does not take much to realize that this is a broken system and the newly created ministry is a faltering institution when compared to similar bureaucratic agencies in the world. First at the core of the problem is the orientation of the Ministry itself, that approaches investment and trade promotion with a top-down approach rather than a bottom-up approach. With their current disposition they “help” the investments that do not need any assistance and ignore the investment projects and initiatives where they would actually have had an impact in the outcome. Secondly the arms and legs need to be attached to the body. The diplomatic officers charged with trade and investment should report to the Ministry of Trade along with Foreign Affairs.

BOTTOM-UP ORIENTATION
Even when you listen to the Minister of Trade speak, which I have done several times, it is clear that his focus is on the large-scale development projects that are ongoing in Nigeria. His office is open primarily to the proprietors of those projects, and most of their “work” is geared at supporting them. Despite their claims of having an “open-door” policy, their doors remain closed to the overwhelming majority of medium and small-scale investors. Thus many of the foreign investment projects in Nigeria go completely ignored by the trade ministry, even those who solicit their support in the process. While many of the smaller projects get implemented in spite of the disdain they received from the Ministry of Trade, many of the smaller-scale projects that could have benefited from support from the ministry, never see the light of day. While it is natural in the private sector for the banks and global capital investors to gravitate towards the stronger and larger projects, its common sense in the framework of public administration that the public-sector cannot do this. In fact, the public sector has a fiduciary obligation to mimic the private sector in reverse, thus orienting themselves to support the projects and the proprietors most-likely to be ignored and shunned by the private sector. The compound impact of this approach is that more projects get done, and many of the intermediate but important job-creating investments that are straddling the fence as to whether or not they would get executed, are bolstered by the support of government, and pulled over into safety. Coming exclusively from the private sector, with very little understanding of public administration, the inaugural Minister of Trade has done a very poor job in this regard. Going forward, the new leadership is going to have to turn the culture fostered by incumbent minister on its head, reorienting the ministry to be primarily a bottom-up focused body. In this regards, they should develop much stronger ties with the start-ups, the young entrepreneurs, and the diaspora, developing initiatives focused on assisting them in achieving their objectives.

CONNECT THE ARMS & LEGS
With respect to the disconnect between the Ministry of Trade and Foreign Affairs, all economic and trade officials on foreign posting should be retrained and take the bulk of their marching-orders from the trade ministry. Only in matters of protocol and posting should the foreign affairs ministry be involved. The arraignment is similar to the ongoing posting of numerous military and naval officers stationed in Nigeria’s diplomatic missions throughout the world where Nigeria has military cooperation and partnerships. The military personnel are stationed by foreign affairs but they report back to there respective outfits and the Ministry of Defence as well as foreign affairs. Instead of sitting around idling at the country’s foreign missions, economic foreign officers on diplomatic posting, should have a heavy case load, working for individuals and companies that are seeking to invest in Nigeria. Everything from assisting our nationals in diaspora seeking guidance in buying or building a home in Nigeria, or start-ups seeking foreign investment capital, or small SMEs in Nigeria seeking to sell their products abroad, should all be part of the daily routine within the trade ministry. Economic and trade officers stationed abroad should be trained and mandated to handle volumes of these types of cases on a regular basis, with view of seeing them executed. In today’s ministry most of these types of cases would be ignored. However the new and properly functioning Ministry of Trade should solicit and seek-out these types of small missions and reorient themselves from being an elite-serving ministry to one that serves the marginalized small-scale young entrepreneurs and assists our nationals abroad who desire to invest in their country. In order to achieve this, the new minister has to have an acumen for both the private sector and for public administration, with a keen understanding of bureaucratic organizational behaviour.

Kuranga and Associates Limited is an investment management advisory firm and an asset manager with a principle practice area of Africa. To learn more about Kuranga and Associates go to www.kaglobal.net. © Copyright 2014 David Kuranga. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Dr.Kuranga

David O. Kuranga; Ph.D.
Managing Director
Kuranga & Associates Limited
Phone: 212.363.0936
david.kuranga@kaglobal.net
https://kurangaandassociates.wordpress.com
http://us.macmillan.com/thepowerofinterdependence/DavidOladipupoKuranga

Averting Economic Crisis: The First 100 Days

6 Apr

David O. Kuranga, Ph.D. The author is the Managing Director and Principal of Kuranga and Associates, a full-service investment, political and economic risk consultancy, and asset management firm that specializes in Africa. He is also the author of The Power of Interdependence with Palgrave Macmillan Press.

Muhammadu-Buhari1Economists are in agreement that the Nigerian economy is headed for a substantial hit if things continue on its current course. Many believe that an economic crisis, due to the crash in the global price of oil, is inevitable. The overwhelming majority of Nigerian government revenue is derived from oil exports. Since oil prices have fallen from 115 dollars a barrel to 50 dollars a barrel, economic indicators in Nigeria have taken a downward spiral. The naira has fallen to record lows of around 230 to 1 dollar, and Nigerian capital markets have had a dismal performance in recent months. Following the election of General Buhari to the presidency, there was relative calm and peace throughout the country which took most observers by surprise. In the first election where the incumbent lost power in Nigeria through an election, there was very little violence or protest. In fact the losing party, incumbent President Jonathan, conceded defeat and congratulated the victor. Capital markets surged in Nigeria following the peaceful polls as investors flocked back, allowing the market to recover some of the ground stocks had lost before the election.

Despite the bounce in the stock market, the naira is still flat, hovering at around 200 to 1 dollar, with a devaluation seemingly imminent. The first responsibility of the new APC-led administration is to arrest the current economic slide and prevent the naira from sliding further. The only way to do that is to increase government revenue, immediately. Throughout the campaign General Buhari and his running-mate as well as his other APC political associates articulated that their plan to do this was by plugging the holes of mismanagement and political corruption, particularly in the petroleum sector and the NNPC. It is undoubtedly true that Nigeria has suffered from gross mismanagement and theft of public funds, particularly in the petroleum industry. The recently released audit report on the NNPC identified a host of opaque and unprofessional practices, including oil swaps (paying for refined oil with unverifiable amounts of crude oil), that needed to be rectified immediately. However, as long as oil prices remain around 50 dollars a barrel, it is doubtful that there will be enough revenue to service debts, fund social development programmes, and sustain the value of the naira.

Once General Buhari assumes office he will be on a honeymoon of goodwill as the newly elected leader for at least the first 100 days. During this time he will have a tremendous amount of political capital to spend in order to achieve political objectives that he would otherwise not be able to achieve. Once the honeymoon period is over, political opponents will begin to regain their footing, and executing acute policy shifts will become more difficult. It is very important during the honeymoon period that General Buhari and the APC pick their “moves” and decide their battles carefully, in order to sustain their momentum throughout their term in office. It would be a catastrophic mistake for General Buhari and the APC to spend their honeymoon period focusing primarily on waging corruption battles with the NNPC and other entrenched interests. FIRST, the wellspring of political support to tackle political corruption and mismanagement in Nigeria will never run dry throughout General Buhari’s entire term in office. Nigerians are sick and tired of the graft and mismanagement that has plagued the country for over half a century. Ironically, it would be a complete and total waste to squander the honeymoon period of heightened political capital on an issue that they could tackle at any other point in time with little or no public resistance. SECOND, it is doubtful that the protracted corruption battles with NNPC will plug enough holes and raise enough revenue to stabilize the naira and avert a severe economic slowdown. Throughout the campaign APC took a page from Soludo, and pointed to the period a decade ago where Nigeria was receiving debt relief, and thus was able to increase its savings with the comparatively low oil prices at the time. The argument they make is that they can continue to rely on oil to fund all their initiatives and run the state no matter how low the price falls. The problem with this logic is that the economic landscape in Nigeria is totally different today, Nigeria is not receiving debt relief anymore, but rather is servicing its mounting debts. To make parallels and assertions like this is simply a case where political brinksmanship has been taken too far, and is not based on economic reality. While it may help score cheap political points and mask the truth from the public, the fact remains that as long as oil prices remain down, Nigeria will almost likely face difficult economic times, even if General Buhari were able to curtail all corruption and mismanagement in Nigeria overnight. THIRD, now that General Buhari has emerged the victor, the prospect of Delta militancy disrupting oil production is very high. Reports are now coming in that Delta militants have blown up pipelines even before Buhari’s formal inauguration. All these developments only strengthens the notion that oil revenue is not a reliable primary source of income for a Buhari-led government. Accordingly squandering his highly potent honeymoon period to focus on unraveling the complex web of corruption in that industry is not a wise political “move”. It is common sense that from the second General Buhari was declared the victor, the NNPC, and those deeply involved in the political corruption and mismanagement in the petroleum industry, began preparing for an attack from the new president. Making decisive inroads against those entrenched interests is not going to be as rapid as is needed to have any positive impact on the economy let alone avert the devaluation of the naira any further. If he wants to be a great leader General Buhari should resist the initial kneejerk reaction to focus solely on dismantling corruption, shunning the advice of political amateurs urging him to engage in high-profile corruption battles during his limited and extremely important honeymoon period.

chess-imagePower politics is like a game of chess, and the greatest political leaders throughout history know how to play it, understanding that there are “moves” and “countermoves”. On Nigeria’s chessboard the voting public are the pawns, the key political associates of both parties are the rooks, the security forces and militants are the knights, the economic decision-makers including ministries and DFI’s are the bishops, while the petroleum industry and the NNPC is the queen. Shortly after General Buhari’s election, militants in the delta began taking up offensive positions blowing up pipelines in a bid to disrupt oil and gas supply lines. The chess match that has begun unfolding in Nigeria has taken the Ruy Lopez opening sequence, one of the ancient predetermined set of strategic opening moves in a chess match. The voters made the first move by voting out the PDP incumbent and voting in the APC opposition, moving the pawns (e2-to-e4; e7-to-e5). Shortly afterwards militants in the delta took up positions, as did those in north, security forces have begun and continue their pursuit of both, thus moving the knights (g1-to-f3; b1-to-c6). The last move in the sequence is an economic move cutting deep into the opponents ground, completely disrupting the balance-of-power on the board moving the bishop (f1-to-b5), checking the potential impact of militancy in the delta. In the case of Nigeria, what is this economic “move” that General Buhari must make next?

Understanding that in order to prevent the naira from devaluating further, General Buhari, has to raise government revenue immediately, how is he to achieve this? Oil prices are not likely to increase, and the recent Iranian peace breakthrough is likely to push oil prices even lower than they currently are, the revenue has to come from another source besides oil. So where? Over the last decade, the elite in Nigeria have grown fabulously wealthy. The number of millionaires and billionaires has shot up dramatically. The country has become a top destination for luxury products like private jets, luxury cars, champagne and wine, and a host of other extravagances enjoyed by the elite in other parts of the world. The difference in Nigeria is that the elite in the country enjoy one of the lowest tax rates on the planet at around 3%. Nigeria cannot afford to continue to allow its elite to get away with not paying what they owe to the society that has made them wealthy. The same way the elite in every other economically successful country pay their share to society in the form of taxes at an average 13% or more, Nigerian elite must do the same. What is even more pressing an issue for Nigeria than addressing corruption and mismanagement in the petroleum industry, is that the amount of money that these elites are avoiding paying in taxes in Nigeria, by far exceeds the money the country squanders due to corruption and mismanagement by at least 3 to 1. In laymen’s terms, for every 1 dollar of oil money stolen, the elite in Nigeria are getting away with not paying 3 dollars in taxes as compared to wealthy elite in other parts of the world. While it would be a long and protracted fight to curb theft in Nigeria’s oil industry, in his honeymoon period during the first 100 days in office, General Buhari can fix Nigeria’s revenue problem almost overnight by finally drawing the fair amount of taxes from the nation’s elite. By doing this, Nigeria will avoid devaluing the naira further, and the country will not need to implement austerity measures on anyone except the nation’s elite.

There are a series of taxation measures that General Buhari can push for that would achieve this objective, most of them target the lifestyle of Nigeria’s elite:

  1. Mansion Taxes – a. houses and Flats that are valued in the top 5% in the country (provisions for 80% of these taxes to be passed on to tenants where the properties are leased), b. owners of multiple houses, c. owners of houses abroad as well as property in Nigeria, d. more than 2 household servants.
  2. Luxury Vehicle Taxes – a. A personal vehicle valued in the top 5% in the country (this includes firms that purchase luxury vehicles for employees and owners), b. owners of more than 1 vehicle per household, c. owners of yachts and other leisure aquatic vehicles, d. owners of luxury private aircraft.
  3. Additional income taxes on incomes over 10 million naira, deducted by employer.
  4. Capital gains taxes on owners of companies, properties, and the shareholders of companies, including SMEs that employ more persons than the registered owner.
  5. Government contractor taxes- an additional slight tax on the profits or earnings of any company or individual that has done business with the government in the previous 3 years.
  6. Inheritance Taxes – on estates valued over 10 million naira.
  7. Luxury Goods Taxes – luxury taxes on imported luxury consumer goods, wine, champagne, beverages, foreign brand foods, luxury textiles, satellite broadcasts, foreign film screenings, business class and first class travel tickets, and other luxury products as determined.

All persons in Nigeria, defined as elites either by net worth or by falling under one of the first 6 taxation measures, either elected official or not, must individually declare their ownership status of properties, salaries, and shares of companies. The declarations of all public officials, both past and present should be a matter of public record. Failure to declare and report ownership status and comply with taxation measures should result in rising penalties for repeat offenders. As it stands, compliance with Nigeria’s existing taxation measures is very limited. However enforcing these elite taxation measures will only target around 5 million individuals and several thousand companies which will make it easier to ensure immediate compliance.

Just like everywhere else in the world, the elite will try to push back against these measures, many of whom are prominent supporters of the APC and General Buhari himself. However during General Buhari’s honeymoon he will have more than enough political capital to execute these changes and get this legislation passed if he makes it his top priority. Once this is done, Nigeria’s revenue will increase substantially, eliminating any possible risk of naira devaluation, or the need for any austerity measures and suspension of services. Even if militants are able to disrupt petroleum exports in any way, it will not affect the fiscal stability of Nigeria as whole. No Nigerian leader that comes after General Buhari will ever attempt to undue any of these measures, and General Buhari will forever be the leader that brought these fundamental shifts about in Nigeria. There are other taxation and revenue-generating measures that the federal government needs to make, including targeting the telecommunications industry, large-scale agriculture and food processing, and the service industries that have grown considerably over the years in Nigeria. However, the elite progressive taxation measures are first and foremost, and should occur during the first 100 days as the top priority of the new administration. The Nigerian people should understand that an economic crisis and slowdown can be adverted, the devaluation of the naira is not necessary, and austerity measures that reduces funding to social services is completely avoidable. If any of these things occur in Nigeria it will be because General Buhari made the wrong “move”.

Kuranga and Associates Limited is an investment management advisory firm and an asset manager with a principle practice area of Africa. To learn more about Kuranga and Associates go to www.kaglobal.net. © Copyright 2014 David Kuranga. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Dr.Kuranga

David O. Kuranga; Ph.D.
Managing Director
Kuranga & Associates Limited
Phone: 212.363.0936
david.kuranga@kaglobal.net
https://kurangaandassociates.wordpress.com
http://us.macmillan.com/thepowerofinterdependence/DavidOladipupoKuranga