Archive | August, 2015

Before Devaluation or Ending Subsidy, Tax The Rich!

26 Aug

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.

With Nigeria recording the worst economic growth numbers in over a decade, it is becoming clearer that the country could possibly be headed for a collapse if everything continues on its current course. Since the overwhelming majority of Nigerian government revenue is still derived from oil exports and crude oil prices have fallen from 115 dollars a barrel to 40 dollars a barrel, economic indicators in Nigeria have spiraled out of control. The naira has fallen to record lows of around 230 to 1 dollar, and Nigerian capital markets have seen investors flee. Calls are now growing to devalue the naira and to remove the fuel subsidy, as if these are the only means to redress the situation. Devaluing the naira will cause inflation on basic imported products and will make the cost-of-living rise much higher in Nigeria especially for the poor and working-class. Further, ending the fuel subsidy will also result in a higher cost for petroleum and the all important cooking oil used by many working-class families for basic sustenance. Thus all the supposed knee-jerk solutions to the Nigeria’s economic woes being touted in mainstream Nigerian media is to place heavier burden on the nation’s poor. What is shocking is that almost nobody, either in mainstream media or in the state, has promoted solutions that place a heavier burden on the nation’s ultra rich elite class. Nigeria has one of the lowest tax rates on the planet at around 3% and Nigeria’s rich are by far the biggest beneficiaries of this gross negligence over the years.

Over the last decade, the number of millionaires and billionaires in Nigeria has increased exponentially. I have repeatedly said that Nigeria cannot afford to continue to allow its elite to get away with this, they must pay what they owe to the country. The elite in every other successful country pay their share to society in the form of taxes at an average 13% or more while Nigerian elite sit on their hands pointing fingers and promoting solutions that will largely affect the poor and bypass them. As we are now seeing, just as I predicted, it will be a long and protracted fight to curb corruption in Nigeria and recover looted funds, it will definitely not happen anytime soon. Yet the revenue problem can still be fixed, almost overnight.

There are a series of taxation measures that I have pushed for nationwide that would achieve this objective, all of which target 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 MSMEs that employ more persons than the registered owner and family.
  5. Government contractor taxes- an additional slight tax on the profits or earnings of any company or individual that has won a contract 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.

It will not be that great of a task for the Federal Inland Revenue Service (FIRS) to identify and target the 5 million individuals and several thousand companies that would be affected by these policies. Further there is more than enough money in the hands of the nation’s elite in their discretionary spending alone, to curb the current economic slide and bring the nation back on sound footing. Despite ongoing crisis in the rest of the world, despite the drop in oil revenue, an economic crisis in Nigeria can be adverted, the devaluation of the naira is not necessary, and austerity measures that reduces funding to social services like the fuel subsidy is also unnecessary. However if the administration continues to ignore this sound economic adjustment, the ongoing crisis in the Eurozone, China and Asia, and in oil markets could lead to a complete collapse of the Nigerian economy before the end of this year. No amount of probes will avert that. Since there was solution available, the blame should fall squarely at the doorstep of President Buhari and his administration.

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 2015 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

Revamping Nigeria’s Aviation Sector

11 Aug

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.

The administration of President Buhari announced recently that they plan to overhaul Nigeria’s aviation sector. The president’s spokesperson indicated that Buhari is concerned about the massive debt profile currently in the industry. The president is reported to have instructed the aviation ministry to look into re-establishing a new national carrier. Presently the Nigerian owned Arik Airways remains heavily indebted to NEXIM (Nigerian Export Import Bank) and AMCON (The Asset Management Corporation of Nigeria), owned by the government. Aero Contractors Limited is also largely owned by AMCON through its debt acquisition. The operation of Arik and Aero is essentially now largely overseen by AMCON. It is unclear if the president intends to nationalize Arik Airways and/or Aero if he feels that the solution to a struggling and heavily indebted airline that is already now being controlled largely by the government is to create another one to compete with it.

The idea of creating a second Nigerian airline to compete with Arik or Aero given this current dynamic is among the worst ideas and will fail miserably. The government already has heavy interest in the largest indigenous airline in Nigeria, Arik Airways and also in Aero, through their heavy debt burden to two government banks, AMCON & NEXIM. It is in the interest of the government that they become profitable again so that they can repay their debts. A second airline subsidized by the government will only compete with Arik and undermine its market share. In fact having the two airlines working separately is nonsensical and is not in the interest of either airline or the government, to whom they are both heavily indebted.  Accordingly what trade and aviation ministry, AMCON and NEXIM need to do is develop a plan to enhance the efficiency of Arik Airways and Aero in order for them to increase their market share and become profitable enterprises. Whether or not the government formally nationalizes the carriers will have little to no impact on the matter.

What are some of the things that can be done to enhance the efficiency of Aero/Arik Airways and/or increase their market share? Since the 90’s, with the guidance of major private equity investors as well as investment banking and management consultants, major airlines throughout the world have begun to consolidate and merge into larger carriers. In this time the United States has gone from having 10 major carriers to only 4. European carriers have also taken a similar path with KLM and Air France merging, as well as British Airways and Iberia. Even before the merger phenomenon, in the global front airlines began to form alliances with one another forming what is now the 3 major global airline alliances consisting of what is now 62 member airlines. The alliances of SkyTeam, Star Alliance, and OneWorld now account for almost 60% of total air travel worldwide. The market share of these three major alliances continues to grow making it harder for those outside of this to compete and run profitable airlines. Further the trend of airline mergers as a means of increasing efficiency is continuing and showing no signs of slowing. By joining an alliance, individual airlines receive immediate benefits including, shared booking, maintenance, and baggage facilities that helps lower the overhead cost of operation. In addition passengers are able to traverse a wider array of intercontinental routes seamlessly on flights operated by other carriers within the alliance.

Given these trends in the airline industry globally, what are the options for Nigeria and Aero/Arik Airways? Most importantly Arik and Aero need to merge into 1 firm, it makes no sense for the two of them to be competing with each other when the government controls them both. Secondly and perhaps more significantly the two need to merge and/or buy a majority stake in a third airline that would increase its destination capacity and enhance its global market share. As it stands the airlines are simply too small at a combined fleet of just over 30 world class aircraft and offers too few routes to be taken seriously as a partner by any of the major alliances. There are several other airlines in Arik Air’s position that are yet to merge and do not yet cooperate with any of the major alliances. Perhaps most significant among them is Caribbean Airlines, a fledging airline largely owned by the government of Trinidad and Tobago.

Arik/Aero offers very few flights to North American destinations, while Caribbean flies through much of the US and Canada as well as the Caribbean and South America. A merger between the two would expand Aero/Arik Air’s reach to both North and South America and would allow the two to increase market share on flights to various African destinations that Aero/Arik service. Together the two airlines will be a major player in the global air industry with almost 60 aircraft and will offer unique routes that no other airline in history has ever serviced or offered. This is the same strategy that South African Airways took when it purchased Ethiopian Air, Kenyan Airways did when it merged with KLM. To ensure Aero/Arik maintain a healthy market share in Africa they would need to codeshare flights with as many African airlines as possible. Codesharing would enable Aero/Arik to offer flights to more African destinations that it currently does. Codeshare partnerships with African airlines like Air Cote D’Ivoire, Equatorial Congo, Daallo Airlines, Africa World Airlines, East African Airways, and Libyan Airlines would enable Aero/Arik to fly passengers to virtually every destination in Africa. It would also position Aero/Arik as one of the leading airlines servicing African routes along with Kenyan Airways and South African Airways. It is worth noting that both Kenyan Airways and South African Airways are members of 2 of the 3 major global alliances, namely Star Alliance for South African Airways, and Sky Team for Kenyan Airways.

(One World Route Map)

The only major global airline alliance that does not have an African partner is OneWorld. Once Nigeria merges Aero/Arik Air, executes a strategic merger most likely with Caribbean Airlines, and codeshares with other African carriers, the next logical step would be for it to become the strategic African partner in the OneWorld air alliance which badly needs a solid African partner. By doing this Aero/Arik Air will be able to deliver Nigerian and African passengers to virtually any destination in the world and connect travelers throughout the world with Africa. Just as South African Airways, Kenyan Airways, Emirates, and Quatar Airways have become very profitable when teamed with an air alliance, Aero/Arik/Caribbean Air when structured this way will be able to do the same. While this rough-sketch blueprint for revitalizing Nigeria’s aviation industry is light on specifics and details, it is informed by trends in the aviation industry coupled with an understanding of the state of the industry in Nigeria and Africa as a whole. It is this kind of strategic economic planning that leads nations to succeed in the fast-paced and increasingly complex global economy. The Buhari administrations economic team, whenever it becomes active, must have strategic planners within their ranks that have experience both in corporate finance and management consulting but who also are strategic national planners that are hungry for change. In the past, Nigeria has fielded some of the most incompetent decision-makers that when compared to their counterparts in the rest of the world have no business occupying the positions they boastfully occupy in Nigeria. Even among the ones that can compete globally, many of them are too old and/or are often comprised by their records and longstanding ties which prevents them from making the drastic shifts like this, that are needed. If you look at some of the major deals and leading global firms that are reshaping our world, they are led and executed by talented young people with little to no connection with the “old guard” they are eclipsing.

Just as is the case with revitalizing Nigeria’s aviation industry, above all what I want to demonstrate is that the solutions to move our country forward are within reach. It does not require a miracle to turn-around the conditions on the ground in Nigeria immediately. Anyone who believes this is either unqualified and thus unable to see, or is obsessed with chasing stolen funds that may never be recovered, or has a vested interest in maintaining the status quo. Fighting corruption while extremely important in the context of Nigeria, is not a substitute for economic planning and effecting decision-making. It is not a panacea, not even for Nigeria, and even if Nigeria is unable to recover 1 kobo, the country’s economic capacity to thrive in the immediacy remains strong. There is no need for the naira to be weak, or for local governments to be unable to pay salaries, or for the aviation sector to be in disarray. All these issues we face have solutions within our reach that does not involve fighting corruption, many of which I have outlined in previous articles. The challenge today is to hold decision-makers accountable, and to no longer let them get away with low-levels of achievement, distracting the public with stories of corruption, in order to pass blame and make excuses for their incompetence.

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 2015 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