Lagos Chamber seeks full deregulation of oil sector, scrapping of NNPC

on   /   in Business 12:24 am   /   Comments

By Omoh Gabriel, Business Editor

… thumbs down economy
LAGOS Chamber of Commerce and Industry, a body of organised businessmen based in Lagos has urged the federal Government to fully deregulate the oil and gas sector in 2013 beyond the removal of oil subsidy and to scrap the Nigerian National Petroleum Corporation. The chamber suggested that in place of the scrapped NNPC, a regulatory body be set up to properly regulate the oil and gas sector. It also said that the government should take bold steps and privatise all the refineries and depots in the country.

The Chamber in its 2012 end of year business environment assessment report signed by its Director General, Mr Mudal Yusuf, that was released, yesterday, said that operators in the oil and gas sector have long proposed as the way forward for the industry “Full deregulation of the downstream oil and gas sector beyond removal of fuel subsidy; immediate privatisation of all the refineries; petroleum products depots and pipelines. The Chamber is also in favour of the recommendation that a strong regulator, an equivalent of NCC in the telecom sector be installed in the oil and gas sector and the subsequent scraping of NNPC and its affiliates institutions”.

It said that President Goodluck Jonathan’s transformation of the Nigerian economy agenda was critically dependent on the quality of investment climate. The chamber noted: “In pursuance of its policy advocacy mandate, the Lagos Chamber undertook an evidence based assessment of the business environment in 2012 with inputs from its members and stakeholders in the Nigerian economy. The purpose of this exercise was to identify key issues for advocacy and engagement for the improvement of the business environment.

President Jonathan and Minister of Petroleum, Diezani

President Jonathan and Minister of Petroleum, Diezani

“The business and economic environment was typically characterized by upsides and downsides, but the latter seem to have outweighed the former. The economy (as always) offered tremendous opportunities during the year, but the capacity of investors to harness the opportunities was constrained by the prevailing challenges of the operating environment.

Indigenous enterprises
The limitations were even more profound for indigenous entrepreneurs.  The country is reputed for its robust natural endowments, youthful demography, large coastlines, largest population in the continent, seventh largest oil exporting country in the world, a large enterprising population, an innovative banking sector, a GDP growth of 6.6 per cent, which is one of the best globally; rising foreign reserves which was $44.5 billion as at November 2012, excess crude account of $9.6 billion and a stable polity, bolstered by increased credibility of the electoral process.

All these form the major components of the upside in the economy in 2012. However, for most investors, the downside was more overwhelming. The operating environment was generally adjudged to be unsatisfactory by many investors. This had profound impact on returns on investment and profit margins.

“Funding was a major problem for investors in 2012. The cost of fund in the economy is high and access to credit was even more serious problem. The tight monetary policy stance of the CBN was identified as a major factor that affected the credit conditions. Other areas of concern were: Collateral cover requirements by banks were beyond many investors.

“This impeded access to credit, slowed down the tempo of economic activities and undermined intermediation role of banks in the financial system. Government borrowing at a high cost of between 14-16 per cent which is one of the highest globally was a major source of the credit problem in 2012. It created a disincentive to lend to entrepreneurs; put pressure on interest rates and increased the flow of funds from the banking system to the government coffers; a scenario which was clearly not healthy for the economy”.

The Chamber report stated “The power supply situation in the country improved slightly mid-year but declined in the last quarter. This scenario created sustainability concerns over the celebrated improvement in the power situation. High energy cost was thus a major issue for investors during the year. This of course had implications for productivity and profitability of investments.

“Interest Rates and Regulatory uncertainty had adverse impact on the banking sector. Tough operating environment made lending very difficult as it increases the risk of loan default. Businesses, especially small and medium enterprises are reluctant to take loans because of the high interest rates which affect the banks on the long run. Businesses are also prone to defaulting on their loans because of the cost of these loans and business fundamentals which affects the quality of the bank’s balance sheet.

Capital Market: The interest rate regime made it uneconomical to access bank borrowings for the purpose of investment in capital market. The dearth of capital sourcing by companies also affected the tempo of activities in the capital market. The huge inflow of bank assets into government securities also had a profound adverse effect on capital market operations during the year. Most businesses have placed expansion plans on hold because funding has been a major challenge during the year. Without expansion there will be no need for new capital which is a core activity in the capital market.

Manufacturing/Industrial: The report said that the “Insecurity in most parts of the North and few spots in the South impeded turnover and distribution throughout the year. Rising cost of production due to high cost of capital and alternative source of power remains a key concern. Increasing Cost of Labour was a challenge due to scarcity of required skills and new minimum wage legislation. It said that the unabated influx of finished consumer goods as well as fake and substandard products into the country posed a major challenge to manufacturing in the country.

“It said that sales/turnover and margins dropped across the entire manufacturing sub sector.  It said that expansion, diversification and new employment were rare in the course of the year.  Importation of technical skills required by the industry affected the bottom line. Difficulty, delays and high cost of getting bank loan remains a formidable threat. Innovation and planning is suffering on the back of uncertain and unstable policy environment.”

It suggested that government should ensure as a way forward that SMEs and manufactures get loan at single digit and eliminate delays associated with loan processing. There is urgent need to responsibly check the influx of fake, imitation and substandard goods into the Nigerian market. It suggested that government should  swiftly and permanently fix the security problems in Nigeria, reform the curriculum of tertiary institutions in the country to bridge the wide gap between industrial skill requirement and the output coming from Nigerian institutions

Agricultural Sector: In the agric sector the Chamber reported that commercial farming suffered frustration on account of poor access to credit and high interest rate as the intervention fund for agriculture has since been exhausted. It said that poor capitalisation of the Bank for Agriculture was also a major constrain to funding commercial farming in the country. It said that Agricultural insurance is virtually non existent.

Investors had difficulty in getting claims from Nigerian Agricultural Insurance Company. Access claims was fraught with heavy bureaucracy and corruption. Funding remains a major issue. Investors had to source commercial loans to invest in agriculture. Interest rates are as high as 25-30 per cent. Even access to credit at these rates was difficult. Many farmers have no title to their land. This made collateral provision for credit very difficult. Infrastructural facilities are poor making processing and transportation costs very high.

As a way forward the Lagos Chamber said there was the need to make long term fund available to farmers at single digit interest rate and the need to re-capitalise Bank of Agriculture.

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