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Local content, local troubles: How big firms kill small businesses

By Michael Eboh

MOSES, not his real name, is a supplier to two major fabrication and logistics yards in Lagos (names withheld). He said he supplies varied items, ranging from petroleum products to personnel to these companies. However, Moses, who does not want his real name in print, for fear that the companies might blacklist him in the future, is currently broke, does not have a dime in his account and is surviving from the support of his wife and his in-laws, as well as from the goodwill of his friends.

welding workshop

Moses is being owed over N35 million by both companies since last year, for various supplies to these companies, and is unsure when the debts would be settled. Nevertheless, he is optimistic that the debts had not gone bad, and that they would eventually be settled on a gradual process. He noted, however, that the main challenge confronting his business was when the debts would eventually be cleared.

Similar tales abound among suppliers and contractors of oil companies, both in the upstream and downstream sectors of the petroleum industry. Majority of these companies typically take up to a minimum of six months, and in worst case scenarios, up to two years, to pay their suppliers and contractors for jobs done. While still indebted, the oil majors still give new jobs to these suppliers and contractors, and where the companies decline on the basis of lack of funds to prosecute the contracts, the jobs are given to new companies.

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At the end of the day, only companies with strong financial backing, mainly from foreign financiers, or foreign parent companies, as well as highly-connected firms continue to do business with these big companies. It is instructive to note also that this situation cuts across almost all the sectors of the Nigerian economy.

These companies in the Nigerian petroleum industry had, over the years, fully supported the Nigerian content initiative which had seen them patronising indigenous companies. However, in the course of their activities, sometimes unknown to them, they had brought about the demise of many indigenous businesses. The Nigerian content initiative, though filled with good intentions, is currently being abused by big firms, especially in the petroleum industry.

The Nigeria Oil and Gas Industry Content Development, NOGICD, Act, is currently being abused by these big companies as well as government agencies. They frustrate small businesses, leading to many of these businesses going bankrupt. Another small business owner, who also asked to be called Osmond, to hide his real identity, is a printer for a midstream and downstream oil company, having its corporate headquarters in Lagos. Osmond said he is on the verge of bankruptcy. He stated that despite the immense work he does for this oil firm, he is indebted to the tune of over N20 million both to banks and friends.

He said that the fact that he is still able to feed his family and pay other bills was a miracle. According to him, his saving grace was that he was able to acquire a landed property and built a house somewhere along the Lagos-Badagry Expressway, noting that rents from the property had helped in no small measure in alleviating his plight. Osmond prints the company’s transactional documents such as invoices, receipts and letterheads, among others; stating that he had been printing for the firm’s parent company for almost ten years before he was referred to the midstream and downstream subsidiary two years ago.

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Both Moses and Osmond, among many others, are still contractors and suppliers to these big companies; they are still being given jobs to prosecute, but getting payments early for these jobs is the major problem. Some of these small business owners still bid for and get jobs from these big companies and they are expected to carry out the jobs without any form of mobilisation fee or down payments, and when the contracts are completed, they are still not paid.

Most of these big companies delay the payments to as much as nine months, some up to two years, while in-between these periods, they still give the small businesses other jobs to deliver on, sometimes on a monthly basis, thereby piling up the indebtedness. The small business owners claimed that when they are called to come and receive payments, they would only be paid for the earliest unpaid jobs, leaving the most recent ones untouched till a future date.

These small business owners resort to borrowing, both from banks, friends and from close relatives to continue to survive and deliver on new contracts while waiting for the big payday. These businesses access short term loans from banks, at high interest rates, to finance their operations and deliver on new jobs, while their capital is tied down in previous unpaid jobs.

The borrowings continue and before funds are released to the small businesses by these big companies, the repayment period for the loan had long become overdue, leading to sanctions from the banks. The delay in liquidating the loan and the high interest rate erode the profits accruable to the small businesses. It also lead to default in servicing debts owed banks and these small businesses get punished as, sometimes, the assets they used as collateral are seized or their businesses taken over.

Winding up processes

Today, it is stated that 90 out of 100 Small and Medium Scale Enterprises, SMEs, fail within the first five years of their formation, while 90 per cent of the remaining 10 commence winding up processes after the fifth year. The demise of these SMEs has been further worsened by the delay in receipt of payment for services rendered to companies. While the NOGICD law emphasized the need for companies, both in the public and private sectors, to give priority to indigenous firms, it did not envisage the crisis currently being faced by these indigenous firms in terms of payment for services rendered.

Specifically, the NOGICD law stated that: All regulatory authorities, operators, contractors, subcontractors, alliance partners and other entities involved in any project, operation, activity or transaction in the Nigerian oil and gas industry shall consider Nigerian content as an important element of their overall project development and management philosophy for project execution.

It also added that all Nigerian independent operators shall be given first consideration in the award of oil blocks, oil field licences, oil lifting licences and in all projects for which contract is to be awarded in the Nigerian oil and gas industry subject to the fulfilment of such conditions as may be specified by the Minister.

In addition, it said: “There shall be exclusive consideration to Nigerian indigenous service companies which demonstrate ownership of equipment, Nigerian personnel and capacity to execute such work to bid on land and swamp operating areas of the Nigerian oil and gas industry for contracts and services contained in the Schedule to this Act.

“Compliance with the provisions of this Act and promotion of Nigerian content development shall be a major criterion for award of licences, permits and any other interest in bidding for oil exploration, production, transportation and development or any other operations in Nigerian oil and gas industry.” Big companies have seen the lacuna in the Nigerian Content law and have started to exploit it, using it to frustrate indigenous companies.

Commenting on the issue, former President of the Trade Union Congress, Comrade Peter Esele, confirmed that he has a couple of friends who are facing this same problem, stating that the friends are no longer interested in doing any further business with the international oil companies, IOC, because of the issue.

In the case of the IOCs, he noted that one way the multinational companies get money out of Nigeria, making sure that their economy back home is growing, was to make sure that they give contract to themselves, and the money taken out of the country, thereby, ensuring that local businesses are not strengthened.

He argued that a closer look at the few small businesses that are thriving today would reveal that the owners are very well connected to either someone in government, the regulators or the big businesses. He said: “Who then will the local businesses go to and complain to? That is another big factor. The regulators, how powerful are they? Another aspect is that even if regulators are powerful, how patriotic are they? All these noise about local content, the few ones that are surviving if you dig deeper, you will find out that they very well connected.

“And in a civilized society you do not need any of that. The only thing you need is: how good are you? How competent are you? How can you deliver? If the local companies cannot go to court because they might end up spending another five years there and probably do not even have the money to go to court. So, who will come to their rescue?

“These are the problems businesses face in Nigeria. In other part of the world, everything is done to encourage the local companies, from employment to giving out contracts. You have to be the best in the world to go Saudi Arabia and get a job; and that job, there must be no Saudi that can offer that job before you get it.”

He further stated that in most contracts documents in the petroleum industry, the payment period is listed as within 90 days of the conclusion of the project. He lamented that majority of the companies in the industry do not abide by this clause without any sanctions.

To address this issue, Esele, who is also the former President of the Petroleum and Natural Gas Senior Staff Association of Nigeria, PENGASSAN, said the system and laws of Nigeria should be allowed to work, while anyone found culpable would be severely dealt with. He said: “Normally when you are given a contract in the oil company they will always tell you that you should expect payments within 60 to 90 days. If the contract is signed and states that you should pay in 90 days and you have not paid, in other parts of the world, they start charging interest based on those numbers of days. When you know that you have not paid and you will now start paying a certain percentage as interest, you will want to pay your money early and as at when due”.

Payments to contractors

Also, reacting to the issue of delay in payments to contractors, a source in LADOL, says most oil and gas companies do not deliberately delay payments. The source, who does not want to be named, said LADOL, for instance, has very strict guidelines and it pays its contractors and suppliers according to these guidelines.

Explaining while some contractors do not get their payments on time, he said: “Substandard or incomplete work by the supplier sometimes delays payment, because some of these oil and gas companies have a very rigorous compliance system. But most of our suppliers have been working with us for over ten years. We take care to mentor our local contractors and give them steady work so they can make investment and build their companies up alongside LADOL.”

In his response to the development, Executive Secretary of the Nigerian Content Development Monitoring Board, NCDMB, Mr. Simbi Wabote, stated that the Board is willing and ready to intervene in any case that is brought to the notice of the organisation.

In a response sent through the Director of Press of the Ministry of Petroleum Resources, Mr. Idang Alibi, Wabote said: “If you have any specific issue and the big companies involved, we can intervene.” Also speaking, a Professor of Petroleum Economics and Policy Research, and Director of Emerald Energy Insititute, University of Port Harcourt, Nigeria, Mr. Wumi Iledare, declared that it is unethical for any firm not to pay contractors on time for services already rendered.

Iledare, who is also President of the Nigerian Association for Energy Economics, NAEE, said: “This is so common in Nigeria. Contract sanctity is inconsequential in most cases. Unfortunately, there is not much you can do when government itself does not honour for the most part, simple rule of law.”

However, he said: “Regarding the National Content law, I am not sure there is a loophole to invoke to not pay contractors. Of course, there is need to review the law itself as demanded. No law or regulations affecting the petroleum industry should be perpetual. The industry is in constant restructuring mode.”

In addition, spokesperson for Nigerdock, Mrs. Hadiza Adukonu, said the company is also affected by the issue as well which had become a major challenge, stating that typically, the company gets projects and the clients pay it when it achieves certain milestones. Apart from handling jobs for oil and gas companies, Nigerdock also awards jobs to smaller contractors and suppliers and pay these companies for services rendered.

Adukonu noted that Nigerdock do not intentionally delay payments to its contractors, but ensures that payments are made immediately funds are available. She said: “Unfortunately, there are little or no projects and we have a facility we are running — our Snake Island yard. Whether or not there are projects, things like diesel band are needed. We have to power the facility, otherwise, the next option is to say, everybody, all the hundreds of people we employ should go home; we lay them off. That is another problem on its own.

“We have limited funds that we are managing to make sure that we can pay people salaries, because you know that employees are the most important. We do not intentionally delay anyone’s payment, let me just clear that now. Whether small or big companies, we do not intentionally delay payments. Even people, our clients, do it to us; they owe us money, and say they cannot pay us the money they owe at once, and ask us to agree on how they can spread the payment over a period of time.  If there is anyone, I would be very surprised.”

Responsibility for the delay

Adukonu added that in some cases, some contractors are responsible for the delay, as they usually forget to send their invoices to the company until after several months. She said: “There are people that actually forget to send their invoices to us. It is not until after they are through probing (investigating) the people or companies owing them that they actually come around to sending invoice for works they did last year. There are some that we get like that; that is after six months, nine months that they come around to send in their invoices. In some cases, they send it after about one year.

“Under no circumstances do we intentionally delay payments to other companies; that is a no-no for us. It is so funny that even the smaller companies are, a lot of the time, among the most important to us, because of the critical items that they are able to deliver to us in short turnaround time.”

However, she blamed the issue of delay in payment on the lull in the Nigerian petroleum industry, which she attributed mainly on policy inadequacies. She said: “One of the key messages for us is really that the oil industry is suffering. Some of it is beyond our control, when you look at the oil price; but others are within the control of the government; when you talk about policies, policies that would actually encourage the companies, the producers to invest.

“That is essentially what it is. If the producers are not investing, then people like us are not getting work, because it is the investment of the producers that feeds us. They want to build infrastructure, they want to repair, optimize, they call on us to do that. But when the environment is not friendly, if the systems are delayed, whatever it is, it does not help us as well. It is just the industry lifecycle.”

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