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Internally generated poverty

By Pat Utomi

I am sure we have heard the news. Forbes thoroughly slaughtered Nigeria as an investment destination, naming our dear country as where to go if you really want to lose money. After the damage from two major studies in 2018 that left us with the label of the poverty capital of the planet, with a desperate need for investment capital to help turn things around, this is a sucker punch. Forbes dubs Nigeria Africa’s money losing the machine.

Prof Utomi

I was inclined to look past the report and say nothing. The reason, the passion to correct, and the fervour for Nigeria’s renewal leads to comments that sometimes seem to point to things not so palatable. With that, there is danger of being seen as a prophet of doom. No true citizen or patriot desires that label. So I was going to pass on this; even though in some way, such a choice is reverse treachery, for anyone truly committed to the Common Good. But playing in the Public Sphere challenges everyone with hard choices. So I was going to vote for silence, with its troubling outcomes. But I remembered my favourite prophet, Amos, and I wondered what that prophet of Social Justice would do, and I reversed myself.

The greatest risk of doing Business in Nigeria

Part of the reasons I did so is because my sense is so strong, from experience of an intimate following of the Nigerian Development experience for nearly 45 years, that I feel strongly that if we fail to confront the hard issues again and end up with superficial efforts, we celebrate as progress, the consequences could be cataclysmic. Nigeria just simply cannot afford more band-aid (plaster) on a deep cut. The Forbes finding comes from fundamental problems with our institutions and popular culture, and exercises around the ease of doing business, will not resolve the problem.

To run from sounding intellectual, let me illustrate with personal experience as a Business Angel involved in many Business Start-Ups and as a serial entrepreneur who believes in testing out just about everything he teaches, in the field.

I wrote a book,  Business Angel as a Missionary chronicling a small part of those experiences of ventures I helped found. So when I say that the greatest risk of doing Business in Nigeria is not a market risk but regulatory risk and the general attitude of the government to business I talk from experience. While few in positions of Authority in Nigeria may deeply reflect on the consequences of the MTN saga of recent months on the perception of Nigeria as an investment destination I can speak to personal consequences for my own experience as a citizen in some decent standing. Was I not of a certain die-hard on wealth creation I would not be embroiled in green fields Agric/Industrial town project  I am currently developing in Edo and Delta states and settled for using my networks to extract rent from the system?

In 1994 I co-founded the company that got Nigeria on the Internet, Linkserve. When I was making the pitch to investors, presenting the Business plan, at dinner at a Victoria Island Restaurant, one of those potential investors, Erastus Akingbola, in an honest comment said the project carried big risk. It would be leasing EI lines from NITEL. That parastatal, he thought, could just wake up one morning and pull Linkserve off the plug. I was rescued by Tunde Dabiri who said there could be ways of mitigating that risk. We raised necessary monies and inspired a quantum leap in value creation with the founding of the firm. Within weeks Akingbola’s fears came to pass. But we were lucky to mitigate the risk first time out. To compare that experience with that of Israel as reported in the book  Start-Up Nation by Dan Senor and Saul Singer tells the story.

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Having a significant stake in a foremost technology company that should be worth a few billion dollars today should be a due reward for effort. But a variety of ethical, and regulatory issues have left me holding zero today from that effort.

When I teach the role of institutions and entrepreneurship for economic growth I often turn to the work of Raghuram Rajan and Luigi Zingales in the book  Saving Capitalism from the Capitalists. They show well how the US environment better sustains the process of creative destruction which disrupts but sustains economic advance. Their truth comes so clear in my own venture in financial services.

I had for years told students that the problem with institutional growth in Nigeria was the way Africans relate to being in authority positions. To give a uniform of authority to most in Africa was to make them bullies instantly. Just watch the policeman, soldier, LATSMA person, etc deal with the public. I told them for years that Douglas North’s book on Institutions, Institutional Change, and Economic Performance shows how interested parties engage for the evolution of institutions. The problem, I often charged was that stakeholders were often shy before power in Nigeria. I even sometimes suggested as the root of the problem the fact that in more mature countries the powerful founded government and thrived on legal plunder which then had to be checked by instruments of governance while in decolonized society’s government patched together by colonials predated local wealth and entrepreneurship. So the government is presumptuous and abusive of citizens’ rights and the evolution of governance is on how to contain that.

Here government came first and becomes the first mover, making its Authoritative allocation of values the source of wealth and privileges.

My becoming involved with ventures in financial services

My becoming involved with ventures in financial services would reveal to me how right Douglas North and my admonitions, both in class and in my book,  Managing Uncertainty – Competition and Strategy in Emerging Economies,  were.

First, there was Lead Merchant Bank. Oba Oladele Olashore of blessed Memory had invited a few friends to invest in the venture. I borrowed and mortgaged assets to be part of what would be a sturdy small investment bank delivering value. That would be my retirement nest.

All seemed to be going well until CBN decided that size was the problem. A new capital base of N25 billion was set. I was away in Barcelona at the World Expo when I heard the news. From there I wrote an OPED piece critical of the Chukwuma Soludo one size fits all solution, citing a few British Banks that were up to a hundred years old but serving just a few customers alongside multi-billion dollar High Street Banks. But few stakeholders spoke up. They felt intimidated by the regulator, the way citizens are frightened by men in uniform. It was probably only Atedo Peterside and I that publicly expressed dissenting views. That error has become a model for regulators in Banking, Insurance, and other sectors where virtue is found in not consulting stoutly the stakeholders. The Insurance sector is currently battling that again.

At that time I was trying to cash out my Lead investments because I had invested in a small finance venture that I had helped through the metamorphosis into Platinum Bank which I served as Chairman.

As the merger game played out, Lead Merchant Bank was left stranded and more than N200 million became nothing overnight. That money would probably be valued at a billion Naira or more today. Nobody cared what happened to investors who did nothing wrong. The World including foreign investors watched all that, and we want them to invest here.

Then Platinum Bank merged with Habib Bank and continued as Bank PHB. In 2008 US Banks in overreaching themselves created the subprime crisis.

But the US system was deliberate to avoid a systemic crisis with Main Street, bailing out Wall Street. The case of AIG is more telling. But we, who were shielded from the speed of contagion by limited integration into the global economy and the Obasanjo savings which buffeted what ripples may have been felt. Then step in the regulators with imitation stress tests. By the time they were done playing like Policemen on the country roads of “occupied” Eastern Nigeria or the South East States, and going after those they did not like, they had halved the value of the Nigerian Banking system. As one PWC USA consultant speaking at the Wharton Business Club in Philadephia put it, they had done more damage to the Nigerian economy than he had ever experienced in unforced ‘self-inflicted harm’ anywhere. In the case of Bank PHB, it was a brazen effort to “snatch” or steal a bank. This Bank robbery happened before a cheering media and Community of Bankers. Those spared the bullying said nothing and whispered in their bedrooms that ok banks were taken over and some terrible ones let go. But the world saw the damage to Nigeria.

Need I add my venture into Food produce retailing. Working with a South Africa Food lovers retail franchiser, Fruit and Veg City, we began to develop a model outlet in Lagos with space leased from OPIC plaza just by Sheraton Hotel. It was a BOT scheme. With much work and more than 180 million Naira deployed on construction and market development from 10 years ago, uncertainty bared its fangs. Ibikunle Amosun arrived on the scene as new Governor. For no reason ever offered and at reputation damage in excess of a billion Naira he stopped the project along most approved during the tenure of Gbenga Daniel.

When people educated as Accountants can violate property rights so brazenly no one should be surprised at the Forbes classification of Nigeria as a money losing machine.

Imagine all the foregoing as only part of the experience of one entrepreneur. Aggregate the damage to the economy of this phenomenon I referred to in my 1998 book, Managing Uncertainty, as the predatory acts of public officials.

I had borrowed several hundred million nairas to increase my stake in the bank and ended up with zero value in my portfolio within a few months. In many countries, those kinds of outcomes result in mass suicides. Not many returns to such an investment destination.

All these at a time when it is clear that Nigeria must produce or go into economic meltdown; and when capital flows into the economy are critical for that. Nigeria needs capital to produce but even if oil was on top performance our budgets could not drive needed investments.

In 1996, at the heart of Afro-pessimism, I participated in the Europe-Africa Summit hosted by Aspen Institute, France, in Annency. The theme was ‘Africa must Produce or Die.’ In much of my writings, I have tried to make the point that cash flows, such as from Oil revenues, never really make a people affluent. My typical explanation was the lottery effect as seen in how a poor man who wins the lottery returns to poverty after a season of splurging, tells the story.

Nigeria must produce or die

I believe that Thomas Sowell in ‘Wealth, Poverty and Politics’ does a better job of articulating that phenomenon than I have done. Nigeria must produce or die. But how does Nigeria produce?

Our institutions are anti-production in their mode, our financial system is designed for trading and economic rent extraction and not production and our infrastructure makes producing a nightmare, whether it be power, road or rail transportation. As the French Economist Thomas Piketty shows the world has never had so huge a stock of capital due to Globalization. But he laments that they are in few hands. For me, that could actually be an opportunity rather than a threat. It means that if we dress well before those few we will receive the capital needed for a growth surge. The way Nigeria dresses up turns its possibilities to the other end. To produce and grow Nigeria has to rebuild its institutions and rebuild the collapsed culture.

To begin to seriously produce, you need value chain champions organized as a college of obsessively focused change drivers, on the policy side, and true wealth creators rather than celebrity-wannabe Bankers more interested in siren-escorts than in customers who create wealth.

A cultural revolution that celebrates output that bridges dissatisfaction gaps and not one that puts more cash in the pockets of economic actors like profiteers from structural distortions in the economy, will power this change of direction towards sustainable development.

The bottom-line is our current order can more deepen internally generated poverty than internally generated revenue from production output. With investments aimed at the social sectors to boost input into production, like with education and healthcare,  TheGreat Escape from the misery that the Nobel Prize-winning Economist Angus Deaton celebrates, can more quickly be our lot.

*Pat Utomi, Political Economist and Professor of Entrepreneurship is Founder of the Centre for Values in Leadership

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