Teriba: Stop talking about expected oil revenue, turn to your idle assets

Dr. Ayo Teriba, the Chief Executive Officer of Economic Associates, is the Coordinator of the Technical Working Group (TWG) on Financial Sector and Capital Markets on National Development Plans MTNDP 2021-25, MTNDP 2026-30 and Nigeria Agenda 2050. In this interview with CHIJIOKE IREMEKA, he spoke on the burgeoning challenges of NNPC’s new status and how the nation would address it, and leapfrog from these concerns, especially the financially non-viable states.

There has been a gap of information on what the Federal Government intends to achieve with the new NNPC Ltd; and how the states would keep afloat amid dwindling revenue without agitating for resources control and derivations. If the states have to wait for NNPC’s dividend on yearly basis, what do you think would happen?
Well, the Nigerian government has adopted a very long process and a long descriptive for describing what is happening to NNPC. But in a very simple approach, NNPC is transited from being a state-owned company that is run more like a parastatal to a private company. It transited to the market as a company that would be run like a normal private company. The fact that the company is going to be listed on the stock market means that the government will allow the market forces to determine the value of the company.

The basic reason companies go public is to establish the market value of such companies. Asset – whether land, house or a company – can be grouped into two major categories: The financial and non-financial assets. If you know the financial value of an asset, it’s a financial asset, but if you do not, it is a non-financial asset.

So, as it stands, NNPC and other companies owned by Nigeria are nonfinancial assets. We do not know their market value; the values of their stocks price are not defined. So, at the point that they get to the market, we need to do an initial public offering (IPO) to establish the value of their shares and the market price must involved third party claim; somebody must be willing to buy it at the stated market price. You can’t establish the value of a company if the government continues to hold 100 per cent shares in that company. That is the reason a company like Saudi Arabian Aramco only issued an IPO of 1.9 per cent, and 98.1 per cent still belongs to Saudi government.

Aramco has been listed to the market and open to market scrutiny and discipline. But only 1.9 per cent of it shares has been privatised; 98 per cent is still state-owned. Even if we do an IPO of 0.001 per cent, to make it 99.9 per cent state-owned, you are no longer going to be able to operate like a bureaucracy; you will now be regulated by detects of the market.

You have to comply with the disclosure requirements, the transparency requirements of the checks and balances imposed by the market, which tends to make companies in most part of the world more efficient, because the market will demand that all precautions be taken, all grounds covered and that is in the interest of any company. Hopefully, the years of inefficiency that NNPC is known for would come to an end.

Many Nigerians are not comfortable with the level of transparency the Federal Government has shown in dealing with the new status of NNPC. Why would a serious government pronounce the change of nomenclature of NNPC in 2022 and wait till June 2023 to surrender it for market scrutiny, that administration is no longer in the office?
Like I said, hopefully, the years of inefficiency that NNPC is known for would come to an end. But then, the only bit of problem some of us have is why should the government wait till June 2023 for the NNPC’s IPO? That long dated looks like procrastination and there is the risk that it might be derailed, because the government that is making the pronouncement will no longer be in the office by June 2023. So, if the government of the day meant business, it should have made it happen in the life of this administration. We hope that the government that would be elected in into office by February next year would buy into that sentiment and agree to go that route.

If you have been in the office for the past eight years and you have not surrendered the company to market scrutiny and transparency, why are you now saying that the NNPC would be surrendered to market scrutiny and transparency just after you have gone? So, to me, I don’t understand why such. Any serious government will do it in the life of that administration.

Resources within states are exploited and held on trust by the Federal Government on their behalf, which informed monthly revenue sharing among the three tiers of the government. Now that remittances from NNPC Ltd won’t come on monthly basis anymore, how would the nation manage issues that would emanate from it?
Okay, I have already said that Nigeria is following the example of Aramco. Saudi Arabia is an oil producing and dependent country, even more dependent on oil than Nigeria. Saudi has traveled that route. Of course, if Nigeria wants to retain its major ownership of the NNPC, it will not only going to be converting the sales of NNPC, but also the shares of the NNPC. You can’t treat the NNPC as parastatal again; it’s now a company. You can’t treat NNPC as a department of government, where all the money made is remitted to the Federation Account on monthly basis; that has to stop. NNPC is now a company of its own and you need to allow it to live it own life.

For the states to have something to share, you have to wait for the company to declare profits before you can get a dividend to do whatever you want to do with your dividend. The shares of the government are still owned by the federation account, as well as the dividends, but the problem is, can you wait for one year before you receive dividend from NNPC when it’s declared?

The other day, the Minister of Finance, Zainab Ahmed, said that an arrangement could be worked out where dividend can be remitted, maybe, monthly or quarterly if they agree, but that needs to be seen. What has worked in the case of Saudi Arabia is that the main benefit of listing Aramco in the market is the feeling that the company upon listing worth $1.7trilion. So, prior to the listing, if you look at the balance sheet of Saudi, Aramco was just a non-financial asset; you don’t know its value. But suddenly, $1.7 trillion appears in the balance sheet, which has also increased to $2.4trilion after the outbreak of Russian-Ukraine war. So, you now have in Saudi, one company worth 2.4trillion sitting on the balance sheet. Saudi GDP is over 800billion. You now have this one company three times as big as Saudi’s GDP. Aramco announced the policy that it will be paying out dividends of $75 billion annually. And out of that $75billion, 19.1 per cent of it is remitted to Saudi government. So, somehow, it has created a fiscal guidance that you expect revenue of $75 billion. That’s a plus.

But the Nigerian government announced revenue of N10 trillion. How much is that in dollars? As at the time they announced it, it might be $20 billion, but we all know that they are not going to get half of that in revenue, especially with the exchange rate they were using to draw the budget. They are not going to get half of $20 billion. So, if Aramco is promising $75 billion a year, it’s a lot. With that expectation, both the Saudi Arabian government and the Aramco itself begin to raise Sukuk abroad against the Aramco shares and the expected dividend of Aramco. They are not raising the dividend of oil exports or sales altogether; they are securitising the asset value of the company.

So, the point is, when the NNPC disvalues its market, we will then have to look away from the sales of oil as revenue because that no long belongs to the government, that belongs to the company. The listing would have established the value of the company and to whatever asset we still own in the company and how many percentage IPO that they are going to own. But whatever portion they own, that will also be giving forward guidance to the market and say we will be giving certain amount in dividend annually, usually stated in dollars, because oil business is a dollar business. So, that will give the fiscal authorities something to work with and may not have to wait until dividend is declared to issue securitised bonds using the market value as the leverage.

So far, that has worked for Saudi Arabia. They issued securitised bonds and most of them are Sukuks; they don’t pay interest on them. It’s not a burden on their budget, just as we are paying interest now because our debts are not securitised. So, going to the market will now help us to know the asset to tie our debts to.

From what you’ve said, what danger does an undefined revenue expectation portend for the country? Would this force the states to agitate for control of their own resources?
Until the company’s value is known in the market, you can securitise it. Nigeria has no prior example of a company that has a market value; even the Nigeria LNG Limited, it doesn’t have a market value. It’s a joint venture, but its market value has not been established. So, you have to list publicly and let the market determine the value. I don’t see why this would lead to agitation for resource control. In any case, the clamour for resource control or may be, what you are saying is that the government has conceded the 13 per cent derivation to the oil producing states. I guess that would be applicable to the sharing of the dividends from the NNPC since it does not remit outright anymore.

But then, that is subject to debate, because when you were basing it on output and sales of output, it was based on derivation, but we are now talking about a dividend from a company. I don’t know if the same would be applied to the dividends, but I guess. If you apply that 13 per cent to the portion of the shares owned by the government, you can also extend it to the 13 per cent of the dividend received by the government. I probably think that is the route they would take.

Well, I don’t see the NNPC transiting to the market as a problem, though it has opened the doors for debate. But the problem I see is that you have been receiving remittances from NNPC into the federation account and you have been sharing on the monthly basis, using the revenue allocation formula in the vertical and horizontal (across the states) that includes the vertical (derivation). But we have said that in the new dispensation, monthly revenue will no longer be remitted. What will now be remitted is the dividend. This could come quarterly if they agree or monthly basis, but it could also be securitised and this is the angle that I want us to deliberate upon. It will be the war on securitisation and not resource control and derivations.

What exactly do you mean when you talk about debt securitisation and how would it help the country wriggle out of this current economic quagmire?
If the government securitises its debts, it will be easier to plan. It means that if it’s known to the world how much the NNPC will be paying in dividend annually, then the fiscal authorities soar and plan with it. They can say $75 million annually, but I don’t think NNPC will ever pay $75 billion annually, because it’s only a firm that is valued above $2trillion that can boast of $75 billion. But if it is $20 billion or $10 billion that NNPC is promising, it means that instead of struggling to issue $1billion debt today or $1.5billion debt tomorrow in Eurobonds, Nigeria will have a stronger proposition than to approach all the Eurobond markets where IOUs are used and issue a promissory note against the expected income from the oil income.

That can’t fly anymore, because you won’t be getting the income any more.
Of course, the monthly income is not there again, so what you will be getting is dividends at end of the year. What will fly is that you have to issue securitised debts like Sukuks or conventional securitised debts against our shares in NNPC.

Now, the Federal Government does not own those shares anymore, they are owned by the federation. So, the problem here is how the share revenue will fair. If you now issue Sukuk or bond security based on the share that it owned, how do you share it across the state? Do you now begin to get allocation formula or what? Are you going to adopt debt allocation sharing formula or what? This is going to be a tricky one, because I have always felt that it is not fair to the state that the Federal Government has more advantageous access to debt market than states. We all get the revenue at the same source; we all receive money from the federation account, so, your revenue prospects are the same. Why would the Federal Government be able to issue bonds and treasury bills at wish, but the state cannot?

So, if Nigeria wants to leverage on its shares in NNPC to issue Sukuks or securitised bonds, how would the proceeds of that bond be used? It is going to be used exclusively by the Federal Government, or when the proceeds of the bonds are in, you apply a revenue allocation formula to it? It’s a puzzle. This can be an issue. I don’t think the problem is going to be derivation, I think the issue will now be a war on securitisation where you don’t wait for your dividend to come before getting the discounted present value in the market.

How will that be done, as the dividend in question is owned jointly by the state, federal and local governments? My question is how will they deal with that? I am not giving an answer to this; I’m throwing up an issue that the nation will have to address. And if you have to treat it the way you treat revenue, perhaps, any time the FG approaches any debt market, home or abroad, it has to do that on behalf of the federation and therefore apply revenue allocation to it. State doesn’t need to apply for their individual treasury bills or bonds. So, it’s not going to be issued as FGN bonds, it’s going to be federation debt bonds.

Since the dividend is most likely not to come on monthly basis, as was the earlier position, how would financially nonviable states deal with this situation?
Well, the development will not excuse any state from looking inwards. The bulk of the fortunes of the state lie within the states, but they are neglected. So, the major message to the states is that the states will do well to follow the example of what the Federal Government is doing with the NNPC by listing their own companies in the market to establish their market value and to establish some transparent dividend guidance from those companies. They should also be approaching the global financial market to issue Sukuk and securitised debts against the asset value of their companies.

Right now, the states are not buoyant becuase none of them has company that is listed in the market. You own companies and you do not know the asset value of your companies. And as long as you don’t know the assets value of your company, the market value of your company is deemed to be zero. So, you see the list of your companies in balance sheet, but the value of your company, you don’t know. You are committed to writing the historical value that since the value of a company in 1970 is 2,000, pounds at a time, by now, it should be 20,000 pounds. That is not so.

So, the poverty of the state came from the fact that they neglected to establish the value of their corporate assets. Once you list companies in the market, it unleashes their productive efficiency. While you are sleeping, the market is putting them on their toes and the benefit is yours and no company will go and declare lost. If you declare loss, the market will penalise you. As matter of fact, the market doesn’t wait for you to declare loss. For the matter of fact, the market will make some noise that makes you not to declare loss.

So, the states should not sit back looking for money from NNPC dividend. States should list the companies that they own like the FG is treating NNPC, that is the recommendation number one. Recommendation number two is that even where you don’t have existing companies, the idea behind companies are mere special purpose vehicles for exploiting assets owned by state or private individuals.

So, look at the sources of wealth that your state is sitting on. For examples, your central business areas or inner cities areas, which are the residential areas, or your transits routes and bus stops… I don’t know any state or city in the world that doesn’t make a fortune from its rail stations, or buss stations and rest of them. It’s here that you build rail stations and walk away, allowing street traders to be selling to people in traffic.

So, let state be more conscious that those economy hotspots that I mentioned, are gold mine they could go and grow companies in order to unlock the values in those places. Those companies would secure the value of those places; it will make the places clean. Even if you are running a city centre, it will be like the person that is running a mall. The moment they open them up, it was an idle land before you opened them, but you have made it a place where value is extracted on the 24 hours basis. You can turn more potential bus stations and rail stations into places that look like malls, just like when a five star hotel takes an area of land around this wealth creation centres. State can do that rather than just sitting down and waiting for money from NNPC.

Currently, the FG appears to be taking more from poor states than giving. How does the FG want these states to survive without strangulating the masses with multiple taxes in an era where there is genuine clamour for power devolution? State cannot generate power without depending on the FG. How do we get out of this?
Let me correct an impression that you just created. I said that the states currently tend to spend money on the motor parks, on market places, bus stops and rail stations rather than make money from them. They spend money in the city centres rather than make money from them. And I said, if they make those places a bit more organised, secure, and clean, they can be making money from them in the same manner that the private companies are making money from malls, five star hotels and from decent residential estates.

The distinction is that, if we can move away from the disorderliness that rules public place now, to more orderliness places as we have in most other places of the world, where such centres attract revenue for the states. Dubai thrives, because it is orderly; Lagos does not thrive because Lagos is disorderly. You don’t have Area boys springing on you in Dubai; you won’t have traffic robbery in Dubai, you won’t have the bandits jumping out on the road in Dubai and you won’t have herdsmen having a field day in Dubai. These are all public spaces and if the government can eliminate these entire nuisances in all these places, the value created in those areas would be increased. And that is not taxation.

The orderliness of Dubai makes people all over the world to see Dubai as way to go to enjoy welfare. Every state has the potential to turn the city centres to such a revenue-generating centre. I don’t know any local council where people want to hold a seminar or conference and they will go there and pay. We all will go to privately owned event centres and pay. So, why is our state crippled to the point that they can’t even have health centres that rival the ones done by private sectors or have the hotels that rival the ones by private?

The state doesn’t have to run them. All the state needs to do is to create special purpose vehicles, create companies listed in the market like the FG trying to list NNPC in the market to handle them. So, you can create a company and list that company in market and it will be paying you dividend. That is not taxation.

So, the citizens that will want to use the facilities like Eko Hotel pays like N6million per day to use the hall, but you don’t see it as taxation; you get value for your money. But there is no state government or Federal Government that owns such a company. We, the private citizens, go and pay those private companies for those benefits and federal and state government follow to do it; they spend state money on them.

So, that is the suggestion I just made that you can get non-tax revenue optimising your assets. Why am I going to Eko Hotels and Transcorp? Because they will not snatch my phones there and nobody is going to point a gun at me. So, if government makes their own spaces safe like in any central business centres, not as a mall controlled by the government, under serious bureaucracy, but controlled by a listed company in the market, it will make more money for the government than oil.

The states don’t have to be waiting for the remittance of oil dividend from NNPC. This is how states thrive in other world. Unless you have a company listed in the market to make sure that those businesses work, you cannot optimise. I think I should make that clarification.

Currently, the country is facing serious challenges offsetting her debts. In fact, the Nigeria’s debts have outgrown its means of repayment, how do we survive this single economic stroke of multiples consequences?
Okay, this is the problem with the Nigeria’s debts. Historically, Nigeria has been beneficiary of commodity boom even in pre-colonial times; we were dependent on the agricultural exports. For instance, when the price of cocoa boom, in those days, we made instant millionaires out of farmers, but when the prices went down, it forced them into liquidation. It’s not just in the pre-colonial Nigeria, but also all over the world. The farmers become rich when the commodity prices go up and they are forced out of the business when the prices go down.

Nigeria as a country has kept that primitive model. But it’s no longer agricultural wise; it has been extended to oil product. So, when the price of oil goes up, we prosper and whenever the price crashes, we crash with it. Unfortunately, our debts have been tied to our revenue expectation. The only type of debt that Nigerian government issues are promissory notes or IOUs against revenue expectations, and when the revenue collapses, that becomes junk bonds; the people doubt your ability to service it and therefore would ask you for the highest possible rates before they can lend you money. That’s the issue with the country currently. Interest on the principal is high and our expected revenue cannot match it.

The alternative way of borrowing is what they referred to as investment grade bonds, which is the independent of the ability of the borrower to repay; it’s dependent on the ability of the underlying asset to repay. So, Nigeria currently does not have any investment grade bond and any bond that is below the investment grade is called junk bond. So, you can see that Nigeria debt portfolio is 100 per cent junk; it is just a promise to pay without being sure whether the revenue prospects will be realised. And unfortunately, we started from promissory. The interest rate you promised to be pay is small fraction of your revenue, but the revenue has been declining over time and interest commitment has been rising over time that the interest commitments are now raised above revenue expectations in 2022.

So, that tells you that you should stop issuing promissory note against the declining income and you should stop writing IOUs; you have written more IOUs than your salary can carry. That doesn’t mean that you can’t raise debts, it means that you can only raise investment grade debts. You can’t go and say, ‘lend me until I get my salary,’ because you have borrowed more than your salary can cover.

But you can say, ‘look, I have this idle asset, come and invest in it for a period of time.’ So, it’s like you have a land that you want to lease or you have a building that you want to lease. So, they will give you money and use the asset in return for the money. So, when they are giving the money, it’s debt, but it securitised. You are releasing the land or the house for them to use for the next five years and that is like renting your house out, and they will never come back to you and say give us back the money. He will use his money value and your assets remain for you.

So, that is what we are talking about when we say securitisation. Nigeria is walking out of that by listing NNPC in the market. That is what the Saudi and Malaysia are enjoying today. They are borrowing more than Nigeria, but it is not interest-burden for them, because they are issuing Sukuks; you don’t pay interest on Sukuks. The investors have to patiently wait for dividends or profits.

So, the way towards the government revenue sustainability is to turn to assets, determine the market value of your assets, like we are trying to do with NNPC and that is what I urge the state to do with any asset that they own. And the way to debt sustainability is to tie debts to assets.

For example, if you look at Aramco, if Saudi was tying it debts to its GDP, it won’t work, because its GDP is just $800 billion. There is the limit to the debt it can issue based on its GDP, but it has a company that is $2.4 trillion. So, its debt sustainability is determined by the value of its assets not by the value of its GDP. So, if you own just one company that is 300 per cent of your GDP, if you borrow 200 per cent of your GDP, your debt is sustainable.

So, the solution to the declining revenue is stop talking about taxing anybody, stop talking about expected revenue from oil, turn to your idle assets and extract non oil and non tax revenues from them. Again, the path to this debt sustainability is stop issuing IOUs; begin to issue investment grade debts because the IOUs are the most expensive type of debts you can issue. Investment grade debts are the cheapest type of debts that you can issue. A word is enough for the wise.