In April 2017, the President of Nigeria launched the Nigerian Economic Recovery and Growth Plan 2017-2020 (ERGP). The oil price slump has had a significant impact on the Nigerian economy. Previously healthy GDP growth has turned negative and there has been a significant rise in poverty and unemployment. The ERGP documents the Nigerian Government's medium-term approach to rejuvenating the economy by stimulating economic growth through diversification of the economy. The ERGP is built on three objectives:
- restoration of sustained inclusive growth;
- investment in the Nigerian people; and
- the building of a globally competitive economy.
The document is admirably detailed in its scope and objectives. There are no less than 60 separate strategies listed and a simultaneous focus on another five execution priorities. Needless to say, it will only be when the Government starts to take positive action that investors will be able to see what real-world impact the ERGP will have.
That said, it is clear that, notwithstanding the seemingly detailed plan, the starting point to making the ERGP a success lies in recognising that statutory and regulatory changes are required and that political will and detailed publications are not sufficient. Thankfully, the Government seems aware of this and is taking action in this regard.
The success of the ERGP will largely depend on how well the private sector can shoulder the responsibilities that the Government is demanding from it. This article will focus on the implications of a number of the key activities and some of the recent actions that have been taken by the Government towards realizing the objectives of the ERGP.
VAT and other indirect taxes to rise
The ERGP has an emphasis on the Government sector cutting costs and increasing non-oil revenue through improved tax and customs administration. Nigeria is said to have one of the lowest tax to GDP ratios in the world at just 6%. The 'big ticket' item is an increase of the value-added tax (VAT) on luxury items.
The ERGP does not define luxury items but the past administration had listed some items that were to be taxed as luxury goods to include champagne, alcoholic beverages, private jets, luxury cars based on engine capacity, and yachts. The VAT on luxury items will increase from 5% to 15%.
This discussion is likely to include a review of current tax incentives and waivers with a view to retaining concessions, waivers, tax breaks and zero duties (on imports) for strategic and priority sectors (agriculture, manufacturing, solid minerals, services, oil and gas, and construction and real estate).
In line with this thinking, the Government, in August 2017, issued a revised list of eligible industries qualifying for a tax holiday under the pioneer status incentive regulations. 27 new industries were added to the list while 2 industries (mineral oil prospecting and cement manufacture) were removed. As expected, the revisions reflect the priority sectors of the ERGP and the Government's agenda to diversify to non-oil sectors including entertainment and IT.
The ERGP also places emphasis on improving taxation administration and collection and the use of improved technology to close collection loopholes. As part of Government's efforts towards this, effective from July 1, 2017 until March 31, 2018, taxpayers can voluntarily declare previously undisclosed assets and income. Those who choose to do so are assured that they will not be charged penalties and interest on unpaid taxes and that they will neither be criminally prosecuted for tax offences nor be subject to tax investigations.
This is a step in the right direction which, if combined with efficient enforcement of tax regulations, can help achieve the objective of recording higher levels of tax compliance.
Partial Privatisations of Oil Assets
Oil is Nigeria's biggest Government revenue source. As at 2015, according to OPEC, Nigeria had estimated proven crude oil reserves of over 37 billion and estimated proven gas reserves of 5.3 billion. In implementing the ERGP, the Federal Government will also seek to increase revenue from oil assets.
It intends to do this by gradually divesting its share in joint venture oil acreage assets and ultimately privatising other select oil assets, such as pipelines and storage assets and perhaps also seismic data. It is expected that there will be short-term revenue increase from the proceeds of the consequent sales, and long-term from the more efficient operation of the assets by the private investors.
In the past, the privatisation of oil assets process has proven to be controversial. This is because privatisation of government assets has so far been restricted to assets specifically listed in the Public Enterprises (Privatisation and Commercialisation) Act (the "PE Act"). Privatisation of any asset outside of that list necessitates an amendment of that statute. The Petroleum Industry Bill creates a statutory mandate (outside of the PE Act) for privatising oil assets but a clear framework for privatising these assets is still required.
The ERGP also talks about liberalising the downstream sector. This essentially means complete removal of state regulation of fuel pump prices. Local refineries are non-functional and most (if not all) of the locally consumed petroleum products are imported and sold at prices set by the government.
Investors have been wary of investing in the refineries because it is believed that such a venture will be unprofitable at the current regulated fuel pump prices. It is hoped that a complete liberalisation of the downstream sector will encourage investors to invest in reviving the local refineries or in building new ones.
These strategies would be of great advantage to the business sector in Nigeria and, if done well, could potentially lead to a huge wave of investment in Nigeria's oil sector.
Privatisation and Concession of Non-Oil Assets
The Federal Government also expects to privatise non-oil assets. This is a very sensible move as the government has a number of valuable assets, such as industrial parks and transport sector infrastructure like railways and trailer parks. These types of low risk, stable return assets are viewed favourably by investors and would provide the Government with capital to allow investment in some of the other ERGP priorities. These assets will then also probably benefit from a more focused and professional management which should increase efficiency across the economy.
To pave the way for the commencement of the privatization process, in June 2017, the Government inaugurated the National Council on Privatization (NCP). The NCP has authority to approve assets to be sold and the frameworks for such sales.
An official list of public assets to be privatized is yet to be released but assets previously reported as likely to be sold or concessioned include part of the Government's shares in the Africa Finance Corporation, the railways lines, the airports and perhaps the presidential air fleet.
The transport sector has seen two major concessions in this year alone. The Government selected General Electric as the preferred bidder in respect of the concession of two (2) narrow gauge lines in Nigeria. The concessions of the Lagos and Abuja airports have also been approved by the Federal Executive Council.
In addition, a Public Private Partnership Regulatory Commission Bill, 2016 (the "B") is to be enacted to, among others, give the Government the liberty to grant financial incentives or investment support to approved PPP projects. There is an overwhelming consensus that the enactment of the Bill will go a long way in attracting and facilitating private investments in public infrastructure.
Increased Credit to Industry
The slowdown has had significant impacts on the availability of credit within the Nigerian economy. Nigerian banks have discovered they have a large book of poorly, or non-performing loans and this has made them reticent to lend. The ERGP envisages Government intervention in the financial sector to improve credit to the private sector. This strategy is multi-pronged and linked to supporting priority industries.
For example, in relation to agriculture, it involves the recapitalisation and re-orientation of the Bank of Agriculture to enhance credit access; the strengthening of the Central Bank of Nigeria's several agricultural credit schemes; and the encouragement of the private sector to develop and support investment products such as agribonds as strategies for agriculture.
In the manufacturing sector, the capacity of the Bank of Industry will be enlarged, and access to loan schemes – the CBN MSME scheme and micro loans for women – will be simplified. The enactment of the Credit Reporting Act (CRERA) and the Collateral Registry Act (CORA) in May 2017 may have set the pace for the much-needed development of credit infrastructure in the country.
Generally, both legislations aim to improve access to credit facilities. Specifically, the CORA will facilitate lending to MSMEs by regulating the use of movable assets as collateral, while CRERA will help lenders make informed decisions on the grant of credit to certain borrowers based on the information in the databases of credit bureaux.
It is our view that the current regulatory powers of the Central Bank are insufficient to achieve all of the goals that are set out. It appears that both the regulatory powers of the Central Bank and the range of financial products permitted by securities laws will need to be broadened. This is long overdue and, done well, will help modernise Nigeria's financial systems regulatory regime.
There is a huge amount of work to be done if Nigeria is going to see the benefits that the ERGP touts. If the Government can succeed, then this will be seen as a turning point in Nigeria's history. The ERGP sets out such an ambitious program – impacting almost every facet of how Nigeria is governed – that it is easy to be cynical about the chances of success. Nevertheless, it is our view that, even if only a proportion of the ERGP's goals are achieved, conditions will be improved.
*This article first appeared in the July 2017 edition of ALN's Legal Notes. It has since been slightly updated and is reproduced with the kind permission of the publishers. ALN is an alliance of independent top-tier African law firms.