Home Project-material CORRUPTION IN NIGERIA’S OIL AND GAS INDUSTRY: EXTENT AND MACROECONOMIC IMPACT, 1981-2014

CORRUPTION IN NIGERIA’S OIL AND GAS INDUSTRY: EXTENT AND MACROECONOMIC IMPACT, 1981-2014

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Abstract

Typically, the nexus between the oil and gas industry and the economy has evolved from the Dutch Disease literature to the resource curse literature. However, at the core of the relations is the issue of corruption. The various reports into corruption in the upstream and the downstream by the House of Representatives (2012) and the nonpayment of $49 billion into the Federation Account suggest the likelihood of an endemic problem that is a pointer to the susceptibility of the industry to corruption which has undermined the development of the economy. This study investigated the problem of corruption in the oil and gas industry. The objective of the study was to determine the extent and macroeconomic impact of corruption in the oil and gas industry.To achieve the objectives,the study measured the extent of corruption in the industry, fromthe activities of the industry in both the upstream and the downstream. The summation of the losses from these activities was the measure of the extent

CHAPTER ONE

Background to the Study Despite the complexities that surround the concept of corruption globally in terms of its multi dimensional nature with regards to cultural, sociological, psychological, definition, secrecy and measurability, corruption has continued to attract interests of scholars, advocates, governments and multilateral organizations. This is so given the challenges and problems that are associated with the menace globally. Scholars differ on the perception and effects of corruption on the economy. Some of them such as Leff (1964), Huntington (1968), Lui (1985), Lien (1986) Acemoglou and Verdier (1998) and Aluko (2008), argued that corruption enhances efficiency and as such positively impacts on the economy. For example, Leff (1964) and Huntington (1968) suggest that under rigid regulation and inefficient bureaucracy, corruption might foster economic growth. In their model, they believed that agents use “speed money” to get around bad laws and institutions. Additionally, Lui (1985) shows that bribery can be efficient in a queuing model if agents with higher values of time can use bribes to obtain a better place in line. Acemoglou and Verdier (1998) on their part argue that some degree of corruption may be part of the optimal allocation of resources in the presence of incomplete contracts or due to market failure.

This opinion is partly justified on the ground that illegal payments are required to make things pass swifter and favorably through the state bureaucracy. By implication, corruption has the potency of making an economic agent more efficient and in the long run it promotes economic growth. The next logical question is what is the evidence? Is it

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conclusive? If not conclusive, this provides opportunities for further studies. Also what are the limitations of the existing studies? On the other hand, Mauro (1995) Tanzi and Davoodi(1997) among others maintained that corruption lowers investment and by extension impacts negatively on the economy. Tanzi and Davoodi (1997) not only supported this position by their findings but also extended it by showing the direction of causality. Bardhan, (1997) .Weder,(2003), Meon and Seklat (2005) followed the above pattern in their analysis of the effect of corruption on the economy. The effects of corruption generally are so broad and complicated to the point of losing it devastating consequences on the economy in which it exist, and to address this problems without been carried away with it elusive features, the areas of concern where corruption affect the macro economy is hereby been focused. This is in line with the decision of the United Nation Convention against Corruption (UNCAC) in early 2002.Where it was agree that corruption should not be define at all because of it complicated nature, but rather address the problem areas. The emphasis (focus) of this work is on the corruption in the Nigeria‘s oil and gas industry. In the work of Garba et al, (2009) GIABA study on corruption and Money Laundering in West Africa, The case of Nigeria, Agriculture and oil and gas industries were identified as the most susceptible industries to corruption. This work picks one out of the two industries, which is the oil and gas industry. The susceptibility of the sector to corruption has undermined the development of the economy.

Oil is a major source of energy in Nigeria and the world in general. Oil being the mainstay of the Nigerian economy plays a vital role in shaping the economic and political destiny of the country. Although Nigeria‘s oil industry was founded at the beginning of the century, it was not until the end of the Nigeria civil war (1967 – 1970) that the oil industry

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began to play a prominent role in the economic life of the country. Odularu (2008).The study therefore look back at the operation of the industry in the period under review. In many economies that are not resource-dependent, to carry out government activities, the governments tax citizens, who demand efficient and responsive governance in return. This bargain establishes a political relationship between rulers and subjects. In countries whose economies are dominated by natural resources, however, rulers don’t need to tax their citizens because they have a guaranteed source of income from natural resources. Because the country’s citizens are not being taxed, there appeared to be less incentive to be watchful of how government spends its money. In addition, those benefiting from mineral resource wealth may perceive an effective and watchful member of the society as a threat to the benefits that they enjoy, and they may take steps to thwart them. As a result, citizens are in most cases impoverish by their rulers, and as such disempowered, and if the citizens complain, money from the natural resources enables governments to pay for armed forces to keep the citizens in check. Countries whose economies are dominated by resource extraction industries tend to be more repressive, corrupt and badly-managed. Asobi (2009)

Oil dominates the Nigerian economy and generates enormous revenue, indeed the bulk of government revenue, but this has not translated into an improved standard of living for the citizens due to corruption and mismanagement. This argument is woven around the concept of the ‗rentier state‘. The contention is that states, like Nigeria, which depend heavily on rent from their natural resources, rather than taxes from their citizens, corporate and individual, tend to be corrupt and poor. This is so for three main reasons. First, resource rent is much more easily appropriable than revenue from taxation because its source is concentrated (oil is a ―point resource‖), not dispersed. Second, it is easier for political leaders to ignore public

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demand for accountability in a rentier state because, since they do not depend on taxes from citizens for the national income, they can acquire, retain and use state power without bothering about legitimacy. Third, rent seeking has a magnetic effect; it tends to suck all and sundry into its seductive loop, including entrepreneurs who could have invested in manufacturing and agriculture. Consequently, diversification of the economy is difficult to achieve in a rentier state. Asobi (2009). The influence of the international players in the oil and gas industry owing to the importance of the product to them cannot be ruled out as they go out of their way in most cases to undermine the process so as to have their way always and protect their own interest. They mostly succeed in this venture because of the selfishness and ignorant of the officer in charge of the sector. This is evidence in the wikileak report (Ann pickard) which the then president of the Federal Republic of Nigeria (Good luck Jonathan) referred to as the beer parlour gossip.

Apart from that, corruption has also been blamed on colonialism. According to this view, the nation’s colonial history may have restricted any early influence in an ethical revolution. Throughout the colonial period, most Nigerians were stuck in ignorance and poverty. The trappings of flash cars, houses and success of the colonists may influence the poor to see the colonist as symbols of success and to emulate the colonists in different political ways.

Involvement in the agenda of colonial rule may also inhibit idealism in the early stage of the nascent nation’s development. A view commonly held during the colonial days was that the colony‘s property (cars, houses, farms etc.) is not “our” property. Thus vandalism and looting of public property was not seen as a crime against society. This view is what has

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degenerated into the more recent disregard for public property and lack of public trust and concern for public goods as a collective national property. (Wikipedia free encyclopedia; corruption in Nigeria). The government has claimed to be tackling corruption and mismanagement in the country through institutional changes. The 1979 constitution 5th schedule provides the code of conduct for public officers. The code of conduct required the public officers to publicly declare their assets before assumption of office and immediately after leaving the office. In the year 2000 Independent Corrupt Practices and other related offenses Commission (ICPC) was established with the aim of prohibiting corruption and prescribing punishment for the violator of the provision. Among other measures, Economic and Financial Crime Commission (EFCC) was established in 2003 to investigate all financial crime. In spite of all these measures, there seems to be notmuch effect on corruption and this has affected the country‘s rating on global index of perception of corruption. Nigeria performs very low on the Transparency International‘s Corruption Perception Index. Nigeria ranked 54 out of 54 in 1996, 152 out of 158 in 2004, 134 out of 178 in 2010 and 143 out of 183 in 2011. 1.2 Statement of the Problem

Nigeria is richly endowed with oil and natural gas reserves in addition to solid minerals and Agricultural resources that are capable of financing development that can meet the basic consumption and developmental needs of the nation. Yet, Nigeria ranks among the least developed countries in the World Bank league tables, with a per capital income of $1490.1, a poverty level of about 70% and unemployment level of about 24% in 2011.Couple with this is a very low ranking of 127th out of 139 countries and a score of 3.45 (aggregate), in the global competitiveness index. With a score of 3.19(basic requirement), 80th with a

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score of 3.88,(efficiency enhancers),111th with a score of 3.31( institutions),135th with a score of 2.21(infrastructures )121st with a score of 3.96 (macroeconomic environment). (Which fall within 3.10-3.50 of low ranking category), The corruption in the oil and gas sector is believed to have adverse macroeconomic effects on the economy. In Nigeria, just like any other resource rich countries, corrupt practices tend to impair the performance of the sector and by extension undermine the development of other sectors of the economy. An Audit Report on the Nigerian National Petroleum Corporation (NNPC) between 1999 and 2002 alone revealed that there was overshooting of production targets every year. The excesses of NNPC crude oil production within this period added up to 375.45 million barrels. Based on the oil price of $25 per barrel and the exchange rate of N111.6 to $1 at that period, Nigeria lost $9.4 billions or N1.05 Trillions. More recently, the oil subsidy scandal has revealed an extra-budgetary spending in excess of N2 trillion (House of Representatives, 2012). The opportunity cost of N1.05 trillions in 1999-2002 in terms of forgone investments in infrastructural development, forgone competitiveness, forgone investment in output and productivity growth and forgone employment, income and welfare are likely to be very significant.

Similarly, the opportunity cost of about N2.0 Trillions linked to the subsidy scandal of 2009-2011 is likely to be very high. The NNPC (2011) indicated that Nigeria earned $200.34 billions (about N30 trillions) in oil revenue from the sale of 4.56billions barrel of crude between 1999 and 2009. From the above figures it is obvious that Nigerian economy from 1999 to 2009 witnessed an increase in the price of crude oil, which invariably increases the government revenue; the implication of this is that there should be an increase in the public assets, and reduction in government debt, which will have positive impact on macroeconomic

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variables. But this was not so. Simply because, as the revenue and the price of crude oil are increasing, the qualities of infrastructures as well as the quality of public service are decreasing while the government debt is increasing. This is an indication of the fact that something is fundamentally wrong; the admission of this fact is what led to the establishment of the various probe panels. The outcomes of the panels revealed high contract cost and lack of performance. This has adverse effect on Government Revenue in terms of the actual amount that is to be generated and Government Expenditure in terms of how well the revenue is been expended. This by extension impacted on the macroeconomic variables. Even though there may be other factors that are responsible for this situation, leakages in the oil and gas industry of the economy are likely to have significant impacts.

Garba et al (2008) observed that Nigeria‘s resource endowment particularly, the fact that oil and gas and, agriculture are the major sources of foreign exchange earnings makes Nigeria‘s fiscal system and international trade and financial flows highly susceptible to corruption and money laundering. Oil and Gas activities (exploration, production and transportation) like most extractive activities are highly capital intensive, rent generating and, foreign dominated. The rent generating attribute inherent in oil and gas business is an inherent incentive for government officials and foreign oil and gas corporations to engage in corruptive behaviours. In the Joint Ventures Partnerships (JVPs) that dominate the upstream of the oil and gas industry, the partner with the majority shares (the Federal Government) is passive. The passivity of the government gives room for corruptive behaviour in the exploration, production and transportation of oil also, in the flaring and utilization of gas. Therefore, in JVPs and even more so, in Production Sharing Agreements (PSAs), the nature of oil and gas

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compounded by information asymmetries provide opportunities for the thriving of high-level corruption and, money laundering. The stylized facts of the oil and gas industry and the Nigerian economy in the last two decades suggest that;

1. There is persistent and enlargement in the scope of corruption in the oil and gas industry in Nigeria;

2. The oil and gas industry is highly vulnerable to large scale corruption as revealed by all the probe panel and recent reports.

3. The opportunity cost of corruption is likely to be very high especially as oil revenue is not matching the increase in prices; and

4. The paradox of a rich nation of poor people is indicative of the potential adverse effects of corruption.

Rather than test the hypothesis however, it is important to:

(a) quantify the extent of corruption in the oil and gas industry;

(b) analyze its macroeconomic impact on the economy;

1.3These give rise to the following key questions; (a) What is the extent of corruption in the Nigerian oil and gas industry? (b) What are the impacts of the corruption on the macro economic variables? 1.4 Objectives of the Study Broadly, the objective of the study is to examine the corruption in the Nigeria‘s oil and gas industry. The specific objectives are;

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(a) To measure the extent of corruption in the Nigerian oil and gas industry.

(b) To analyze and measure the impact of corruption on macroeconomics variables.

1.5 Justification of the Study In the various analysis of corruption, much emphasis and focus has been on the expenditure side. However, there is need to focus also on the revenue side of corruption. This thesis provides another perspective, the revenue side.Given the size of the oil and gas industry and the opportunities for corruption in the industry because of it ‗rentier‘ nature, minimizing corruption is an important national goal. More importantly, estimating corruption as well as the measurement of its impacts is critical. With factual information on corruption, a country is better equipped to target its specific responses to corruption problems and understand the extent of the problem in a country. The use of simulation analysis to establish the impact of corruption in the industry makes it different from the previous studies on corruption in the industry, as the results show clearly the extent of the impact on the various blocks of the macroeconomy. These results are expected to help policy maker target different sources of corruption and to imrove the management of the economy. 1.6 The scope of the study The study covers the period from 1981 to 2014. The focus is on the Oil and Gas industry of the economy because of the susceptibility of the sector to corruption. The emphasis is more on the measurement of the extent and the impact of corruption in the oil and Gas industry on macroeconomic variables. In the areas where corruption becomes an issue, some are measurable while some are not. This study focused on the measurable ones.

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1.7 Organization of the work The work is organized into five chapters. The introduction is chapter one. Chapter two is the literature review. Chapter three presentsthe methodology of the study. Chapter four discusses the findings of the research and chapter five contains the summary,conclusion andrecommendations of the work.


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