A Political Settlements Analysis of Industrial Policy in Nigeria’s Oil Refining Industry


Essay, 2019
11 Pages, Grade: 63

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A POLITICAL SETTLEMENTS ANALYSIS OF INDUSTRIAL POLICY IN NIGERIA’S OIL REFINING INDUSTRY

Abel B.S. Gaiya*

1. Introduction

Industrialization is not automatic; various market and coordination failures imply the inadequacy of a laissez faire approach to develop robust industrial capabilities (Rodrik, 2016). Therefore, industrial policies have been ubiquitous since the advent of capitalism as a means for states to facilitate industrialization and diversification. Nonetheless, there is stark diversity of outcomes in industrial policy experiments. The most successful cases of the post-war period are often contrasted with the failures and limited successes of the Latin American and Sub-Saharan African cases. Many have sought to explain the diversity in outcomes as being due to variation in the scale of neopatrimonialism (van de Walle, 2001). This essay emphasizes Khan’s (2010) political settlements approach as a key explanatory paradigm for the variation in industrial policy results. It focuses on Sub-Saharan Africa and uses the case study of industrial policy efforts in Nigeria’s downstream oil sector to argue that the competitive clientelist nature of the Nigerian political settlement makes it highly difficult to successfully implement industrial policy in this sector, and so it has taken an external agent to attempt to circumvent it altogether. Section two briefly outlines the various explanatory approaches to the topic. Section three then briefly explores a few suggestions on industrial policy design.

2. Political Settlements Approach

There is a prevalence of attributing the failures of industrial policies in SSA simply to “government failure” (Krueger, 1990) arising from the ubiquity of neopatrimonial state-elite relations (van de Walle, 2001), as well as an anti-export bias arising from a focus on import-substitution industrialization strategies (Bhagwati, 1988). However, this interpretation does not square well with the observation that even the often exemplified cases of successful development, especially the East Asian Tigers, have been found to also be mired in neopatrimonial forms of political and economic relations (Lim, 1998); and even in export-oriented developmental states, such policies were, in several cases, built on the progress made under import-substitution policies. Additionally, within cases of “failures”, there is a diversity of results across sectors within a country, and across countries. There are also many cases where industrial policy was targeted at promoting exports failed to produce desired outcomes. Therefore, as KjÆr (2014, 231) portends, “the right question to ask would be under what conditions industrial policy can be successful in countries that are in general characterized by neo-patrimonialism”.

Rents are ubiquitous in political economies; and while some rents may be growth-reducing, others may be growth-enhancing (Khan, 2012, 21). Due to the necessity of a period of “learning-by-doing” in developing countries to develop technological and organizational capabilities to bridge North- South productivity gaps (Gershenkron 1962; Khan, 2013), state-created rents are widely recognised as crucial to serve as a protection and incentive (Gray, 2013, 186). Khan (2013) emphasizes that the importance of organizational capabilities to be built by protected firms. As UNCTAD (2013, 71) states, this encompasses “the wide range of incremental changes that enterprises undertake in order to remain competitive and profitable through improvements in the technologies they use, in product design, technical performance and product quality and by introducing changes in organizational structures, management style, marketing and maintenance routines, as well as other knowledge-intensive elements of production.”

Developmental state theories argued that the centralized control by the state made possible its “embedded autonomy” (Evans, 1995) to enable it to discipline rent recipients if they shirked on improving economic performance and productivity. Yet, the prevalence of neopatrimonialism in SSA meant that industrial policy often fell into growth-reducing rent distribution networks (Easterly and Levine 1995). There is however, a need to dig deeper, especially since the obvious solution of general liberalization to the simplistic conclusion does not induce rapid growth and structural transformation (Rodrik, 2016). It is not the existence of clientelism per se, that constrains the effectiveness of formal industrial policy, but rather the wider distribution of power in society (Khan and Blankenburg, 2009). This is the political settlement – “a description of the distribution of power across organizations that are relevant for analyzing a specific institutional or policy problem” (Khan, 2017, 640).

Khan (2010, 8-9) notes that the power of excluded groups relative to the ruling coalition describes the horizontal distribution of power; while vertical distribution refers to the relative power of groups within the ruling coalition. In a competitive clientelist configuration, prospects for developmental governance over the long term are reduced when there is a credible threat to the ruling coalition from powerful excluded groups who may be able to seize power through elections, and where lower-level factions are strong enough to make multiple demands on the centre (Abdulai and Hickey, 2016, 51).

A range of case studies have been used to demonstrate the utility of the political settlements approach in explaining the variation in industrial policy outcomes. For instance, Gray (2013) shows how the distribution of power within Tanzania after independence affected its industrial policies and its effects on its manufacturing sector. KjÆr (2014) does so for Uganda; Booth and Golooba- Mutebi (2014) do so for Rwanda’s agricultural policy; Whitfield and Buur (2014) for Mozambique and Ghana.

This essay applies it to the case of Nigeria’s downstream oil sector for which there has been little political settlements analysis conducted, although Roy (2017) has fairly done so for the upstream sector. Yet there has been general acknowledgement of the role of power and politics in the sector (Chikwem, 2016). Nevertheless, Roy’s (2017, 20) analysis categorizes Nigeria’s political settlement as having oscillated between vulnerable authoritarian coalition (under military rule) and competitive clientelism (under civilian rule).

3. Industrial Policy in Nigeria’s Oil Refining Sector

In 1965, Nigeria commissioned its first oil refinery as a joint venture (JV). It was registered as the Nigeria Petroleum Refining Company (NPRC) in 1972 when the Government of Nigeria increased its shareholding to 60%, but it remained a JV Company under private sector control and management (Wapner, 2017, 2). With a capacity of 38,000 barrels per day (bpd), production levels were steady during the first four years of private operation. Since then, three other refineries had been built, all involving attracting Foreign Direct Investment to enter into a JV with the federal government.

The decline in the performance of the refineries began in the 1990s when the Nigerian National Petroleum Corporation (NNPC) lost its autonomy under the military administration (Ogbuigwe, 2018, 183). It progressively became exposed to interference by politicians. Decisions on when to carry out turnaround maintenance (TAM) and which contractor to execute it became influenced by political elites rather than by the professionals within the corporation (Ogbuigwe, 2018, 183). Maintenance has often been neglected due to shortages of spare parts and a lack of systematic maintenance activity (Wapner, 2017, 7). There have been slow completions of maintenance requested of the NNPC by the refineries. Since 2000, no major TAM has been carried out in any of the refineries (Ogbuigwe, 2018, 183).

Pipelines supplying crude to refineries, and those transmitting output from them are habitually vandalized (Ogbuigwe, 2018, 183). As Roy (2017, 33) notes, this practise sustains the powerful elites in the producing areas, as well as the oil companies. One of the solutions sought to circumvent this problem was the use of ships to transport crude by ship to the refineries, but this is very expensive (Wapner, 2017, 8). The inefficiency of the refineries is manifest in the persistently low and even decreasing capacity utilization over time (Wapner, 2017, 9). It is estimated that supply chain Issues accounted for 53% of the unplanned shut downs while equipment failure made up 47% in 2009 (Ogbuigwe, 2018, 188). Therefore, while billions of naira have been put into improving the operations of these refineries, the results have been disappointing.

The horizontal power of excluded actors ensures that oil bunkering persists, and that the marginalized locals take up armed conflict over the oil companies’ activities. The scale of rents required to placate them is large; and even when the federal government provided the Niger Delta Development Commission, the vertical power of the lower elite classes means that such rents do not go to the people on-ground, but diverted to local elites (Omotola, 2007; Isidiho, 2015).

In 1973, subsidies were introduced by the state to stabilise the price of fuel and provide succour for the populace in light of oil price fluctuations (Chikwem, 2016, 19). These subsidies empowered a rentier class who favour the expansion of oil subsidies. Therefore, the subsidy elites oppose both attempts at eliminating such subsidies, and at expanding domestic production of refined petroleum (Boyo, 2015, 44). The HRACR (2012, 192), for instance, noted the “the practice whereby PPPRA as a regulator in the petroleum downstream sector being supervised by the Ministry of Petroleum Resources whose minister (Rilwan Lukman) is the chairman of the Board of NNPC (a major importer/participant in the PSF scheme) negates the principles of checks and balances and international best practices.” The oil sector itself, due to its importance as the main source of rents, is heavily given attention to by the government. Hence, since 1999, all the presidents appointed oil ministers from his state or region (Chikwem, 2016, 31)

Due to the state’s heavy dependence on the oil sector for its revenues, it is a site of heavy political contestation. The powerful players, ranging from multinational oil companies to the minister of petroleum resources, the president, the NNPC, and oil marketers which include politicians, ensure that there will always be substantial difficulties in trying to implement industrial policy in the downstream oil sector. With high poverty and unemployment rates, the general electorate also poses a formidable force against the effectiveness of such policies in terms of the distorting role of fuel subsidies. The difficulties in passing the petroleum investment bill within the National Assembly and implementing it afterward attests to the diversity of interests and powers involved (Roy, 2017, 154).

However, things are somewhat changing. First, the recent Nigerian recession, the fall in international oil prices, rise in government deficits, and scarcity of foreign exchange, have created greater pressure on the government to limit oil bunkering which has been a drain on government revenues. One of the ways the Buhari administration has approached this is to seek to co-opt some of the locals engaged in illegal operations of modular refineries by formalizing some of these operations (Onojeghen, 2018).

Second, the Dangote Industries Ltd. is at present building a 650,000 bpd capacity refinery in the country, “the biggest refinery of its type in the world” (Munshi, 2018) and a gargantuan $15 billion investment. Aliko Dangote is the wealthiest man in Africa, and this may play a role in his ability to muster the resources to undertake this task. It is reported that he has put in $6 billion of his own cash into the project (Munshi, 2018). Rather than rely on the domestic politics of oil rents and federal transfers, he is relying on the organizational capabilities accumulated over time through manufacturing and exports of cement, sugar and flour, as well as financial markets to finance the undertaking. Indeed, it is reported that Dangote “admits his businesses, including cement, might not have succeeded without some protectionism, but says the refinery won’t get any favours from government, including subsidized crude deliveries.” (Wallace, 2018). Interestingly, Dangote’s social capital enabled him to attain billionaire status, having initially taken a loan from his grandfather, who was from one of the wealthiest business families in Northern Nigeria. And it was his ability to connect with President Obasanjo who at the time had a fallout with his vice president, which enabled him to gain some state rents in order to build his cement production capabilities (Fawehinmi, 2017). In an interview at the Mo Ibrahim (Mo Ibrahim Foundation, 2019), Dangote revealed that, due to the incapacity of the required road networks to handle the kind of transport equipment involved, they had to incur the cost of building more appropriate roads (Edozien, 2018).

Likewise, they had to build their own port. The refinery project also involves the construction of two undersea pipelines to transport oil from Delta to the Lagos refinery (Edozien, 2018). This therefore bypasses both the political economy of oil bunkering and sabotage of the Delta area and the high costs of the alternative of using ships. Nonetheless, the project still faces the challenge of the oil subsidies, which means, domestically, its output must be sold at the subsidized price rather than at the market price.

A similar story can be told of the Nigerian telecommunications sector. Prior to 2001, the state company, NITEL, held monopoly over the industry and was notoriously inefficient (Hassan, 2011). However, with the emergence of democratic rule and the need to attract foreign investment and, importantly, to improve international confidence in the country after the long period of military rule. In addition to setting up an anti-corruption agency, there was pressure to override the power of the NITEL bureaucratic elites. The president was further able to do champion this because of the more consolidated under a weak dominant party at the time (Roy, 2017, 20). The privatization of the telecommunications sector occurred mainly through FDI, as South African and Indian companies set up operations in Nigeria (Roy, 2017, 14). As a result, the industry has boomed and become a fast-growing one.

Agricultural policies in the country have also had very limited success due to unfavourable political settlements (Ayinde et al, 2016). The nature of Nigeria’s political settlement is also manifest in the success of its Banking sector reforms, being implemented by a fairly autonomous entity, the Central Bank of Nigeria (CBN), which is meritocratically staffed, and which has a greater degree of insulation from domestic politics. Yet while the CBN finds it easier to set and implement banking policy effectively, it finds it more difficult to do so with monetary policy, as there are more political factors associated with, say, black market foreign exchange operations, excess liquidity (Inam, 2014), and so on, which are often beyond its control. It is only with the support of the federal government, under conditions of substantial economic pressure, that the banking operations of government ministries, departments and agencies have sought to be consolidated further under the purview of the CBN in the Treasury Single Account (Roy, 2017, 35).

4. Industrial Policies and Institution Design

The understanding that different distributions of power can have different effects on industrial policy results have inspired some suggestions as to different options that can be used in different contexts.

Collier and Venables (2007, 1333), who acknowledge the potential of ossifying growth-reducing industrial policy rent transfers suggest the complementarity between domestic policy and international policy, particularly in the age of fragmentation of production. They argue that, unlike domestic industrial policy, trade preferences in OECD markets are not under domestic state control. Therefore, “there is no way in which their level can be escalated in support of failing firms” (Collier and Venables, 2007, 1333). Furthermore, because they support exports, trade preferences offer an incentive based on performance in that only exporting firms benefit. Rodrik (2004) argues that this discipline was an important positive factor underlying the success of export-oriented strategies, as compared to import substitution. The establishment of Export-Processing Zones for FDI is also advocated. Yet, the limitation is that administrative procedures and infrastructural provision even for these spaces can remain inefficient if the distribution of such infrastructural rents is not supported by elites within the ruling coalition. In Tanzania, for example, the weakness of EPZ initiatives since 2010 was not merely a technical problem about bureaucratic coordination, but that the political legitimacy of EPZ industrialists remained contested over the period in light of the transfer of significant infrastructural subsidies (Gray, 2013, 195).

There are even implications for development aid. KjÆr (2014, 238) argues that aid could be more focused and sector-specific when the sector-specific political economy contexts are understood better.

5. Conclusion

There has been a diversity of industrial policy outcomes, and it is not enough to simply say it is due to some hegemonic notion of “government failure”. The political settlements approach provides a useful framework to explain these variations. The performance of industrial policy in the Nigerian downstream oil sector may be interpreted from a political settlements framework, as performance in telecommunications, agriculture and even banking demonstrate the limits of an indiscriminate neopatrimonialism. It is therefore time to deepen understanding of development politics.

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[...]


* Essay written as part of coursework for MSc Development Economics at SOAS, University of London, under M. K. as convenor of the Institutions and Governance module.

11 of 11 pages

Details

Title
A Political Settlements Analysis of Industrial Policy in Nigeria’s Oil Refining Industry
College
School of Oriental and African Studies, University of London
Course
Institutions and Governance
Grade
63
Author
Year
2019
Pages
11
Catalog Number
V505339
Language
English
Tags
industrial policy, political settlements, institutions, political economy of development
Quote paper
Abel Gaiya (Author), 2019, A Political Settlements Analysis of Industrial Policy in Nigeria’s Oil Refining Industry, Munich, GRIN Verlag, https://www.grin.com/document/505339

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