From America to Asia: Fresh Moves atment, fragile financial conditions, weak housing markets, and...

EDITORIAL TEAM

MARCEL OKEKEEditor

EUNICE SAMPSONDeputy Editor

ELAINE DELANEYAssociate Editor

IBRAHIM ABUBAKARSUNDAY ENEBELI-UZOR

OLUWASEUN OLAOYEAnalysts

SYLVESTER UKUTROTIMI AROWOBUSOYE

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EDITORIAL BOARD OF ADVISERS

UDOM EMMANUELNONYE AYENI

GIDEON JARIKREMICHAEL OSILAMA OTU

ZENITH ECONOMIC QUARTERLYis published four times a year

by Zenith Bank Plc.

Printed by PLANET PRESS LTD.Tel 234-1-7731899, 4701279, 08024624306,

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The views and opinionsexpressed in this journal

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All correspondence to:The Editor,

Zenith Economic Quarterly,Research & EIG,Zenith Bank Plc

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FROM THE MAIL BOXThis contains some of the aknowledgements/commendation letters from our teeming readersacross the globe

PERISCOPEThis contains a panoramic analysis of majordevelopments in the economy during the periodunder review and the factors underpinning them

POLICYA focus on the Central Bank of Nigeria’s policydirectives aimed at addressing currencymanagement issues in Nigeria in line with the newcashless economy initiative

GLOBAL WATCHFrom America to Asia, major economies were inlast quarter 2012 preoccupied with bailout effortsaimed at averting a recession. This articleanalyzes this trend in-depth

ISSUES IExamines the issues, challenges and prospectsof the controversial Nigeria’s Petroleum IndustryBill now before the National Assembly

ISSUES IIAnalyzes the ills of the current petroleumproducts price subsidy regime and the imperativefor its reversal as a precursor to the rapiddevelopment of the sector and the larger Nigerianeconomy

ISSUES IIIAn analysis of recent trends in the Nigerianmanufacturing sector, gains, prospects and theneed to build on improving indicators

FOREIGN INSIGHTSA review of global financial markets in thirdquarter 2012 with emphasis on the market driversand the outlook for the remaining part of the yearand beyond

DISCOURSEAn exposition on the concept of corporateidentity mix; the divergent views; its relevance intoday’s corporate world and the evolving trendsand best practices

FACTS & FIGURESThis contains economic, financial and businessindicators with annotations.

2 Zenith Economic Quarterly October 2012

T

Imies, and slowdown in major emerging market economies.In addition, says the Committee, high and rising unemploy-ment, fragile financial conditions, weak housing markets,and deterioration in both public and private sector balancesheets in some major industrial countries posed major risksto global economic recovery.

As scary as the MPC scenario and analysis is, the con-cern becomes even merely euphemistic in the face of the

stark realities that is the lot of many an economy today.Whether the focus is on the fiscal gridlock in the US, thelingering Euro-zone financial and economic crisis, or thedeclining output growth in the key emerging Asian econo-mies, the conditions look really grim. These depressing con-ditions are not any different from those of the 2008/2009era, when the global economic meltdown ravaged all nooksand crannies of the world. Again, the ‘warning signs’ areevery where. Virtually every country is at one stage ofeconomic reform or the other; yet the fundamentals seemto keep defying all expectations and hope. Steadily butunwillingly, it seems, the global economy is headed for an-other crisis—or meltdown. This worry—or ineluctablefate—is couched in the piece—”From America to Asia:Fresh Moves at Salvaging Economies.” In it, the authorsums up that, with the increasing aggressive fiscal and mon-etary stance against looming global recession, it is gettingincreasingly more certain that a sustainable solution couldbe in the offing. This optimism is however with a caveat:“…a lot would depend on chance, and of course, on what-ever becomes of the EU common currency dream.” TheEU story and challenge is analysed in-depth in another piece

“All Quiet on the EU Front, or Too Qiuet?” In this, the over 20summits of the leaders of the EU member-states as well as theirdetermination to keep their Euro are masterfully discussed.

Allied to these is our focus on the manufacturing sector in Nige-ria—one of the supposed pillars in the nation’s quest to be amongthe top 20 largest economies of the world by the year 2020. In thispiece—”Recent Trends in Nigeria’s Manufacturing Sector: Cause forOptimism?”— the plaid history of this crucial sector is told in luriddetails. However, the flicker of hope emerging from the impact ofrecent reforms in the economy as it affects the sector is also vividlycaptured. Our focus on the ‘hydra headed and Octopoid’ PetroleumIndustry Bill (PIB) is also revealing. The PIB which aims to stream-line a legal, fiscal and regulatory framework for the oil and gas sectorhas had several versions—some still in circulation, others consigned

to the rubbish bin—with attendant contro-versies. Yet the PIB (or the eventual Act) isa product of efforts to reform the oil andgas industry towards greater efficiency.

In a related article titled “Agenda forDevelopment: Petroleum Subsidy”, the au-thor delves into the controversy-ridden de-regulation of the downstream sector of theoil industry. In view of the fraud, scams andother sharp practices that characterize theoperations of the downstream sector of theoil industry, according to the author, gov-ernment, through deregulation, wants to doaway with discretionary interventions andadministrative controls—such as fixing of

pump prices that are responsible for distortions.In our section, ‘Discourse’, the ever-evolving corporate identity

mix is expertly analysed. This essentially deals with how a firm’spersonality is expressed through symbolism, communication andbehaviour.

Other segments of the journal, including ‘Periscope’, ‘Facts &Figures’, ‘Policy’, etc, also contain our usual informative master-pieces.

Please read, digest, and stay enriched!

n its communiqué No. 86, the Monetary PolicyCommittee of the Central Bank of Nigeriapointed out the continued deceleration in glo-bal output, which resulted from a combina-tion of austerity-driven Euro-zone develop-ments, weak recovery in some Asian econo-

As scary as the MPC scenario and analy-

sis is, the concern becomes even merely

euphemistic in the face of the stark reali-

ties that is the lot of many an economy

today.


I am directed by the Hon. Ag. President, Courtof Appeal to acknowledge with thanks the re-ceipt of a copy of the July edition of the ZenithEconomic Quarterly (ZEQ) Titled “Agric Trans-formation: Tackling Nigeria’s Food Import De-pendency” forwarded to His Lordship undercover of your letter dated 25th September, 2012.Once again, thank you.Yours sincerely,E. Akhilor, (Mrs.)Secretary to the Ag. PCA,For: Ag. President, Court of Appeal

We acknowledge with thanks the receipt of One(1) copy of April, 2012 edition of Zenith Eco-nomic Quarterly (ZEQ) donated to the Library.We are very grateful for this kind gesture and wepromise to put the Journal to the good use ofstaff and students of the College.On behalf of the College Management, onceagain I say thank you.Yours faithfully,Adebowale, T.O (Mrs.)LibrarianYaba College of Technology

The University Librarian gratefully acknowledgesyour kind donation of the following publica-tion to the University Library;1 copy of Zenith Economic Quarterly, October2011 vol 7(4).We appreciate your kind gesture and contribu-tion to the development of the University Li-brary. We also commend your contributions tointellectual development.We solicit your further help and will count onyour future co-operation in the continuous pro-cess of building the University Library.Thank you.F. Balogun (Mrs.)Head, Gifts and Exchange UnitUniversity of Lagos Library

We wish to acknowledge with gratitude receiptof a copy of the January 2012 edition of theZenith Economic Quarterly (ZEQ).The ZEQ has proven to be a valuable source ofrelevant information since it focuses on the cash-less economic issues. The journal has been auseful reference material because its incisiveanalysis has provided significant insight into im-peratives for legal and Regulatory Framework.Please accept the assurances of the Embassy’shighest consideration.Warm regards,Beatrice AyokhaiAdmin. AttachéFor: AmbassadorEmbassy of Nigeria,The Republic of Guinea

We write to acknowledge with thanks the re-ceipt of a copy of your Economic Quarterlyand to appreciate your continuous recognitionof NASME as a critical stakeholder in EconomicDevelopment.

As usual the content is quite educative, informa-tive and gives a clear investment guide and stra-tegic policy decisions to readers.Best regards,Nerus EkezieAg. Executive SecretaryNigerian Association of Small and MediumEnterprises

We wish to acknowledge, with thanks a copy ofthe June 28, 2012 edition of Zenith EconomicQuarterly Journal.

The copy will be put in a prominent place forthe benefits of our staff and students’ researchand up-date their background on the issuestreated therein.Once again, thank you.Dr. S.A. AlaladeHead of Department, Economics B/FBabcock University

Your letter dated 28th June, 2012, forwardingApril, 2012 edition of the Zenith EconomicQuarterly (ZEQ) refers.We are grateful to you for providing us a copyof the Zenith Economic Quarterly, which wefound to be informative and educative.Please, accept our warm regards.Thank you.Chief Terkaa I. GemadeRegistrar/Chief ExecutiveAssociation of National Accountants of Nige-ria

We acknowledge with thanks the receipt of one(1) complimentary copy of the April, 2012 edi-tion of your Institutes’ Journal “Zenith EconomicQuarterly (ZEQ)”.We appreciate this gesture and commend yourorganization for this contribution to CharteredInstitute of Stockbrokers (CIS) and the financialindustry in the area of impacting knowledge.Please be assured that you remain on our mail-ing list in the exchange of well articulated re-search work.Thanking you for your cooperation, while as-suring you of ours at all times.Yours Faithfully,Olayiwola Ajayi & Shakirat OladimejiResearch & TechnicalChartered Institute of Stockbrokers

We would like to acknowledge the receipt ofthe copy of your Zenith Economic Quarterly(ZEQ-April 2012 Edition).The journal is insightful, and we commend youreffort in putting it together.Thank you for your kind gift.Dr. Yinka David-WestFacultyPAN-AFRICAN UNIVERSITY

We write to appreciate and acknowledge the re-ceipt of the Zenith Economic Quarterly Jour-nal of April, 2012 which focuses on the “Cash-less Economy: Imperatives for Legal and Regu-latory Framework”.It is indeed packed with critical information onthe Nigerian and global economy for strategicpolicy decision which is relevant to the CollegeCommunity and library users.It is very interesting and educative.Thanks.Mrs. Molokwu, E.UCollege LibrarianFederal College of Fisheries and Marine Tech-nology

“The ZEQ has proven to

be a valuable source of

relevant information

since it focuses on the

cashless economic

issues. The journal has

been a useful reference

material because its

incisive analysis has

provided significant

insight into imperatives

for legal and Regulatory

Framework.”

October 2012 Zenith Economic Quarterly 5

PERISCOPE

Fitch Ratings can be described as most apt.According to Fitch, the key rating driversinclude the ongoing macro-economic re-forms: partial removal of oil subsidy,privatization of the power sector, bankingand financial sector reforms, increasing ex-ternal reserves, among others. S & P in itsreport indicated that Nigerian governmenthas sustained reform momentum in severalareas such cutting the fuel subsidy, reform-ing the power sector, as well as restructuringand strengthening the previously troubled banking sector.Although these reports were released in the early part ofthe fourth quarter, 2012, their contents are testaments tothe positive cumulative effects of macro-economic initia-tives of the Federal Government so far this year.

Specifically, by the close of third quarter 2012, virtu-ally all economic indicators moved in the desired direction:inflation rate came down consistently from July, throughAugust to September; external reserves increased mark-edly; exchange rate maintained stability; the capital marketexperienced a robust turnaround; oil production remainedupbeat, just as crude price rally continued in the interna-tional market. Inflation rate which stood at 12.80 per cent(year-on-year) in July, declined to 11.70 per cent in Augustand further came down to 11.30 per cent in September.

This is attributable to relatively tight monetary policy ofthe Central Bank of Nigeria (CBN) which saw the baseinterest rate on hold at 12 per cent in September for thesixth time in a row.

The apex bank simultaneously also focused on sup-porting the volatile national currency and building up for-eign exchange reserves to help in dealing with the threatof inflation. Hence, the Naira held largely steady all throughthe quarter under review owing to among other factors,improved supply of foreign exchange which is reflected inthe country’s huge current account surplus—also due inlarge measure to the high price of oil—Nigeria’s majorexport. The CBN’s tightening of liquidity through the re-duction of net open foreign exchange position (NOP) limit(that is, the ratio of dollars banks can hold relative to share-

*By Marcel Okeke

he positive, stableeconomic outlookverdict given on Ni-geria almost at the same timeby the two global rating agen-cies, Standard and Poor’s andT


PERISCOPE | Economy: Recoveryas Dividend of Reforms

holders’ funds) from three per cent toone per cent during its July 2012 Mon-etary Policy Committee (MPC) meet-ing also helped in strengthening theNaira, as the pressure on the local cur-rency promptly subsided. Also, a thirdquantitative easing in the United Stateshas kept the global economy awash withUS dollar liquidity which, combinedwith the relatively high yields in Nige-ria, has provided a great incentive forimproved portfolio investment, furthersupplying the domestic economy withforeign currency.

The net effect of all these was thatthe Naira appreciated against the USdollar in all segments of the foreignexchange market during the third quar-ter 2012. Specifically, the whole saleDutch auction system (WDAS) rateappreciated by N0.06, from N157.40on July 25 to N157.34 on September28, 2012. Inter-bank rate appreciatedby N2.81, from N160.00 to N159.00in the same period. Bureau De Change(BDC) rate also appreciated, by N4.00,from N163.00 to N159.00 during thesame period. In sum, the appreciationrecorded in all segments of the mar-ket could be traced to the combinedeffects of tight monetary conditions,improved supply of foreign exchangeto the market by oil companies; in-creased inflows from portfolio inves-tors and the policy that barred theDeposit Money Banks (DMBs) fromaccessing the CBN lending window(SLF and Repo) and WDAS simulta-neously.

On the same trend, strong dollarinflow during the quarter under reviewalso enabled the CBN to boost its hold-ings of foreign reserves substantially.Indeed, the nation’s external reservesincreased from US$32.64 Billion atend-December 2011 to US$40.64 Bil-lion at end-September, 2012— ap-proximately 7.80 months of importscover. This rise by US$8.00Billiontranslates to nearly 25 per cent year-to-date. On month-by-month basis, thereserves grew from US$36.28Billionin July to US$36.51Billion in August,hitting US$40.64Billion in September.

The robustness of these macro-economic indicators also reflected inthe performance of the Gross Domes-

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tic Product (GDP) during the first threequarters of the year. Data from theNational Bureau of Statistics (NBS)show that the economy on a quarterlybasis grew by 6.34 per cent; 6.39 percent, and 6.48 per cent respectively inthe three quarters up to September2012. Although compared to the cor-responding periods in 2011, thesegrowth rates are less cheery; they arenonetheless encouraging in the globalcontext. Specifically, the economy, com-prising two broad output groups of Oiland Non-oil sectors, witnessed slowergrowth output in the third quarter of2012 as a result of declines in non-oilsector output. While the oil sector wit-nessed positive growth for the first time

in four quarters, according to NBSdata, the slower non-oil sector growthwas driven by growth in activities re-corded in the building & construction,cement, hotel and restaurant, and elec-tricity sectors.

The impact of the FederalGovernment’s reform policies alsotranslated into a number of othercheery developments during the quar-ter under review. Thus, according tothe Manufacturers Association of Ni-geria (MAN) report, the fortune ofNigeria’s manufacturing sector hadbegun to ‘look up’ as over 240 facto-ries commenced operations in the lastone year, with a projected turnover ofN140 billion. This development is an

indication of increased investment andimproved turnover for the industrialsector. The improving business envi-ronment for the manufacturing sectoris also reflecting on industrial capacityutilization, as industrial activities im-proved significantly in the quarter un-der review relative to the level in thepreceding quarter and the correspond-ing period in 2011.

According to the 2012 second quar-ter economic report of the CBN, thesepositive developments in the sector areattributable to improved business con-fidence—which led to a rise in con-sumer demand, and improved electric-ity supply. Some of Government’s ini-tiatives to encourage the manufactur-ing/industrial sector in recent timesinclude: pioneer status—given to pio-neer companies located in economi-cally disadvantaged areas (providing taxholiday period of five to seven years);tax relief for research and develop-ment—up to 120 per cent of expenseson R & D are tax deductible; re-in-vestment allowance –given to manu-facturing companies that incur capitalexpenditure for purposes of approvedexpansion of production capacity,modernization of production facilities,and diversification in related products,etc.

In the same vein, the Federal Gov-ernment, in a bid to attain self suffi-ciency in sugar production, developeda New Sugar Master Plan (NSMP)which is envisioned to generate 1.80million tonnes of sugar annually; about40, 000 permanent jobs; 400 Megawatts of electricity annually. It is alsoexpected to generate 1.6 million tonsof animal feeds annually; $65.8 mil-lion savings in foreign exchange on fuelimports annually; and $350 million sav-ing in foreign exchange on sugar im-ports annually. Currently, Nigeria de-pends almost exclusively on sugar im-ports in the form of brown sugar,largely imported from Brazil, despitethe recent privatization of all govern-ment-owned sugar resources.

During the period under review, theFederal Government forwarded to theNational Assembly, the ‘correct version’of the much-awaited Petroleum Indus-try Bill (PIB) for deliberations. High-



lights of this crucial Bill include thecreation of a conducive environmentfor petroleum operations; enhancementof the exploration and production ofpetroleum resources in Nigeria for thebenefit of the Nigerian people; opti-mization of domestic gas supplies, par-ticularly for power generation and in-dustrial development. Others includeestablishment of a fiscal frameworkthat encourages further investment inthe petroleum industry while optimiz-ing revenues accruing to the Govern-ment; establishment of a commerciallyoriented and profit driven oil and gasentities; deregulation and liberalizationof the downstream petroleum sector,etc.

Still during the quarter under re-view, Nigeria moved closer to joiningmost of its OPEC partners in steeringoil revenues into longer-term invest-ment, by announcing a top manage-ment team for the Sovereign WealthFund. The Fund also took off with acash hoard of around $1billion. Untilthis quarter, Nigeria was one of onlythree OPEC member states that didnot have an SWF. Mahey Rasheed, amember of the board of First Bankof Nigeria, was chosen as the chair-man of the Fund team with UBS ex-ecutive and former JP Morgan head,Uche Orji, as the managing directorand chief executive officer.

Sovereign wealth funds are essen-tially government-run investment port-folios that buy into anything from main-stream assets such as stocks and bondsto direct foreign investment. The SWFhas three main aims: saving money forfuture generations, funding infrastruc-ture and defending the economy againstcommodity price shocks. But while theSWF initiative was taking shape, thenation’s public debt stock was inchingup at a pace that had started attractingsome concern. Indeed, as at Septem-ber 30, 2012, Nigeria’s external debtstock stood at US$6.2 billion, while herdomestic debt was put at N6.30 tril-lion, according to data released by theDMO. Of the total external debt,multilateral loans represent about 81per cent, non-Paris (Bilateral and com-mercial) loans about 10.70 per cent andEurobond about 7.90 per cent. At the

close of the third quarter 2012, thecountry’s total multilateral loans stoodat about US$5.1 billion; World Bank’sIDA loan stood at US$4.4 billion whileAfrica Development Bank’s ADF loanwas US$402 million.

THE CAPITAL MARKETBy every yardstick, the astounding per-formance of the capital market in thethird quarter 2012 proved a validationof the efficacy of the reform mea-sures initiated in that sub-sector in re-cent times. Indeed, the Nigerian StockExchange (NSE) All-share Index (ASI)which opened at 20, 730.63 points inJanuary 2012, closed the third quarterat 26, 011.63 points—translating to

about a 25.5 per cent improvement.Also, the market capitalization of eq-uities rose from N6.53 Trillion toN8.28 Trillion—a growth of about 27per cent or N1.75 Trillion within theperiod. This remarkable performanceis attributable to a number of factors,including the improving confidence ofdomestic investors, sustained foreigninvestor patronage owing to a numberof market-growing initiatives of theNSE and the Securities and ExchangeCommission (SEC). The improved sec-ond quarter financial performance ofblue-chip companies, especially thebanking stocks, as well as the bargainhunting of investors also proved keydrivers.



One major move that also boostedinvestor confidence (and thus, activ-ity) in the Nigerian equities market wasthe constitution of the Board of Trust-ees (BoT) for its Investor ProtectionFund (IPF). The nine-man BoT hasGamaliel Onosode as chairman whilethe NSE, shareholders, stockbrokers,registrars, are also represented. TheIPF, which had a balance of N625million as at December 30, 2011, ismeant to compensate investors wholose money as a result of the bank-ruptcy, insolvency, negligence or wrongdoing of stockbroking firms. Also, TheNigerian Stock Exchange (NSE) ap-pointed a new Executive Director,Business Development Division. The

appointee, Mr. Jalo-Waziri would haveoversight for the Listings Sales andRetention, Branch Network and Prod-uct Management Departments of theNigerian bourse.

But from all indications however,the most significant driver of the mar-ket during the quarter was the intro-duction of the ‘market-making’ initia-tive. The SEC had earlier in the yearmandated 10 investment bodies tocommence market making—a processwhereby a broker-dealer provides con-tinuous two-way quotes to the marketfor the securities that they make mar-kets on during the trading day—oneindicating the price and size they arewilling to buy a particular security, theother indicating the price and size theyare willing to sell that same security. Inadopting this initiative, the NSE com-menced market making on September17, 2012 with 16 stocks—but has sinceadded nine more. Indeed, according tothe NSE, all quoted stocks that aretrading above par value would beadded to the market makingprogramme over a period of sixmonths.

This cheery performance of thecapital market during the period un-der review is also evident in the bondsegment. Specifically, on October 1,2012, the FGN bond was adjudged

robust and sophisticated enough to beincluded in the widely used JP MorganGovernment Bond Index—EmergingMarkets (GBI-EM). The JP MorganGBI-EM indices are comprehensiveemerging market debt benchmarks thattrack local currency bonds issued bygovernments of emerging markets.The index was launched in June 2005and is the first comprehensive globallocal emerging markets index.

According to the Debt Manage-ment Office (DMO) Nigeria, until nowSouth Africa was the only Africancountry whose bonds are included inthe index. Other countries in the indexare Brazil, Chile, Columbia, Hungary,Indonesia, Malaysia, Mexico, Peru,Philippines, Poland, Russia, Thailandand Turkey. Again, according to theDMO, Nigeria joining this ‘exclusiveclub’ is a clear demonstration theGovernment’s investments in develop-ing the domestic bond market andexternalization of the Nigeria storythrough the Eurobond issuance andrelated road shows, have been reward-ing. In particular, the DMO sums up,“this development represents an au-thoritative validation that the qualityand strength of the domestic financialmarkets have improvedcommendably…it is indeed, a new fil-lip to the momentum of the transfor-



mation agenda.”Also giving an opinion on this de-

velopment, JP Morgan’s sub-SaharanAfrica economist, Giulia Pellegrini,noted that Nigeria’s economic outlookhas continued to improve as policymakers remove restrictions on foreigninvestment, control inflation and steadythe currency. The CBN had last year,lifted a requirement for foreign inves-tors to hold local-currency debt for atleast one year to attract capital—a de-velopment that has been key to luringinvestors and improving liquidity as wellas build up of external reserves.

As the boom in transactions on theFGN bond was raging, the sub-nationalbond market was also active—follow-ing the quest by various state govern-ments to fill budget gaps or fund bigticket infrastructure projects in theirdomains. A number of state govern-ments got to various stages in the pro-cess of raising funds in the capitalmarket during the quarter under re-view. They include Gombe, Rivers,Lagos, Ebonyi and Osun states. In theface of the trend however, the DMOhad commenced steps to restrict therush by many state governments to thebond market. Thus, according to the

DMO, “no state will be allowed to bor-row if its total debt service outlay ona monthly basis is above 40 per centof its FAAC allocation for the past 12months. This is bearing in mind the factthat every state should have an Inter-nally Generated Revenue (IGR) andso should not depend fully on FAAC.”

BANKING AND FINANCEIn this critical sector, reforms contin-ued with gusto all through the quarterunder review, just as the performanceof the players (especially the depositmoney banks—DMBs) continued tobe encouraging. Indeed, the third quar-ter financial reports of the banks havesince constituted one of the drivers ofthe rapid recovery activities in the stockmarket. More banks have joined thelist of market makers—thus strength-ening the efficacy of the new policy inreviving the market. The non-perform-ing loans (NPLs) that had hitherto bur-dened most DMBs have dropped toinsignificant levels, while each bankembarked on market share consolida-tion and brand equity building.

In this regard, Zenith Bank Plcfast-tracked its strategic move to haveits shares listed on the London Stock

Exchange (LSE). This move is toachieve additional level of comfort forthe Bank’s teeming international inves-tors derivable from the subjection ofits operations to the LSE’s reputed cor-porate governance standard which isregarded as ‘best-in-class.’ Besides, Lon-don is seen as the hub for emergingmarket fund investors and other spe-cialist investors. Zenith Bank thereforeopted for a technical listing of its sharesthrough non-capital raising GlobalDepository Receipts (GDRs) that willconfer it with a number of benefits.These will include increased liquidityof the Bank’s shares; access to inter-national investors; increased demandin share price and better diversifiedshareholdings.

Most of the banks embarked onnew ‘electronic products’ developmentin tune with the ‘cashless’ policy of theapex bank. Again, Zenith Bank cameup with ‘EazyMoney’ and others; FirstBank unveiled ‘FirstMonie’; Ecobankintroduced ‘Rapid Transfer’; GT Bankcame up with a product targeted atsenior citizens. They also have beenaggressively deploying point of sale(POS) devices and automated tellermachines (ATMs) in virtually every



business location in the Lagos area inline with the ‘Cash-less Lagos’ project.Many DMBs also embarked on freshrestructuring in the effort to arrive atnew business forms in line with theemerging banking model of the CBN.Some are opting for the holding com-pany (HoldCo) structure while othersare adopting the ‘single company’ ar-rangement—divesting from none corebanking businesses. Although the dead-line for the restructuring which entailedthe surrendering of the universal bank-ing licenses to the CBN had expired,the apex bank has given no new date.

The Central Bank of Nigeria(CBN) on its part embarked on a num-ber of reform initiatives during thequarter under review: the (suspended)Naira restructuring; financial inclusion;drafting of agent banking framework;bank customer identification via bio-metrics; upgrading of its interventionfunds in agric, etc. Under a policy movecode named ‘Project Cure’, the CBNwas to restructure the national currency.As part of the scheme, a new higherdenomination currency, five thousandnaira note would be issued. In the samevein, the lower bank note denomina-tions of N5, N10, N20 were to be

converted to coins. In all, the Nairacurrency structure would have been 12units: six coins and six bank note de-nominations. Although the new Nairanotes were to be introduced early in2013, the Presidency at a point issueda statement ‘suspending’ the currencyrestructuring exercise.

Under the agent banking initiative,the apex bank commenced the devel-opment of a framework that will alsomake for a tiered Know Your Cus-tomer (KYC) to create easier accessfor rural dwellers and other financiallyexcluded individuals to open bank ac-counts. A banking agent is a postal out-let contracted by a financial institutionor a mobile network operator to pro-cess clients’ transactions. Rather thana branch teller, it is the owner or em-ployee of the retail outlet who con-ducts the transaction and lets clientsdeposit, withdraw, and transfer funds;pay their bills, enquire about an accountbalance, or receive government ben-efits or a direct deposit from theiremployer. Banking agents can be phar-macies, supermarkets, conveniencestores, lottery outlets, post offices,among others

On moves to tackle customer iden-tity challenges in the DMBs, the apexbank under the auspices of the Bank-ers’ Committee set up a committee ofseven bank chief executives plus theNigeria Interbank Settlement System(NIBSS) and heads of two of its rel-evant departments (Shared ServicesUnit) to achieve a biometric solutionfor the entire industry. The committeetagged “Bankers’ Committee Sub-Committee on Customer Identity Man-agement in the Banking Industry” isled by the Chief Executive Officer ofZenith Bank Plc. The Committeewhich had since commenced work isexpected to put in place a robust bio-metric solution for the entire industryby mid-2013—to eliminate all mannerof identity fraud in the industry. Theapex bank has also directed that effec-tive January 8, 2013, the NationalIdentification Number (NIN), to beissued by the National Identity Man-agement Commission (NIMC), shallbecome the basis for Know Your Cus-tomer (KYC) verification and compli-

ance by all DMBs and other deposittaking financial institutions in the coun-try. The CBN has also directed theDMBs and other financial institutionsto include the Independent NationalElectoral Commission (INEC) voters’card as an acceptable identification fortransaction purposes in banks.

The National Financial InclusionStrategy (FIS) formulated by the apexbank was also launched during the quar-ter under review. The FIS seeks to en-able more Nigerians have access tofunds; that is to bring about 85 millionadult population of the country intothe banking system through a deliber-ate creation of access to finance. Ac-cording to the CBN, 39.2 million ofthe Nigerian adult population, repre-senting 46.3 per cent currently has nolink or access to any banking servicesof any sort. Of the un-banked popu-lation, women account for 54.4 percent while 73.8 per cent of the popu-lation is below 45 years. Also, 34 percent of the population is without for-mal education, with 80.4 per cent ofthem living in the rural areas of thecountry.

TELECOMMUNICATIONSAll through the period under review,the quality of service (QoS) by the tele-communication companies, especiallythe GSM firms, remained a dominantissue. The regulator in the sector, theNigerian Communications Commission(NCC) had, in the previous quarter,imposed some fines on these opera-tors, following from the result of a QoSsurvey early in the year. This trend hashardly abated. Indeed, the Commissionsaid it had in recent times been inun-dated with several complaints fromconsumers, and other industry stake-holders against the various promotionsoffered by telecommunications opera-tors. The NCC said it had evaluatedthose complaints against the backdropof sustaining the integrity of the net-works, the general interest of the con-sumers, the socio-economic impact ofthe promotions on operators and otherrelevant stakeholders.

These promotions, according to theNCC have increased the number ofminutes available to subscribers for use


PERISCOPE | Economy:Recovery as Dividend of Reforms

within a limited period of timethereby creating congestion inthe networks as subscriberstry to use up the availableminutes within the stipulatedtime. The regulator adds thaton-net calls were now beingoffered by operators at tar-iffs well below the prevailinginter-connect rates, thereby in-troducing anti-competitivepractices and behaviour.

The NCC insists that thetermination of calls were be-coming increasingly difficultfrom one network to anotherand overall consumer experi-ence on the networks has be-come very poor thereby mak-ing it extremely difficult forsubscribers to make calls suc-cessfully. The Commissiontherefore banned all promo-tions by TelecommunicationsNetwork Operators as well aslotteries being carried out onsuch networks, adding that themeasure covered all proposedand approved promotions andlotteries on which it had givenapproval, further to theMemorandum of Under-standing (MOU) entered intowith the National LotteryRegulatory Commission(NLRC).

Still concerned with con-sumer dissatisfaction withquality of service, the NCCin a directive issued last Au-gust mandated “that from November1, 2012, all mobile operators shall send,free of charge, a message or an alertto both postpaid and prepaid subscrib-ers after every call, SMS, or systemgenerated charge or tariff, with a pro-viso that a subscriber can opt out if heor she so wishes”. The order mandatesoperators to send messages containingsix critical information including: ex-act duration of call minutes and sec-onds, total cost for each call or SMS;customer accounts balance after thelast call and SMS for prepaid custom-ers; customer account balance after acharge or tariff and the reason for thecharge or tariff; cumulative call charges

up to the last call within the chargingperiod for postpaid customers; cost ofservices and credit balance upon re-quest by customer for data service.

While issuing the directive, theNCC said “this direction is a responseto one of the major concerns of thesubscribers as it relates to the actualamounts deducted from their creditbalances by the service providers foreach call or SMS sent”, adding that,with this service, subscribers are em-powered to promptly discover anyanomaly in their bills, and will be ableto prove if they are billed for calls thatthey did not make.

The telecoms operators on theirown part have been contending with a

number of debilitatingchallenges including mul-tiple taxations, wilful at-tacks on telecoms infra-structure, interference ofsome federal, state andlocal government offi-cials and agencies. These,according to the telecomcompanies, have been af-fecting their quality ofservice in the country aswell as pushing operatingcosts up. The sub-sectorhas also been contendingwith the face-off be-tween NCC and the Na-tional EnvironmentalStandards and Regula-tions EnforcementAgency (NESREA) overmast regulation in thecountry. While theNESREA Act gave it thepower to regulate the en-vironment, the NCC Actempowers it to regulatethe telecoms industry.

Even with these con-cerns and regulatory ac-tions by the NCC, thesector continued to turnout impressive recordson subscriber patron-age—as reflected in vari-ous indices. Indeed, whilethe total subscriber baseof all telephone compa-nies stood at 95.89 mil-lion as at end-December

2011, the figure rose to 102.37 millionin June 2012 and rose further to107.37 million at the close of the thirdquarter 2012. Of this number in Sep-tember, the GSM operators accountedfor 96.54 per cent or 103.65 million.During the period also, the teledensityimproved from 68.49 in December2011 to 73.12 in June 2012 and stillwent up to 76.69 in September 2012.(* Marcel Okeke is the Editor,Zenith Economic Quarterly)


ments directive of the Federal Government of January2009.

This press statement forms part of the CBN’s pro-gram of engagement and enlightenment of the public, tofurther clarify the policy and allay any anxieties that mayarise from misunderstanding or misinterpretation of thepolicy. The CBN seeks to ensure that the essence of thepolicy is properly understood and seen as beneficial to usas a nation that desires economic growth and development,particularly in view of our ambition to be amongst the top20 economies of the world by the year 2020.

Polic

y

he Central Bank of Nigeria recently announceda set of policy directives aimed at addressingthe currency management challenges in Nigeria,and enhancing the national payments system. Thepolicy also further reinforces the electronic pay-

T


POLICY | New CBN Cash Collection Policy


1. What informed the newpolicy?In the wake of the 2009 reforms, dataanalysis of the commercial banksshowed a high cost structure in thebanking industry, of which a signifi-cant proportion is passed on to thecustomers in the form of high servicecharges and high lending rates. Alsoworthy of note is that a substantial partof the operational costs is the expen-diture on cash management.

The Nigerian economy is tooheavily cash-oriented in the transactionsof goods and services. The huge vol-umes of cash transactions impose tre-mendous costs to the banking sectorand, consequently, the customer, interms of cash management, frequentprinting of currency notes, currencysorting and cash movements.

This informed the preference bythe banks to lend to the capital marketand oil & gas industry rather than thereal sector and small and medium scaleenterprises (SMEs). There are also therisks involved in keeping or movinglarge amounts of cash, namely the highincidences of robberies and burglariesand the public’s propensity to abuse andmishandle currency notes.

In 2009, the direct cost of cashmanagement to the banking industrywas N114.5bn, and it is estimated tobe as high as N192bn by 2012. Thisspiralling cash management cost, mostof which is passed on the consumer inthe form of bank charges and lendingrates, is as a result of the cash domi-nant economy. For example, the valueof Currency-In-Circulation (CIC) as atDecember, 2009 amounted to N1.184trillion, an increase of 20.36% overthe level at the end of 2008. As at 31st

December, 2010 the total CIC valuestood at N1.378 trillion, showing anincrease of 16%.

Further analysis indicated that 90%of bank customer daily withdrawalsare of amounts below N150,000whereas only 10% of bank customerswho withdraw over N150,000, are re-sponsible for the heavy cost of cashmanagement being borne by all bankcustomers.

The present levels of cost and in-

efficiencies in providing banking ser-vices and the poor quality of servicesexperienced by the majority of thebanking public will be addressed by thenew cash withdrawal policy, in concertwith other efficiency initiatives by theCBN in collaboration with the Bank-ers Committee. There is need to re-move the burden of cost of manag-ing cash from the low savers and im-prove services to them.

The progress made by the FederalGovernment in the electronic paymentsof salaries and contractors/suppliers,the growing acceptance among the citi-zens of innovations such as the ATMand mobile telephony and commitmentby the banking community to improvethe supporting infrastructure for seam-less electronic payments were encour-aging factors which propelled the newretail cash policy.

The New Cash PolicyThe retail cash policy which com-mences from June 1, 2012 stipulatesthat over the counter cash transactionsabove N150,000 and N1,000,000 forindividual and corporates respectivelywill attract a charge. Notwithstanding,the Policy recognises that Merchantshave to continue to receive payments,therefore, it allows merchants and trad-ers alike to choose either cash optionfor receiving payments or adoptcheaper and convenient alternativeelectronic payments channels to facili-tate business transactions. The imple-mentation of the policy will commenceat first in Lagos, and gradually phasedto cover Port Harcourt, Kano, Aba andF.C.T.

A careful review of the policy re-veals the following salient consider-ations that went into the formulationof the policy as well as actions beingtaken to ensure seamless implementa-tion:

1. The Central Bank of Nigeria,while acting within the limits of itsstatutory responsibilities in respect ofthe development of the payments sys-tem, did not place a limit on cash trans-actions in the banks rather the CBN isformally encouraging banks to shiftcost burden of heavy cash manage-ment to customers conducting high

volumes of cash transactions in thebanking halls.

Individuals and corporates who aredesirous of such cash usage should bewilling to pay for the cash services be-ing offered by the banks. Since themajority of Nigerians (90%) do notcarry out cash transactions of up toN150,000 a day on their respective ac-counts, the threshold for charging wasset taking into consideration the needto protect the low income earners andsavers.

2. It is should be clarified that thepolicy does NOT prohibit the with-drawal of more than N150,000.

Those who still wish to conductheavy cash transactions with their banksare free to do so within the provisionsof the directive.

3. The banks are poised and com-mitted to an aggressive roll-out of




ATMs, Point-of-Sale (POS) and other electronic channelsto ensure these are readily available to the high cash drivenindividuals and businesses. The CBN and Bankers Com-mittee are implementing an e-payment rollout program thatwill deploy additional 40,000 POS and 10,000 ATMs be-fore December 31,

2011 and 375,000 POS and 75,000 ATMs by Decem-ber 2015. These are to be deployed with strict rules onhigh uptime and availability.

4. Currently, there are funds transfer products of banksthat ensure same day value to customers anywhere in thecountry through the electronic funds transfer system.

5. The CBN aims to roll out this policy with a pilotstarting with Lagos, to be implemented by January 1, 2012.Following proof of concept, the roll-out will continue tothe remaining identified cash-dominant localities with ef-fect from June 1, 2012.

6. To address the communication infrastructure issuewhich had hitherto affected the level of availability of POSand ATMs to users in the country, the CBN and the Bank-ers Committee have commenced concrete actions to en-

sure that priority is given to payments related data trafficby telecommunication networks. Agreement has beenreached to provide dedicated channels for transactions overthe Point of Sale (POS).

7. Power is another key infrastructure which impactsthe availability of POS and ATMs. The CBN has there-fore agreed on minimum POS standards which specifyadequate battery life span to support uninterrupted avail-

Power is another key infrastructurewhich impacts the availability of POSand ATMs. The CBN has thereforeagreed on minimum POS standardswhich specify adequate battery lifespan to support uninterrupted availabil-ity of service of the terminals.

http://fc04.deviantart.net/fs70/f/2010/023/e/4/Electricity_Line__by_Pranomic.jpg



ability of service of the terminals. In addition, the CBNwill stipulate and enforce minimum uptime for ATM andPOS. Providers of these services will be held to minimumavailability standards.

8. The non-acceptance of some cards over the POS,owned by certain payments networks due to lack ofinteroperability, is equally being addressed. POS serviceproviders and banks have been issued, through this policy,a clear directive to vacate any existing contract which isrestrictive to card usage with effect from June 1, 2012.The CBN has commenced compliance checks.

9. Last year, the CBN issued approvals in principle to16 mobile payment providers for which the pilot was re-cently concluded, as part of the efforts to provide effec-tive and efficient alternatives to cash in the economy. Theeventual licensees will be held to strict service quality androll out targets. The arrangement for prioritising paymentsdata traffic over the telecommunication network will also

be extended to cover mobile payment providers.10. Today, the cheque is available to make payments of

up to N10million through the clearing system. Enforce-ment of the T+2 clearing cycle is being stepped up andefforts are ongoing to reduce the cycle to T+1. We areprepared to ensure discipline in the usage of cheques andwe shall give necessary assistance to the EFCC in prosecut-ing issuers of dud cheques. Issuance of dud cheques is afinancial crime.

11. The CBN has set up a Consumer Protection Officeto address users’ complaints especially in respect of thesealternative banking and payment channels.

12. The CBN is mindful of the need for careful imple-mentation. The policy becomes effective on June 1, 2012(not 2011) in selected areas of the country. In fact, wehave obtained the understanding of the President and theExecutive Governor of Lagos state to carry out a pilot

commencing January 2012 to demonstrate the feasibilityof the policy. We have a clear plan of action over the nextsix months to continue efforts to ensure that alternativepayment modes are effective and efficient for conductingbusiness transactions.

13. We are convinced that the low level of literacy isnot a potent limitation to the adoption of innovation andtechnology in payments. Millions of the so called illiteratesuse mobile phones effectively and even send text messages.Nevertheless, the CBN is committed to a robust grassrootsawareness and education campaign strategy to aid the un-derstanding, adoption and usage of POS and ATMs.

14. The banking industry will also be adopting biomet-ric authentication for POS and ATMs to address safety ofcustomers’ funds and avoid losses through compromise ofPIN. This will improve the ease of transaction on elec-tronic channels as customers will no longer have to worryabout forgetting PIN numbers or disclosure of PIN to

fraudulent assistants.15. We need to be mindful that Nige-

ria cannot relent in ensuring that it main-tains its accreditation by the internationalmoney laundering watchdog - the Finan-cial Action Task Force. In this regard, it isessential to ensure that our payments sys-tem keeps trail of internal and external flowof funds within the economy.

16. Our sister countries in Africa aremaking progress in reducing the level ofcash transactions in their economy. Nige-ria currently has 13 POS/per 100,000adults whereas Uganda has 453 POS/100,000 adults, South Africa is 1,063POS/1000 adults and Brazil 2,247 POS/100,000. If Uganda could take the boldstep to embrace more efficient paymentsoptions some years ago, it is very clear thatNigeria requires an aggressive POS andother electronic payment rollout to realisethe vision of being one of the 20 biggest

economies in 2020.In conclusion, Nigerians can be assured that this

programme is for their benefit and for the benefit of thecountry as whole. It will reduce cost of accessing financialservices and quality of banking services while also helpingto stem cash-related crimes such as burglary and arm rob-bery. Over the next 12 months, the CBN will carry outadequate public awareness and enlightenment as we en-gage all stakeholders in a two-way conversation to under-stand the concerns and explain how the new policy willaddress all those concerns and issues. We seek the coopera-tion of Nigerians on this initiative and we assure them thatthe economic/financial stability and the protection of fundsof the banking public remain key priorities for the CBN.

We are convinced that the low level of literacy is not a

potent limitation to the adoption of innovation and

technology in payments. Millions of the so called

illiterates use mobile phones effectively and even send

text messages. Nevertheless, the CBN is committed to a

robust grassroots awareness and education campaign

strategy to aid the understanding, adoption and usage

of POS and ATMs.


Glo

bal W

atc

h

By EUNICE SAMPSON

Growing recession signalsThe global economy has witnessed some very toughtimes in the last five years – and almost concomi-tantly. A big challenge remains the euro zoneeconomy — the starting point of the new roundof crisis. The huge debt and deficit burden therehas been difficult to fix owing to the zone’s struc-tural peculiarities.

In addition, rising energy prices, slow USeconomy and the seeming cooling in China’s growthhave further complicated the snail paced recoverywitnessed since the Great Recession of 2007-2009– to the extent that several economies have been

America, Brazil, China and many more – the grow-ing trend during this last lap of 2012 is economicstimulus – because the key economies are not justgrowing as they should!

Once more, the Keynesian economic school ofthought seems to be holding sway – their dogmaof robust public spending as a critical growth pro-peller is again being tested out in various countries.

And so, just as in 2008 and 2009, the majoreconomies are currently drawn into two camps –those that have already announced their stimulusplans and those seriously mulling over the idea. Thechallenge before national leaders is how to stimu-late economies back to normal growth paths.



about 6.8% at the end of the third quarter.In the UK, GDP contracted by 0.4% (q/q) in second quar-

ter 2012 (-0.5% y/y), after a decline of 0.3% in the firstquarter, which means that technically, the economy entered arecession second quarter. The contraction has been attributedto weaknesses in the construction, production and servicessectors, according to data from the Office of National Statis-tics.

In France, Gross Domestic Product stagnated at 0.00% insecond quarter 2012 over the level in the previous quarter.Third quarter growth announced in October showed a fur-ther contraction (q/q) of 0.1%. France could be said to havegone into recession already based on its third quarter growthperformance. Outlook for the last quarter of the year doesnot seem any more promising.

In China, year-on-year GDP growth continues to deceler-ate. Data released by the country’s National Bureau of Statis-tics on October 18 shows that Third quarter GDP (y/y) grewby 7.4%, a decline from the 7.6% and 8.1% growth recorded

in the second and first quarters, respectively. But on aquarter-on-quarter basis, third quarter performance of2.2% growth marked the first quarterly gain after sevenconsecutive quarters of decline. Analysts have expressedrelief that third quarter growth signaled a soft landingrather than the drastic slowdown that had been antici-pated.

In Greece – the goose that laid the troubling eggs –fiscal and monetary challenges persist. Yes, there havebeen some slight improvements in its deficit data and alowering in its debt servicing obligations in recent months— but that is as far as the good news goes. The Greekeconomy continues to contract rapidly, with a declineof 6.2% (y/y) in second quarter 2012 after an earlier6.5% decline in the first quarter. Greece’s condition isnow a classical example of an economy in depressionwith unemployment rate now put at over 23%.

Citi’s economists are adamant that despite all the poli-tics targeted at preventing it, a Grexit (referring to aGreek Exit from the Euro zone as coined by the bank’schief economist) could still happen between 2013 and2014, unless a complete write-off of the country’s offi-cial debt is agreed. But this is of course most unlikely.

Which way to go – stimulus orausterity?For decades, the world’s poorest countries have groanedunder IMF imposed austerity measures which the BretonWoods institution recommends as an effective route outof fiscal and monetary crisis. But the Fund has in recenttimes joined the clamour against the measure – at least,in addressing the current challenges faced by the devel-oped economies.

The IMF now agrees with the likes of the OECDthat austerity measure, which comes as a spontaneousnational response during periods of economic stagna-tion such as this one, could “act as a drag” and further

flagged for a possible recession by theend of the year.

Everyday, stakeholders hope forsome news that would signal that at least,the worst is over. But so far, some goodnews from one economic bloc is can-celled out by some bad news from an-other – almost in quick succession.

According to IMF estimates, publicdebt is at the highest levels in 60 yearsand is increasingly becoming unsustain-able. For the advanced economies, pub-lic debt now averages 110% of GDP.

Growths are slowing in virtually allmajor economic centers. In the US, therehas been some improvements in labormarket and housing data. But accordingto data released by the Bureau of Eco-nomic Analysis, the economy grew by aslow 1.3% in the second quarter of 2012,after a more impressive 2.0% in the firstquarter. Growth however returned to2.0% in the third quarter boosted by con-sumer spending, an improving housingsector and increased defense spending.But the mood remains pensive as thestill sluggish growth pace is deemed in-sufficient to snap the economy out ofits downbeat labor market recovery.

In Germany, GDP continues to ad-vance albeit very slowly. In second quar-ter 2012, growth accelerated by a mere0.3% after a 0.5% growth in the previ-ous quarter. Unemployment rose by9,000 in September, marking the sixthconsecutive month of increase as exportwanes in response to the euro zone cri-sis. Unemployment rate remained flat at


The global economy has wit-

nessed some very tough times in

the last five years – and almost

concomitantly. A big challenge

remains the euro zone economy

— the starting point of the new

round of crisis. The huge debt

and deficit burden there has

been difficult to fix owing to the

zone’s structural peculiarities.


GLOBAL WATCH | Recession Fears andAfrica’s Commodity Export: What Lies Ahead?

aggravate rather than ameliorate eco-nomic troubles. This is definitely abrand new IMF position and a majoru-turn on its age long austerity gospel.

Moreover, the IMF recently admit-ted that it had underestimated the dam-age caused by a sudden public spend-ing cut. Its recent World EconomicOutlook report admits that previousestimates that for every £1 of spend-ing cut the economy shrank by 50pwere wrong – rather, the economyshrank by around £1.30.

A new survey also found thatsweeping austerity measures worsenrather than solve public debt burdenssince, as public spending falls, so doeseconomic growth —- with downwardpressure on employment and tax rev-enues. In the end, the initial target ofdeficit cut is hardly ever achieved.

Propelled by its latest findings, theIMF now urges governments to allowfor spending cuts that are staggeredover a longer period to reduce the im-pact on economic growth.

The need to spur economies backto growth has therefore become amajor theme in recent gatherings ofnational leaders, even during the Oc-tober 2012 annual meetings of theIMF and World Bank which held inTokyo, Japan. And to spur growth,many experts now agree with the in-creasingly popular Keynesians that fis-cal stimulus is the best bet.

Stimulus – what are theyproposing?Since the Great Recession which endedeffectively around mid 2009, the ma-jor economies have been struggling withrecovery efforts. The OECD in Sep-tember 2012 downgraded growth pros-pect for virtually all G7 economiesexcept Japan. This has heightened theneed to take measures that would spurgrowth.

2012 projected growth for the USeconomy has been cut from an earlier2.4% to 2.3%. For the world’s biggesteconomy, a stimulus move is evenmore expedient. As the country ap-proaches its so-called “fiscal cliff ” –when Bush-era tax holidays wouldcome to an end and a series of strin-

gent spending cuts and other austeremeasures imposed – a recession is pos-sible if the situation is not tacticallymanaged.

It did not come as a major surpriseto analysts therefore when the US Fed-eral Reserve on Thursday September13, 2012 unveiled a new stimulus planaimed at boosting economic activitiesand creating new jobs.

In the new package, the US Fed isembarking on a quantitative easing

plan tagged QE3 – a new round ofbond buying scheme targeted at stimu-lating growth and reviving a labor mar-ket where unemployment remains stub-bornly above 8%.

The Fed would undertake open-ended monthly purchases of mortgage-backed securities which, together withother measures would inject $85 bil-lion into the economy monthly.

The Fed also plans to keep interestrates at “exceptionally low levels” until

http://euobserver.com/media/src/13ea11cbea3af19d695e17910b72e414.jpg


GLOBAL WATCH | From America to Asia:Fresh Moves at Salvaging Economies

at least the middle of 2015.This easing would continuefor as long as it takes toachieve some significant eco-nomic recovery.

Fed Chairman, BenBernanke has warned againstthe austerity measures thatthe “fiscal cliff ” could rep-resent from 2013 (in theform of spending cuts andtax increases) and has called

on the US Congress to takesteps to avert them.

The stock market sawmajor gains following the an-nouncement, with the S&Pshare index ending the day1.6% higher; Dow, 207 pointshigher and NASDAQ, 1.3%higher, according to reportsfrom the CNN.

Also, in the EuropeanUnion, a similar measure hasbeen taken to address recenteconomic contractions in thatarea. The European CentralBank (ECB) unveiled a bond-buying plan on September 5,2012. The ECB would buythe bonds of its debt-bur-dened member countries tocut their borrowing costs andease the euro zone’s debt cri-sis.

The maturities of thebonds being purchased wouldbe between one and threeyears and there would be nolimits to the size of bond pur-chased.

In the words ofMario Draghi, the ECBPresident, the planwould engage in out-right monetary transac-tions (OMTs) to ad-dress “severe distor-tions” in governmentbond markets based on“unfounded fears.”

The new palliative isin conjunction with theEuropean StabilityMechanism programsand the ECB will be so-liciting the assistance ofthe IMF to ensure thatbenefiting countriescomply strictly with theset conditions.

However, for the OMTsto be triggered, economicallytroubled countries wouldhave to first request a bail-out.

The ECB President hasreiterated the need for mem-ber countries to continue with

their deficit reduction plansand labor market reforms aspart of efforts to address thecurrent debt crisis and averta possible collapse of thecommon currency.

The ECB expects theeuro zone economy to shrinkby 0.4% in 2012 and growby 0.5% in 2013, with infla-tion rising to 2.6%.

Euro zone markets ralliedsignificantly in response to thestimulus plan – The FTSE100 ended 2.1% higher; theGerman Dax, 2.9%; theFrench CAC 40 index, 3.1%;and the Spanish IBEX, 4.9%.Understandably, bank stockswere the biggest gainers.

Also, Spanish and Italiangovernments’ implied bor-rowing costs fell sharply as aresult of the stimulus plan.For Spain, the implied cost ofborrowing over two years fellfrom 4.71% to 2.80%; thethree-year rate went downfrom 5.09% to 3.68%; and

the four-year borrowing costfell from 5.97% to 4.60%. Inthe secondary market, Spain’syield on 10-year bonds fellbelow 6% after hitting 7% inrecent months —- the levelat which Ireland, Portugaland Greece were compelledto file for bailouts.

The ECB intervention inbond markets is aimed at re-ducing the borrowing costsof highly indebted membercountries and reducing theodds of their requiring bail-outs.

Away from Europe, theBank of Japan – in what ap-pears to be a harvest of eco-nomic stimulus – on Wednes-day 19 September announcedthat it would expand its assetpurchase and loan programby 10 trillion yen (about $126billion) in a move expectedto ease monetary policy andstimulate the economy.

Japan’s growth outlookwas recently reviewed up-ward by the OECD, from anearlier 2.0% to 2.2% as thecountry rebuilds its infra-structure following the earth-quake and tsunami of Janu-ary 2011. Japan’s economyhas been helped by the hugegovernment spending in aneffort to recover from the

twin disaster. Yet growth hasbeen relatively slow in linewith falling global demandfor its exports.

For an export-dependenteconomy in a world wheredemand is slowing signifi-cantly as trade and businessconfidence dampen, Japanese

As in previous stimulus efforts, advanced

economies have so far undertaken the mea-

sure this year with the aim of increasing

liquidity, boosting bank lending, creating jobs,

enhancing disposable income and consumer

confidence and returning the economies back

to the path of sustainable growth.



authorities have reasons to beworried. Near stagnantgrowth, falling earnings fromexports and persisting defla-tion are some of the troublesthe country currentlystruggles with.

To keep the economyafloat, Japan has thereforeembarked on a proactivestimulus plan in which thecentral bank would increaseits current bond buying pro-gram from 70 trillion yen toabout 80 trillion yen, a dif-ference of an equivalent of$126 billion. The bond andtreasury bills purchases wouldbe completed by the end of2013.

The plan was unani-mously adopted by the mon-etary policy committee ofJapan’s central bank whichalso left monetary rates un-changed at a range of zeroto 0.1%.

The announcement cameless than a week after that ofthe United States and twoweeks after the European

Central Bank unveiled itsown bond purchase plan.

As expected, the newsgave a significant boost to therisk appetite of investors asAmerican, European and sev-eral Afro-Asian markets ex-perienced some gains imme-diately after.

Neighboring China hadon 5 th and 6 th Septemberthrough the National Devel-opment and Reform Com-mission, announced approv-als for 60 infrastructureprojects totaling more than 1trillion Yuan ($157 billion) inefforts to boost an economythat has sagged in the lastseven quarters.

The spending plan in-cludes 25 new subway linesand 13 new highway projectsspanning thousands of kilo-meters. Other projects in theoffing include airports, en-ergy production and waste-water treatment plants.

The new spending boostis coming amid criticisms that

the Chinese authorities havenot done enough to stimulategrowth following recent un-characteristic quarterly dropin GDP. Export earnings andFDI inflow have also slowedand the profits of industrialcompanies have dropped fora fifth consecutive month asat August.

Moreover, the domesticproperty market hasstruggled in recent months,and so has the manufactur-ing sector. Inflation has alsoexperienced a downwardtrend, all indications that theeconomy could do with someprompting.

The new infrastructureprojects are therefore de-signed to jump-start growthand inspire confidence thatthe economy remains upbeat.

The announcement gavean instant boost to the globalfinancial market, eventhough the approved infra-structure projects were a partof the 12th five-year plan,

rather than new, spontaneousones targeted specifically atstimulating the economy asperceived in several quarters.

But it was an economicstimulus anyway and inves-tors swooped on the news,resulting in the biggest gainsin months in Asian markets.

While China’s quick andmassive stimulus of an esti-mated 4 trillion Yuan (about$585 billion) during the 2008-2009 recession helped lift thecountry and other majormarkets out of the quagmirethen, this time, Chinese au-thorities have taken theirtime. The cautious approachis perhaps in the bid to avoida repeat of the sweeping fis-cal measures that ignited aninvestment surge, overheated the economy and sentproperty prices and other as-sets soaring in 2009 and2010.

But the recently publishedthird quarter data whichshowed a growth of 7.4% and




some recovery in industrialoutput and retails salesbrought with it some reliefand reduced the anxiety fora comprehensive fiscal boost.

However, the economy isnot completely out of thewoods yet. From year-end2011 growth level of 8.5%,analysts and even the Chi-nese authorities now peg theexpected 2012 growth levelat 7.5%. By China’s standard,this is not a very impressiveperformance.

In far away LatinAmerica, Brazil in mid Au-gust unveiled the first phaseof a major economic stimu-lus plan to boost growth inan economy that had wit-nessed the second year ofslowdown.

After an impressive 7.5%growth in 2010, the economyexperienced a sharp fall ingrowth to 2.5% last year. Inaddition, 2012 growth projec-tion was this September re-viewed downward by Brazil’scentral bank to 1.6%, froman earlier 2.5%.

The stimulus move cameafter monetary measures likea cut in interest rate and adevaluation of the country’scurrency, the Real, failed tostimulate growth.

Like in China and Japan,

the stimulus would be chan-neled through infrastructuredevelopment. More than$60bn (£38bn) will be in-vested in the country’s roadsand railways over the next 25years, with more than half ofthis spent in the next fiveyears.

Major projects targetedinclude 8,000 kilometers ofnew roads and 8,000kms ofrailways. Ports and airportsare also expected to benefitfrom the planned spendingspree.

Other measures plannedby the authorities include areduction in energy price forindustries through tax cutsthat could bring the price ofenergy products down byabout 10%.

Stimulus – resistingthe urgeAs tempting as it may seemhowever, not all majoreconomies have chosen thepath of stimulus. And asbleak as growth prospectsseem for key economies inthe European Union, severalof them still hang on to di-verse levels of austerity mea-sures.

In addition to the EU’splanned bond purchase pro-

gram some experts have ad-vocated for individual mem-bers of the bloc to take ac-tion too, to enhance thechances of a quicker recov-ery. But so far, nothing farreaching has been done inthis regard.

The UK is a case in point.The OECD recently slashedthe country’s 2012 growthprospects from an earlier0.5% growth to a decline of0.7%. It also warned that thecountry will be one of theworst hit by the currentdownturn among G7 nationsand suggested that a fiscalboost would be useful. Butthis call has so far gone un-heeded.

Though the authoritiesintroduced two new stimuluspackages in mid June 2012,including a plan to providebillions of pounds of cheapcredit to banks to lend tocompanies; and access toshort-term facilities for banksfacing “exceptional marketstresses,” stakeholders haveactually demanded for muchmore considering the rathergloomy economic outlook.

A Bank of England’sMPC meeting of October 4,2012 would have been anopportunity to take some far

reaching actions. But thepolicy makers voted againstnew stimulus measures. Eventhough the current record lowinterest rate was maintainedat 0.5%, no upward reviewwas made to the earlier£375bn quantitative easing(QE) plan.

The UK economy hascontinued to underperform,with growth slowing and ma-jor sectors, including manu-facturing and constructioncontracting.

The enthusiasm withwhich markets received thenews of the QE measures inJune was an indication thatthe economy had craved forsome fiscal incentives. Stockprices of UK banks soaredwith the Royal Bank of Scot-land for example advancingby a whopping 8%.

Meanwhile, it’s not all badnews from the UK. In midOctober, the Office for Na-tional Statistics said the em-ployment level rose to 29.59million for the period be-tween June to August, 2012.This is the highest employ-ment level since the recordswere first captured in Janu-ary to March 1971. Alsowithin the period, unemploy-ment level fell from 8.1 per-cent to 7.9 percent, far morethan analysts had hoped for.

Also, a shocking growthdata emerged on October 25when the UK Office forNational Statistics announceda 1.0% growth in third quar-ter 2012. This far-higher thanexpected growth came aftertwo consecutive quarters ofdecline – signaling that theUK was now out of a reces-sion. The growth, accordingto the authorities was helpedmostly by sales recorded dur-ing the recent summer Olym-pic Games which added 0.2percentage points to the fig-ures.


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Meanwhile, while the UK had re-mained relatively cautious in its stimu-lus efforts, other major economies haveembarked on actual fiscal tightening inrecent months. France had in Octoberannounced its 2013 budget that in-cluded a package of tax increases. Oneof the highlights of the new measuresis a 75% tax rate imposed on personsearning more than one million euros— in an effort to reduce spending defi-cit to 3.0% of GDP in 2013, from4.5% in 2012.

Spain also recently introduced someausterity measures even as it struggleswith growth, unemployment, debt anddeficit challenges. In July, Spanish au-thorities approved a new round of€65bn austerity packages.

In nearby Italy, students and laborunions took to the streets in protestmid October against stringent auster-ity measures so far introduced by theItalian authorities in efforts to addressdebt and deficit problems.

But despite these stringent mea-sures by several of the member coun-tries, second quarter data from theEuro zone shows that at the end ofthat period, the total debt burden ofthe 17 countries that make up the blochad risen to 90% of total GDP —their worst debt situation since thelaunch of the common currency in1999.

Source: OECD


Will the stimulus planswork?Similar stimulus measures in the USand other major economies during the2007-2009 recession recorded somelevel of success, including stimulatinggrowth pace, reducing job losses andcreating new ones, and quickening ac-tivities in major financial markets

across the world. It was also a signifi-cant boost to public confidence andspending which are indispensible in anyquest for a sustainable recovery.

Reports from the White House saythe multi-year $814 billion stimuluspackage passed by the US Congress in2009 created between 2.5 million and3.6 million jobs and raised the nation’s

annual economic output by almost$400 billion.

Also, in China, the $586 BillionStimulus Plan unveiled in November2008, at the height of the global reces-sion, played a significant part in up-holding robust growth put at 8.7% asat year-end 2009 and helping to expe-dite global recovery from the reces-

Source: OECD



sion, even though trailed by some sterncriticisms.

Critics of China’s stimulus packagehave maintained that it had injectedexcessive investments into an economythat was already over-saturated withexcess capacity and over-investment,thereby further overheating theeconomy.

However, barely six months afterthe package was announced, the WorldBank in June 2009 reviewed China’sGDP growth for that year upward to7.2%, from an earlier 6.5%. By theend of the year, China’s actual growthwas a whopping 8.5%. The develop-ment was an indication that the stimu-lus effort did work, at least in acceler-ating growth.

Even in the Euro zone during thatrecession period, the same was true toa large extent. EU’s 200 billion eurostimulus announced in November2008, which represented 1.5% of theregion’s GDP helped to halt fallinggrowth and lift several economies inthe bloc out of a deep recession.

As in previous stimulus efforts,advanced economies have so far un-dertaken the measure this year with theaim of increasing liquidity, boostingbank lending, creating jobs, enhancingdisposable income and consumer con-fidence and returning the economiesback to the path of sustainable growth.

So, will the 2012 stimulus regimebe effective in achieving these setgoals? That remains the million dollarquestion right now.

Although it is still far too early inthe day to gauge impact, early economicresponses to the stimulus measureshave been mixed.

Financial markets around the worldof course advanced remarkably fol-lowing the announcements of the vari-ous stimulus plans. Capital marketswitnessed soaring prices while severalof the troubled economies saw a sig-nificant drop in their bond yields –notably Spain and Italy.

But some analysts have argued thatthe drop in yields for these countriesin recent times might not be all aboutthe EU stimulus plan. Some also say itcould be more of a market perceptionthat these countries are actually mov-

ing closer to asking for bailouts, thanan indication of growing confidenceon a possible recovery.

This October, Standard & Poor’scut its credit rating for Spain to a leveljust above the junk territory, andMoody’s is expected to follow suitsoon.

Also, after an earlier S&P down-grade on January 13 by two notches,from A to BBB+, Moody’s in July cutItaly’s rating by two notches, from A3to Baa2, two levels above junk statusin a move that heightened concernsabout the future of the euro commoncurrency.

In the United States, much of thecriticisms of the stimulus policy cen-ters round the inflationary impact ofsuch a plan.

Meanwhile, latest data released inOctober and monitored through TheGuardian (UK) shows some upbeateconomic data from the United States– consumer sentiment index (a mea-sure of the level of confidence of UScitizens in the economy) has soared farabove expectations. It came in at 83.1,a big improvement on Reuters’ earlierforecast of 78.0. The latest index is ata five-year high, and a major step upfrom the September level of 78.3.

The new data implies some levelof good recovery in the US economy– a perception that helped markets agreat deal following the news.

From initial data from America toChina, it seems the stimulus plans un-leashed by major economies duringthird quarter 2012 just might have some

positive impact on the global economy.However the next couple of quarterswould give a far clearer picture of theiractual effectiveness.

But even if these economic stimu-lus measures do not work wonders, itis at least reassuring to know that theywere the most viable options open tothe troubled countries at this point intheir history – and they are leveragingon them.

In the meantime however, IMF’sChristine Lagarde has proposed to na-tional leaders a five-point plan to tacklethe current economic challenges:

1. Accommodative monetarypolicy

2. The right pace of fiscal adjust-ment, “mindful of not undercuttinggrowth but with solid and realistic plansto bring debt down over the mediumterm”

3. Finishing the banking sectorclean-up

4. Structural reforms to boost pro-ductivity and growth and

5. A rebalancing of global demandtoward the dynamic emerging markets.

With the increasingly aggressive fis-cal and monetary stance against thelooming global recession, it is gettingprogressively more certain that a sus-tainable solution could be in the off-ing. But a lot would depend on chance,and of course on whatever becomesof the EU common currency dream.(* Eunice Sampson is the DeputyEditor, Zenith Economic Quar-terly)

With the increasingly aggressive fiscal and monetary stanceagainst the looming global recession, it is getting progressivelymore certain that a sustainable solution could be in the offing.But a lot would depend on chance, and of course on whateverbecomes of the EU common currency dream.

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Nigeria’s hydrocarbon resources havetended to be more of a curse than ablessing for the majority of the popu-lation. Others have pondered the para-dox whereby a country with some ofthe world’s richest hydrocarbon re-sources harbours some of the world’spoorest of the poor.

In the 10 years from 1999 to 2009,the Nigerian National Petroleum Cor-poration (NNPC) collected about $200billion in revenue. Yet, the country ispoorer today than at independence in1960; with only about 48% of peoplehaving access to potable water.

igeria’s hydrocarbon in-dustry remains one of themost troubled in the an-nals of oil producingcountries. Indeed, somehave contended that

NThese contradictions have kept the

industry and the country on their kneesfor decades, thus the inevitable disquietfrom most stakeholders. It is thereforenot surprising that the Petroleum In-dustry Bill (PIB) 2012 has been de-signed to seemingly cure all that ailsNigeria’s oil industry.

Nigeria is undoubtedly a petroleumpowerhouse. As Africa’s primary oilproducer, Nigeria is home to the sec-ond largest oil reserves in the conti-nent. The light, sweet quality of theNigerian crude makes it a preferredgasoline feedstock. However, stalledreforms in the oil industry due to de-lays in the enactment of the PetroleumIndustry Bill had been damaging to thecountry’s prospects.

Many of the planned projects havealready been delayed, as investors await

Issues (

I)

* By Emeka Nwadioke

Nigeria is undoubt-

edly a petroleum

powerhouse. As

Africa’s primary oil

producer, Nigeria is

home to the second

largest oil reserves in

the continent.


ISSUES (I) | Petroleum Industry Bill:Issues, Challenges & Prospects

32 Zenith Economic Quarterly July 2012

the fiscal terms to be embedded in thePIB. Nigeria’s resource governance andinstitutions have fared worse whencompared with Brazil’s relatively stableand clear regulatory regime and effec-tive National Oil Company (NOC) inthe shape of Petrobras.

The need for an extensive reformof the oil and gas sector prompted theObasanjo Administration to establishthe Oil and Gas Sector Reform Imple-mentation Committee (OGIC) on 24thApril, 2000 under the Chairmanshipof Dr. Rilwanu Lukman. The OGICReport led to the National Oil and GasPolicy, and formed the basis for thePIB which was submitted as an Ex-ecutive Bill in December 2008.

Several versions of the Bill soonemerged, all pandering to varying in-terests. The inability to assuage theseinterests effectively led to the non-pas-sage of the Bill by the 6th NationalAssembly. To revive the process, theMinister of Petroleum Resources onJanuary 19, 2012 inaugurated a taskforce and technical committee to re-view the different versions and thenproduce a unified Bill. The Draft Billwas submitted to the government on29th June, 2012. The President for-warded the Bill to the National Assem-bly on 18th July, 2012.

The PIB is designed as the mainlegal architecture on which Nigeria’s oiland gas sector will revolve. It attemptsto streamline a legal, fiscal and regula-tory framework for the sector by coa-lescing the multiplicity of laws, rulesand regulations governing the sectorinto a single document. At any rate,some of these legal prescriptions aredeemed as lax, archaic, dysfunctionaland out of sync with global best prac-tices. The perennial sub-optimal per-formance of the NNPC when com-pared to national oil companies in otherjurisdictions such as Saudi’s Aramco,Malaysia’s Petronas and Brazil’sPetrobras has been a constant sourceof irritation for many stakeholders.

Long years of uncertainty in en-acting the PIB have blocked billionsof dollars of investment. Licensingrounds, contract renewals and invest-ments have been put on hold pendingthe new bill to regulate Africa’s top oil

and gas industry. The non-passage ofthe bill has also stalled further devel-opment of the Nigerian LiquefiedNatural Gas (NLNG) expansionproject which has not been able to takeoff due to lack of clarity on the fiscalregime that is to govern the project.Three additional LNG plants with atotal of seven trains were expected tocome on stream after 2012, but theirexpected start-ups have been postponedbeyond 2016. Availability of natural gasfor domestic electricity generation alsodepends largely on the fiscal regime forgas as set out in the PIB.

PIB: THE HEART OFTHE MATTER“The Petroleum Industry Bill 2012" isa 223-page document with 363 sections,five schedules and an “ExplanatoryNote”. The explanatory note states thatthe Bill “provides for a legal, fiscal andregulatory framework for the Nigerianpetroleum industry and establishes in-stitutions, regulatory and commercialentities for the proper administrationand coordination of the operation ofthe upstream and downstream sectors



of the petroleum industry as well asproviding for the imposition, assess-ment and collection of the NigerianHydrocarbon Tax.”Section 9 of the Billestablishes the Petroleum TechnicalBureau consisting of professionals withexpertise in the upstream and down-stream sectors of the petroleum indus-try. The Bureau shall provide techni-cal and professional support to theMinister on matters relating to the pe-troleum industry and in formulatingstrategies to implement governmentpolicies on the petroleum industryamong others. Section 13(1) of the Billprovides for the establishment of the

Upstream Petroleum Inspectorate. Sec-tion 16(a) empowers the Inspectorateto modify, extend, renew, suspend andrevoke any licence or permit issued byit pursuant to the provisions of theBill.Section 43(1) of the Bill establishesthe Downstream Petroleum RegulatoryAgency while Section 116 establishesthe Petroleum Host Community Fund.Section 117 provides that the PHCFund “shall be utilized for the devel-opment of the economic and socialinfrastructure of the communitieswithin the petroleum producing area.”On the other hand, Section 73 of theBill re-establishes the Petroleum Tech-

nology Development Fund while Sec-tion 100 also re-establishes the Petro-leum Equalisation Fund. Section 120sets up the National Petroleum AssetsManagement Corporation to be vestedwith certain assets and liabilities of theNNPC in unincorporated joint ven-tures (UJVs). Instructively, Section 148of the Bill provides for the incorpora-tion of the National Oil Company(NOC) as a public company limited byshares not later than three months af-ter the commencement date. The NOCshall be vested with certain assets andliabilities of the NNPC. By Section 170of the Bill, the administration of all



acreage for exploration, developmentand production of petroleum shall beadministered by the Inspectorate. Cru-cially, Section 190 directs that the grantof petroleum prospecting licence or apetroleum mining lease not derivedfrom a petroleum prospecting licence“shall be by open, transparent and com-petitive bidding process....” However,Section 191 provides that “the Presi-dent shall have the power to grant alicence or lease....” Section 194(4) statesthat the Petroleum Minister may re-voke a licence or lease under certaincircumstances.The Bill also providesfor environmental quality managementby upstream petroleum operators (Sec-tion 200) and penalties for gas flaring(Section 201), even as Section 221 de-regulates the pricing of petroleumproducts in the downstream sub-sec-tor. Section 299 of the Bill imposesthe Nigerian hydrocarbon tax to be lev-ied upon the profits of each account-ing period of any company engaged inupstream petroleum operations duringthat period. Section 355 preserves li-cences and leases granted under theOil Minerals Act, 1958 and the Petro-leum Act 1969. On the other hand,Section 354 repeals a plethora of leg-islations including the Petroleum Act,Petroleum Products Pricing RegulatoryAgency (Establishment) Act, and Pe-troleum Profits Tax Act. Section 354(3)also repeals subsidiary legislations madepursuant to any of the repealed enact-ments where inconsistent with the pro-visions of the Bill.

THE PIB AND ITS CRITICS

The much touted Bill is however notwithout its strident critics. Some IOCscontend that certain provisions in theBill are not investor-friendly and woulddeter growth and investment. Somecritics are worried about the burdenof new and extant taxes, including theNigerian Hydrocarbon Tax (NHT),PHC Fund levy, Company Income Tax(CIT), Niger Delta Development Com-mission levy, rent on assigned acreages,education tax and penalty for flaredgas from where government hopes toearn an average of $10 million daily atthe current average oil production ca-pacity of about 2.3 million barrels perday (bpd).The IOCs also contend thatthe Bill must not take retroactive ef-fect in a way as to affect existing con-tracts and ongoing projects started un-der the current fiscal regime. Concernshave also been raised as to lease termsfor deep-water concessions, especiallythe plan to limit oil prospecting licensesto 10 years. It is further contended thatthe new fiscal framework endangersNigeria’s gas aspirations, with criticsstating that the fiscal regime for gas isnot as attractive as that for oil. Thismay also have a spill-over effect onthe country’s power reform agenda.Another thorny issue is the discretion-ary powers of the President and thePetroleum Minister under the PIB.Some critics contend that the wide lati-tude of discretion accorded the duomay lead to uncertainty and abuse, andultimately imperil the new legal frame-work. It is recalled that the recent bid-ding round which saw Asian firms be-ing accorded a “Right of First Refusal”to choice acreages was roundly boy-cotted by major IOCs as inequitable.Also worrisome is the omnibus Sec-tion 6(1)(k) which empowers the Pe-troleum Minister to “do all such otherthings as are incidental and necessaryto the performance of the functionsof the Minister” under the Bill. Criticsalso assert that the PIB lacks a clearfiscal roadmap for deep-water conces-sions, adding that this may open theentire process to arbitrariness. On theother hand, some industry operatorswonder why the Bill seeks to dichoto-mize the regulation of upstream anddownstream sub-sectors by creating

two regulatory agencies for the oil in-dustry when one will do. Curiously, pro-visions that would have compelled thegovernment to publish how much oilis produced and payments received forsame have been stripped from the Bill.Furthermore, transparency provisionsrelating to corporate income tax, hy-drocarbon tax and production sharinghave also been deleted. Though the Billproposes some changes that will im-prove transparency in some areas – forinstance, keeping royalty payments se-cret will not be allowed and oil com-pany profit taxes proposed are also inthe public domain for the first time –it also does not require disclosure ofoil sales and payments to the govern-ment, including signature bonuses. Thisis viewed as a major setback in thequest for increased transparency andefforts towards cleaning up the cess-pool of corruption in the oil industry.Given that royalties are payable basedon actual production than on exports,the issue of metering has become ger-mane. The oil companies argue thatthe provision is inequitable given that

It is further con-tended that the newfiscal frameworkendangers Nigeria’sgas aspirations, withcritics stating thatthe fiscal regime forgas is not as attrac-tive as that for oil.


some of that production is lost or sto-len during transmission to the exportterminals through pipeline vandalismamong others, more so as governmenthas the primary duty to ensure secu-rity of these facilities.They also arguethat the fiscal balance between royal-ties, taxes and enablers is lost due toexcessively high royalty rates and ahigher aggregate tax burden, even asothers contend that the PIB is ex-tremely complex and lacking in clarityin many respects, especially in relationto its mode of implementation.Thoughthe unbundling of the NNPC into aNational Oil Company (NOC) amongothers has found favour with many,they contend that the control of theNOC by the government apparatchikfalls short of stakeholder expectations.Instructively, the Bureau of PublicEnterprises (BPE) has valiantly lam-pooned the funding model set out forthe key institutions that will shepherdthe oil and gas sector – including theNOC - describing same as unsatisfac-tory. It prescribes an independent fund-ing scheme for these agencies through

12 cents per barrel charge and 1%charge on fiscalized crude. The BPEreasons that such arrangement will in-sulate them from official interferenceand wrought strong institutions. TheIOCs also argue that the current JVterms are among the highest globally,and that the proposed terms under thePIB would further erode Nigeria’s com-petitiveness. Nigeria has one of thehighest government take (as a percent-age of net revenue) at 94 percent pre-PIB, they argue, and this will hit 96percent post-PIB. This compares withGhana at 52 percent; Kazakhstan, 61percent; Russia, 65 percent; UAE, 77percent; and Angola, 83 percent. Theyassert that none of the planned Pro-duction Sharing Contract (PSC) invest-ments is economically viable, addingthat deepwater fields especially requireincentives to attract investors. Also,some operators contend that while gasproduction has tripled over the last sixyears and about $20 billion invested inthe upstream gas sector since 2007, theGas Master Plan and moves to spurthe development of small to medium

sized gas fields may suffer a setbackunder the PIB framework due to un-attractive fiscal regime. About 73 per-cent of new gas production would beunviable, they argue, thus putting at riskabout $23 billion in new investments.While Shell Nigeria Chief ExecutiveMutiu Sunmonu canvasses “a balancedPIB,” he however asserts that “as itstands right now, the PIB will renderall deepwater projects and all dry gasprojects non-viable.” According to him,what is required is a PIB that will pro-vide optimal revenue to the govern-ment while providing sufficient incen-tives for new investment to fuelgrowth, adding that such a Bill mustalso “take local business challenges intoconsideration, as well as the impact onexisting investments.” The PIB pro-poses tax rates of 50 percent on prof-its for production operating onshoreor in shallow waters, while the rate isset at 25 percent for profits from deepwater operations. Though these fig-ures are a substantial decrease fromthe 85 percent and 50 percent respec-tive taxes that were originally opposedby oil producers in 2009-2011, Shellstill feels that the provisions are overlyonerous to investors. It asserts that an“unbalanced bill” will hinder new in-vestment rather than unlock it, addingnew challenges to existing ones in theareas of investment, licence renewals,the industry-wide PSC disputes and lackof gas terms for PSCs. The PIB re-quires significant improvement to se-cure Nigeria’s competitiveness, MutiuSunmonu asserts, adding that the op-portunity to grow the oil and gas sec-tor “will be lost” unless the PIB is over-hauled to meet the interests of theIOCs especially. While it is believed thatthe fiscal terms for onshore operationsare a lot more favourable than the cur-rent terms, little is known about secre-tive terms on offshore contracts. TheIOCs also envisage that the fiscal termsneed to compensate them for the en-vironmental challenges faced, includ-ing extra security risks such as piracy,kidnapping and oil theft by armedgangs.Although the salutary effect ofthe Petroleum Host Community Fund(PHCF) has been validated by many,the concern has shifted to the appar-

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ent lacuna in the PIB as to the controland management of the fund. It hasalso been observed that the fund seem-ingly duplicates the raison d’être of theNiger Delta Development Commission(NDDC) and the state oil producingareas development commissions (statePADECs), more so as the PIB is silenton the relationship between the fundand these other vehicles. However,Section 118(6) mandates the PetroleumMinister to “make regulations on en-titlement, governance and managementstructure with respect to the PHCFund.”Although the PIB is touted as

having the requisite muscle to spur lo-cal content, Indigenous Oil Producersare not amused, as there is no provi-sion that sets aside any acreage categoryfor indigenous producers. Also viewedas contradictory is the retention of thePetroleum Equalization Fund in an eraof deregulated downstream operations,more so as the insistence of some law-makers on such retention was criticalin stalling the earlier PIB.Some have

also queried the role of the draftsmanin the PIB debacle vis-à-vis both hisexpertise and style. For example, theycontend that the proper entity to vestownership of petroleum resources isthe Nigerian state and not the “Gov-ernment of the Federation.” The Billalso suffers from typographical errorsand numbering challenges. For example,Section 57(2) is duplicated while Sec-tion 15(1)(t) is blank. Furthermore,Sections 39, 69, 98 and 145 which barexecution or attachment against thephysical property of certain agenciesis deemed as an affront on the rights

of litigants and a violation of the rightto fair procedures.

IN DEFENCE OF THE PIBConversely, pro-PIB analysts assert thatthe Bill was drafted with equity in mind.They contend that the concerns of theinternational oil companies (IOCs)were taken into consideration so as toengender a win-win situation for Nige-ria and all stakeholders. The new legal

framework will create a commerciallyviable National Oil Company (NOC),deregulate petroleum product prices,create efficient regulatory entities, pro-mote transparency and good gover-nance, engineer sustainable economicdevelopment, promote Nigerian Con-tent, and engender health, safety andsustainable environment. The centralplank of the reform strategy is to re-structure joint ventures between theNNPC and IOCs to allow them raiseprivate capital rather than rely on anotoriously unreliable cash callregime.”We have a fiscal regime by

royalty and tax which is now predicatedon production as opposed to terrainand investment as was previouslydone,” says Petroleum Minister DiezaniAlison-Madueke. “Royalty by produc-tion as we have outlined in the Bill willcapture the output of company as op-posed to its location; it will create afair balance between small and big op-erators operating in the same terrain;it will give operators the opportunity

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to make fair returns duringfield decline, and it proposeslower rates on condensatefrom large fields as well asultra-deep water fields.” Shestates that the royalty-by-price model ensures a trig-ger mechanism for fair andbalanced pricing which is fairto all irrespective of the ter-rain of the operator, since itcomes with a self-adjustingrate based on the prices forcrude oil and natural gas. Shenotes that the PIB provides

for a robust and efficient taxregime based on CorporateIncome Tax (CIT), NaturalHydrocarbon Tax (NHT)and Production Bonus basedregimes.On the reported con-cerns of some operatorsover the proposed increasein government take from 61to 72 percent in the deep andultra-deep offshore, the pe-

troleum Minister argues thatin arriving at the figure, gov-ernment considered all thevariables. According to her,the increase in governmenttake in the deep offshoreblocks “is not only competi-tive but considerate when welook at the scale of otherentities around the world likeNorway, Indonesia and evenAngola with higher govern-ment take.” It was thereforeonly natural to review thePSC terms to reflect the glo-bal current. The 1993 PSCagreement was based on $20per barrel price for crude oilreal-time, but records indi-cate that since the start ofproduction in the PSC fields,crude prices have been onthe upward swing, thus theneed to review the terms.The PIB proposes lowerrates on condensate fromlarge fields as well as ultra-deep water fields. The Billoffers strong incentives forenhanced exploration ofnew frontiers especially inthe inland sedimentary ba-sins, she argues, and has thecapacity to catalyze thenation’s gas master-plan. In-deed it is envisaged that un-der the PIB regime, gas willbe the next area of explo-sion for the country, giventhe quantum of Nigeria’s gasreserves estimated at over180 trillion cubic feet. ThePIB is designed to repositionthe natural gas sub-sector to-wards a greener, flare-freeregime while promotinglinkages to other industries.The planned commercializa-tion of gas resources is, be-yond supporting the powergeneration efforts, aimed atenabling gas to serve as feed-stock for the industry. Ac-cordingly, an arrangementhas been initiated withNagarjuna of India andXenel of Saudi Arabia to

establish fertilizer and petro-chemical plants and a cen-tral processing plant to makegas the fulcrum of industrialdevelopment.Governmentwill undoubtedly reap in-creased revenue under thenew fiscal regime set out bythe PIB. Based on the 2008figures, total revenue fromtax returns from the threePSCs was $5.856 billion.Contrary to the fiscal ar-rangement under the exist-ing joint ventures betweenthe NNPC and the IOCswhere government revenuetake is on the basis of royal-ties and taxes only, the termsproposed in the PIB shiftsemphasis from taxes to pay-ment of rents and royalties.This reduces the tax natureof the petroleum profit tax(PPT) by splitting it into theNHT and CIT, to be paidby all companies involved inpetroleum industry opera-tions, with the former notdeductible for the latter. Thenew tax rate will be reducedfrom 85 percent to 80 per-cent in the ratio of 30 per-cent for CIT and 50 percentfor NHT.It is believed thatNigeria flared 536 Bcf natu-ral gas in 2010 – or about athird of gross natural gasproduced in 2010. TheNNPC reportedly assertedthat gas flaring cost Nigeria$2.5 billion per year in lostrevenue. While the PIB re-quires all gas producers tomeet DGS obligations speci-fied by the Inspectorate (theDPR successor agency), ithas equally spelt out penal-ties for non-compliance,namely that the lessee maybe precluded from supply-ing gas to any export opera-tions, except where the les-see can adduce satisfactoryreasons for such non-com-pliance. The PIB also pro-hibits the flaring of natural

gas beyond a flare-out dateto be determined by theMinister. These measuresare bound to impact posi-tively on environmentalremediation if carriedthrough, more so in the lightof hazards occasioned byclimate change. Also, provi-sions dealing with third partyaccess to gas pipelines andlicensing are believed to havethe potential to drive the GasMaster Plan.Given that ac-cess to new acreages hastended to impede new in-vestments in the petroleumindustry, the relinquishmentprovisions in the PIB (Sec-tions 186 and 193) aredeemed as timely. Accord-ingly, the PIB attempts tobring allocation of acreagesor oil blocks in line with theglobal practice wherebyunutilized acreages are re-turned to government withina given period, usually after10 years. This ensures theavailability of acreages forre-allocation to new entrants,even as it serves as an in-centive for the allottees toactively explore the allottedacreages. It is expected thatthe new regime will free upabout 30% of acreages cur-rently tied down by IOCsunder production sharingcontracts and JVs.Stock mar-ket operators are equallyexcited at the prospect ofthe NOC divesting 30 per-cent of its authorised sharesto the public within six yearsfrom the date of its incor-poration (Section 151). TheNational Gas Company Plcis also directed to divest upto 49 percent of its sharesto the public in a transpar-ent manner on the NigerianStock Exchange (Section162). They assert that thesefresh injections would buoythe equities market whichhas remained lethargic due



to limited instruments.Indeed somebelieve that the Bill is even deliberatelyskewed to whittle down governmentrevenue from petroleum operations.Chairman of NEITI National Stake-holders Working Group (NSWG) AssisiAsobie said the Bill will setgovernment’s share of oil revenuesbelow internationally competitive lev-els, while the proposed fiscal structureis designed to ensure a rapid erosionof government earnings from the pe-troleum sector within the next fiveyears.He said a maximum 45 percentshare in oil revenues under PSC and60 percent in joint ventures “is dan-gerous to our already fragile economythat is oil-revenue dependent.” Somehave argued that while the current fis-cal regime gives the government 48percent share of all oil revenues un-der the production sharing contract(PSC) and 82 percent under the jointventure agreements (JVAs), interna-tional rates of IOC host governmentsput same at 56 and 90 percent respec-tively.

Others assert that the IOCs maybe bent on stalling the passage of thePIB because of its perceived adversefiscal regime. They argue that the op-erators would rather prefer the persis-tence of the current fiscal regimewhich is immensely favourable to theirinvestment interests. For example, it isestimated that about $300 million is lostmonthly as additional revenues to gov-ernment from the three ProductionSharing Contracts (PSCs) operated byShell, ExxonMobil and Chevron jointventures.

CONCLUSIONThe PIB is a product of efforts to re-form the oil and gas industry towardsgreater efficiency. The Bill seeks toprune the plethora of laws, regulationsand guidelines that clutter the oil in-dustry landscape, while establishing alegal architecture that is easily acces-sible and in sync with global best prac-tice. The Bill also seeks to enhancegovernment revenues through bettertax codes and undo the harm done bythe profit sharing contract regime of1993 which is viewed by many as un-duly lopsided in favour of the OICs

to the detriment of Nigerians.However, as the debate unfolds, it

remains to be seen whether the majorIOCs will find the fiscal regime set outby the PIB attractive enough to sup-port its passage. It is instructive thatthe strident criticism of the earlier PIBby the IOCs contributed immensely toits demise. Furthermore, the powersof the President and Petroleum Min-ister under the PIB may remain athorny issue, more so as the contro-versy over this issue also stalled theearlier PIB as lawmakers insisted thatsuch discretionary powers must bewhittled down. The deleting of sometransparency clauses from the Bill re-mains a major source of worry.

All said, unless the national interesttakes preeminence in the ensuing de-bate, the PIB may yet be doomed. LeeMaeba, Ex-Chair, Joint National As-sembly Committee on PIB and Ex-Chair of the Senate Committee on

Petroleum (Upstream) should know.“The kind of situation we faced in thelast days of the (defunct) PIB is a situ-ation that should not happen in theParliament, where people insist on is-sues like allowing the PetroleumEqualisation Fund (PEF), PetroleumProduct Price Regulatory Agency(PPPRA) to exist,” he reminisces.“These are institutions that were de-leted by the PIB to pave way for de-regulation of the economy, and we be-lieve that deregulation is the way to go.”

With the PIB, it only gets curiouserand curiouser. Even as the quest for aconsensus ensues, will the jinx be bro-ken this time around?(* Emeka Nwadioke, a formerbanker, is the Lead Partner atEmeka Nwadioke & Co., a full ser-vice law firm practising out ofLagos.)

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Issues (

II)

* By Chuks Nwaze

n the last edition of this serial, I completed thetwo-part analysis of Advance Fee Fraud, a na-tional embarrassment which most Nigerians arefully aware of. The menace is not new, hence itdoes not come as a surprise to anybody that some-body has been fleeced, defrauded or separatedfrom his hard- earned money. Individuals maketheir choices and must, therefore, bear the fullconsequences of those choices, for good or forbad.

In this edition and the next, we shall discussanother brand of national embarrassment, calledpetroleum subsidy fraud, which is novel, unprec-edented and hence unexpected. Of course, thepractice of subsidizing the pump price of petro-

leum products is not new in our land. What is new,which obviously shocked Nigerians beyond imagina-tion, is the alleged scam that emanated from subsidyimplementation between 2011 and early 2012, obvi-ously masterminded by individuals who for their ownselfish reasons are intent on sabotaging the good in-tentions of government for instituting such policies.

There is no doubt that this is part of the inexpli-cable ironies of our corporate existence where a fewcitizens frequently conspire against the state and byextension against themselves. It does not dawn onthem that government is interested in the greatestgood for the greatest number —- not for a few indi-viduals.

I

In ordinary parlance, according to the Oxford Dictionary, the termsubsidy is “a sum of money given to help keep the price of aproduct or service low”.


THE CRUX OF THE MATTERNonetheless, the problem is not just that the ordinaryNigerian and taxpayers have been taken for a ride by atiny group of people popularly called the cabal. It isalso that we are shying away from a serious economic,social and political conundrum, called subsidy, which willsooner than later explode if not urgently tackled.

In other words, why not face the devil now anddefeat it, rather than pretending that all is well with thestate of affairs? Why not do away with this cancer knownas subsidy through deregulation, thereby tackling the cor-ruption in the system? What does this term ‘deregula-tion’ mean to the ordinary Nigerian?

These are some of the issues we shall be exploringin this two-part discussion, with a view to finding a wayforward for our dear country in the short, medium andlong term. At the onset, however, this writer wishes toown up to the fact that this is simply an informed com-mentary based on research, as distinct from an expertopinion which is not directly within his area of jurisdic-tion. However, efforts will be made to simplify the is-sues and present a balanced analysis not only to enable

the generality of Nigerians appreciate the situation but alsoassist our policy makers navigate the minefield.

WHAT IS PETROLEUM SUBSIDY?In ordinary parlance, according to the Oxford Dictionary, theterm subsidy is “a sum of money given to help keep the price of aproduct or service low”. With reference to petroleum products,therefore, subsidy refers to the difference between the land-ing (or production) cost of petroleum products and the pumpprice (i.e. dispensing price to the general public).

THE CONTROVERSYThe fundamental issue at stake has to do with the process ofproduct importation, and the attendant ‘sweetener’ called sub-sidy, which is alleged to be bedeviled with scams, corruption,greed and inefficiency. In other words, there is a questionmark on the integrity of the downstream processes which ismostly populated by shrewd business barons known as petro-leum marketers.

Even the volume of petroleum products said to be im-ported into Nigeria is alleged to be infested by the corruption

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ISSUES (II) | Agenda forDevelopment: Petroleum Subsidy

virus, hence the fictitious allocationsand disbursements of subsidy allegedlycollected by some organizations. Thedilemma of government that can neither guar-antee the accuracy of landing cost nor vol-ume of importation because of the actions orinactions of some of its own agents but, none-theless, retains the sole prerogative of eco-nomic management through price adjustmentsis better imagined!

WHAT ISDEREGULATION?This is one twelve-letter word that Ni-gerians must understand and quicklycome to terms with. It is pretty obvi-ous that every successive governmenthas identified it as an economic im-perative. Fortunately, many enlightenedNigerians also agree that it is economi-cally unavoidable.

Economic decisions are not takenbased on sentiments or on the ca-cophony of voices in the jungle ormarket-place —- even when they re-main the ultimate beneficiaries of thosedecisions. Hence, it is no longer a mat-ter of “IF” but “WHEN” full deregu-lation will be ushered in.

In simple parlance, to deregulate is“to remove regulations or controlsfrom”. In economic parlance, it refersto the practice of allowing the marketforces of demand and supply to de-termine the price of a commodity orservice. With respect to petroleumproducts which are imported into Ni-geria for domestic consumption, sinceour refineries are not functional, theinternational price of refined productsas well as the exchange rate betweenthe naira and the major currencieswould constitute the determining fac-tors at any point in time.

In a deregulated environment,there is no room for administrative orarbitrary fixing of prices. Only the in-visible hand of demand and supply,otherwise known as market forces de-termine prices. However, this has neverbeen allowed to happen in our land.

CommentAlthough the vast majority of Nigerianswould readily argue that the word deregula-tion is synonymous with price increases, thisis simply a reflection of the fact that the

average citizen had been disappointed by previous governments.Most would argue that domestic prices never came down evenwhen there was a decline at the international level. Nonetheless,this assertion is not completely valid for the oil industry since therehas never been full deregulation in Nigeria. What happened inJanuary 2012 is what has been happening over the years —partial removal of subsidy, not deregulation.

FACTS AND FARCEThe major arguments for deregulation can be summa-rized as follows:

Lopsided BenefitsLet us take our bearing from “A Story Of The De-regulation Of The Nigerian Downstream Oil Sec-tor” written by government officials in the oil in-dustry and published in 2007. According to page95: “there is no equity in this subsidy arrange-ment since the elite consume more petroleumproducts than the masses…who commute inpublic transportation; it is the affluent that havechains of vehicles and power their homes withgenerators that run on petroleum products.”

Practical Demonstration:We can easily demonstrate this assertion quanti-tatively by assuming that the subsidy per litre ofpetrol is N60:

Maco lives in a village in Sokoto state where hewalks to his farm and back. He cooks his meals withfirewood and has no need to commute by bus or use anypetroleum products. He gets N0.0 kobo as subsidy.

On the other hand, Moyo, a gateman, takes a bus fromKaru, a satellite town in the FCT to Federal Secretariat and back. Ittakes a bus that carries 16 passengers about five litres to do this journeyand back. Fuel subsidy on the 5 litres of fuel is N300. If you divide this by16 people in the bus it gives you N18.75. Thus, Moyo gets a paltry N18.75 assubsidy.

Now, Johnson, a top executive buys up to 300 litres of petrol which comesto N18,000 at the subsidy rate of N60 per litre. Hence, our executive gets asubsidy of N18,000 each time he buys 300 litres of petrol.

Comment:From the above calculation, it is clear enough that the top executive is the prime beneficiaryof the subsidy regime. Remember that the above comparison has been confined to fuelconsumption while on the road. How about domestic consumption which is also heavilyskewed in favour of the executive, courtesy of uninterrupted supply of electricity throughgiant electricity generating sets?

To Save Money and DevelopInfrastructureAgain, on page 56 of the document referred to above, the authors have this tosay: “government resources previously used for subsidizing petroleum prod-ucts will be freed to undertake construction of good roads, clinics, hospitals,schools and provision of drinking water…”

Incidentally, although this document was released in 2007, it remains the

July 2012 Zenith Economic Quarterly 43


This is one twelve-letter word that

Nigerians must understand and

quickly come to terms with. It is

pretty obvious that every succes-

sive government has identified it as

an economic imperative. Fortu-

nately, many enlightened Nigerians

also agree that it is economically

unavoidable.

major thrust of the government’s Neighbour-To-Neighbour public enlighten-ment initiative in 2012. In other words, the issues have remained the same.

CommentThis is the chick-and-egg debate, which one came first. That is, should government removesubsidy and deploy the money to provide infrastructure as the government is advocating orshould government look for money and put infrastructure in place first and then introducenew taxes by way of removing the fuel subsidy to repay the loan as Nigerians seem to besuggesting? Surely, the present government has shown that it is capable of departing fromthe previous failed promises by initiating the Subsidy Reinvestment and Empowerment(SURE) by which the proceeds of the partial removal of subsidy is channeled towardssocial services.

Cross-Border Smuggling ofPetroleum ProductsIt is also strongly argued that because petrol is cheaper in Nigeria than our

next-door West African neighbors, coupled with the porous nature of ourborders, there is large-scale arbitrage and criminal trans-border ship-

ment of petroleum products from Nigeria to those countries —-the business will immediately become unprofitable if there is price

parity.

CommentThis argument is valid but critics have advised that the security

agencies should work harder to police the borders and reduce theeconomic leakages arising from the smuggling of petroleum andother products as well as criminal activities, many of which areallegedly committed by foreign nationals.

To Eliminate Malpractices in the Oil IndustryIn view of the fraud, scams and other sharp practices

that characterize the operations of the downstream sec-tor of the oil industry, government wants to do away

with discretionary interventions and all manner of inter-ventions and administrative controls, such as fixing of pump

prices that are responsible for those distortions.


ISSUES (II) Agenda forDevelopment: Petroleum Subsidy

CommentNo one can fault this economic principle.

To Encourage Private SectorParticipation in the DownstreamSectorAlthough about 20 licenses were issuedmany years ago to interested operatorsof refineries, not a single one has takenoff the ground, ostensibly becausequick returns on investment is not guar-anteed at subsidized pump prices. Inother words, subsidy removal will raiseprices initially and provide better re-turns for the huge capital required inthe sector as well as usher in the levelof competition that will ultimatelylower prices just as was witnessed inthe mobile telecommunications sector.

CommentLet us hope that ‘the cabals’ who have beenspoilt by cheap money from subsidy will stillbe interested in investing in the downstreamsector when subsidy goes.

FRAUD, SUBSIDY ANDGOVERNMENTINTERVENTIONIt is clear enough that government isdetermined to sanitize not only thedownstream sector but also the petro-leum industry as a whole, courtesy ofthe Petroleum Industry Bill (PIB).However, we need to also understandwhere we are coming from and howwe got to where we are today as a guidefor the future. In other words, whatwere the wrongdoings and how werethey being perpetrated?

‘THE CABALS’The dictionary meaning of the word“cabal” is ‘a secret political group’. Al-though it has political connotation, thefact remains that in this jurisdiction,the word has assumed a larger-than-life image in our social and economiclexicon. But who are the cabals in rela-tion to the petroleum industry andwhere are they? The answer to thisquestion is not rocket science. The ca-bals are everywhere, but mostly in themonopolistic competition known aspetroleum marketing companies.

Now, it is strongly alleged that it is

the nefarious activities, frauds andscams of the oil marketing cabals andtheir collaborators within the variousgovernment offices that are responsiblefor the myriad of dislocations and dis-tortions in the petroleum industry,hence generating tension and disen-chantment within the polity.Consider the following:• Creating artificial scarcity throughhoarding of petroleum products tomaximize revenues and profit margins.

• Creating non-existent importdocumentation and receiving subsidyin respect of products that never ar-rived into Nigeria

• Padding of the landing costs ofimported products through inflated,contrived, or fictitious demurrage andother associated costs which constitutethe parameters for the fixing of pumpprices.

• Quickly doing an upward adjust-ment in pump prices when the gov-ernment directs as such, while refus-ing to comply with a directive by thesame government for a downward re-view after negotiation with labourunions.

CommentThe government needs to be steadfast in in-vestigating or dealing with confirmed cases ofoverpayment and other cases of economicsabotage.

SUBSIDY ON PHONEYIMPORTS OF PMSThis is where petroleum products arefraudulently certified as imported intoNigeria but is actually diverted to othercountries in West Africa. Meanwhile,the documentation is perfected in con-cert with criminally minded elementsin the relevant government offices.They not only collect the subsidy (whichactually is outright theft), they also con-nive to collect demurrage on products

The dictionary mean-ing of the word “ca-bal” is ‘a secret po-litical group’. Al-though it has politicalconnotation, the factremains that in thisjurisdiction, the wordhas assumed alarger-than- life im-age in our social andeconomic lexicon.



that never entered the Nigerian mar-ket. In other words, what we actuallyconsume in Nigeria may not be up tohalf of what the records or statisticssay we consume.

CommentIf you have been wondering why all mannerof emergency businessmen and quick-fix con-tractors obtained licenses to import fuel, evenwithout meeting the basic conditions of hav-ing tank farms and national spread of fill-

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In view of the fraud, scams and other sharp practices

that characterize the operations of the downstream

sector of the oil industry, government wants to do

away with discretionary interventions and all manner

of interventions and administrative controls, such as

fixing of pump prices that are responsible for those

distortions.


ISSUES (II) Agenda forDevelopment: Petroleum Subsidy

ing stations, now you know. Therewas a stampede for the subsidyfund and the aroma was irresist-ible!

FRAUDULENTPETROLEUMEQUALIZATIONAND BRIDGINGAnother goldmine for the oilmarketers which has beenon for a much longer timeis the Petroleum Equaliza-tion Fund (PEF). We shalltake our bearing from thetechnical analysis presentedby a renowned petroleum ex-pert, Ben Oguntuase:

“PPMC used to have anetwork of pipelines anddepots across the country.Supply envelops were cre-ated around each depot in away that ensured that allparts of the country werecovered. Each supply enve-lope is divided into zones.Actual transportation costwas calibrated according tozones within each supply en-velope. The objective herewas to ensure that products

sell at the same pricethroughout each deport sup-ply envelope regardless ofthe distance of consumptionfrom supply.”

Bridging: This is the sys-tem whereby products aremoved by road across depotsas may be permitted in whatwas meant to be exceptionalcases such as when repair isbeing carried out on a pipe-line or at a depot. Over theyears and driven by fraudu-lent intent, what was essen-tially designed for ad-hocpurposes became the routinepractice. Hence, productswould be released from theAtlas Cove in Lagos, osten-sibly for bridging, to sayKano or Sokoto, but wouldactually be sold at nearbystations while the documen-tation is perfected and bridg-ing allowance is paid.

The products were alsomeant to be sold at equalprices in all locations nation-wide. When the refinerieswere working and the pipe-lines/depots were also func-tional, the products were

pumped through pipelinesfrom the various refineriesto the various depots fromwhere they were picked fordistribution within the sup-ply envelope covered byeach depot. In principle, theEastern axis was meant tobe supplied from the nowobsolete Port Harcourt Re-finery1. The Northern axiswas expected to be servedby the now thoroughly can-nibalized Kaduna Refinery.The Midwest and Middlebelt were expected to beserved by the equally obso-lete Warri Refinery while theWestern axis was designed tobe supplied from productsshipped to Atlas Cove fromPort Harcourt Refinery 2.This particular refinery wasalso equipped to export prod-ucts to West African coun-tries.

All marketers were givena price structure by PPMCwhich routinely (and franklyunprofessionally) decidedthe marketing margin andoverhead allowance, thetransportation allowance and

the dealer’s margin. Such aterrible system it was! Thestandard Transportation Al-lowance was decided basedon what was required tomove products from thedepots to Zone 3 within thedepot supply envelope.Transporters moving prod-ucts to zones 1 and 2 arepaid less than the standardallowance while the balancewas meant to be paid intoPEF by the marketer. Trans-porters moving products tozones 4 to 9 are paid theadditional cost of transpor-tation from PEF. Obviously,most of the consumptionoccurs in zones 1 to 3, usu-ally up to 70%.

The Fraud: Sell all theproducts within zones 1, 2and 3 but collect PEF allow-ance as if almost all prod-ucts were sold in the outerzones. Apparently, this hasbeen on for a very longtime”.(* Chuks Nwaze is theManaging Consultant/CEO, Control & Surveil-lance Associates Ltd)



Issues (

III)


*By Sunday Enebeli-Uzor

economy is beginning to look up. Accordingto the Manufacturers’ Association of Nige-ria (MAN), 240 new factories commencedoperations in the last one year with a pro-jected turnover of N140billion.

Also, the Central Bank of Nigeria’s (CBN)Second Quarter 2012 Economic Report indicatedan improved performance in industrial ac-tivities with estimated capacity utilisation ris-ing to 56.0 percent. Similarly, the estimatedindex of manufacturing production, at 106.32(1990=100), rose by 0.4 and 8.2 percentabove the levels in the preceding quarter andthe corresponding period of 2011, respec-tively.

After some deterioration in its global com-petitiveness rankings in recent years, Nigeriamoved up to the 115th place this year, from127th last year, according to the 2012-2013Global Competitiveness Report of the World Eco-nomic Forum (WEF).

These positive developments in the manu-facturing sector and global competitivenessranking have been attributed mostly to a bet-ter business environment, rise in businessconfidence, and improved electricity supply.

Since the emergence of the moderneconomy, the manufacturing sector has playedthe role of the engine of growth and devel-opment. The sector acts as a catalyst thattransforms the economic structure of coun-tries from simple, slow-growing and low-valueactivities to more productive activities, bridg-ing the income gap with the industrialisedeconomies.

Economic literature is replete with evi-dence from developed countries like theUnited States of America, the United King-dom, and emerging economies like Chinaand India that shows the role of the manu-facturing sector in the structural transfor-mation of economies from a subsistence,low production and low income state to dy-namic, diverse economies.

The manufacturing sector has the high-est multiplier effects of all the sectors in anational economy because of its forwardand backward linkages with the other sec-tors of the economy. Manufacturing is themajor source of productivity gains and for-eign direct investment, a major investmentinducer, a prime creator of jobs and em-ployer of labour. It is also the driver ofresearch and innovation.

Manufacturing accounts for the largestshare of the Gross Domestic Product(GDP) of leading economies of the world.It is also pivotal to broadening both the pro-ductive base of the economy and the rev-enue base of the government. In terms ofglobal trade, manufactured goods consti-tute the bulk of world merchandise trade– 77 percent. Food and agriculture accountsfor about 9 percent of global merchandisetrade while fuels account for about 8 per-cent and ores and minerals represent 3 per-cent of global merchandise trade. Themanufacturing sector is a major foreignexchange earner and a stable and reliablesource of foreign exchange earnings foreconomies.

In Nigeria, the manufacturing sector’scontribution to the Gross Domestic Prod-uct (GDP) has been abysmal – 4.16 per-cent in 2011, while agriculture which con-

fter several years of low in-dustrial capacity utilisation,there are indications that thefortune of the manufacturingsector of the NigerianA


ISSUES (III) | Recent Trends in Nigeria’s Manufacturing Sector: Cause for Optimism?

tributes 40.69 percent is the mainstayof the economy.

Empirical evidence shows that pro-ductivity is higher in the manufactur-ing sector than in the agricultural sec-tor which party explains the paradoxof impressive economic growth buthigh incidence of poverty in Nigeria.Comparative with agriculture, themanufacturing sector offers specialopportunities for capital accumulation.Capital accumulation can be more eas-ily realised in spatially concentratedmanufacturing than in spatially dis-persed agriculture.

Also, the manufacturing sector of-fers special opportunities for econo-mies of scale, which are less availablein agriculture or the services sector.Linkage and spillover effects are stron-ger for manufacturing than for agri-

culture or mining. Evidence also showsthat as per capita incomes rise, theshare of agricultural expenditure in totalexpenditure declines and the share ofexpenditure on manufactured goodsincreases. Therefore, countriesspecialising in agricultural and primaryproduction will not profit from expand-ing world markets for manufacturedgoods.

From the foregoing, Nigeria’s questto be among the top 20 largest econo-

mies of the world by the year 2020 asenunciated in the Vision 20:2020 de-pends to a significant extent on thetransformation of its manufacturingsector.

The Vision 20:2020 plan ambi-tiously seeks to have a technologicallydriven and globally competitive manu-facturing sector, with a high level oflocal content and contributing a highproportion of the national GDP.Among several other objectives, theplan seeks to grow local content inmanufacturing by 5 percent annually,to enable the country reach 60 per-cent by the year 2015 and 80 percentby 2020.

The vision also seeks to reduce thepercentage of imported manufacturedgoods to 20 percent by year 2020; in-crease the share of manufactured

goods in exports to 35 percent in 2020;and increase manufacturing valueadded per capita to at least 40 percentby 2020. The Vision 20:2020 plan es-sentially seeks to have a vibrant manu-facturing sector that will wean thecountry of total reliance on importsof manufactured goods and conservescarce foreign exchange.

To be competitive in the modernknowledge-based technologicallydriven global economy, Nigeria cannot

continue to be dependent on exportof oil and gas – commodities that areprone to vagaries that are exogenousto the domestic economy.

Government Incentives toencourage ManufacturingIn a bid to encourage investments inthe manufacturing sector to jumpstartindustrial development in the country,the government has over the years in-troduced a number of incentives de-signed to stimulate vibrancy in the sec-tor. These incentives are policy mea-sures in the form of tax reliefs andallowances. Some of these incentivesinclude the following.

Export Processing Zones: (Alsoknown as Free Trade Zones) are clearlydelineated and fenced industrial estatesor enclaves within Nigeria. They areset up principally for manufacturingcompanies producing mainly for theexport market, and normal customsregimes do not apply. The objectiveis to attract foreign investments andstimulate industrial production for ex-port.

Companies operating in the zonesenjoy duty free export production,elimination of all forms of bureau-cracy, employment of foreign manag-ers, and 100 percent ownership ofbusiness. Also, legislative provisionspertaining to taxes, levies, duties andforeign exchange obligations do notapply within the zones; repatriation offoreign capital investments are allowedin the zones at any time, with capitalappreciation on the investments. Un-restricted remittance of profits, anddividend earned by foreign investorsin the zones are also allowed while noimport or export licenses are required.

Other peculiar incentives that FreeTrade Zones enjoy are that up to 50percent of products may be sold inthe customers’ territory against a validpermit and on payment of appropri-ate duties; rent free land at construc-tion stage, thereafter rent shall be asdetermined by the Nigeria Export Pro-cessing Zones Authority; services suchas warehousing, standard pre-built fac-tories, transportation, sanitation, andcanteen are available within the zones.

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October 2012 Zenith Economic Quarterly 51Source: Nigeria Export Processing Zones Authority


ISSUES (III) | Recent Trends in Nigeria’sManufacturing Sector: Cause for Optimism?

There are currently twenty-fiveexport processing zones in the countrysince the commencement of the ini-tiative and a number of successes havebeen recorded. The export processingzones provide good investment win-dow for firms willing to take advan-tage of government’s drive to encour-age manufacturing especially for ex-port. The export processing zones cir-cumvent tough regulations and elimi-nate administrative bureaucracies andprovide easy access to export channels.

Pioneer status: An incentive thatgrants tax holidays on corporate in-come to manufacturing exporters whoexport at least 50 percent of their turn-over. It is a tax holiday granted to quali-fied or (eligible) industries anywhere inNigeria and a seven-year tax holiday inrespect of industries located in eco-nomically disadvantaged local govern-ment areas of the country.

Currently, there are 71 approvedindustries with pioneer status and whichcan benefit from tax holidays. Toqualify, a joint venture company or awholly foreign-owned company musthave incurred a capital expenditure ofnot less than N5,000,000 whilst thatof qualified indigenous companyshould not be less than N150,000. Alsoto qualify, an application in respect ofpioneer status must be submittedwithin the first year of commencementof commercial production otherwisethe application will be time-barred.

The scheme is designed to encour-age the establishment of export-ori-ented industries in Nigeria and enablethem to make a reasonable level ofprofit within their formative years, andthe profit so made is expected to beploughed back into the business.

There are also several other gener-ous incentives designed to encourageinvestment in the manufacturing sec-tor. For instance, government offers25 percent import duty rebate to ame-liorate the adverse effect of inflationand to ensure increase in capacityutilisation in the manufacturing sector.The government also grants re-invest-ment allowance to manufacturing com-panies that incur capital expenditurefor purposes of approved expansionof production capacity; modernisation

of production facilities; anddiversification into relatedproducts. This incentive isaimed at encouraging rein-vestment of profits.

Also, dividend fromcompanies in the manufac-turing sector with turnoverof less than N100million istax-free for the first fiveyears of their operationwhile companies with turn-over of less than N1millionare taxed at a low rate of20 percent for the first fiveyears of operation if theyare into manufacturing.Profits of companies,whose supplies are exclu-sively input to the manufac-turing of products for ex-ports, are excluded fromtax.

As a means of encour-aging industrial technology,companies and otherorganisations that engage inresearch and developmentactivities forcommercialisation enjoy in-vestment tax credit on theirqualifying expenditure.Companies engaged whollyin the fabrication of tools,spare parts and simple ma-chinery for local consump-tion and export also enjoyinvestment tax credit ontheir qualifying capital ex-penditure while purchasersof locally manufacturedplants and machinery arealso entitled to investmenttax credit on such fixed as-sets bought for use.

To provide access to fi-nance for manufacturers,the federal government es-tablished the Bank of In-dustry (BOI). The bank hasrecently undergone institu-tional, operational and fi-nancial restructuring to en-able it efficiently deliver onits mandate as a develop-ment bank. As the nameimplies, the bank was set up

principally to providelong term financing tothe industrial sector ofthe Nigerian economy.The institution was de-signed to transform theindustrial sector and in-tegrate it into the globaleconomy by providingfinancial and businesssupport services to at-tain modern capabilitiesfor the production ofgoods that are competi-tive in both the domes-tic and external markets.

The bank is intendedto be a one-stop finan-cial institution for manu-facturers. The bank’sauthorised share capitalwas initially set atN50billion in the wakeof the reconstruction ofNigeria Industrial Devel-

Companies

engaged wholly

in the fabrication

of tools, spare

parts and simple

machinery for

local consump-

tion and export

also enjoy

investment tax

credit on their

qualifying capital

expenditure

while purchasers

of locally manu-

factured plants

and machinery

are also entitled

to investment tax

credit on such

fixed assets

bought for use.


opment Bank (NIDB) into the Bankof Industry (BOI) in 2001. This hashowever been increased toN250billion due to current realities andthe country’s growing economic pro-file.

Another financial incentive to en-courage the manufacturing sector is thecurrency retention scheme of the gov-ernment. This scheme is operated bybanks and allows exporters to retain100 percent of their foreign exchangeearnings in their domiciliary accountsin any authorised bank of their choice.The objective is to enable exporters tohave foreign exchange at their disposalwhich can be utilised for export-relatedactivities and exporters are free to con-vert their foreign exchange earnings tothe Naira equivalent at the prevailingrate of exchange. There is also a taxrelief on interest income incentivewhich attracts favourable tax treatmenton interest accruing from loans grantedby banks in aid of export activities. Theobjective of this scheme is to encour-

age banks to grant credit facilities toNigerian exporters. The facility is ex-tended to all banks granting loans forexport activities and covers interestsaccruing from such loans.

The Nigerian government also guar-antees access to land in any state ofthe federation for any company incor-porated in Nigeria for industrial pur-poses and such companies are requiredto abide by the regulations on the useof land for industrial purposes andwith environmental regulations.

To safeguard investments in thecountry, the Nigerian government alsocommits itself to guarantees against ex-propriation. The government guaran-tees under section 25 of the NigerianInvestment Promotion Council (NIPC)decree that no enterprise shall benationalised or expropriated by anygovernment of the federation, unlessthe acquisition is in the national inter-est or for public purpose; and no per-son who owns either wholly or in part,

the capital of any enterprise shall becompelled by law to surrender his in-terest in the capital to any other per-son. This guarantee is an essential safe-guard to assure both local and foreigninvestors that their investment will notbe expropriated by the government.

Challenges of theManufacturing Sectorin NigeriaThe manufacturing sector like othersectors of the Nigerian economy hassome challenges impeding against itsoptimal performance. Industrial capac-ity utilisation, even at the present 56percent is way too low for the economyand underscores the horrendous scaleof industrial recession that has hit thesector.

Principal amongst the challengesfacing the sector as enunciated by theManufacturers Association of Nigeria(MAN) is lack of critical infrastruc-

Recent Trends in Nigeria’s Manufacturing Sector: Cause for Optimism? | ISSUES (III)

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ISSUES (III) | Recent Trends in Nigeria’s Manufacturing Sector: Cause for Optimism?

ture especially electricity. Prior to therecent improvement in electricity sup-ply in the country, manufacturers vir-tually depended on private generatorsfor power supply. Private power gen-eration account for about 30 percentof manufacturers’ cost of productionand this impacts negatively on theirprofitability and competitiveness.

Persistently high inflation rate isconsidered most unfavourable to themanufacturing sector because it is adisincentive to savings and investment,and ultimately economic growth. Per-sisting double-digit inflation rate leadsto short-term investments as long terminvestment cannot be undertaken in asituation of uncertainties.

Also, incidences of multiple taxa-tion and levies by the various tiers ofgovernment, and unfavourableECOWAS Common External Tariff(CET) policy are also bemoaned byMAN as factors that have impeded thegrowth of the manufacturing sector.Proliferation of smuggled substandardgoods into the country is also a seriousthreat to the manufacturing sector anda menace to the economy.

Most manufacturing firms in thecountry operate with antiquated plantsand machinery which do not supportthe production of standard contem-porary products. In today’s global worldof free flow of information, consum-ers have full knowledge of the state-of-the-art products and will not settlefor second best. Developments in tech-nology and innovation in the countryover time have not been commensu-rate with the fast pace ofindustrialisation in a dynamic globaleconomy. Some firms still have plantsand machinery procured several de-cades ago in their production lines andmaintaining such outdated plants andmachinery has become a serious drainpipe on profitability.

The Protection ArgumentManufacturers also contend that thegovernment has not protected themagainst stiff competition with their in-ternational competitors. The domesticinfant industry protection (protection-ism) versus free trade argument is oneof the most debated topics in economic

discourse. Proponents of protection-ism posit that the comparative advan-tage argument for free trade has lostits legitimacy in a globally integratedworld—in which capital is free to moveinternationally. They believe that byimposing high tariffs on imported com-modities (or even out right prohibition),domestic industries will grow and be-come self-sufficient within the inter-national economy. It is argued thatdomestic infant industries cannot com-pete with international competitors thatare more established. In effect, expos-ing domestic infant industries to com-petition with foreign competitors is akinto a day old-chick and an eagle engag-ing in a flying competition.

Proponents of the free trade argu-ment on the other hand criticise pro-tectionism as harmful to the people itis meant to help. They contend thatthe gains from free trade outweigh anylosses; as free trade creates more jobsthan it destroys because it allows coun-tries to specialise in the production ofgoods and services in which they have

a comparative advantage. They alsoargue that protecting domestic indus-try amounts to anti-globalisation.

The argument appears to be some-what settled in favour of free trade atleast in the academia based on the pre-ponderance of supporting theories. Inreality however, countries at the fore-front of the free trade crusade havein the past used some form of gov-ernment regulations to discourage im-ports and protect domestic industriesfrom foreign take-over or competition.

The conditions that prevailed in theworld order that culminated in theGeneral Agreement on Tariff andTrade (GATT) of 1944 have changedfundamentally. There is now mount-ing criticisms of the World Trade Or-ganization (WTO) with some calling forits abolition and suggesting either uni-lateral or regional trade agreements asmore efficacious in achieving lowertrade barriers. Some believe that theWTO still exists for political logic only.

While these controversies rage,there is no gainsaying the fact that for

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Recent Trends in Nigeria’s Manufacturing Sector: Cause for Optimism? | ISSUES (III)

the sake of strategic national interest,it is only expedient that countries, es-pecially industrially weak ones shouldadopt some protective measures toshield the productive base of theireconomies from stiff internationalcompetition. It is however imperativeto add that when domestic infant in-dustries are protected for too long, theycould become inept ‘aged-infants.’

Plagued by Dutchdisease?The manufacturing sector of the Ni-gerian economy has been performingsub-optimally for a long time in spiteof the preponderance of raw materi-als in the country and the diverse in-centive packages. Several studies havediscovered a relationship between thedecline in manufacturing and the dis-covery of crude oil in commercialquantity in the late 1950s. Whilst cor-relation may not necessarily mean cau-sation, it will not be out of place tobelieve that the manufacturing sector

got ensnarled with the infamous Dutchdisease (an economic concept that ex-plains the apparent relationship be-tween the exploitation of natural re-sources and a decline in the manufac-turing sector).

The theory has it that an increasein revenues from natural resourcesreduces the industrial capacity of anation’s economy by raising the ex-change rate, which makes the manu-facturing sector less competitive andpublic services entangled with businessinterests. The phenomenon was firstobserved in the Netherlands and theterm Dutch disease was coined in 1977by The Economist to describe the de-cline of the manufacturing sector inthe Netherlands after the discovery ofa large natural gas field in 1959.

The manufacturing sector’s contri-bution to the Nigerian economy hasremained insignificant as the sectorcontend with myriads of challengesleading to massive under-capacityutilisation. These have painfully resultedin the relocation of the processing linesof some prestigious companies toneighbouring countries in the recentpast while a number of others haveclosed shop. The resultant effect ofthese is enormous loss of jobs and adecline in government revenue whichhas aggravated the country’s unemploy-ment situation and exacerbatedgovernment’s fiscal deficit. The unfor-tunate incidence of mass importationof nearly all goods and commoditiesinto the country gets worse as prod-ucts from West African neighbours findtheir way into the Nigerian market.

Electricity is CrucialThe epileptic state of electricity sup-ply has been most inimical to the manu-facturing sector as lack of stable sup-ply of electricity features as the com-mon denominator amongst the chal-lenges enumerated by manufacturersin the country. For a long time untilrecently, maintenance andmodernisation of the nation’s electric-ity infrastructure has been grossly in-adequate. This scenario has culminatedin the use of private power generationby manufacturers. Private power gen-eration accounts for about 30 percent

The manufacturingsector of the Nigerianeconomy has beenperforming sub-optimally for a longtime in spite of thepreponderance ofraw materials in thecountry and thediverse incentivepackages. Severalstudies have discov-ered a relationshipbetween the declinein manufacturing andthe discovery ofcrude oil in commer-cial quantity in thelate 1950s.

of manufacturers’ cost of productionand this has severe negative impact onthe competitiveness of Nigerian prod-ucts and the profitability of manufac-turing companies.

Empirical evidence suggests thatgrowth in energy use is closely andpositively related to growth inindustrialisation. For instance, a recentstudy by the United Nations IndustrialDevelopment Organization (UNIDO)concludes that energy infrastructure inan economically meaningful sensehelps to explain why some countrieshave managed to industrialise whileothers have been less successful. Inother words, energy infrastructure iscrucial and holds one part of the keythat brings development and prosper-ity.

From the foregoing, recent im-provement in electricity supply and theongoing privatisation of the entirepower sector (generation and distribu-tion) are welcome developments forthe manufacturing sector. The govern-ment intends to achieve a target of40,000MW of electricity generation tomeet the Vision 20:2020. The PowerSector Reform Roadmap recognizesthe link between electricity supply andeconomic development. There is posi-tive momentum in the ongoing powersector reform and it is believed thatthe dark days of epileptic electricitysupply will soon be over and the manu-facturing sector would have sur-mounted its major challenge.

The recent rise in the number ofnew factories commencing operationsin the country, relatively better elec-tricity supply, improved capacityutilisation and index of manufacturingproduction, and the surge in globalcompetitiveness ranking are reasonablecause for optimism in the manufac-turing sector while hoping that the in-dustry would continue to build on thesenew gains – going forward.(* Sunday Enebeli-Uzor is an Ana-lyst, Zenith Economic Quarterly)


Fore

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backroom diplomacy which would se-verely test the relationships of the mainprotagonists in the euro zone crisis.

Jens Weidmann, head of the pow-erful Bundesbank, is a vocal critic ofDraghi’s plan, as he believes and prac-tices the German mantra that such amove will compromise the ECB’s in-dependence. Additionally he and therest of the German nation are still fix-ated by that Teutonic taboo – Infla-tion - and the political consequencesthat the hyperinflation of the 1920scaused in the 1930s. Yet, it was criticalthat Draghi got Germany on board.As Europe’s biggest economy, Ger-

T

ing further has really been publicly said,seen or done.

Immediately after the speech, eq-uity markets, then biased towards aEuro-Zone break-up scenario, ralliedsharply on this unexpected sentiment.Interestingly, equally as shocked wereDraghi’s aides and colleagues, none ofwhom suspected such a promise could,or indeed, would, be uttered. However,as with all matters concerning the Euroand the ECB, the truth is somewhatignored in all of this rhetoric. No-onewas in any position to guarantee “what-ever it takes” and the words were agamble setting off weeks of frenzied

Gregory (The Scotland Yard detective): “Is there any otherpoint to which you would wish to draw my attention?”Sherlock Holmes: “To the curious incident of the dog inthe night-time.”Gregory: “The dog did nothing in the night-time.”Holmes: “That was the curious incident.”

From the Sherlock Holmes story “Silver Blaze” FirstPublished in 1892.

ingly endless Euro-Zone Crisis. So far,well, over 20 summits seem to havefailed to move the process much fur-ther. What, though, is of extreme in-terest, is that for the past few monthseverything seems to have gone quietafter the head of the ECB, MarioDraghi’s famous, or infamous, speechon July 26th that he would do “what-ever it takes” to preserve the Euro.After that, as with Sherlock Holmes’dog question, it is significant that noth-

he dominant story this pastquarter for markets contin-ues to be the much soughtafter outcome of the seem-

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FOREIGN INSIGHT | All Quiet on the EU Front, or too Quiet?

many has the unenviable role as theEuro-Zone’s paymaster in a crisis.

No Germany, no Euro. If Draghi’spolicies ran up against a German wall,they would surely fail.

In the end, Draghi won over ev-eryone except Weidmann. Crucially hesecured the backing of Europe’s domi-nant leader, German Chancellor An-gela Merkel, who has been walking atightrope since the Euro crisis eruptedin late 2009, using tough rhetoric toappease an electorate deeply scepticalabout supporting crisis-hit euro mem-bers like Greece, while nudging bail-out deals through parliament to keepthe single currency intact.

Merkel faces a tough re-electionbattle in 2013 and is loath to see theEuro zone explode on her watch andas such a lifeline was critical. In theend it came in the form of a promiseof unlimited bond purchases by theECB from nations in trouble, but onlyon condition that any ECB bond buy-ing be tied to an aid program involvingthe notoriously tough IMF.

In 2011, the ECB had bought Ital-ian bonds only for Italy’s then-primeminister, Silvio Berlusconi, to drop re-form promises days later and as such,they were in no mood to have this ex-perience repeated. To stop such a re-currence, it was agreed that countrieswho wanted the ECB to intervene mustfirst sign up to a formal aid program.Then, and only then, would IMF in-volvement be sought and bond pur-chases restricted to maturities of upto 3 years. The ECB could choose tosell as well as buy bonds - a veiledwarning to countries that it might pullthe plug if they failed to deliver ontheir promises.The new initiative justneeded a name. Initially dubbed “Out-right Open Market Operations” or(OOMO), the ECB board ditched thatfor “Monetary Outright Transactions”(MOT), before settling on the moregrammatical “Outright MonetaryTransactions” (OMT) shortly beforethe program was unveiled.

So, on October 4th Draghi spoke atthe monthly ECB press conference andannounced “Under appropriate condi-tions, we will have a fully effectivebackstop to prevent potentially destruc-

tive scenarios.”He stated the volumeof bond purchases would be unlim-ited.

Unsurprisingly Euro zone blue chipstocks soared to levels not seen sinceMarch and the Euro extended its up-ward march. A week later, Germany’sConstitutional Court gave a green lightfor Europe’s new bailout fund andDutch voters handed pro-Europeanparties a sweeping election victory.

After three years of seemingly con-stant crisis, can Europe breathe again?

Maybe not!It is far too early to hail Draghi’s

plan as a solution to the crisis.The ECB has not yet bought any

bonds and its members are alreadysending conflicting signals over howthe plan can be implemented.

Many questions remain unan-swered about whether the ECB is re-ally prepared to put their money wheretheir mouth is and buy a genuinelyunlimited amount of bonds.

A bigger question is the real im-pact of Draghi’s plan on Germanvoter sentiment. At the inception ofthe Euro, the ECB was sold to scepti-cal Germans as a carbon copy of theBundesbank, inflation fighting mea-sures and all. Germans feel betrayed;many convinced the ECB has beentaken over by a cabal of dovishsoutherners.

Still, the one precious commodity http://w

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All Quiet on the EU Front, or too Quiet? | FOREIGN INSIGHT

that Draghi has bought Europe is time.This allows politicians more space toattempt to sort out the mess. Whetherthey actually find a definitive solutionis another question. Frau Merkel’s elec-tion fate depends on the next 4 months!

Equities – after a quietsummer, where next?Market activity for most of the sum-mer period was extremely quiet. InEurope the market did perk up fromthe end of July after Draghi’s Speech,but in the UK the distraction of host-ing the Olympics was a major factor ina somewhat unexpected downturn inoverall economic activity. Generally thesense was one of markets grindingslowly higher more in the absence ofany new bad news rather than becausethere was anything too wonderful toexcite market participants.

All three Index baskets that we trackhave had a positive past three months.In both the MSCI World and Emerg-ing Indices, volatility remained height-ened and, for once, the Frontier mar-kets have had a far smoother uplift.

This all round positive and quietlystrong market performance shows inthe individual indices. Of the 93 indi-ces we follow there were positive re-turns over the past three months in 76markets, 81.7% of the total, which sta-tistically is very high number and fallsin only 17 / 18.3%. The best perform-ing market has been Venezuela,+35.6%, not a market that many fol-low and even fewer are permitted toinvest in, where the re-election ofPresident Chavez has, for now, rein-vigorated Venezuelan nationalism. Thiswas closely followed by Athens,+35.3%, a move more on the back ofpositive short-term optimism based onnothing more than there being no re-cent additional surprises. Third, we arepleased to show, was the Nigerian stockmarket, +24.8%, where banks wereespecially popular.

The worst performances camefrom areas that overall had previouslyproved to be somewhat populist butwhere most rational investors wouldonly invest a miniscule proportion oftheir money, if any. Losses in markets

Source: MSCI Barra & Bloomberg

Market activity for most

of the summer period

was extremely quiet. In

Europe the market did

perk up from the end of

July after Draghi’s

Speech, but in the UK

the distraction of host-

ing the Olympics was a

major factor in a some-

what unexpected down-

turn in overall eco-

nomic activity. Gener-

ally the sense was one

of markets grinding

slowly higher more in

the absence of any new

bad news rather than

because there was

anything too wonderful

to excite market partici-

pants.


FOREIGN INSIGHTS | All Quiet on the EU Front, or too Quiet?

such as the Ukraine, -18.3%,Mongolia,-17.5%, Cyprus, -12.0% andZambia, -11.9% all showed that thinlycapitalised exchanges only need a smallproportion of their overall capital tobe sold or withdrawn for losses to bemagnified disproportionately. Again, allthese four markets are areas that atpresent we would never countenanceany investment, no matter the possibleshort term and explosive gains that maybe achieved. To reiterate a point wecontinually tell our investors, there isno well-balanced reason to be investedin any small or smaller index merelybecause it is a component that tacitindex-followers demand be included inyour portfolio merely because ‘it isthere’. That is the worst possible rea-son to invest. If a market looks bad,smells, bad and trades badly, then thereis an investor accident waiting to hap-pen.

In the large capitalised globalindices,there has been a more concen-trated series of returns. The Dax is stillbenefitting from the flow of capital intoGerman equities noted previously. An18.1% return is slightly surprising andcaution would dictate that some profittaking is almost inevitable during thefourth quarter. However, any sign ofnew or unexpected problems in South-ern Europe is likely to see further capi-tal inflows. The only negative returncame from Japan where the Topix, -4.1% and the Nikkei 225, -1.5%, bothcontinue to show the negative impactof the worsening Sino-Japanese rela-tions. Indeed, the possibility of the dis-pute over the Senkaku Islands (as theyare named by Japan) / Diayo (in Chi-nese) lurching into a small armed con-flict over this territory continues toworry the wider world. Hopefully san-ity will prevail.

A small nugget of interest in equi-ties is that it is claimed by many, whoprobably should know better, thatstocks always decline during the sum-mer so you should sell your equityholdings before everyone goes away –on or before May 31st – and then wheneveryone returns in the Autumn – Sep-tember 1st – you can buy them backagain more cheaply.

Sounds good, doesn’t it? Many

believe this to be true – even experi-enced investors.

Wrong!Over the past 50 years if you had

not sold in May and still ‘gone away’you would have lost money in 24 ofthose years but made money in 26 –including 2012. The average gain in theS&P 500 for the 3 month summerperiod from May 1963 to September1st 2012 was +0.4%. That does notsound too positive but once you fac-tor in the additional dealing costs ofselling and buying back the differencebegins to grow between holding, reap-ing the gain, selling and losing it. Ad-mittedly there have been some verybad years such as 2002 when duringthis holding period the market declined-15.7% but this is evened out with yearssuch as 2009, +13.8%. However, 2012with a return in the S&P 500 of+7.35%, far from being the exception,is just better than normal.

The US ElectionIn the U.S., the gloves are off and thequadrennial mudslinging has begun inearnest. The Presidential Election isnow only a short time away and thereare some serious problems for the in-cumbent; unemployment and housingare acting as lightning conductors foradverse public opinion and already itis statistically too close to call.

While we are forbidden to endorseeither candidate, the recent surge forMitt Romney has put him into a dead-heat tie with President Obama.

Certainly, whatever the result on thenight of Tuesday November 6th, it willbe extremely close and the final out-come will hinge on a few states with arecount a distinct possibility in at least3 states. Whoever wins, it is likely to beby the slimmest majority since GeorgeW. Bush beat Al Gore in 2000 – theresult then hinging on the “hangingchad” debacle in Florida.

http://msnbcmedia.msn.com/i/reuters/2012-11-05t064817z_1293901224_gm1e8b5153101_rtrmadp_3_usa-campaign.jpg



Agriculture – US droughthad a disastrous effect oncrop pricesThe drought that hit the United Statesduring the summer continues tosqueeze crop prices. Around 64% of

the contiguous U.S. was in drought atone stage, the highest recorded levelssince 1956. Despite rain fall in Sep-tember, crop yields were decimatedand the impact of this is spread rap-idly away from a purely agricultural‘softs’ predicament, to have a direct

impact on other areas of the agricul-tural industry such as ethanol produc-tion and the livestock sector.

The current U.S. ethanol directive– the Renewable Fuel Standard - re-quiring that a minimum of 9% ofcorn-based ethanol production is addedto petroleum/gasoline is a measure thatprobably should be reviewed or sus-pended, given the continued squeezeon crop prices. The recent rainfall,while encouraging, is no drought buster.Analysts now expect final productionlevels to be even lower than the re-cently downgraded USDA (UnitedStates Department of Agriculture)forecasts.

Corn rose at one stage well over60%, peaking at 838 cents a bushel.Even now, the price is still at around750 c. Such a move has led to a sig-nificant rise in the costs of animalfeedstuffs with a consequent roll-through of inflationary pressures downthe chain of food production. Similarbut not such extreme moves were alsoseen in Oats, the bedrock of any por-ridge, peaked at a rise of over 40%,with a similar move in Soybeans.

Many consumers are growing an-gry, believing that the US ethanol policyitself has led to higher corn prices,tightening supplies and increasing vola-

Source: Bloomberg

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Corn rose at one stage wellover 60%, peaking at 838cents a bushel. Even now,the price is still at around750 c. Such a move has ledto a significant rise in thecosts of animal feedstuffswith a consequent roll-through of inflationarypressures down the chain offood production. Similarbut not such extreme moveswere also seen in Oats, thebedrock of any porridge,peaked at a rise of over40%, with a similar move inSoybeans.



tility. A further problem has been con-firmation of the expected downgradeof the Russian harvest prospects andthe possible suspension of internationalexports. While spot prices are slippingback as the harvest in the US beginsto come in, we are unlikely to see anyreturn to lower prices in the short-term.While the exact inflationary impactfrom this remains to be seen, there isno doubt that the US economy in thisElection Year, will experience inflation-ary turbulence. Not quite what thePresident had hoped for given the cur-rent tightness of the opinion polls.

Gold – US QE measureshave put some zip into theGold priceAfter the 13th September announce-ment that the Federal Reserve wasgoing to continue its Quantitative Eas-ing program, demand for gold, alreadystrong on the back of further globaltensions and indifferent US economicreleases, saw the price push closer tothe recent highs around $1,800=.However, the price of the yellow metalis now starting to be agitated frommany sides; Labour unrest in South

Africa is growing and at one stage inSeptember upwards of 40% of thecountries’ entire gold production hadstopped. Add in the increasing tensionsbetween Iran and Israel, which isworryingly impatient to bomb the Ira-nian nuclear facilities at Natanz andFordow and you could well end up witha perfect storm of bad news - a strong

positive for Gold.Central banks globally are now

turbo charging their printing presses inthe hope that more liquidity is the keyto future economic health – this, un-fortunately is unlikely to be the case inthe longer term without stoking someserious inflationary fires in the comingquarters. Its potential as a store ofwealth is again being reassessed as just

Source: Bloomberg

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FOREIGN INSIGHT | All Quiet on the EU Front, or too Quiet?

about all countries are vainly trying toweaken their currencies against eachother – something of an overall slightimpossibility.

In Europe, just when you thoughtthe final, final line in the sand had beendrawn and everyone was going to startpulling the Euro back from the abyss,Catalonian secessionist forces haveappeared almost out of nowhere justas Spain was trying its hardest not tobow to the inevitable and ask for a fullblown bail-out. The price of gold inEuros hit an all-time high of €1,378.41on October 1st.

Given the ability of the Europeanauthorities to manage to snatch defeatfrom the jaws of victory, the price ofgold in US Dollars is more than likelyto rise to test the old $1,900 highs quitesoon. Add in the increasing likelihoodof some serious economic growth overthe next few years – highly likely out-side of Southern Europe – then $2,500has to be viewed as a target for 2014-15, maybe earlier if geopolitical ten-sions erupt in the Gulf, or there is seri-ous and sustained labour unrest inSouthern Africa.

In the US at the Republican Partyconvention and for the first time in

over 30 years, talk of a return to thegold standard became part of main-stream politics in America. It becameofficial policy to support the creationof a new commission to look at re-establishing the link between the USDollar and gold. The proposal evokesmemories of a similar commission set-up by President Reagan in 1981; thenonly 10 years after Richard Nixon hadfinally removed the link in the light ofthe 1971 oil crisis.

There are though too many practi-cal problems to return to a fully-fledged gold standard and the commis-sion is likely to return to an exactlysimilar conclusion as in 1981 to main-tain the status quo. The key problemwill be at what price in gold the UScould peg its currency. Great Britainin 1925 returned to the gold standardit left in 1914, at 1914 prices. This wasprobably the biggest mistake the thenChancellor of the Exchequer, WinstonChurchill, could have made as it ig-nored the high inflation in the inter-vening years. The result was a vastovervaluation of the Pound with con-sequential deflation and high unemploy-ment.

For the US, there is no ‘correct’price at which to theoretically return –whatever price is set whether it is$2,000 or $5,000 an ounce, marketswill test this level and it will collapse

much as pegged currencies always faileventually.

This does not mean there couldtheoretically not be a “back-door” goldstandard. Central Banks are alreadydoing this by rebuilding their stockpilesof gold. Two decades of heavy gov-ernment selling globally has been re-versed and in 2010 Central Banks be-came net buyers of gold and the mo-mentum has built since. Gold will prob-ably end up being used as “good” col-lateral by global central banks, as op-posed to the alternative and rathershaky collateral offered by sovereigndebt.

2012 – The 25th

Anniversary of the 1987‘Black Monday’ stockmarket crashHistory, as they say, is all around us –every day is the anniversary of someevent, meaningful or meaningless, foreveryone. In financial markets, the fo-cus for market shifting and significantevents continues to be fixated on themonth of October and this month,October 2012, is the 25th anniversaryof the great 1987 crash – Black Mon-day - that for those of us who werethere at the time seemed to be literallythe end of the world, as we knew it.

A further problem hasbeen confirmation of theexpected downgrade ofthe Russian harvestprospects and the pos-sible suspension ofinternational exports.While spot prices areslipping back as theharvest in the US beginsto come in, we are un-likely to see any returnto lower prices in theshort-term.

Source: Bloomberg



However, with hindsight and rational-ity, the reasons for its occurrence be-came clearer and its lessons continueto resonate – especially as history whilenot repeating itself exactly at thepresent, most certainly has a very fa-miliar feeling.

A year before, during 1986, the USeconomy began to cool rapidly fromits earlier fast-paced recovery, to aslower rate of expansion resulting in a“soft landing” – where the economyand inflation fell to more muted butstill economically positive levels. On theback of this benign period, equity mar-kets rose rapidly and the Dow Jonespeaked on August 25th at 2,722.42. Atthe time, it was ‘confidently’ prophesiedby some that the Dow would hit 3,000by year-end. From this August peak,markets drifted slightly and had fallenaround 3% by the end of September.On October 14th a far larger than ex-pected US trade deficit combined withsome injudicious comments by the thenTreasury Secretary, James Baker, thatthe US dollar was seriously overval-ued, led to foreign selling of dollar as-sets.

In the days between the 14th and19th October 1987 US Indices fell over30%, the Dow falling -22.6% onMonday the 19th – “Black Monday” –the greatest one day closing percent-age loss ever seen, beating the -12.82%loss seen on a previous ‘Black Mon-day’, October 28th 1929. The marketshad been in free-fall since the Asianopening earlier that morning, wherelosses were accelerated by news thatthe US had fired upon an Iranian oilplatform in response to an earlier Silk-worm missile attack on a US flaggedship. What is sometimes, rather conve-niently, forgotten is that after the slumpto the low of 1,738.74, the Dow thenalmost immediately started to rally.

By the beginning of November theDow was back above 2,000, a rise of+15.8% from the closing lows of Oc-tober; it then fell again by -9.0% dur-ing the month but finally ended the yearat 1,938.83 a net rise for the year of+2.26%. Many feared at the time thatthis would trigger a recession, similarto the 1929 crash. This time, becausethe Federal Reserve had painfully learnt

from its previous mistakes, it ensuredcontinuing monetary liquidity. As theFed was seen as a source of constantsupport to the financial system, a cri-sis was averted. It was also fortunatethat President Reagan had recently ap-pointed Alan Greenspan as Chairmanof the Federal Reserve – probably themost influential Chairman there hasever been.

Since then, as can be seen in thegraph, the Dow has risen +8.13% ayear, on a pure point to point mea-surement (2,168.57 on 31st December1987 to 13,473.53 on 9th October2012) – if you reinvested the dividendsthat were paid out by the 30 constitu-ents net of tax, the returns increase to+9.43% (+10.94% gross).

Do we think that the Dow, or in-deed the S&P 500, is too high? TheDow is currently only 691 points or5.13% off the all-time high of 2007;the S&P 121.50 points or 8.42% offrecord levels.

Our internal indicators pointed tothe first signs of a sea change in atti-

tude to equities at the beginning ofAugust and the subsequent steady rallyon the back of what has been someslightly unexceptional US economic fig-ures masks what, to some, is a glar-ingly obvious state of affairs. The USeconomy is growing - it is back as theglobal engine of growth.

Given the low current yields in theUS Treasury market, where the 5 YearNote currently yields 0.625% (Price100=), the average dividend yield onthe Dow of 2.52% is looking especiallyattractive – equity yields currentlyrange from 4.77% for AT&T (T:US)to 0.43% for Bank of America(BAC:US). If you also factor in thehigh likelihood of meaningful capitalgains to be had in the next 5 years onthe Dow when compared to the pre-cisely ‘Zero’ capital gains to be had byholding the current 5 year TreasuryNote to maturity, the signs are therethat a meaningful move back to equi-ties may be about to happen.

It is thus highly likely that the Dowwill register a new high within the next

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The next 25 years -Equities or Bonds?By the time we get to the Golden Jubi-lee of the 1987 crash in October 2037,a mere 9,120 or so days’ time, whereare you likely to have made moremoney?

Certainly, the case for equities isgrowing more compelling but again -as we have warned before – you needto have a careful and skilful guide forthis.

However, as we caution, seeminglyendlessly, you will need a mixed port-folio with the bond and equity elementsvarying in line with the then prevailingmarket conditions. Certainly some ofthe recent issuance of perpetual (irre-deemable) corporate bonds recentlycoming to the market, which yield sub-stantially more than the US 30 Yearbond’s current 2.81% are well worthlocking into now for yields of at leastdouble this. As many irredeemablebonds have coupon re-sets 5 or 10years hence that will be re-fixed fromfuture [higher] benchmark levels, logichas it that such coupons can only rise.

With the Dow Jones Index, if youfactor in even some low or middlingaverage rates of return for the next25 years, just the point-to-point returnscertainly add up, thanks to probablythe most important invention of thepast 800 years – compound interest.Even a 3% average growth rate willgive us a Dow level of 28,134.37 by2037. Add just one per cent to thegrowth rate (4%) and suddenly your13,437.13 level moves to 35,821.19 afull 27.32% higher than the 3% ratereturns. Crank it up to a 6% annualrate and you are looking at a final fig-ure of 57,670.42!

As 2037 will be when your writeris [currently] meant to have just retired,he will be very happy for the marketsto continue at their recent 8%annualised average growth rate.

Dow 92,023.85 anyone!(* Neil Hitchins is a Senior Rela-tionship Manager, Zenith Bank(UK))

four months – the 15,000 level willhave to wait, but as this is only +11.6%from current levels we could poten-

tially see this level either by Q4 2013or Q1 2014.

Source: Bloomberg


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* By Olutayo Otubanjo, PhD

Tmultidisciplinary phenomenon. Unfor-tunately, the multidisciplinary nature ofthis discipline is only captured by a fewauthors within the corporate identitydiscipline (Birkigt and Stadler, 1986;Balmer, 2002). This paper adds to theseworks by offering ‘an extended corpo-rate identity mix’ comprising organiza-tion storytelling, core competence, vi-sual style, and buyer value. Addition-ally, the study demonstrates how thesecomponents serve as channels throughwhich a firm’s personality is conveyedto stakeholders.

Views on corporateidentity mixMeaning: the literature of corporateidentity mix owes much to Birkigt andStadler’s (1986) theory which narrowedthe concept down to how a firm’s per-sonality is expressed through Symbol-ism, communication and behaviour.Following the publication of this influ-

ential work, many leading corporateidentity authors belonging to the mar-keting mindset have since attemptedto clarify the meaning of corporateidentity mix from the perspective ofthis philosophy. For instance, VanRekom et al. (1991) see corporate iden-tity mix as having to do with “the self-presentation of an organization. It con-sists of the cues which an organiza-tion offers about itself via itsbehaviour, communication, and sym-bolism, which are its forms of expres-sion.”

Van Riel and Balmer (1997) con-curred with these views when they de-scribed corporate identity mix as “theway in which an organization’s identityis revealed through behaviour (and)communications, as well as throughsymbolism to internal and external au-diences.” Similarly, Otubanjo andCornelius (2008) agreed that corporateidentity mix is a philosophy reflectiveof the channels through which a firm’spersonality is conveyed to stakehold-ers. Some of these channels include‘who/what you are’, ‘what you standfor,’ etc.

Channels or elements ofcorporate identity mixA few studies have been put forwardin literature to explicate the channelsor elements of corporate identity. Theauthor will in the paragraphs that fol-low discuss these in details:

Birkigt and Stadler’s (1986)theory of symbolism, communica-tion and behaviour: symbolism re-fers to a set of visual identities thatbusiness organizations deploy either atcorporate or product level to denoteownership and achieve differentiation.More importantly, it helps firms to ex-press the nature of their personalitiesto stakeholders. Communication on theother hand represents the very many

oday, the concept of corporateidentity is pursued, especiallyamong industry practitioners,as a broad and


ways in which firms conveytheir entire personality tostakeholders. This may bethrough corporate advocacyadvertising and corporatepublic relations. Behaviourdenotes the ways that firmsconvey personalities throughactions as well as throughnon-verbal behaviour, whichcan be planned or unplanned(Otubanjo et al, 2010).

Balmer and Soenen’s(1998) theory of mind,soul, and voice: is to someextent grounded on Birkigtand Stadler’s (1986) theory ofsymbolism, communication,and behaviour. For these au-

thors, the ‘mind’ representsthe vision, philosophy, strat-egy, performance, brand ar-chitecture, ownership, andhistory. The ‘soul’ denotesvalues, sub-cultures, em-ployee anities, and internalimages. The ‘voice’ on theother hand reflects a firm’stotal corporate communica-tion activities comprised ofcontrolled and uncontrollablecommunication, indirect com-munication, symbolism, em-ployee and corporatebehaviour. These conceptsprovide channels throughwhich a firm’s personality isconveyed internally and ex-

ternally.Balmer’s (2002) strat-

egy, structure, communi-cation, and culture per-spective: this theory buildson Balmer and Soenen’s(1998) work of the mind,mind soul and body. ForBalmer (2002), strategic con-scious decisions made by se-nior management in the pastcould impact on the firm’spersonality today. These in-clude management vision andphilosophy, corporate strat-egy, service, product and fi-nancial performance, the cor-porate brand covenant andcorporate architecture, andthe nature of corporate own-ership. Structure for Balmer(2002) reflects how a firmconducts its multiple relation-ships with subsidiaries, busi-ness units as well as allianceor franchise partners. Com-munication refers to themulti-faceted ways in whichfirms convey strategic inten-tions to stakeholders. Cultureis a way of life in many orga-nizations. According toBalmer (2002), culture is“that ‘soft’, subjective, albeitimportant, elements whichare at the centre of anorganisation’s corporate iden-tity”.

Benefits andlimitations ofcorporate identitymix literatureExisting literature on corpo-rate identity mix (Birkigt andStadler, 1986; Balmer andSoenen, 1998; Balmer, 2002)contributes immensely to-wards a deepened under-standing of the nature of cor-porate identity and other con-cepts of corporate personal-ity. Contributions made byauthors towards this concepthave equally enhanced mana-gerial understanding of the

concept and how to bettermanage it. However, a num-ber of elements, whichequally serve as importantchannels through which thepersonality of firms are con-veyed, are left out. The ab-sence of these elements inexisting literature motivatesthe need to offer a new setof channels which are ofcourse consistently deployedby firms in the marketplace.These elements include orga-nizational storytelling, corecompetence, corporate ad-vertising and visual style.

OrganizationalstorytellingStories are fundamental waysthrough which we understandthe world (Bruner, 1990;Jameson, 1985; Tenkasi andBoland, 1993). Organiza-tional storytelling is a com-prehensive narrative historyabout the origin, strategic in-tention and other landmarkachievements of an organi-zation. Storytelling has beenused in several cultures toconvey stories from genera-tion to generation about re-markable events in the livesof people in societies and ithas been most useful in soci-eties with little or no meansof recording events(Johansson, 2004).

Corroborating theseviews, Jabri and Pounder(2001) averred thatstorytelling serves to “expressthe richness and diversity ofhuman experience and thuschallenge simplistic analysesof management issues suchas change that can resultfrom adherence to narrow,mechanical models of hu-man nature”. It is a powerfultool used to evoke andheighten emotions. Accordingto Adamson et al. (2006) “agood story always combines

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conflict, drama, suspense, plot twists,symbols, characters, triumph over odds,and usually a generous amount ofhumour - all to do two things: captureyour imagination and make you feel. Itdraws you in, places you at its centre,connects to your emotions, and insertsits meaning into your memory”.

Storytelling is an integrative tool ofcorporate strategy. Stories create the ex-perience of enhancing understanding of‘who and what’ the organization is atcorporate level. The use of stories hasenhanced effective communication oforganizational history to stakeholders(particularly the external ones) and hasenabled organizations to capture stake-holders’ imaginations and interest andprovide the stimulus to pursue mutualunderstanding between organizationsand stakeholders. Storytelling makesremarkable events in the history oforganizations easier to remember andmore believable. They are a powerfulmeans of communicating organizationalvalues, ideas, and norms to stakehold-ers. Stakeholders see themselves in sto-ries and unconsciously relate it to theirexperience (Morgan and Dennehey,1997).

Stories entertain, evoke emotions,trigger visual memories, and strengthenrecall about symbolic events in the livesof organizations. They function asrhetoric for business organizations(Boje, 1995). As Brown (1990) argued,storytelling enhances the constructionof various organizational activities andserves the purpose of explaining whyspecific decisions were taken in regardto certain business activities. Most im-portantly, stories are unique. They seekto differentiate the organization, andposition it as poles apart from otherswith similar business interests. Theydemonstrate that the institution is un-like any other (Martin, Feldman, Hutchand Sitkin, 1983).

Zemke (1990) put forward fourimportant characteristics of organiza-tional storytelling. First, the story mustbe concrete and talk about real people,describe real events and actions, be setin a time and place which the listenercan recognize and with which he or shecan identify. The story must be con-nected to the organization’s philosophy

and/or culture. Second, stories must becommon knowledge in the organization.Stakeholders must not only know thestory, but know that others know it aswell and follow its guidance. Third, thestory must be believed by the listeners.To have impact and make its point, astory must be believed to be true ofthe organization. Fourthly, the storymust describe a social contract. (i.e.,how things were done or not done inthe organization) and must allow the lis-tener to learn about organizationalnorms, rewards and punishments with-out trial-and-error experiences.

In the same vein, Brown (1990)contends that organizational stories mustfirst, reduce uncertainty for organiza-tional stakeholders by providing reliableaccounts of information about the or-ganization and second, organizationalstories must manage meaning by fram-ing events within organizational valuesand expectations. Third and most im-portant of all, organizational stories

must identify why organizations and itsmembers are special or unique.

Mogens Holten Larsen (2000) ar-gued that what makes organizationalstorytelling different from all other cor-porate communication tools is not justits ability to construct the strategic in-tentions of the organization but its ca-pacity to incorporate the core compe-tencies, philosophical beliefs and valuesof that organization. It also providesdeeper and strategic information aboutorganizations; it is also a simple yet ef-fective framework for guiding the ac-tivities of organizations and their mem-bers.

Many organizations have employedthe use of effective storytelling to cre-ate bond among employees on the onehand and also to build trust betweenthe organization and employees on theother. Organizational storytelling is avery good vehicle for assuring the con-tinued delivery of top quality goods andservices, for peddling confidence and

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Discourse | The ExtendedCorporate Identity Mix


also for building corporate reputationamong stakeholders.

Mogens Holten Larsen (2000)averred that organizations that utilizelegitimate reputation to explain its stra-tegic intentions, through its contribu-tions to society and commitment toadding value, create a very strong op-portunity for strategically positioningitself, no matter how competitive themarket place may be.

Many modern day successful busi-ness organizations employ the use ofstorytelling not just to convey informa-tion about landmark events about theirorganizations to internal and externalstakeholders but most importantly, todifferentiate and distinguish themselvesfrom others operating within their mar-ket space. Mogens Holten Larsen cor-roborates this view while contendingthat the incorporation of the origin oforganizations, strategic intentions andcore competencies and all the wordsand visual images constructed in orga-

nizational stories provide a fundamen-tal platform on which organizations dif-ferentiate themselves from others withsimilar business interests.

Take the case of 3M as an example.The organization differentiated itselfstrategically in the market place by us-ing storytelling to explain remarkablemilestones in its history, drawing fromrecollections of major participants inthese milestones. The construction ofsuch organizational stories helped 3Min understanding the many sources ofits innovative culture, together with thechallenges it faced in achieving buyervalue (Porter, 1985) and differentiat-ing itself from competitors. A full textof 3M 248 page organizational storyhas been published and is found atwww.3m.com/about3M

Core competenciesThe concept of core competencies,developed originally by Prahalad andDoz (1987), proposes that organizations

should base their strategies around theircore technical, competencies (Hussey,1998) to transform, re-engineer busi-ness processes and achieve competitiveadvantage (Hamel and Prahalad, 1994).

What, therefore, is a core compe-tence? A core competence is a collec-tion of various organizational skills andtechnologies (Hamel and Prahalad,1996) representing the integration ofvarious skills which differentiate orga-nizations from competition. Core com-petence involves the harmonization andintegration of various streams of tech-nologies and the use of such technolo-gies to deliver customer value (Prahaladand Hamel, 1990). Corroborating thisview, Hamel and Henee (2000) addedthat the concept of core competencewhen applied adds disproportionately tocustomer value and enables the deliv-ery of highly valued benefits to cus-tomers. It is the collective learning re-lating to the coordination of diverseskills and the integration of multiplestreams of technologies (Prahalad andHamel, 1994).

The integrated skills that lead to theemergence of core competencies areenhanced as they are shared amongemployees and do not diminish with use.Core competencies bind existing busi-nesses and offer a guide to patterns ofdiversification and market entry. Hameland Prahalad gave a summary of themeaning of core competence in their1996 classic and best seller text: “A corecompetence is a bundle of skills andtechnologies that enables a company toprovide a particular benefit to custom-ers. At Sony, for example, that benefitis ‘pocketability’ and the core compe-tence is miniaturization. At Federal Ex-press, the benefit is on-time delivery andthe core competence, at every high level,is logistics management. Logistics arealso central to Wal-Mart’s ability to pro-vide customers with the benefits ofchoice, availability and value. At EDS,the customer benefit is seamless infor-mation flow and one of the contribut-ing core competencies is systems inte-gration. Motorola provides customerswith benefits of ‘untethered communi-cations’, which are based on Motorola’smastery of competencies in wirelesscommunications.”

Figure 1: 3M Innovation storyhttp://multimedia.3m.com/mwsmediawebserver?77777XxamfIVO&Wwo_Pw5_W7HYxTHfxajYv7HYv7H777777




Hamel and Heene (2000)theorised core competenciesinto three main categories,namely market access com-petencies, integrated relatedcompetencies and function-ality related competencies.Market access competenciesinvolve the development ofskills that put organizations inclose proximity with stake-holders. Integrated relatedcompetencies relates to qual-ity management, cycle timemanagement, just in time, in-ventory management andother skills that enable thedelivery of products and ser-vices speedily with reliabilityand efficiency. Functionalitybased competencies however,encourage investment inproducts and services withunique functionality whichinvests the product with dis-tinctive customer benefits.Functionally related compe-tencies assume greater im-portance than the other twotypes of core competenciesgiven the convergence of or-ganizations around univer-sally high standards of prod-uct and service integrity andthe movement towards alli-ances, mergers and acquisi-tions and most importantly,transformation and change.

Rapid and dramaticchanges in technology, gov-ernment policy and businesspractices make the function-ality based competence proneto change. Within a short pe-riod however, what consti-tutes a distinct functionalitybased competence to an or-ganization becomes a genericcompetence common to alloperators. This makes thetransformation of competen-cies increasingly inevitable toorganizations that seek mar-ket dominance and strategiccompetitive advantage. Corecompetencies, if identified,provide essential platforms

for the rejuvenation, restora-tion and renewal of organi-zations towards market com-petitiveness. The process oftransformation allows theappraisal of core competen-cies and its future prospectin terms of durability.

The appraisal exercise istantamount to the establish-ment of the core corporateidentity (Hussey, 1998) whichincludes the strategic intent,unique combination of skillstogether with abilities andexperiences matched to op-portunities that exploitstrengths in identities andcorrect its weaknesses. Thetransformation of core com-petencies, which competitorsfind difficult to imitate(Hussey, 1998) therefore re-quires commitment of re-sources. A significant amountof funds must be committedto skills identification and de-velopment throughout thecompetence transformationexercise.

While the commitment oflarge investment to the iden-tification of core competen-cies is deeply appreciated,organizations must continu-ously sift out homogeneouscompetencies or generic iden-tities (Olins, 1989; Olins,1978) common to the indus-try and commit greater atten-tion to the development ofunique skills, which compet-ing organizations find diffi-cult to imitate. The transfor-mation of core competenciespresents another form of sig-nification. By transformingthe core competencies oforganizations, especially thefunctionality based ones(Hamel and Heene, 2000);identity signals of transfor-mation (founded on re-engi-neering, re-structuring) andrenewal are communicatedto stakeholders who, in turn,process and develop an im-

age based on the transforma-tive signals received.

CorporateadvertisingModern advertising cam-paigns were originally devel-oped to persuade and driveconsumer purchase of a spe-cific brand or service. How-ever, with the arrival of mod-ern business organizationsand the jostle for leadershipand market supremacy invarious industries, anothertype of advertising called cor-porate or institutional advert-ing (Schumann et al. 1991)emerged to promote and(Garbett, 1981) signify thedifferences between organi-zations and competition andmost importantly, build

favourable corporate imagesabout organizations in theminds of stakeholders. Forthis reason, organizations,particularly those in the finan-cial services industry, havecommitted billions of poundsto corporate advertising cam-paigns. The committal ofsuch huge investment intocorporate advertising cam-paigns demonstrates the keyrole corporate advertisingplays in the signification oforganizational differences.

But what is corporate ad-vertising? Aaker (1996) de-fined it as messages spon-sored and communicated byorganizations through themedia to persuade consum-ers’ perceptions of an orga-nization and its products and

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their intentions to purchase the prod-ucts. It is a ‘catchall’ term (Garbett,1981) used to describe all forms ofadvertising that promote organizationsas opposed to its products or services.The use of the word ‘catchall’ byGarbett suggests that over the years,organizations have attempted to signifytheir differences through various formsof corporate advertising campaignsand most importantly, there have beenchanges in the methodologies adoptedby organizations in the signification ofthese differences.

After the Second World War, gov-ernments in western countries beganto relax and dismantle controls on mar-keting activities. Restrictions on hirepurchase of goods and services werelifted in 1954 in Britain, giving impe-tus and greater demand for goods andservices in the marketplace. In addi-tion, the media witnessed an unprec-

edented rise in the advertising of re-tail goods and groceries particularly be-tween 1952 and 1954, (Nevett, 1982)further stimulating the demand forgoods and services. Within a short pe-riod, fiercely competitive battles formarket leadership rose and the desireto signify organizational goodwill andcommitment to good public service asopposed to products, emerged.

The aim of this new wave of com-munications was not only to signifyorganizational differences but to buildfavourable corporate image, achievegreater consumer patronage(Schumann et. al, 1991) and maintainmarket dominance. This type of ad-vertising was called ‘corporate’ or ‘in-stitutional advertising’. In the follow-ing decades, there was, however, achange in the degree of use of corpo-rate advertising as the 1960s and mid1970s witnessed a lull in its use (Crane,

1980). By the late 1970s and towardsthe late 1980s, however, the socioeco-nomic environment of business wit-nessed a massive change. Socioeco-nomic institutions including govern-ments, religious bodies and even aca-demic institutions suffered a huge lossin public trust and credibility. The pri-vate sector was not spared. Businesses,particularly publicly quoted organiza-tions, declined in public confidence andcredibility (Sethi, 1978) and there wasthe urgent need to counteract publicscepticism of the social role of institu-tions and businesses through corporateled campaigns.

There was a rising desire to takepublic opinion on controversial issuesof social importance and engage andshape public discourse through vari-ous corporate communications cam-paigns (Sethi, 1978). Hence the use ofcorporate advocacy advertisingemerged. Cutler and Muehling (1991)defined corporate advocacy as a spe-cial form of advertising in which or-ganizations express their opinions oncontroversial societal issues in order tosway public sentiment and court goodcorporate image. It is a competitive toolcreated by organizations with the ulti-mate aim of shaping public opinion tocreate a business environment morefavourable to their position.

Since the late 1970s organizationshave become increasingly active, add-ing their voices to social issues of na-tional and even international impor-tance. In fact, many organizations havegone beyond the political realm, add-ing voices to legislative issues (Lord,2000) either through direct or indirectlobbying (Armey, 1996; Kuntz, 1995).By adding their voice to issues of so-cial and environmental concerns, or-ganizations shape public policies, re-duce uncertainties in the business en-vironment, reduce existing threats andcreate trust among stakeholders. Byadding voice and signifying support toprevailing social issues, many organi-zations have (in the process) courtedpublic support for their businesses,achieved competitive advantage (Lord,2000), differentiated themselves fromcompetition and secured impeccablecorporate image.



Although the use of cor-porate advocacy advertisingcontinues to dominate themedia, an addition to the dis-cipline of corporate advertis-ing called ‘market prepara-tion’ advertising, which givesgreater emphasis to corpo-rate identity emerged in theearly 1990s. Threemultidisciplinary factors ex-plain the reasons why manyorganizations turned to theuse of market preparatoryadvertisements. First is thatcorporate marketing led fac-tors of shortening productlife cycles, the desire amongcorporations for differentia-tion, merger and diversifica-tion/consolidation activities,and high rates of media in-flation. Other factors includethe redefinition of businessesfrom a marketing perspec-tive, increasing recognition ofthe value of integrated mar-keting communications, finerapproaches to segmentation,rising incidence of crisis situ-ations amongcorporations(Marwick andFill, 1997), a rise in productinnovation and reorientationof corporations towards cus-tomer service (Schmidt,1995).

Second are socio-eco-nomic factors of the unifi-cation of Europe, challengesof economic recession, valuechange and related increasein environmental awareness,opportunities and challengesof the European market(Schmidt, 1995) andprivatisation and divestmentof government stocks(Wilkinson and Balmer,1996).

Third are business andstrategy-induced factors ofglobalisation of markets andproduction, stiffer competi-tion, rising cost of businessoperations and crises in manyareas of industry. Others in-

clude increased desire for re-engineering and many otherfactors, which place severechallenges on corporations’national and internationalcompetition more than everbefore (Schmidt, 1995). Themain aim of this sort of ad-vertisement is to convey in-formation relating to reputa-tion derived from its history,core competencies and con-tributions of the organizationto stakeholders. More impor-tantly, it is designed to signifyorganizational differencesand court a favourable im-age for its users.

Visual styleThe use of strong visualidentity styles first attractedthe attention of business or-ganizations in 1908 whenAllgemeine Electrizitats

Gesellschaft (AEG) a Ger-man electrical appliancemanufacturing organizationdesigned a visual style (i.elogos/signage, uniforms,business cards, letterheads/stationery designs, vehicle liv-eries, company reports, pro-motional materials and inter-nal memos etc.) to unify itsarray of product lines, inte-grate its operations into amonolithic identity, build apowerful corporate identity,differentiate itself fromemerging competitors andbuild a stable but conserva-tive visual image. The use ofconservative visual stylescontinued unabated until thelate 1950s and over this pe-riod a series of conservativevisual identity styles were de-signed for Studebaker carsand Greyhound buses (Carls,

1989).Between the late 1950s

and mid 1970s, however, theeffects of competition beganto bite heavily and the needto exhibit very strong unifiedidentity globally using word-marks emerged, paving theway for the relegation of con-servative visual styles (Carls,1989). The word-mark styleof design allows the full spell-ing of the name and cementscorporate names in the mindsof stakeholders. Many orga-nizations, particularly those inthe United States, Britain andJapan constructed their visualcorporate identities drawingheavily from the Swiss Mod-ernist School of Design,which advocated the use ofword-marks using Helveticatypeface/letters, grey or bluecolors and clinical images in-

IBMhttp://www.africabusinesssource.com/wp-content/uploads/2009/08/prnphotos080682-ibm-logo.jpgFederal Expresshttp://www.logodesignsense.com/blog/wp-content/uploads/2011/02/Federal-Express-Logo.jpgApplehttp://th08.deviantart.net/fs71/PRE/i/2010/199/f/f/Apple_Computer_Inc__by_Quadrafox700.jpgShell logohttp://www.yourlogoresources.com/wp-content/uploads/2011/08/shell-logo.jpgMunich 1972http://cdn.bleacherreport.net/images_root/slides/photos/000/616/623/1972s_emblem_bjpg_display_image.gif?1294278021Prudential Logohttp://www.saigon-gpdaily.com.vn/dataimages/original/2011/01/images195522_prudenti.jpg



corporating the organization’s brandname into a uniquely styled type fonttreatment to construct desired imagesin the minds of stakeholders.

Fonts like script font were com-monly used to signify formality or infact corporate re-structuring. Boldfonts like IBM proclaimed strength andpower and slanted thick type fonts likeFedEx conveyed motion or movementor speed. Hand-drawn letters, charac-ters or symbols were designed to in-trigue target audiences and arrest in-terest. Besides the intentions of orga-nizations, the main objective of theword-mark is to construct a formalidentity of speed and dynamism, sym-bolize presence in the marketplace,achieve maximum visual effect, ce-ment brand name in the minds ofstakeholders, differentiate its usersfrom competitors and achieve a strongcorporate image.

These new approaches to visualstyle took on a more solid, well

grounded and well balanced appear-ance to project and signify desired or-ganizational messages and differenti-ate the organization (Carls, 1989).Within the same period, many small,medium-sized, young enterprising or-ganizations emerged as powerful com-petitors challenging bigger ones with anew sense of corporate identity ac-companied by very strong competingcorporate messages that made themstand out in the market place. Thesenew organizations adopted idiosyn-cratic artistic flair to corporate iden-tity design, challenging the cold ratio-nalism of the older conservative gen-eration (Carl, 1989). For example, theApple user-friendly, postmodern iden-tity was designed to convey the notionof high technology to challenge IBM’snew corporate identity, which conveyeda message of speed and dynamism.

Again during this period, a newwave of identity construction emergedand organizations began to adopt the

use of glyphs to represent themselvesgraphically. They are less direct thanstraight text, leaving room for broaderinterpretation of what the organizationrepresents. They are iconic, compellingand uncomplicated. They are used toconvey literal or abstract representa-tion of organizations. During this pe-riod, however, glyphs were not gener-ally used for logos, but as communica-tion devices, such as the 1972 Olym-pic event icon (a crown of ray of lights)representing the spirit of the MunichOlympic Games – light, freshness andgenerosity. Glyphs provided organiza-tions with the most impact and en-hanced the creation of a sophisticated,intellectual corporate identity for thosethat adopted it. Shell and the MunichOlympic glyphs (below) were designedby Raymond Loewy in 1971 and OtlAicher in the late 1960s respectivelyto give distinct identities to its promot-ers.

Beginning in the 1980s, organiza-tions began to express corporate visualidentities either through passive or ac-tive visual identity programs. Underpassive corporate identity programs,firms developed single and uniformmarks for every application. The samelogo accompanied by the same colorand typestyle appears on all businesscards, stationery designs, vehicle liver-ies, company reports, promotionalmaterials and internal memos.

Many large organizations likeAT&T lost confidence in their old globesymbol styled logo which had all thehallmarks of standardized passive cor-porate identity style of approach andembraced the flexible visual approachoffered in active identity programs thatallowed the flexible construction oftheir identity. The active identity pro-gram allowed organizations to main-tain greater flexibility and less rigidityin their visual applications. Many orga-nizations that adopted this approachexpressed their corporate identity in aseries of compatible, but non uniformways. It allowed organizations to changeand evolve without the need to rid itsentire visual identity as change evolvedover time.

Increasingly, the use of active iden-tity programs rose among very big or-

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ganizations, presenting them-selves with more diverse vi-sual identities (Carl, 1989). Asmuch as the active approachallowed for greater flexibility,it also came with severalchallenges which managersfound difficult to implement.For instance, the AT& T ac-tive identity program camewith as many as 24 versionsand a complex set of rulesto ensure proper usage. De-spite these rules and intensemonitoring, confusion led tofrequent and costly misuse ofthe active programme. Thisbecame a real problem forAT&T managers to deal withand the problem is reflectedin the publication of articlesdiscussing the use of the logowith employees. (See http://www.bellsystemmemorial.com/pdf/att_globe.pdf accessed,January 2006)

Buyer valueThe differentiation of orga-nizations through productsand services is achieved whenproducts or services offeredfor sale are deemed to addvalue to customers. However,the extent to which organiza-tions can differentiate them-selves through their productsremains an important issue.Product differentiation allowsfirm to command premiumprice, sell more products atspecific prices, and maintaincustomer loyalty even duringmarket turbulence.

Since the 1940’s, cus-tomer value was predomi-nantly equated to price. Sev-eral attempts were made dur-ing these periods to reduceproduct pricing to achievedifferentiation from competi-tors. Given the rising level ofcompetition and lower mar-ket entry barriers in manyindustries, the trend began tochange. Right from the1970’s value adding became

a more complex issue and or-ganizations responded withequally more sophisticatedmethods. Besides offeringproducts at reduced prices,emphasis was laid on shop-ping convenience and timing.Many organizations werepositioned differentlythrough corporate communi-cations conveying messagesrelating to the benefits ofconvenience of speedy ser-vices.

The economic recessionof the 1980’s fuelled theemergence of a new set ofconservative and cautiousspending consumers replac-ing the hedonistic, shop-‘til -

you-drop philosophy thatblossomed earlier in the de-cade (Levere, 1992). Themajority of organizations thatattempted (in the years thatfollowed) to differentiatethemselves by providing su-perior customer value to cus-tomers did so narrowly. Theprovision of higher buyervalue was approached bytinkering with the physicalaspects of organizationalproducts or marketing prac-tices (Porter, 1985) or at bestbringing prices down toachieve greater sales volume.During that period, manybusiness organizations in-vested huge sums of money,

http://www.technobuffalo.com/wp-content/uploads/2012/07/ATT-GNOC-composite.jpeg

For instance, the

AT& T active iden-

tity program came

with as many as 24

versions and a

complex set of rules

to ensure proper

usage. Despite

these rules and

intense monitoring,

confusion led to

frequent and costly

misuse of the active

programme.



time and effort in the visualdesigns on their products todistinguish them from thosebelonging to competing orga-nizations. Organizationalproducts and services wereconverted into branded port-folios through various mar-keting communications ef-forts and many business or-ganizations competed bybuilding and maintainingproduct or service quality atreduced prices, rationalizingtheir product portfolios andimproving supply-chain man-agement (Maklan and Knox,1997). Although, these ef-forts yielded returns, theywere, however, short lived.

Various environmentaltrends including the explosionof the mass media in theearly 1990s cum other inte-grated marketing communi-cation practices (Belch andBelch, 1995) together withrapid technological advance-ments enhanced greater cus-tomer awareness and cus-tomers began to demandgreater value for moneymore than ever before. Con-sequently, many business or-ganizations that could notmeet ‘customer value’ de-mand suffered huge losses inmarket share as customersrefused to accede to pre-mium products offered forsale by many industry lead-ers (Maklan and Knox, 1997).As a result, business organi-zations began to take a sec-ond but critical look at theirvalue chain practices. Today,businesses now search fornew opportunities to achieve,retain, upgrade and leveragecompetitive advantages(Yonggui Wang et al. 2004)and differentiate productseffectively through buyervalue. According to Levere(1992), “many organizationsare responding to this in-creased demand for value by

adopting innovative market-ing strategies or by using apreviously established valueorientation to win new cus-tomers while maintainingtheir traditional customerbase.”

ConclusionThis paper makes an attemptto broaden our academic andmanagerial understanding ofthe concept of corporateidentity by extending the con-cepts of corporate identitymix. Previously, existingworks failed to recognize therole of these five new emerg-ing phenomena in conveyinga firm’s personality to stake-holders. Specifically, previousworks (Birkigt and Stadler,1986; Balmer and Soenen,1998; Balmer, 2002) cham-pion the positioning of sym-bolism, communication,behaviour, mind, soul, andvoice, strategy, structure, andculture as dominant elementsof corporate identity mix.However, contributionsemerging from this study in-dicate that the elements ofcorporate identity mix are notlimited to what is obtainablein academic literature. Thisstudy provides evidence tosuggest that the concepts oforganization storytelling, corecompetencies, corporate ad-vertising, visual style andbuyer value, in addition toexisting elements; equallyserve as channels throughwhich a firm’s personality canbe conveyed effectively tostakeholders. These contribu-tions are unique given thatthese new concepts are yet toappear in literature as chan-nels or elements of corporateidentity mix.(* Olutayo Otubanjo, PhDis a Senior Lecturer (Mar-keting) Lagos BusinessSchool Pan-African Uni-versity Lagos, Nigeria

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MACROECONOMIC ENVIRONMENTThe Nigerian economy grew impressively in the third quarter 2012. Some of the indicators grew morestrongly than expected and others showed modest pick up. Gross Domestic Product (GDP), for instancegrew at a brisk pace than in the preceding quarter. Inflation figure was well-behaved, easing all through theperiod. The foreign exchange reserves witnessed some improvements, mainly driven by higher prices ofcrude oil. The nation’s currency, the naira, remained steady against other major world currencies. TheMonetary Policy Rate remained steady all through. In the capital market, the bulls roamed the terrain onceagain. Crude oil price in the international capital markets surged, despite cooling global demand.

GROSS DOMESTIC PRODUCTGross Domestic Product (GDP) in the third quarter was estimated at 7.47 percent, a marked improve-ment when compared to the preceding quarter. Real GDP growth was mainly driven by the non-oil sector.Despite extensive and abnormal flooding in Adamawa, Kano, Plateau, Yobe, Katsina, Kaduna, Nasarawa,Gombe Taraba, Benue, Kebbi, Niger and Borno states in the north, as well as Ebonyi, Oyo, Lagos, CrossRiver, Edo and Delta states in the south, early harvest from improved variety crops in the northern regionhas ensured agriculture asa major contributor toGDP. For the oil sector, thedividends of the AmnestyDeal with the Niger Deltamilitants continued to yieldpositive results with outputjumping 3 percent betweenJuly and August. The out-look for 2012 remainsfavourable with real GDPremaining robust at 6.77percent.

Source: National Bureau of Statistics

INFLATIONThe Year-on-Year inflation rateunexpectedly eased in the thirdquarter 2011, pushed lower byslowing food prices. The head-line inflation rate ended the quar-ter at 11.3 percent in Septem-ber. Inflationary pressures mod-erated earlier in July due to de-celeration in imported food in-flation such as rice, preservedmilk and tea, coffee and choco-

late. The harvest of early maturing crops such as vegetable, yam, potatoes as well as processed food, fish,sea food; meat; and yam flour also pulled inflation lower. Inflation eased significantly in August due to theharvest of early maturing crops such as vegetable, yam, potatoes as well as processed food, fish, sea food;meat; and yam flour. However, the pace of the slowdown reduced slightly in September due to impact offloods on the production of certain crops as well as movement of food products to markets across thecountry. Despite the challenges, the impact on food prices was not as severe due to the relative stability ofthe naira. Core inflation also dropped slightly in September. Inflationary risks remains a threat in themonths ahead due to expected rise in consumer spending in the run up to the festive season.

Source: National Bureau of Statistics


INTEREST RATEAs expected, the CBN

threw in no surprises and

left interest rate unchanged

in its September 17th and

18 th Monetary Policy

Committee meeting. It was

the sixth consecutive hold

since the Monetary Policy

Rate (MPR) was raised by

275 basis points from 9.25

percent to 12.0 per cent

in October 2011, citing in-

flationary pressures.

The average interbank rate

witnessed significant rate

swings in the third quarter

2012. Volatility was higher

on shorter term tenors

due to repayment of Repo

borrowings to CBN as well

as restraining net interbank

placers from accessing the

Repo/Lending windows.

For instance, rates on the call and 7 Days tenors hit as high as 31.93 percent and 31.90 percent, respec-

tively, in August and as low as 10.50 percent and 10.83 percent in September. Rates eased in September

EXTERNALRESERVESThe nation’s external re-

serves touched it’s strongest

in almost two and half years

in the third quarter 2012,

owing in part to sharp

pickup in crude oil receipts

and output. External re-

serves recorded impressive gains during the quarter, expanding about $4.4billion to $41.1billion. It was

however, a nervy start for the reserves, shrinking slightly in July. The leakage was nevertheless short-

lived, as foreign investors piled into the naira as they seek a haven from the global financial crisis. It

propelled the reserves back up to $41.1billion, capable of financing up 12 months worth of imports. In

the near to medium term, the authorities project improvements in the stock of external reserves as result

of higher crude oil prices and output.

Source: Central Bank of Nigeria

Source: Financial Markets Dealers Association of Nigeria (FMDA)



due to N675billion in-

flows from Statutory

Revenue Allocation

and maturing Treasur-

ing Bills.

The average Prime

Lending Rate (PLR)

remained relatively

stable during the pe-

riod, hovering around

18 percent as at end September 2012. Returns on the average deposit rate went up slightly across most

investment horizons, with volatility higher on the overnight and 180 Days tenors.


EXCHANGE RATEThe nation’s currency, the naira, ended the third quarter virtually unchanged, holding firm against major

world currencies. It consolidated its gains, finishing the period comfortably at $X/NY. The naira wit-

nessed some volatile movements against the US dollar, hitting a three and half month high in the

interbank and official markets. Earlier in August, the nation’s currency met minor headwinds with pres-

sure coming from downstream oil companies and importers. It however drew strength from foreign

investors pouring funds into government securities combined with sales from the oil majors. To keep a

lid on speculations, the CBN lowered the Net Open Position to 1 percent from 3 percent of sharehold-

ers fund. In its twice weekly auction, the CBN offered about $5.65billion and sold $5.34 against the

$1.81billion demanded during the period. With clarity of expectations, the premium between the official

and interbank rate narrowed to 1.1 percent as at end September 2012, compared to 4.2 percent in

September. . In the months ahead, the naira is projected to draw strength in the short-medium term due

to higher crude oil prices in the international market.

Source: Central Bank of Nigeria


CAPITAL MARKETThe capital market ended a bullish third quarter on a high, signaling that the worst might be over. It

reversed direction to post solid gains as the All Share Index and market capitalization finished strongly at

26,011.63 and N8.28billion, respectively, from 21,599.57 and N6.89billion in the preceding quarter. After

its impression run, sentiments gradually tilted towards the market as a large number of stocks traded

around their 52 weeks high. Bargain hunters took positions awaiting release of more second quarter

results, helping the market return almost 20 in the first nine months. However, investors remained cau-

tiously optimistic, with a large number sitting on the fence, trading again once the dust has settled. On a

brighter note, investors gave thumbs up to the NSE on the commencement of Market Making on

September 18th, 2012. To shore up liquidity, sixteen equities were initially offered on which market making

is allowed. Market sentiment climbed higher as a number of quoted companies such as Flour Mills of

Nigeria; Seven-Up Bottling Company; Presco; Conoil and PZ Cussons paid impressive dividends of

N1.60; N2.00; N1.00; N2.50 and 43kobo, respectively. In the international capital market, investors

positioned funds on Nigeria other frontier markets’ Eurobonds as global central banks embark on bond

buying programmes.

Source: Nigerian Stock Exchange

Source: Nigerian Stock Exchange


OilCrude oil prices gained strength in the third quarter 2012 buoyed by efforts among global central banks to

stimulate flagging economies. Oil prices gained nearly 15 percent in the third quarter, its best showing in 1-

1/2 years, following a steep 20 percent second quarter drop. It was an up and down ride for oil prices,

hitting $114 a barrel in May and tumbling about 30 percent to an eight months low in June. Nigeria’s brand

of crude oil, bonny light, rebounded sharply by about $25, its strongest quarterly performance in 2012. It

traded in a band of $98-$117 per barrel. Industry analysts attribute the rebound to Iran’s inability to export

oil at normal levels as result of sanctions imposed in July; fears over possible conflict between Israel and

Iran; the summer driving season in the northern Hemisphere and higher consumption in the Middle East

for electricity generation. In an Energy Debate organized by the German Council on Foreign Relations

and Wintershall Holdings GmBH, in Berlin, Germany, on September 28, 2012, OPEC revealed that

market is currently well supplied and that speculations has been behind much of the price volatility.

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