Leadership (Abuja)
Lillian Wong
7 January 2009
analysis
Many believe that the Asians were only interested in the oil blocs, and having acquired them, that the linked promises were hollow. They were seen as both difficult customers and insincere partners.
For their part, the Asians have struggled with Nigeria's slow, labyrinthine and corrupt-laden bureaucracy together with its byzantine politics. From the start, there was concern in government that there was no formal mechanism to enforce the deals. The downstream promises were little more than promises in principle. The MOUs signed were little more than expressions of intent.
But, few critics of the scheme noted the important small print. For example, when ONGC/Mittal (OMEL) of India signed the MOU with the Nigerian government in November 2005 for infrastructure investments in exchange for drilling rights (later acquired in the 2006 mini-round), the MOU was valid for 25 years. At the time of signing, the Chairman of ONGC made it clear that the investment would be proportional to the scale of oil discoveries. He said, "The investment in infrastructure would depend on the joint venture's returns from the blocs." (45) That would suggest that no action would be taken on the downstream promises for many years. In any case, Mittal had made it clear that he wanted 2 billion barrels of reserves before signing up to the implementation of any downstream investment. (46) This largely explains why, in India's case at least, no progress has been made on the ground on any of the commitments. In any case, given the scale of the promised projects they would have had very long lead times. Progress would have depended on inputs from the Nigerian side, such as arranging land access rights with local communities, always a tricky matter. The slow pace of Nigerian bureaucracy and the absence of monitoring mechanisms would have added to the timescale of any project.
Looking at the oil-for-infrastructure deals as a whole, the projects were vague lacking in technical or financial detail. Subsequent negotiations were slow. Endless visits by Nigerian officials to Asian capitals produced little clarity or progress and no timetables for delivery were ever announced. The projects chosen by Nigeria for Asian investment were high cost, high value, with high commission opportunity but not properly considered in the context of wider national economic planning needs. The political context also exposed the weakness of the arrangements. In retrospect, this was an ill-thought out, half-baked ad hoc exercise dressed up in fine words.
•KNOC wins and loses
There was one exception. KNOC had made some progress. It had put together a consortium (47) to build a 600km gas pipeline from Ajaokuta to Kano, together with 2 gas-fired power plants sited at Abuja and Kaduna. Spurs to Katsina and other northern cities were to be considered. The total cost was estimated at US$ 5 bn. KNOC had laid out a timetable of 8 years, from the feasibility stage in 2006 to completion in 2014. South Korea had even proposed to dismantle a steel mill in that country, to re-build it in Nigeria to manufacture the pipeline in Nigeria. A Joint Working Committee, KNOC/NNPC, had been established to follow through on the engineering and design and, inter alia ,to carry out the required environmental impact assessment (48). The financial arrangements had not however been agreed, and negotiations with relevant IOCs to secure the gas supply were far from finalised.
However, this project seemed solid and robust. By early May 2008, when the bulk of the fieldwork for this paper was undertaken, the KNOC project seemed likely to proceed. It had been included in the new government's Master Plan for Gas issued in February 2008. Indeed, the KNOC consortium had revised the alignment of the proposed gas pipeline to fit in with the Master Plan. KNOC was confident that the project would go ahead and the Yar' Adua government had reportedly asked KNOC to fast track it.
However, by late May 2008, a serious problem arose putting the project in jeopardy. It was discovered that KNOC had not paid the full signature bonus on its blocs acquired in 2005. While KNOC has since argued that it had been given a discount by President Obasanjo, there was no record of this in NNPC, DPR or Presidency files. It is common knowledge that President Obasanjo was fond of making ad hoc decisions with no supporting documentation. The discount given to KNOC , probably verbally during the South Korean President's visit, is a good example of Obasanjo's quirky style of government.
But consequences have followed. The discount issue has given the new government the grounds to cancel the contract for the gas pipeline project with the added threat to revoke the oil blocs into the bargain. Negotiations are ongoing with the South Koreans. The problem with the oil-for-infrastructure deals was that the new government found itself locked into contracts which had not gone out to international open tender. This meant that on pricing there was no benchmark against which to judge a proposal such as that from the KNOC consortium. This meant that in effect Nigeria did not know whether it was getting value for money. For all these reasons, the KNOC gas pipeline project was cancelled in May 2008. (49)
•Railways on track and off track
The Railway projects tied to oil bloc allocation have also been put on hold or cancelled by the Yar'Adua administration. The Obasanjo government had an ambitious plan to upgrade its rail system. The then Chairman of Nigerian Railways, the late Mohammed Waziri (who incidentally spearheaded the campaign to fund the third term project) had lobbied for funds to renew and expand the railway system.The overall cost was high at an estimated US$35 bn. Seeking funding from Asia to kick start the plan seemed a smart option given Western donor resistance to funding large infrastructure projects. So, in return for guaranteed access to oil blocs, the ANOCs committed to building 3 separate railway lines: China promised to construct a new double track, standard gauge line between Lagos and Kano; South Korea pledged to rebuild the decrepit Port Harcourt-Maiduguri line; while India committed to undertake a feasibility study for a new east-west railway linking Lagos with the Niger Delta.
Preliminary MOUs on these undertakings were duly signed - with India's OMEL in November 2005, with China in April 2006 during the visit to Nigeria of the Chinese President, and with South Korea in November 2006. The latter signed by Nigeria's Minister of State for Petroleum, Edmund Daukoru and Korea's Minister of Energy, provided for Korean long-term low interest loans to help Nigeria cover part of the estimated US$10bn necessary to rebuild the 930 mile-long railway. Following negotiations with South Korea, a proposal for an initial loan package of US$ 2bn at 3% interest with the mark-up to prevailing commercial lending rate bridge was provisionally proposed. But significantly, acting on instructions from the Presidency, this loan was predicated on the allocation of 4 oil blocs to Korea, with a Signature Bonus waiver - at the next bidding round in 2007. (50) But the Koreans did not take part in the 2007 bidding round and the whole proposal fell away.
There had been some progress , however, on the Chinese pledge over the Lagos-Kano line. The Obasanjo government had opted to replace the existing single track, narrow gauge line with double track standard gauge. A Chinese contractor , China Civil Engineering Construction Corporation (CCECC) was appointed, bypassing the normal open tendering process. The initial price quoted for the job was astronomical at US$ 15.4 bn. After intense negotiations and some amendments to the design, the final price agreed was US$8.3 bn and the work was to take 4 years from the start date. But, according to the World Bank, this was still double the cost it should have been. (51) Although the Due Process Unit in the Presidency reviewing the CCECC proposal had reservations, it was passed because of political pressure. The contractor was allocated a mobilisation fee of US$250million, a sum taken from the Excess Crude Account in January 2007. Some argue that this was illegal because the project had not taken off, the government had not agreed the financing package for the railway, and there was no provision for it in the 2007 Budget. The mobilisation fee itself had not been appropriated (52) . In any case, no work was started.
Earlier, in November 2006, Nigeria had signed a Loan Facility agreement with China for US$2.5bn - of which US$1.3 bn was to be dedicated to the first phase of the new Lagos-Kano railway. The loan comprised 2 facilities - the first valued at US$ 500 m provided by China through the Chinese Exim Bank, on concessionary terms, with an interest rate of 3%, a repayment period of 20 years including a grace period of 5 years; and the second, for a US$2bn provided directly by the Chinese Exim bank on the same terms. However, the most significant condition of the loan facility was that it was linked directly to the lifting of crude oil by Chinese companies and the allocation of 4 oil blocks (one of which had to be producing) - in the upcoming 2007 licensing round. And as with the Korean loan, China was to benefit from a Signature Bonus waiver under this arrangement But, crucially the MOU required to confirm the terms of the Loan Facility agreement had not been signed by the time President Obasanjo had left office, nor since (53). The signature of such an MOU had been an imperative for drawing on this facility. In any case, the IMF did not support this facility on the grounds that the terms of the Chinese loan did not meet the required concessionality defined by the PSI (Policy Support Instrument). (54)
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