SUBJECT: NIGERIA: RESOURCE ALLOCATION DECISION

UNCLAS SECTION 01 OF 03 ABUJA 001194

SIPDIS


DEPTARTMENT PASS USTR, OPIC, EXIM


E.O. 12958: N/A
TAGS: EFIN ECON ETRD EINV PGOV NI
SUBJECT: SUBJECT: NIGERIA: RESOURCE ALLOCATION DECISION
CHANGES EXTERNAL DEBT AND CASH CALL COMPUTATIONS


REF: REFERENCE: 01 ABUJA 997


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Summary
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1. Summary and Introduction: The April 5 Supreme Court
judgment, which ruled that offshore resources belong to the
Federal Government not the coastal states, also removed
external debt and oil cash calls from "first line payments."
Rather than pay Nigeria,s external debt solely from national
government funds, the GON now plans to allocate the
approximately USD 30 billion debt between the national and
state governments. Debt originally contracted by Nigeria,s
states during the 1980,s will be ascribed to their
successors. The Debt Management Office (DMO) believes that
external payments will be delayed this month as they work out
this new national-state debt apportionment procedure.



2. Initial reporting speculated national control of the
Federation Account would drop to less than 52 percent as a
result of the decision, as opposed to 57 percent before the
judgment. The GON decision to charge states for part of the
external debt and states and local governments for cash call
obligations attempts to diminish this resource shift. The
ruling is so sweeping that it will affect almost every aspect
of government. Other areas where it will force change
include the 2002 Budget, payment of elementary school
teachers and financing of the new capital, Abuja. End
Summary


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The Resource Allocation Ruling
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3. The Nigerian Supreme Court announced on April 5 its
decision that the national government, and not regional
authorities (states),has sole control over offshore
resources, including oil and gas. However, the same decision
ruled that Nigeria's external debt and other official
obligations such as cash calls by the joint-venture oil
companies will no longer be deducted before the money is
distributed among national, state, and local governments.
Note: Cash calls are the Nigerian Government obligation to
pay its share of joint venture capital projects in the
petroleum industry. Joint ventures include most onshore and
shallow water production, in addition to the majority of
existing and proposed gas utilization projects: LNG's,
Independent Power Projects (IPP),and ChevronTexaco's
Gas-to-Liquids (GTL) plant. Offshore prospects, including
Nigeria's deepwater blocks, are governed by Production
Sharing Contracts (PSCs),and therefore are not subject to
cash calls.



4. Note continued: GON collectible revenues from oil and
non-oil sources, after first-line deductions, are deposited
into the Federation Account. With the Supreme Court
decision, first-line deductions are now limited to the oil
derivation allocation (13 percent of net oil revenues),which
is set aside for development of the nine oil-producing
states, and a few other small charges. The Federation
Account is then allocated to the national, state and local
governments according to a constitutionally mandated formula.
National government revenue is, therefore, only one portion
of the Federation Account. For a full description of how the
Federation Account functioned prior to the ruling, see
reftel.


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External Debt Traced Back to Original Source
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5. April 8, Debt Management Office Director General Akin
Arikawe told EconOff that, based on the ruling, the GON
planned to hold states responsible for payment of their
portion of Nigeria's external debt. (Comment: Most
state-originated debt was accrued during the 1980s when only
19 states existed compared to today's 36.) The reworking of
the external debt accounts will take place over the course of
the next month. Nigeria's debt payments, he added, would be
delayed until the accounting has been completed.



6. The DMO will assign to Nigeria's new states a
proportional amount of the debt accumulated by their
predecessors using some yet undisclosed criteria. For
example, if calculations show Zamfara is 45% of the old
Sokoto State, it will be assigned 45% of the old Sokoto State
debt. The DMO calculations, Arikawe believed, would be
controversial. One problem was what to do with outright
fraud. Arikawe cited the non-existent Anambra Carpet
Factory, a company that obtained loans backed by Anambra
State which eventually were incorporated into Nigeria's
sovereign debt. In this case, Arikawe indicated the GON was
considering charging the current state (Enugu) for the
malfeasance of the former Anambra Governor (current Senator
Jim Nwobodo.)



7. Arikawe expects to have the State-based portion of the
debt ascribed by the end of this month. This work will,
however, mean that the DMO may be late with this month's
external debt payments. Once established, the states will
have their portion of the external debt withheld from their
Federation Account payment. This is per the "right of set
off" in the Constitution. Nevertheless, he expects some
states, especially Imo and Abia that he claims are bankrupt,
to seek a court injunction against this action.




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Cash Calls To Be Shared?
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8. While not directly involved in the cash call issue,
Arikawe believes cash call obligations will be assessed
against the states and local government authorities. He
assumes the GON will measure the relative impact of oil and
gas investments on each state and withhold that proportion of
funds from the state's Federation Account allotment. Cash
calls and external debt present U.S. dollar exchange
problems. Arikawe believes that keeping the books straight
will become complicated and make the rate of exchange the
source of constant bickering. These and other issues,
including the criteria for allocating debts from "old" states
to "new" states, will be looked at by the Government's new
implementation committee, which met for the first time on
Tuesday, April 9, with the Attorney General at its head.



9. While Arikawe felt there would be little impact on the
national or state governments from reworking external debt
payments, other aspects of the judgment, however, augur
additional funds for the states. The country's revenue from
natural gas exports, capital gains tax, and stamp duties will
be subject to the same resource allocation process as oil
revenues (retroactive to May 1999). Heretofore, they have
not been treated similarly. All of these items will increase
revenue to the states and local governments at the expense of
the national government. The Supreme Court decision also
struck down the one-percent first-line payment to the
Ministry of the Federal Capital Territory (FCT) and the
five-percent deduction for teacher salaries from the
allocation to local governments.


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Comment
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10. Save for the March 28 decision declaring
unconstitutional parts of the electoral act, this is the most
far-reaching Supreme Court decision since the 1999 return to
civilian government. It is certainly the most important
decision regarding the rights of the national and state
governments regarding resource allocation. Where possible
its effect is retroactive and goes back to the date the
present Constitution went into force, May 29, 1999. While it
will take some time before the full impact of the decision is
clear, it is certain that there will be many changes --
including a new 2002 Budget ) that will need to be put into
place.



11. For reapportioning external debt, we believe Arikawe is
underestimating the work and time his office will need to
make the accounting changes the Administration believes
necessary. They will then face the inevitable quarrels about
how to divide the debt among the states. While in the
aggregate, the practical effect on external debt itself may
mainly be the change in accounting procedures (from taking
payment directly from the Federation Account to taking the
payment directly from the individual states),the process
will represent a great burden on the DMO. Collectively the
effect on the states may be small, but some individual states
will be relative winners while others inevitably will lose.



12. Financing of the FCT will have to be dealt with by the
National Assembly. Moreover, the states will probably return
to court over GON attempts to use the right of set off to
minimize the transfer of resources to the states and local
governments. Even if they don't, the federal government will
still realize a large net loss from having to share tax and
natural gas revenues and fully finance the development of
Abuja.






Andrews