NIGERIA: REPORTED DISBURSEMENT OF USD 10 BILLION FROM

UNCLAS SECTION 01 OF 02 ABUJA 001191

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E.O. 12958: N/A
TAGS: ECON ENRG EFIN PGOV NI
SUBJECT: NIGERIA: REPORTED DISBURSEMENT OF USD 10 BILLION FROM
EXCESS CRUDE ACCOUNT


1. (U) Summary. The National Economic Council (NEC),comprising
both federal and state authorities, reportedly approved taking
approximately $10 billion from the Excess Crude Account for
disbursement to power projects and state and local governments. The
operation of the Excess Crude Account (ECA),which some have
referred to as a sovereign wealth fund, operating on an oil-price
based fiscal rule, has continued to generate attention among various
interest groups in the nation. While some Nigerians argue that
saving money in this account makes good economic sense, others,
particularly from the Niger Delta argue that the region is being
shortchanged through the implementation of the ECA. The situation
is made more confusing as Section 162 of the Constitution makes it
illegal to save any accruals coming into the Federation Account as
all the funds must be shared to ensure a zero balance after every
month's sharing. However, the three tiers of government have
continued to maintain the account, sharing part of its proceeds at
intervals. There are ongoing plans to fund infrastructure projects
from the account. Some members of the National Assembly, however,
insist that the ECA is illegal and must be scrapped. End summary.
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LATEST DISBURSEMENTS FROM ECA
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2. (U) On June 19, the National Economic Council (NEC) comprising
the 36 State Governors, with the Vice President as Chairman,
approved the release of USD 10.24 billion from the Excess Crude
Account to fund projects in the power sector and sharing by the
states and local governments. Specifically, USD 5.37 billion would
be invested in the power sector, while USD 4.87 billion would be
shared by states and local governments. The balance in the account
was reported to be about USD 18 billion as at May 2008 and with this
reported planned disbursement may drop to just under USD 7 billion.


3. (SBU) EconOff spoke with Waqar Haider, Senior Energy Specialist
at the World Bank (WB) regarding the recent release of ECA funds to
the States and LGAs. He reported that he had seen the same media
reports and was unclear how the USD 5.37 billion figure for the
power sector was calculated and what it would fund. He suspects
that because many of the National Independent Power Projects (NIPPs)
have been stalled for lack of funding that the allocation will go to
them. However, he had no information on which projects may be
funded. Haider commented that the new committee setup within the
Vice President's office to oversee the USD 5.37 billion
implementation added another forum to a crowded list of committees
that so far have failed to improve on the crucial issue of
implementation." A contact at the Power Ministry told Econcouns
June 20 that no concrete plans had been agreed to on the use of the
reported disbursements.
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The Excess Crude Account: Background
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4. (U) The ECA was established in 2003 via an agreement between the
three tiers of government during the Obasanjo administration to save
revenues accruing to the Federation Account above the budget
benchmark price for crude oil resulting from the implementation of
the Oil Price Based Fiscal Rule. The ECA is made up of proceeds
from the Federation's export of crude oil; excess Petroleum Profit
Tax (PPT); and excess royalty.


5. (U) The aim of maintaining the ECA was to cushion the economy
from the negative effects of oil price volatility as well as
financing infrastructural projects. Consultations and negotiations
were held between the various tiers of government with the results
of the discussions finally captured in the Fiscal Responsibility Act
which directed the saving of a portion of revenues accruing to the
Federation Account from the implementation of the Commodities Price
Based Fiscal Rule.


6. (U) The ECA has been very useful in augmenting federal budget
revenues whenever there are shut-ins in oil production resulting
from militant activities in the Niger Delta. The ECA was also the
source of funding for Nigeria's Paris Club debt exit, likewise the
National Integrated Power Projects (NIPP) initiated by the Obasanjo
administration.
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Federation Account
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ABUJA 00001191 002 OF 002


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7. (U) The Federation Account is recognized by Section 16 of the
Nigerian 1999 Constitution, which notes that all revenues collected
by the Government of the Federation are paid into the Federation
Account, except the proceeds from the personal income tax of the
personnel of the armed forces of the Federation, the Nigeria Police
Force, the Ministry of Foreign Affairs, and the residents of the
Federal Capital Territory, Abuja.


8. (U) The beneficiaries of the Federation Account are the federal,
state, and local government councils of the Federation, and the
funds in the account are distributed every month in accordance with
the revenue allocation formula approved by the National Assembly.
Section 162 of the Constitution stipulates that all accruals to the
account must be shared in such a manner that after each month's
sharing the account must have a nil balance. Therefore, many
legislators and certainly many state governors and local government
chairmen see savings such as the ECA as unconstitutional.
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The Quagmire
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9. (SBU) Bright Okogu, Director General of the Budget Office of the
Federation, informed EconOff June 19 that the three tiers of
government have agreed to maintain the ECA despite its
unconstitutionality. "The ECA should continue in principle and it
is hoped that it does continue. Notwithstanding the provisions of
Section 16 of the constitution, oil prices won't remain high
forever, and it is only prudent that we continue to save for the
rainy day and have funds to build critical infrastructure needed for
development."


10. (SBU) Okogu said he is disturbed that some legislators and other
members of the public continue to talk about the legality of the ECA
proposing that the funds be shared and the ECA scrapped, while in
his view people should be thinking of how to ensure more
transparency in its operations and be concerned more with the merits
of maintaining the ECA. "People should speak out that the saving be
continued".
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Comment
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11. (SBU) The Oil Price Based Fiscal Rule of sterilizing excess
crude oil proceeds resulted in macroeconomic stability during the
last administration which was inherited by the Yar'Adua
administration. However, the sharing of its proceeds since the
beginning of the current administration have continued to exert
pressures on macroeconomic stability with observers expressing
concerns that Nigeria could relapse into its old prodigal nature.
Notwithstanding the issue of its legality, the current road map is
the ECA being maintained but its funds will be shared at intervals
among the tiers of government. It will also be the source of
funding for infrastructure projects. It is important to ensure
transparency in its operations and the state governors should
understand that though there are 36 states in the federation, there
is only one economy. Therefore if the states continue to agitate
for and ensure that ECA accruals are continuously shared,
macroeconomic gains of the last four years could be in jeopardy.
End comment.

SANDERS