In a 2012 Working Paper that Jeffrey Frankel presented at the Harvard University (Center for International Development) titled the ‘’Diagnoses and some Prescriptions, Jeffrey defined the Resource Curse Theory as ‘’Countries with Oil, Mineral & other Natural Resources wealth, on average, that have failed to show better economic performance than those without, often because of undesirable side effects.’’He outlined six channels as causes:
1. Long term trend in world prices
2. Price volatility
3. Permanent crowding out of manufacturing
4. Autocratic/Oligarchic institutions
5. Anarchic institutions
6. Cyclical Dutch disease
It beggars’ belief that the Nigerian Government in 2024 is embarking on financialization of future revenues from Oil & Gas assets by securitizing crude oil and gas output at the altar of immediate cash. The desperation of the Nigerian Government to raise FX income as a means to clear outstanding backlog of $6.8bn, for which $4.8bn is still pending has led to the execution of project gazelle; ‘’An Oil for Cash loan that was led by Afreximbank but syndicated three other FIs’’
The Afreximbank loan structure leaves so much to be desired in terms of deal structure, and here are my concerns and why I believe it sets a very bad precedent for the fiscal future of the Nigerian Economy.
ASSUMPTIONS:
• The deal is structured at 90,000 barrels of crude oil per day at a base price of $65. The parties to the transaction assume $65 is a safe base price for backwardation and mitigation of force majeure on delivering stated number of barrels
• The deal is structured to last for a duration of 60 months, which is 1,825 days
• The deal is structured for the NNPCL to create a special purpose vehicle (SPV) offshore that will receive payments in both taxes, revenue from
sales, from the offshore account bank, which happens to be Afrexim Bank in this case
• The deal is structured to pay the total of ten billion, six hundred and seventy-six million, two hundred and fifty thousand US Dollars ($10,676,250,000.00) at a base price of $65 per barrel, not accounting for any price differentials between the base and spot price
• The deal is structured to net off principal and interest of 11% per annum, with a prorata for the second year, since the total sum of $3.9bn can be paid off in exactly 581 days
• The deal assumes that any difference left after payment of principal, interest, facilitation fee, will go towards funding a debt service reserve account (DSRA) balance
WHY YOU SHOULD BE WORRIED:
• Securitizing a forward sales agreement (FSA) of 90,000 barrels per day at $65 per barrel will bring in $5,850,000.00, which if multiplied, comes to 269% of the total loan value
• According to the term sheet of 11% per annum (that is high considering it is not a government Eurobond that is structured to mimic the inflation to interest yield curve), total repayment of principal and interest is not supposed to exceed 581 days
• Even though the ‘’Special Purpose Vehicle’’ structure is pretty much standard for debt capital market transactions, creating an SPV that is not subject to any constitutional oversight in an offshore location to warehouse windfall from crude sales (at a time when the oil markets are expecting a bull run from the maritime insecurity in the Gulf of Aden and red sea) is quite the climb in terms of reach. The Government proposing to use an offshore SPV to fund a Debt Service Reserve Account without recourse to the sinking fund in the consolidated revenue fund, shows a complete lack of transparency
• The deal places NNPCL that is a private company with its principal shareholder as the Federal Government of Nigeria (Federating unit). Question becomes; Why will a private company borrow on behalf of the FGN when there’s the Ministry of Finance Incorporated tasked with warehousing all the government’s shares in government owned enterprises
• The deal ignores the benefit of dealing directly with a multi-lateral development bank that usually gives very low interest at between 3-5% with up to 36 months of moratorium, considering that the same MDB has been instrumental in financing several other projects including the FGN capital contribution from NLNG Train 7, several vendor programs, project eagle, brogue, bison, yield, as well as Offtakers financing
At a time when the Nigerian Government should be laying out a detailed plan to conduct house cleaning for NNPCL, engage in complete business process re-engineering, engage forensic auditors to clean its books, start book building for an IPO, raise capital to fund building NNPCL into an operator of blocs both onshore, Deepwater, build gas gathering infrastructure for channeling, build FLNG Vessels for trapping associated gas offshore, start the development of JVs for Non-Associated Gas Fields, build petrochemical plants, build high pressure transmission pipes both for domestic and external dependencies, the Nigerian Government is celebrating amortizing precious future crude oil earnings in a deal structure that robs the federating units of 164,250,000 million barrels of crude oil in an oil for swap transaction that sums up the point Jeffrey Frankel made in his working paper about the ‘’Resource Curse Theory at Harvard University’’.
