DFID's Programme in Nigeria - International Development Committee Contents


Managing oil wealth

105. Nigeria is the world's 10th, and Africa's largest, oil producer. Oil provides 85% of government revenue and over 95% of export earnings. In 2005, 75% of foreign direct investment was in the oil sector. It is therefore a dominant factor in both the economics and the politics of the country. DFID says that management of oil resources is fundamental to Nigeria's economic, social, political and environmental future.[201] Oil production is currently estimated to be 1.5 million barrels per day (bpd) against a government target of 2.3 million.[202] The turbulence and insecurity in the oil-producing Delta region has contributed to this decline in production (see below). It is estimated that Nigeria has received oil revenues over the last 25 years of US$300 billion (excluding payments to oil companies)[203] yet half the population lives on less than a dollar a day and 90% are estimated to live on less than $2 a day.[204]

106. Michael Peel has described Nigeria as an "oil-ruined country".[205] Whilst fully acknowledging that there was "huge poverty" in Nigeria, he believed that the real challenge was the:

    […] marginal richness that oil brings; and while that pot of money is there, and there is not much else going on, the temptation is always to try and get yourself in a network to benefit from those revenues as they flow down, rather than particularly to be involved, say, in building up social services in your area or small industries and so forth.[206]

The impact of oil wealth on public attitudes to taxation and economic diversification were made clear to us during our visit. Many people see oil as a blessing which obviates the need for them to seek other sources of economic activity or to contribute to the provision of services through taxation. Lagos State is exceptional in raising 50% of its revenue from non-oil sources. Many Nigerian people quite reasonably question the point of paying taxes when they have to pay for most services, including health and education, separately. Businesses, too, often evade taxes: they see little return in the provision of infrastructure or public goods and therefore regard taxes simply as a way for Federal, State and local authorities to extract money from them.[207] It was pointed out to us that a heavy burden is placed on people registered to pay tax because squeezing them is easier for the Government than bringing the many people in the informal sector into the formal, tax-paying sector.

107. The Federal Government has carried out significant reforms to end the shocks to the economy created by fluctuations in oil prices and to remedy previous regimes' failure to manage oil receipts prudently. In 2004, the Government broke the link between government expenditure and oil price fluctuations by introducing a budget system based on a conservative reference price for oil. All income which the Government receives when oil sells at above the reference price is now saved in an Excess Crude Account rather than being spent. DFID says that "this mechanism has succeeded in avoiding boom-bust cycles of spending that had plagued Nigeria since the 1970s" and that it was central to the turnaround in Nigeria's economic performance.[208] However, oil wealth continues to distort the economy and is a major contributory factor in, and victim of, the corruption which pervades the country. It also contributes to the view that government should provide jobs, rather than a successful private sector.

Nigeria Extractive Industries Transparency Initiative (NEITI)

108. The Extractive Industries Transparency Initiative (EITI) is an international framework, initiated by the UK. It has established a coalition of governments, companies and civil society to promote transparency in oil, gas and mining. Its aims are to "make natural resources benefit all" and it sets a global standard for companies "to publish what they pay and for governments to disclose what they receive".[209] Nigeria passed specific EITI legislation in 2007 which DFID says "reinforced its position as a global leader in this initiative." DFID has supported Nigeria's adoption of EITI with £3 million over four years.[210] The DFID Minister told us that "We are probably the leading partners supporting the establishment" of NEITI.[211]

109. The NEITI board is appointed by the President and comprises representatives from civil society, government, extractive industry companies and the media. Day-to-day work is carried out by the NEITI Secretariat, which works to deepen awareness of NEITI-related issues and build the capacity of government and civil society to understand and monitor extractive revenue transparency. Under the 2007 legislation, NEITI has the authority to withdraw licences from oil companies which do no co-operate with its work. This has not been tested yet.

110. NEITI's first audit report covered the period 1999-2004 and was published in April 2006.[212] It put into the public domain financial data, information on volumes of oil produced, refined and exported and the legal framework of the petroleum sector. This encouraged tighter scrutiny of oil revenue flows for 2004 and 2005 which enabled the Government of Nigeria to recover additional revenues due to it from oil companies of about £500 million.[213] The 2005 audit has been submitted to the Federal Government for approval, before its public release.[214] The NEITI Chair told us that the process for producing audits would now be speeded up and that those for 2006-2008 would be published together. The DFID Minister welcomed this.[215]

111. The NEITI Chairman told us that his organisation could only be effective if it was part of an integrated government reform programme but that there was no evidence that this was taking place yet. Witnesses welcomed NEITI's work and believed that DFID's contribution to it was important and should continue. However, their view was that it was only a small part of a bigger picture and that the Federal Government should put better systems in place to trace oil from the well-head to the export point and that the use of oil money needed to be closely tracked once it reached the Treasury.[216] They agreed with the NEITI Chairman that improving transparency in the oil sector could not be achieved until the interaction between oil wealth and politics had been addressed. Sam Unom summed it up: "oil lubricates politics".[217] DFID agreed that "oil wealth distribution is at the heart of Nigerian politics" and that division of oil revenue still dominated discussions about the federal system which should properly be focused on the elements of a well-functioning country: accountability, coordination and institutional capacity.[218]

112. The Nigerian Extractive Industries Transparency Initiative (NEITI) has brought a very welcome increase in transparency and accountability to the country's oil sector. We commend DFID for taking such a strong lead in supporting the initiative. However, as its Chairman made clear to us, NEITI is an important, but at the moment isolated, element in what needs to be a much broader, integrated and government-led programme to reform both the oil industry and its relationship with the country's economic and political structures. While oil and politics remain inextricably linked, corruption and mismanagement will prevail. We recommend that DFID take every opportunity to apply pressure to the Nigerian Government to prioritise oil industry reform measures, including publication of data on the contribution which oil revenues make to the public finances and on the programmes which oil revenues fund, and the separation of oil wealth from politics. These measures should also include provision of adequate resources to NEITI to maintain and build upon its excellent work to date and full co-operation with NEITI in the provision of data to ensure that publication of the audits for 2006-08 can be expedited.

Conflict in the Niger Delta

113. In the last few years the oil-producing Niger Delta region has seen a serious deterioration in its security situation. There was a lull in the violence immediately after the 2007 elections but kidnappings and violent attacks on communities and oil installations soon restarted. A state of emergency was declared in Rivers State late in 2007 and a military Joint Task Force was sent in.[219] Michael Peel, the author of a recently published book on the oil sector in Nigeria, believed that a military crack-down was not the answer to the Delta's problems and that a bigger military presence in the Delta would be "extremely dangerous".[220]

114. A recent report from the UN Office on Drugs and Crime (UNODC) highlighted the seriousness of the problems in the Delta:

    […] the threat posed by oil seems to be the greatest rule of law challenge confronting the [West Africa] region. It directly destabilises the most powerful economy in the region, with implications far beyond the Niger Delta. The problem has been allowed to persist for so long that it will be difficult to uproot […].[221]

UNODC says that the conflict in the Delta "is rooted in grievances of residents who, despite the wealth beneath their land, remain very poor" and who believe that environmental damage related to the industry has undermined their traditional livelihoods. UNODC estimates that 10% of total production is lost through theft and smuggling (known as "bunkering"). This means that as much as a third of the oil income which makes up 80% of Nigeria's national budget is lost, with the Nigerian public being the "net loser".[222] President Yar'Adua has compared illegal oil bunkering to the trade in "blood diamonds" that fuelled the conflicts in Sierra Leone and Liberia and has called for international action to arrest the flow of "blood oil".[223] Solving the problem of insecurity and criminality in the Niger Delta is one of his key areas in his 7-Point Agenda. The new Country Partnership Strategy highlights the need for "sustained efforts to end militancy in the Delta."[224]

115. UNODC argues that the violent political struggle in the region "provides a convenient smokescreen for those intent on personal enrichment. Militants and officials earning good incomes off the conflict may be less than eager to come to the negotiating table." The report highlights the intersection between oil theft and corrupt election practices with young men involved in stealing oil also being used to "get out the vote" at election time.[225] Michael Peel similarly highlighted the cross-over between militants, "gangsters" and young men armed and paid by politicians "who needed to rig elections".[226] The Chair of the NEITI Board told us that the violence and lawlessness in the Delta were part of a wider problem of how politics was financed in Nigeria and that security in the Delta would not be possible until the underlying causes were resolved. DFID asserts that the problem in the region "is not one of resources". [227] Its assessment is that:

    The situation in the Niger Delta is largely a result of poor governance, particularly a failure on the part of the governments of the region to use their substantial resources for the benefit of their citizens. There are legitimate grievances about the existence of poverty in the face of extreme wealth and dissatisfaction with some of the ways in which the oil companies have operated.[228]

116. Some steps are being taken to try to tackle violence and instability in the Delta. The Governors of the six Delta region states have held a summit meeting in which they resolved to improve governance and build regional infrastructure.[229] The Federal Government established a Ministry of Niger Delta Affairs in late 2008, but it is unclear how effective it will be. Sam Unom described it as "gesture politics" and the sort of "quick fix" which was unlikely to have an impact and which itself was exposed to becoming another part of the "patronage system".[230] The International Crisis Group (ICG) says that the Ministry's low budget, uncertain division of responsibilities and unclear guiding principles have reduced its credibility.[231] Dr Mustapha agreed that the new Ministry's resources were "miniscule" and believed that it was just "another thing to dazzle people".[232]

117. DFID has funded a £2 million programme to improve social cohesion and delivery of basic services by local government in Rivers and Delta States (Supporting Transparency and Accountability in the Niger Delta programme (STAND)).[233] However, DFID points out that it remains difficult for donors to have an impact on the MDGs there until the State governments show greater willingness "to improve governance, reduce corruption and address the security situation."[234] The DFID Minister told us:

    Where development donors […] can begin to make a difference, and we are certainly trying to, is in two ways: one is in terms of the dialogue we have with ministers and politicians in Nigeria; secondly, in the sort of pro transparency and voice programme that we are funding in the Delta areas […] to begin the process of helping officials and politicians in the Delta States be held accountable for progress, or lack of progress, against the MDGs.[235]

The conduct of oil companies

118. While donors have a clear role to play in trying to bring stability to the Delta region, the oil companies who are benefiting from exploitation of the natural resources of the region have an equal, if not greater, responsibility. However, some commentators believe they are part of the problem rather than the solution.

119. Amnesty International has recently highlighted violations of the rights of the local people in the Delta to an adequate standard of living, and to work, food, water and health.[236] It believed that the UK Government should do more to:

    […] encourage the Nigeria Government to ensure robust, independent and coordinated oversight of the oil industry, including its impact on human rights. They must make the assessment of the social and human rights impacts of all oil and gas projects mandatory and ensure systematic clean-up of oil pollution.[237]

The majority of evidence which Amnesty has collected relates to the operations in the Niger Delta of Shell Petroleum Development Company, which is a subsidiary of Royal Dutch Shell, a company with a registered office in London. It believes that the UK Government should require such companies to undertake and report on human rights due diligence measures and that, where human rights of people in overseas countries are harmed by a company's operations, they should have access to effective remedy in the UK if this is not available in their own country.[238]

120. We put Amnesty's proposals to the DFID Minister. He told us that he was:

    […] sceptical at this stage about whether there is a magic bullet in terms of a piece of legislation that might operate from the UK and lead to a dramatic transformation of what is happening in the Delta. I think it is a much more complex problem. Our job has got to be to help Nigeria improve its structures.[239]

We agree with the Minister that the challenge is to make Nigeria's own institutions effective, including ministries and the National Assembly and to strengthen its structures and mechanisms to tackle human rights abuses and to ensure that public money is being spent in the way it is supposed to be.[240] The Minister said that the appropriate role for donors was to:

    […] strengthen the ability of the government in Nigeria and the parliament and state legislatures to hold their politicians and officials to account and, if they think it is appropriate, to introduce the relevant legislation to bear down further in terms of human rights abuses, poor environmental standards, etc, and have the capacity to follow through and check whether businesses and, indeed, other organisations operating in that country are adhering to those laws and regulations.[241]

121. Other witnesses agreed with Amnesty International that the behaviour of oil companies was a significant factor contributing to the instability in the Delta. Shell in particular was identified as a company with complex relationships with local communities in the areas where it operates. We were told that it provided benefits such as clinics, boats and education scholarships to what are described as "host" communities. However, there were frequent disputes about what constituted a "host" community and what share of any benefits neighbouring communities should have when they also suffered the environmental and other impacts of oil exploitation.[242] Sam Unom said that it was sometimes "difficult to reconcile the value of what is on the ground with the value that is in Shell's books" in terms of its huge community budget.[243]

122. We invited Shell to respond to these claims and also asked the company a series of questions about its co-operation with the Nigeria Extractive Industries Transparency Initiative. The DFID Minister said that he would be "very interested to see the response".[244] We received a response from Shell as we were finalising our report.[245] Shell asserts that it "has met all the data and information requests from NEITI and cooperated with the auditors in all respects." It points out that Shell Petroleum Development Company (SPDC) was the first company to disclose the revenues it pays to the Nigeria government. It highlights a recent report from Transparency International in which "Shell scored 'high' overall in revenue transparency initiatives and 'very high' in transparency initiatives in Nigeria".[246] In relation to the contribution it makes to the Nigerian economy and local communities in oil-producing areas, Shell says that it spent $25.2 million on community development projects (as part of a $84 million SPDC joint venture), in addition to the $56.8 million it contributed in 2008 to the Niger Delta Development Commission, the government development agency for the region.[247] Shell says that the problems in the Delta "can only be solved with collaborative solutions" and that it wishes to see "coherent action that addresses the root causes of the issues that affect the people of the Niger Delta and brings positive change".[248] We have some queries about the responses we have received from Shell to our questions on its co-operation with NEITI. The chairman of the company offered to discuss these matters in more detail with us but, as we received Shell's evidence so late in the inquiry, we have not had an opportunity to do this. We do, however, intend to pursue these issues in oral evidence with Shell at a later date.

123. Violence and instability in the Niger Delta are having a serious impact on Nigeria's oil industry and therefore on its economic situation. The people of the region suffer poverty and live in fear, despite the wealth being generated in the region. The causes are complex and reflect the interaction between oil, politics, crime and corruption in Nigeria which have to be tackled in a co-ordinated and integrated approach. We believe DFID must do more to support the Nigerian authorities to meet their responsibility to provide this response. This should include the adoption where necessary of stronger legislation to compel oil companies to honour the rights of local people and to conduct their business in a way which enables Nigeria's oil wealth to be shared by its people, with robust mechanisms in place to guarantee transparency and accountability in the flows of money and oil.

201   Ev 64; GEMS Technical Annex, para 1.1 Back

202   Ev 91-92 Back

203   Oil-dependence and civil conflict in Nigeria, Aderoju Oyefusi, Department of Economics & Statistics, University of Benin, 2007, Section 2.2 Back

204   Ev 89 Back

205   Michael Peel, A swamp full of dollars: pipelines and paramilitaries at Nigeria's oil frontier, (London, September 2009), prologue, p xviii; see also Q 37 Back

206   Q 20  Back

207   GEMS Technical Annex, para 2.3 Back

208   Country Partnership Strategy 2009-13, paras 3-4; Ev 92 Back

209   See EITI website at www.eitransparency.org  Back

210   Ev 64 Back

211   Q 157 Back

212   Nigeria Extractive Industries Transparency Initiative, Audit of the period 1999-2004  Back

213   Q 167 Back

214   Q 167 Back

215   Q 167 Back

216   Qq 42-45 Back

217   Q 43 Back

218   Ev 92 Back

219   Ev 70 Back

220   Q 38; Michael Peel, A swamp full of dollars: pipelines and paramilitaries at Nigeria's oil frontier, (London, September 2009)  Back

221   Transnational Trafficking and the Rule of Law in West Africa: a threat assessment, UN Office on Drugs and Crime, July 2009, Executive Summary, p 8 Back

222   UNODC report, op cit, p 4 Back

223   UNODC report, op cit, p 72 Back

224   Country Partnership Strategy 2005-09, Executive Summary, para 16 Back

225   UNODC report, op cit, p 4 Back

226   Qq 37-38  Back

227   Ev 87 Back

228   Ev 55 Back

229   Ev 55 Back

230   Q 39 Back

231   International Crisis Group Africa Briefing No. 60, "Nigeria: seizing the moment in the Niger Delta", April 2009 Back

232   Q 39 Back

233   Ev 88 Back

234   Ev 87 Back

235   Q 168 Back

236   Ev 46; see also Amnesty International, Nigeria: Petroleum, Pollution and Poverty in the Niger Delta, June 2009 Back

237   Ev 46 Back

238   Ev 46 Back

239   Q 172 Back

240   Q 170 Back

241   Q 172 Back

242   Q 47 Back

243   Q 47 Back

244   Q 173 Back

245   Ev 107-110 Back

246   Ev 108 Back

247   Ev 108 Back

248   Ev 108 Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2009
Prepared 23 October 2009