A ‘cash cow’ is a product or a business unit that generates unusually high profit margins: so high that it is responsible for a large amount of a company's operating profit. This profit far exceeds the amount necessary to maintain the cash cow business, and the excess is used by the business for other purposes.
Risks of a ‘cash cow’ include complacency, with management ignoring the need for change as market forces erode value; and ongoing turf wars between the management in charge of the ‘cash cow’ and other managers trying to garner support for other products.
The above definitions succinctly describe the economic situation in Nigeria with particular regards to crude oil, which has become the nation’s ‘cash cow’ over the last few decades.
It is common knowledge that Nigeria has earned phenomenal revenue from crude oil sales, which culminated in the creation of the Excess Crude Account by the Obasanjo administration in 2004. Funds were drawn from the Excess Crude Account in the past to pay for special projects and debt servicing. During Obasanjo’s administration, about $12.4bn was withdrawn from the account to offset Nigeria’s debt to the Paris Club; $17milllion for two additional days for the 2006 National Population Census; and more than $2.3billion for Niger Delta Power Plants. Whilst it’s not the reason for my comments, it is worth noting that the so-called ‘Power Projects’ is still a dog’s breakfast!
It is not surprising that Nigeria has now become so complacent, even though market forces (ie the current global economic downturn) has eroded the value of crude oil from its peak of $147 to $40 per barrel. Whilst other countries (United Arab Emirates as an example) has looking at ways of generating revenue and reduce their dependence on crude oil, economic managers in Nigeria cannot see beyond their nose. Dubai is arguably the current largest construction site in the world, with the Monarch working extremely hard to turn the City into one of the world’s favourite tourist destination. The decision to diversify was based on the advice received on the depletion of its oil reserves and hence, the need to explore alternative ways of raising revenues. Dubai is now famous for its shopping malls and upmarket fashion label shops.
A report recently released on world commodities, did show that over the last decade, Cocoa has remained the most stable commodity. In fact, the price of Cocoa is trading at its highest for 37 years. I remember vividly been taught about ‘cash crops’ (Cocoa, Rubber etc) during my primary education. I don’t think at that point I knew the meaning of ‘crude oil’. The infrastructure built in the Old Western Region by the Late Obafemi Awolowo was mainly financed through Cocoa export. Instead of our leaders think outside the box, and use the current global economic crisis to retrace their steps, they are still busy speculating on future oil prices.
The 2009 budget is based on $45, which is higher than the current oil trading price. Which means the 2009 budget might be in deficit from the word ‘go’. Members of the Senate Committee on Budget Appropriation jumped for joy last week when oil price rose from $40 - $48 as a result of the Israeli-Palestinian crisis. The Senate Committee Chairman was quoted as saying the “benchmark for the 2009 budget should be been raised higher, and he went as far as speculating that oil will be trading at $50 and rise to $100 within the next two months”. When did honourable members of the Senate become ‘oil trading experts’?
Governance in the states of the federation (probably with the exception of Lagos) goes to sleep for 29 days everyone month, only for State executives to turn up in Abuja at the end of the month to collect their share of nation ‘booty’ from the Excess Crude Account.
It is my understanding that the Federal, State and Local Government shared N106billion in December alone from the account. The highest recipients were the oil-producing states, River (N15.5billion) Akwa Ibom (N4.5billion), Delta (N3billion), Bayelsa (N1.8billion). What has been the development in these states over the last eight years apart from allegation and counter allegation of corruption and fraud. It will be interesting to see how the states’ budget stacks up against the guaranteed monthly return from the Excess Crude Account. I’m sure their budget is 100% based on future oil revenue allocation. When a State receives N15.5billion monthly, why will the Governor be interested in ‘internal generated revenue’?
Anyway, as the Yoruba says ‘igba kan ko ni lo bi orere’ meaning ‘nothing last forever’, except for the Grace of the Almighty God. However in the meantime, it is business as usual – we keep milking the ‘cash cow’.
Thursday, January 15, 2009
Lagos Rail Mass Transit Project
Lagos with an estimated population of 17million or 9million (whichever you believe!) is one of the so-called ‘megacities’ without a mass transit system. The population of state has grown significantly over the last few decades mainly due to urban migration. The high concentration of manufacturing, commercial and financial industries has continued to fuel the growth and traffic congestion in the city.
The Lagos Metropolitan Area Transport Authority as part of its effort to tackle congestion recently developed a Rail Master Plan, which proposes an extensive network of rail lines connecting most parts of Lagos metropolitan area. The urban rail system is proposed to be implemented through a Public Private Partnership scheme (PPP).
It is heartening to see for the first time – since the civilian administration of Alhaji Lateef Kayode Jakande – we will see a State Administrator with a vision of how to deal with the menace of traffic congestion in Lagos State. Much commendation should also be given to the Ex-Governor Asiwaju Bola Tinubu for setting up the necessary institutional framework that is currently driving the state's transport agenda.
Whilst I fully support the principle of delivering of transport infrastructure through Public –Private Partnerships, however if not properly negotiated it can leave the government out of pocket and not serve any public good.
PPP describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. PPP has been used as a mechanism to deliver major transport infrastructure (toll roads, light rail etc) in most parts of the western world. It is based on the principle of transferring investment risk to the private sector, and also on the notion that delivery and operation of infrastructure and services can be undertaken 'cheaper and smarter' by the private sector, thus providing cost savings to the Government coffers. However, this is not always the case, as there are examples of 'how not to undertake a PPP'.
With specific regards to the Lagos rail project, the private sector is expected to Design and Build the infrastructure which will be financed by the State government. The operation of the system is also expected to undertaken by the private sector (under a 25 year concession). In return, the private sector operator will be expected to provide rolling stock, maintenance depot, and control systems.
One major concern with the Lagos Rail Mass Transit PPP is the liberty that will be given to the private sector operator to set fares and collect revenue. If the private operator is given absolute control over pricing, this could impact on passengers negatively and consequently affect patronage. It is plausible to assume that the private sector will be keen to recover its operating cost, repay bank loans and also make a return on their investment. It is common knowledge that construction of rail system is an expensive expenditure and the maintenance cost (rolling stock, staff, etc) can be significant. This is the fundamental difference between investment in road and rail infrastructure. If the private sector operator is allowed to charge passengers the real cost of operating the service plus their profit margin, it is very likely that the fares will be set at a cost that will be prohibitive to commuters. This begs the question of - ' who will use the service'. I'm sure it's not the government's agenda to provide high-quality public transport system only for the 'middle class'. There is no where in the world where passenger rail service operates at a profit – that is cover its real cost. Even in a densely populated city like Hong Kong with a populaton of 7 million and an efficient mass rapid transit system - which carries about 3 million passengers a day. The Hong Kong transport authority makes more money from leasing air rights over train station than it collects from the fare box. Also as an example, the cost recovery on public transport in the state of Queensland, Australia is just 30%.
Public transport is a social utility that is needed to provide access to services, jobs etc and help encourage social inclusion. There are social equity issues that need to be considered in planning of transport systems. Provision of public transport cannot be allowed to operate in a totally deregulated environment. This is the reason why Government around the world subsidize public transport provision. While one could argue that public transport subsidy defeats the purpose of a PPP, I tend to believe that it is in the best interest of the Government to subsidise the rail service when it becomes operational. The subsidies should however be linked to service level agreement and minimum service standards that will be expected from the operator.
On the other hand, if the fare levels are set too low without Govt top-up, the operator will be running the services at a loss. This could result in the private operator going into administration. If this happens, Govt will either have to 'bail-out' the company or take over the operation of the service. This could come at a significant cost to the State.
The delivery and operation of the proposed urban rail network can result in a situation, where different companies will be operating rail services on different parts of the network (that is, Blue Line – operator A, Red Line – operator B). This then brings me to the second issue of 'integrated ticketing' across the rail network. I will note that this also has an implication of fare pricing. The principle of having an integrated ticketing system is great, as this provides seamless travel journey. In fact, the integration should not be limited to rail; LAMATA should be looking at integrating the BRT Lite service as well. Having said that, giving operators total control on fare pricing and expecting integrated service across the network flies in the face of reality, and can result in price fixing by train operating companies. For passengers to enjoy the benefit of having an integrated ticketing system, LAMATA will need to have some control pricing structure.
Lastly, the issue of track maintenance seems unclear from the project briefing documents. Considering that part of the new rail line will be utilising the existing Nigeria Railways Corporation rail corridor, then one will assume that the NRC will be responsible for maintaining its own tracks. However, will the private operator be responsible for maintaining the new tracks or will it be the Govt through NRC?
Anyway, I believe the authorities involved in the negotiation of PPP contract will be brave enough to make sure that the Govt is getting 'value for money' from the PPP. Also, the social, economic, and safety interest of commuters should be central to the contract negotiations.
The Lagos Metropolitan Area Transport Authority as part of its effort to tackle congestion recently developed a Rail Master Plan, which proposes an extensive network of rail lines connecting most parts of Lagos metropolitan area. The urban rail system is proposed to be implemented through a Public Private Partnership scheme (PPP).
It is heartening to see for the first time – since the civilian administration of Alhaji Lateef Kayode Jakande – we will see a State Administrator with a vision of how to deal with the menace of traffic congestion in Lagos State. Much commendation should also be given to the Ex-Governor Asiwaju Bola Tinubu for setting up the necessary institutional framework that is currently driving the state's transport agenda.
Whilst I fully support the principle of delivering of transport infrastructure through Public –Private Partnerships, however if not properly negotiated it can leave the government out of pocket and not serve any public good.
PPP describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. PPP has been used as a mechanism to deliver major transport infrastructure (toll roads, light rail etc) in most parts of the western world. It is based on the principle of transferring investment risk to the private sector, and also on the notion that delivery and operation of infrastructure and services can be undertaken 'cheaper and smarter' by the private sector, thus providing cost savings to the Government coffers. However, this is not always the case, as there are examples of 'how not to undertake a PPP'.
With specific regards to the Lagos rail project, the private sector is expected to Design and Build the infrastructure which will be financed by the State government. The operation of the system is also expected to undertaken by the private sector (under a 25 year concession). In return, the private sector operator will be expected to provide rolling stock, maintenance depot, and control systems.
One major concern with the Lagos Rail Mass Transit PPP is the liberty that will be given to the private sector operator to set fares and collect revenue. If the private operator is given absolute control over pricing, this could impact on passengers negatively and consequently affect patronage. It is plausible to assume that the private sector will be keen to recover its operating cost, repay bank loans and also make a return on their investment. It is common knowledge that construction of rail system is an expensive expenditure and the maintenance cost (rolling stock, staff, etc) can be significant. This is the fundamental difference between investment in road and rail infrastructure. If the private sector operator is allowed to charge passengers the real cost of operating the service plus their profit margin, it is very likely that the fares will be set at a cost that will be prohibitive to commuters. This begs the question of - ' who will use the service'. I'm sure it's not the government's agenda to provide high-quality public transport system only for the 'middle class'. There is no where in the world where passenger rail service operates at a profit – that is cover its real cost. Even in a densely populated city like Hong Kong with a populaton of 7 million and an efficient mass rapid transit system - which carries about 3 million passengers a day. The Hong Kong transport authority makes more money from leasing air rights over train station than it collects from the fare box. Also as an example, the cost recovery on public transport in the state of Queensland, Australia is just 30%.
Public transport is a social utility that is needed to provide access to services, jobs etc and help encourage social inclusion. There are social equity issues that need to be considered in planning of transport systems. Provision of public transport cannot be allowed to operate in a totally deregulated environment. This is the reason why Government around the world subsidize public transport provision. While one could argue that public transport subsidy defeats the purpose of a PPP, I tend to believe that it is in the best interest of the Government to subsidise the rail service when it becomes operational. The subsidies should however be linked to service level agreement and minimum service standards that will be expected from the operator.
On the other hand, if the fare levels are set too low without Govt top-up, the operator will be running the services at a loss. This could result in the private operator going into administration. If this happens, Govt will either have to 'bail-out' the company or take over the operation of the service. This could come at a significant cost to the State.
The delivery and operation of the proposed urban rail network can result in a situation, where different companies will be operating rail services on different parts of the network (that is, Blue Line – operator A, Red Line – operator B). This then brings me to the second issue of 'integrated ticketing' across the rail network. I will note that this also has an implication of fare pricing. The principle of having an integrated ticketing system is great, as this provides seamless travel journey. In fact, the integration should not be limited to rail; LAMATA should be looking at integrating the BRT Lite service as well. Having said that, giving operators total control on fare pricing and expecting integrated service across the network flies in the face of reality, and can result in price fixing by train operating companies. For passengers to enjoy the benefit of having an integrated ticketing system, LAMATA will need to have some control pricing structure.
Lastly, the issue of track maintenance seems unclear from the project briefing documents. Considering that part of the new rail line will be utilising the existing Nigeria Railways Corporation rail corridor, then one will assume that the NRC will be responsible for maintaining its own tracks. However, will the private operator be responsible for maintaining the new tracks or will it be the Govt through NRC?
Anyway, I believe the authorities involved in the negotiation of PPP contract will be brave enough to make sure that the Govt is getting 'value for money' from the PPP. Also, the social, economic, and safety interest of commuters should be central to the contract negotiations.
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