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RETHINKING THE LEGAL PARADIGM OF ENERGY
RESOURCE MANAGEMENT IN OIL-BASED
ECONOMIES: NIGERIA AS A CASE STUDY
BY
JOHN ADEBISI AREWA
B.A. PHILOSOPHY/SOCIOLOGY (COMBINED HONS.),
(IFE), M.I.L.D. (UNILAG)
MATRIC. NO: 889006064
A THESIS SUBMITTED TO THE SCHOOL OF POSTGRADUATE
STUDIES, UNIVERSITY OF LAGOS, IN PARTIAL
FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF
THE DEGREE OF DOCTOR OF PHILOSOPHY (Ph.D.) IN
INTERNATIONAL LAW
JANUARY, 2011
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SCHOOL OF POSTGRADUATE STUDIES
UNIVERSITY OF LAGOS
CERTIFICATION
This is to certify that the Thesis:
‘RETHINKING THE LEGAL PARADIGM OF ENERGY
RESOURCE MANAGEMENT IN OIL-BASED ECONOMIES:
NIGERIA AS A CASE STUDY’
Submitted to the School of Postgraduate Studies
University of Lagos
For the award of the degree of
DOCTOR OF PHILOSOPHY (Ph.D.)
is a record of original research carried out
By
JOHN ADEBISI AREWA In the Department of Jurisprudence and International Law
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AUTHOR’S NAME SIGNATURE DATE
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DEDICATION
THIS WORK IS DEDICATED TO THE MEMORY OF MY LATE MOTHER,
MADAM VICTORIA OLANREWAJU AREWA (NEE BABINGHTON) WHO
TRANSISTED TO ETERNAL GLORY ON 2ND
JANUARY 2008.
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TABLE OF CONTENTS PAGES
Title Page……………………………………………………………............................i
Certification……………………………………………………………………........... ii
Dedication……………………………………………………………………………..iii
Table of Contents……………………………………………………………………...iv
Acknowledgements…………………………………………………………………....x
Abstract………………………………………………………………………………..xii
Abbreviations...………………………………………………………………..............xiv
List of Figures................................................................................................................xvii
List of Tables.................................................................................................................xvii
CHAPTER ONE: INTRODUCTION
1.1 Thesis…………………………………………………………………..1
1.2 Statement of the Problem………………………………………………7
1.3 Aims and Objectives…………………………………………………...10
1.4 Operational Definition of Terms……………………………………….11
1.5 Scope and Limitation of Study.………………………………………..29
1.6 Research Questions…………………………………………………….30
1.7 Theoretical Framework………………………………………………...31
1.8 Methodology…………………………………………………………...53
1.9 Summary of Research Findings………………………………………..54
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CHAPTER TWO: LITERATURE REVIEW
2.0 Literature Review…………………………………………………………………55
CHAPTER THREE: AN OVERVIEW OF LAW AND DEVELOPMENT
3.1 The Nigerian State, Law and Development………………………………………8.3
3.2 The Rule of Law and Economic Development…………………………………...104
3.3 Supremacy of the Constitution……………………………………….................. 120
3.4 Military Rule, Collapse of the Parliamentary and Legal System……...................132
3.4.1 Collapse of the Judicial System and Stultification of Generation of
Wealth...........................................................................................................................141
3.5 The Evolution of the Nigerian Legal Order……………………………………....151
3.5.1 The Transplant Effect…………………………………………………………..154
3.5.2 Receptive and Unreceptive Transplants………………………………………...160
3.5.3 Legality and the Transplant Effect……………………………………………..162
3.5.4 Fragmented Sovereignty…………………………………………… ………….163
3.5.5 Land as the Basis of Human Identity and Essence……………………………..166
3.5.6 Colonial Sovereignty in Nigeria…………………………………………………179
3.5.7 The Colonial State and Customary Law………………………………………...181
3.5.8 The Genesis of Legal Pluralism…………………………………………………183
3.5.9 Transition to Nationhood………………………………………………………..186
3.5.10 Nationhood and Legal Pluralism……………………………………………….187
3.6 The Impact of Corruption on Economic Efficiency and Equity…………………..198
3.6.1 The Corruption Profile of Nigeria..…………………………………...................200
3.6.2 The Impact of Corruption on Economic Development…………….....................205
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CHAPTER FOUR: THE IMPACT OF CORRUPTION ON ALLOCATION AND
QUANTUM OF PUBLIC EXPENDITURE
4.0 The Impact of Corruption on Allocation and Quantum of Public Expenditure….212
4.1 Corruption and Public Expenditure……………………………………………. ...212
4.2 Corruption and Institutional Inertia…………………………………………….....214
4.3 The Economics of Legal Relationship………………………………………….....217
4.4 Market Versus State Regulation…...………………………………………….…..218
4.5 The Evolution of Institutions………………………………………………….......221
4.6 Self Regulation………………………………………………………………….....223
4.7 The Paradox of Abundance and Want in Oil-based Economies…………………..226
4.8 The Nature of the Oil-based Economy……………………………………….........237
4.9 The Challenges to the Rentier State and the Evolution of Civil Society……….....238
4.10 The Rentier State and the International Oil Industry…..…………………….......239
4.11 State Failure and Market Failure as the Costs of Corruption……………….. …..249
3.12 The Relationship Between Energy Resources and the Rentier State…………….252
CHAPTER FIVE: CASE STUDY- NIGERIA
5.0 Case Study: Nigeria……………………………………………………………......258
5.1 Conceptual Framework…………….……………………………………………....272
5.2 Sectoral Allocation of Investments....……………………………………………...282
5.3 Land Use Policy………………………………………………………………........285
5.4 Tariff Policy……………………………………………………………………......287
5.5 Credit Policy....…………………………………………………………………….287
5.6 Consumer Subsidies……………………………………………………………......288
5.7 The Macro Impact of Oil Revenues on Aggregate Expenditure....………………..289
5.8 The Nature of Government Expenditure………………………………………......291
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CHAPTER SIX: OVER VIEW OF PETROLEUM DEVELOPMENT MODELS
6.1 Introduction……………………………………………………………………..296
6.2 Commercialization……………………………………………………………....298
6.3 Participation and Nationalization: The Need for State Participation…………...300
6.4 Legislative Framework………………………………………………………….308
6.5 Theories of Nationalization……………………………………………………..310
6.5.1 Marxist/Socialist Theory of Nationalization………………………………….311
6.5.2 Capitalist Perspective of Nationalization……………………………………..315
6.5.3 The Third World Perspective of Nationalization……………………………..316
6.5.4 Public International Law of Nationalization………………………………….319
6.6 Petroleum Development Models for the 21st Millennium………………………332
6.6.1 Vertical Integration…………………………………………………………...332
6.6.2 Exploration and Development………………………………………………..337
6.6.3 Downstream Operations………………………………………………………339
6.7 Institutional Framework of Petroleum Development....………………………...340
CHAPTER SEVEN: A RE-APPRAISAL OF THE PRIVATE CONTRACT
PARADIGM
7.1 Introduction……………………………………..………………………………..343
7.2 The Legal Nature of State Contracts……………………………………………..348
7.3 The Proper Law of Petroleum International Agreements………………………...357
7.4 Legal Framework of Petroleum International Agreements……………………….379
7.5 Petroleum International Agreements and Applicable Laws……………………....384
7.5.1 The Lex Contractus……………………………………………………………..385
7.5.2 Municipal Law of the Contracting State………………………………………..391
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7.5.3 The Principles of Law Common to the Parties………………………………….402.
7.5.4 The General Principles of Law Recognized by Civilized Nations……………...405
7.5.5 Public International Law………………………………………………………...408
7.6 A Perspective on Stability of PIAs vis-à-vis the Right to Development……….....414
CHAPTER EIGHT: A RE-APPRAISAL OF THE INSTITUTIONAL
FRAMEWORK FOR ENERGY RESOURCE MANAGEMENT
NIGERIA
8.0 The Importance of the Oil Industry to the Nigerian Economy…………………....440
8.1 The Sovereign as an Entrepreneur………………………………………………....442
8.1.1 The Need for State Participation in the Oil Industry…………………………....454
8.1.2 Modes of State Participation in the Oil Industry..………………………………463
8.1.3 Legal Instrument of State Participation: The Participation Agreement………....465
8.1.4 Appointment of Operator…………………………………………………….....466
8.2 The Nigerian Petroleum Policy as Distilled From Legislation, White Papers…....469
8.2.1 The Search for a Policy Focus…………………………………………………..469
8.2.2 The Regime of the Exploration and Development and Production Phases…….478
8.2.3 The Structure of Ownership and Management………………………………....484
8.2.4 Marketing Dispensation………..………………………………………………..488
8.2.5 Fiscal Dispensation……………………………………………………………...491
8.2.6 The Memorandum of Understanding (MOU)………………………………….494
8.2.7 State Participation……………………………………………………………....497
8.3 The National Oil and Gas Policy…………………………………………………499
8.3.1 Exploration and Production…………………………………………………… 501
8.3.2 Downstream Regime…………………………………………...……………....509
8.4 The Nigeria Extractive Industries Transparency Initiative............... .....................512
8.4.1 The Nigeria Extractive Industries Transparency Initiative Act 2007..................514
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8.5 The Fiscal Responsibility Act 2007.......................................................................518
8.6 Public Procurement Act 2007.................................................................................523
8.7 The Nigerian Oil and Gas Industry Content Act 2010..........................................530
8.8 Overview of Ongoing Issues in the Nigerian Oil Industry……………………....536
8.9 The Constituent Instrument of the NNPC……………………………………......543
8.10 Structural Reform of the NNPC………………………………………………...556
8.11 Towards a Viable and Efficient NNPC………………………………………....561
CHAPTER NINE: APPLICATION OF THE LEGAL PARADIGM
9.0 Application of the Legal Paradigm………………………………………………576
9.1 The Legal Prototype……………………………………………………………...615
CHAPTER TEN: CONCLUSIONS AND RECOMMENDATIONS
9.0 Conclusions and Recommendations……………………………………………..622
BIBLIOGRAPHY.………………………………………………………………….634
I. BOOKS……………………………………………………………....634
II. ARTICLES………………………………………………………….641
III. CASES……………………………………………………………...652
IV. STATUTES………………………………………………………....657
V. Nigerian Legislation............................................................................657
VI. FOREIGN LEGISLATION...………………………………….....658
VII. INTERNATIONAL INSTRUMENTS.……………………….......659
VII. FOREIGN AGREEMENTS……………………………………….659
VII. INTERNET SOURCES……………………………………………660
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ACKNOWLEDGEMENTS
I wish to acknowledge our creator, God the Father Almighty, the Eternal Rock of
Ages for his infinite mercies, faithfulness and steadfastness. I glorify and lift up His
name on high for providence, good health, emotional stability and the strength of
character which are necessary for the consummation of the arduous task which a work
of this magnitude represents.
I owe a debt of gratitude to my supervisors, Professor Akin Oyebode and Professor
S.O. Akinboye for their immense and invaluable intellectual guidance. I am
particularly indebted to Professor Akin Oyebode, my principal supervisor who took
the risk to supervise my work at a most trying stage of my research. I consider myself
highly privileged to have come under his pupilage at the highest level of academic
endeavour which a doctoral work represents. I certainly cannot be the same person
again after passing through him. I have been truly enriched.
I must express my deepest appreciation to the entire faculty of the Faculty of Law,
University of Lagos, for their accepting me as a member of the „family‟ through out
my odyssey on the Ph.D, programme. Specifically I wish to convey my appreciation
to Professor I.O. Smith, for his kindness and support; Chief Akin Ibidapo-Obe
(Associate Professor); Professor Ayo Atsenuwa; Professor T.A.I Osipitan, SAN;
Professor A.A. Adeyemi; Professor Chioma Agomo; Professor Oyelowo Oyewo; Dr.
Yemi Oke; Dr. Dayo Ayoade; Dr. Amusa; Dr. Abugu; Mr. Babatunde Oni; Dr. Abiola
Sanni; Mrs. Iyabo Ogunniran; Mrs. Oyewumi; Dr. Ego Chinwuba; Mr. A.O.
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Salami; Mr. Yinka Owoeye; Mr. Akingbehin; Mrs. Andrea Ajibade; Mr. Olaniyan;
Mr. Wahab Shittu.
I am indebted to the principal officers and staff of the School of Postgraduate Studies,
University of Lagos, Lagos, for their support and assistance. Specifically I wish to
express my appreciation for the purposive direction of the Dean School of
Postgraduate Studies, University of Lagos, Professor Toyin Ogundipe. I am also
indebted to Pastor Adefarakan, for his kindness and deep concern, especially during
moments of anxiety. I must express my appreciation of the kindness of Professor
Remi Anifowoshe, a peerless kinsman and my dear friend, Dr. Derin Ologbenla.
I am eternally grateful to the entire staff of the Department of Jurisprudence and
International Law, Faculty of Law, University of Lagos. I am grateful to Mr. Akeem
Ibrahim; Mrs. Kemi Adejumo and Miss Nonye for their support.
I also owe a debt of gratitude to Professor Epiphany Azinge, SAN, Director-General
Nigerian Institute of Advanced Legal Studies (NIALS) for providing the platform on
which I serve the nation as faculty of the Nigerian Institute of Advanced Legal
Studies (NIALS). I appreciate the support of Professor Bolaji Owasanloye; Professor
Adedeji Adekunle; Professor Lanre Fagbohun; Mrs. Animi Awah; Dr. Chinyere Ani;
Mrs. Helen Chuma-Okoro; Dr. (Mrs.) Nlerum; Mr. Dada; Mrs. Lamikanra; Mr. James
Bathna; Mr. Goziem; Miss Kafayat; Mr. Okay Agwu; Mr. Chinua Asuzu; Mr. Peter
Anyebe; Mrs. Ngozi Udombana; Mrs. Abbey-Taiwo and last, but not least, Miss
Chioma Ilozumba.
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ABSTRACT
The most crucial challenge of nationhood which confronts Nigeria is how to transit
from the state of mere ground rent collector from transnational oil companies who
dominate the nation‟s extractive industry, to a modern State economy in which there
is a reciprocal linkage between the extractive industry and the non-extractive sectors
of the economy, such as manufacturing and agriculture.
Oil remains the linchpin of the Nigerian economy and since its ascendancy in the 70s
as the major foreign exchange earner, (it contributes about 95 per cent of federally
generated revenue),1 and there has been no significant transformation in the living
standards of Nigerians. There is pervasive mass impoverishment and a total
disconnect between Nigeria‟s stupendous petroleum and gas resources and mass
impoverishment. Nigeria‟s chequered post-colonial history is a classical case of the
paradox of abundance and want, its stupendous oil resources seems to be a curse
rather than a blessing.
The study establishes a causal link between the collapse of the parliamentary system
in Nigeria in 1966 through degeneration and revolutionary ouster; resultant
normlessness; statelessness which has since then characterized its bodypolitik and
abysmal State failure. The unconscionable state of the rule of law, arbitrariness and
very wide latitude for discretion characterizing the Nigerian State results in pervasive
1 The World Bank, World Development Indicators 2008, Washington D.C., World Bank Publications,
1-446 (2008); Central Bank of Nigeria, Annual Report, Abuja, Central Bank of Nigeria Publications,
passim (2009).
xiii
corruption pandemic as competing rent-seeking elites are content to control resources
rather than innovate for diversification.
The study implicates the lack of centrality of law and the rentier structure of the
Nigerian petro-State in the colossal market (economic) and State failures
characterizing the Nigerian bodypolitik. The convoluted evolution of the Nigerian
legal order disparages the creation of an environment of formal rational law which
would have diffused and induced a highly predictable and calculable economic
environment in which expectations of all economic actors are not wilfully disparaged
by arbitrary rule.
The macro economic model which derives from the study‟s multi-dimensional
analysis is subsequently invoked in the legal prototype which will drive and catalyse
the far reaching changes which are necessary to diversify the Nigerian economy away
from the dominance of the extractive sector to the non-extractive tradeable real sector.
The legal paradigm constitutes a charter for the efficient husbandry of Nigeria‟s
petroleum resources such that at full depletion, Nigeria would have accumulated
sufficient stock of non-oil capital and assets in the post-oil epoch from which it will
earn continuous stream of external receipt from strategic perspective investment of oil
revenue, complemented by a carefully calibrated development of infrastructure.
xiv
ABBREVIATIONS
AGIP……………………..Azienda Generali Haliana Petroli
AMINOIL……………….American Independent Oil Company
APC……………………..Asian-Pacific Economic Cooperation
AGCC…………………...Arab Gulf Cooperation Council
AIOC……………………Anglo-Iranian Oil Company
BBC……………………..British Broadcasting Corporation
BP……………………….British Petroleum
CFP……………………...Compagnie des Francaise des Petroles
CPDD…………………...Corporate Planning and Development Division
DMO……………………Debt Management Office
DPR……………………..Department of Petroleum Resources
ERAP……………………Enterprise de Recherche et d‟ Activites Petrolieres
ELF……………………...Essences et Lubrifants de France
ENI………………………Ente Nazionale Indrocarburi
FOB……………………..Free on Board
GA………………………General Assembly
GDP…………………….Gross Domestic Product
GED…………………….Group Executive Director
GIS………………………Global Inspection Services
GMD……………………Group Managing Director
HCs……………………..Host Countries
ICJ………………………International Court of Justice
JOA……………………..Joint Operation Agreement
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MNOCs………………...Multinational Oil Corporations
MOU…………………...Memorandum of Understanding
MDGs…………………..Millennium Development Goals
MVA…………………...Manufacture Value Added
NAPIMS……………….National Petroleum Investment and Management Services
NEEDS……………….. National Economic Empowerment and Development
Strategy
NNPC………………….Nigerian National Petroleum Corporation
NNOC…………………Nigerian National Oil Company
NOCs…………………. National Oil Companies
OPEC…………………..Organization of the Petroleum Exporting Countries
OGIC………………….. Oil and Gas Sector Reform Implementation Committee
PPPRA…………………Petroleum Products Price Regulatory Authority
PA………………………Participation Agreement
PDV…………………….Petroles de Venezuela
PEMEX………………...Petroleos Mexicanoes
PERTAMINA………….Persahan Toimbangan Minyak dan Gas Bumi Negara
PIA……………………..Petroleum International Agreement
PPMC………………….Pipeline Product Marketing Company
PPT…………………….Petroleum Profit Tax
PSC…………………….Production Sharing Contract
SBUs…………………..Strategic Business Units
TC……………………...Technical Cost
UAR……………………United Arab Republic
UNCAC………………..United Nations Convention Against Corruption
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UNCTAD……………...United Nations Conference on Trade and Development
UNESCO……………...United Nations Educational, Scientific and Cultural
Organization
WACA……………… West African Court of Appeal
WTO…………………..World Trade Organization
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LIST OF FIGURES
Figure 3.1 General Civil Cases 2001-2006 National Average........................................142
Figure 3.2 Land Cases 2001-2006..................................................................................143
Figure 3.3 Prisons Population in Lagos State.................................................................144
Figure 3.4 Nigeria‟s Estimated Prison Statistics (40,447 Prisoners)...............................146
Figure 3.5 National Average of Time Taken to Conclude Criminal
Cases Across the Country 2001-2006.............................................................................147
Figure 9.1 Oil and Non-Oil Revenue (per cent of GDP)...............................................600
Figure 9.2 Composition of Non-Oil Revenue in 2009...................................................600
Figure 9.3 Federation Account: Composition of Revenue (Naira billion).....................601
Figure 9.4 Composition of General Government Expenditure 2009.............................602
Figure 9.5 Federal Government Revenue and Expenditure (per cent of GDP).............602
Figure 9.6 Composition of Federal Government Expenditure in 2009..........................603
Figure 9.7 Functional Classification of Federal Government Recurrent
Expenditure in 2009.......................................................................................................603
Figure 9.8 Functional Classification of Federal Government Capital
Expenditure 2009..........................................................................................................604
LIST OF TABLES
Table 1.1 Current Revenue of the Federal Government...............................................592
Table 2.1 Functional Classification of Recurrent Expenditure of the
Federal Government.....................................................................................................597
Table 3.1 Functional Classification of Capital Expenditure
of the Federal Government..........................................................................................606
Table 4.1 Benchmark Country Assessment.................................................................613
Table 5.1 Nigeria: Macroeconomic Volatility 1961-2000...........................................614
1
RETHINKING THE LEGAL PARADIGM OF ENERGY RESOURCE
MANAGEMENT IN OIL-BASED ECONOMIES: NIGERIA AS A CASE
STUDY
1.0 CHAPTER ONE: INTRODUCTION
1.1 THESIS
This work argues the thesis that the gross inefficiency characterizing the husbandry of
Nigeria‟s oil resources; the abysmal performance of its oil-based economy and resultant
mass impoverishment of its citizenry in spite of its stupendous oil resources is due
largely to the existence of an interphase between the orthodoxy of economic paradigms,
economic policy based on these paradigms, the institutional framework of policy
implementation and the law which purpose it is to effectuate economic policies.2 The
2 The World Bank, World Development Indicators 2008, Washington D.C., World Bank
Publications,1-446 (2008); The World Bank, Africa Development Indicators 2007: Spreading and
Sustaining Growth in Africa, Washington D.C., World Bank Publications, 1-179 (2008); The United
Nations, Economic Commission for Africa, African Statistical Yearbook, New York, United Nations
Pubns., 1-774 (2008); The United Nations Development Program, Human Development Report
2003:Millennium Development Goals: A Compact Among Nations to End Human Poverty, Oxford,
Oxford University Press, 1-384 (2003); The United Nations Educational, Scientific and Cultural
Organization (UNESCO), Education for All: Global Monitoring Report 2008, Oxford, Oxford
University Press, 3-500 (2008); Managing oil wealth has proven to be a difficult challenge for many
countries across the world. Examples include Ecuador, Mexico, and Venezuela. In Nigeria, for
example, oil revenues have led to huge investments in capital and infrastructure in the 1970s and 1980s
but productivity declined and per capita GDP remained at about the same level as 1965. In other
words, accumulated oil wealth over a 40 year period of some $400 billion did not raise the standard of
living but worsened the distribution of income in Nigeria. Studies show that not only the Dutch Disease
but, importantly, waste of capital resources through bad investments and corruption have resulted in
this predicament. Preponderance of Nigerians still live below the poverty line of US$1.0 per day, the
urban poor are homeless, living in squalor in the sprawling slums of Nigerian cities; infrastructure are
derelict and run down while electricity supply is epileptic. Three out of every five Nigerian is not
literate and access to education is still limited; maternal mortality rate for Nigeria is one of the highest
in the world; Nigeria is plagued by perennial food crisis and the rural poor are sinking deeper and
deeper in the mire of poverty. About 75 per cent of Nigerians do not have access to health services
while both tertiary and primary health institutions and facilities are veritable death parlours where
pharmacies do not dispense drugs and where they do, chances are 9 out of 10 that they are „bad
medicine.‟ The life expectancy quotient for Nigerians of between 43 and 47 years is below the global
minimum of 50 years; about 80 per cent of Nigerians in both the rural and urban settlements do not
have access to portable drinking water, in itself, this phenomenon perhaps is the single and most
important source of diseases and poverty for the rural and urban poor in Nigeria. Nigeria numbers
amongst one of the countries that saw a drop in the human development index, 1980s and 1990s and is
2
interphase creates a lag between the orthodoxy of economic paradigms; economic policy
based on these paradigms; the institutional framework of policy implementation and the law
which purpose it is to effectuate economic policies.3
It posits that this lag is a function of a combination of factors, ranging from the nature and
structure of the State, to institutional failures; the lack of intellectual input in governance;
corruption; inefficiency in the husbandry of resources; cumulative and progressive effect of
many years of wrong economic choices and gross fiscal indiscipline in the expenditure of
revenue accruing from oil resources and most importantly, the lack of inter-temporal
planning model for the economy.4
The work submits that the extant private contract paradigm adopted by Nigeria is inorganic
and would perpetually stultify Nigeria‟s aspiration to transit from the state of mere ground
rents collector from trans-national oil corporations to a modern State economy which is
propelled by its oil revenue, and which after consolidation would have accumulated a
considerable stock of non-oil assets upon which it will found a solid economic base in the
post-oil epoch.5
far behind on all the millennium development goals, viz., changes in the share and number of people
living on $1 a day pursuant to eradication of poverty; reduction in the child mortality rates ; water and
sanitation; life expectancy; food insecurity and eradication of hunger; girl child education, gender
equality and empowerment of women; per capita income; curtailment of maternal mortality and
improvement in maternal health; universal primary education and combat of HIV and malaria and
ensuring environmental sustainability. 3 A. Buscaglia, Law and Economics in Developing Countries, New York, Hoover Institution Press, 9-
101, 87-97, 9-27 (2000); R,Cooter, Law and Economics, New York, Addison Wesley, 5-200 (2007);
P. Coolier, The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done
About It, Oxford, Oxford University Press, 3-175 (2007). 4 J. Blocher, „Institutions in the Market place of Ideas,‟ 57 Duke L.J. 821 (2008); L.Karp, Inter-
temporal Consistency Issues in Depletable Resources,’ in J. Sweeney, (ed.), Handbook of Natural
Resources and Energy Economics, Oxford, Elsevier, 881-928 (2006). 5 N. Miranda, „Concession Agreements: From Private Contract to Public Policy,‟ 117 Yale L.J. 510
(2007); within the realm of trans-national investment involving State entities and transnational oil
corporations, the principle pacta sunt servanda can not operate in an absolute sense, not only because it
is not applied absolutely in international law, but also because most investment contracts operate in a
field which falls within the domestic sovereignty of the State. As a result, there exists greater scope for
3
It is being argued that the lack of centrality of law and its institutions in Nigeria‟s oil-based
economy creates a lag between the orthodoxy of economic paradigms and the institutional
framework of policy implementation. It is being adumbrated that the undifferentiated nature
of its laws and legal institutions result in a total lack of rein on the economy.6
applying the doctrine of changed circumstances, clausula rebus sic stantibus in State contracts,
particularly where economic conditions change and welfare of the State requires that the contract be
rescinded or changed. Within the context of Petroleum International Agreements (PIAs), this argument
is especially relevant when one considers that under international law, States are recognized to have a
certain degree of sovereignty over their natural resources and that a public emergency may require
them to take unilateral action which is likely to affect the rights of foreign investors parties to a PIA.
The notion that State entities and foreign private trans-national oil corporations act essentially as equals
in their capacity as parties to a private contract is also part of the paradigm of the West and their
arbiters in international commercial arbitration proceedings. Contractual equality is hinged on the
public/private distinction that the State as a private actor is different from the State as a public actor
because, in some State contracts, the State will expressly waive its right to amend laws or regulations
that would affect the rights and obligations of the parties under the PIA. The logical implication of
contractual equality is that an attempt by the State to take unilateral action to amend contractual
obligations will be considered to be unlawful within Western perception of international contract law.
We submit contrary to the foregoing that contracts with State entities should be analyzed under an
administrative or public contracts doctrine which is generally acknowledged in the Continental and
Anglo-American legal systems. It effectively skirts the rigid boundaries of private law in the face of
public regulatory interventions. The administrative contract doctrine assumes an essential unequal
relationship between the parties, in which the State may exercise its coercive power to take unilateral
action in amending its legal obligations. The State, in this case, is guided in such actions by the dictates
of public interests. In the context of Petroleum International Agreement in Nigeria, this doctrine of the
administrative contract is highly relevant considering the public importance of oil resources to the
economic survival of the Nigerian State; Anglo-Iranian Oil Co. Case, [1952] I.C.J. Reports 93;
Aminoil Case 21 I.L.M. (1983); B. Montembault, „The Stabilization of State Contracts Using the
Example of Oil Contracts: A Return of the Gods of Olympia?‟ 6 International Business Law Journal
593-643 (2003); M.S.Perera, „Stable Investment Contracts in the Developing World,‟ 14 Sri Lanka
Journal of International Law 97-106 (2002). 6 J.M. Davis, (ed.), Fiscal Policy Formulation and Implementation in Oil Producing Countries,
Washington D.C., International Monetary Fund, 1-484 (2003); K . Davis, „The Relationship Between
Law and Development: Optimist Versus Skeptics,‟ 57 American Journal of Comparative Law 8-14
(2008); The intrusion of the military into the civil domain in Nigeria has resulted in very untoward
consequences, particularly its desecration of hallowed institutions, and the justice system. The legal
system in Nigeria has been progressively destroyed since 1966 when the first coup d’etat was
executed. The judicial sector in Nigeria has been hijacked by a succession of dictators to subvert the
rule of law and indeed the corporate existence of Nigeria. Perhaps the most important feature of
military rule is its desecration of the constitution. The military in Nigeria have a penchant for inserting
ouster clauses in their decrees which oust provisions of the Constitution that restrain their absolute
exercise of power while concomitantly preserving provisions of the Constitution which facilitate their
rule or which are innocuous. By their nature, military governments conduct the affairs of State without
the ambit of the law. Every civil interlude in the chequered history of Nigeria is midwifed by a military
dictatorship that contrived constitutions which they foist on the nation, for example, the 1979, 1988,
1995 and 1999 Constitutions were diktats handed down by the military. Nigeria is a legal void, and its
rule-of-law deficit is unremitting since independence in 1960 it has been plagued by a succession of
military dictatorships interspersed and punctuated by civil rules which suffer from crises of legitimacy
and lack of authority. This is without prejudice to the rule-of-law agenda being pursued by President
Umar Yar Adua‟s administration. It remains doubtful, however, whether it is within the cognitive field
of the Nigerian political elite to fathom the centrality of law in the polity, and the husbandry of energy
4
It posits that the lack of centrality of law and its institutions coupled with the rentier nature
of the State in the oil-based economy affects in a rather untoward manner the output of the
economy in both the traded and the non-traded goods sectors. The rent-seeking behaviour of
the rentier State creates severe distortions in the economy in both content and form. The
form here relates to the adjectival law that the government uses to reach its policy decisions,
with regards to for example the spending appraisal procedure adapted or not adapted, for
electing between alternative spending proposals.7
resources, nay the economy and whether such cognition would not be refracted in the prism through
which they visualize, contrive and conduct the affairs of State for personal and group interests. Equally
rife in certain quarters is the view that the sincerity and commitment of the administration to the rule-
of-law is disarticulate, incoherent and cynical. At best, according to this community of opinion, it is
mere verbiage and sloganeering and betrays a misapprehension of the exigency and enormity of the
rule of law crisis which has permeated Nigeria‟s body politik since independence in 1960. 7 A.Oyebode, Law and Nation-Building in Nigeria: Selected Essays, Ikeja, CEPAR, 1-9, 35-42, 218-
226, 229-241 (2005); Lakanmi & Anor. v. Attorney General for Western Nigeria (1971), 1 U.I.L.R.
201 (Sup. Ct. Nig.); Isaac J.A. Boro & Others v. The Republic (1967) NMLR 163; The Federal
Military Government (Supremacy and Enforcement of Powers) Decree, No. 28 of 1970; Federal
Military Government (Supremacy and Enforcement of Powers) Decree ,No. 13 of 1984; Constitution
(Suspension and Modification) Decree No. 1 of 1966; Adamolekun v. Council of the University of
Ibadan, S.C. 378/1966, [1967] 1 All N.L.R. 213; Adebiyi Adejumo v. H.E. Colonel Mobolaji O.
Johnson, Military Governor of Lagos State; SC. 158/70 (1970) 1 All ALR 183; K. Mair, This House
has Fallen: Nigeria in Crisis, London, Penguin, (2002); by a single stroke of absolutist promulgation
(that is, Constitution (Suspension and Modification) Decree No. 1 of 1966), Nigeria crossed the
threshold into a latent state of statelessness, the State its laws and legal institutions lack majesty,
authority and legitimacy. The polity is anarchical and characterized by a pervasive state of
normlessness. The citizenry have not internalized the laws of the State and lack the psychological
acceptance of the authority of the State; they are alienated from the State. Symptoms of this
phenomenon abound in the Nigerian social political milieu. For instance, how many Nigerians would
stop as a matter of course at an intersection at 2.00 a.m. on a deserted street when the red light comes
on and the city is asleep with no law enforcement officers in sight? The answer to that question had
better be left to the imagination. The succession of absolutist military regimes has left a festering
laceration on the national psyche, which the few civil interregna have not healed. Mair, in his best
seller, likened Nigeria to a sinking ship, where you have a profound sense of foreboding of imminent
disaster, where when you are jumping for the safety raft, you have a feeling that you were leaving
before the party is begun. In fact, Nigeria‟s precarious existence itself is a miracle when compared with
its peers in the African region, for example, Somalia, Sudan, Angola, Zaire, Sierra Leone, Liberia and
so forth. It still totters on despite this state of normlessness. The question, however, is for how long?
For, no society can survive and exist without the centrality of law; it is the law that restrains, constrains
and channels human conduct and behaviour in a rational and productive course. Without the centrality
of law and its institutions, a society labours in vain, and no matter the magnitude of the treasures buried
in the bowels of its landmass and waters, it will not achieve sustainable growth and development. That
realism has been euphemistically and variously characterized as the paradox of abundance and want,
and resource curse. Congruence has been established between resource abundance, poverty, inorganic
laws and legal institutions. It has been found that it is only resource endowed countries which have
strong legal and political institutions that have escaped the resource trap. While those without organic
laws and strong legal institutions for the husbandry of their resources are failing.
5
The content of behaviour of the State under this schema refers to the type of policy adopted.
Policy areas would normally include fiscal and monetary policy; land-rights policy; credit
policy; pricing policy for food crops; tariff policy; and consumer-subsidy policy. The
foregoing planning elements are integral to the larger planning perspective which is long
term.8
As a corollary to the foregoing, the following macro implications can be derived. The pace
of increase in domestic expenditure is a consequence of the growth of money. The growth
of money is in turn, a function of the government budgetary expenditure in oil-exporting
countries. Changes in money can be regarded as indicating changes in aggregate
expenditure.9
The composition of aggregate expenditure would depend upon the changes in relative prices
of traded and non-traded goods. Therefore, from changes in government expenditure and its
monetary consequences, one can derive the expected changes in relative prices of traded
and non-traded goods.10
Against the backdrop of the foregoing macro analysis, it is argued that economic policies
cannot be effectuated where the law and its institutions are undifferentiated and weak. It is
8 G.Candela, „Economics of Externalities and Public Policy,‟ 55 International Review of Economics
285-311 (2008). 9 Ibid.; F.A.G. den Butter, „What Makes the Models-Policy Interaction Successful?‟ 15 Economic
Modelling, 443-475 (1998); it is instructive to analyze the interaction between economic paradigms;
economic policies based on these paradigms; institutional framework of policy implementation and the
law, in terms of the structure of the State, the social economic and political issue which the policy
addresses and the working arrangements. Some institutional structure may lead to reciprocal
interaction, that granted, the way a structure is run is more critical than the nature of the structure in
determining the success of interaction between economic paradigms; economic policies deriving from
those paradigms and the institutional framework of policy implementation and the law; C. Freeman,
„Innovation, Changes of Techno-Economic Paradigm and Biological Analogies in Economics,‟ 42
Revue Economique 211-231 (1991). 10 Ibid.; E. Cohen, „Economic Institutions and Policies in the US and EU: Convergence and or
Divergence?‟ 2005. Available at http://ies.berkeley.edu/calendar/files/Berkeley-Vienna% 2005/EC-
JPF%20 Berkeley%20paper_conference%20version.pdf
6
being asserted that efficiency in the husbandry and allocation of resources can only be
achieved through legal instrumentation and major and far-reaching institutional reforms.
Where there is lack of centrality of law and its institutions the following are the likely
outcomes given the crucial and indispensable role of the law in the allocative process and
the determination of property rights.11
At the sectoral level for instance, the land-rights policy (Land Use Act) affects especially
the agricultural output by affecting both the incentives to invest on the land and access to
credit by small farmers; credit policy affects availability, price, and access to both
technology and start-up capital, hence affecting the level of output. Tariff policy affects
incentives in the domestic traded goods industry and thereby their level of output; pricing
policy for food (also export) crops affects the respective supplies of these sectors.12
The sectoral allocation of public investment and the types of project undertaken, especially
in such sectors as infrastructure, would affect the cost of production, and therefore output,
in various sectors of the economy. The proportion of the traded to non-traded content of
11 Ibid.; A. Mann, „Orthodox and Heterodox Stabilization Policies in Bolivia and Peru: 1985-88,‟ 31
Journal of InterAmerican Studies and World Affairs 163-192 (1989); M. Pastor Jr., „Peruvian
Economic Policy in the 1980s: From Orthodoxy to Heterodoxy and Back,‟ May 1991. Available at
http://Kellogg.nd.edu/publications/working papers/WPS/ 161.pdf.; there has been dramatic fluctuations
in Nigeria‟s macroeconomic policy from the 80s the failure of orthodoxy or neo-liberal policy in the
first half of the decade is attributable to external shocks, economic inconsistencies and the erosion of
the States institutional and administrative capacities. Further policy experimentations also collapsed
owing to the unconscionable state of the rule of law, and military dictatorship, rising ethnic nationality
conflicts and the States inability to implement its decisions due to corruption and the refraction of such
policies through the prism of ethnic and sectional interests. The legacy of the 80s and 90s include
deepening social cleavages, highly volatile politics, international isolation, a severely weakened State
and a totally alienated populace; R. Gounder, „Political and Economic Freedom, Fiscal Policy, and
Growth Nexus: Some Empirical Results For Fiji,‟ 20 Contemporary Economic Policy 234-245 (2008);
The Royal Swedish Academy of Sciences, „Finn Kydland and Edward Prescott‟s Contribution to
Dynamic Macroeconomics: The Time Consistency of Economic Policy and Driving Forces Behind
Business Circles,‟ 2004. Available at
http://nobelprize.org/nobel_prizes/economics/laureates/2004/ecoadv.pdf 12 Ibid. The Asian-Pacific Economic Cooperation, Heng Mui Keng APEC Economic Policy Report
2006, APEC Publications, 12,18,29, 50 (2006).
7
government expenditure would also determine the extent to which the economy is
articulate.13
1.2 STATEMENT OF THE PROBLEM
For most developing nations and the group of very poor countries of the world, poverty and
underdevelopment are caused by the paucity of resources. For oil producing developing
nations such as Nigeria, however, the converse is the case. Poverty and underdevelopment
in these oil-based economies have a positive correlation with the abundance of petroleum
resources. The abundance of resources for these countries seems to be a curse rather than a
blessing. Since the ascendancy of oil as an energy resource, oil-based economies have not
been able to attain the level of economic development commensurate with their stupendous
oil resources endowment. The paradox of abundance in oil-based economies perhaps best
provides an insight into the relationship between the management of extractive sector by
law and resultant mass impoverishment. The study in attempting to establish a correlation
between management of extractive sector by law and resultant mass impoverishment draws
attention to the nature of a modern State economy and the centrality of law in the efficient
husbandry of its resources. As a device for social control, law and its institutions stricture
the process of transformation of nature into tradable goods, by defining property rights and
organization of labour and determining the allocative process of the revenue accruing from
the extractive sector.14
13 Ibid. L. Ratinoff, „Social Policy Issues At The End of the 20th Century,‟ 2008. Available at
http://www.idrc.ca/en/ev-85581-201-1-DO TOPIC.html; T. Notermans, „Policy Continuity, Policy
Change, and the Political Power of Economic Ideas,‟ 2008. Available at
http://www.arena.u10.no/publications/wp98_17.htm 14 A. Rosser, „Escaping the Resource Curse,‟ 11 New Political Economy 557-570 (2006); the critical
feature of an exhaustible resource is that it is in finite supply, so that if one unit is consumed today,
there are fewer units available for consumption in the future. As a consequence it commands a scarcity
value, and its opportunity cost is the sum of two elements. The first is the standard marginal cost of
production (in this case extraction), and the second is the scarcity value or rent. The theory of
exhaustible resources is largely the theory of the determination of this rental element. The larger is the
rental element relative to extraction costs, the more important is this theory in explaining the
8
Thus, where the State is characterized by unconscionable state of the rule of law and due
process, arbitrariness and very wide latitude for discretion, the body politik is characterized
by corruption pandemic, which combined effect stultifies efficiency in the husbandry of
natural resources, and inhibits the capacity for innovation as rent-seeking elites are content
to control resources rather than innovate, pursuant to efficient husbandry and
diversification.15
In itself, the inefficiency of the oil-based economy, like most economies that are dependent
overwhelmingly on the extractive industry, is a function of the direct accrual of the revenue
from exports of mineral resources to the State in these countries. Thus, the capture of State
power is synonymous with the capture of resources and without a strong foundation of legal
norms upon which to build an efficient economic structure, the dominant political group
subjects revenue accrued from trade in extractive products to despoliation. The mass
impoverishment in oil-based economies, in turn, is a derivative of the combined effects of
despoliation and cumulative effects of wrong economic choices due largely to the
undifferentiated state of their legal order.16
opportunity cost of the resource. Natural resources which are relatively abundant (as measured by the
ratio of economically recoverable stocks to annual consumption) and/or are costly to extract will have a
low rental element in their opportunity cost, and conversely those which are relatively scarce and yet
cheap to extract will have a high rental element. Oil is a good example of the latter. 15 J.A.Robinson, „Political Foundations of the Resource Curse,‟ 79 Journal of Development
Economics 447-468 (2006). 16 R.W. Brooks, „The Efficient Performance Hypothesis,‟ 166 Yale L.J. 568 (2006); L. Pellegrini
„Causes of Corruption: A Survey of Cross-Country Analysis and Extended Results,‟ 23 Economics of
Governance 44 (2007).
9
The orthodoxy of political and economic models aimed at the transformation of these
economies has, in hindsight, failed to guarantee growth and development due largely to the
undifferentiated nature of their laws and legal institutions.17
The only semblance of planning in a typical oil-based economy like Nigeria, which is the
annual budget, is nothing more than a mere statement of income and expenditure, without
throughput.
The foregoing is largely a function of lack of centrality of law and its institutions in the
body politik of this group of resource rich countries, resulting in a total lack of rein on the
management of energy resources.18
That granted, it is a gross understatement to assert that oil-based economies should create an
economic buffer against the vagaries and uncertainty of the post oil epoch, when the stock
of oil resources would have completely petered out and institute an inter-temporal plan
through legal instrumentation in the husbandry of oil resources and most importantly in the
expenditure of the revenue accruing from the exploitation of oil resources.19
A survey of a typical oil-based economy that is Nigeria; betrays lack of coordination and
fiscal indiscipline in the expenditure pattern of oil revenue and an overwhelming
17 J.R. Jones, „Open Markets, Competitive Democracy, and Transparent and Reliable Legal Systems:
The Three Legs of Development,‟ 83 Chicago-Kent Law Review 25 (2007). 18 L.A. Kornhauser, „Governance Structures, Legal Systems, and the Concept of Law,‟ 79 Chicago-
Kent Law Review 355 (2004); J. Blocher, „Institutions in the Market Place of Ideas,‟ 57 Duke L.J.
821 (2008). 19 M.Fitzmaurice, Exploitation of Natural Resources in the 21
st Century (International Energy and
Resources Law and Policy), The Hague, Kluwer Law International, 9-113 (2004).
10
dependence on an easy single income which is unsustainable because of the non-renewable
and wasting nature of oil resources.20
This work dwells on the long run problem implied in the structure of oil- based economies
considering the wasting nature of their resources. A planning model is developed pursuant
to examining the perspective investment strategies of a typical oil based economy, which is
Nigeria.
The model is formulated in the framework of economic analysis of law theory and optimum
choice over time. The inherent nature of a petroleum-exporting country is expressed first by
means of a macroeconomic model which is subsequently invoked in the optimization
process of the legal paradigm.
1.3 AIMS AND OBJECTIVES
Perhaps the major purpose of the State is the efficient and optimal husbandry of human
capital and natural resources for economic growth and development. Most oil-based
economies have been grappling with the problem of how to transit from the state of mere
collectors of ground rents from transnational oil corporations to highly integrated and
modern economies propelled by revenues from the exploitation of their oil resources. This
study attempts to establish a legal charter for the economic transformation of the Nigerian
oil economy, such that when its oil resources has been exhausted, it would have
accumulated sufficient stock of non-oil assets for sustainable growth and development in
the post-oil epoch.
20 M.M. Metwally, „Long-Term Relationship Between Oil Revenue and Government Expenditure in
GCC Countries,‟ 24 International Journal of Energy Research 605-613 (2002).
11
The specific objectives of the study are:
1. To establish a legal paradigm that is adaptive to oil-based economies which will serve
as a charter for the planned expenditure of Nigeria‟s oil revenues thereby establishing
linkages in her economy and catalyze economic growth and development.
2. To examine the nature of the rentier State structure in oil based economies. The nature
and structure of the Nigerian State determines its capacity to deliver social goods and
services for the wellbeing of the citizens.
3. To appraise development strategies, the role of the State, law and legal institutions and
planning in the attainment of sustainable growth and development.
4. To appraise the existing legal and institutional framework for energy resource
management in Nigeria.
5. To provide a perspective on the paradox of abundance and want in oil-based economies.
1.4 OPERATIONAL DEFINITION OF TERMS
The operational definitions of the following recurrent terms and concepts in the study are as
follows:
1.4.1 GROWTH AND DEVELOPMENT:
Economic growth is defined in the context of this study as a positive change in the level of
production of goods and services by a country over a certain period of time. In this regard,
nominal growth is defined as economic growth including inflation, while real growth is
nominal growth minus inflation; real growth is nominal growth minus inflation. Economic
12
growth is usually a function of high productivity brought about by technological innovation
and positive macro/micro economic indicators. The study defines economic development as
the quantitative measure of economic progress in an economy. It refers to development and
adoption of new technologies, transition from agrarian to industrial economy and the
general quantifiable improvement in the living standards of the citizenry. A major goal of
poor countries is economic development and economic growth. The two terms are not
identical. Growth may be necessary but not sufficient for development. Economic growth
refers to increases in a country‟s production or income per capita. Production is usually
measured by gross national product (GNP), an economy‟s total output of goods and
services. Economic development refers to economic growth accompanied by changes in
output distribution and economic structure. This changes may include an improvement in
the material well-being of the poorer half of the population; a decline in agriculture‟s share
of GNP and a corresponding increase in the GNP share of industry and services; an
increase in the education and skills of the labour force; and substantial technical advances
originating within the country.21
In a reflection over the United Nations Organization‟s first
development decade (1960-1970) target, Seer posed the following questions as determinant
of development:
What has been happening to poverty? What has been
happening to unemployment? What has been happening
to inequality? If all three of these have become less
severe, then beyond doubt this has been a period of
development for the country concerned. If one or two of
these central problems have been growing worse,
21 E. W. Nafziger, The Economics of Developing Countries, Upper Saddle River, NJ, Prentice Hall, 9-
10 (1997).
13
especially if all three have, it would be strange to call
the result „development,‟ even if per capita income has
soared.22
The focus on national income as target for achieving poverty reduction
avoided the real problems of development, argues Seers. He attempted
to redefine how development was measured and offers policy lessons
which are particularly foretelling for today in light of the Millennium
Development Goals. He posits that there is no real „development‟ when
the benefits of technology and progress helped only a small number of
people, who are already relatively rich. National income according to
him does not show a realistic picture of the causes or problem of
poverty.
In 1972, Robert McNamara, then World Bank president, declared that
despite the relative rapid economic growth of developing countries, the
world remains one:
in which hundreds of millions of people are not only
poor in statistical terms but faced with day-to-day
privations that degrade human dignity to levels which no
statistics can adequately describe…Two-thirds of the
children (who live beyond five years of age) have their
physical and mental growth stunted by malnutrition.
22 D. Seers, „The Meaning of Development,‟ 11 International Development Review 3-4 (1969).
14
There are 100 million more adult illiterates than there
were twenty years ago. Education and employment are
scarce, squalor and stagnation common.23
According to Easterlin, growth may be defined as a rapid and sustained
rise in real output per head and attendant shifts in the technological,
economic and demographic characteristics of a society. Growth encom-
passes the concepts of social and political development which denotes in-
novation in various aspects of individual behaviour and social organiza-
tion. 24
1.4.2 ECONOMIC DEVELOPMENT/UNDERDEVELOPMENT:
Economic development is the quantifiable improvement in the living standards of the
citizenry in a modern State economy, brought about by high productivity as a result of
technological innovations. Underdevelopment connotes an economic state relating to
societies in which the surplus capital, infrastructure and stock of national assets and the
State capacity necessary for economic advancement are grossly inadequate or lacking.25
According to the New Encyclopaedia Britannica, national income per capita is the
conventional criteria of economic development and underdevelopment:
23 R.S. McNamara, Address to the UN Conference on Trade and Development, Santiago, Chile, April
14, 1972 Washington, D.C. , World Bank, 2-3 (1972). 24 R.A. Easterlin, „Economic Growth: Overview,‟ in D. L.Sills (ed.), International Encyclopedia of the
Social Sciences, Vol. 3, New York, The Macmillan Company and the Free Press, 395-407 (1972). 25 N.J. Udombana, Human Rights and Contemporary Issues in Africa, Lagos, Malthouse Press Ltd.,
3-33 (2003).
15
….This criterion may be applied to the level or to the
rate of growth of per capita income. The
„underdeveloped‟ countries are usually defined as those
with a much lower level of per capita income than the
„developed‟ countries.
The income per capita definition of underdevelopment is
based on the selection of an arbitrary level of per capita
income (for example $500.00 a year); the countries with
per capita income below this level are put in the
underdeveloped category.26
To Streeton,
Development means modernization, and modernization
means transformation of human beings. Development as
an objective and development as a process both embrace
a change in fundamental attitudes to life and work, and
in social, cultural and political institutions….27
More specifically, Streeten sees the process of development in terms of
progress in a number of interrelated dimensions: (i) output and incomes
(ii) conditions of production (iii) levels of living (including, health and
26 The New Encyclopaedia Britannica, Vol. 6, London, Encyclopaedia Britannica Inc., 202-210 (1974). 27 P. Streeten, The Frontiers of Development Studies , London, Macmillan, 15, 30 (1972).
16
Education), (iv) attitudes to work, (v) institutions and (vi) policies.28
Szentes view on the use of per capita income as measure of develop-
ment/underdevelopment is very pessimistic:
This indicator, however, may prove extremely
misleading. It conceals essential differences existing in
the socio-economic relations of individual countries and
do not reveal anything about the actual distribution of
national income and methods of its utilitization. But it is
even more deceptive if used to define
underdevelopment, to disclose its true causes and to
delineate the group of developing countries. Thus if we
regard underdevelopment as a temporary state
characterized by a statistical index number, we can not
understand its causes and can not answer the questions
what impediments hamper rapid economic development
in countries concerned, and, consequently, what
obstacles have to be removed in order to liquidate this
state in the shortest possible time.
Consequently, underdevelopment despite the original
sense of the word does not mean either a dropping out of
and lagging behind development or an earlier stage of
28 Ibid.
17
the general process of evolution; but just the contrary, it
is the result of a specific, distorted development. It is for
this reason that no analogy can be drawn between the
present conditions of these countries and the former
state of the developed capitalist countries.29
According to Colman,
Development can be considered either as a process of
improvement with respect to a set of values or, when
comparing the relative levels of development of
different countries, as a comparative state of being with
respect to such values. The values in question relate to
desired conditions in society. Self-evidently, there is no
universal agreement about what these desired conditions
should be; individuals certainly have different
preferences regarding their life-style and relationships
with the rest of society and through their political
manifestos nations express different collective (majority
or minority) views about the desired state of society-
view which change through time. Inevitably therefore,
the rate or the relative level of a country‟s development
is a normative concept whose definition and
29 T. Szentes, „The Main Theoretical Questions of „Underdevelopment‟,‟ in J. Nyilas (ed.), Theory and
Practice of Development in The Third World, Budapest, Akademiai Kiado, 15-49 (1977); N.J.
Udombana, Human Rights and Contemporary Issues in Africa, 1-33 (2003).
18
measurement depend upon the value judgements of the
analysts involved.30
1.4.3 RENTIER STATE:
In the context of this study, a rentier State is a State reliant not on the appropriation of the
domestic population‟s surplus production but on external receipts derived from the export
of a commodity, or rents, like external receipts from export of oil. In this regard, a rentier
State is founded on a rentier economy in which income from rent dominates the distribution
of national income. A rentier State generally lacks a productive base since the income
derived from the bounty of nature accounts for a disproportionate share of the Gross
Domestic Product (GDP).
According to Hazem Beblawi and Giacomo Luciani:
A rentier State is any State that derives a substantial part
of its revenue from foreign sources and under the form
of rent (that is, because specific conditions allow it to be
the direct beneficiary of income derived from selling
goods or services at prices well above their production
costs). This is a rather restrictive definition that says
little about the economy. Alternatively, one could put
greater emphasis on the economy, and define the
concept of „rentier economy,‟ which is either an
30 D. Colman, Economics of Change in Less Developed Countries, Delhi, B.R. Publishing Corp., 2-
15 (1980).
19
economy substantially supported from rent accruing
from abroad; or more generally an economy in which
rent plays a major role. A rentier State is then a sub-
system associated with a rentier economy31
They further insist on three essential features of a rentier economy:
(i) rent cannot be the only kind of income in the economy, but it should
predominate; (ii) the origin of the rent must be external to the econo-
my, as „pure internal rent boils down to a situation of domestic pay-
ments transfers;‟ (iii) a minority in the population must be engaged in
the generation of the rent, while the majority is involved only in the
distribution or utilisation of it. A rentier economy would in all pro-
bability generate a rentier State, and is in any case strictly connected
with the spread of a rentier mentality, which in turn has important pol-
itical and development consequences. They further submit:
In such oil-rentier economies, the State becomes the
intermediary between the oil sector and the rest of the
economy. It receives revenues which are channelled to
the economy through public expenditure, and since
public expenditure generally represents a large
proportion of national income, the allocation of these
public funds between alternative uses has great
31 H. Beblawi and Giacomo Luciani, The Rentier State, New York, Routledge, 11-12 (1987).
20
significance for the future development pattern of the
economy.32
The theory of the rentier State is a complex of associated ideas concer-
ning the patterns of development and the nature of States economies do-
minated by external rents, particularly oil rent. In its broadest sense ren-
tier States are those countries that receive on a regular basis substantial
amount of external economic rent 33
1.4.4 RENTIER ECONOMY:
A rentier economy is an economy where public finance is not derived significantly from
taxation but rather on rents derived from the export of an extractive commodity, for
example oil. Thus the State in rentier economy has an untrammelled existence from civil
society and released from democratic obligations to its taxpayers. The extractive industry is
the dominant economic activity and it progressively eclipse other economic activities in the
rentier economy. The extractive product contributes the highest proportion of the Gross
Domestic Product (GDP).
In his characterization of a rentier economy, Knowles argues that:
Two important elements contribute to the concept.
Firstly, as is apparent from the five different types, rent
will exist in all national economies. However, in a
rentier economy rent is the predominant contributor to
32 Ibid. 33 D.G. Yates, The Rentier State in Africa: Oil Rent Dependency and Neo-colonialism in the
Republic of Gabon, Trenton, NJ, Africa Press, 16-21 (1996).
21
the national income. Secondly, as the concept is being
defined for the purpose of analysing the relationship
between the State and the private sector, the rent in
question must be external. A preponderance of internal
rent would have no effect on this relationship, merely
creating a strong rentier class or group but still requiring
the existence of a strong productive sector in order to be
maintained. Consequently, a rentier economy is one in
which external rent contributes significantly to the
national income or, as Mahdavy argues, a „rentier
economy is an economy which relies on substantial
external rent.‟34
1.4.5 PARADOX OF ABUNDANCE:
The paradox of abundance and want denotes the complex condition which occurs in
resource endowed economies, who fail to develop economically inspite of their abundant
natural resources. The lack of economic development is as a result of governmental
mismanagement of resource revenues. Resource abundance has not translated to the well-
being of the impoverished mass of the citizens in this group of nations, hence the inverse
relationship between resource abundance and mass impoverishment in these nations. It
connotes the relationship which exists between the management of the extractive sector and
resultant mass impoverishment; where there is a disconnect between stupendous resource
endowment and pervasive poverty, there exists a paradox of abundance and want.
34 W. Knowles, Jordan Since 1989: A Study in Political Economy, London, I.B.Taurus, 7 (2005).
22
The paradox of abundance and want denotes the complex condition which occurs in
resource endowed economies, who fail to develop economically inspite of their abundant
natural resources. The lack of economic development is as a result of governmental
mismanagement of resource revenues. Resource abundance has not translated to the well-
being of the impoverished mass of the citizens in this group of nations, hence the inverse
relationship between resource abundance and mass impoverishment in these nations.
Alexeev, however found no correlation between natural resource endowments and the
quality of institutions if the calculations are done correctly. Previous analysis that found
such link, he says, were skewed by using per capita gross domestic product (GDP) as
controlling variable. That approach resulted in comparing countries with high GDP and
strong institutions with those that have high GDP purely because of resource wealth, for
example, comparing Portugal with Kuwait. In essence according to him, the logic of the
earlier work was as follows: most countries with high GDP have good institutions. Natural
resource rich countries, however, have high GDP but poor institutions. Therefore, natural
resources must, lead to poor institutions. In his analysis, the author calculated what he
believed countries‟ GDP would be if they did not have oil. With oil-driven increases in
GDP removed from the equation, the presence or absence of oil had no impact on the
quality of national institutions. he compared Russia, Ukraine and Belarus. Russia has
extensive deposits of oil, gas and minerals; Belarus has almost none; and Ukraine is in
between. If there were a natural resource curse, Russia would be expeted to have the worst
institutions and Belarus the best. In fact, Russia and Ukraine have similar scores for
institutional quality, and Belarus scores much worse.35
35 M. Alexeex, „The Elusive Curse of Oil,‟ 86 The Review of Economics and Statistics 303-312
(2005).
23
The idea that natural resources might be more an economic curse than a blessing began to
emerge in the 1980s. In this light, the term resource curse thesis was first used by Auty in
1993 to describe how countries rich in natural resources were unable to use that wealth to
boost their economies and how, counter-intuitively, these countries had lower economic
growth than countries without an abundance of natural resources.36
This disconnect between
natural resource wealth and economic growth can be seen by looking at an example from
the oil-producing countries. From 1965-1998, in the OPEC countries, gross national product
per capita growth decreased on average by 1.3 per cent, while in the rest of the developing
world, per capita growth was on average 2.2 per cent. It seems to conventional wisdom that
natural resources in general and oil in particular, are a „curse‟ rather than a „blessing.‟ The
growing literature on the „resource curse‟ and the „paradox of abundance‟37
has established
important causal chains linking resource abundance and dependence to corruption,
authoritarianism, economic decline and violent conflict. Oil-dependent countries in
particular, it has been frequently argued, are among the most economically troubled, the
most authoritarian, and the most conflict-ridden States in the world.38
As regards violent
conflict, resource curse theory claims that resource abundance provides both finance and
motive for armed conflict, that is, the so called „greed and grievance,‟ adverse effects on the
economy and institutions create further indirect causes of violence.39
Empirically, both
quantitative and country case studies have established evidence that resource dependent and
abundant countries are indeed more likely to lapse into domestic violence40
and the debate
36 R.M. Auty, Sustainable Development in Mineral Economies the Resource Curse Thesis, London,
Routledge, 1, 13 29, 46, 175, 220, 241 (1993). 37 T.R. Karl, The Paradox of Plenty: Oil Boom and Petro-States, Berkeley, University of California
Press, 510, 20, 35-90 (1997). 38 P. Collier, Greed and Grievance in Civil War, Washington D.C., World Bank, 45 (2001). 39 M.L. Ross, „The Natural Resource Curse: How Wealth Can Make You Poor,‟ in I.Bannon (ed.),
Natural Resources and Violent Conflict: Options and Actions, Washington D.C. World Bank, 17-42
(2003). 40 P.Collier, Greed and Grievance in Civil War, Washington D.C. World Bank, 5-150 (2001); I.de
Soysa „Paradise is Bazaar? Greed, Creed and Grievance in Civil War 1989-1999, 39 Journal of Peace
Research 395-416 (2002).
24
is already moving towards recommendations in terms of actions and options for conflict
prevention and resolution.41
1.4.6 OIL-BASED ECONOMY:
Within the context of this study, oil-based economy denotes an economy characterized by
overwhelming dependence on revenues from the export (and not the internal consumption)
of petroleum, as measured by the ratio of oil and gas to GDP, total exports, and the
contribution to central government revenue. Dependence on oil is generally measured by
the ratio of oil and gas exports to gross domestic product; in nations dependent on oil rents,
this figure range from cameroon‟s 4.9 per cent to a high of between 75 to 86 per cent for
Equatorial Guinea and Nigeria. Dependence is also reflected in export profiles, with oil in
dependent countries generally accounting for between 60 to 95 per cent of exports.42
Kalynzhnova, characterized an oil-based economy thus:
Azerbaijan, Kazakhstan and Turkmenistan represent
examples of natural resource-based economies.
Commonly a resource based economy is defined as one
where natural resources account for „more than 10 per
cent of GDP and 40 per cent of export. However, we
would stress that these data are based on a narrow
definition of the hydrocarbon sector: they understate the
reality of this sector in their national economies.43
41 P. Collier, Breaking the Conflict Trap: Civil War and Development Policy, London, Oxford
University Press /World Bank 5-90 (2003). 42 S.Goldsmith, „Economic Instability in Petroleum-Based Economies,‟ 16 OPEC REVIEW 41-61
(2008). 43 Y.Kalyuzhnova, Economics of the Caspian Oil and Gas Wealth: Companies, Governments,
Policies, London, Palgrave Macmillan, 7-10 (2008).
25
In his examination of the nature of the economies of the Arab Gulf Co-
Operation Council States, (AGCC) Ibrahim underscores the fact that:
The AGCC States are mainly oil economies sharing
around 20 per cent of global crude oil production, and
45 per cent and 17 per cent of the world‟s known oil and
natural gas reserves respectively. Oil revenues
contribute over 40 per cent of GDP for all States, except
Bahrain, in which the share is the range of 25 per cent.
The oil share in export proceeds is not less than 70 per
cent. Oil is also the leading driver of governments‟
activities and provider of support to private-sector
spending.44
According to Amuzegar, oil-based economies are united by:
Two principal features: reliance on petroleum export
revenues as a mainstay of their economies; and primacy
of the State in the ownership, acquisition and disposition
of oil revenues. The centrality of State power, in
addition to the authoritarian nature of government in
nearly all members during most of 1974-1994 period,
was underpinned by a number of other factors. The legal
44 B. Ibrahim, Economic Co-Operation in the Arab Gulf: Issue in the Economies of the Arab Gulf
Co-Operation Council States, New York, Routledge, 1-6 (2007).
26
and constitutional ownership of mineral deposits by the
State empowered governments to make crucial decisions
regarding the magnitude of oil exploitation and
distribution of oil income.45
Olumuyiwa, based his characterization of Nigeria on the crite-
ria of its overwhelming dependence on oil revenue, direct accrual of oil
revenue to the State and the disproportionate share of oil in Gross
Domestic Product (GDP).46
I.4.7 HUMAN DEVELOPMENT
Human development in the context of this study is the process of creating an economic
social and cultural environment where the generality of the citizenry can develop and
actualize their full potentials pursuant to being functional, productive and creative members
of the society.47
1.4.8 SUSTAINABLE DEVELOPMENT
In the context of this study, sustainable development connotes the need to establish
equilibrium between the needs of humanity to improve general wellbeing and preservation
of natural resources and the ecology which in the context of inter-generational justice
impels the present generation to exploit natural resources responsibly. Consequently,
45 J. Amuzegar, Managing the Oil Wealth: OPEC’s Windfalls and Pitfalls, London, I.B. Taurus, 1-2
(2001). 46 S.A. Olumuyiwa, The Balance of Payments Analysis of Developing Economies: Evidence from
Nigeria and Ghana, London, Ashgate Publishing, 4-10 (2005). 47 UN GA Declaration on the Right to Development, A/RES/41/128, 1986; M.T. Ladan, „Human
Rights as the Benchmark For Development Policy,‟ 1 Journal of Economic, Social and Cultural
Rights, 1-26 (2002); Y. Osinbajo and O. Ajayi, „Human Rights and Economic Development in
Developing Countries,‟ 28 Int‟l Lawyer, 727-730 (1994).
27
sustainable development meets the needs of the present without disparaging the capacity of
future generations to meet their need from the natural resources endowment.
It denotes economic growth which is predicated on the protection of the environment;
economic and social development which do not result in radical depletion of natural
resources. It is the process of change in which the exploitation of resources, the pattern of
public and private investment, technological advancement and institutional change are
effected without undermining the present and future capacity of the nation to survive.
1.4.9 SUSTAINABLE HUMAN DEVELOPMENT
The individual is the unit of development; consequently the individual should be the focus
of the development process. Sustainable human development entails the conscious creation
of life opportunities for the future generation by preserving the ecology on which the
sustenance of depends. Consequently, economic growth is not an end in itself, but a means
to sustainable development. Economic growth does not translate automatically to
sustainable human development and the eradication of poverty.
Sustainable human development denotes the expansion of the individual‟s capabilities and
choices; enhancement of his ability to make choices whilst free of deprivation, diseases,
want and hunger.
1.4.10 GOOD GOVERNANCE
Governance in the context of this study is defined as the exercise of administrative, political
and economic authority in the management of a nation‟s affairs. It encapsulates the various
institutions of State, mechanisms and processes by which individuals and groups conceive
28
their interests, espouse it, protect their legal rights, discharge their obligations, and reconcile
differences.
As an objective function of the foregoing, good governance, has the following as its
essence; it is accountable, participatory and transparent; equitable and effective governance.
Good governance is characterized by the rule of law; good governance guarantees that
economic social and political goals are set and predicated on broad based consensus of a
broad spectrum of the citizenry and that the voices of the poorest and the most vulnerable
segment of the society are heard in decision-making regarding the allocation of
development resources.
1.4.11 ENERGY
Etymologically, the word energy is derived from the ancient Greek word, energeia which
translates to „activity, operation.‟ In physics, energy denotes a quantity that is often
understood as the ability which a physical system has to produce changes on another
physical system. It is a fundamental entity of nature that is transferred between parts of a
system in the production of physical change within the system and usually regarded as the
capacity for doing work.
1.4.12 ENERGY RESOURCES
In the context of this study, energy resource(s) denotes substances like hydrocarbon of
fossil fuels, solar energy, wind energy, electric energy; bio-fuels; nuclear energy and so
forth. These constitute sources of usable energy, in that they can be easily transformed to
other kinds of energy sources that can serve particular purpose. Consequently, energy, in
this context, must not be confused with energy in natural sciences, because energy resources
29
are not conserved in nature in the same way as energy is conserved in the context of physics
and chemistry. The production and consumption of energy resources is critical to economic
development because all economic activities require energy resources, to manufacture
goods, provide transportation, run machines, computers and all sorts of industrial devices
and equipment.
1.4.13 ENERGY RESOURCE MANAGEMENT
Energy resource management denotes the optimal and efficient husbandry of finite energy
resources which are wasting, and non-renewable. In the context of this study it underscores
the need for an oil-based economy like Nigeria to diversify away from oil-dependency to
the non-oil tradable sector by progressively accumulating a stock of non-oil capital assets. It
entails the coordinated and planned expenditure of oil revenue, equity in the allocative
process of such revenues and the establishment of an inter-temporal strategic planning
model of the over-all economy such that Nigeria would have been able to accumulate
sufficient stock of non-oil assets upon which to build a solid economic base in the post-oil
epoch when the stock of oil reserve would have been completely exhausted.
1.5 SCOPE AND LIMITATION OF STUDY
The main concern of the study is the examination of the peculiar economic problems
confronting Nigeria as member of the group of poor but oil rich countries of the third world.
The study adopts a multi-disciplinary explication of these problems while exploring the
prospect for annexing the instrumentality of law for the husbandry of Nigeria‟s oil
resources.
30
The study relies on secondary data in its analysis of the macro economic element in the
study. Specifically, it relies overwhelmingly on the variegated statistical reports of the
International Monetary Fund (IMF); The World Bank and the United Nations Organization;
Central Bank of Nigeria; United Nations Development Programme (UNDP); Federal
Ministry of Finance and the National Bureau of Statistics in its analysis.
1.6 RESEARCH QUESTIONS
The study shall examine the following questions:
1. What is the role of law and its institutions in economic development as such; and how
relevant is law and development theory in developing third world countries like
Nigeria?
2. Is the extant legal paradigm of energy resources management in Nigeria impacting
optimally on the economy and how effective is the contract paradigm in Nigeria?
3. What are the institutional reforms required to catalyse growth and development in
Nigeria and reverse the resource curse?
4. To what extent is sustainable poverty reduction and equitable economic development
dependent on the solid foundation of the rule of law; and how can law remedy the lag
between the orthodoxy of economic paradigm, economic policy; institutional
framework of policy implementation and the law?
5. What are corruption‟s long term impact on efficiency and equity, corruption and
institutional inertia and the general failure of the judicial system in Nigeria?
31
1.7 THEORETICAL FRAMEWORK
This study is an element of the generic field of law and development48
and employs the
theory of economic analysis of law theory49
as a heuristic device to establish congruence
between law and development in relation to the management of Nigeria‟s oil economy. The
study departs from the Anglo-American positivist and pragmatic formalism which
emphasize the binding and enforceable nature of law as such as „value free‟ norms. It
adopts the paradigm which promotes the conception of law as an important mechanism in
the dynamics of economic, social and political change.50
This conception of law is in line
with the thoughts of Guy de Lacharriere, who attempted an analysis of the gap between law
and social reality. He argues that law, as language, should be in close conjunction with
social reality and practice, rather than by what might be described as a systematic
exaggeration of the normative character of words and expressions.51
George Schwarzenberger dwells on some of the „meanings and functions of International
Development Law.‟ He analyzes the concept of development which is sometimes assumed
48 D.Trubek, The New Law and Economic Development: A Critical Appraisal, Cambridge,
Cambridge University Press, 1-18, 174,203 (2006); B.Simma, International Law and Sustainable
Development: Principles and Practice, New York, Brill Publishers, 5-700 (2004); P.Bergling, „Rule of
Law in Development and State Building: Conflicting Visions and Approaches,‟ paper presented at the
annual meeting of the Law and Society Association, TBA, Berlin, Germany July 25, 2007. Available at
http://www.allacademic .com/meta/p178186_index.html 49 R.A.Posner, . Economic Analysis of Law, New York, Aspen Law & Business, 10-103 (1999);
J.J.Miceli, The Economics Approach to Law, Stanford, Stanford University Press, 5-98 (2008);
D.D.Friedman, Laws Order: What Economics Has to Do With Law and Why it Matter, Princeton,
Princeton University Press, 7-96 (2001); R.Cooter, Law and Economics, New York, Addison Wesley,
17-125 (2007); E.Buscaglia, Law and Economics in Developing Countries, New York, Hoover
Institution Press, 7-150 (2000). 50 N.MacCormic, An Institutional Theory of Law: New Approaches to Legal Positivism, New York,
Springer, 1-248 (1986); N.McCormick, Institutions of Law: An Essay in Legal Theory (Law, State
and Practical Reason), Oxford, Oxford University Press, 3-336 (2008); A.Marmor, Interpretation and
Legal Theory, Portland, Hart Publishing, 9-160 (2005); H.L.A.Hart, The Concept of Law, Oxford,
Oxford University Press, 1-320 (1997); H.Kelsen, Pure Theory of Law, New York, Lawbook
Exchange, 1-350 (2005); R.Dworkin, Law’s Empire, Boston, Belknap Press of Harvard University
Press, 1-470 (1986); J.Austin, The Province of Jurisprudence Determined, New York, Prometheus
Books, 1-410 (2000). 51 G. de Lacharriere, „The International Law of Development: Words and Conduct,‟ in F.Snyder, (ed.),
International Law of Development: Comparative Perspectives, Abingdon, Professional Books Ltd.,
41 (1987).
32
without question to have a generally accepted meaning. On the basis of this treatment, he
suggests that the claims in favour of the recognition of an international development law
should be weighed against those of the „International Law of retrogression and the
„International Law of non-development.52
LAW AND DEVELOPMENT THEORY
The thrust of this theory is that it seeks to establish a nexus between law, growth and
development. It underscores the role of law in the development process. L.R. Sharyn
provides considerable new insight in respect of the law and development movement by
examining socio-legal research, and exploring the relationship between the law and other
aspects of social life. He dwells considerably on the social conditions under which laws
emerge and are changed; the extent to which law can be a resource to implement social
change and the ways in which laws shape social institutions and practices.53
Rum Sarkar, examines the policy framework of the rule of law programmes aimed at legal
reform and structural legal change, and examines emerging constitutional and sustainable
principles of development law and the institutional framework which it is unfolding. He
dwells on the impact on development from changes in the role of the State.54
52 G.Schwarzenberger, „Meanings and Functions of International Development Law,‟ in F.Snyder,
(ed.), International Law of Development: Comparative Perspectives, Abingdon Professional Books
Ltd., 49 (1987). 53 L.R.A.Sharyn, Law and Social Change, London, Sage Publications, 1-11, 12-230 (2003). 54 R.Sarkar, Development Law and International Finance, New York, Springer, 4-153 (2002);
R.Sarkar, Transnational Business Law: A Development Law Perspective, The Hague, Kluwer Law
International , 7-97 (2003).
33
Anton, attributes the Asian crisis of 1997 to lack of regulation and transparency and because
the role of law in development was neglected.55
Snyder‟s analysis is a pessimistic view of the role of law in development. He concludes that
development law is an ideology considering the inequality between nations. He submits that
development law does not fulfil the functions of law, to stabilize social arrangements, at
least, for a season or two; and to form a framework for a particular set of social conditions.
In his view the law exists and fulfils that function when it enables norms which can actually
be put into practice to arise above social antagonism, and to settle it in equilibrium, which is
acceptable and recognized by the parties. Thus, under this schema, development law, is an
antithesis of the foregoing. Development law is pure legal formalism; formalism in this
perspective gives appearances primacy over reality.56
ECONOMIC ANALYSIS OF LAW
Consequent upon the imprecision characterizing Bentham‟s utilitarianism, particularly, its
inability to establish a model, which will render the impact of a decision, policy and, most
importantly, of a law calculable with a high degree of precision and rigour; the field of
economic analysis of law emerged as a scientific option to utilitarianism.57
Unlike utilitarianism, economic analysis of law offers a scientific schema, for calculating
the relative variations in the level of pleasure of one individual to another. Borrowing the
55 C.Anton, Law and Development in East and South East Asia, London, RoutledgeCurzon, 7-145
(2002). 56 F.G.Snyder, International Law of Development, London, Butterworth Law, 1-140 (1987);
J.Hatchard, Law and Development: Facing Complexity in the 21st Century, London, Routledge
Cavendish, 43 (2003). 57 P.Schofield, Utility and Democracy: The Political Thought of Jeremy Bentham, Oxford, Oxford
University Press, 28-50 (2006); J.Bentham, The Work of Jeremy Bentham: Published Under the
Superintendence of His Executor, John Bowring, London, Adamant Media Corporation, 155 (2005).
34
notion of value which is the central theme of the rationalist school of economics, it
proceeded to adumbrate that a thing has value, that is, utility, for an individual when he
values it. The value an individual invests in a thing is determined and calculated by the
maximum that a person would be willing to pay for it or the minimum the person will be
prepared to accept to pass property in it. The foregoing assumption of economists is hinged
on two props. Firstly, they examined the concept of private property rights and attempted to
found its basis on rationality. They posit that where ownership of a scarce good does not
reside in a finite entity, there are bound to be cost implications in terms of disutilities which
will be borne by the society. Thus they adumbrate, further that, where the cost of
establishing a system of ownership rights is comparatively lesser than the cost of external
disutilities. Then, by necessary implication vesting property rights in finite entities would
negate those disutilities and provide a rational justification for the institution of private
ownership of property in the society.58
Secondly, they dwelt on optimilization, which is the rational and efficient allocation of
resources in the production process such that the optimum utility is derived by choosing
between competing uses of resources or „alternative transactions.‟ The institution of private
ownership according to them stabilizes expectations by vesting property rights in finite
entities.59
58 B.Ben-Amitai, „Incommensurability of Values Thesis and its Failure As a Criticism of
Utilitarianism,‟ 19 Canadian Journal of Law and Jurisprudence 50-67 (2006) ; D.Alexander, „A
Law and Economics Look at Contracts Against Public Policy,‟ 199 Harv., L. Rev. 34-45 (2006);
G.Calabresi, „Transaction Costs, Resources Allocation and Liability Rules: A Critical Comment,‟ 11
Journal of Law and Economics 40-60 (1968). 59 A.Mas-Colell, Micro-Economic Theory, Oxford, Oxford University Press, 3, 17, 40-912 (1995);
L.Ki-Zerbo, „Schutz and The Rational Choice Debate in African Economics,‟ 14 The Review of
Austrian Economics 157-172 (2001).
35
Drawing prototypes overwhelmingly from the works of Pareto, the lexicon of the field of
economic analysis of law is replete with economics terms such as optimality, allocation and
distribution, efficiency and superiority.60
Economic analysis of law proceeds from the fundamentals of Pareto optimality and
efficiency. Where at least one person is made to believe that he will be worse off on account
of a change in a situation, then that situation can be characterized as Pareto optimal since it
is impossible to alter it without such a person believing he is worse off than before the
change.61
Concomitantly, where at least one individual believes that he is better off on account of a
change in a situation, then, that change is characterized as Pareto superior to another
alternative.62
We must hasten to enter a caveat to the effect that the characterization of the terms
superiority and optimality are not predicated on objective criteria in the evaluation of goods,
rather they are subjectively derived through a non-rational process. An individuals
conclusion, which is conjecturally reached as to whether he will be better off, worse off or
the same under a new law or policy is calculated by the extent to which they are amenable
to giving a price for the change, what is going to be the quantum of that price, or to embrace
60 T.Pyzdek, The Six Sigma Handbook: The Complete Guide for Managers at All Levels, New York,
McGraw-Hill, 259-260 (2003). 61 G.Becker, The Economic Approach To Human Behavior, Chicago, University of Chicago Press, 3-
282 (1978). 62 R.E.Lucas, Jr., „Some Macroeconomics for the 21st Century,‟ (2000) 14 Journal of Economic
Perspective 159-168 (2000).
36
the change only if there is a form of reward accruing to them, and what is going to be the
nature and quantum of that reward.63
One of the basic assumptions of the Pareto superiority standard is that it is applicable in
situations where all are winners and no one is in any way disparaged by the new law or
policy, that is, no losers. This assumption flounders in the face of practical reality, as it is
inconceivable and improbable that there could be a policy or a law which does not create
both winners and losers. Thus, an unqualified application of the Pareto test to evaluate in
calculable form the economic impact of a policy or law may yield outcomes in abstraction,
which are not replicable and verifiable empirically.64
The foregoing inanity of the Pareto test can be obviated by introducing compensation as a
variable, while concomitantly allowing for the possibility of hypothetical compensation.
Under this reformulation, it is not required, as demanded under the Pareto formula, that no
one be made worse off by a variation in resource allocation; in contrast it makes a
distinction, to the effect, that, the proportionate added value to the society is far larger than
the cost which will be borne by losers in the short run on account of the change.65
The assumption under this model is that, the long-term positive impact of the change in
allocation of resources would progressively cancel out and negate the untoward impact of
the policy on losers. This schema is not without its fair share of negative review chief
amongst which is, that it is too deterministic and that the hypothetical nature of the
63 R.E.Lucas, Jr., Recursive Methods in Economic Dynamics, Cambridge, Ms., Harvard University
Press, 239 (1989). 64 Note 57 supra, at 260. 65 Ibid.
37
compensation under the schema may lead to injustice and inequitable redistribution of
wealth.66
The missing link in all the foregoing economic assumptions is the failure to reconcile
efficiency with justice. There is a need to attach an ethical value to what is efficient and
optimal, but then, economists avoid being caught in a moral web as they regard ethical
notions such as justice and equity irreducible to scientific evaluation.67
The foregoing, it would seem, underscores a fundamental flaw in the economic notion of
efficiency. For how do we, for instance, determine the efficiency of disproportionate
allocation of resources to the production and procurement of weapons to the detriment and
neglect of basic necessities such as food production and health in an economy?68
To the economist, that may not be suboptimal allocation of resources, provided that certain
indicia of economic growth are discernable; such as the size of the rate of return, the
increase in the tradable content of the economy, and the relative contribution of the military
industrial complex to the Gross Domestic Product. It will be immaterial to the economist,
that it is a small proportion of the population that benefits from the gains of such a policy,
while the preponderance of the population is shut-out, completely untouched by this
seeming gains.69
G. Calabresi‟s point of departure is the neo-classical assumption „if one assumes
rationality, transaction costs and no legal impediments to bargaining, all misallocation of
66 Ibid.; R.E.Lucas, Jr., „On Efficiency and Distribution,‟ 102 Economic Journal 233-47 (1992). 67 M.Friedman, Essays In Positive Economics, Chicago, University of Chicago Press, 3, 47, 100, 117-
301 (1966). 68 Ibid. 69 Ibid.
38
resources would be fully cured in the market by bargains‟ Calabresi, alongside others in the
neo-classical school of law and economics, adumbrates the ideal world that should exist, in
which transactions will be efficient, that is a world without transaction costs.
A corollary of that position is their policy thrust, based on the premise that the government
should strive to eliminate transaction or „social costs,‟ thereby making the market more
efficient by having it emulate, as much as possible, a market without transaction costs. The
assumption about transaction cost is predicated on the economic notion of efficiency.
Calabresi dwells considerably on the Coase theorem and alludes to relationships between
economic externalities and transaction costs, the roles of uncertainty and asymmetrical
information in the size-distribution of transaction costs.70
Implicit in his work is the fundamental premise of transaction cost economics, that
transaction is the basic unit of analysis, and that economic governance is a prerequisite for
economic resource optimization and enhancing economic efficiency. Under this schema,
transaction entails exchange costs and these matter at all levels, in both the short and the
long run. In itself, transaction cost economics is an approach to the study of economic
systems and organizations, the comparative merits of alternative forms of economic
organizations, (often called assessment of discrete structural alternatives) with its focus on
micro analytic and behavioural assumptions governing the static or dynamics of economic
agents and institutions, and based on an integrated perspective of institutions, the law and
economics71
In an earlier effort, Coase attempted the definition of transaction cost thus, „in order to carry
out a market transaction, it is necessary to discover who it is that one deals with to inform
70 G.Calabresi, „Transaction Costs, Resources Allocation and Liability Rules: A Critical Comment,‟ 11
Journal of Law and Economics 67- 73 (1968). 71 Ibid.
39
people that one wishes to deal and on what terms, to conduct negotiations leading up to a
bargain, to draw up a contract, to undertake the inspection needed to make sure that the
terms of the contract are being observed and so on,‟ This Coasean formulation perhaps
constitutes the central feature of transaction cost economics.72
D.D. Friedman suggests that there is a strong correspondence between efficiency and
justice, since efficiency is the foundation of modern economics, he argues, economics can
be used to explain and shape the law in ways that can benefit humanity. His approach is
also modelled upon the works of the noted British economist, Ronald Coase.73
R. A. Posner posits that economics can be used to illuminate the entire range of the legal
field, including the common law fields such as contracts, torts, property, procedures and
criminal law and statutory and constitutional fields such as anti trust, corporations, taxation,
welfare law, freedom of speech, and taxation of interstate commerce. To him, common law
fields in particular, often turn out to be best explained on the hypothesis that judges,
fashioning rules of law, are attempting to maximize social wealth, that is, judges in their
judgements try to maximize wealth in the economic sense. Under this schema, attempts are
made to use economic analysis to predict the effects of various legal rules. He underscores
efficiency as the key concept for normative law and economics, that is „Pareto efficiency‟
under this schema, a legal rule is Pareto efficient if it makes at least one person better off
and it makes no person worse off. Posner‟s analysis is predicated on the neo-classical
rational choice theory, the zero transaction cost and risk allocation.74
72 R.H.Coase, The Firm, the Market, and the Law, Chicago, University of Chicago Press, 1-215
(1990). 73 D.D.Friedman, Laws Order: What Economics Has To Do With Law and Why It Matter, Princeton,
Princeton University Press, 3-309 (2001). 74 R.A.Posner, Economic Analysis of Law, New York, Aspen Law & Business, 3-802 (1999).
40
T.J. Miceli, posits that law‟s correlation with economics is based on the fact that law like
economics provides materials for the evaluation of theories of rational behaviour, and that
the two disciplines relate in varying degrees to incentives. That is, rational decision-makers
in economics act to further their self-interest subject to the constraints that they face. The
economic approach to law assumes that rational individuals view legal sanctions (monetary
damages, prison, and death sentence) as implicit prices for certain kinds of behaviour, and
that these prices can be set to guide this behaviour in a socially desirable direction.75
THE RELEVANCE OF LAW AND DEVELOPMENT
The debate has raged since the inception of the domain of law and development as to its
relevance to economic development as such, and even as that unresolved question dogged
the field of law and development studies in its early beginning. The jury is now out as to its
relevance in developing and the group of very poor countries.
The question that is being stridently posed is that, given the crises which bedevilled the
field of law and development study at inception and the scepticism as to its relevance and
efficacy in solving the social/economic problems of the industrialized societies which were
its field of application of first instance, how relevant is it in the development process of
third world countries? Doubts are being expressed in ultra pessimist circles that aside from
the dangers inherent in wholesale unqualified importation of law and development dogma
into the social, economic and political milieu of third world countries without regard to the
dissimilarities in the different planes of application; fears are also being expressed that the
identified inanities of the law and development theory in its application to industrialized
75 T.J.Miceli, The Economics Approach to Law, Stanford, Stanford University Press, 4, 1, 7,5,13
(2008).
41
societies may be inflicted upon third world countries, thus compounding their problems,
rather than being instrumentality for solving those problems.76
76 J.Hatchard, Law and Development: Facing Complexity in the 21
st Century, London,
RoutledgeCavendish, xi-xiii, 1-312 (2003); W.Twining, „Law and the Millenium Development Goals,‟
Paper Presented at the Annual Meeting of The Law and Society Association, TBA, Berlin Germany,
July 24, 2007. Available at http://www.all academic.com/meta/p208106_index.html; P.Hamilton, Max
Weber: Critical Assessment, London, Routledge, 149 (1991); E.W.Thomas, The Judicial Process:
Realism and Principles, Cambridge, Cambridge University Press, 287 (2005; The International Legal
Center, Law and Development: The Future of Law and Development, New York, The Nordic Africa
Institute, 58 (1975); T.R.S.Allen, „Legislative Supremacy and the Rule of Law: Democracy and
Constitutionalism,‟ 44 Cambridge Law Journal 111-143 (1995); T.Carothers, „The Rule of Law
Revival,‟ 77 Foreign Affairs 95-106 (1998); R.D.Cooter, „The-Rule-of-State Law and the Rule-of-
Law State: Economic Analysis of the Legal Foundations of Development,‟ in The Proceedings of the
Annual World Bank Conference in Development Economics, Washington D.C., The World Bank,
191-217 (1997); P.Craig, „Formal and Substantive Conceptions of the Rule of Law: An Analytical
Framework,‟ 5 Public Law 467-487 (1997); Y.Ghai, „The Rule of Law, Legitimacy, and Governance,‟
14 International Journal of the Sociology of Law 179-208 (1986); M.P.Golding, „Transitional
Regimes and the Rule of Law,‟ 9 Ratio Juris 387-395 (1996); B.R.Weingast, „The Political
Foundations of Democracy and the Rule of Law,‟ 91 American Political Review 245-263 (1997);
T.Hobbes, Leviathan, New York, Collier Book, 1651 (1962); S.Knack, „Institutions and Economic
Performance: Cross-Country Tests Using Alternative Institutional Measures,‟ 7 Economics and
Politics 207-227 (1995); R.Barro, „Economic Growth in a Cross-Section of Countries,‟ 106 Quarterly
Journal of Economics 407- 444 (1991); A.Brunetti, „Political Credibility and Economic Growth in
Less Developed Countries,‟ 5 Constitutional Political Economy 23-43 (1994); A.Chong, „Causality
and Feedback Between Institutional Measures and Economic Growth,‟ 12 Economics and Politics 69-
81 (2002); C.Clague, „Property and Contract Rights in Autocracies and Democracies,‟ 1 Journal of
Economic Growth 243-276 (1996); D.S.Clark, „Judicial Protection of the Constitution in Latin
America,‟ 2 Hastings Constitutional Law Quarterly 405-442 (1975); W.J.Henisz, „The Institutional
Environment for Economic Growth,‟ 12 Economics and Politics, 1-31 (2002); P.Keefer, „Why Don‟t
Poor Countries Catch Up? A Cross-National Test of an Institutional Explanation,‟ 35 Economic
Inquiry 590-602 (1997); R.La Porta, „The Quality of Government,‟ 15 Journal of Law, Economics,
and Organization 222-279 (1999); R.La Porta, „Legal Determinants of External Finance,‟ 52 Journal
of Finance 1131-1150 (1997); P.Mauro, „Corruption and Growth,‟ 110 Quarterly Journal of
Economics 681-712 (1995); M.Olson, „Big Bills Left on the Sidewalk: Why Some Nations are Rich,
and Others Poor,‟ 10 Journal of Economic Perspectives 2-24 (1996); D.M.Trubek, „Scholars in Self-
Estrangement: Some Reflections on the Crisis in Law and Development,‟ 50 Wisconsin Law Review
1062-1101 (1974); J.H.Merryman, „Comparative Law and Social Change: On the Origins, Style,
Decline and Revival of the Law and Development Movement,‟ 25 The American Journal of
Comparative Law 457-83 (1977); J.Faundez, Good Governance and Law: Legal and Institutional
Reform in Developing Countries, New York, St. Martins Press, 3-15, 16 -300 (1997); J.Faundez,
Democratization, Development, and Legality: Chile, 1831-1973, London, Macmillan, 1-16, 17, 55,77,
105, 127, 201, 227 (2007); R.E.Messick, „Judicial Reform and Economic Development: A Survey of
the Issues,‟ 14 The World Bank Research Observer 117-36 (1999); W.Ewald, „Comparative
Jurisprudence (II): The Logic of Legal Transplants,‟ 43 American Journal of Comparative Law 489-
510 (1995); M.Elliot, The Constitutional Foundations of Judicial Review, Portland, Hart Publishing,
37, 105, 166, 247 (2001); N.F.Campos, „Development Performance and the Institutions of Governance:
Evidence From East Asia and Latin America,‟ 27 World Development 439-452 (1999); S.Zhao,
Debating Political Reform in China: Rule of Law Vs. Democratization, New York, M.E. Sharpe, 5-
270 (2006); P.T.Zeleza, Human Rights, the Rule of Law and Development in Africa, Philadelphia,
University of Pennsylvania Press, 21-23, 109,120 (2004); N.J.Diamant, Engaging the Law in China:
State, Society, and Possibilities for Justice, Stanford, Stanford University Press, 3,54,74-76 (2005);
M.Tamayo-Calabrese, „The Rule of Law and Economic Development: An Overview On the Region,‟
25 Arizona Journal of International and Comparative Law 267-297 (2008); J.Rose, „The Rule of
Law in the Western World: An Overview,‟ 35 Journal of Social Philosophy, 457-470 (2004);
R.Pritchard, Economic Development, Foreign Investment and the Law, London, Kluwer Law
International, Chaps. 1-11 (1996).
42
Thus a review of the law and development field is pertinent pursuant to determining its
relevance in third world countries. The divergent views on both sides of the divide in this
regard have been based on either of the two dominant schools of development theory, that
is, the Modernization Theory and the Dependency Theory.77
The Modernization Theory evolved at the end of the Second World War, first as an
intellectual rationalization for the promotion of western values and ideals of society in the
post-war era and, secondly, to illumine the attractiveness of such western notions of society
over and above non- western paradigms. Spearheaded by Parson, who propounded the
Structural-Functionalism Theory; it postulated an evolutionary theory of society, which
adumbrates that development as a process is deterministic and inexorable movement from
one state of the evolutionary pedestal to another, leading to structural differentiation of
social institutions which will create economic, political and social institutions akin to
western social institutions of capital, market economy, democratic liberalism, the rule of
law and due process, freedom of the judiciary, separation of powers, freedom of the press
and respect for the fundamental human rights of the citizenry.78
77 M.Woolcock, The World Bank Legal Review, Volume 2: Law, Equity, and Development,
Washington D.C., World Bank Publications, 5-550 (2006); L.Cao, „Law and Economic Development:
A New Beginning?‟ in A.Carty, (ed.), Law and Development, New York, New York University Press,
506 (1992); C.Antons, Law and Development in East and Southeast Asia, New York,
RoutledgeCurzon, 387 (2003); B.Hauserman, „Exploring The New Frontiers of Law and
Development: Reflections on Trubek/Santos (eds.), The New Law and Economic Development,‟ 8
German Law Journal, 657-670 (2007); U.Razdan, Law and Development: An Anthology of Topical
Legal Studies, London, Regency Publications, 3-350 (2003); H.Schafer, Law and Economic
Development: Economic Approaches to Law, New York, Edward Elgar Publishing, 5-550 (2006);
F.Fukuyama, The End of History and the Last Man, New York, Free Press, 3-39, 55-131,143-199,
211-328 (2006). 78 S.P.Huntington, „The Change to Change: Modernization, Development, and Politics,‟ in
N.W.Provizer, (ed.), Analyzing the Third World: Essays From Comparative Politics, Cambridge,
Massachusetts, Schenkman Publishing Company, 30-69 (1978).
43
Under the modernization schema, certain conditions must be fulfilled in order to attain the
structural differentiation of social institutions pursuant to attaining economic development.
The first major condition is rationalization; based on the works of Emile Durkheim, Max
Weber and Tallcott Parsons, this entails the progressive movement from the particular to the
universal, from a society characterized by ascriptive roles to individual attainment rather
than arbitrary ascription of status at birth. Second, is the significance of the integration of
diverse nationalities and nation-building. Democratization is the third condition that must
be met pursuant to attaining social differentiation. Democracy according to the
modernization theory, underscores social pluralism, transparency and eradicates
arbitrariness and discretion while fostering constructive engagement and the sporting spirit
in political culture. Finally, the political space must be expanded so as to be inclusive
through mass mobilization of the citizenry to participate in the political process.79
That granted, the abysmal economic performance of post independence developing
countries, the rot and decay of their social, legal and political institutions; the affliction of
rapacious and corrupt political elites, restive youths and predatory military have combined
to engender scepticism about the relevance and efficacy of the modernization theory in post
independence, developing third world countries.80
In counter-eloquence, the modernization school attributes State failures in the third world to
endogenous factors, such as the lack of civic culture necessary to evolve, grow and sustain
western type political and social institutions. To the modernization theorist, the political
culture in third world countries is inorganic, characterized by individual and group
79 E.Hermassi, „Changing Patterns in Research on the Third World,‟ 4 Annual Review of Sociology
239-257 (1978). 80 E.J.De Kadt, Sociology and Development, New York, Tavistock Publications, 65 (1974)
44
solidarity with the clan or ethnic nationality rather than the national State. Borne out of the
lack of organic solidarity is the lack of psychological acceptance of the legitimacy of the
national government, democracy, non-internalization of national laws; the role of the State,
political actors vis-à-vis the obligations of the citizenry to the State.81
Among many of the foibles of modernization theory elicited by critiques is that it is
ethnocentric, deterministic and evolutionist. Its theoretical foundation of structural-
functionalism was subjected to critical appraisal, and characterized as a value-laden
paradigm with acute ideological asymmetry.82
The pessimism with which the modernization theory was viewed must be considered
against the backdrop of the social turmoil which rocked the American society in late 1960s
and early 1970s. The cataclysm of this era in the evolution of American society resulted in
the call in certain quarters for curtailment of individual rights while imposing greater order.
This crisis removed the wind from the modernization sail and scepticism was generally
expressed on the universality of the so called core libertarian American values and ethos.83
Thus, it was discovered, that the modernization theory in itself cannot operate ex propio
vigore. It can not yield any development premium, as its tenets can only impact positively
where, there is purposive single- mindedness of the political elites and the people
themselves to develop.84
81 M.E.Latham, Modernization as Ideology: American Social Science and ‘Nation Building’ in the
Kennedy Era, Chapel Hill, NC, The University of North Carolina Press, 288 (2000). 82 D.O‟Neill, „A Modernization Theory: Economic Growth, Income Equality and Democratization,‟
Paper presented at the annual meeting of the Midwest Political Science Association, Chicago April 12,
2007. Available at http://www.allacademic.com/meta/p196991_index.html 83 R.Inglehart, Modernization, Cultural Change and Democracy: The Human Development
Sequence, Cambridge, Cambridge University Press, 5-25, 26-180 (2005). 84 M.L.Anderson, Sociology: Understanding a Diverse Society, New York, Wadsworth Publishing, 252
(2005).
45
The law and development movement emerged amidst the throes of the social crisis
experienced in the American society between 1965 and 1975; hence it inherited the
perceived inanities of its underpinning theory of modernization. However, the failing of the
modernization theory and by extension the law and development theory is completely
unconnected with the state of law in developing countries nor does it in any way negate the
centrality of law in society.85
Drawing heavily from the fundamental doctrine of the modernization theory, which is
predicated on the assertion that through the means of an evolutionary process, the law and
its institutions will progressively attain a level of differentiation corresponding to western
law and legal institutions?86
Many scholars may not fault the position asserting the centrality of law in development nor
would they fault the evolutionary underpinnings of both the modernization theory and the
law and development theory. What they question is the use of western institutions as
benchmarks in the evolutionary process. They detect a lot of ideological representation in
that model which establishes western ideals and social/legal institutions as the terminal
point on the evolutionary scale. A study of social statics and dynamics shows that human
society is in a flux and in constant motion and unamenable to statics. Thus, it is not
improbable that a universalizable ideal loses that attribute by yielding to either a variant of
itself, which has mutated into a higher form of itself or a completely different form which
supplants and displaces the extant form in the evolutionary process. The central tenet of
85 R.J.Brym, Sociology: Your Compass for a New World, New York, Wadsworth Publishing, 214
(2005). 86 R.Kiely, Sociology of Development: The Impasse and Beyond, London, Routledge, 1, 11, 85-143
(1995).
46
modernization theory is wrong-headed to the extent that it suggests that the evolutionary
path to be trodden by the emergent modernizing States of the third world had to be exactly
those trodden by western societies, without regard to social cultural differences. The
foregoing submission is without prejudice to the realism of the gains of western ideals and
values such as liberal democracy, the rule of law and due process and respect for the
individual rights. Our point of departure is to disagree with the position that the
evolutionary pedestal attained by western societies is the terminal point on the evolutionary
scale and that its attainment marks the end of history.87
Such wide conclusions could only be made in the worst state of intellectual depravity. It is
not only pedestrian, it is ahistorical and completely at variance with the dynamics of the
dialectic upon which any evolutionary process is predicated. Above every other
consideration, it is impossible as it is improbable to contrive and engineer an end of history
as it moves inexorably in a circle from ages to ages and epoch to epoch. This order of the
cosmos is immutable and constant and it is not without theoretical foundation. Circularity is
not a fallacy in the hermeneutic sciences. The hermeneutic circle breaks the crust of
formalism (or pseudo-formalism?) which provides the seeming justification for the
structural-functionalist conclusion.88
87 N.Gilman, Mandarins of the Future: Modernization Theory in Cold War America, Baltimore, The
John Hopkins University Press, 1-24, 72-241 (2004); F.Fukuyama, The End of History and the Last
Man, New York, Free Press, 3-39, 55-131, 143-199, 211-328 (2006). 88 According to Fukuyama, history is directional and its end point is capitalist liberal democracy. This
view, of course, is not novel. What engages the attention however is the simplicity of Fukuyama‟s
reformulation of this view point. It is an apologia by Fukuyama, a former U.S. State Department
planner. He identifies two prime factors that supposedly push all societies toward this evolutionary
goal. The first is modern natural science complemented by technology, which creates universal
cultures. The second vehicle of history which he derived from Hegel is the desire for recognition,
driving innovation and personal achievement. Fukuyama‟s main concern seems to be whether in the
coming of what he considers a capitalist utopia, humans will not become complacently self-absorbed
„last men‟ or, alternatively, revert to „first men‟ embroiled in destructive wars. His argument that
western democracies are not hegemonic is ahistorical in the light of world history and, particularly, the
behaviour of the United States and its allies. He first articulated his thesis in the Foreign Policy Journal,
National Interest, summer 1989, where he posited that most recent world history is punctuated by the
47
While disagreeing with the modernization theory and the law and development movement
which is its offshoot and most importantly, the structural-functionalist paradigm which is
the theoretical foundation of the two models, on the foregoing score, we must hasten to
submit that the reality in developing countries among which are the lack of political
plurality while the society is characterized by acute social stratification, and wide gaps
existing between the classes, the prevalence of absolutist and personalized governments;
weak state structures and total alienation of the people from the national government, the
citizenry have greater allegiance to primordial groupings and lack the psychological
acceptance of the law, as such laws are contrived to do the bidding of the dominant political
and economic elites. The judiciary is derelict.89
While it is a platitude to state that the foregoing limitations are legion and may limit or
constrain the instrumental application of law for social economic change in developing
societies, those limitations and constraints rather than diminish the centrality of law and its
institutions in development process, compels the use of law as an instrumentality to catalyse
economic growth and development in this group of countries.90
Thus, the perceived gaps between the structural-functionalist paradigm, the modernization
theory and the central tenet of the law and development model and the reality in the
modernizing and developing third world nations in no way diminish the relevance,
functionality and applicability of these models to catalyse social/economic change in the
collapse of absolutist regimes, and concomitantly, there is unprecedented ascendancy of liberal forces
in these nations. 89 S.Huntington, Political Order In Changing Societies, New Haven, Yale University Press, 8, 32, 59
109, 344 (1996). 90 B.Hsiung, „Economic Analysis of Law: An Inquiry of its Underlying Logic,‟ 2 Erasmus Law and
Economics Review 1-3 (2006).
48
third world. It only requires the reforming State to adjust for those gaps and adapting the
models to the circumstances of its social and political milieu.91
Thus it is important to dispel the self-indulgent pessimism of those who have only seen the
evil perpetrated in the name of the law and fail to see the good that have been wrought
through the instrumentality of the law nor even the limitless potentials of law to advance
economic goals with a view to moving the society forward and increasing the well-being of
the citizenry.92
Having examined the posturing of the modernization theory and its offshoot,
the law and development model we are obliged to rivet our attention on its converse, the
Dependency Theory.
DEPENDENCY THEORY
The Dependency Theory, in contradistinction to the modernization theory holds, among
other things, that State failure, underdevelopment and lack of growth in third world
countries, is contrary to the position of modernization theorists not wholly internal but are
functions of the political economy of international western capitalism which in its evolution
had by astute adaptiveness exploited non-western peoples in Africa, Asia and Latin
America by means of the process of colonization.93
Through that process, these regions were forcefully incorporated into the structure of
western international capitalism. Their natural resources and human capital exploited
91 To create a legal framework for economic development, particularly when considering legal and
judicial reforms developing countries should as a matter of priority create substantive and procedurally
efficient rules for the husbandry of the economy. A rule could be regarded as substantively efficient if
it sets forth a precept that internalizes an externality or compels the efficient allocation of resources.
Concomitantly, a rule is procedurally efficient if it eliminates or reduces the cost of or increases the
accuracy of using the legal system. 92 K.E.Davis, „The Relationship Between Law and Development: Optimist Versus Skeptics,‟ 57
American Journal of Comparative Law 8-14 (2008). 93 J.Ndulu, The Political Economy of Economic Growth in Africa, 1960-2000, Cambridge, Cambridge
University Press, 5-650 (2008).
49
unremittingly for many centuries at first through pillage and slave trade and later through
outright colonization.94
Consequent upon the consolidation of colonialism, an international division of labour was
contrived which structured the economies of the colonies in a manner that would
complement the economy of the metropolis. The colonies provided raw materials which are
fed to manufacturing industrial complexes of the metropolis whilst concomitantly turning
the colonies into captive markets for the products of such industries. For these purposes,
chartered trading companies were commissioned and deployed to such colonies with
exclusive rights to engage in the production, trade in and evacuation of such raw materials.
The plantation economy thrived and white settler enclaves were created.95
The exploitation persists unabated in the post-independence epoch. New structures that
were adaptive to the seeming emergence of a new world order were ingenuously contrived
to sustain the stranglehold on the international economic order. Domination was sustained
by means of the agency of transnational corporations which have operations cutting across
international boundaries. These octopi corporations are run as sovereign states and are avid
exploiters and destabilizers of their host countries.96
Thus, the unique historical experience of developing third world countries has bled these
societies of their vitality and zest to develop. They were forcefully conscripted into the
international capitalist system with a legion of disabilities. The pillage their economies were
subjected to during colonialism stunted industrialization, as their economies were
94 L.Hubbell, „Rethinking Dependency Theory: The Case of Dominica, the Rascal State,‟ 10 Journal
of Third World Studies 112 (2008). 95 R.Peet, Theories of Development, New York, The Guilford Press, 3-12, 18-57, 107 (1999). 96 M.Rahnevia, The Post-Development Reader, New York, Zed Books, 3-250 (1997).
50
deliberately structured to complement that of the metropolis by serving as mere sources of
raw materials that were evacuated without added value. Allied to that, and as a consequence
of the colonial agenda, the infrastructure they inherited was derelict and run down. The
foregoing only results in a vicious circle as these nations slip further and further down the
mire of dependence. They require foreign aids, direct foreign investments and loans from
both private and public international financial institutions of the west to develop their
infrastructure. They remain gross exporters of primary products mainly derived from their
extractive sectors, which have no nexus with the other sectors of their economies resulting
in lack of diversification and making them prone to price shocks and fluctuation in the
commodity exchanges controlled by the west.97
To the dependency school, there is an unbridgeable divide between the western core and the
developing periphery yielding a structure which sustains the perpetual exploitation of the
periphery by the core.98
A key element of the dependency postulate is the identification of the collaboration between
economic and political elites in developing nations and western capitalists, pursuant to the
sustenance of the status quo. According to the dependency theorists, the most vulnerable
groups who suffer the tyranny of this unequal world order are the rural poor and the urban
poor who are completely untouched by what ever little impact is generated under this
economic order.99
97 V.Desai, The Companion to Development Studies, Oxford, Oxford University Press, 150 (2008). 98 J.Larrain, Theories of Development: Capitalism, Colonialism and Dependency, New York, Polity,
5-215 (1991). 99 B.Hettn, Development Theory in Transition: The Dependency Debate and Beyond: Third World
Reponses, New York, Zed Book, 5-150 (1985).
51
The foregoing dependency theory postulations are not without merit, for one, they provide a
fresh draught of air against the suffocating impact of the modernization theory which many
justifiably regard as eurocentric. Secondly, they catalysed the spirit of economic
nationalism in a number of developing nations who contrived policies to shield their
fledging industries from foreign competition.100
That granted, the dependency theory has received its fair share of negative reviews and
critique. To many, its Marxist foundation diminishes its explanatory powers, especially
after the collapse of the Soviet Union and the subsequent loss of ascendancy by
communism and Marxism coupled with the economic successes recorded by the Asian
countries. The phenomenal growth and development of Asian countries like Japan, India,
Singapore, South Korea, China and so forth have combined to diminish the influence of the
dependency theory. The Asian successes have been achieved not with wholesale and
unqualified application of modernization model just as it is not predicated on the
dependency model.101
The emergence of China as the world‟s fastest growing economy is a
testimony to this fact. China‟s mix of selective but eclectic reform agenda has had profound
impact on its growth.102
That granted, another limitation which the dependency theory suffers can be attributed to
the sceptical and pessimist Marxist perspective of law as superstructure of the economic
base. To Marxists, law is value-laden, and replete with asymmetry and an ideological
representation which is contrived by the dominant group to further its cause. Thus, given
100 B.N.Ghosh, Dependency Theory Revisited, London, Ashgate, 3-165 (2001). 101 M.A.Tetreault, Dependency Theory and the Return of High Politics, New York, Greenwood
Press, 5-210 (1986). 102 C.Leys, The Rise and Fall of Development Theory, Bloomington, Indiana University Press, 3, 48,
64, 80,107-188 (1996).
52
the Marxist origin of the dependency theory, it is rather hesitant and cautious of annexing
law to serve the purpose of development.103
The foregoing is without prejudice to the crucial role played by dependency theory in the
evolution of the domain of international law of development, by bringing the right to
development of peoples to the front burner. The concerted and articulate efforts in this
regard have yielded positive results in terms of trade concessions and an initiative for the
group of highly developed and industrialized nations to partner with the group of very poor
nations pursuant to their economic growth and development. The view is, however, rife in
certain quarters that all these incoherent agendas to save the third world are half-hearted and
ill-conceived measures that are too little and too late. This community of opinion
underscore the fact that much more far reaching measures surpassing the reconstruction
agenda contrived to rebuild Europe in the ruins of the World War II were required to
salvage the third world from the mire of poverty.104
While the relevance of law and development in third world countries have been proved by
the foregoing, and the centrality of law established accordingly, formal law, while a sine
qua non of the development process, is not sufficient though necessary to the development
process. To serve the purpose of development, law must be complemented by other
conditions, such as participatory democracy; good governance; high State capacity and
strong institutions.105
103 A.Brewer, Marxist Theories of Imperialism: A Critical Survey, London, Routledge, 161,201 260
(1997). 104 R.Chilcote, Theories of Development: Mode of Production or Dependency? New York, Sage
Publication Inc., 5-180 (1983); for the legal foundation of development see, UN GA Declaration on the
Right to Development, A/RES/41/128, 1986; N.J. Udombana, Human Rights and Contemporary Issues
in Africa, Lagos, Malthouse Press Ltd., 3-33 (2003); M.T. Ladan, „Human Rights as the Benchmark for
Development Policy,‟ 1 Journal of Economic, Social and Cultural Rights, 1-25 (2002). 105 D.Jaffee, Levels of Socio-economic Development Theory, WestPort, Praeger, 5,151-199 (1998);
K.Willis, Theories and Practices of Development, London, Routledge, 32,62 (2007).
53
1.8 METHODOLOGY:
This study is library based. In that regard, textual analysis of theories, concepts and facts
from relevant books, journals, monographs and Newspapers which dwell on law and
development; the centrality and role of the law in economic development, the nature of the
State and the oil-based economy shall be subjected to critical analysis.
Furthermore, the research adopted the Doctrinal Content Analytical Method. Under this
schema, an attempt is made to determine the extant legal framework for energy resources
management in Nigeria, highlight its inadequacies and proffer a remedy. In a similar vein, a
re-appraisal of the legal, policy and institutional framework for energy resource
management is carried out. In this regard, the study shall eclectically deploy the various
tools of analysis of relevant domains of economics, law, political science, sociology and
management science pursuant to establishing a legal paradigm for energy resources
management in Nigeria. The work shall analyse, connect and synthesize the various
domains. The study adopts a multidisciplinary explication of Nigeria‟s developmental
problems, while exploring the prospect for annexing the instrumentality of law for the
husbandry of Nigeria‟s oil resources.
The study also uses the institutional approach to economic development by determining the
success or failure of key institutions in facilitating development. Success or failure of key
institutions are major determinant of development on the one hand or lack of development
on the other.
54
1.9 SUMMARY OF RESEARCH FINDINGS:
It was found that poverty, underdevelopment and lack of growth in developing oil-
based economies is largely due to one or more development traps and that Nigeria is
caught in several of these traps, for example, bad governance; political instability;
corruption; debt; conflicts; poverty and resource trap.
1. The study found that poverty is in large part the result of laws, judiciaries and other
legal mechanisms that fail to promote the generation of wealth by all citizens (in the
private sector).
2. It was found that the role of law to effectuate economic goals has been grossly
unappreciated and understated in Nigeria and most developing oil-based economies.
3. It was found that overwhelming dependence on a single income resource in Nigeria and
most developing oil-based economies has undermined manufacturing and agriculture
and swell the ranks of civil servants, the military and unemployed.
4. It was found that attempts by Nigeria to participate in her oil sector through the
instrumentality of Participation Agreements, Service Contracts and Joint Operation
Agreements have failed owing largely to the total lack of technical capacity of her
national oil corporation.
55
CHAPTER TWO
2.0 LITERATURE REVIEW
The subject of law and development has had ample attention from generations of scholars
of the neo-classical school of law and economics. Understandably, their treatment is biased
towards the theory of the firm in an industrialized western economy setting. Most of the
literature in this regard does not envisage the peculiar situation and circumstances of the oil-
based economies. Most of the literature is economics, political science and or sociology
specific. The following works are being examined with a view to highlighting the gap in
knowledge pursuant to the establishment of the point of departure of the research.
While the study holistically examines the development crisis faced by Nigeria oil economy,
particularly its lack of perspective strategic management of the consistent stream of oil
revenue accruing from export of oil; analytically highlight Nigeria‟s wrong economic
choices since the ascendancy of oil as the mainstay of the Nigerian economy, by means of
macroeconomics analysis which is subsequently invoked in a legal charter for the efficient
husbandry of Nigeria‟s petroleum resource; Maxwell Michael Gidado‟s effort, „Petroleum
Development Contracts With Multinational Oil Firms: The Nigerian Experience,‟ focuses
on the structure and forms of petroleum development contracts between Nigeria and
Transnational Oil Companies. The span of his treatment is from the base year 1908 to
1990s. He examines crucial issues bordering on ownership, control, transfer of technology,
financial returns and indigenisation of the industry under the contracts examined against the
56
backdrop of Nigeria‟s overall foreign investment policies, and changes in the international
oil industry. The work is a metamorphosis of his doctoral dissertation.106
Similarly, Patrick Ndubisi Oche‟s work „Petroleum Law in Nigeria: Arrangements for
Upstream Operations,‟ attempts a „systematic presentation and analyses of the legal rules
that govern the exploration, development and production of petroleum in Nigeria.‟ This
work is not a marked departure from the examination of the various contractual forms of
Petroleum International Agreements (PIAs).107
The thrust of Lawrence Atsegbua‟s argument in „Nigerian Petroleum Law: The Acquisition
of Oil Rights in Nigeria,‟ is that „despite fundamental changes which took place in the
modes of acquisition of oil rights in Nigeria, de facto control is in the hands of the
international oil companies, and that in the absence of de facto control of the oil industry by
Nigerians, it is highly doubtful whether the modes of acquisition of oil rights are compatible
with the principle of permanent sovereignty over natural resources.‟108
Still in the mode of strict examination of contractual forms of Petroleum International
Agreements between Transnational Oil Companies and Host Countries, Yinka Omorogbe in
„The Oil and Gas Industry: Exploration and Production Contracts,‟ sets out to identify what
she considers an „elusive thing; an ideal petroleum exploration and development contract.
While she concede that it is most improbable that such ideal contractual form exists she,
106 M.M. Gidado, Petroleum Development Contracts With Multinational Oil Firms: The Nigerian
Experience, Maiduguri, Ed-Linform Services, passim (1999). 107 P.N. Oche, Petroleum Law in Nigeria: Arrangements For Upstream Operations, Jos, Heirs Great
Commission, passim (2004). 108 L.A. Atsegbua, Nigerian Petroleum Law: The Acquisition of Oil Rights in Nigeria, Lagos, New
Era Publications, passim (1993).
57
„attempted to identify the possible contractual forms and clauses for petroleum contracts
which will enable parties to design ideal contracts for the particular acreages in question.‟109
In „Human Rights as the Benchmark for Development Policy,‟ Ladan underscores the
reciprocal relationship existing between human rights and development. He established a
nexus between the two concepts and posits that they are interdependent. He examines the
concept of human rights approach to development in the context of sustainable human
development, addressing the human being in relation with both resource management and
participation. Consequently, according to Ladan, economic growth has to serve human
development.110
While the study analytically link together the various legal, economic and political strands
that must be examined in order to provide a plausible account of Nigeria‟s post colonial
tragedy, Soremekun „Oil and the Nigerian State: An Overview,‟ predicated his analysis on a
restrictive political economy and economic history perspective. He dwells on the evolution
of the Nigerian Petrol State, from the era of oil concessions when Britain, through the
instrumentality of the colonial State, had exclusive control over Nigeria‟s oil.
According to him, the second phase of this evolutionary process is underscored by
increased participation in the oil industry, in the period during and after the Nigerian civil
war, characterized by increased global demand for oil, and increased global oil price as a
result of the emergence of the Organization of Petroleum Exporting Countries (OPEC).
109 Y. Omorogbe, The Oil and Gas Industry: Exploration and Production Contracts, Lagos,
Malthouse Press Ltd., passim (1997). 110 M.T. Ladan, „Human Rights as the Benchmark for Development Policy,‟ 1 Journal of Economic,
Social and Cultural Rights, 1-25 (2002).
58
They identified a third phase marked by the desire of the Nigerian State to attract more
direct foreign investment in the oil sector.111
In a similar vein Obi‟s treatment in „The Crisis of Environmental Governance in the Niger
Delta 1985-1996,‟ is restrictive; it dwells on the environmental dimension of the political
economy of Nigeria‟s oil. He focuses on the exploitation of crude oil and its impact on the
economy, the environment and the people which he conceptualized as environmental
governance, particularly in the volatile Niger Delta region. He draws attention to the
upsurge of struggles for the advancement of human and environmental rights among the oil
minorities of the Niger Delta since the late 80s.112
In his attempt to provide a plausible explication of the causes of the crisis of
developmentalism bedevilling Nigeria, Oyebode adopts a peripheral dependency
perspective to argue that the lop-sided international division of labour under which Nigeria
has been assigned the role of essentially a primary commodity producer, ensures that it is
perpetually trapped in the international dependency web. He posits that Nigeria‟s
dependency is further reinforced by its political economy which is disarticulate resulting in
its inability to effectively control petroleum production, refining, marketing and distribution
both locally and internationally.
In his exploration of the prospect for the instrumental deployment of the law to redress
Nigeria‟s crisis of developmentalism, he does not discountenance the explanatory value of
the pessimist perspective of the instrumental deployment of the law to further economic
goals of the State. He however shares the view of Lon Fuller that the law is the enterprise of
111 K. Soremekun, „Oil and the Nigerian State: An Overview,‟ in K. Soremekun (ed.), Perspectives on
the Nigerian Oil Industry, Lagos, Amkra Books, 7-37 (1995). 112 C. Obi, „The Crisis of Environmental Governance in The Niger Delta 1985-1996,‟ 3 African
Association of Political Science Occasional Paper Series 3-35 (1999).
59
subjecting human conduct to the governance of rules, therefore, according to him, creating a
more efficient, functional, reliable and wholesome petroleum sector is, therefore, a task for
which the law can be considered as being admirably suited.113
The effort of Marie-Claire Cordinier Seggar „Weaving the Rules for Our Common Future:
Principles, Practice and Prospects of International Sustainable Development Law,‟ is well
researched, giving a lot of insight into the subject of law and development, the work is
characterized by a balanced analysis of the role of law in development.114
Anleu, and Sharyn „Law and Social Change,‟ is another major work which provides a
clear and comprehensive guide to the sociology of law, surveying current theoretical
debates and examining socio-legal research, exploring the relationship between the law and
other aspects of social life. It goes beyond a discussion of contemporary institutions
focusing on broad and general patterns grounded in specific examples from a wide range of
contexts. The book addresses the social conditions under which laws emerge and are
changed; the extent to which law can be a resource to implement social change; the kinds of
value or world views that laws incorporate and the ways in which laws shape social
institutions and practices and vice versa. Accessible and wide-ranging law and social
change process, the work is an invaluable introduction to, and critical analysis of law as a
social institution and social process.115
113 A. Oyebode, „Law and the Management of a Petroleum Economy: Revisiting the Nigerian Crisis,‟ A
lecture delivered at the Second Edition of the Lectures in Honour of Prof. G.A. Olawoyin, on 21st
June, 2005. 114 M.C.Seggar, „Weaving the Rules For Our Common Future: Principles, Practices and Prospects of
International Sustainable Development Law,‟ in M.C.Seggar, (ed.), Weaving the Rules For Our
Common Future: Principles, Practices and Prospects For International Sustainable Development
Law, Oxford, Oxford University Press, 5-320 (2004). 115 R.Anleu, Law and Social Change, London, Sage Publications, 1-230 (2000).
60
Snyder, in „Law and Development in the Light of Dependency Theory,‟ expressed a rather
pessimistic view of the role of law in development. Not alone in this regard, he regards
development law, as a corpus which aims at being coherent as an expression of ideology,
what with the absolute impoverishment of an ever-increasing part of countries and
population of the Third World, the increase in inequality between nations and between
classes inside different nations but, most particularly, inside the poorest nations and the
global failure of operations of development. He submits that we are then obliged to admit
that development, at any rate, development for all, has become a myth, a story which people
tell to each other, and development law and the constant rhetoric which it engenders is,
therefore, an ideology, no longer in the sense of an intention of modifying reality, but of a
conceptual distortion of that reality.116
To this school of thought development law does not fulfil the functions of law to stabilize
social arrangements at least for a time; and to form a framework for a particular set of social
conditions. In this perspective, the law exists and fulfils that function when it enables
norms, which can actually be put into practice to rise above social antagonism, and to settle
it in equilibrium, which is acceptable and recognized by the parties. To this school of
development law, law is an antithesis of the foregoing, development law is pure legal
formalism. Formalism, according to this view, gives appearances primacy over reality.
Faced with a very profound social contradiction between well-off and poor nations,
development law is only a derisive expression of one branch of the contradiction which
characterizes international real politik.117
116 F.G.Snyder, „Law and Development in the Light of Dependency Theory,‟ 14 Law and Society
Review 736-761 (1980). 117 Ibid.
61
Flory in „Adapting International Law to the Development of the Third World,‟ attempts to
examine the specific problematic of third world economic development, and the role of law
in the process of development.118
Hernando de Soto, in „The Mystery of Capital: Why Capitalism Triumphs in the West and
Fails Everywhere Else,‟ refocuses attention on the political choices and economic
assumptions embedded in policy-making, emphasizing that elements in a legal order encode
distributional choices and reflect economic and other ideological commitments. He affirms
the centrality of law to development, stressing that „capital‟ is a legal institution. It is not
just that you need a working legal framework regime to implement development policies; to
collect tariffs, to manage monetary policy, administer the State and so forth. de Soto rightly
turns our attention to the fundamental norms and institutions of ownership, exchange,
money, security, risk, corporate form and so forth. Everything in the economy from this
perspective is built on the foundation of norms, norms that remain for, the most part, in the
background.119
In his work, „Law and Economics in Developing Countries,‟ Edgardo Buscaglia takes a
critical look at the malaise of official corruption by examining the causes of and responses
to corruption in judiciaries, corruption‟s long term impact on efficiency and equity,
corruption and institutional inertia and the general failure of the judicial system in
developing countries. He dwells considerably on efficiency and the source of legal norms.
In his broad treatment of the economic impact of legal norms in developing countries,
118 M.Flory, „Adopting International Law to the Development of the Third World,‟ 26 Journal of
African Law, 12-20 (1982). 119 H.de Soto The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Every Where
Else, New York, Basic Books, 1-270 (2000).
62
according to Buscaglia it is commonly believed that in a sovereign nation all law-making
power is in the hands of the State. Although the State often plays a major role, it is wrong
to think of the State as all-powerful and rather, that impersonal exchanges can be well
developed without State enforced legal frameworks. Private sector associations adopt,
provide, and enforce rules covering property rights, contracts, systems of civil responsibility
and other matters.120
Analysts thus need to understand a nation‟s source of legal order as the interplay between
the public domain, where legal rules are provided by the State, and the private domain,
where rules are created by non-State parties, with the objective of facilitating interactions
and reducing transaction cost. Cooter believes that the ineffectiveness of the laws enacted
by parliaments in many countries today reflect the lack of links between the essence of what
the law stipulates and the social norms followed by businesses and people in their daily
activities and lives. When regulations or laws lack this compatibility, according to
Buscaglia, the costs of complying and enforcing them becomes higher. These are the so-
called bad laws mentioned by de Soto in his book, in which he demonstrates the far higher
transaction costs of complying with the formal law in comparison to following the social
norm within an informal market. In de Soto‟s work these higher transaction costs are rooted
in the drive of governments to centralize law-making without regard to the people‟s actual
social practices. Only when laws and regulations reflect the practices of the people will the
transaction costs of social interactions decline and a tendency toward efficiency occur.121
120 E.Buscaglia, Law and Economics in Developing Countries, New York, Hoover Institution Press,
1-101 (2000). 121 Ibid.
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From the Soto‟s perspective, the size of many informal sectors around the world is
intimately related to the way laws and regulations fail to capture social practices. Following
the studies by Cooter, Mattei and Buscaglia, laws generating voluntary compliance are
those that are truly compatible with the ethical code prevailing in a society. Individuals seek
the kind of predictability they think will increase their wealth.122
In Transaction Costs, Resources Allocation and Liability Rules: A Critical Comment, Guido
Calabresi‟s point of departure is the neo-classical assumption „if one assumes rationality, no
transaction costs and no legal impediments to bargaining, all misallocations of resources
would be fully cured in the market by bargains,‟ Calabresi alongside others in the neo-
classical school of law and economics, adumbrate the ideal world that should exist, in
which transactions will be most efficient, that is a world without transaction costs. A
corollary of that position is their policy thrust, based on the premise that the government
should strive to eliminate transaction or „social costs,‟ thereby making the market more
efficient by having it emulate, as much as possible, a market without transaction costs. The
assumption about transaction costs is predicated on the economic notion of efficiency. He
dwells considerably on the Coase theorem and alludes to relationships between economic
externalities and transaction costs, the roles of uncertainty and asymmetrical information in
the size-distribution of transaction costs. Implicit in his work is the fundamental premise of
transaction cost economics, that transaction is the basic unit of analysis, and that economic
governance is a prerequisite for economic resource optimization and enhancing economic
efficiency; to him transaction entails exchange costs and that these matter at all levels, in
both the short and the long run. In itself, transaction cost economics is an approach to the
122 Ibid.
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study of economic systems and organizations, the comparative merits of alternative forms
of economic organization (often called assessment of discrete structural alternatives) with
its focus on micro analytic and behavioural assumptions governing the static or dynamics of
economic agents and institutions, and based on an integrated perspective of institutions, the
law and economics. In an earlier work, Coase attempt the definition of transaction cost thus,
„in order to carry out a market transaction it is necessary to discover who it is that one deals
with, to inform people that one wishes to deal and on what terms, to conduct negotiations
leading up to a bargain, draw up a contract, to undertake the inspection needed to make sure
that the terms of the contract are being observed and so on,‟ this Coasean formulation
perhaps constitutes the central feature of Transaction Cost Economics.123
In her work, „Sustainable Development Law: Principles, Practices, and Prospects,‟ Marie-
Claire Seggar, draws on international economic, environmental and social law, in an
attempt to provide a coherent approach to the study of international sustainable
development law. It establishes a set of principles for this emerging field; looks at case
studies of implementation instruments and describes future directions for international
sustainable development law.124
In their work, „International Law and Sustainable Development: Past Achievements and
Future Challenges,‟ Allan Boyle and David Freestone examine the developments in
international environmental law since the Rio Conference on Environment and
Development in 1992. They focus on sustainable development, natural resources and dwell
considerably on the new and complementary themes in international law, environmental
123 G.Calabresi, „Transaction Costs, Resources Allocation and Liability Rules: A Critical Comment,‟
11 Journal of Law and Economics 67-73 (1968). 124 M.Seggar, Sustainable Development Law: Principles, Practices, and Prospects, Oxford, Oxford
University Press, 5-480 (2005).
65
protection and sustainable development. They posit that their significance is not simply
phenomenological, but pose some of the most interesting challenges to international law-
making; they attempt to address these challenges and proffer solutions. The focus of their
work is pursuant to establishing an international legal order, which will compel the
responsible exploitation and annexation of natural resources without thereby resulting in
large-scale degradation of the environment. The recurrent theme in this work is the efficient
husbandry of natural resources particularly the wasting assets aspect of the environment
which are not renewable, such as hydrocarbons.125
Rum Sarkar, in „Transnational Business Law: A Development Law Perspective,‟ explains
the prospect of an inclusive law of transnational contracts which will serve to stabilize
expectations and induce sustainable development.126
In yet another work, „Development Law and International Finance,‟ Rum Sarkar, against
the backdrop of the significance which Development Law has progressively gained, and in
view of an unprecedented global interdependence which gives rise to numerous legal and
practice-oriented questions, he presents a comprehensive analytical framework for
understanding development law issues from both a theoretical and a practical view-point.
The book analyses this growing body of law in the context of the policy framework of „rule
of law‟ programmes aimed at legal reform and structural legal change, and examines
emerging constitutional and sustainable principles of development law and institutional
framework in which it is unfolding. The author further discusses structural legal reform in
the financial sector, and the extent to which private international transactions act as catalyst
125 A.Boyle, International Law and Sustainable Development: Past Achievements and Future
Challenges, Oxford, Oxford University Press, 3-250 (2001). 126 R.Sarkar, Transnational Business Law: A Development Law Perspective, The Hague, Kluwer
Law International, 5-400 (2003).
66
for such reforms, and the impact on development from changes in the role of the State, the
privatization process and the growing importance of emerging capital markets. It addresses
the international human rights dimension of development law and, in particular, the
question of whether there are human rights to development.127
In their joint effort, „Environmental Law, the Economy and Sustainable Development,‟
Richard L. Revesz L..; Phillipe Sands and Richard B. Stewart provide a comparative
analysis of environmental regulation in multi-jurisdictional legal and political systems,
focusing on the United States, European Union, and the international community. Each of
these systems must deal with environmental interdependencies that cross local borders, in
some cases creating regional problems, such as acid deposition, ozone type smog, and
pollution of shared water bodies. Some trans-jurisdictional environmental problems are
global, including stratospheric ozone depletion, climate change, and the loss of
biodiversity.128
Gerard Kreijen in „State Failure, Sovereignty and Effectiveness: Legal Lessons from the
Decolonization of Sub-Saharan Africa,‟ searches for the causes of State failure in Africa in
the legal revolution of decolonization. He upholds the view that the collapse of States in
Sub-Saharan Africa is a self-inflicted problem caused by the abandonment of the principle
of effectiveness during decolonization. On the one hand, the abandonment of effectiveness
may have facilitated the recognition of the new African State, but on the other, it did lead to
creation of States that were essentially powerless; some of which became utter failures. The
study casts doubt on some of the most sacred principles of the modern doctrine of
international law. It establishes that the declaratory theory of recognition cannot
127 R.Sarkar, Development Law and International Finance, New York, Springer, 3-300 (2002). 128 L.Revesz, Environmental Law, the Economy and Sustainable Development, Cambridge,
Cambridge University Press, 3-369 (2000).
67
satisfactorily explain the continuing existence of failed States. It also demonstrates that the
principled assertion of the right to self-determination as the basis for independence in Africa
has turned the notion of sovereignty into a formal-legal figment without substance.129
In „Political Order in Changing Societies,‟ Samuel Huntington, attributes State failure in the
so called modernizing countries of Asia, Africa and Latin America to lack of political
community and of effective, authoritative, legitimate government. In these countries,
according to him, the political community is fragmented against itself, political institutions
are weak, bereft of majesty and lack resilience and their governments do not govern. The
thrust of this work is that the high rate of ethnic and class conflict, recurring rioting and
mob violence, coups d’etat, the dominance of unstable personalistic leaders who often
pursued disastrous economic and social policies; widespread and blatant corruption among
cabinet ministers and civil servants, arbitrary infringement of the right and liberties of
citizens, declining standards of bureaucratic efficiency and performance, the pervasive
alienation of urban political groups, the loss of authority by legislatures and courts, and the
fragmentation and at times complete disintegration of broadly based political parties are, in
large part, the product of rapid social change and the rapid mobilization of new groups into
politics coupled with development of political institutions. According to him, equality of
political participation is growing much rapidly than the art of associating together, social
and economic change, urbanization. Increases in literacy and education, industrialization,
mass media expansion, all extend political consciousness, multiply political demands,
broaden political participation. These changes, in his view, undermine traditional sources of
political authority and traditional institutions; they enormously complicate the problems of
creating new bases of political associations and new political institutions combining
129 G.Kreijen, State Failure, Sovereignty and Effectiveness: Legal Lessons from the Decolonization
of Sub-Saharan Africa, Boston, Martinus Nijhoff, 98, 101-377 (2004).
68
legitimacy and effectiveness. The rates of social mobilization and the expansion of political
participation are high; the rates of political organization and institutionalization are low.
The result is political instability and disorder. To him, the primary problem of politics is the
lag in the development of political institutions behind social and economic change. In
modernizing nations, the primary problem according to him, is not liberty but creation of a
legitimate public order. Men to him, may, have order without liberty, but they cannot have
liberty without order. Authority has to exist before it can be limited, and it is authority that
is in scarce supply in those modernizing countries where governments are at the mercy of
alienated intellectuals, rambunctious colonels, and rioting students.130
Anthony Anghie, Bhupinder Chimni, Karin Michelson and Obiora Okafor in „The Third
World and International Order: Law, Politics and Globalization,‟ which is a collection of
essays explore different dimensions of the relationship between the third world and
international law. The topics covered include third world approaches to international law,
non-state actors and developing countries (trans-national corporations); foreign investment
and territorial disputes and native peoples. It is a further contribution to the work done by
scholars‟ intent on elaborating what might be termed „Third World Approaches to
International Law,‟ (TWAIL). This initiative seeks to continue and further develop the
important work that has been done over many decades, particularly by scholars and jurists
from third world to construct an international law which is sensitive to the needs of third
world peoples. This body of scholarship has attempted to extend and expand the concerns
and materials of international law. These essays are animated by these same motives at a
time when unprecedented issues appears to be disempowering third world peoples,
intensifying inequality between the North and the South, and indeed, importantly, within the
130 S.Huntington, Political Order in Changing Societies, New Haven, Yale University Press, 8,
32,59,109,344 (1996).
69
North and the South. TWAIL scholars attempt to look afresh at the history of colonial
international law, engage previous trends in third world scholarship in international law,
take cognizance of the dramatic changes which have characterized the body of international
law in the last few decades from the perspective of third world peoples, record their
resistance to unjust and oppressive international laws, and advance new approaches that
address their needs and concerns. The foregoing are the broad themes and concern, which
animate the collection of the essays.131
Ann Seidman and Robert B. Seidman in „State and Law in the Development Process:
Problem Solving and Institutional Change in the Third World,‟ explore the correlation
between Law and Development, their quest yields a congruence between the two variables
whilst underscoring the far reaching changes which are necessary for the economic
development of the group of Developing Third World Nations. The work gives a much-
needed insight into the problematic of change and change management in the development
process.132
In „Law, Order and Power,‟ Chamblis and Seidman examine the nature of social control and
the use of criminal law in the regulation of behaviour of groups; and individuals. Employing
the conflict perspective, they believe that it is the best framework for understanding social
circumstances because it is interdisciplinary, they focus on why things change, what are the
disruptive aspects of society, how is society divided by power, wealth, prestige and
perceptions of the world? The position, that the shape and character of the legal system in
complex societies can be understood as deriving from the conflicts inherent in the structure
131 A.Anghie, The Third World and International Order: Law, Politics and Globalization, London,
Brill Academic Publishers, 150,208, (2004). 132 A.Seidman and R. B. Seidman, State and Law in the Development Process: Problem Solving and
Institutional Change in the Third World, New York, St. Martins Press, 10, 92, 148,172 (1995).
70
of these societies which are stratified economically and politically. They posit that every
society is subject at every moment to changes, social change is ubiquitous; every society
experiences at every moment social conflicts, social conflicts is ubiquitous; that every
element in a society contributes to its change and that every society rests on constraints of
some of its members by others.133
They see the State as the most important factor in the struggle and is certainly on one side
against the other. Coercion usually in the form of law is the chief factor that helps maintain
social institutions such as private property, slavery and other institutions that create unequal
rights and privileges. Social inequality arises out of these coercive techniques. To them, in a
complex society, groups experience a wide variety of different life conditions. Thus,
complex societies are characterized by conflicting sets of norms. The probability of a
particular group‟s norm being encompassed within the law is directly related to the group‟s
political and economic power. So basically, to them, the law reflects the perspectives,
values, definitions or reality and morality of the upper and middle classes, while at the same
time being in opposition to the values and morality of the poor.134
Christoph Antons in „Law and Development in East and South East Asia,‟ finds a point of
departure in the fact that during the 1980s and 1990s Asian „development States‟ attracted
much attention in political science and economics literature, but the role of law in the
economic development was neglected. It was only after the Asian crisis of 1997 that many
analysts began to focus on a lack of regulation and transparency as a major factor triggering
the crisis. The crucial questions now are how successful the current reforms will be, and
which features of the Asian approach to commercial law will be resistant to reform
133 W.Chamblis,, Law, Order and Power, London, Addison Wesley, 11-500 (1982). 134 Ibid.
71
pressures. This book examines the prospects for commercial law reform in Asia giving
particular attention to Japan and Singapore, frequently cited role models for Asian
developmentalism, and also examines development-related business laws in countries such
as China, Korea, Indonesia, Malaysia, Vietnam and Philippines.135
Dragan Milovanovic in „Weberian and Marxian Analysis of Law: Development and
Function of Law in Capitalist Mode of Production,‟ lends an ideological dimension to the
Law and Development discourse by exploring the classical works of Max Weber, and Karl
Marx. Weber‟s pioneering efforts in the area of the sociology of law; specifically his theory
of formalization and bureaucracy was brought to bear on the explication of the relationship
between law and development, whilst concomitantly adapting Marx‟s dialectical
materialism to explicate the function of law.136
Bryant G. Garth in „Building Strong and Independent Judiciaries Through the New Law and
Development: Behind the Paradox of Consensus Programmes and Perpetually
Disappointing Results,‟ posits that weak State institutions will invariably stultify
development, and proffers solutions by way of building strong and independent judiciaries
as a means of enshrining the rule of law and due process which are essential for an orderly
prosecution of the development agenda of the State.137
135 C.Anton, Law and Development in East and South East Asia, London, RoutledgeCurzon, 248
(2002). 136 D.Milovanovic, Weberian and Marxian Analysis of Law: Development and Function of Law in
Capitalist Mode of Production, London, Gower Pub Co., 3-230 (1989). 137 B.G.Garth, „Building Strong and Independent Judiciaries Through The New Law and
Development: Behind the Paradox of Consensus Programmes and Perpetually Disappointing Results,‟
52 DePaul Law Review 383-400 (2002).
72
In „Law and Nation Building in Nigeria: Selected Essays,‟ Oyebode underscores the
centrality of law in nation building, by focusing on the progressive decay of the legal
system in Nigeria with the concomitant constitutional instability, he concludes that what is
left of the law in Nigeria after a succession of absolutist military regimes is too
indeterminate to guarantee sustainable growth and development. He argues that meaningful
development can only be achieved in an environment of formal rational law.138
Amend Perry in „Legal Systems as a Determinant of FDI-Lessons from Sri Lanka,‟ poses a
formidable challenge to the current consensus on the best way to reform legal systems in
order to attract and support foreign direct investment (FDI) in developing countries. Using
detailed examples from Sri Lanka, she shows that the „ideal paradigm,‟ approach to legal
reform espoused by multilateral development organizations and bilateral aid donors is not
only fundamentally flawed but also misconceived for reasons that we may not fully
understand. She recommends a shift in emphasis from the „global‟ legal reform agenda to a
country-specific approach, based on a rigorous formulation of the common ground where
the expectations of investors and the countries in question meet. The crux of this „ideal
paradigm‟ approach resides in the generally accepted belief that a western-style market
oriented, rule-bound legal system is the sine qua non of successfully attracting and
supporting FDI. However, through a wide-ranging survey of Sri Lanka and foreign business
people, lawyers, non-legal advisers, NGO workers, diplomats, development workers, and
government officials, Perry shows that this is far from the case. Investors are generally
insensitive to the nature of the host State legal system when making the decision to invest
and their perceptions and expectations of the host State legal system may be significantly
138 A. Oyebode, Law and Nation Building in Nigeria: Selected Essays , Ikeja, CEPAR, 1-9, 11-20,
35-42, 117-168 (2005).
73
affected by such factors as their nationality, export orientation and size. Perry suggests that
the conclusions drawn from this detailed analysis from Sri Lanka applied on a global scale
have the potential to greatly improve the quality of many developing countries‟
participation in world economy.139
In „Eyes on the Prize: Law and Economic Development in Singapore,‟ Connie Carter
departs from the traditional, „what went wrong‟ preoccupation of preponderance of the
literature on law and development. The book highlighted „what went right‟ in Singapore‟s
transformation from squalid colony to successful growth-oriented, capitalist State. It
questions the efficacy and nature of the role of law in the forty-year transformation, in the
light of traditional and neo-traditional theories of law and development. It has not been the
„rule of law‟ as such that has contributed to Singapore‟s development. Rather it has been
law as embodiment of „mature policy‟ of a goal oriented, politically stable, and educated,
largely non-corrupt, communitarian and authoritarian State bureaucracy, which was grafted
onto the remnants of the previous colonial administrative structures. Carter examines
Singapore‟s economic development in relation to labour law, land law, and intellectual
property law, testing these against key aspects of law and development theories. While
analysis of the former challenge the law and development convergence theory; that of
intellectual property law uncovers the transformation impact of global influences such as
the WTO. As such the book provides a novel and balanced account.140
139 A.Perry, Legal Systems as a Determinant of FDI-Lessons From Sri Lanka, New York, Springer,
1-230 (2001). 140 C.Carter, Eyes on the Prize: Law and Economic Development in Singapore, The Hague, Khluwer
Academic Publishers, 1-300 (2001).
74
In „A Theory of Universal Democracy: Beyond the End of History,‟ Ali Khan examines the
traditional notion of democracy which is often associated with western liberal values, such
as free markets, individual rights and secularism. Some scholars assert that liberal
democracy is the end of history. Disputing such claims, this work presents the concept of
Universal Democracy to think beyond the values of western democracy. A theory of
Universal Democracy in consonance with their traditional values. For example, the book
makes concrete proposals for Muslim countries to democratize their constitutions without
accepting western values and without violating the principles of Islamic law. More
importantly, Universal Democracy further develops the idea of Free State. The proposed
fusion of Universal Democracy and Free State is designed to revolutionize the classical
theory of government and to offer a new paradigm that accommodates both universality and
uniqueness.141
In „The World Bank Legal Review: Law and Justice for Development (Governance, Civil
Society and Participation) Rudolf Van Puymbroeck examines the subject of law and
development against the backdrop of the consideration that sustainable poverty reduction
and equitable economic development depend on the solid foundation of the rule of law, and
in view of the fact that economic and political reforms are underpinned by legal reforms,
whether it be to increase efficiency in business transactions, benefit from globalization
policies, improve the way governments deliver essential services or facilitate access to a
more efficient and effective justice system, internationally, rules and frameworks of
cooperation are required in order to confront new global threats, such as communicable
141 A.Khan, A Theory of Universal Democracy: Beyond the End of History, The Hague, Kluwer
International, 13-257 (2003).
75
diseases, attacks on the environmental common heritage, destabilizing capital movements
and money laundering.142
The World Bank Legal Review, an annual series, offers a combination of legal scholarship,
lessons from experience, legal developments, and recent reports on the many ways in which
the application of law and the improvement of justice systems promote poverty reduction,
economic development, and the rule of law.143
In „Chinese Foreign Investment Laws: Recent Developments towards a Market Economy,‟
Zeng Huaqun examines and explicates the paradigm shifts in China, from command
economy toward a market economy.144
In „The Law and Economic Development in the Third World,‟ P. Ebow Bondzi-Simpson
examines critical issues that all developing countries must face. With the world becoming
progressively global and technological, vast ranges of new issues arise in commerce,
finance, communications, consumer protection, environmental safety, and the use of
resources. Developing nations need to address these concerns from their own vantage
points, not those of the developed world. This volume seeks to identify central issues,
critically analyze the political and/or juridical responses to them and propose alternative
institutional policy arrangements.145
142 R.V.Puymbroeck, The World Bank Legal Review: Law and Justice for Development (Governance
Civil Society and Participation) The Hague, Kluwer Law International, 3-627 (2003). 143 Ibid. 144 Z.Huaqun, Chinese Foreign Investment Law: Recent Development Towards a Market Economy,
New York, World Scientific Publishing Company, 1-38 (1999). 145 P.E.Bondzi-Simpson, The Law and Economic Development in the Third World, New York, 1-112
(1992).
76
In „The Role of Law and Legal Institutions in Asian Economic Development: 1960-1995,‟
Katharine Pistor, explore the role of law and legal institutions in economic development.
The work investigates the period 1960-1995, an era of rapid growth and socio-economic
transformation. The study draws on the experience of six Asian Countries. The People‟s
Republic of China; India, Japan, Korea, Malaysia and Taiwan.146
In „International Law of Responsibility for Economic Crimes: Holding State Officials
Individually Liable for Acts of Corruption,‟ Ndiva Kofele-Kale focuses upon the problem
of indigenous spoliation in developing countries. Unlike the traditional scholarship, which
is preoccupied with the exploitation of the natural wealth of developing countries by
transnational corporations, this work unveils and tackles the controversial issue of
spoliation by national officials of the wealth of the States of which they are temporary
custodians. Due to constraints of the State system and the lack of appropriate substantive
municipal efforts to punish those responsible for the economic rape of entire nations and to
recover spoliated funds have been frustrated and rendered insubstantial. The challenge,
which the author attempts to answer, is two fold. By using a multidisciplinary approach and
on the basis of data generated from empirical, cross-national research, he first makes the
case for indigenous spoliation as a violation of international law; second, he attempts to
articulate a coherent, internationally consistent international legal standard for evaluating
this type of international crime.147
Abdulhay Sayed in „Corruption in International Trade and Commercial Arbitration,‟
introduces the normative consideration of corruption in international trade from the
146 K.Pistor, The Role of Law and Legal Institutions in Asian Economic Development 1960-1995,
Oxford, Oxford University Press, 3-300 (1999). 147 N.Kofele-Kale, International Law of Responsibility for Economic Crimes: Holding State Officials
Individually Liable for Acts of Corruption, Aldershot, Ashgate, 1,9,22,35-69,79, 157, 259 (2006).
77
perspective of international commercial arbitration, and explains why there is no uniformity
in the arbitral practice concerning corruption. He calls on philosophy, social science, and
legal theory to address such issues as legal pluralism and social preconditions for the
emergence of effective public policy rules at the national or international level.148
In „Governance, Development and Globalization (Law in its Social Setting) Julio Faundez,
Mary Footer, Joseph Norton establish their point of departure in the consideration that
governance and law are today firmly on the agenda of the World Bank and other
international financial institutions. As the scope of the governance agenda expands, so does
the need to discuss and analyze the variety of factors that should be taken into account to
ensure success in the implementation of governance related projects. This book, addresses a
wide range of issues related to governance both at the local and international levels. It
covers topics that have long been on the governance agenda, such as judicial training,
privatization, financial sector reforms and various aspect of capacity building. It also covers
many issues that have only recently become part of the development agenda, such as legal
education, the political parties in the establishment of democracy. It includes studies that
explore often-neglected links between the structures of domestic governance and the
growing number of international economic law rules in the areas of trade, investment
technology transfer and the environment.149
In „Law‟s Order: What Economics Has to do With Law and Why it Matter,‟ David D.
Friedman advocates an economic analysis of law and further suggests that there is a strong
correspondence between efficiency and justice since efficiency is the foundation of modern
economics, he argues, economics can be used to explain and shape the law in ways that can
148 A.Sayed, Corruption in International Trade and Commercial Arbitration, The Hague, Kluwer
Law International, 8,9,11,19, 27, 43 (2004). 149 J.Faundez, Governance, Development and Globalization: Law in its Social Setting, London,
Blackstone Press, 5-469 (2000).
78
benefit humanity. Especially insightful is Friedman‟s application of this theory to tort and
contract law, which impose obligations based upon laws and mutual consent, respectively.
Friedman delineates formulae for dispute resolution in these and other areas of law. His
approach is modelled upon the works of noted economist Ronald Coase, whose theorem on
transaction costs has generated both positive and negative review.150
In „Economic Analysis of Law,‟ Richard A. Posner posits that economics can be used to
illuminate the entire range of legal field, including the common law fields such as contracts,
torts, property, procedures and criminal law and statutory and constitutional fields such as
antitrust, corporations, taxation, welfare law, freedom of speech, and state taxation of
interstate commerce. To him, common law fields in particular often turn out to be best
explained on the hypothesis that judges, in fashioning rules of law, are attempting to
maximize social wealth. This work represents an attempt to apply economics across the
whole range of legal fields. Posner advances the thesis that the common law, which is law,
created largely by judges rather than by the framers of statutes or constitutions, was best,
explained as if the judges were trying to maximize wealth in the economic sense. Posner‟s
argument is that a model of judicial behaviour in which judges are assumed to do just that
provides the best fit with the actual pattern of the common law, historically and today. He
attempts to use economic analysis to predict effects of various legal rules. He underscores
efficiency as the key concept for normative law and economics, that is, „Pareto Efficiency.‟
Under this schema, a legal rule is Pareto efficient if it makes at least one person better off
and it makes no person worse off. Posner‟s analysis is based on the neo-classical rational
choice theory, the zero transaction cost and risk allocation.
150 D.D.Friedman, Laws Order: What Economics Has to Do with Law and Why it Matter, Princeton,
Princeton University Press, 3-309 (2001).
79
In „The Economic Approach to Law,‟ Thomas J. Miceli posit that law is an ideal subject for
economists to study because it provides a wealth of materials for evaluating theories of
rational behaviour. The most creative researcher could not dream up the variety of
situations that even a casual examination of legal disputes reveals. According to Miceli
another reason that economists study law is that both disciplines are concerned, to varying
degrees, with incentives. Rational decision makers in economics act to further their self-
interest, subject to the constraints that they face. The economic approach to law assumes
that rational individuals view legal sanctions (monetary damages, prison) as implicit prices
for certain kinds of behaviour, and that these prices can be set to guide these kinds of
behaviour in a socially desirable direction. In recent decades, the economic approach to law
has developed into a mainstream field of study for both legal scholars and economists. The
book emphasizes unifying themes and methodologies rather than an exhaustive coverage of
legal topics.151
In „Economic Development, Foreign Investment, and the Law: Issues of Private Sector
Involvement, Foreign Investment and the Rule of Law in a New Era,‟ Robert Pritchard
posits that the issues involved in the economic development process have been pursued with
a practical approach. Bearing in mind that the legal system of each country is unique, that
many countries are currently undergoing major programmes of legal reforms and that most
development issues are country specific, this study does not make any claim to
comprehensiveness or coherence of treatment.152
151 R.A.Posner, Economic Analysis of Law, New York, Aspen Law & Business, 3-802 (1999). 152 R.Pritchard, Economic Development, Foreign Investment, and the Law: Issues of Private Sector
Investment, Foreign Investment and the Rule of Law in a New Era, The Hague, Kluwer
International, 3-265 (2002).
80
In „Exploitation of Natural Resources in the 21st Century (International Energy and
Resource Law Policy)‟ Malgosia Fitzmaurice, made the examination of the notion of
efficient husbandry of natural resources the focus of this effort. The book dwells on how the
concept of sustainable development should alter existing industrial regulations. He posits
that the essential elements of sustainable development are that it extends in time and space.
It is concerned with future generations (time) and extends to beyond a locality (space).
Indeed, as far as he is concerned, it is inconceivable to regard sustainable development
being achievable at all below the level of the global system. No locality, or industry or
country can be sustainable on its own, since all are dependent on other parts of the earth for
resources or markets, and the most that each can do individually is contribute to the
objective of achieving sustainable development.153
In „The Critical Legal Studies Movement,‟ Roberto Mangabeira Unger attempts a statement
of the goals and methodology of the Critical Legal Studies Movement. In this work, Unger
dwells on the general implications of critical legal thought for „normative commitment‟ and
for „freedom and structure in modernist experience and social theory.‟ He claims that
critical legal studies have discovered „the axis around which the most basic controversies of
social theory must revolve. Unger devotes most of this work to critical legal theory. To him,
orthodox leftist legal theory had two purposes, which is theoretical, on the one hand, and
practical, on the other, aimed at critiquing the core ideas of modern legal thought; and the
„purely instrumental use of legal practice and legal doctrine to advance leftist aims.‟ To
him, preceding leftist movement linked these two activities only loosely and perfunctorily.
The critical legal scholars, however, have reformulated both activities and „drawn them into
a larger body of ideas,‟ specifically sharpening the leftist critique of formalism and
153 M.Fitzmaurice, Exploitation of Natural Resources in the 21
st Century (International Energy and
Resources Law), The Hague, Kluwer Law International, 9-113 (2004).
81
objectivism and carried this critique to an unprecedented extreme. Unger sees the task of the
critical law studies as one of „working from within the legal tradition,‟ of using existing
„legal materials to further radical aims.‟154
In „Law in Modern Society,‟ he dwells considerably on what he characterizes as the
„Burden of the Past,‟ in social theory. He sees social theory as the study of society whose
characteristic features began to appear in the writings of Montesquieu, his contemporaries,
and successors and which reached a sort of culmination in the works of Marx, Durkheim,
and Weber. He identifies two distinguishing features of this movement; one to him has to
do with its conception of its own aim and methods, the other with a view of the relation
between human nature and history. To him, social theory is engaged in a quest for an
understanding of the different forms that people‟s awareness of each other, of nature, and of
themselves assume in each kind of social life. It is less interested in the psychology of
individual minds or in the constitution of a universal human nature than in the historically
unique systems of shared understandings and ideals that make up the culture of a society.
To him the historical conception of human nature and the emphasis on the difference
between understanding and evaluation are intimately connected. On the unity and crisis of
social theory, he identifies two theses, one that position that the social sciences are founded
on a legacy of concepts, theories and methodology of the classics. The other thesis, which
reinforces the first, is that which underscores the overlap in the theories contrived by the
classics. Hence, they make up a unified whole. He also dwells on the problem of social
order through a discussion of the relationship between form of law and of society. To him,
each society reveals through its law the innermost secrets of the manner in which it holds
men together. To him, the first step in clarifying the relationship between law and society is
154R. M. Unger, The Critical Legal Studies Movement, Cambridge Mass., Harvard University Press, 3-
130 (1986).
82
to distinguish the major sorts of law. For without such classification, he stressed, we lack a
language in which to describe the connections between species of law, on one side, and of
society, on the other. He characterizes law in the broadest sense, as simply, any recurring
mode of interaction among individuals and groups, together with the more or less explicit
acknowledgement by these groups and individuals that such patterns of interaction produce
reciprocal expectations of conduct that ought to be satisfied, he calls this, customary or
interactional law.
He identifies two sides to the concept of law as interaction; each corresponds to an aspect of
a traditional notion of custom, viz: that one element is factual; regularity in behaviour. The
other dimension, in this respect according to him is normative: the sentiment of obligation
and entitlement, or the tendency to identify established forms of conduct with the idea of a
right order in society and in the world at large. He also identifies a second concept of law as
that of bureaucratic or regulatory law. It is distinguished from custom by its public and
positive character. Bureaucratic law consists of explicit rules established and enforced by an
identifiable government. Where ever bureaucratic laws appear, there exists a State to define
more or less effectively the powers different groups may exercise over one another. There is
a third and narrower concept of law, which he calls the legal order of a legal system. To
him, law as legal order is committed to being general and autonomous as well as public and
positive. He devotes the reminder of the work to an in-depth analysis of law and modernity
and a revisit of the predicament of social theory.155
155 R. M.Unger, Law in Modern Society, New York, Free Press, 1-266 (1977).
83
CHAPTER THREE
3.0 AN OVERVIEW OF LAW AND DEVELOPMENT
3.1 THE NIGERIAN STATE, LAW AND DEVELOPMENT
Nigeria like most of her peers in the group of poor and underdeveloped countries has had
largely convoluted development path from independence in 1960 to date. She has had to
grapple with a myriad of problems which stultify economic growth, resulted in mass
impoverishment, deepening inequalities, diseases and unemployment.156
Attempts to unravel these problems by means of the adaptation of orthodoxy of economic
paradigms have failed. The bedrock of most of these paradigms is the rational choice
theory, which holds that efficiency can only be achieved when individuals, households and
firms pursue their variegated private interests and that through a process of convergence and
aggregation, these private entities would have advanced the common good of the
commonwealth by pursuing purely private interests. In an attempt to adopt these paradigms
156 F. Teal, „Domestic Policies, External Constraints and Economic Development in Nigeria Since
1950, 87 African Affairs, 69-81 (1988); J.S. Guseh , „Government Size, Political Freedom and
Economic Growth in Nigeria, 1960-2000 in Journal of Third World, 2007. Available at
http://findarticles.com/plarticles/mi_qa3821/is_200704/ai_n19431916/pq_8/?tag=content;co1; T.
Obadan, „Nigeria‟s Economy at the Cross roads,‟ 13 Africa Rocovery, 8 (1999) Available at
http://www.un.org/ecosocdev/geninfo/afrec/subjindx/131nig1.htm; A.Sekwat, „Economic Development
Experience in Nigeria,‟ in T. M. Kuotsai (ed.), Hand book of Economic Development, New York,
Marcel Dekker, 569 (1998); H.Hino, Nigeria, Washington D.C., International Monetary Fund, 4-84
(2005); Nigeria‟s economic growth performance since independence in 1960 has been disappointing,
with no significant improvement in living standards. Real economic growth averaged 3.5 per cent
between 1960 and 2002, barely exceeding average population growth. The country has also lagged
behind countries at a comparable level of economic development in 1960. Most indicators of social and
economic progress, including real per capita income, real per capita consumption, literacy, access to
clean water, and income distribution, indicate that poverty has worsened since 1960. Despite its human
and natural resource wealth, Nigeria has become one of the poorest nations of the world. Per capita
income in real terms was lower in 2002 than in 1975.
84
to solve the developmental problems afflicting Nigeria, the role and nature of the Nigerian
State have been grossly understated.157
In contradistinction to the foregoing, we argue that the nature of the Nigerian State and the
inorganic state of its laws and institutions hinder economic development. The study‟s point
of departure is that the Nigerian State lacks the capacity to effect the major changes which
will catalyse growth, development and increased wellbeing. The study posits that the lack of
capacity of the Nigerian State is due to the undifferentiated nature of its institutions. The
nature and institutional characteristics of the Nigerian State stultify its economic growth and
development. The study establishes a correlation between growth, development and the
differentiated State institutions. The nature of the Nigerian State inhibits its capacity to
deliver on the Social Compact and compete effectively in the comity of nations.158
The crucial question which agitates this study is, what factors led to the lack lustre
economic performance of Nigeria? The rentier economy of Nigeria, is characterized by
157 J. Dibua, Modernization and the Crisis of Development in Africa: The Nigerian Experience,
Aldershot Hampshire, Ashgate, 1-249 (2006); G.B.N. Ayittey, Africa in Chaos: A Comparative
History, London, Palgrave MacMillan, 259 (1999); neoliberal economic orthodoxy have largely failed
in Africa because of politically insecure reforming governments, which are most personalized and
despotic; where they are elected through electoral process marred in irregularities they suffer a crisis of
legitimacy and crippled by lack of authority. Thus the crisis of developmentalism in Nigeria is
accentuated by the lack of an authoritative legitimate State which will drive reforms; S. Grant,
„Expected Utility Theory,‟ in P. Anand, (ed.), The Hand book of Rational and Social Choice, Oxford,
Oxford University Press, 21 (2009). 158 J. Aron, „Growth and Institutions: A Review of the Evidence,‟ 15 World Bank Research Observer
99-135 (2000); P.K. Bardhan, „Understanding Underdevelopment: Challenges for Institutional
Economics from the Point of View of Poor Countries,‟ 156 Journal of Institutional and Theoretical
Economics 216-235 (2000); D.A. Grigorian., „Industrial Growth and the Quality of Institutions: What
Do (Transition) Economies Have to Gain From The Rule of Law?‟ 5 Journal for Institutional
Innovation, Development and Transition 73-82 (2001); D.C. North, Institutions, Institutional
Change and Economic Performance, Cambridge, Cambridge University Press, 5-150 (1990); E.A.
Brett, Reconstructing Development Theory: International Inequality, Institutional Reform and
Social Emancipation, London, Palgrave MacMillan, 15-320 (2009); A. Kohli, State-Directed
Development: Political Power and Industrialization in the Global Periphery, Cambridge, Cambridge
University Press,322 (2004). The pattern of State construction and pattern of State intervention aimed
at driving growth and development would impact on development. Economic growth and development
is invariably stultified in a neo-patrimonial State like Nigeria. The origin of the neo-patrimonial State
in Nigeria is traceable to the Nigeria‟s peculiar colonial experience in the process of construction of the
Nigerian State.
85
overwhelming dependence on a single easy source of income, that is, petroleum resources; a
shrinking real sector; lack of economic growth, mass impoverishment, low literacy rates;
inequity in the allocation of resources; limited access to health services and high rate of
destitution among the urban poor. Between 1973 and 1992 Nigeria experienced a 21 per
cent change in Gross Domestic Product (GDP) per capita while GDP per capita declined by
23 per cent. The share of real sector‟s contribution to GDP declined from 46 per cent in
1980 to 41 per cent in 1998. The manufacturing sector in Nigeria contributed 8 per cent of
GDP in 1980 and declined to 5 per cent in 1998. While the share of the service sector
contribution to GDP declined from 34 per cent in 1980 to 27 per cent in 1998159
The pertinent question, then, is why has the Nigerian State failed in the growth and
development process? The study posits that the Nigerian State lacks capacity, by using the
institutional approach; the study seeks to highlight the fundamental factors inhibiting the
States capacity to perform economically. The centrality of the State, law and institution of
State is underscored under this schema. Thus the resilience and differentiation of
institutions of State will invariably impact on the capacity of the State to attain high
economic performance.160
According to the neo-liberal school, economic failure in developing countries is as a result
of the non-adherence to the tenets of the liberal free market economic paradigm which
underscore trade liberalization; private sector led growth, and curtailment of the
overwhelming presence of the State in the economic sphere. The pertinent question is
159 World Bank, World Development Report 2000/2001: Attacking Poverty, Washington D.C., World
Bank Publication, 15, 45, 61 (2000). 160 P. Collier, The Bottom Billion: Why the Poorest Countries are failing and what Can Be Done
About It, Oxford, Oxford University Press, 3, 224 (2008); W. R. Easterly et al., The Elusive Quest For
Growth: Economists’ Adventures and Misadventures in the Tropics, Cambridge, The MIT Press, 1,
356 (2002).
86
however, why has Nigeria continued to drift after the application of this neo-liberal
panacea? The drift of the Nigerian State is unremitting, because of the lack of synergy and
interaction between this plethora of wide arrays of neo-liberal models and economic
policies based on such paradigms. Adaptations of such models fail in Nigeria because of the
peculiar structure of the Nigerian State. The State lacks capacity in Nigeria; and is
characterized by undifferentiated institutions and inorganic laws, inefficiency in the
husbandry of resources, low intellectual input in governance and corruption pandemic.161
As a result, the orthodoxy of macroeconomic paradigms and policies has failed from the
1980s. The failure of orthodoxy or neo-liberal policies in the first half of the decade, as
earlier adumbrated, is attributable to external shocks and globalization, wrong economic
choices and inconsistencies but most importantly, the progressive and consistent erosion of
the States institutional and administrative capacities. Further policy experimentations also
collapsed owing to the unconscionable state of the rule of law; and military dictatorship;
rising ethnic nationality conflicts and the States inability to implement its decisions due to
corruption and the refraction of such policies through the prism of ethnic and sectional
interests. The legacy of the 80s and 90s include deepening social cleavages; highly volatile
161 R.A. Posner, A Failure of Capitalism: The Crisis of 2008 and the Descent into Depression,
Harvard University Press, passim (2009). State capacity refers basically to the effectiveness with which
policies are made and implemented. State capacity is independent of political regimes; both democratic
and despotic regimes vary terms of the effectiveness of their States. Lack of effectiveness may be due
to factors such as the sheer incompetence of bureaucrats in the State apparatus; lack of adequate
material resources; corruption; insufficient autonomy vis-à-vis elites and other strategic groups in the
society.
The economic and political consequences of a weak State capacity would vary according to the extent
of the State‟s control of the society, the larger the scope of the State, the more devastating the
consequences of its ineffectiveness. Capacity encapsulates (a) administrative capacity which is the
efficient management of resources in the various administrative processes required for delivering the
outputs of government, such as public services, enforcement of regulations and so on, (b) policy
capacity, is the ability to marshal information and decision making power to make intelligent choices
and to set strategic policy directions, (c) State capacity is the ability to mobilize social and economic
power through participation and co-operation to achieve a wide variety of social and economic goals; J.
Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street,
New York, HarperBusiness, passim (2009).
87
politics; international isolation; a severely weakened State and a totally alienated
populace.162
While the study is by no means oblivious of the success and positive impact of neo-liberal
models in certain developmental States, particularly the Asian emergent economies, it
however departs significantly from the unqualified assumption of the neo-liberal school that
these models collectively represent panacea for redressing the development deficits of the
group of very poor underdeveloped countries.163
162 N.S. Okogbule, „An Appraisal of the Legal and Institutional Framework for Combating Corruption
in Nigeria,‟ 13 Journal of Financial Crime 92-106 (2006); International Monetary Fund, Nigeria:
Poverty Reduction Strategy: National Economic Empowerment and Development Strategy, IMF
Country Report, No.05/433, Washington D.C., IMF Publications, 7 (2005); G.T. Abed et al.,
Corruption, Structural Reforms and Economic Performance in the Transition Economies,
Washington D.C. International Monetary Fund, 132 (2002); L. Anderson, „Antiquated Before They
Can Ossify: States that Fail Before They Form, 58 Journal of International Affairs 1-16 (2004); J.
Milliken, ‘ State Failure, State Collapse, and State Reconstruction: Concepts, Lessons and Strategies,‟
33 Development and Change 762 (2002); C. Clapham, Africa in International Relations: The Politics
of State Survival, Cambridge Cambridge University Press, 34 (1996); R. I. Rotberg, When States Fail:
Causes and Consequences, Princeton, Princeton University Press, passim (2003). 163 A.H. Amsden, The Rise of the Rest: Challenges to the West from the Late-Industrializing
Economies, Oxford, Oxford University Press, passim (2001); M.Beeson, Regionalism, Globalization
and East Asia: Politics, Security and Economic Development, Basing Stoke, Palgrave, passim (2007);
S.K. Vogel, Japan Remodeled: How Government and Industry are Reforming Japanese Capitalism,
Ithaca, N.Y., Cornell University Press, passim (2006); E. Terry, How Asia Got Rich: Japan, China,
and the Asian Miracle, Armonk N.Y., M.E. Sharp, passim (2002); S. Baek, „Does China Follow the
East Asian Development Model?‟ 35 Journal of Contemporary Asia 485-495 (2005). The features of
the Japanese State, principal among which were competent State agencies and carefully calibrated
industrial policies, that allowed it to play a decisive role in directing the course of Japan‟s economic
resurrection from the devastation of war. The key quality that made the State in Japan developmental
was that it planned the development process rather than relied on market forces to determine the
optimal allocation of resources. Unlike „market rational‟ States, which were concerned with simply
establishing the rules of the economic game, the „plan rational‟ State sought to formulate and pursue
„substantive social and economic goals.‟ Differing State capacities underscore the relative success of
Asian countries vis-à-vis the abysmal economic performance of African States. At one level State
capacity may be defined simply as a State‟s ability to design and implement policy. However, this begs
a series of further questions about the precise attributes that allow some broadly similar States to do
this more or less effectively while others find it more difficult. The varying degree of success is a
function of the degree of „stateness‟ or „strength‟ that different States may have. It is the apparent
absence of such qualities that explains disappointing developmental outcomes in Africa. By contrast, it
was precisely the possession of State strength, or more particularly an ability to penetrate and mobilize
the society in which the State was embedded is the key to the rise of East Asia; J.S. Midgal, Strong
States and Weak Societies: State Society Relations and State Capabilities in the Third World,
Princeton, N.J., Princeton University Press, passim (1988); M. Beeson, ‘Neoliberalism and East Asia:
Resisting the Washington Consensus, 41 Journal of Development Studies 197-219 (2005).
88
In contradistinction to the foregoing neo-liberal tenet, the study argues that macro-economic
orthodoxy can be efficacious only where certain antecedent conditions have been met, of
which the most fundamental are, that the institutional capacity of the State be high, there
must be the rule of law as development can only occur in an environment of formal rational
law, where expectations are not wilfully disparaged, transparency and zero tolerance for
corruption.164
Economic paradigms and policies predicated on market fundamentalism suffer several
inanities. For one, despite the adaptation of macro economic orthodoxy, Nigeria and
preponderance of underdeveloped nations have slid deeper and deeper in the mire of
poverty; this raises questions about the internal precision of the Washington Consensus and
cast doubts about the efficacy of economic policies predicated on them.165
164 R.D. Cooter, „Rule of State Law and the Rule-of-Law State: Economic Analysis of the Legal
Foundations of Development,‟ in The Proceeding of Annual World Bank Conference on
Development Economics, Washington D.C., The World Bank, 191-217 (1997); P. Craig, „Formal and
Substantive Conceptions of the Rule of Law: An Analytical Framework,‟ 31 Public Law 467-487
(1997); G. Yash, „The Rule of Law, Legitimacy and Governance,‟ 14 International Journal of the
Sociology of Law 179-208 (1986); B.Weingast, „The Political Foundations of Democracy and the Rule
of Law,‟ 91 American Political Review 245-263 (1997); R.Barro, „Economic Growth in a Cross-
Section of Countries,‟ 106 Quarterly Journal of Economics 407-444 (1991); W. J. Henisz, „The
Institutional Environment for Economic Growth,‟ 12 Economics and Politics, 1-31 (2000); P. Keefer,
„Why Don‟t Poor Countries Catch Up? A Cross-National Test of an Institutional Explanation,‟ 35
Economic Enquiry 590-602 (1997); R. La Porta, „The Quality of Government,‟ 15 Journal of Law,
Economics, and Organization 222-279 (1999); P. Mauro, „Corruption and Growth,‟ 110 Quarterly
Journal of Economics 681-712 (1995). 165 K. S. Jomo, „Economic Reform for Whom?: Beyond the Washington Consensus,‟ 35 Post-autistic
Economic Review 11-18 (2005). Available at
http://www.paecon.net/PAEReview/issue35/Jomo35.htm; B.Kahn, „Africa and the Washington
Consensus.‟ Available at http://www.fonded.org/uploaded/Diversity%20i; K.Y. Amoako,
Transforming Africa, An Agenda for Action, New York, United Nations, passim (2005); D.Rodrik,
„Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank‟s
Economic Growth in the 1990s: Learning from a Decade of Reform,‟ 44 Journal of Economic
Literature 973-987 (2006). Korea for instance did not play by the orthodox wisdom (nor has it ever
accepted the Washington Consensus to be therapeutic during the Asian crisis) when it started to
integrate into the world economy. In contrast, the country successful economic reform involves two
major key strategies-market orientation coupled with central planning in developing and protecting
infant industries while strategically opened up other industries to the world market. During the reform,
Korean government, indeed, acted as an entrepreneur to induce desirable private investments towards
targeted industries. Korean trade liberalization, therefore, was a selective process instead of being
driven solely be global marketization. Many major sectors were deliberately protected and excluded
from trade. By using selective export strategy and heavy government intervention, Korea was able to
89
Secondly, the Washington Consensus fails to address the pervading inequities in most
developmental States. Thirdly, while the Washington Consensus underscores the
significance of good governance in economic development, it grossly understates the
centrality of the State, its laws and institutions in development process.166
Thus, the study argues that the nature of the Nigerian State and its institutions are crucial to
its development, it equally posits that its lack lustre economic performance is due to lack of
State capacity. It avers that macroeconomic orthodoxy, rule of law are in themselves,
dependent variables, dependent on the nature of the State, its institutions and organizational
structure. Where for instance there is lack of intellectual input in governance, this can only
occur where technocrats are not employed on merit, there are bound to be distortions within
organization of State, such personnel invariably are most prone to corruption and subversive
of corporate existence of the State in preference for promotion of purely personal and
sectional interests. Where that is the state of affairs as is the case in Nigeria, bureaucrats are
more inclined to undermining the rule of law and due process than upholding them. That
outcome will invariably hold, without prejudice to the constitutional entrenchment of lofty
ideals of the rule of law. State organizations are not entities in abstraction they are the sum
of variegated individuals; rules and procedures contrived to ensure that they function
optimally in furtherance of the objective principle of State policy which informs their
establishment. Where the State is characterized by corruption pandemic and lack of
develop many highly competitive manufacturing industries such as automobiles, electrical appliances
and shipping which respectively hold their own names in the world market. 166 H.Chang, „The Market, the State and Institutions in Economic, Development,‟ in H. Chang (ed.),
Rethinking Development Economics, London, Anthem Press, 41 (2003); P. Drysdale, Reform and
Recovery in East Asia: The Role of the State and Economic Enterprise, London, Routledge, 14
(2000); M. Lange, States and Development: Historical Antecedents of Stagnation and Advance, New
York, Palgrave Macmillan, 4 (2005); J. D. Pedersen, Globalization, Development and the State: The
Performance of India and Brazil Since 1990, New York, Palgrave Macmillan, 25 (2008).
90
meritocracy, State officials, will undermine rules rather than enforce them, this
phenomenon is pervasive in the Nigerian Structure.167
In itself, the foregoing portends great danger for the survival of the Nigerian nation, for it is
within organizational structures that best practices which determines whether rules are
enforced are deliberately cultivated as enduring values and tradition. Equally,
organizational structures also serve as platforms for the intermediation of conflicts with a
view to building compromises and consensus in the allocation of scarce resources. The
rentier State structure in Nigeria is an antithesis of the ideal organization structure of the
State which is contrived for the articulation and enforcement of rules which can catalyse
growth and development.168
The study adopts the framework which underscores the inherent institutional characteristics
of the Nigerian State; and its relationship with socio-economic and political actors
invariably impacts its economic performance and capacity to deliver on the social compact
and sustain international competitiveness. Thus the study argues that States with resilient
institutions generated by enduring values attain growth and development over and above
States characterized by inorganic, undifferentiated and weak institutions.169
In its attempts to determine the features of a State which leads to the foregoing outcomes,
the study analytically and conceptually underscore the centrality of institutions and law, the
two variables are mutually reinforcing. The study highlights the function of a competent
State, which capacity for prompt intervention has not been compromised. Accordingly, the
study shows that the institutional characteristics of the Nigerian State impact in no small
167 L. G. G. Morales, The Economics of Corruption and Bureaucratic Inefficiency in Weak States:
Theory and Evidence, New York, Peter Lange, passim (2003). 168 S. Andreski, Max Weber on Capitalism, Bureaucracy and Religion, London, Routledge,62 (2008). 169 H. Stein, Beyond the World Bank Agenda: An Institutional Approach to Development, Chicago,
University of Chicago Press, 111 (2008).
91
measure on its economic and social performance. The study found that successful
economies are those that have nurtured institutions which have the features of meritocracy,
absence of ascriptive roles, rationality driven, political plurality, lack of social stratification,
non existence of absolutist and personalized governments, psychological acceptance of laws
by the citizenry, strong judiciary, transparency and zero tolerance of corruption. A State‟s
economic performance invariably is a function of the extent to which these features
characterize its institutions. Meritocracy and well defined career trajectories creates
organizational harmony, efficiency and inclination for embarking on long ranged goals. By
increasing the intellectual input in governance, the foregoing negates the prospect of rent-
seeking behaviour, it also increases the capacity of the State to engage with and secure the
cooperation from civil society; business; labour and groups regarding its policies and
projects. Thus the study argues that State-business, civil society relations constitute a
veritable source of State capacity, and therefore impact economic performance. It also
establishes a link between participatory/consultative structures and process rather than
coercion.170
Where technocratic elites are highly knowledgeable and meritoriously recruited, well-paid
with well defined career paths they will most likely ensure efficiency and minimize
corruption and ensure that resources are efficiently allocated pursuant to economic and
social well being of the citizenry.171
In contrast where recruitment is predicated on patronage and ascription, a culture of waste;
inefficiency and corruption will be the norm as bureaucrats are more inclined to being loyal
170 C. Clague, Institutional and Economic Development: Growth and Governance in Less-Developed
and Post-Socialist Countries, Baltimore, John Hopkins University Press, 13 (1997). 171 P. Silva, In the Name of Reason: Technocrats and Politics in Chile, Pennsylvania, Pennsylvania
State University Press, 84 (2009).
92
to patrons and pursuance of purely private goals. Such bureaucracies are wont to divert and
siphon resources from productive poverty reducing policies and projects to ruinous and
compulsive consumptive projects and policies.172
That granted an efficient bureaucracy requires to be complemented by a political elite which
guarantees the accountability of the bureaucratic elite. It is only in this way that efficiency
and optimalization can be achieved in the husbandry of resources.173
In contradistinction to the foregoing, renteerism will be fostered and well articulated
policies and paradigms will fail where technocratic elites are preoccupied with the pursuit
of individual private interests and maximization than successful execution of State policies.
Policies will not be predicated on economic rationality, but rather on private and individual
agendas to capture public resources for personal gains. Bureaucrats pursue a life style of
compulsive consumption and primitive accumulation in Nigeria with concomitant untoward
effect on the over all economy.174
Equally important is the caveat that where State capacity is mobilized to make wrong
economic choices in the wrong sectors by promotion of narrow interests such as Nigeria‟s
building of huge steel complexes that never rolled out any steel since commission and
embarking on various white elephant projects which have low salvage value and abandoned
172 G. M. Meir, Leading Issues in Economic Development, Oxford, Oxford University Press, 481
(2000). 173 M. Heller, Capitalism, Institutions, and Economic Development, New York, Routledge, 271
(2009). 174 D. J. Smith, A Culture of Corruption: Every Day Deception and Popular Discontent in Nigeria,
Princeton, Princeton University Press, 53 (2008); P. Green, State Crime: Governments, Violence and
Corruption, London, Pluto Press, 45 (2004); P. Collier, Economic Policy Options for a Prosperous
Nigeria, London, Palgrave Macmillan, 31 (2008).
93
projects contrived for the purpose of despoliation rather than economic rationality, these
will impact negatively on economic growth and development.175
Another fear in Nigeria is the rising spectre of institutional capture with its concomitant
rent-seeking proclivity, which invariably disparages economic transformative programmes.
Public/private sector cooperation and synergies are contrived between the Nigerian State
and society pursuant to generating purely distributional coalitions rather than meaningful
economic transformation and equitable distribution of resources. Such coalitions are
contrived pursuant to obtaining from the State purely private gains for individuals and
groups to the detriment of the commonwealth. However, where the State organizational
structure is characterized by meritocracy, rationality, transparency and zero tolerance of
corruption, the State can insulate itself from the danger of institutional capture and
renteerism. It will also discourage socio-economic players from annexing institutional ties
to curry favours and patronage from bureaucrats and the State.176
In Nigeria, the State-society relation is too paternalistic, vertical and axial. Businesses,
professional associations, labour and civil society have been deliberately weakened and
fragmented with low resources endowment to meaningfully compel accountability of the
State. The foregoing perhaps constitutes the reasons for the rather low capacity of the
175 F. Stewart, Adjustment and Poverty: Options and Choices, London, Routledge, 51 (1995); R.
Szostak, The Causes of Economic Growth: Interdisciplinary Perspective, Berlin, Springer, 103
(2009). 176 D. Fuguitt, Cost-Benefit Analysis for Public Sector Decision Makers, New York, Greenwood
Press, 19 (1999); J. J. Laffont, „Transaction Costs, Institutional Design, and the Separation of Powers,‟
42 European Economic Review 673-684 (1998); World Bank, Poverty Reduction and the World
Bank, Washington D. C., World Bank Publications, 38 (2002); J. J. Chriss, Social Control: An
Introduction, Cambridge, Polity Press, 187 (2007).
94
Nigerian State to effectuate the far reaching changes required to transform Nigeria to a
modern State economy.177
According to Nicolas Van de Walle the African State
is highly fragmented, composed of divergent interests and permeated by patrimonial
networks that link its top echelons with the most isolated villages. At the same time,
however policy-making processes in the State apparatus are relatively impermeable to
pressures from economic and functional interest groups. The paradox is only apparent; for
though the State is weak and its capacity to implement desired policies severely limited, its
monopoly on coercive power and the absence of significant independent non-State
institutions grant it much autonomy.178
Thus far, it has been demonstrated that the capacity of the Nigerian State to effect the far
reaching changes pursuant to transforming its economy and catalysing growth and
development must be predicated on the resilience of State institutions and the reciprocal
cooperative relations between these institutions, and with society, national and international
power centres. High economic performance and or under performance depends on a largely
insulated State bureaucracy characterized by meritocracy, rationality, transparency and zero
tolerance of corruption, duly complemented by political elites who have a clear vision of
those far reaching changes that will transform the economy.179
Since the dawn of human history, the State arguably represents the most central and
complex socio/political organizations. Its centrality and complexity derives from its process
177 J. Midgal, Strong Societies and Weak States: State-Society Relations and State Capabilities in the
Third World, Princeton, Princeton University Press, 3,10,15,24,33 (1988); K. Omeje, State-Society
Relations In Nigeria: Democratic Consolidation, Conflicts and Reforms, London, Adonis & Abbey,
10, 15 (2007). 178 N. Van de Walle, African Economies and the Politics of Permanent Crisis, 1979-1999,
Cambridge, Cambridge University Press, 113 (2001). 179 H. Stein, Beyond the World Bank Agenda: An Institutional Approach to Development, Chicago,
The University of Chicago Press, 85, 111 (2008); R. Peet, Theories of Development: Contentions,
Arguments, Alternatives, New York, The Guilford Press, 214, 282 (2009).
95
of evolution, its functions and most importantly the magisterial powers it arrogates to itself
in its relationship with every other institution within the socio-political milieu. Thus,
historically, the State evinces an uncanny astuteness for drawing the vortex of powers to it
and it seeks to sustain itself by relating axially and vertically to other institutions in the
polity which compete with it for influence and power. It achieves this through progressive
and systematic erosion and decimation of other power centres, but lately it seeks to achieve
this obliquely by establishing its legitimacy, which certain communities of opinion
characterize as the States proclivity for self preservation, renewal and continuity.180
The history of human society is perhaps a chronicle of attempts at justification and
legitimization of the State. Various attempts have been made by jurists and philosophers to
articulate a justification for the State. Typically, such justifications are invariably hinged on
certain virtues that an ideal State must possess or the social goods and services it must
provide for the well being of its citizenry, such as social justice, equity and the rule of law;
protection of life and property and so forth.181
Engels in „Violence and Origins of State,‟ attempts a description of the origin of the State in
„Chapter on Barbarism and Civilization,‟ he posits that society,
…by all its economic conditions of life had been forced
to split itself into freemen and slaves, into the exploiting
rich and the exploited poor; a society which not only
180 A. Johnson, The Evolution of Human Societies: From Foraging Group to Agrarian State,
Stanford, Stanford Unversity Press, 29, 32 (2000); C. Schmitt, The Leviathan in the State Theory of
Thomas Hobbes: Meaning and Failure of a Political Symbol, Chicago, University of Chicago Press,
91 (2008); J. S. Midgal, State in Society: Studying How States and Societies Transform and
Constitute One Another, Cambridge, Cambridge University Press, 41, 97, 231 (2001). 181 M. Wissenburg, Political Pluralism and the State: Explorations in Political Theory Beyond the
Nation-State, New York, Routledge, 102 (2008);
96
could never again reconcile these contradictions, but
was compelled always to intensify them. Such a society
could only exist either in the continuous open fight of
these classes against one another, or else under the rule
of a third power (the State) which, apparently above the
warring classes, suppressed their open conflict and
allowed the class struggle to be fought out at most in the
economic field, in so called legal form. The gentile
constitution was finished. It had been shattered by the
division of labour and its result, the cleavage of society
into classes. It was replaced by the State….
As the State arose from the need to keep class
antagonisms in check, but also arose in the thick of the
fight between the classes, it is normally the State of the
most powerful, economically ruling class, which by its
means becomes also the political ruling class, and so
acquires new means of holding down and exploiting the
oppressed class. The ancient State was, above all, the
State of the share owners for holding down the slaves,
just as the feudal State was the organ of the nobility for
holding down the peasant serfs and bondmen, and the
97
modern representative State is the instrument for
exploiting, wage-labour by capital.182
Engel argues that human history is characterized by a culture of State violence, either in
form of war with other contending States or by way of its appropriation and monopoly of
the apparatus of force and coercion to inflict violence on its population pursuant to
enforcing or imposing its will.
Consequently Engel and his cohort, Marx adumbrated that capitalism, which is the very
essence of the modern State would be supplanted by socialism, this to them marks the end
of the dialectic process as there would be no further conflicts, and the State would atrophy
and become extinct.183
According to Engel, in the socialist utopia,
a special repressive force, the State, is no longer
necessary ……State interference in social relations
becomes, in one domain after another, superfluous, and
then dies out of itself; the government of persons is
replaced by the administration of things, and by the
conduct of processes of production. The State is not
„abolished.‟ It dies out.184
182 F. Engels, Origins of the Family, Private Property and the State, New York, Pathfinder, 195
(1972). 183 K. Marx, The Communist Manifesto: Complete With Seven Rarely Published Prefaces, New
York, Filiquarian, 53 (2007). 184 F. Engels, Socialism: Utopian and Scientific, New York, Pathfinder Press, 37 (2008).
98
Carneiro, in his work „A Theory of the Origin of the State,‟ attempts a modification of the
fundamentals of the coercive theories of State. He suggests that States evolve in response to
ecological or social circumscription, or resource concentration. When dense populations
develop, fighting over land forces loser into political subordination or cooperation.
Concomitantly, he equally rejected the posturing of voluntaristic theories such as the Social
Contract Theory.185
To Nozick, the most crucial question of political philosophy, which must be resolved before
any consideration of what structure the State should assume, is whether there is a need for a
State entity to superintendent the affairs of human society. He attempts an exploration of the
state of anarchy, which is a converse of the State theory. To him, beginning the subject of
political philosophy with state-of-nature theory has an explanatory purpose. He dwells on
the need to first prove that the State would be superior to a state of anarchy, that it is only
when that yields an outcome establishing conclusively, the superiority of the State over and
above the state of anarchy can a rationale for the State‟s existence and its justification can
be derived. He submits that anarchy is not tenable, while concomitantly advocating for a
„minimal State‟ or what he characterizes as „night watchman State‟ which function and
purpose is restricted to the protection of the rights of its constituents.186
Individuals in Locke‟s state of nature are in:
state of perfect freedom to order their actions and
dispose of their possessions and persons as they think
fit, within the bounds of the law of nature, without
185 R. L. Carneiro, A Theory of the Origin of the State, New York, Menlo Park, 10 (1970). 186 R. Nozick, Anarchy, State, and Utopia, Oxford, Wiley Blackwell, 3,10,26 (2003).
99
asking leave or dependency upon the will of any other
man, the bounds of the law of nature require that no one
ought to harm another in his life, health, liberty, or
possessions. Some persons transgress these bounds,
invading others rights and doing hurt to one another, and
in response people may defend themselves or others
against such invaders of rights. The injured party and his
agents may recover from the offender so much as may
make satisfaction for the harm he has suffered.187
For Locke, the state of nature leads to civil society. Those who feel the inconveniences of
the state of nature enter into a social compact to establish a minimal State. To join is not
compulsory.188
Norzick‟s thesis is that while Locke‟s civil society is a logical state preceded by the state of
nature, it would be apposite to seek remedies for the inanities of the state of nature without
necessarily creating a State, within the state of nature. In a sense, Norzick‟s effort is
evolutionary and less ahistorical than the social contract theory. It is not postulating in
abstraction, an assembly of rational men who sought to redress the foibles of the state of
nature. Norzick‟s entrepreneur who enters into a contract with clients who want protection
is like the feudal Lord and the stage when contracts between the protectors and clients are
replaced by unilateral protection and taxation corresponds to the defeudalising of States in
latter middle ages Europe.189
187 John Locke, Two Treatises of Government, Cambridge, Cambridge University Press, 137,141
(1988). 188 Ibid. 189 Note 31, supra.
100
However, the foregoing is regarded a distinction without a difference as Norzick is hard put
to characterize his entrepreneur and how radically different he is from say, Hobbes,
Leviathan.190
In his explication and contribution to the legitimacy of State discourse, Rawls in „Justice as
Fairness,‟ aims to describe a just arrangement of not only the State, but all the major
political institutions of a liberal society, such as the political constitution, the legal system,
the economy, property, capital and so forth. According to him, the arrangement of these
institutions is a society‟s basic structure. Norzick‟s point of departure, if we recapitulate is,
that, the existence, that is, how an institution came into being, and its justification should be
the starting point of analysis. Be that as it may, to Rawls, the basic structure of an institution
be it the State or other institutions of State is the location of justice because these
institutions distribute the main benefits and burdens of social life, for instance, the State
defines what basic rights appertains to individuals, creates or refrains from creating
opportunities for its citizenry to have a livelihood, determines the distribution of income
and wealth and allocation of resources.191
Thus to Rawls, the form of a society‟s basic structure will have tremendous impact on the
wellbeing of the citizenry, influencing according to him not only their potentials but their
very essence as humans. Hence institutions such as the State that have such far reaching
impact on human kind must be justified. Furthermore, he argues that since existing society
is not a viable proposition for most citizens, it would be fallacious to conclude that they
have consented to be bound by its rules and have accepted as an article of faith its
institutional arrangements because they remained in its jurisdiction. The requirement for
190 Ibid. 191 J. Rawls, Justice as Fairness, Cambridge Mass., Belknap Press of Harvard University Press, 5, 8,
10, 39 (2001).
101
justification of the State and the imposition of its authority is further heightened, in view of
the fact, that such rules and authority are axially and coercively enforced, while their breach
is often visited with dire penalties.192
Hobbes Leviathan represents perhaps, the most enterprising rationalization of State and
apologia of absolutist monarchies. He succinctly articulates a justification of the State and
proffers criteria for its legitimization. The heart of his political philosophy is to be found in
the social contract theory. In his bid to justify the curtailment of liberties, and expand
authority of State, he argues for the necessity of a sturdy central authority to avert further
reoccurrence of the civil war that ravaged the England of his time.193
He postulates that man is ruled by basic instincts and passions which without rein would
lead to a state of war, a war of all against all, bellum omnium contra omnes, a virtual state
of nature in which every individual has unqualified right and licence. Man‟s life in this state
of nature is „solitary, poor, nasty, brutish and short.‟ In order to reverse that state of affairs,
men by mutually binding convention, he characterizes as a social contract agreed to create a
civil society. In this society, all contracting parties agree contractually to cede and subsume
their rights under a sovereign who becomes responsible for their protection. He argues for
the concentration of power in the sovereign by rejecting the tenet of separation of powers
and regards tyranny of the sovereign as the price of peace that is to be borne by the people.
The powers of the sovereign must be far reaching and all encompassing.194
Aside from the inanity of the contract theory which is the prop upon which he establishes
his political philosophy, particularly its foible of being an historical abstraction, as it is
192 Ibid. 193 T. Hobbes, Leviathan, Oxford , Oxford University Press, 7, 111,403 (2008). 194 Ibid.
102
improbable to locate the point in human history when the social contract was negotiated and
concluded between men. Hobbes philosophy has been characterized as ultra-deterministic
and an anti thesis of methodological individualism or its metaphysical converse the
philosophy of the free-will upon which the so called libertian notion of the modern nation
State is predicated.195
In his two treatises of Government, Locke characterized the state of nature as a state in
which men lived in accordance with their own whim and caprice, free and equal with no
entity imposing its will upon them. Man‟s conduct according to him is only restrained by
natural law or the law of reason which stipulates that no individual shall disparage the
liberty, property, health and life of another. Thus while man has an unfettered freedom, in
Locke‟s state of nature, he nevertheless has no licence to infringe on the rights of others.
The law of reason acts as a rein on his conducts and passions. The law of nature or the law
of reason is susceptible of different interpretations as there is no central authority to enforce
the law of nature. Thus while Locke‟s state of nature is not that of outright war, it is
nevertheless a precarious order, fraught with uncertainties, fears and perils. At this point
Locke‟s theory of the social contract converges with Hobbes anarchic interpretation. The
only difference between their divergent posturing is that, while Hobbes state of nature is
that of permanent belligerence among men, Locke‟s perspective is anticipatory of imminent
war.196
Thus at this point of convergence, Locke like Hobbes found the rationale of the State on the
necessity to redress the inanities of the state of nature, to avoid the state of war that
characterizes the state of nature and to protect life and property; that men enter into civil or
195 Ibid. 196 Note 32, supra.
103
political society. The State according to Locke is a creation of contract in which men
covenant with one another to yield their individual rights of enforcing the natural law or law
of reason to the commonwealth pursuant to the preservation of life, liberty and property.
Locke differs in this respect from Hobbes, as he invests sovereignty in the people and not a
leviathan.197
Unlike Hobbes and Locke‟s depiction of the state of nature as that of war and imminent war
respectively, Rousseau‟s state of nature is an idyllic state of bliss devoid of the
imperfections of the Hobbesian state of nature where men were equal and at liberty to
pursue a life of happiness. In his state of nature, man is not a self-absorbed, egoistic, selfish
entity but empathic, imbued with a communitarian spirit of peaceful co-existence with other
men.198
This idyllic world according to Rousseau, was shattered through an evolutionary process
beginning with the creation of the institution of private property reinforced by population
pressure on scarce resources as a result of which conflict arose between men in their contest
to appropriate resources. This pervasive state of conflict necessitates the need for an arbiter
to whom man is under compulsion to yield his natural freedom. However, unlike in Hobbes
theory, Rousseau‟s arbiter is a creation of a general will, a sort of collective body or
assembly under whom the individual subsumes his personal will and freedom, the general
will of the community constitutes the sovereign. It would seem that Rousseau‟s theory is
similar to Locke‟s in that under his schema, the individual surrenders his rights to the
community rather than to the ruler as Hobbes postulates; similarly he makes a distinction
between the State and government. His postulations are tangential to Locke‟s as he
197 Ibid. 198 J. Rousseau, The Social Contract, Oxford, Oxford University Press, 9,43,53,54,56 (2008).
104
underscores total surrender of freedom to the collective, thus investing it with absolute
sovereignty, in Locke‟s schema, sovereignty is neither absolute in the collective nor does
the individual totally surrender his freedom.199
The major flaw of Rousseau which critiques have underscored is that he understates the
potentials for the general will‟s unfettered powers to progressively result in absolutism and
despotism. The general will may not be the value free will of the collective in pursuit of the
common good, it is equally not improbable that what the community wills is not only wrong
but disparages the common good.200
The divergence of perspectives on the origin and purpose of the State articulated by various
philosophers‟ leads to one outcome, and this is that a State is a State to the extent that it
legitimizes its existence by delivering social goods and services pursuant to enhancing the
well being of the people. It must restrain itself from omissions and commissions which will
result in manifest breach of the social contract. Where the compact is disparaged, then the
State loses its essence and lacks legitimacy.201
3.2 THE RULE OF LAW AND ECONOMIC DEVELOPMENT
The rule of law is a sine qua non for good governance, efficiency and opitimality in the
husbandry of resources, growth and development. In itself, the doctrine of the rule of law
connotes the centrality of law and its institutions in a polity. It denotes the absolute
supremacy and pervasiveness of formal rational law over and above the exercise of arbitrary
199 Ibid. 200 Ibid. 201 J. H. Turner, Human Institutions: A Theory of Social Evolution, Lanham, Rowman and Littlefield,
182 (2003).
105
power, prerogative or unfettered discretionary authority. Where ever there occurs a rule of
law deficit, such a polity is invariably characterized by anarchy and chaos and a total lack of
rein on the economy. Our task in this segment is to demonstrate the untoward impact which
an unconscionable state of the rule of law has on growth and sustainable economic
development. It is however apposite to attempt a characterization of the doctrine of the rule
of law before we embark on this task.202
Since the dawn of human history, the doctrine of the rule of law has come to mean several
things to all manner of people. The doctrine has come to be associated with democracy,
constitutionalism; fundamental human rights; legislative supremacy; independent judiciary;
law and order and its converse, corruption.203
It engaged the interest of ancient thinkers who elucidated on its theoretical and
philosophical foundation. Aristotle opined that, „the rule of law is preferable to that of any
individual,‟ he stressed that „law should be the final sovereign; and personal rule, whether it
be exercised by a single person or body of persons, should be sovereign in only those
matters which law is unable, owing to the difficulty of framing general rules for all
contingencies,‟ the import of Aristotle‟s formulation is that it establishes the centrality of
law, such that every act or omission of every official of State, organ of State, and the
citizenry are constrained by law. Thus to Aristotle, the law alone constitutes, the benchmark
with which to determine the propriety or impropriety of human and institutional conducts
whether by way of conformity with particular legislation or the constitutionality of
202 R. D. Cooter, „The Rule of State Law and the Rule-of-law State: Economic Analysis of the Legal
Foundations of Development,‟ in the Proceedings of The Annual World Bank Conference on
Development Economics, 1996. Available at. http://works.bepress.com/robert_cooter/48 203 K. W. Dam, The Law-Growth Nexus: The Rule of Law and Economic Development, Washington
D.C., Brookings Institution Press, 13,14,15, 16 (2006); J. M. Maravall, Democracy and the Rule of
Law, Cambridge, Cambridge University Press, 62 (2003); R. A. Cass, The Rule of Law in America,
Baltimore, The John Hopkins University Press, xi, xii, xiii,xiv,2, 5 (2003).
106
governmental actions or omissions and the constitutionality of actions and omissions of
institutions of State. It also alludes to the hierarchical nature of norms which constitutes a
legal order. In this hierarchy the constitution is the grundnorm in which the ultimate
prescriptive power lies, it is the source of all laws, and it delineates the bounds of
governmental powers and the limits of the powers of every institution of State. It divides
powers between every organ of State to facilitate control between them and thus prevent
abuse of power. It provides an institutional mechanism for horizontal accountability and
answerability.204
That granted, there is as yet, no internationally accepted characterization of the rule of law.
Its major features are: the hierarchy of norms, equality before the law and non-
discrimination, the government is subject to the law. In its instrumental application, it is
employed as a device to actualize human rights and gender equality, a key element for good
governance, poverty reduction, economic development, peace and stability. Thus the
context in which it is being examined and applied invariably determines and shapes its
characterization. That however should not constitute a source of mistiness as the doctrine‟s
differing features have the quality of reciprocally reinforcing one another. In fact, they
constitute link in a chain in which the strength is determined by its weakest link.205
The rule of law is perhaps the most central tenet of constitutionalism, it is equally a device
for realizing human rights and democracy, a sine qua non for good governance, and it
defines how public affairs should be conducted in a nation. Good governance and the rule
of law facilitate the creation of a stable and peaceful socio-political and economic
204 J. N. Shktar, Political Thought and Political Thinkers, Chicago, Chicago University Press, 22
(1998). 205 R. Peerenboom, China’s Long March Toward Rule of Law, Cambridge, Cambridge Unversity
Press, 2-6 (2002).
107
environment in which the citizenry are able to realize their full potentials, coexist peacefully
with other groups and guarantee human rights for all. The law remains central, a crucial
instrument of the State in the conduct of its affairs. To this connection, the rule of law
defines, and legitimizes the conduct of the State and its institution and the manner of its
relationship with the citizenry. The law determines the allocative process of resources and
establishes the rules for access to resources and for political, economic and social
conduct.206
Thus irrespective of what ever is the thematic priority or preference in the consideration of
rule of law, its variegated features are cross-cutting with one dependent, deriving,
associated and predicated on the others.207
The doctrine as presently known has its watershed in the upsurge of liberal thinking of the
Middle Ages, which was a counterpoise to the design of Kings on arrogating absolute
power to themselves. For example Bracton wrote, „the King himself ought not to be subject
to man, but subject to God and the law, because the law makes him King,‟208
Due to
different national histories and experiences the term has long been susceptible of many
usages in different legal systems, economic and political contexts. When viewed within the
prism of absolutist and authoritarian rule, the law is seen and appropriated by the political
elite as an instrument for imposing their will and pursuing purely individual and group
interests, legitimized by formal State laws and judicial institutions. It may also be restated
as „ruling by law‟ by the dominant political group in a polity. A distinction could also be
206 B. Z. Tamanha, On The Rule of Law: History, Politics, Theory, Cambridge, Cambridge University
Press, 7-12 (2004). 207 R. L. West, Re-Imaginning Justice: Progressive Interpretations of Formal Equality, Rights, and
the Rule of Law, New York, Ashgate Publishing, 1-13 (2003). 208 R.V. Turner, The English Judiciary in the Age of Glanville and Bracton, c. 1176-1239,
Cambridge, Cambridge University Press, 268 (1985).
108
made between the rule-of-law State and the rule-by-law State.209
The last formulation of the
doctrine represents an unwholesome accretion which underscores the fact that the doctrine
is not only prone to misapplication but is a potent weapon at the disposal of the aberrant
State to justify and legitimize its actions. In liberal democratic context the rule of law
impels State institutions to function horizontally and autonomously in pursuit of the long
term interest and survival of the nation as expressly prescribed by the constitution and the
laws of the land.210
In a more contemporary formulation, A.V. Dicey based his characterization on three props,
he posits:
(1) Firstly, it means the absolute supremacy or
predominance of regular law as opposed to the influence
of arbitrary power, and excludes the existence of
arbitrariness, of prerogative, or even of wide
discretionary authority on the part of the government.
Englishmen are ruled by the law, and by the law alone; a
man may with us, be punished for a breach of the law,
but he can be punished for nothing else.
(2) Secondly, it means equality before the law, or the equal
subjection of all classes to the ordinary law of the land
administered by the ordinary law courts; the „rule of
law‟ in this sense excludes the idea of any exemption of
209 B. Z. Tamanaha, Law as a Means to an End: Threat to the Rule of Law, Cambridge, Cambridge
University Press, 11,60, 101, 215, 227 (2006). 210 T. Ginburg , Rule by Law: The Politics of Courts in Authoritarian Regimes, Cambridge,
Cambridge University Press, 23, 180, 261,326 (2008).
109
officials or others from the duty of obedience to the law
which governs other citizens or from the jurisdiction of
the ordinary tribunals.
(3) Thirdly, the rule of law may be used as a formula for
expressing the fact that with us laws of the constitution,
the rules which in foreign countries naturally form part
of a constitutional code are not the source but the
consequences of the rights of individuals, as defined and
enforced by the courts.211
The significance of Dicey‟s formulation lies in the fact that it underscores the need to have
a rein on government powers and that what ever the plenitude and amplitude of power it
must be exercised within the ambit of the law existing in the legal order. A corollary of the
foregoing is the condition which every legal order must fulfil, that is, the uniform
application of the law to every class of people in the land irrespective of their status.212
In his formulation, Wade highlights five meanings of the rule of law:
Its primary meaning is that everything must be done
according to law. Applied to the powers of government,
this requires that every government authority which
does some act which would otherwise be wrong or
which infringes a man‟s liberty must be able to justify
its action as authorized by law. Every act of government
211 A. V. Dicey, Introduction to the Study of the Law of the Constitution, London, Adamant Media
Corporation, 179 (2005). 212 Ibid,
110
power, that is, every act which affects the legal rights,
duties or liberties of any person, must be shown to have
a strictly legal pedigree.
The secondary meaning of the rule of law is that
government should be conducted within a framework of
recognized rules and principles which restrict
discretionary power.
A third meaning of the rule of law, though it is a
corollary of the first meaning, is that disputes as to the
legality of acts of government are to be decided by
judges who are wholly independent of the executive.
A forth meaning is that the law should be even-handed
between government and citizen. What the rule of law
requires is that the government should not enjoy
unnecessary privileges or exemptions from ordinary
law.
The rule of law has other important meanings outside
the sphere of public administration, for example, in the
principle that no one should be punished except for
some legally defined crime, it is made a rallying cry
when any in road is threatened upon certain ideals which
underlie the legal system.213
213 H.W. Wade, Administrative Law, London, Clarendon Law, 26 (1971).
111
While establishing the centrality of law in a polity, Wade‟s formulation also underscores the
need for a horizontal relation of powers between co-ordinate organs of government on the
one hand and between the State and the citizenry on the other.214
Determined to pursue its rule of law programme, the United Nations attempted its official
characterization of the rule of law in a report of the Secretary General to the Security
Council on the Rule of Law and Transitional Justice, thus:
The „rule of law‟ is a concept at the very heart of the
United Nations Organization‟s mission. It refers to a
principle of governance in which all persons, institutions
and entities, public and private, including the State
itself, are accountable to laws that are publicly
promulgated equally enforced and independently
adjudicated, and which are consistent with international
human rights norms and standards. It requires, as well,
measures to ensure adherence to the principles or
supremacy of law, equality before the law,
accountability to the law, fairness in the application of
the law, separation of powers, participation in decision
making, legal certainty, avoidance of arbitrariness and
procedural and legal transparency.215
214 Ibid. 215 Report of the UN Secretary-General on The Rule of Law and Transitional Justice in Conflict and
Post Conflict Societies. Available at http://www.un.org/en/ruleof law/index.shtml
112
The UN‟s characterization mirrors the growing departure from traditional positivist
characterizations, it underscores the position that the rule of law is not tantamount a formal
legality which guarantees regularity and consistency in the achievement and enforcement of
order, but rather justice predicated on the realization and full adherence to the supreme
value of the human personality and secured by institutions which provide a structure for its
fullest ventilation.216
According to James Wolfensohn, a former World Bank President, a comprehensive
development framework should address legal reform issues in the following terms:
Without the protection of human rights, and a
comprehensive framework of laws, no equitable
development is possible. A government must ensure that
it has an effective system of property, contract, labour,
bankruptcy, commercial codes, personal rights laws and
other elements of a comprehensive legal system that is
effectively, impartially and clearly administered by a
well functioning impartial and honest judicial and legal
system.217
In a similar vein, the World Bank‟s 2004 Initiatives in Legal and Judicial Reform, defines
the rule of law as a state of affair which exists when:
216 Ibid. 217 Quoted in John K. M. Ohnesorge, On Rule of Law, Rhetoric, Economic Development, and North
East Asia July (2006). Available at http://papers.ssrn.com/so13/papers.cfm?abstract_id=918122
113
(1) the government itself is bound by the law; (2)every
person in society is treated equally under the law;
(3) the human dignity of each individual is
recognized and protected by law; and (4) justice is
accessible to all. The rule of law requires
transparent legislation, fair laws, predictable
enforcement; and accountable governments to
maintain, order, promote private sector growth,
fight poverty and have legitimacy. Legal and
judicial reform is a means to promote the rule of
law.218
The foregoing represent the Washington Consensus rule of law definition, its significance
lies in the inclusion of human dignity, fighting poverty and legitimacy, ideals which are
dear to those who impugn the International Financial Institutions prescriptions as too
market orientated. It has augmented the rather narrow neo-liberal emphasis on privatization,
deregulation, property rights protection, and controlled bureaucracy. Sceptics have however
highlighted the fact that North East Asia‟s phenomenal growth occurred inspite of the gross
violation of the Washington Consensus rule of law and the tenets of 2002‟s comprehensive
development rule.219
The state of the rule of law has a tremendous impact on economic development of a nation.
For one, the constitution, variegated codes, rules and laws establish the State structure, and
218 The World Bank, Initiatives in Legal and Judicial Reform, Washington D.C., World Bank
Publications, 2-3 (2004). 219 Ibid.; T. Ito, Growth Theories in Light of the East Asian Experience, Chicago, University of
Chicago Press, 9, 37, 73, 105 (1995).
114
the legal framework, and creates an environment of formal rational law wherein socio-
economic and political actors will have their conduct so rationalized by a diffusion of law
that such conducts are properly channelled towards development appropriate behaviours in
contradistinction to purely opportunistic behaviour in the public and private domain and the
overall economy.220
The rule of law catalyzes a complex process within the State structure which derives from
the amplitude, plenitude and latitude of sovereignty. This process is effectuated by the
instrumentality of a corpus of laws, through the agency of variegated institutions, which are
contrived to impact positively on growth, forces of development and ultimately on the
citizenry who in their respective private capacities must behave and conduct themselves
within the bounds of the law.221
The instrumental value of the rule of law is predicated on the reconciliation of two planes of
sovereignty, within a polity, that is the public and private domain. This schema is preferred
to the tendency in the literature to focus on governance crisis and dwindling State capacity
within the public domain without thereby redressing the acute cases of corporate
governance failures in the private domain.222
Thus good governance in the public domain must be complemented by development
appropriate behaviour by every actor in the economy. While we are not discountenancing
other applications to which the doctrine of the rule of law can be put, our attention is
focused on the impact which an efficient and effective legal system makes on efficiency in
220 D. M. Trubek, The New Law and Economic Development: A Critical Appraisal, Cambridge,
Cambridge University Press, 1, 19, 74, 95, 174, 203, 253 (2006). 221 Ibid. 222 R. P. Malloy, Law and Market Economy: Reinterpreting the Values of Law and Economics,
Cambridge, Cambridge University Press, 57,136 (2000).
115
the husbandry of economic resources, economic growth and development. The relationship
between law and economic efficiency was dwelt upon by Adam Smith in his „Lectures on
Jurisprudence,‟ where he states that a factor which „greatly retarded commerce was the
imperfection of the law and the uncertainty in its application,‟ thus where the law has
suffered malfeasance, and there is a wide room for arbitrariness and discretionary use of
power both in the public and private domain, that is, in corporate governance, there will be
entrenched corruption both in the public and private domain. Acute official systemic
corruption particularly hampers the clear definition and enforcement of laws, hence,
according to Smith, a great deal of constraints are placed on commerce.223
The structure of the institutions of State allied with a high degree of legal discretion creates
ample opportunities for officials and politicians to subject public funds to despoliation,
particularly where a great deal of power is concentrated and vested in a few individuals and
group; lack of procedural transparency; uncertainty related to existing laws, regulations,
doctrines and codes.224
There is a positive correlation between the rules of law and „good governance‟ the doctrine
of the rule of law perhaps constitutes the most significant element of good governance. The
legal order determines the nature of governance in the public domain; it controls the
exercise of State‟s regulatory powers and guide line for the execution of public functions.225
Thus good governance is a necessary condition for sustainable growth and development.
Governance is the process by which the institutions of State carry out their functions, the
223 A. Smith, Lectures on Jurisprudence, New York, Liberty Fund Inc., 56 (1982). 224 E. M. Uslaner, Corruption, Inequality, and the Rule of Law: The Bulging Pocket Makes the Easy
Life, Cambridge, Cambridge University Press, 58, 180, 214 (2008). 225 S. Munshi, Good Governance, Democratic Societies and Globalization, New York, Sage
Publications, 7, 9, 19, 33, 70 (2004).
116
nature of the State relationship with the citizenry, civil society and the private domain is
crucial in the development process.226
Among other things, good governance implies that the polity affords all manner of people
the opportunity to make input to State policy; the government must be accountable;
transparent and efficient in its management of public resources and must have zero
tolerance for corruption; ensure equitable allocation of resources and access to public
services and justice.227
The rule of law is fundamentally related to good governance. For one, it encapsulates
accountability. The responsibilities of authorities at every level of governance are defined
by binding rules. These rules serve as standards by which officials are held accountable for
their acts or omissions. The judiciary must constitute an autonomous entity and bastion for
holding those who are temporary custodians of public resources accountable.228
Secondly, the rule of law guarantees transparency in governance. The process of electing
between alternative decisions is conducted by adhering to strict procedures and
predetermined rules rather than arbitrary and discretionary opportunistic behaviour of
officials. The rule of law provides a judicial arm which insulates the legal domain available
for the expression of critical dissents, and creates a space for participatory decision making
process.229
226 E. Poluha, Contesting ‘Good’ Governance: Cross Cultural Perspective on Representation,
Accountability and Public Space, New York, RoutledgeCurzon, 2 (2002). 227 Ibid. 228 E. Peruzzotti, Enforcing the Rule of Law: Social Accountability in the New Latin American
Democracies, Pittsburgh, University of Pittsburgh Press, 7 (2006). 229 Ibid.
117
The efficiency and effectiveness in the husbandry of public resources induced by the rule of
law increases transparency and accountability, as the legal framework under the rule of law
will be coherent with an independent and impartial judiciary bringing every other organ of
State to account for their acts and omissions.230
The legal order is not ideologically neutral. The notion of development is characterized by
asymmetrical representations. Thus the political environment in which development is to be
effectuated is crucial to the attainment of developmental goals and whether set goals have
been equitably determined. The legal order establishes the rules for the allocation of power
and resources; defines the nature of the relationship between the citizenry and the State,
variegated individuals; groups and economic actors in the private and public domains. In
itself, politics connotes the relation of power, the exercise of power to determine the
utilization of productive forces in the production process, that is, alternative uses of
resources. It determines the allocative process of resources. Politics is the process by which
conflicting interests are reconciled in a polity. However, where the body politik is
characterized by lack of political plurality, civic culture, integration of divergent ethnic
nationalities to form a nation State and democracy, then the process of reconciliation of
conflicting interests will be convoluted and skewed. The ideal political system therefore,
will be that which gives voices to divergent opinions, equal representation of variegated
interests, social justice, equitable distribution of powers, equity in the allocation of
resources and most importantly, the rule of law.231
The political system which best fits the foregoing characterization is arguably a democracy.
Under a democracy, there is a democratically elected legislature which provides for the
230 Ibid. 231 V. Kerrushi, Jurisprudence as Ideology, London, Routledge, 1, 15, 31, 138 (1992).
118
even and proportionate representation of variegated groups and competing interests
encompassing the broad spectrum of the citizenry. Representative legislative process
confers legitimacy, majesty and authority on the State and its laws.232
The hierarchy of norms which is an important feature of democracy makes the constitution
the basic norm from which regular laws and executive decrees must ultimately derive their
validity. Thus, the rule of law confers legislative supremacy on the legislature by means of
the principle of separation of powers; hence parliament has a significant role in establishing
the legal basis of public policy through the process of law making.233
The rule of law induces inclusive and effective political participation. For one, the
separation of powers between coordinate arms of government insulates the autonomous
judiciary from executive usurpation of judicial powers. An independent judiciary constitutes
a bastion of hope against the abuse of executive powers. Where the judicial arm has
suffered malfeasance and has become dedicated instrument of powerful groups and
interests, democratic institutions become farcical. The judiciary must guarantee freedom of
expression, safety and integrity of dissenting voices that have elected to challenge acts of
State before the Courts.234
Secondly, the hierarchy of norms established under democracy aside from constitutional
validation of laws also contains within definable bounds, political decision making at all
tiers of government. In a democracy, there is a rule of law State in contradistinction to the
232 S. Pejovich, Law, Informal Rules and Economic Performance: The Case for Common Law,
Northampton Mass., Edward Elgar, 67 (2008). 233 S. Tierney, Constitutional Law and National Pluralism, Oxford, Oxford University Press, 163
(2006). 234 D. Dyzenhaus, Legality and Legitimacy: Carl Schmitt, Hans Kelsen and Herman Heller in
Weimar, Oxford, Oxford University Press, 113 (1999).
119
rule by law State. In the rule of law State, authorities at all levels of governance are bound
by the constitution and the relevant laws. Where decisions, acts or omissions violate the
provisions of the constitution, they remain void and ultra vires the powers conferred on the
authority by the constitution or the law which ultimately derives its validity from the
constitution.235
By enshrining the principle of equality, the rule of law can break the cycle of multi-
dimensional and inter-generational poverty by promoting the empowerment of the poor and
all excluded groups, like women, minorities and the physically challenged.236
Through the principle of equality, the rule of law confers on all citizens irrespective of their
status equal access to public services such as health, housing and education. It also ensures
equitable allocation of resources like land and its variegated appurtenants. Where the
allocative process is inequitable and favours the dominant groups, the principle of equality
provides a platform for the disadvantaged and disenfranchised poor to break out of the cycle
of poverty. Judicial machineries propelled by the rule of law provide the opportunity for the
instrumental use of the law to redress injustice in the distribution of social goods and
services.237
In a democracy characterized by the rule of law, rules and norms apply to all citizens
irrespective of their social and economic status. Rules are applied by State authorities not
only when the weak and voiceless are concerned but also where the powerful are involved.
Where the legal order in its operation does not apply rules differentially on the rich and
235 Ibid. 236 D. M. Trubek, The New Law and Economic Development: A Critical Appraisal, Cambridge,
Cambridge University Press, 268 (2006). 237 P. Costa, The Rule of Law History, Theory and Criticism, Dordrecht, Springer, 3,27, 153 (2007).
120
powerful, then the rule of law can be annexed for the empowerment of the poor and
voiceless individuals and groups in the polity.238
By curtailing arbitrariness and discretion of State authorities, the rule of law rids the polity
of corruption, which is the hydra-headed monster which shuts out the weak and the poor
from realizing their potentials by making public services more accessible to poor
individuals and groups who can not afford gratification in cash or kind which corrupt
government officials, judges and variegated service providers demand as a pre-condition for
rendering the services which they are remunerated to render.239
3.3 SUPREMACY OF THE CONSTITUTION
The doctrine of the rule of law is enshrined in the 1999 constitution. This fact has been
underscored in a plethora of Nigerian cases, in Momoh v. Fashe, the court characterized the
constitution as the „organic law‟ „grundnorm‟ „the stem from which all other laws flow.‟240
In Miscellaneous Offence Tribunal v. Okorafor, the Supreme Court held among other things
that the Nigerian Constitution of the Federation of Nigeria is predicated on the doctrine of
the rule of law. This means that the constitution forbids arbitrariness and wide latitudes for
discretion. The affairs of the State must be conducted strictly in accordance with formal
rational rules.241
238 Ibid. 239 D. Peppers, Rules to Break and Laws to Follow: How Your Business Can Beat the Crisis of
Short-termism, Hoboken NJ., 196 (2008); G. Palombella, Relocating the Rule of Law, New York,
Hart Publishing, 3, 17, 43, 51 (2009). 240 Momoh v. Fashe (2007), 42 WRN 131 at 144, 148. 241 Miscellaneous Offence Tribunal v. Okorafor, [2001]18 NWLR (Pt. 745)295 at 327.
121
According to the Court in Governor of Ebonyi v. Isuama,
Obedience to the rule of law by all the citizens but more
importantly by those who publicly took oath of office to
protect and preserve the constitution is a necessity for
good government and respect for the law, because in a
democratic society where the rule of law is regarded as
the norm, it is incongruous for the government to ignore
the provisions of the law and the necessary rules made
to regulate certain matters.242
Thus the doctrine of the rule of law and the concept of supremacy of the constitution are
mutually reinforcing, for one, every law must of necessity have an authoritative legitimizing
source from which it derives its binding and imperative force which compels obedience.243
According to Sir John Salmond,
There must be found in every legal system certain
ultimate principles from which all others are derived,
but which are themselves self-existent. Before there can
be any talk of legal sources, there must be in existence
some law which establishes them and gives them their
authority.244
242 Governor of Ebonyi State v. Isuama, [2004] 6 N.W.L.R (Pt. 870) 511; H. L. A. Hart, The Concept
of Law, Oxford, Oxford University Press, 15 (1997). 243 Ibid. 244 J. Salmond, Jurisprudence or the Theory of the Law, Cambridge, Cambridge University Press, 55
(2009).
122
The watershed, from which other norms take their sources has been referred to by, Kelsen
as the „basic norm‟ (Grundnorm), „origin-norm‟ (Ursprungs-norm) and „constitution in the
legal-logical sense‟ (Verfassung im rechtslogischem sinne).245
According to Kelsen, the basic norm,
Brings about the unity of system and founds the system
of the legal order. The question as to the reason (of
validity) of a norm can be tested only by ascertaining
that it derives its validity from the basic norm which is
the last reason of validity within the normative
system.246
According to him, every power under this normative order is subsumed and subordinate to,
and controlled by the constitution as the fundamental law which takes precedence over and
above every other legislation.247
Thus all acts of State must be in accordance with the provision of the constitution. It does
not derive its validity and force from any other law other than it self, albeit from the
collective will of the people. Every legislative, executive and judicial power must derive
their legitimizing authority from the constitution.248
The constitution of the Federal Republic of Nigeria, 1999 (hereinafter referred to as the
1999 constitution) provides in section 1 as follows:
245 H. Kelsen, Pure Theory of Law, New York, Exchange Lawbook, 117 (2005). 246 Ibid. 247 Ibid. 248 Ibid.
123
(1) This constitution is supreme and its provisions
shall have binding force on all authorities and
persons throughout the Federal Republic of
Nigeria.
(2) The Federal Republic of Nigeria shall not be
governed, nor shall any person or group of
persons take control of the Government of
Nigeria or any part thereof, except in
accordance with the provisions of this
constitution.
(3) If any other law is inconsistent with the
provisions of this constitution, this constitution
shall prevail, and that other law shall to the
extent of the inconsistency be void.249
The foregoing provision is also embedded in the 1979 and 1989 constitutions. Thus the rule
of law emanates from the highest and most fundamental of norms (that is the constitution)
in the hierarchy of norms.250
The Supreme Court per Sir Udo-Udoma in Nafiu Rabiu v. Kano State, expressed its opinion
on the significance of the 1979 constitution,
It is the duty of this Court to bear constantly in mined
the fact that the present constitution has been proclaimed
the Supreme Law of the Land; that it is a written,
249 The Constitution of the Federal Republic of Nigeria 1999, Lagos, Federal Government Press. 250 Ibid.
124
organic instrument meant to serve not only the present
generation, but also several generations yet unborn; that
it was made, enacted and given to themselves by the
people of the Federal Republic of Nigeria in Constituent
Assembly assembled, for which reason and because it is
autochthonous, it, of necessity, claims superiority to and
over above any other constitution ever devised for the
governance of this country; the unwarranted
intermeddleness of the military authority with some of
its provisions not withstanding; that the function of the
constitution is to establish a framework and principles of
government, broad and general in terms, intended to
apply to the varying conditions which the development
of our several communities must involve, our being a
plural dynamic society and therefore, mere technical
rules of interpretation of statutes are to some extent
inadmissible in a way so as to defeat the principles of
government enshrined in the constitution. And where the
question is whether the constitution has used an
expression in the wider or in the narrower sense, in my
view, this Court should when ever possible, and in
response to the demands of justice, lean to the broader
interpretation, unless there is something in the text or the
rest of the constitution to indicate that the narrower
125
interpretation will best carry out the objects and
purposes of the constitution.251
The question in Tony Momoh v. Senate of the National Assembly and Ors was whether
processes can be served in the chambers and precinct of the National Assembly contrary to
Section 31 of the National Assembly Act.252
While underscoring the general jurisdiction given to the State‟s High Court by Section
236(1) of the Constitution, the Court per Ademola Johnson J. held inter alia:
It is elementary to restate that before a court can
adjudicate on a matter within its jurisdiction, it should
have issued processes to ensure the appearance of the
parties in order to give both sides an opportunity of
being heard and so ensure a fair hearing. The service of
process therefore, is deemed to be an essential means of
enforcing the rights guaranteed in the Constitution when
such rights are threatened or contravened.
When by statute, the laws give a right, it is equally
deemed to give all such rights which are necessary as an
aid to the enforcement of the given rights. Since
therefore in a matter of this nature, special jurisdiction is
conferred on the Court, there is also deemed conferred
on it ancillary powers towards the effective exercise of
that jurisdiction. I have no doubts in my mind that the
251 Nafiu Rabiu v. Kano State, [1980] 8-11 S.C. 130.; (1981) 2 NCLR 293. 252 [1981] 1 N.C.L.R.105.
126
all-embracing and wide provisions of Section 42 of the
Constitution is deliberate so as to prevent any person,
body or authority from frustrating in any manner what
so ever, the effective exercise of the jurisdiction of the
Courts including the service of processes without let or
hindrance and the effective enforcement of the rights so
guaranteed.
What way can be better employed to frustrate and or
delay the exercise of the jurisdiction of the Court under
the Constitution than by making it impossible and or
difficult to effect service of the process of the Court by
some restrictive laws inconsistent with the provisions of
the Constitution? The Courts would and should resist
and frustrate any such move.
I shall therefore say that there is a right conferred on the
Court to serve any process of the Court either in
accordance with the rules or as specially ordered by the
Court.
What then we may ask is the effect of the provision of
Section 31 of the Act? The Section reads: not
withstanding any thing in any written law, no process
issued by any court in Nigeria in the exercise of its civil
jurisdiction shall be served or executed within the
chambers or precincts of a Legislative House while that
127
House is sitting or through the President or any office
of a Legislative House.
The provision of Section 42 of the Constitution earlier
quoted is all-embracing because its provisions would
appear to be unlimited and unrestricted as to the mode or
place of service of any process required for the due
enforcement of the rights conferred.
Section 31 of the Act clearly appears to be restrictive in
its provision as to place of service of process relating to
the Legislative House and such is inconsistent with the
provision of Section 42 of the Constitution.
That Section of the Act can not but suffer the fate
reserved for such legislation (sic) by the provision of
Section (1) of the Constitution which proclaims the
supremacy of the Constitution and declares void any law
inconsistent with its provisions.
By reason of my conclusion on Section 31 of the Act, I
hold that the Section is void and of no effect.253
In Attorney-General of Bendel State v. Attorney-General of the Federation and Ors., the
plaintiffs sought among other things a declaration that a bill for an Act of the National
Assembly with respect to any matter which the National Assembly authorized to prescribe
253 Ibid.
128
pursuant to the provisions of Section 149 Constitution of the Federal Republic of Nigeria or
the provisions of item A1(a) of part 11 of the 2nd
Schedule to that Constitution can only be
enacted into law in accordance with the procedure prescribed in Section 55 of the
Constitution. In alignment with the demand of the plaintiff, the Supreme Court declared the
Allocation of Revenue (Federation Account Act, etc.) Act 1981 (No.1 of 1981)
unconstitutional and therefore invalid, null and void, and of no effect what so ever.254
In the case Senator Chief T.A. Doherty v. Sir A. Tafawa-Balewa, the first respondent, the
Prime Minister of the Federation, in pursuant of The Commissions and Tribunals of
Enquiry Act 1961 (1961, NO. 26) enacted by the Federal Parliament, appointed the other
three respondent Commissioners to hold a Commission of Enquiry into certain activities of,
among other persons, the plaintiffs, in relation to a bank licensed under the Banking
Ordinance (Cap. 19) and doing business principally in the Western Region and the Federal
Territory. In these proceedings the plaintiffs sought a declaration that the Commissions and
Tribunals of Enquiry Act, 1961, under which the Commission of Enquiry was appointed,
was unconstitutional generally, or if not, that certain Sections thereof were
unconstitutional.255
Whereupon the High Court of Lagos referred the following questions to the Federal
Supreme Court under Section 108 of the Constitution of the Federation, 1960.
254 [1981] F.N.R. 179. 255 [1961] All N.L.R. 604.
129
The matter that arises for determination is whether the Commissions and Tribunals of
Enquiry Act 1961 (NO. 26 of 1961) exceeds the legislative power of Parliament in so far as
that power relates to the whole Federation.256
After underscoring that Nigerian Constitution is a truly Federal Constitution in which the
residual powers are vested in the Regional Governments, the Court inferred that the Federal
Parliament can legislate for the Federation only on those matters in respect of which it is
specifically empowered to legislate under the Constitution. The Court held that the
Commissions and Tribunals of Enquiry Act 1961 is not within the legislative competence of
the Federal Parliament in so far as the said Act purports to have effect in relation to matters
and things within Federal competence any where within the Federation and that the ouster
of jurisdiction of the Courts to adjudicate over matters arising under the law was
unconstitutional, null, void and of no effect.257
The Court held among other things in Aoko v. Fagbemi that nobody could be punished for
an offence that was not prescribed by the written laws of the Federation at the time of
commission.258
The fundamental human rights of the plaintiff was successfully espoused in Shugaba
Abdurahaman Darman v. The Federal Minister of Internal Affairs and Ors. The applicant,
the Federal Authorities deported the majority leader and member of the Great Nigeria
256 Ibid. 257 Ibid. 258 [1961] 1 All N.L.R. 400
130
Peoples Party in Borno State House of Assembly from Nigeria, on the grounds that he was
not a Nigerian. Consequent upon the application filed on his behalf by Counsel within the
purview of the Fundamental Rights (Enforcement Procedure) Rules 1979 for enforcing and
securing the enforcement of his Fundamental Rights and for redress for violation, the Court
at first instance and on appeal held that his deportation was arbitrary, oppressive,
unconstitutional null and void and contrary to provisions of Section 23 and 38 of the 1979
Constitution.259
The review of the foregoing landmark cases evinces a judicial attitude underscored by an
unwavering commitment to the doctrine of the rule of law as enshrined in the Constitution.
The intolerance of the judiciary of acts contrary to the rule of law in these cases was given
full rein and latitudes under civil democratic dispensations. The converse is however the
case under military dictatorship and it is pertinent at this juncture to ask like Oyebode,
„what is left of the law? In the chequered history of Nigeria which is characterized by a
succession of military dictatorships interspersed by short-lived civil inter regna.260
Reflecting on the unconscionable state of the rule of law generally in Nigeria and
particularly under military dictatorships Oyebode avers:
In a situation of general hopelessness and mass
disillusionment, it would not be totally surprising to ask
what was left of the law. For any country characterised
by draconian military decrees, embodying ouster
259 [1981] 1 N.C.L.R. 25. 260 A. Oyebode, Law and Nation-Building in Nigeria: Selected Essays, Ikeja, CEPAR, 1-9 (2005).
131
clauses, legislative judgements, prohibition of appeal
and which are, more often than not, enforced
retroactively, must per force confront the issue of the
prospects for the rule of law as against the rule of man.
Now at a certain level, the question can be approached
in terms of continued relevance of what Wole Soyinka
once called „leftocracy.‟ However, the thrust of this talk
is not in that direction. One is more concerned here with
the possibilities that exist for keeping hope alive, hope,
that is, in our ability to run a law-based society like the
rest of the civilised world.261
It is on the foregoing note that we will dwell on the state of the rule of law under the
degenerate polity of the First Republic and the subsequent legal void created by the collapse
of the parliamentary system and military revolutionary ouster of the Constitution. The
resultant state of Statelessness shall concomitantly be ranged against the gross inefficiency
characterizing the husbandry of Nigeria‟s oil resources, the abysmal performance of its oil-
based economy, the stultification of growth and development and the pervasive mass
impoverishment of the citizenry.262
261 Ibid. 262 A. B. Bah, Breakdown and Reconstitution: Democracy, The Nation-State, and Ethnicity in
Nigeria, London, Lexington, 69 (2005).
132
3.4 MILITARY RULE, COLLAPSE OF THE PARLIAMENTARY AND LEGAL
SYSTEM IN NIGERIA
The preoccupation in this segment is to critically and analytically connect the various legal,
economic and political strands that must be examined in order to provide a plausible
explanation of Nigeria‟s post colonial tragedy. Shortly after independence in 1960, Nigeria
experienced political turbulence of cataclysmic proportions, there was a total break down of
norms, the polity was anarchical, and characterized by an unconscionable state of the rule of
law, corruption pandemic, institutional inertia, general failure of the legal system which
combined effect stultifies growth and development.263
The first revolutionary ouster of the Constitution, and dissolution of the parliamentary
system in Nigeria occurred on 15th
January, 1966, via a coup d’tat which led to the
gruesome murder of the Prime Minister of the Federation of Nigeria, the Federal Minister of
Finance, the Premier of the Northern and Western Regions; while the Premiers of the East
and Mid-West Regions were ostensibly under „house arrest.‟ A coterie of the Council of
Ministers, led by the Acting President, Mr. Orizu, went over and above the Prime Minister
263 M. Kesselman, Introduction to Comparative Politics, Boston, Houghton Mifflin Company, 515,
525, 531, 567 (2004). Nigeria exemplifies the harsh reality of authoritarian and unaccountable
governance. Corruption, fraud, mismanagement, and the restriction of political liberties were tolerated
in the past by populations numbed into complacency by political repression and the daily struggles for
economic survival. One crucial lesson Nigeria provides is that rich endowment of resources is not
enough to ensure economic development. A nation must conform to two general conditions in order to
reach a prosperous development. The first of the conditions is the paradoxical condition of secure and
well-defined individual rights. The second one is that there is no predation of any kind. However, the
political and economic model of Nigeria makes it very hard for these conditions to be met. All property
rights, in Nigeria emanate and revolve around the State. The property rights of individuals are trumped
by the supremacy of the government, which can appropriate or nationalize any number of resources at
any time. Also, because a small group (without an encompassing interest in the country‟s welfare) can
gain access to government and manipulate to its benefit, the State is generally a predatory force on the
economy. It is no coincidence that despite a constant struggle to meet the basic needs of its citizens,
many of the Heads of State of the Nigerian nation have ended up in the lists of the wealthiest men in
Africa. Once a diagnosis is proposed for the possible causes of underdevelopment in Nigeria, a much
more complicated question arises; how can the post-colonial African nations escape their persistent and
seemingly inescapable retardation?; M. Olson, Power and Prosperity, New York, Basic Books,
195,196 (2000).
133
(declared missing) to „hand over power‟ to the armed forces. The purported hand over
constitutes an abdication of power as there was no provision under the Republican
Constitution, 1963, conferring powers on the Council of Ministers to hand over the
government to the Armed Forces. Therefore, the Council of Minister‟s decision was
unconstitutional null and void.264
The promulgation of Decree No.1, the Constitution (Suspension and Modification) Decree
1966 constituted the first official act of the military, the effect of which was to invalidate
the legal order of the 1963 Republican Constitution by establishing an entirely new order
that was not in the contemplation of the Republican Constitution. The Decree was the basis
of the arbitrary rule of the military from 1966 to 1979 when the military ushered in a civil
interregnum. In an obliquy, the decree purportedly recognized the existence of the
Republican Constitution of 1963, but merely suspended and modified certain provisions of
the Constitution while concomitantly dissolving the Parliament and the Federal and
Regional Executives.265
There was a civil interregnum between October 1979 and December 1983 which was
predicated on Executive Presidency. The civil dispensation was curtailed on 31st December,
1983 by the military inspite of the provision of Section 1(2) of the Constitution of the
Federal Republic of Nigeria outlawing violent and unconstitutional take over of power by
any individual or group of persons. The military government promulgated the Constitution
264 E. E. Osaghae, The Crippled Giant: Nigeria Since Independence, Bloomington, Indiana University
Press, 54 (1998). 265 T. O. Elias, Africa and the Development of International Law, Berlin, Springer, 106 (1988); M.
Siollun, Oil, Politics and Violence: Nigeria’s Military Coup Culture, New York, Algora Publishing,
74 (2009).
134
(Suspension and Modification) Decree 1984, which like the 1966 decree dissolved the
National Assembly, State House of Assembly, the Presidency and State Governors while
concomitantly modifying certain provisions of the constitution. Nigeria experienced a
counter coup on August 27, 1985 which overthrew the Buhari-Idiagbon regime which
ushered in the Babangida years between 1985 and 1993; the Abacha regime between 1993
and 1996 and the Abdulsalam government between 1996 and 99. General Abdulsalam
Abubakar handed over power to a democratically elected government in 1999 ushering in
about ten years of civil rule.266
In Lakanmi and Another v. Attorney-General (Western State) and Others, the applicants had
filed a notice of appeal before the Western State Court of Appeal who heard and dismissed
the appeal of the appellants from the judgment of the High Court of the Western State
sitting at Ibadan. The application before the High Court was for an order of certiorari to
remove an order dated the 31st day of August, 1967, made by Mr. Justice Somolu in his
capacity as Chairman of the Tribunal of Inquiry into the assets of public officers of the
Western State, into Court, for the purpose of being quashed.
The learned judge of the High Court dismissed the application, holding that the order was
not ultra vires and that Edict No.5 of 1967 was validly made.267
266 Note 105 supra at 7. 267 Lakanmi and Another v. Attorney-General (Western State) and Others (1971), 1 U. I. L. R. 201
(S. Ct.)
135
Consequently, the appellants appealed to the Supreme Court. While ruling on the
substantive issues before it, the Court addressed the controversy as to the legitimacy of the
power of the Federal Military Government to make laws. It sought to resolve the question
whether or not the events which took place in Nigeria on January 15, 1966, could be
regarded to be a revolution or a mere „Constitutional Emergency,‟ if indeed, the change is a
revolution, then all laws enacted by the Federal Military Government would be valid. If the
change however is a mere „Constitutional Emergency,‟ then, actions on the constitutionality
of any law made by the Federal Military Government will be justiciable and subject to
review by the Supreme Court.268
The Supreme Court declared as invalid the Forfeiture of Assets (Validation) Decree No. 45
of 1968 as contrary to the Constitution, thereby allowing the appeal of the appellants. The
Court held among other things that the events of January 15, 1966, did not amount to a
revolution but a mere invitation of the Armed Forces to form an interim Military
Government, under the 1963 Republican Constitution.269
That the Federal Military Government accepts the continued existence of the 1963
Constitution and that its Decree No.1 of 1966 impliedly provided for a separation of powers
between the legislative, the executive and the judiciary as was provided by the Republican
Constitution; it stressed that this State of affairs must be sustained unless necessity
otherwise arose compelling it under Section 3 of Decree No.1 of 1966 to make laws by
decree „for the peace, order and good government of Nigeria on any matter whatsoever.‟
268 Ibid. 269 Ibid.
136
That since Decree No.45 of 1968, which sought to validate the order made by the Tribunal
under Edict No.5 of 1967, which implied that it was otherwise invalid, was a legislative act
which impinged upon the sphere of the judiciary by specifically naming the appellants and
some other persons in its schedule, it was an unnecessary intrusion into the sphere of the
judiciary and therefore, void. The Federal Military Government, however promptly
responded to the Supreme Court judgement by enacting the Federal Military Government
(Supremacy and Enforcement of Powers) Decree, No. 28 of 1970 to reaffirm its plenitude
and powers to make laws for the peace and good order of the Federation of Nigeria.270
While commending the courage and ingenuity of the Justices of the Supreme Court in their
futile and quixotic mission to redefine a revolutionary situation which was already a fait
acompli, the sylogy of their forensic argument however, flies in the face of the realism of
the situation.271
Stricto sensu where a revolution is a fait acompli, the extant legal order ceases to exist; it is
replaced by a legal order imposed by the forces of revolution. The question as to whether
the Supreme Court can rule over the legitimacy of the new legal order does not arise, as
what obtains as the law is at the behest of the revolutionary forces, subject to their whims
and caprices. This perhaps inform the very first official act of the military when they struck
in 1966, the promulgation of the Constitution ( Suspension and Modification) Decree No.1
of 1966. According to Kelsen:
270 Ibid. 271 Ibid.
137
A revolution occurs, when ever the legal order of a
community is nullified and replaced by a new order in
an illegitimate way, that is, in a way not prescribed by
the first legal order itself. It is in this context irrelevant
whether or not this replacement is effected through a
violent uprising against those individuals who so far
have been the legitimate organs competent to create and
amend the legal order. It is equally irrelevant whether
the replacement is effected through a movement
emanating from the masses of the people, or through the
nation from those in Government positions. From a
puristic point of view, the decisive criterion of a
revolution is that the order in force is overthrown and
replaced by a new order in a way which the former had
not itself anticipated.272
In an attempt to salvage what is left of the law, the Supreme Court interpolated and
extrapolated from the speeches of the Commanding Officer of the Nigerian Army and the
Acting President intentions which were totally tangential to the motives and agenda of the
military. It equated the coup de’tat to a mere invitation to the military to form an interim
military government which would not disparage the Constitution, excepting where necessity
demands that certain sections be suspended.273
272 H. Kelsen, Pure Theory of Law, New York, Lawbook Exchange, 117 (2005). 273 A. Ojo, Constitutional Law and Military Rule in Nigeria, Ibadan, Evans Brothers (Nigeria
Publishers) Limited, 81 (1987).
138
The foregoing line of reasoning is overly speculative and completely out of touch with the
realism of the situation. For one, the fiction of invitation to the armed forces is redundant in
view of the fact that the coup d’tat was already a fait acompli, the subsequent ritual of
transfer of power from the civilian administration to the military administration is of no
moment, it lacks any legal effect, not only was it not prescribed by the old order which the
revolution swept away, it also lacked validity under the new order. Kelsen posits:
Every jurist will presume that the old order to which no
political reality any longer corresponds has ceased to be
valid, and that all norms which are valid within the new
order, receive their validity exclusively from the new
constitution. It follows that, from the juristic point of
view, the norms of the old order can no longer be
recognised as valid norms.274
The political realism of a revolution is not amenable to the type of forensic argument which
was advanced by the learned Counsel to the applicants, Chief Rotimi Williams, and which
was adopted by the Supreme Court in its judgement. A revolution derives its legitimacy by
successfully bringing about an abrupt change to the extant legal order which in itself, must
not have been within the purview of the old order. Above every other consideration, a
revolution‟s legitimacy is achieved by means of effective control of the apparatus of the
government.275
274 Note 117, supra. 275 Ibid.
139
If the event of January 15, 1966 is ambivalent and prone to speculations regarding the
legitimacy of the Military Government, the July 29, 1966 counter coup‟ was a clear break
from the old order and totally unamenable to the redefinition of its purpose and intendment
by forensic legal argument.276
In contrast to the attitude of the Supreme Court in Lakanmi’s case, subsequent court
decisions regarding the legitimacy of the Federal Military Government and the validity of
its decrees took cognisance of the realism of a military dispensation. In Ogunlesi & Ors. v.
Attorney General of the Federation, two decrees of the Federal Military Government, by
which the salaries of certain grades of public corporations‟ staff were reduced, were
challenged as being ultra vires the Federal Government which took over from the civilian
Government which it overthrew and which could not therefore exercise legislative powers
in excess of those laid down in the pre-existing Constitution of 1963, since suspended and
modified by the Constitution (Suspension and Modification) Decree No.1 1966 enacted by
the Federal Military Government. The High Court of Lagos State held that the two decrees
were valid as being intra vires the Federal Military Government whose decrees can over
ride the constitution.277
In Adamolekun v. The Council of the University of Ibadan, the Supreme Court held that the
courts can not question the vires of the Federal Military Government in making a decree or
an edict on the grounds that there is no legislative authority to make one.278
276 Ibid. 277 Ogunlesi & Ors. v. Attorney General of the Federation (1970), LD/28/69. 278 Adamolekun v. The Council of the University of Ibadan, [1967] 1 All N.L.R. 213
140
In response to the foregoing spate of judicial activism questioning its legitimacy and
legality of its acts, the Federal Military Government promulgated the, Federal Military
Government (Supremacy and Enforcement of Powers) Decree No. 28 of 1970. Section 1 of
the decree affirmed and declared that the January 15, 1966 coup was a revolution, but
categorically affirmed that the July 29, 1966 coup was also a revolution. The decree
unequivocally affirmed that both revolutions altered the extant legal order in Nigeria save
what has been preserved by the Constitution (Suspension and Modification) Decree No.1 of
1966. The decree affirmed that both revolutions entail a radical political change which had
not been contemplated by the 1963 Republican Constitution which certain provisions
modified operate as ancillary to Decree No. 1. the decree further bar the Courts from
entertaining any questions as to the validity of any decree or any edict (in so far as edict is
not inconsistent with a decree ) equally, the provisions of Decree No.1 shall prevail over
those of the unsuspended provisions of the 1963 Republican Constitution.279
Furthermore, any decision, whether made before or after the commencement of this decree
by any court of law in the exercise or purported exercise of any powers under the
Constitution or any enactment or law of the Federation or any statute which has purported
to declare or shall hereafter purport to declare the invalidity of any decree or of any edict (in
so far as the provisions of the edict are not inconsistent with the provisions of a decree) or
the incompetence of any of the governments in the Federation to make the same, is or shall
be null and void and of no effect whatsoever as from the making thereof. Section 1(3) (6)
further provides that a decree and edict encompass any instrument made by or under such
279 Ibid.
141
decree or edict. Thus the Courts are not only barred from determining the validity of a
decree or edict but are without the powers to inquire into the validity of any instrument
made under a decree or edict by State agencies of inferior competence.280
3.4.1 COLLAPSE OF THE JUDICIAL SYSTEM AND THE STULTIFICATION OF
GENERATION OF WEALTH IN NIGERIA
The judicial sector in Nigeria is characterized by erosion of due process of law. In itself,
due process of law denotes what Lord Denning characterizes as „those measures authorized
by the law so as to keep the stream of justice pure: to see that trials and enquiries are fairly
conducted: that arrest and searches are properly made: that lawful remedies are readily
available: and that unnecessary delays are eliminated ...It is in the long run, on the
maintenance of law and order that civilized society depends.‟281
Consequently, the preoccupation in this segment is to determine through statistical and case
law analyses the extent by which the Nigerian State is characterized by unconscionable
state of the rule of law and due process, arbitrariness and very wide latitude for discretion.
The undifferentiated and inorganic state of the law and legal institutions have had a general
untoward impact on the capacity of the Nigerian State to deliver on the social compact with
Nigerian people.
For one, the efficiency, effectiveness, independence, transparency and integrity; speed and
fairness of the courts in the administration of civil justice facilitates commerce; by defining
and protecting property rights, optimal and efficient allocation of resources and the
enforcement of contracts and the organization of labour.
280 Ibid. 281 A. Denning, The Due Process of Law, Oxford, Oxford University Press, passim (1980).
142
The inanities of the Nigerian criminal justice system betrays the pervasive normlessness of
the polity; heinous crimes have been perpetrated brazenly and with increasing impunity
against the citizenry and property; the criminal justice system has failed to curb this threat
of anarchy. The overall effect is the increasing recourse to self-help, capital flight, paucity
in inflow of Foreign Direct Investment (FDI) and concomitant high rate of transaction cost
in the Nigerian economy.
Where a polity is characterized by pervasive legality, totally devoid of arbitrariness, wide
latitude for discretion, organic and highly differentiated laws and legal institutions, the
resolution of disputes emanating from economic activities are promptly, efficiently and
effectively resolved and expectations of variegated economic actors are not unduly
disparaged. The dispensation of civil justice is tortuous, frustrating, slow and inefficient,
resulting in high transaction cost and general disenchantment with the justice system. The
survey on duration of trial in civil cases in Lagos State reveals:
FIGURE 3.1
Source: NationMaster.com
143
FIGURE 3.2
Source: NationMaster.com
The national average of about 10.5 years duration from commencement to final
determination of matters is rather too high by the time this figure is adjusted to include
interlocutory appeals, the average could be between 13 to 16 years, it is not uncommon to
have trials spanning about 20 years before final determination. The high uncertainty,
inexactitude and undue delays in the resolution of disputes emanating from commercial
activities have led to capital flights and a disincentive to foreign direct investments. Aside
from the resultant high transaction cost engendered by the gross inefficiency of the justice
sector, the inorganic and undifferentiated state of the Nigerian judiciary constitutes a
colossal waste and undue drain on scarce financial resources, but above every
considerations it impacts negatively on productivity, sustainable economic growth,
development and sustainable human development.
144
The penchant of lawyers for exploiting interlocutory appeals has been implicated as one of
the factors causing undue delays in the disposition of cases. Consequently, it may be
instructive to constitutionally provide for the curtailment of interlocutory appeals at the
Court of Appeal. All antics by counsels to deploy non-substantive and purely technical
issues to frustrate proceedings and thereby gain procedural advantages must be curbed by a
disciplinary mechanism.
The criminal justice system is equally bedevilled by a myriad of foibles, many people
undergoing trials as Awaiting Trial Inmates (ATMs) have been held for over five years
without a single appearance in court since their arraigment, and have been awaiting trial for
up to thirteen years. The following statatistics show the total prisons population in Lagos
State in 2009:
FIGURE 3.3
Source: United Nations Office On Drugs and Crime.
As a system of social control, criminal justice system in Nigeria has failed to guarantee the
protection of life and property, there is pervasive normlessness and anarchy. The resulant
145
uncertainty and instability engendered by this situation impacts in a rather untoward manner
on the overall economy. The pervasive illegality, high rate of violent crime impairs
commerce. Perhaps the most important indicia of a failed or failing State or statelessness is
the collapse of the criminal justice system and the break down of law and order.
The greatest disincentive to both domestic and Direct Foreign Investment in Nigeria, is the
high rate of violent crimes against the person and property. Such crimes range from
kidnapping for ransome, ritual killings, human trafficking, political assassination and
brigandage, ethno-religious violence and so forth.
A 2007 NDS/EFCC survey conducted on Nigeria yielded startling results. Out of 2,200
business men interviewed, 75 per cent and 71 per cent said that crime, insecurity and
corruption constitute the greatest impediment to economic activities in Nigeria. It is
significant that 50 per cent of businesses interviewed experienced at leaast one crime in the
penultimate year before survey. Dangerous weapons were used in 40 per cent of the cases;
30 per cent of the businesses interviewed in the preceding 12 months revealed that their
premises were burgled with 20 per cent reporting fraud and theft during the period.
Pervasiveness of corruption was indicated with more than 34 per cent of interviewed
businesses who had course to seek public services from State agencies had to pay bribes. In
a similar vein 1 in 3 out of the businesses surveyed paid bribes to public officials in the
process of administrative procedure.
The greatest danger which the foregoing statistics portends is underscored by the non-
detection and punishment of such heinous crimes. A comparative analysis of the rates of
conviction per capita of Nigeria vis-à-vis certain nations shows how many convictions for
crimes as a percentage of Nigeria‟s population.
146
With a population of 140 Million, Nigeria has a rather low conviction per capita rate;
Russia with a population of 143 Million with a mere 3 Million people more than Nigeria
has about 22 times as many convicted prisoners as Nigeria; with a population of 47.4
Million, South Africa‟s population is about a third of Nigeria‟s yet it has about five times as
many convictions per capita than Nigeria. The United States with a population of 298.2
Million has the highest per capita rate of conviction at 2,198,798. The United Kingdom also
has a very high per capita conviction rate of 88,197 and a population of 59.7 Million. When
compared with other countries it may well be that there is zero deviance or that custodial
sentences are infrequently made or that the administration of justice is so inefficient and
ineffective that most crimes go undetected and unpunished. The latter explanation seems
the most plausible.
FIGURE 3.4
Source: NationMaster.com
147
Perhaps the rather long pre-trial detention profile of Nigeria is the most significant betrayal
of the inefficiency of Nigeria‟s administration of criminal justice system. Delays do not
only constitute grave violations of the right to fair and prompt trials and right to dignity of
human person of detainees; it negates the fundamental objective of a penal system of reform
and rehabilitation of prisoners. The facilities are overstretched, what with 105 per cent share
of prison capacity filled; while Pre-trial detainees constitute 63 per cent of total; with a male
population of 91.10 per cent of total.
FIGURE 3.5
Source: NationMaster.com
Criminal trials take the average of 7 years from arraigment to final determination. The
endless delays in criminal causes disparages the effective administration of criminal justice
as cases often have to be commenced de novo when witnesses develop apathy, investigation
are distorted and frustrated when the investigating police officer is redeployed to another
State other than that in which offences were committed. The foregoing is a function of a
combination of factors, such as the leeways provided by lapses in the rules of procedure
148
which is permissive of time wasting tactics by defence counsel who over exploit
interlocutory injunctions to induce court to stay proceding. The capacity of the courts to
discharge their functions is highly impaired by derelict infrastructural facilities; power
outages are rampant, the court rooms are inclement and primitive, judges in most
jurisprudence still take notes of procedings in long hand.
The foregoing have engendered a negative perception in other countries regarding the safety
of life and property in Nigeria. Most nations in Europe and the United States of America
issue travel advisories labelling Nigeria as one of the most dangerous destinations in the
world.
Nigerians are stereotyped all over the world as fraudsters, on account of the failure of the
State and the administration of criminal justice system to radically address the prevalence of
the Advance Fee Fraud (419). There is paucity of apprehension and conviction.
There are several high profile homicide cases which have not been unraveled since their
commission. The then Attorney-General of the Federation and Minister of Justice, Chief
Bola Ige, was assassinated in 2001 in his bed room in Ibadan. His security details claimed
they left the premises in order to have a meal. The investigation was manipulated, in 2003 a
nolle prosequi was entered by the Director of Public Prosecutions Oyo State for
preponderance of the suspects. The court ruled per Justice Atilade Ojo in 2004, that the
prosecution had failed to prove its case beyond reasonable doubt.
In 2006, Funso Williams a PDP governorship candidate in Lagos State was gruesomely
murdered in his study at home in Dolphin Estate, Ikoyi, Lagos. The investigation of his
murder was equally manipulated and no one has been charged with the killing of Funso
Williams to date. The assassination of Mr. Dipo Dina a governorship candidate in Ogun
State also remains unsolved to date; while investigation of the attempted assassination of
149
Iyabo Obasanjo-Bello and the killing of Adeife Sodipo Akin-Deko (Aged 14 years) and
Akinola Sodipo Akin-Deko (aged 11 years) who were travelling with her in a convoy have
not been unravelled to date. As a consequence, assassinations have become common place,
brazen and perpetrated with impunity.
The precision and exactiude which is the hallmark of the common law legal order is lost in
Nigeria due to conflicting decisions of appellate courts. It becomes very difficult to
establish a hierarchy of authorities under such condition of inexactitude. Conflicting reports
on the decision of the Court of Appeal in various divisions underscore the unreliability of
decisions of our courts for precedental purposes.
In E.S. & C.S. Ltd. v. NMB Ltd.282
the Court of Appeal, Lagos Division held, per Ogunbiyi
that it would be unconstitutional to grant an interlocutory mareva injunction ex parte as it
would offend the principles of fair hearing to do so.
The Court of Appeal, Port Harcourt Division, in contradistinction to the decision in E.S. &
C.S. Ltd.v. NMB Ltd., held that a court of law has jurisdictional powers to grant
interlocutory injunction ex parte; it subsequently, granted a mareva injunction ex parte in
the case IFC v. DSNL Offshore Ltd.283
In Mele v. Muhammad,284
the appellante‟s victory at the polls was challenged on the ground
that he did not properly resign his employment. In sustaining the objection, the Court of
Appeal, Jos Division held that a candidate subject to the Revised Local Government Staff
Regulation, 1986, desirous to contest an election under Decree 36 of 1998 has to make his
application for resignation, withdraw or retire in good time to allow matters of his
disengagement to be in place 30 days before the date of election.
282 (2005) 7 NWLR (Pt. 924) 215 at 265. 283 (2008) 7 NWLR (Pt. 1087) 592. 284 (1999) 3 NWLR (Pt. 595) 419.
150
The Court of Appeal, Ilorin Division, set aside that decision in the case Adefemi v.
Abegunde285
in this case, Section 107 (1)(f) of the 1999 Constitution of the Federation of
Nigeria was in issue; it is in pari materia with Section 11(1)(f) of the Decree 36 of 1998
which was in issue in the Mele v. Muhammad case.
In the case Ogwuche v. Mba,286
the Court of Appeal, Jos Division, in determining the
question whether Fundamental Rights Proceedings not set down for hearing within 14 days
of filing is incompetent, the court held that where hearing date is fixed beyond the statutory
14 days, then the entire proceedings is a nullity.
The foregoing was followed by lower courts until 2000, when the Court of Appeal, Lagos
Division set it aside in the case AG Federation v. Ajayi.287
In Bi Zee Bee Hotels Limited v.
Allied Bank (Nig.) Limited288
the Court of Appeal (Kaduna Division) interpreted the
provision of Section 230 (1)(d) of the 1979 Constitution (as amended by Decree 107 of
1993) to mean that the jurisdiction of the Federal High Court is ousted in banker/customer
relationships. The Court of Appeal (Benin Division) held in a similar vein in Union Bank of
Nigeria Plc. V. Integrated Timber and Plywood Products Ltd289
that the jurisdiction of the
Federal High Court has been ousted. The decision was however given in ignorance of the
existence of the Supreme Court‟s decision in F.M.B.N. v. NDIC.290
The foregoing statistical and case law analyses underscores the fact that the progressive and
cumulative erosion of the capacity of the State in the administration of civil and criminal
justice has untoward consequences on attainment of sustainable economic growth,
development and sustainable human development and reduction of extreme poverty. For
285 (2004) 15 NWLR (Pt. 895) 1. 286 (1994) 4 NWLR (Pt. 336) 75 287 (2000)12 NWLR (Pt.682) 509 at 532. 288 (1996) 8 NWLR (Pt. 465) 176 at 185. 289289 (2000) 12 NWLR (Pt. 680) 99. 290 (1999) 2 NWLR (Pt. 559).
151
one, the high uncertainty and inexactitude of the law and the administration of civil and
criminal jusitice constitutes great disincentives to economic activities. Secondly, economic
growth and development and the creation of wealth can only be effectuated in an
environment of formal rationale law, consequently, the creation of wealth by law can not be
effectuated in an environment of pervasive illegality and normlessness.
3.5 THE EVOLUTION OF THE NIGERIAN LEGAL ORDER: IMPLICATION
FOR EFFECTIVENESS
It is our preoccupation in this segment to examine the determinant of organic legal
institutions. The study demonstrates that the mode of legal transplant in Nigeria constitutes
the most important determinant of effectiveness. The study argues that the lack of pre-
existing similar legal order to that transplanted in Nigeria, poor adaptation of transplanted
law, and the fact that sociologically, the Nigerian population primordially could not
comprehend the fundamental principles of transplanted law, renders its transplanted legal
institutions ineffective. Concomitantly, the study adumbrates that the mode and process of
transplant has a tremendous causal impact on economic development by virtue of its effect on
evolving an environment of formal rational law, that is, an economic environment with
pervasive legality.291
The transplantation of the common law legal codes in Nigeria occurred between 1861 and
1914 and 1914 and 1960. These epochs represents the apogee of western imperialism, when
English and French law were exported to colonial possessions in Asia, Latin America and
Africa.292
291 A. Watson, Legal Transplants: An Approach to Comparative Law, Athens Ga., University of
Georgia Press, 21 (1993). 292 T. O. Elias, The Nigerian Legal System, London, 3, 39, 58, 113 (1963).
152
The major problem with any transplantation process is that it implies an understatement of
the significance of the evolutionary process; it fails to take cognisance of the fact that the
borrowed law took ages to evolve to the form in which it is being transplanted. Thus
wholesale importation of legal codes from a sociological milieu other than that to which it is
being exported to is a convolution of this evolutionary process, and as evidence in Nigeria
suggest, the enforcement of borrowed codes is fraught with mentally stultifying problems,
because the people lack the psychological acceptance of these codes.293
The study attributes poor economic performance and inefficient governance in Nigeria to its
weak laws and legal institution. There is no dearth of borrowed laws for the husbandry of the
economy in Nigeria. It has adopted for instance sophisticated laws for the enforcement of
contracts; protection of creditors and corporate governance pursuant to the protection of share
holders rights, but lack the required organic legal institutions for the administration of these
laws, while it is afflicted with the corruption pandemic.294
Nigeria‟s corporate governance law for instance arguably is one of the most sophisticated in
Africa region, inspite of which massive corporate frauds have been reported and shareholders
rights have been progressively and systematically disparaged while the judiciary has been
ineffective in tackling this dangerous trend.295
The study seeks to examine the determinants of an environment of formal rationale law, that
is, legality in view of its significance for economic growth and development. It posits that the
mode in which the common law formal legal order that evolved in England was transplanted
293 E. F. Oeser, Evolution and Constitution: The Evolutionary Self Construction of Law, Dordrecht,
Kluwer, 90 (2003); J. O‟ Manique, The Origins of Justice: The Evolution of Morality, Human
Rights, and Law, Philadelphia, University of Pennsylvania Press, 15,90,112,132,163 (2002). 294 T. Ginburg , Rule By Law: The Politics of Courts in Authoritarian Regimes, Cambridge,
Cambridge University Press, 304, 326 (2008). 295 P. E. G. Angaye, „Corporate Governance in Infancy and Growth: An Interview-Based Study of the
Development of Governance and Corporate Regulation in Nigeria,‟ in S. Uddin, (ed.), Corporate
Governance in Less Developed and Emerging Economies, Bingley, Emerald Group Publishing
Limited, 359 (2008).
153
into Nigeria is most crucial for effectiveness. Our thesis is hinged on two props. For one, for
the borrowed law to be effective, it must be such that its subjects can relate with it and
comprehend its intendment and the public purpose it is safe guarding, such that the citizenry
will as a matter of course have a predisposition to bring themselves within the purview of the
law and to contribute to the evolution of institutions that will effectively administer, enforce
and progressively develop the law.296
Secondly, the judiciary, the bar and other institutions whose duty it is to develop the law must
add value to the law so as to make it responsive to the demands of social reality and
legality.297
For our purpose, Nigeria is being classified as a nation which received its formal legal order
exogenously through the process of transplant in contradistinction to those nations that
developed their legal orders through a process of evolution endogenously. We argue that a
social requirement for law must exist in a milieu for legal institutions to be organic and for
the codes in the statutes to be practically applied legal intermediaries must be conscious of
that requirement pursuant to developing the law to meet that requirement.298
A corollary of the foregoing is that there are certain preconditions of effectiveness of
transplant, where the borrowed legal order is adapted to local conditions, or the indigenous
population could comprehend and internalize the fundamental principles of the borrowed
legal order, then its application will be pervasive and fully embraced. Where the legal order
is mal-adapted to local conditions, or borne by imperial hegemony and colonization, is
296 K.W. Dam, The Law-Growth Nexus: The Rule of Law and Economic Development, Washington
D. C., Brookings Institution Press, 13, 26 (2006); D. M. Trubek, The New Law and Economic
Development: A Critical Appraisal, Cambridge, Cambridge University Press, 1, 174 (2006). 297 Ibid. 298 W. E. Scheuerman, Between the Norm and the Exception: The Frankfurt School and the Rule of
Law, Cambridge Ms., MIT Press, 1, 65,189,191 (1997); A. Watson, The Evolution of Western Private
Law, Baltimore, The John Hopkins University Press, 91, 234 (2000); Ibid., The Evolution of Law,
Baltimore, The John Hopkins University Press, 73,98 (1989).
154
incomprehensible to the indigenous population, they would be alienated from the law and its
use will not be pervasive. The mode of legal transplant in Nigeria is an imperial imposition,
and hence, from the very inception of the common legal order in Nigeria, it has suffered an
acute form of the „transplant effect‟ its legal order remain inorganic, with a concomitant
untoward impact on economic performance in view of the lack of an environment of formal
rational law that have been fully internalized by the population. Thus the study focuses on the
adaptations of borrowed institutions to primordial social requirements, while exploring its
impact on the progressive evolution of institutions.299
3.5.1 THE TRANSPLANT EFFECT
The formal legal order or a modicum of it exists in every modern nation State. It comprise of
statutes or cases that were generated by courts and other institutions of State who have the
prerogative of enforcement of the rules. Co-existing with the formal legal order in every
society is the body of informal norms and institutions. This informal sphere of norms exists
in both developed and underdeveloped societies albeit in varying degrees. Through
progressive evolution, the informal legal order develops by means of socialization process of
a social group, whose members internalize its existing norms through the process of
socialization. The informal legal order is a parallel order which exists outside the orbit of
State enforcement, its efficacy as a binding body of codes is predicated on trust, and honesty
and the time tested custom of the group.300
299 A. Watson, Legal Transplants: An Approach to Comparative Law, Athens Ga., University of
Georgia Press, 16, 21 (1993); H. P. Glenn, Legal Traditions of the World: Sustainable Diversity in
Law, Oxford, Oxford University Press, 344 (2007). 300 D. L. Van Scott, „Dispensing Justice at the Margins of Formality: The Informal Rule of Law in
Latin America,‟ in G. Helmke., (ed.), Informal Institutions and Democracy: Lessons From Latin
America, Baltimore, The John Hopkins University Press, 249, (2006).
155
Most countries who in their chequered history came under colonial rule, had the formal legal
order of the cosmopolis transplanted in them wholesale, resulting in concomitant replication
of the legal order which took ages to evolve and develop in most post colonial States like
Nigeria.301
We adumbrate that an effective legal system can only evolve in a social milieu where the
formal legal order had been forged internally through a gradual but progressive process of
evolution; the transplanted law is adapted to the social condition of the receiving society; and
the fundamental principles underlying the transplanted laws are within the cognitive field of
the indigenous people.302
Where the foregoing pre-conditions are absent in the receiving countries, the converse effect
results. The development of the formal legal order will be stultified and by necessary
implication the resultant legal system will be ineffective (the transplant effect) Nigeria
evinces attributes of the latter category of countries it presents traits of the transplant
effect.303
301 K. McNeil, „Judicial Treatment of Indigenous Land Rights in the Common Law World,‟ in B. J,
Richardson, (ed.) Indigenous Peoples and the Law: Comparative and Critical Perspective, Portland,
Hart Publishing, 257 (2009). 302 A. Watson, The Evolution of Law, Baltimore, The John Hopkins University Press, 98 (1989). 303 M. Lupoi, The Origins of the European Legal Order, Cambridge, Cambridge University Press, 368
(2007); A. Watson, Legal Transplants: An Approach to Comparative Law, Athens Ga., University of
Georgia Press, 20 (1993); D. Nelken, Adapting Legal Cultures, Portland, Hart Publishing, 15 (2001);
M. Reimann, The Oxford Hand Book of Comparative Law, Oxford, Oxford University Press, 441,477
(2008); M. A. Glendon, Comparative Legal Traditions in a Nutshell, New York, West, 153 (2008).
156
According to Watson, legal transplants are not without historical precedents. At the apogee of
the Roman Empire, Roman law was received in Europe and the farthest reaches of the
Roman Empire. Confucian jurisprudence, which developed in China, was pervasive in Asia
and there was the massive exportation of the Spanish and Portuguese law to Latin America.
Nigeria along side most colonial States received their current formal legal order from
European powers in the nineteenth century and the first half of the twentieth century. This
epoch coincides with the consolidation of the transplantation process. Nigeria has since then,
preserved the core features of the common law of England it received during this epoch.304
The emergence of the nation State in Europe and the concomitant scramble among these
States for territories in Asia, Africa and the Americas coupled with the progressive evolution
and subsequent differentiation of the formal legal order in those European nations resulted in
massive and persistent transplantation of their legal systems in their overseas „possessions‟305
Of the dominant legal systems in Europe, the continental civil code system was systemized
and codified, in contradistinction, the English common law evolved progressively through
precedents or case law established by courts. These authorities have encapsulated in them
legal principles that are applicable in the determination of other cases. The Norman conquest
of England in 1066, constitutes the watershed of the common law, however it was not until
the second half of the fifteenth century that a defined corpus of legal principles was
established as a substitute for customary law.306
304 A. Watson, Legal Transplants: An Approach to Comparative Law, Athens Ga., University of
Georgia Press, 21 (1993). 305 Ibid. 306 Ibid.
157
Several legal orders had existed in Nigeria before the transplant process was begun, this fact
is crucial to the understanding and evolution of the entire process of transplantation. Prior to
the transplant of the English common law system in Nigeria, the variegated nationalities that
constitute Nigeria had norms which were formal, such as the sharia codes, which are
embodied in written rules. In the predominantly none Moslem societies, these norms were
predicated on conventions, customs and because they had not been reduced to writing, they
are characterized as informal. Thus Nigeria is characterized by legal pluralism having both
formal and informal legal systems. These primordial legal orders still exist after the
consolidation of the transplant process.307
The crucial question is would the differing ethnic nationalities have been able to
autochthonously evolve effective legal orders comparable with the transplanted English legal
order? To what extent had the superimposition of the English legal order distorted, stultified
and arrested this evolutionary process? For some of the ethnic nationalities, it would seem
that there was a modicum of social political structure which were both precocious and astute
in sophistication, and if they had not been subjected to the debilitating effect of colonialism,
would have through a conscious process of evolution and development of indigenous norms
and selective borrowing, have evolved effective legal orders comparable with the
transplanted English legal order. For instance, Japan insulated its civilization from whole sale
European influence while concomitantly borrowing selectively and eclectically pursuant to
modernizing its legal order.308
307 L. Sheleff, The Future of Tradition: Customary Law, Common Law and Legal Pluralism,
London, Routledge, 93 (2000); P. Shah, Legal Pluralism in Conflict: Coping with Cultural Diversity
in Law, Portland, Cavendish, 27 (2005); K. M. Clarke, Fictions of Justice: The International
Criminal Court and the Challenge of Legal Pluralism in Sub-Saharan Africa, Cambridge,
Cambridge University Press, 41 (2009). 308 A. Watson, The Evolution of Law Baltimore, The John Hopkins University Press, 98 (1989).
158
Thus, the transplantation of the English common law order has stultified the process of
evolution which would have resulted in the emergence of a legal order which could construe
every aspect of modern social, political and economic relation and activity.309
Legal pluralism in Nigeria has among other things, the effect of complicating a problem
which afflicts every legal order, that is, the ever increasing gap between social reality and
substantive formal law. The efficacy of a law is a function of the cognitive appreciation by its
subjects, of its intendments, the social and public end it is envisioned to serve and their
concomitant buy-in of the underlying philosophy which animates the law.310
Thus, where laws evolve from and are derivations of the aggregation of the customs and
mores of variegated social groups, this increases the span of cognition of the subjects of the
law, and its rules are obeyed and applied in social economic relations as a matter of course.
This is because; there is already a pervasive understanding and knowledge of the underlying
values and norms from which these laws emanate by the generality of members of the
community.311
309 Ibid. 310 N. K. Komesar, Imperfect Alternatives: Choosing Institutions in Law, Economics, and Public
Policy, Chicago, University of Chicago Press, 30 (1997); L.M. Friedman, The Republic of Choice:
Law, Authority, and Culture, Cambridge Ms., Harvard University Press, 22 (1998); R. Cranston, How
Law Works: The Machinery and Impact of Civil Justice, Oxford, Oxford University Press, 4 (2006);
D. Black, Sociological Justice, Oxford, Oxford University Press, 3 (1993). 311 S. Uddin, Corporatte Governance in Less Developed and Emerging Economies, Bingley, Emerald
Group, 379 (2008); The International Monetary Fund, Nigeria: Selected Issues and Statistical
Appendix, Washington D.C., IMF Publications, 43 (2005). Sound corporate governance practices are
essential building blocks for fostering a good investment climate. They help creditors and investors
make informed decisions, help build confidence in the company, and reduce capital costs. Corporate
governance practices have been weak in Nigeria. Nigeria‟s company law, Companies and Allied
Matters Act; Bank and other Institutions Act, and the Securities and Exchange Commission‟s listing
requirements incorporate many sound corporate governance features. However past banking and
corporate failures point to major weaknesses in corporate governance. Key problems are inadequate
enforcement of statutory standards and a lack of sanctions for wrong doing. I. R. Akintoye, „Corporate
159
The transplant effect pervades every aspect of Nigeria‟s social economic order. This is
because an application of a rule of the transplanted common law order represents the
application of a rule which evolved in a socio-economic milieu other than its own without
due cognisance of the difference in social cultural circumstances. The transplant of the
English corporate law in Nigeria has not been efficacious. While many firms use the
appellation, limited liability company, they are nothing but sole proprietorships or family
businesses. The variegated rules of corporate governance have equally failed to guarantee
rationality, transparency and efficiency in the management of public limited liability
companies. Massive frauds and manipulation of statutory books are rampant; share holder
rights are eroded with impunity with concomitant negative and untoward effect on the
confidence of the investing public.312
Allied to the foregoing is the fact that rules are context specific. Thus the context in which a
rule evolved at origin would impact legality in Nigeria. Where a rule is characterized by
ambiguity from source, its application in Nigeria may be at variance with its original
intendments. This has led to a rather negative perception of the judiciary in Nigeria.313
If the imposition of the English legal order had been done in a manner that respected local
values and sensibilities in Nigeria, it would have been etched indelibly in the cognition of the
Governance and Merger Activity in the Nigerian Banking Industry: Some Clarifying Comments, 19
International Research Journal of Finance and Economics 126-137 (2008). 312 Ibid. 313 O. Oko, „Seeking Justice in Transitional Societies: An Analysis of the Problems and Failures of the
Judiary in Nigeria, 31 Brook. J. Int’L. 9-82 (2005); H. Yusuf, „The Judiciary and Political Change in
Africa: Developing Transitional Jurisprudence in Nigeria,‟ 7 Int. Jnl. Of Constitutional Law 1093
(2009).
160
people, and it would have in turn, facilitated the evolution of organic legal institutions for its
administration and enforcement.314
For one, when a law encapsulates a value and norm which a person can relate to and buy-
into, there is greater predisposition to apply it and obey it as a matter of course. Secondly,
where the transplant is in harmony with social realities in Nigeria, and incorporates the
primordial legal order in its essential features, to that extent would the transplant legal order
and its institutions are efficacious and effective.315
3.5.2 RECEPTIVE AND UNRECEPTIVE TRANSPLANTS
A transplant process could take either of two forms, the imposed mode which is effected after
conquest or the voluntary mode where the transplant nation embarks on the reform of the
existing legal order. The diffusion of transplants is a function of the mode of transplantation.
314G. K. Hadfield, „Legal Institutions of a Market Economy.‟ Available at
http://works.bepress.com/cgi/viewcontent.cgi?article=1010&context=ghadfield; G. Teubner, „Legal
Irritants: How Unifying Law Ends up in New Divergences,‟ in P. Hall, (ed.), Varieties of Capitalism:
The Institutional Foundations of Comparative Advantage, Oxford, Oxford University Press, 417
(2001). Transplants make sense in so far as it describes legal import/export in organismic, not in
machinistic, terms. Legal institutions can not be easily moved from one context to another, like the
„transfer‟ of a part from one machine into another. They need careful implantation and cultivation in
the new environment. But „transplant‟ creates the wrong impression that after a difficult surgical
operation the fransfered material will remain identical with itself, playing its old role in the new
organism. Accordingly, it comes down to the narrow alternative; repulsion or integration. However,
when a foreign rule is imposed on a domestic culture, something else is happening. It is not
transplanted into another organism, rather it works as a fundamental irritation which triggers a whole
series of new and unexpected events. It irritates, of course, the minds and emotions of a tradition-bound
people; but in a deeper sense, it irritates (indigenous) law‟s „binding arrangements.‟ It is an outside
noise which creates wild perturbations in the interplay of discourse within these arrangements and
forces them not only to reconstruct their own rules but to reconstruct from scratch the alien element
itself.‟ „legal irritants‟ cannot be domesticated, they are not transformed from something alien into
something familiar, not adapted to a new cultural context, rather they will unleash an evolutionary
dynamics in which the external rule‟s meaning will be reconstructed and the internal context will
undergo fundamental change. 315 Ibid. There is a distinction between legal institutions that are culturally deeply embedded and others
that are effectively insulated from culture and society. Legal institutions are ordered alongside a
spectrum which ranges from the „mechanical‟ where transfer is relatively easy to the „organic‟ where
transfer is very difficult, if not outright excluded; O. Kahn-Freund, „On Uses and Misuses of
Comparative Law,‟ 37 Mod. L. Rev. 1(1974); W. Ewald, „Comparative Jurisprudence (ii): The Logic
of Legal Transplants,‟ 43 American Journal of Comparative Law 489 (1995).
161
Where absorption is characterized as the capacity of the receiving nation to comprehend the
transplanted legal order.316
We adumbrate that a transplant legal order‟s rate of diffusion is dependent on the degree of
adaptation to local conditions, especially to the primordial formal and informal legal orders.
Thus the pervading normlessness of the Nigerian State is attributable to the mode in which
the English common law legal order was transplanted to Nigeria and its degeneration and
revolutionary ouster by the military. The transplant is an imposition after the British conquest
of the different ethnic nationalities comprising Nigeria.317
The process of adaptation which could have been afforded after independence was aborted by
the military revolution of 1966. The transplant process in Nigeria was carried out by Britain
with a view to consolidating its rule; the motley ethnic nationalities were not accorded the
dignity of electing between the option of adapting or not adapting the foreign legal order.
They could not comprehend or relate to the law.318
316 D. Berkowitz, „Economic Development, Legality and the Transplant Effect,‟ 47 European
Economic Review 165-195 (2003). 317 Colonialism distorted the parameters for the future development of post colonial societies, by
stultifying socio-economic development. The colonial epoch which persisted for over a century in
Africa was characterized by wholesale importation of alien laws and socio-political institutions which
were not within the cognitive field of indigenous peoples. Thus, post colonial societies are afflicted by
a deficit of pervading legality and institutional vacuum. The law, legal institutions and other
institutional structures established in the colonial epoch were ill-adapted to the socio-political milieu of
the variegated nationalities brought under the rubric of colonial rule. Hence the post-colonial State is
characterized by pervading normlessness, unremitting rule of law deficit, social, economic and political
cataclysm. 318 Ibid.; T. C. Halliday, „Globalization of Law,‟ 32 Annual Review of Sociology 447-470 (2006); D.
Berkowitz, „Economic Development, Legality, and the Transplant Effect,‟47 European Economic
Review 165-195 (2003); D. Klerman, ‘Legal Origin?’ 35 Journal of Comparative Economics 278-293
(2007); U. Mattei, „Efficiency in Legal Transplants: An Essay in Comparative Law and Economics,‟ 14
International Review of Law and Economics 3-19 (1994); A. N. Licht, „Culture, Law and Corporate
Governance,‟ 25 International Review of Law and Economics 229-255 (2005).
162
3.5.3 LEGALITY AND THE TRANSPLANT EFFECT
The over all effect of the foregoing is that, the existing legal order in Nigeria is inorganic
and evince congruence with underdevelopment of the nation. The only thing that can
reverse this state of affairs and enhance legality is extensive and far reaching reforms of the
justice sector, where legality is a function of effectiveness of the judiciary, rule of law, zero
tolerance to corruption, enforcement of contract and absence of arbitrariness and discretion
in governance. The untoward impact which the mode of transplantation, reinforced by
military revolution has on economic development in Nigeria is a function of the impact
which both process have on legality. For one the imposition of the English common law
legal order on the conquered peoples of Nigeria represents the curtailment of the process of
evolution of the norms in these societies. While military rule constitutes total convolution of
the process of diffusion of the imposed legal order into the social economic fabric of the
nation. Military rule further compounds the transplant effect which Nigeria already suffers
through personalistic and absolutist rule generally carried out without the ambit of the pre-
revolutionary legal order.319
319 G. Aldashev, „Legal Institutions, Political Economy, and Development,‟ 25 Oxford Review of
Economic Policy 257-270 (2009); N. Foster, „Transmigration and Transferability of Commercial Law
in a Globalized World,‟ in A. Harding, (ed.) Comparative Law in the 21st Century, The Hague, Kluwer
International, 59 (2002); A. Watson, „Legal Evolution and Legislation,‟ 18 Brigham Young University
Law Review 353-379 (1987); A. Watson, „Aspects of Reception of Law,‟ 44 The American Journal of
Comparative Law 335-351 (1996); W. Ewald, „Comparative Jurisprudence (ii): The Logic of Legal
Transplants,‟ 43 The American Journal of Comparative Law 489-510 (1995). In contrast to Watson‟s
thesis on social cultural convergence in the evolution of law, Legrand‟s thesis is a departure from the
Eurocentric posterings of Watson, he argues that law is mainly an outgrowth of local society. Law is
embedded holistically in local culture. This makes the reception and assimilation of foreign ideas
problematic. He stressed that: by thinking of law in ways that sever it from its life-world, the
„comparatist‟ deprives herself of insights of great importance for comparative thought. Specifically,
because the „comparatist‟ ignores the socio-historical or socio-cultural context. P. Legrand, „How to
Compare Now,‟ 16 Legal Studies 232-242 (1996). Similarly, Kahn-Freud believed that, some areas of
law are more closely linked to society than others (which are more „organic‟) and that the success of
transplants of more organic areas of law depends primarily on the political system, which is in
concurrence with Montesquieu‟s thesis that environmental difficutlties, such as culture and political
factors, stood in the way of transplantation from one system of law to another. O. Kahn-Freund, „On
Uses and Misuses of Comparatve Law,‟ 37 Modern Law Review 1-27 (1974).
163
3.5.4 FRAGMENTED SOVEREIGNTY
Thus sovereignty which is the amplitude and latitude of legal and political power which a
nation State exercises over a defined population and spatial parameters and every
phenomenon within it is disjointed in the case of Nigeria. Indeed, the notion of an
inalienable indivisible and illimitable sovereignty in itself is unsustainable and can not stand
the test of time. A corollary of imperial imposition of a foreign legal order reinforced by
military revolution and ouster of the transplant, coupled with underlying legal pluralism is
the abysmal inefficacy of what is left of the law. The Nigerian State and its law lack
majesty, and its sovereignty is fragmented.320
320 J. Rex, „Pluralism and Multiculturalism in Colonial and Post-colonial Society: Thematic
Introduction,‟ 5 International Journal on Multicultural Societies 106-118 (2003). Perhaps in no other
post-colonial State is the conflict between the sovereignty of the post-colonial sovereign State and
indigenous sovereignty been as accentuated as the United States of America. John Marshall for
example in Johnson v. Mcintosh, 21 US 543 (1823) drawing inspiration and authority from Papal
Bulls which had provided ecclesiastic rationalization and justification for European conquest of non-
European peoples and territories posits, „on the discovery of this immense continent, the great nations
of Europe were eager to appropriate to themselves so much of it as they could respectively acquire. Its
vast extent offered an ample field to the ambition and enterprise of all; and the character and religion of
its inhabitants afforded an apology for considering them as a people over whom the superior genius of
Europe might claim ascendancy. The potentates of the old world found no difficulty in convincing
themselves that they made ample compensation to the inhabitants of the new, by bestowing on them
civilization and Christianity.‟ Johnson v. McIntosh remains the authority and legal basis for the United
States sovereignty over indigenous peoples. US Federal Indian Law betrays an ambivalence which
underscores the conflict between the post-colonial State‟s sovereignty and indigenous peoples
sovereignty. Thus, the underlying theory of „Federal Indian Law‟ holds that „tribal‟ peoples have a
lesser form of sovereignty which in real terms approximate dependence. Chief Justice John Marshall
for instance in Cherokee Nation v. Georgia 21 US 580 (1831), argues, that American Indians though
they are „nations‟ in the general sense of the word, are not sovereign nations, so truly called, but rather
they are „domestic, dependent nations.‟ Thus the inherent equivocation and ambivalence of US Federal
Indian Law is to create a non-sovereign, sovereign entity within the territorial sovereignty of post-
colonial United States of America. The recurrent conflict between these sovereigns again resonated in
1973, in the case of United States v. Blackfeet Tribe, 364 F. Supp.192. Where the Black feet Business
Council passed a resolution authorizing gambling on the reservation and the licensing of slot machines.
An FBI agent seized four machines. The Blackfeet Tribal Court issued an order restraining all persons
from removing the seized articles from the reservation. The FBI agent, after consultation with the
United States Attorney, removed the machines from the reservation. A tribal judge then ordered the
U.S. Attorney to show cause why he should not be cited for contempt of the tribal court. The U.S.
Attorney applied to federal court for an injunction to block the contempt citations. The Blackfeet tribe
argued that it is sovereign and that the jurisdiction of the tribal court flows directly from this
sovereignty. The federal court held: „no doubt the Indian tribes were at one time sovereign and even
now the tribes are sometimes described as being sovereign. The blunt fact, however, is that an Indian
tribe is sovereign to the extent that the United States permits it to be sovereign neither more nor less.
While for many years the United States recognized some elements of sovereignty in the Indian tribes
and dealt with them by treaty, Congress by Act of March 3, 1871 (16 Stat.566,25 U.S.C. s 71),
prohibited the further recognition of Indian tribes as independent nations. Thereafter the Indians and
164
Britain imposed its sovereignty on the diverse ethnic nationalities in 1914 with concomitant
imposition of the received common law existing parallel with the customary law of the
different communities. The resultant legal pluralism and the rather long spell of military
dictatorship results in fragmentation of the sovereignty of the Nigerian State.321
The incongruity and conflict between the imperially imposed legal order and sovereignty on
the one hand and the primordial legal order and sovereignty on the other leads to
fragmentation of the sovereignty of the post-colonial Nigerian State and inhibits its capacity
for good, efficient and effective governance. There is no synthesis between the conflicting
orders. There is a pervasive lack of psychological acceptance and allegiance of the citizenry
to the imposed sovereign order. The fragmentation of the sovereignty of post-colonial
Nigeria State is a derivative of the alienation of the people from the State, its laws and
institutions.322
the Indian tribes were regulated by Acts of Congress. The power of Congress to govern by statute
rather than treaty has been sustained. United States v. Kagema, 118 U.S. 375, 6 S.Ct. 1109,
30L.Ed.228 (1886). That power is a plenary power ( Matter of Heff, 197 U.S, 488, 25 S.Ct.506, 49
L.Ed. 848 (11905) and in its exercise, Congress is supreme. United States v. Nice, 241 U.S. 591, 36
S.Ct. 696, 60 L.Ed. 1192 (1916). It follows that any tribal ordinance permitting or purporting to permit
what Congress forbids is void. It is beyond the power of the tribe to in any way regulate, limit, or
restrict a federal law officer in the performance of his duties, and the tribe having no such power the
tribal court can have none. Thus federal might of the post-colonial State undermines „tribal
sovereignty‟ not only in the United States of America but virtually in all post-colonial States in the
province of tax law, civil and criminal law, but particularly in property law tribal sovereignty is
fragmented in a labyrinth of conflicting rules which clashes with indigenous customary law. The post-
colonial State has astutely contrived the legal mechanism for alienating indigenous people‟s lands,
dismantling pre-colonial structures of power relation and self-determination. The foregoing however
provides an insight into the stultification of all efforts at nation building in the post-colonial State.
There is a culture of resistance to its laws and authority, as the people are alienated and more inclined
to internalize the underlying norms of customary laws than those of the formal laws of the post-
colonial State hence the fragmentation of sovereignty and lack of centrality of law in its body politik. 321 P. Shah, Legal Pluralism in Conflict: Coping with Cultural Diversity in Law, Portland, Cavendish,
89 (2005). 322 J. S. Nyer, Why People Don’t Trust Government, Cambridge, Ma., Harvard University Press, 19,
77, 133 (1997); T. R. Gurr, Peoples Versus States: Minorities at Risk in The New Century,
165
In no other province of the law in Nigeria has the conflict and incongruence between the
imposed sovereign order and indigenous sovereign order been so made manifest than the
domain of land use law. While land is communally owned and rights to its use and
exploitation of its resources is conferred by membership of particular communities under
customary land tenure; there exists parallel to the communal land tenure the Land Use Act,
which vests property in all land in the Federation of Nigeria in the State Governor.323
We shall dwell in due course on the far reaching implications of the fragmentation in this
sphere of the law in Nigeria on effectiveness and legality. Communal ownership of land is
at variance with western concept which regards land as a tradeable commodity.324
The formation of the Nigerian sovereignty was not the outcome of an optional process; the
variegated nationalities were not allowed the freedom of choice. The Nigerian State was
created by imperial fiat, delineation of borders were made without due consultation with the
indigenous peoples, administrative structures were created with concomitant imposition of
sovereignty. Thus the evolution of the Nigerian State was convoluted at inception. The axial
Washington D.C. United States Institute of Peace Press, 96,100,151 (2000); R. M. Williams , The
Wars Within: Peoples and States in Conflict, Ithaca, Cornell University Press, 34, 64, 91 (2003). 323 L. J. Iwarere, „Property Rights and Land Market Dynamics: An Economic Interpretation of the
Indigenous Land Tenure Transformation Process in Nigeria,‟ in R. A. Simons, (ed.), Indigenous
Peoples and Real Estate Valuation, New York, Springer, 201 (2008); M. Watts, „Anatomy of an Oil
Insurgency: Violence and Militants in the Niger Delta, Nigeria,‟ in K. Omeje (ed.), Extractive
Economies and Conflicts in the Global South: Multi-Regional Perspectives on Rentier Politics,
Aldershot, Ashgate, 51 (2008). 324 H. A. Oluwasanmi, Changing Pattern of Land Tenure in Nigeria. Available at http://idl-
bnc.idrc.ca/dspace/handle/123456789/20491; I. Smith, „Effects of the Land Use Act on Customary
Land Tenure System in Nigeria,‟ 2 Journal of Contemporary Legal Problems, 119-126 (1990).
166
and vertical nature of its creation coupled with a rather long spell of military rule perhaps is
the most significant cause of the lack of allegiance to it and its laws.325
The imperially imposed sovereignty of the Nigerian State was resisted at inception and its
legitimacy has been consistently contested after political independence. The notion of an
independent Nigerian nationhood is only non-commitally dwelt upon in accounts of pre-
independence nationalism and independence movements. The lack of a common heritage
and purpose has dire consequences for nation building. Post independence efforts at forging
a cohesive State out of the motley ethnic nationalities have largely failed with attendant
normlessness and anarchy in the polity. Some of the symptoms of this state of affairs are
recurrent Coup d’tats, political brigandage, election rigging and vote buying, corruption
pandemic, maladministration, lack of transparency in governance, restiveness of ethnic
nationalities and a pervading sense of uncertainty.326
3.5.5 LAND AS THE BASIS OF HUMAN IDENTITY AND ESSSENCE
In indigenous Nigerian world view and cosmogony, the worth of land is denominated in
both spiritual symbolism and the bounty of nature which emanates from it. The identity of
individuals and groups derives from the land upon which they dwell. It sustains them by
bringing forth both economic and subsistence crops, thereby constituting the basis of their
survival, renewal and continuity. The land determines the essence of a people, its industry
325 A. H. M. Kirk-Greene, „The Evolution of the Nigerian State,‟ 72 African Affairs, 455-456 (1973);
T. N. Tamuno, The Evolution of the Nigerian Stata: The Southern Phase, Ibadan, Longman, passim
(1978); J. Peters, The Nigerian Military and the State, London, I. B. Tauris, 1, 23, 48 (1997). 326 J. I. Elaigwu, The Challenges of Nation-building in the Twenty-First Century: The Nigerian
Experience, Calabar, University of Calabar Press, passim (2004); A. Huntington, Political Order in
Changing Societies, New Haven, Yale University Press, 8, 198, 264 (1996).
167
and economic culture. Its ancestors were committed to it. Thus the group consists of the
living dead, the living and generation unborn and is an ancestral trust committed to the
living for their sustenance and those of unborn generations.327
In Amodu Tijani v. Secretary of Southern Nigeria, Lord Heldane, commented inter alia:
The next fact which it is important to bear in mind in
order to understand native land law is that the notion of
individual ownership is quite foreign to native ideas.
Land belongs to the community, village or the family,
never to the individual. This is a pure native custom
along the whole length of this coast, and wherever we
find, as in Lagos, individual owners, this is again due to
introduction of English ideas.328
The cession of Lagos subject to the customary rights of the local people in 1861 by King
Dosunmu to the British represents the watershed of State ownership of land in Nigeria.
Subsequently, land was ultimately vested in the British crown by the promulgation of the
Public Lands Acquisition Act 1917; Public Lands Acquisition (miscellaneous provisions)
Act 1992 (formerly Decree No.33 1976).329
327 R. L. Prosterman, „Land Reform in the Twenty-First Century: New Challenges, New Responses,‟ 4
Seattle J. Soc. Just. 763 (2006); A. De Janvry, „Access to Land and Land Policy Reforms,‟ in A. De
Janvry (ed.) Acess to Land, Rural Poverty, and Public Action,’ Oxford, Oxford University Press, 4
(2001); S. Allen, „Looking Beyond the Bancoult Cases: International Law and the Prospect of
Resettling the Chagos Islands,‟ 7 Human Rights Law Review 441-482 (2007); J. Gilbert, „Nomadic
Territories: A Human Rights Approach to Nomadic Peoples Land Rights,‟ 7 Human Rights Law
Review 681-716 (2007). Land is the most fundamental resource in any society because it is the basis of
human survival. Land is the space upon which all human activities take place and provides continued
existence of all life forms and minerals. 328 Amodu Tijani v. Secretary of Southern Nigeria [1921] AC 39 329 I.O. Smith, Practical Approach to Law of Real Property in Nigeria, Lagos, Ecowatch Publications
Limited, 18 (1999).
168
The Land Use Act 1978 was ostensibly promulgated as a result of the need to acquire land
for agriculture and industrial development. The Act by necessary implication compulsorily
acquired lands which hitherto vest in the variegated land owning families and communities.
The Land Use Act promulgated by the post-colonial Nigerian State is analogous to the
various Land Acquisition laws promulgated by the colonial State. The Act and its colonial
legal precursors intendment is primarily the alienation of the vested rights which indigenous
peoples have in their land, it vests the radical title to all lands within the territory of a State
in Nigeria in the Governor who ostensibly holds in trust for the people. Consequently, a
tenurial system based on legal fiction was created, in which lease holders interest in the land
is a mere right of occupancy which is revocable by the Governor of the State.330
That granted, from the inception of the common law in those territories from which Nigeria
was forged, it was set on a collision course with the indigenous legal order, and in no other
province of the law has the conflict between the British legal order been so pronounced than
in land law. The foregoing is understandably so, as the main purpose of colonization was
the forceful acquisition of land and all its appurtenant resources with a view to exploiting
them for the economic benefit of the colonial power.331
The conflict persists in the post-colonial State, because it did not dismantle the colonial
structure of power relations it inherited, it preserved them while complementing it with a
rentier structure. The only device with which the rentier post-colonial State can capture
resources is first, to alienate all vested rights in land whilst concomitantly vesting same in
330 Cap 202 as amended by Cap 203 LFN 1990/Cap L5, LFN 2004. 331 Ibid.
169
itself. Thus in contradistinction to the received English law, title to the land is not vested in
the leader but in the corporate unit, which comprises the living dead, the living and
generation unborn.332
The Land Use Act is bereft of an express provision preserving the customary land tenure
system as an institution. Its existence is often inferred from the Acts transitional provisions
and the definition section allude obliquely to its existence. This type of forensic expositions
however can not cure the realism that the Land Use Act, by virtue of Section 1 has
extinguished every unfettered rights and interests which hitherto inhered in Nigerians,
whilst concomitantly substituting them with the highly circumscribed and revocable rights
of occupancy which is determinable in 99 years after which the title reverts to the
Governor. It is a platitude to state that the deliberate obliquy of the Act in this regard is the
source of the chaos and uncertainty characterizing conveyance in Nigeria. Its most
proximate outcome is to increase transaction costs as assignees would have to satisfy a
multiplicity of obligations pursuant to perfection of their title. Thus, rather than having one
determinable level of over lordship to which the assignee is obligated, there is
fragmentation of sovereignty, which can be traced to mode of transplant of the common
law. It was borne as it were, by the wind of colonialism which swept through the whole of
Africa in the 19th
century. Since sovereignty is coterminous with territoriality, and granting
that the only objective of colonialism is the alienation of land (territory) belonging to one
sovereign by another through conquest, ownership of and the relation of power which it
engenders constituted the only basis of contention between the colonial powers and
indigenous peoples. The post-colonial Nigerian State has preserved and perpetuated the
colonial structure of power relations with respect to ownership of land. It alienated all lands
332 Ibid.
170
in Nigeria from the people while concomitantly vesting itself with the proprietary rights in
land. The rather circumscribed rights which the Land Use Act grants are a mere usufruct
which is determinable in 99 years.333
The implications of the foregoing are profound and radical, for one, land in its true essence
can not be characterized only in terms of the earth surface. Land encompasses appurtenant
variegated mineral resources in the bowel of the earth and superjacent space above the land
to a considerable distance.334
Thus, given the rapacity and the rather high proclivity of the rentier Nigerian State for rent
seeking, the real and only intendment of the Land Use Act is the capture of the variegated
mineral resources beneath the land dwelt upon by the variegated ethnic nationalities.
Therefore, by necessary implication, the Land Use Act like so many other pieces of
legislation in Nigeria, is nothing but a rent seeking device contrived to capture resources
which exploitation has never in the chequered economic history of Nigeria translated to the
wellbeing of its peoples. In fact congruence has been established particularly between
Nigeria‟s stupendous oil wealth and pervasive poverty. The only beneficiaries of the bounty
from nature are the tribe of corrupt military top brass, politicians, technocrats, favoured
groups and a coterie of individuals. The preponderance of Nigerians is practically shut
out.335
333 Ibid. 334 Ibid. 335 Ibid.
171
That granted, the judiciary has in several decisions articulated arguments in proof of the
continuous parallel existence of customary land tenure system with the land tenure under
the Act. The Supreme Court in Ogunola v. Eiyekole & Ors. Asserted that:
Land is still held under customary tenure even though
dominium is in the Governor. The most pervasive effect
of the Land Use Act is the diminution of the plenitude of
the powers of the holders of land. The character in
which they hold remain substantially the same.336
While the foregoing adumbrations represent an uncanny sagacity and syllogistic artistry of
their Lordships, it remains nothing but a mere opinion which bears no legal effect. In itself
this statement and the judicial attitude it underscores is a commendable effort of the apex
Court in a plethora of cases to manage the pervading untoward outcome, and transplant
effect of the imposition of the British legal order on Nigeria‟s ethnic nationalities. An
expository of the Supreme Courts argument betrays the ambivalence characterizing it. The
Court employs equivocation and juxtaposition of synonyms and stylistic variant of words
and phrases to drive its argument in proof of the preservation of the communal land tenure
system.337
While the phrase „land is still held under customary tenure suggests that title in land still
vests absolutely under customary tenure. The caveat following it locates „dominium‟ in the
Governor. The Merriam Webster‟s Collegiate dictionary defines „dominium‟ as „absolute
336 [1990] 4 NWLR (Pt. 146) 632. 337 Ibid.
172
ownership‟ and gives its synonym as „power.‟ In effect, the Court substitutes the words
„dominium‟ and „power‟ for one another to reach its conclusion. It locates „dominium‟ in
the Governor while „plenitude of powers‟ is located in the holder of title under customary
land tenure, albeit diminutive, a condition which in itself negates the essence of the word
„power‟ which is susceptible of superlatives especially when used in the context of the axial
and vertical power relations between parallel legal orders which the Land Use Act and the
customary land tenure represents. Where „power‟ is qualified as diminutive in relation to a
„power absolute‟ the latter negates the former rendering it non existent.338
While Section 36 (5) of the Act bars any transfer of land in non-urban area which is the
subject-matter of customary right of occupancy, Section 21 provides for the transferability
of such land, albeit with the consent of the Local Government or the Governor. The Act
provides in Section36 (5) inter alia:
No land to which this Section applies shall be sub-
divided or laid out in plots and no such land shall be
transferred to any person by the person in whom the
land was vested aforesaid.339
The foregoing provision of the Act is at variance with the reality, for not only are non-urban
land fragmented, they are subsequently alienated through sale. Such sale is ostensibly not
within the contemplation of the Act, thus it can not be used as security in a loan transaction.
338 Ibid.; F. C. Mish (Ed.), Merriam Webster’s Collegiate Dictionary, Springfield Ms., Merriam
Webster Incorporated, 371 (2003). 339 Note 165 supra.
173
Attempts have been made by certain publicists and the judiciary to conduct forensic
expository of the Act. Suggestions have been proffered that Section 36 (5) be construed in
conjunction with Section 21 which makes such transfer possible with the consent of the
Local Government or the Governor in some cases. That proviso however can not be
substituted for nor does it diminish the imperative force of the express provision of Section
36 (5) of the Act.340
It is a fundamental principle of the construction of statutes that courts may not read into
legislation something which the legislature has not written there. The courts in a federal
system and most especially in the Anglo-American legal system is without authority to add
words, fill gaps or supply omissions. In this respect, the courts are precluded from
interpolating and extrapolating new provisions or ideas in statute, or engrafted thereon any
extraneous meaning thereon. Thus it is without the office of the courts to insert in a statute
that which has been omitted and what the legislature omits, the courts can not supply. In
sum the court has no power to insert qualifying provisions not included in the statute, and
may not rewrite a statute to conform to an assumed intention that does not appear from its
language.341
From our survey of federal constitutions, the judiciary is without authority to legislate or to
amend legislation even though it has powers to declare legislation unconstitutional. The
power to give effect to its opinions about the legislation resides outside it, in a coordinate
institution, the legislature. It is one thing to put in or take out word to express more clearly
what the legislature did say, or must from its own word be presumed to have said by
implication. It is quite another matter to amend a statute to make it say something it does
340 Ibid. 341 E. A. Dredger, Construction of Statutes, Toronto, Butterworth, 183 (1983).
174
not say, or to make it say what it is conjectured the legislature could have said or would
have said if a particular situation had been before it.342
As a result of constitutional provisions distributing the powers of government among three
arms, the legislature, executive and judiciary, courts have no legislative powers, and
certainly not superior to the legislature, if any thing, the presumption of superiority is in
favour of the legislature as it is purely representative whilst the courts are unrepresentative
tribunals. The courts would do well to avoid judicial legislation, or any entry into the
legislative field. Thus as far as textual intentions of constitution framers goes, federal
constitutions provide, it is only the legislature than can amend its own Act not the Supreme
Court.343
Thus, whatever its opinion may be as to the propriety of a legislation or the necessity for
further legislation, the duty of a court is to apply the law objectively as found, and not to
revise it.344
A court may not alter the law by construction because it appears outmoded, and it is not
within the province of a court, in the course of construction of a statute, to make or
supervise legislation. A statute may not, under the guise of interpretation, be modified,
342 Ibid. at 184. 343 Ibid. at 185. 344 Ibid. at 186.
175
revised, amended, distorted, remoded or rewritten, or given a construction of which its
words are not susceptible, or which is repugnant to its terms.345
The foregoing limitations on judicial interpretation of statutes applies mutatis mutandi with
even greater force to purely personal and non-formal opinions and interpretations of statutes
by publicists and other legal experts. Such expositions are of no moment at law. In fact,
they are exculpatory and subversive of the efforts at genuine reviews of the Land Use Act.
The reality is that the true intendment of the Land Use Act is the capture of resources by
rapacious rent seeking post-colonial Nigerian rentier State. No amount of forensic analysis
and argument can alter that truth.346
The most significant and radical effect of the Land Use Act is the erosion of the right which
inhered in a customary landowner. What is left of the customary landowners erstwhile
unfettered title is a residue in form of the highly circumscribed and revocable right of
occupancy which is determinable in 99 years. The reversionary right is vested in the State
Governor.347
Legally, the communal land owner suffers a reversal of role from being an owner; the Act
has converted him to a lease holder subject to the over-lordship of the State Governor or the
Local Government.348
345 Ibid. at 187. 346 Note 165 supra. 347 Ibid. 348 Ibid.
176
Thus, in effect, the legal relationship which had existed between the customary landowner
and customary tenants was altered fundamentally after the promulgation of the Act. The
customary land owner himself was converted to a tenant subject to the over-lordship of the
Governor or the Local Government.349
In the case Aghenghen v. Waghoreghor, Elias C.J.N. (as he then was) aptly explained that
customary tenants:
Are not gifted the land. They are not borrowers or
lessees, they are granted of land under customary tenure
and hold, as such, a determinable interest in the land
which may be enjoyed in perpetuity subject to good
behaviour.350
The pertinent question is to what extent can the customary overlord ventilate his rights of
forfeiture of the customary tenant‟s tenancy where his conduct is malafides or a contestation
of the overlord‟s title. The Court of Appeal in Kasali v. Lawal held that the legal
relationship which had existed between the customary overlord and the customary tenant
have been completely dismantled by the collective impact of Sections 1, 36 and 37 of the
Land Use Act.
……therefore the Court can no longer make a forfeiture
order over such land except as provided for under the
349 Ibid. 350 [1974] 1 All NLR 1
177
Land Use Act dealing with revocation of rights of
occupancy.351
The untoward outcome of the foregoing Court of Appeal‟s decision is to invert the legal
relationship which had existed between the communal land owner and the communal tenant. It
would seem that the Court of Appeal is enamoured of strict interpretation of the provisions of
the Land Use Act. The value of this decision lies in its betrayal of the absurdities which the
Land Use Act has engendered since its enactment.
Contrary to the strict interpretation of the Act in Kasali, by the Court of Appeal the Supreme
Court was less formalistic in Salami v. Oke; Obaseki J.S.C. avers:
It is a mis-statement of law to say that the Land Use Act
abolished the remedies or relief or forfeiture available
when ever a tenant disputes the title of the overlord or
landlord or alienates without the landlord‟s consent the
whole or part of the parcel of land let out to him by the
landlord under customary law.352
The decision of the Court of Appeal by no means represents a misstatement of the law as
argued by the Supreme Court. Its only foible perhaps, if any is that its ratio is derived from the
sylogy of the Act itself and that rather than being a deficit, it has exposed the inanities of the
351 Note 165 supra. 352 Kasali v. Lawal, [1986] 3 NWLR (Pt.28) p.308; Salami v. Oke [1987] 4 NWLR (Pt.63) 1
178
Act pursuant to evolving a practicable and people orientated land use regime devoid of
rentierism.353
The foregoing decisions betray the equivocation which characterizes judicial attitudes
regarding customary title. The political and legal reality of the colonial State negates this
seeming preservation of customary title as the imperial sovereign order annexed and vest all
land in the British Crown.354
The motley ethnic nationalities have always had their distinct sovereign orders and a modicum
of political and legal structure in their different domains before they were forged together by
imperial fiat of the British. The resultant multiplicity of sovereignties in itself is perhaps the
most significant factor stultifying the process of nation building. In the attempt to mitigate the
dysfunctionality of the imposition of the British sovereign and legal order on the various
autonomous sovereign peoples, the British contrived legal pluralism as a rationalization of the
imposition of the British legal order which exists parallel to the primordial sovereign and legal
orders with a concomitant outcome in form of the fragmentation of sovereignties.
Fragmentation leads to conflicts and splits in allegiance to the myriad of sovereign legal
orders, thereby impacting negatively on the effectiveness of the extant legal order in
Nigeria.355
353 Ibid. 354 Ibid. 355 Ibid.
179
The incongruity between the letter and spirit of the Land Use Act and the communal
ownership of land under customary law and Nigerian traditional institutions underscores the
centrality of land to our analysis, as land encompasses not only the mere physical surface but
all the potential derivable resources underneath the land. Thus the process of colonization has
as its single purpose, the forceful annexation and acquisition of land and the resources therein
by the colonial power. It alienates and disenfranchises the owners of the land by force of arms,
imposes its sovereign and legal order pursuant to exploitation of the conquered territory.356
3.5.6 COLONIAL SOVEREIGNTY IN NIGERIA
Nigeria as presently constituted was a pure historical accident; it was not forged through a
conscious and consensual intent of the constituent nationalities but was a creation of British
colonial adventurism and empire building proclivity. The scramble for markets, raw materials
and the self-serving crave for overseas influence led Britain to embark on expeditions to the
west coast of Africa establishing its influence along the coast and the hinterland as far as Nikki
in present day Borno State of the Federation of Nigeria. To the Northwest, Sokoto was sacked
and brought under its influence. Etymologically, the name, Nigeria was derived from the word
„Niger‟ the name of the river that constitutes the most significant geographical feature of the
topography. Britain forged together by imperial fiat the motley ethnic nationalities, which had
their sovereignties within their respective territories, north and south of the river Niger and its
tributary the river Benue, into a modern Nation-State.357
356 Ibid. 357 O. Ikimi, The Fall of Nigeria, London, Heineman, 1-50 (1977).
180
In 1849, the British Government appointed John Beecroft as the Governor of the Bight of
Benin. His mandate was the regulation of commercial relations with the coastal City-States. He
enforced his authority with gunboats and generally intermeddled in the internal affairs of these
States and initiated the process, which culminated in the imposition of colonial rule.358
Lagos was proclaimed a Crown colony in 1861. The United African Company formed by
George Goldie through mergers of British firms in 1879 spearheaded the consolidation of
British rule in what became the protectorate of Northern Nigeria. The company received a
charter to administer it until 1899 when the charter was revoked and the British Government
administered it directly.359
The Delta region was proclaimed the Oil Rivers Protectorate, following the conclusion of
treaties with the rulers of the different nationalities and British consul. The Southern and
Northern protectorates were merged in 1914 to constitute a single territorial unit styled
„Nigeria‟ which was under British suzerainty until 1960.360
Nigeria was bedevilled shortly after its birth by military banditry and adventurism, which
lasted for about 35 years with attendant social, political and economic perturbations, which
culminated in a bloody 30 month civil war. Vestiges of the inequities which snow balled into
the civil war conflagration, characterize the post-civil war era. These vestiges have engendered
restiveness of some federating units who seek the renegotiation of the Nigerian union and
358 Ibid. at 25. 359 Ibid. at 27. 360 Ibid.
181
pressing a case for the devolution of powers to the units in the form of resources control, own
police force and true federalism and fiscal federalism and, in the extreme secession.361
The legal order of the colonial State, was deterministic and authoritarian, its sovereignty was
imposed and sustained by threats and force of arms. Lord Lugard was intent on forging a
nation State out of the ethnic nationalities which constitute Nigeria. He published a treatise in
1922 titled the „Dual Mandate in British Tropical Africa,‟ in which he set out a discourse on
the principles and practices of the administration of „subject races.‟ Britain invested the
colonial State with legalism at its inception. That however, does not make the colonial State
any less illegal. It was founded on a foundation of illegality and its „legality‟ was a function of
the fact that it imposed its suzerainty through sheer force of arms and then invested itself with
legality after consolidation of its power over the conquered peoples.362
3.5.7 THE COLONIAL STATE AND CUSTOMARY LAW
The enforcement of law and order in the colonial State was paramount. Its most significant
development endeavour was to catalyse the evolution of a legal system, which internal
precision and rationality would enhance its diffusion and receptivity in the indigenous
communities. The gradual and progressive adaptation of the colonial legal order was expected
to result in the differentiation of the law and legal institutions of the colonial State, in a process
361 Ibid. 362 Ibid.
182
that would reach cumulation when the legal institutions of the colonial State have assumed and
developed into the forms of the laws and legal institutions of the colonial power.363
The intrusion of the colonial legal order into indigenous communities was resisted; it did not
find a legal void in these communities, who have from time immemorial evolved their body of
norms and legal order. To obviate that obstacle, the colonial authorities contrived a process of
evolution and adaptation of the transplant to the conditions in the indigenous communities.
The process, in hindsight failed largely because, the so called modernization mission of the
colonial powers was a smoke-screen for the real intent of colonialism, which is the alienation
of the land, its resources and labour of the indigenous peoples. The various attempts to
forcefully acquire land belonging to communities were resisted, resulting in wars, which were
bitterly and ferociously fought by the people.364
While the people lost in virtually all the battles fought with the invaders intent on acquiring
their land, the conquerors lost the war, as the people psychologically remained impervious to
norms inherent in the legal order imposed after conquest, consolidation and pacification of the
various ethnic nationalities.365
Perhaps the most significant factor stultifying post colonial efforts at nation building is the
total alienation of the people from the colonial State and resultant lack of psychological
363 A. A. Oba, „The Administration of Customary Law in a Post-Colonial Nigerian State,‟ 37 Cambrian
Law Review 95-111 (2006). 364 J. A. Yakubu, „Colonialism, Customary Law and the Post-Colonial State in Africa: The Case of
Nigeria,‟ 30 Africa Development 201-220 (2005). 365 Ibid.; A. Abramson, Land, Law and Environment: Mythical Land, Legal Boundaries, New York,
Pluto Press, 40 (2001).
183
acceptance of its laws by the people. The post colonial Nigerian State has inherited that burden
of its past, the people remain alienated from the State, it suffers a crisis of legitimacy and its
authority particularly over land (territory) is consistently and persistently contested. It
resonates and manifest in such national questions as resource control, devolution of powers
and so forth. These questions are being stridently posed because the people see the post
independence Nigerian State as not being radically different from the colonial State in terms of
structure and behaviour. The post-colonial Nigerian State to them evince and surpass the
rapacity of the colonial State, as its laws , particularly the Land Use Act are regarded as
contrived to facilitate the capture of local resources by a largely inept and corrupt political
elites at the centre. Its laws in other facets of the social and economic spheres are viewed with
equal scepticism and seen as contrived to seek or maximize rents which are subsequently
subjected to despoliation by rogue military rulers and kleptomanic politicians and
bureaucrats.366
3.5.8 THE GENESIS OF LEGAL PLURALISM
That granted, efforts at adaptation of the norms and customary practices of the people to the
imposed British legal order, took the form of suppressing and curtailing traditional relations of
power and authority. however those aspects of the customary practices which were not within
the ambits of the interests of the colonial State or which were regarded as benign and do not
disparage its purpose, particularly customary laws in the area of private personal law, which
were in tandem with so called core libertian values enshrined in the English common law.
Such customary laws must however be subjected to repugnancy test, by virtue of which a
366 M. Mamdani, „Indirect Rule, Civil Society, and Ethnicity: The Africa Dilema,‟ 23 Social Justice
112 (1996).
184
customary law would be unenforceable where it was at variance with equity and good
conscience.367
The colonial authorities had the conqueror‟s complex and as a matter of policy did not accord
recognition to any parallel legal and political structure outside of itself. For one, the colonial
administration failed to empathize the world view of the indigenous Nigerian communities,
particularly, the temporal dimension of that world view was incomprehensible to colonial
administrators. They were totally detached from the people, their interaction were short and
perfunctory, hence their understanding of customary practices were perceived as irrational and
that they would be progressively and gradually eradicated through evolution and
modernization. The colonial administration, in contradistinction to ethnographers, failed to see
the utilitarian elements in custom. It is regrettable that deliberate erosion of traditional values,
the destruction of traditional institutions and the deliberate undermining and weakening of
traditional authority destroyed the moral fabric of indigenous communities. The resultant
anomie, persisted into the post-independence epoch with untoward effect on nation-
building.368
The colonial administrators‟ schedule of functions involved dispute settlement. That process
would have been a veritable platform for the synthesis of the imposed English jurisprudence
and customary laws of the people. That fact was largely unappreciated by the colonial
administrators,‟ whose limited knowledge of customary practices complicated the process and
367 R. Kuppe, Law and Anthropology: Natural Resources, Environment and Legal Pluralism, The
Hague, Kluwer, 43, 146 (1997); P. Legrand, Comparative Legal Studies: Traditions and Transitions,
Cambridge, Cambridge University Press, 54 (2003); I. Maher, „Community Law in the National Legal
Order: A System Analysis,‟ 36 Journal of Common Market Studies, 237-254 (2002). 368 J. Church, „The Place of Indigenous Law in a Mixed Legal System and a Society in
Transformation.‟ Available at http://www.anzlhsejournal.auckland.ac.nz/pdfs-2005/Church.pdf
185
stultified the administration of justice. Most importantly, the colonial administrators‟ had
difficulties construing customary laws of commercial transaction where they have no analogy
in the common law register. Miscarriages of justice were rampant as judgements ran against
the grain of customary norms leaving no litigant satisfied with the outcome. The indigenous
people progressively developed a culture of resistance to a legal system they regarded as
capricious, arbitrary and which blatantly desecrate indigenous institutions, and erodes
traditional authority.369
The preoccupation of the colonial administration were the administration of law and order and
public order, revenue generation to defray the cost of administration; to create the enabling
environment for capitalist economic incursion through the instrumentality of land use laws and
labour laws. Land use legislation had as its intendment, facilitation of availability of land for
capital investment and development while labour law facilitated the exploitation of the labour
of indigenous peoples by British commercial concerns operating in Nigeria.370
With variegated ethnic nationalities numbering about 300, the colonial administration was
overwhelmed in its effort to accord formal recognition to the divergent customary practices of
the different nationalities. The lack of regard for national identities in the delineation of
colonial boundaries results in atomization and custom variability of Nigerian indigenous
societies.371
369 L. Sheleff, The Future of Tradition: Customary Law, Common Law and Legal Pluralism,
London, Routledge, 240 (2000). 370 A. Soeteman, Pluralism and Law, Dordrecht, Springer, 45 (2001); A. Plaw, Frontiers of Diversity:
Explorations in Contemporary Pluralism, New York, Rodopi, i-xiv (2005). 371 E. N. Amadife, „Africa‟s Political Boundaries: Colonial Cartography, the OAU, and the Advisability
of Ethno-National Adjustment,‟ 6 International Journal of Politics, Culture, and Society 533-554
(2005).
186
The burden of its colonial past which the post-colonial Nigerian State inherited is the
perpetuation of these variegated primordial groupings, characterized by mechanical solidarity
based on kinship and attachment to land and its ownership. Those rudimentary societies have
evolved into the weakened atomised and fragmented discordant civil society of the post-
colonial Nigerian State, making the task of governance a daunting one and stultifying the
process of nation building and above every other consideration it deepens and heightens the
level of normlessness which pervades the Nigerian State and civil society.372
3.5.9 TRANSITION TO NATIONHOOD
Perhaps one of the most significant and unintended consequences of World War II was the
wind of change which was catalysed both by the conduct and outcome of the war. The wind
swept across Asia, Africa, the Caribbean, South Pacific and Latin America. In the equally
impassioned and ferocious war of ideas at the propaganda front the Allied Powers depicted
Hitler‟s Germany and its allies as the „axis of evil‟ intent on subjecting the human race to
unparallel and unprecedented tyranny. Colonized peoples were called upon to rise and fight for
liberty, they were dragged into the imperialist war and made to contribute substantially to the
Allied war efforts.373
Thus after the Second World War, colonialism became out moded and ran against the grain of
the libertian ideals and values which the west professes to hold so dear. There was a
372 D. Eyoh, „The Ethnic Question in African Democratization Experiences.‟ Available at
http://www.codesria.org/Archives/ga10/Abstracts%20Ga%206-11/Politics_Eyoh.htm 373 A. P. Adamthwaite, The Making of the Second World War, New York, Routledge, 47 (1992); B.
Davidson, Modern Africa: A Social and Political History, London, Longman, 24,45,61 (1995); W.
Rodney, How Europe Underdeveloped Africa, Washington D.C. Howard University Press, 147,203
(1981).
187
groundswell of opposition to colonialism, it was perceived as being an obstacle to the growth
and development of colonized peoples. In the intellectual wing of the nationalist movements,
Fanon and Rodney articulated the rational bases of the emancipation struggle of colonized
peoples, they argue that colonialism was an active brake on the process of development. Fanon
particularly posits that the overthrow of colonialism should be viewed within the context of the
operationalization of the dialectic process in the conflictual relationship between colonized
peoples and the colonial powers. The curtailment of the hegemony of imperialism, and the
untoward and economically debilitating and limiting impact of the attendant racial prejudices
which is the hallmark of western imperialism, would usher a cultural renaissance, which would
kindle the spirit of self determination in colonized peoples, remove the yoke of colonial
oppression and the brake on the economic growth and development of colonized peoples. It
was against the backdrop of the foregoing that Nigeria gained political independence from its
British overlords on 1st October, 1960.
374
3.5.10 NATIONHOOD AND LEGAL PLURALISM
Before the cession of Lagos in 1861 to the British Crown under a treaty of cession, the
variegated indigenous communities which now constitute Nigeria had their autonomous legal
and political orders for the administration of justice and order. In the traditionalist south and
parts of the Protectorate of Northern Nigeria, the law was unwritten customary law. In the
predominantly Moslem North, Islamic law of the Maliki school was administered by Alkali
courts. The sharia law is written law based on injunctions in the quaran, practices of prophet
Mohamed and the consensus of Islamic scholars.375
374 Ibid.; F. Fanon, The Wretched of the Earth, New York, Grove Press, passim (2005); F. Fanon,
Toward the African Revolution, New York, Grove Press, 55 (1994); A. Cesaire, Discourse on
Colonialism, New York, Monthly Review Press, passim (2001). 375 T. O. Elias, The Nigerian Legal System, London, Routledge, 12, 17, 21, 31 (1963).
188
The commercial interaction of the indigenous peoples with Europeans created an exigency and
the pressing need to have a modicum of legal order under which contracts for the sale of goods
and enforcement of contracts can be construed. Initial arrangement to litigate disputes arising
from commercial transaction in indigenous courts failed to meet the European notion of
justice.376
It was for the foregoing reasons that the British government appointed consuls in 1849 to
regulate commercial activities between the indigenous people and British merchants.
Indigenous courts co-existed with consular courts in Lagos and other British spheres of
influence, but their jurisdiction was restricted to cases involving indigenous peoples.377
Lagos was made a British colony in 1862. The Supreme Court Ordinance of 1863 established a
Supreme Court for the colony of which had both civil and criminal jurisdiction. The
jurisdiction of customary courts was contested in a Gold Coast case, Oppon v. Ackinie, action
was brought by the plaintiff a subject of a local chief for damages for unlawful imprisonment
on the grounds that the chief‟s judicial powers had ceased by virtue of the application of the
Supreme Court Ordinance 1876. The divisional court sitting as a court of appeal upheld the
contention of the plaintiff. The chief then appealed against the decision to the Full Court. The
Full Court, reversing the judgment of the divisional court, held that the wording of the
Ordinance was not inconsistent with the view that jurisdiction of the Supreme Court and that
376 A. F. Mockler-Ferryman, British Nigeria: A Geographical and Historical Description of the
British Possessions Adjacent to the Niger River, West Africa, Charleston, BiblioLife, LLC, 45 (2009). 377 Ibid. at 55.
189
of the chiefs courts were to be co-existent. The Full Court also held that the Ordinance did not
in any way disparage nor curtailed the legal authority of the traditional rulers.378
The imposition of English law in the British colony of Lagos represents the watershed in the
evolution of the Nigerian legal system. While the received English law comprising of the
common law, equity and English statutes remain from inception till date sources of Nigerian
law, the customary laws of the various communities were and still are co-existent with the
transplant, albeit subjected to test of repugnancy to natural justice, equity and good conscience,
and incompatibility with any legislation in force. Thus customary law and the appurtenant
traditional relations of power were systematically eroded, weakened and rendered
insignificant.379
The process of amalgamation of the colony and Protectorate of Southern Nigeria and the
Protectorate of Northern Nigeria on January 1, 1914 to form the Colony and Protectorate of
Nigeria, did not alter the legal system in any significant respect the transplant and its
institutions were still left co-existent with customary law.380
As earlier adumbrated, the attendant legal pluralism has resulted in fragmentation of
sovereignties and the conflict of cultures which today stultifies the effectiveness of the
transplant legal order, heightens normlessness, and negates efforts at nation building.381
Perhaps the most significant pedestal in the evolution of the Nigerian legal order is the end of
colonialism and independence of Nigeria on October 1, 1960 and the subsequent military
378 Ibid. at 71; Oppon v. Acknie (1887), Vol. 11 (Pt. 1) G & G. 4 Ghana. 379 Note 198 supra, at 93. 380 Ibid. 381 Ibid.
190
revolution which overthrew the government of Nigeria‟s first republic in 1966. This event was
to have dire cataclysmic effects on the legal and political order of the fledgling nation.382
The army struck on 15th
January 1966 and immediately ousted the Constitution and dissolved
the Parliament by promulgating the Constitution (Suspension and Modification) Decree No. 1
of 1966, it concomitantly vested the power to make laws for peace, order and good governance
of Nigeria in the Federal Military Government, it also established a Supreme Military Council.
The executive powers of the Nigerian State was vested in the military government. The Ironsi
administration replaced the federal structure of Nigeria with a unitary structure by virtue of
Constitution (Suspension and Modification) Decree No. 5 of 1966. The attempt at unitarization
of the Republic engendered considerable mistrust across Nigeria, the groundswell of
opposition to the decree, cumulated in a counter coup which toppled the government of
General Ironsi. The contentious decree was subsequently repealed by the Constitution
(Suspension and Modification) Decree No. 9 of 1966 which reverted to the original federal
structure at independence.383
The immediate and patent effect of the intrusion of the military into governance is to curtail the
process of evolution and adaptation of the British transplant to local conditions. Latently, it set
the nation on a precipitous path to the state of statelessness. The military created a veritable
legal void out of Nigreria and for more than 35 years conducted the affairs of State without the
ambit of the law. Parliament was dissolved, while the powers to make laws vest in the highest
ruling military organ, the Supreme Military Council. The independence and powers of the
382 A. Ojo, Constitutional Law and Military Rule in Nigeria, Ibadan, Evans (Nigeria) Limited, 81
(1987). 383 Ibid.
191
courts were progressively eroded as neither civil nor criminal matter can lie before them
contesting the validity of a decree.384
The responses of the courts to the „legal order‟ foisted on the nation, by the military evince
divergence in judicial attitudes. It will suffice to review some landmark cases in this regard.385
In State v. Nwoga & Okoye, shortly after the promulgation of Decree 1 of 1966, Nwoga,
executed a lease of government plot of land which had earlier been allocated to Mrs Okoye in
his capacity as a minister in the Eastern Regional Government. A charge of false assumption
of office contrary to Section107 (b) of the Criminal Code was brought against Nwoga. The
defendant pleaded ignorance of the fact that he had ceased to be a minister by virtue of
Decree1 of 1966. Justice Kaine, Acting CJ (Eastern Nigeria) upheld Nwoga‟s plea of
ignorance of the provisions of Decree No.1 of 1966. it would seem that this decision was given
under the presumption that military putsch in no way supplanted the Constitution, which it
deemed as still operational even after the revolution had become a fait acompli.386
Similarly, the court in Jackson v. Gowon & Others decided under the assumption that the order
prior to the 1966 coup was still in force. The learned trial judge, Sowemimo,J. referring to the
case of Senator Chief T. A. Doherty v.Sir A. Tafawa-Balewa, based his decision on the
Republican Constitution of 1963, he averred:
The decision in the case I have referred to simply put, is
that jurisdiction of the Court will not be ousted where it
384 Ibid.; J. Peters, The Nigerian Military and the State, London, I.B. Tauris, 1, 71, 101, 200 (1997). 385 Note 217 supra. 386 State v. Nwoga & Okoye, Suit No. E/34c/66; 1 E.C.S.L.R. 17
192
conflicts with the provisions of the Constitution. If it is
proved in this case before me that Section 22 of the
Constitution of the Federation 1963 will be violated by
the proceedings in the LEDB Tribunal of Inquiry, then,
of course, whether there is a provision that no court of
law should enquire into such proceedings then one
would be bound to declare that such a provision is
invalid and unconstitutional.387
The foregoing reasoning betrays the learned judge‟s insensitivity to the realism of the
dynamics of the change effected in the body politic of Nigeria through the means of the
military revolution which toppled the Balewa Government.388
For one, Section 17 of the Tribunal of Inquiry Decree which expressly precluded and ousted
the Courts jurisdiction in matters relating to any proceedings, findings decisions or order of
the Tribunal, but most importantly, the decision of the learned judge is a contradiction of
section 1 (2) and 6 of Decree No.1 of 1966 which elevated a Decree over and above any
provisions of the Republican Constitution of 1963, but expressly provides that „no question
as to the validity of this or any other Decree or any Edict shall be entertained by any court
of law in Nigeria. The judiciary at this epoch of the evolution of the Nigerian State and
legal order responded to the challenge of the situation in accordance with the individual
conviction of judges. Responding to the arbitrariness and discretion with which order of
detention were issued under the Armed Forces and Police (Special Powers) Decree No. 24
of 1967; the Court held that the detentions under the decree were ultra vires the decree. Mr.
387 Jackson v. Gowon & Others, NLJ. Vol. 8 (1967), p.87; Doherty v. Balewa, [1961] 1 All N.L.R. 388 Ibid.
193
Justice Aguda (as he then was), opined „it is for the person exercising the powers, where
challenged, to show that he has strictly complied with the enactment under which he is
acting. Not only that, but it must also be shown that every other person acting under his
control or in purported execution of his orders complied strictly with the provisions of the
Decree.‟ 389
In Chief V.O. Onabanjo v. The Special Military Tribunal Lagos Zone Area, the plaintiff
unsuccessfully challenged the jurisdiction of the Special Military Tribunal to try him. The
Courts decision that the military act in accordance with the law was voided by a counter
minding Decree in response to the avalanche of suits before courts challenging its authority
and powers, the military government responded promptly to curtail the powers of the courts
to entertain such suits forthwith. It reasserted the absolutist nature of its decrees and
pronouncements as having the force of law by promulgating the Federal Military
Government (Supremacy and Enforcement of Powers) Decree No. 28 of 1970 and the
Federal Military Government (Supremacy and Enforcement of Powers) Decree No. 13 of
1984 as this became a tradition of successive military governments.390
The 1984 Decree amongst other things provided in section 1(2) (b) that „no civil or criminal
proceedings shall lie or be instituted in any court for or on account of or in respect of any
act, matter or thing done or purported to be done under or pursuant to any Decree or Edict
389 Ibid. 390 Chief V.O. Onabanjo v. The Special Military Tribunal Lagos Zone Area, Suit M/106/84.
194
and if any such proceedings are instituted before, on or after the commencement of this
Decree the proceeding s shall abate, be discharged or made void.‟391
In Lakanmi & Anor. v. Attorney General of the Western State & Others, the Court evinced a
great comprehension of the dynamics of the change effected in the Nigerian legal order by
the coup of 1966, the Western State Court of Appeal held that, „once a Decree is made, as
provided in Decree No.1 of 1966, nothing, not even the provisions of the Constitution can
derogate therefrom. Section 1 of the Constitution with the proviso clearly established the
supremacy of a Decree over the Constitution itself and one may say that Decrees become
the magic wand of the Federal Military Government. The Court went further to aver that:
A new legislative power was created which does not
derive its authority from any provision of the pr-existing
Constitution. The Federal Military Government which
made Decree No.1 of 1966 is not a creation of any
statute although section 8 of that Decree establishes
bodies like the Supreme Military Council and the
Federal Executive Council.392
Similarly, the High Court of Lagos State in Ogunlesi & Others v. Attorney General of the
Federation, was unequivocal in deciding that the full plenitude, amplitude and latitude of
the Federal Military Government is incontestable in any court of law, in that case it
391 Ibid. 392 Lakanmi & Anor. v. Attorney-General of the Western State & Others, (1971) 1 U.I.L.J.
195
dismissed the suit challenging two decrees of the Federal Military Government as being
ultra vires the Federal Military Government.393
The apex Court, evinced a greater comprehension of the dynamics of the change effected
through the military coup of 1966, in Isaac J.A.Boro & Others v. The Republic, the
appellants were convicted of treason and sentenced to death by a High Court in Port
Harcourt. They were accused of waging war against the Head of the Federal Military
Government by attempting through force of arms to create the Delta Peoples Republic out
of the then Eastern Region of Nigeria, in the process of which they sought to over awe and
intimidate the Head of State. The Supreme Court upheld the conviction and sentence.394
The significance of this case is that it represents the most realistic construction of the true
relation of powers engendered by the change to the constitutional status quo in Nigeria. By
necessary implication the judgment of the Court conferred legality on the Federal Military
Government. The Court held,
Following the events of mid-January, 1966, the former
civilian government of Nigeria handed over power to the
military authorities, and the government of Nigeria
became the Federal Military Government.395
393 Ogunlesi & Others v. The Attorney-General of the Federation (1970), LD/28/69. 394 Isaac J.A. Boro & Others v. The Republic [1967] N.M.L.R. 395 Ibid.
196
It would seem that the Court was not enamoured of forensic legalism, it was fully conscious of
the realism and dynamics of the change which ushered in the military dispensation.396
In the case, The Council of the University of Ibadan v. N.K. Adamolekun, the Supreme Court
opined that „it is obviously senseless to speak of an Act of a sovereign law-making body as
ultra vires. There can be no exceeding of power when that power is limitless.‟ The
equivocation which characterized judicial attitudes at that epoch of the chequered history of
Nigeria was betrayed by the apex Court when on appeal, the case E.O.Lakanmi & Kikelomo
Ola v. The Attorney General (Western State) & Others came up for its determination. The
appellants contested the validity of the Forfeiture of Assets (validation) Decree No. 45 of
1966. the appellants adduced that their assets had been wrongfully confiscated under Decree
No. 45 which was invalid and ultra vire the Constitution of the Federation of Nigeria 1963
because (a) the Federal Military Government was only an interim Military Government to
which power had been transferred by the old civilian regime only for a limited purpose of
restoring law and order and after which power should be handed back to them; (b) that the
Federal Military Government could only make laws going beyond that purpose if such laws
could be justified under the doctrine of necessity and (c) the Decree No. 45 was a legislative
act which constituted an unjust intrusion into the sphere of the judiciary. An overwhelming
majority of the Court upheld the following grounds of appeal by its curious construction of the
event of 15 January 1966, as not being a coup but an episode in which the duly elected
government ceded power to the military in a constitutional process. If that was the case then it
followed that the Military Governments source of authority was the 1963 Republican
396 Ibid.
197
Constitution, which follows that its powers was circumscribed and subject to constitutional
constraints on the use of State power.397
In historical hindsight, the foregoing line of reasoning of the apex Court was not only wrong
headed but represents a naïve effort by the Nigerian judiciary to import constitutionality into
an historical event that was a fait acompli act of outlawry against the Nigerian State. The 1966
coup was a successful revolution which annihilated the existing legal order in an illegitimate
manner. Once a revolution becomes a fait acompli , there is no question of adducing judicial
sophistry to qualify or import any distinction into the true character of a revolution. It is simply
a drastic and total change in the existing order. The moment revolutionary forces impose their
will de facto on the sovereign entity, no amount of sheer sophistry and forensic formalism can
alter that realism.398
That granted, the attitude of the Nigerian judiciary in the aftermath of the military revolution is
understandably a spirited attempt by an otherwise independent organ of government, which
constitutional function was to interpret the constitution and apply the laws of the land, in
matters validly before it and check the powers of other organs of government suddenly found
those powers rendered redundant and even totally curtailed. The foregoing cases evince an
attempt by the judiciary in Nigeria to salvage what was left of the law. While the courts had
their say on the constitutionality of the various acts of the military government for the almost
four decades of military rule in Nigeria, the military had their ways, they were not given to any
pretences of legality, their rule was absolute and arbitrary, capricious and whimsical. Indeed,
397 Note, 217 supra; note 219 supra. 398 Ibid.
198
as earlier adumbrated the military as a rule, on successful over throw of legitimate
government, have as their first official act the total dismantling of the existing legal and
political order. Following which, they proceed to conduct the affairs of State within the legal
void they have deliberately created. After inducing and enacting a state of normlessness, they
operate without the ambit of the law.399
3.6 THE IMPACT OF CORRUPTION ON ECONOMIC EFFICIENCY AND
EQUITY
The preoccupation in this segment is to examine the effects which a highly differentiated and
organic legal order has on efficiency, growth and economic development. By establishing a
nexus between an organic and differentiated legal order and growth and development, we
would have been able to also prove the converse of the foregoing, that is, the untoward and
distortionary impact of an inorganic legal order on efficiency, growth and economic
development. The relationship which exists between law and development has had ample
explication from the beginning of the evolution of the modern State economy. Adam Smith
for instance attributed economic stagnation and underdevelopment to imperfection of the law
and uncertainty in its application. To Smith economic growth and development can be
effectuated where there is a solid foundation of norms and laws upon which to establish an
economic structure totally devoid of arbitrariness.400
399 Ibid. 400 E. Buscaglia, Judicial Corruption in Developing Countries: Its Causes and Economic
Consequences, Palo Alto, Stanford, Ca., Hoover Institution Press, passim (1999).
199
However, where the State is characterized by an unconscionable state of the rule of law, due
process, arbitrariness and very wide latitude for discretion, the body politic is characterized
by corruption pandemic. Institutionalized official systemic corruption in both the public and
private domains results in lack of clarity in definition and enforcement of laws and the
concomitant stultification of growth and economic development.401
There is no unanimity on a concise characterization of corruption. The United Nations
Convention Against Corruption (UNCAC) for instance does not elect to define the term
corruption in itself but to highlight and characterize those conducts that could be regarded as
corrupt, opportunistic and criminal behaviour. Corrupt and criminal behaviour includes
bribery, embezzlement, theft, fraud, extortion, abuse of discretion, favouritism and nepotism,
creating or exploiting conflicting interests and improper political donations.402
According to the World Bank, corruption is the abuse of public office for private gains. Thus,
the definition adopted in the characterization of corruption is a highly subjective criteria
dependent on the perspective of whom is concerned.403
In itself systemic official corruption denotes the act of converting public office to dedicated
instrument for the furtherance of purely private individual or group interest. It encompasses
401 G. E. Caiden, „Dealing With Administrative Corruption,‟ in T. L. Cooper (ed.), Handbook of
Administrative Ethics, New York, Marcel Dekker, 429-455, (2001); C.W. Gray, „Corruption and
Development‟ 35 Finance and Development 7-10 (1998). 402 United Nations General Assembly Resolution 58/4 of 31 October 2003, United Nations Convention
Against Corruption. Available at http://www.uno dc.org/unodc/en/treaties/cac/index.html#textofthe 403 The World Bank, „Helping Countries Combat Corruption: The Role of the World Bank. Available at
http://www1.world bank.org/publicsector/anticorruption/corruptn/cor02.htm
200
the act of despoliation of funds by officials of public funds of which they are temporary
custodians. Where systemic official corruption becomes pervasive and deeply entrenched, it
will invariably result in institutional inertia since the organization ceases to function normally
as a provider of social goods and services. Where corruption is pervasive and systemic it is
woven into every process and procedures such that it becomes difficult to delineate the
normal official processes from opportunistic corrupt procedures. The fusion of opportunistic
behaviour with official processes leads to the institutionalization of systemic official
corruption, rendering corrupt practices almost imperceptible. The foregoing stultifies efforts
to curb corruption as the orthodoxy of anti-corruption paradigms become inadequate in the
punishment of corrupt practices, hence the need for far reaching institutional restructuring
pursuant to de-concentrating procedural powers and simplification of processes.404
3.6.1 THE CORRUPTION PROFILE OF NIGERIA
As argued earlier, Nigeria crossed the threshold into the state of normlessness and latent
Statelessness when the military ousted the Republican Constitution of 1963 by the
promulgation of the Constitution (Suspension and Modification) Decree No.1 of 1966 sequel
to the violent and bloody overthrow of democratically elected government of the Federation
of Nigeria.405
This event is significant in several respect, for one, it represents the first in a succession of
military dictatorship which spanned over 35 years of Nigeria‟s chequered history after the
404 J. Charap, Institutionalized Corruption and the Kleptocratic State, IMF Working Paper No.99/91.
Available at http://sss=rn.com/abstract=880618 405 Note 6 of chapter 1 supra.
201
attainment of independence. Secondly, the revolution represents the watershed of the anomie,
anarchy and Statelessness with its attendant pervasiveness of corruption, political instability,
arbitrary rule and the personification of governance by successive military dictators.406
There is a congruence between military dictatorship and systemic official corruption in
Nigeria. This outcome is a logical derivative of the nature of military high commands which
is hierarchical, vertical and axial with very high concentration of organization power in the
hands of few top military brasses that are not subject to external auditing systems.407
Where military rule is foist on a nation, there is a whole sale imposition of the marshal and
axial chain of command on the civil domain with greater severity, as the relationship between
the military and civil society become even more axial for obvious reasons, the military have
the monopoly of State apparatus of coercion. That underscores the absolutist, draconian and
personalized nature of military rule.408
The concentration of absolutist power in the head of the military junta is a function of the
foregoing, allied to the axial nature of the military chain of command which is amenable to
high concentration of powers in the military top brass is the nature of revolutions. Once a
revolution becomes a fait acompli, it sweeps away the existing legal, economic, social and
political order. There is an unconscionable state of the rule of law, arbitrariness and very
wide latitudes for discretion under a revolutionary dispensation. The law, legal institutions
406 Ibid. 407 J. M. Mbaku, Corruption in Africa: Causes, Consequences, and Cleanups, Lanham,Md.,
Lexington Books, 38 (2007). 408 D. J. Smith, A Culture of Corruption: Everyday Deception and Popular Discontent in Nigeria,
Princeton, Princeton University Press, 141 (2006).
202
and other institutions of State which diffuses, disperses and de-concentrate powers are
desecrated, undermined or outrightly dismantled.409
Military rule is whimsical and capricious. Thus as the saying goes, absolute powers corrupt
absolutely, with enormous powers so concentrated in the person of the head of the junta with
the attendant unfettered powers to manage stupendous external receipts from the export of
oil. The military high command together with their cronies can not resist the temptation to
subject oil revenues to despoliation, hence the congruence between higher concentration of
powers under military dictatorship and pervasive systemic corruption. Thus going by the
Nigerian experience of military rule, a necessary and sufficient condition for the eradication
of corruption is the dispersal and de-concentration of powers from few individuals under a
less axial and more horizontal chain of authority with one level constituting a built in check
on the other level. In a similar vein due process must be institutionalized for every procedure
particularly, spending appraisal procedures adopted for electing between alternative spending
proposals. It follows logically from the inevitable chain of causation that since all these
measures can only be effectuated in an environment of formal rational law as
contradistinguished from arbitrariness and wide latitude for discretion, and since an
environment of formal rational law can only be fostered under libertian popular democracy
and the rule of law, every anti-corruption measure must be predicated on the full embrace of
the rule of law and other democratic ethos.410
Lest we are misconstrued, our position by no means suggests that corruption does not thrive
under a democracy; of course it may be pervasive under any social political order. We are
409 D. Kolawole, „Colonial and Military Rules in Nigeria: A Symmetrical Relationship,‟ 3 Pakistan
Journal of Social Sciences 863-867 (2005). 410 O. Oko, „Subverting The Scourge of Corruption in Nigeria: A Reform Prospectus,‟ 34 International
Law and Politics 398-473 (2002).
203
however positing that democracy offers the best structure for combating corruption in the
body politic considering the peculiar features of its appurtenant institutions and doctrines.411
The foregoing probably informed former President Obasanjo‟s statement:
The impact of official corruption is so rampant and has
earned Nigeria a very bad image at home and abroad.
Besides, it has distorted and retrogressed development.
Our infrastructures- NEPA, NITEL, Roads, Railways,
Education, Housing and other social services were
allowed to decay and collapse. All these have brought
the situation of chaos and near despair. This is the
challenge for us.412
He further stressed that,
…corruption, the greatest single bane of our society
today, will be tackled head on at all levels. Corruption is
incipient in all human societies and in most human
activities. But it must not be condoned. The rampant
corruption in the public service and the cynical contempt
for integrity that pervades every level of the bureaucracy
will be stamped out. You the good people of Nigeria
elected me, a man, who had walked through the valley
411 N. Ribadu, „Nigeria‟s Struggle With Corruption,‟ a paper presented to US Congressional House
Committee on International Development, Washington D. C. on 18th May, 2006. Available at
http://www.thehumanitycentre.org/files/anticostruggle.pdf 412 Olusegun Obasanjo, Inaugural Speech, West Africa Review. Available at
http://www.westafricareview.com/vol.1/obasanjo.html
204
of the shadow of death, as your president, to head a
democratic civilian administration. There will be no
sacred cows. Nobody, no matter who and where, will be
allowed to get away with the breach of the law or the
perpetration of corruption and evil.413
The former President is being quoted in extenso with a view to underscoring the enormity of
the problem being posed by corruption in the process of nation-building in Nigeria. As it is
to be expected the efforts of the Obasanjo government in fighting corruption has received
both positive and negative reviews. The administration‟s efforts to combat corruption have
been berated as being un-integrated, un-coordinated, dishonest and selective vendetta.
Hence the cynicism and disenchantment of certain community of opinions with the
government‟s efforts to minimize corruption.414
However, in hindsight, it would seem that the Obasanjo administration‟s efforts to combat
corruption remain unprecedented both in terms of corruption specific institution building
and putting corruption in the front burners. Many high profile convictions were made
including several cabinet ministers, State Governors and Inspector General of Police. The
monster of fake drugs was tackled head on, while it ceased to be business as usual for
advance fee fraudsters. This visible efforts and successes did not escape the attention of the
413 Ibid. 414 M. Chigbo, „From Obasanjo to Yar‟ Adua,‟ Newswatch Tuesday 26 May, 2009. Available at
http://www.newswatchngr.com/index.php?option=com_content&task=view&id=969&Itemid=42; S.
Odunfa, Obasanjo‟s Legacy to Nigeria, BBC Focus On Africa Magazine. Available at
http://news.bbc.couk/2/hi/africa/6412971.stm; K. Maier, This House Has Fallen: Nigeria in Crisis,
London, Penguin, passim (2002).
205
international community, and Nigeria emerged from the state of being a pariah to a global
investment destination.415
3.6.2 THE IMPACT OF CORRUPTION ON ECONOMIC DEVELOPMENT
Corruption‟s long term untoward impact on efficiency and equity is underscored by its
subversion of fundamental rules of economic relations, institutions and structures, good
governance, an equitable and just legal order and other institutions of State. What
corruption does is to juxtapose formal rational rules which safe guards and guarantees that
expectations of actors within the economy in their relationship inter se and between private
individuals, corporate actors and the State with informal and extra legal rules of economic
relationship which are ad hoc and uncertain. Where the State is characterized by corruption
pandemic, it is most manifest in the judicial sector as legal disputes emanating in the course
of economic relationships are increasingly resolved in favour of the party who is able to bid
the highest for the conscience of the judges rather than by established laws and judicial
proceedings. The allocative process is no more transparent and rational but rather according
to the whims and caprices of politicians and bureaucrats; ascriptive roles as
contradistinguished from meritocracy becomes the criteria for recruitment of personnel;
business transactions are conducted with a view to benefiting dominant individual policy
makers in the corporation rather than towards meeting organizational goals.416
415 Ibid. 416 J. Kornai, Corruption, Development and Institutional Design, Hampshire, Macmillan, 45 (2009);
P. Mauro, „Corruption and Growth,‟ 110 Quarterly Journal of Economics 681-712 (1995).
206
The long term cost to the economy of undermining the oversight functions of the regulatory
agencies of the State is enormous, as made manifest for example in the criminal
premeditated use of substandard building materials to build high rise buildings for both
residential and corporate accommodation. Obviously, this practices persist inspite of the
reoccurrence of incidents of collapsed buildings and massive structural failures of public
works resulting in the loss of lives because officials of the various standard and verification
agencies are being paid to refrain from enforcing standard rules strictly and
dispassionately.417
The perversion of regulatory processes and procedures is equally made manifest in the
banking and financial sectors and the capital market resulting in monumental frauds and
other opportunistic behaviours perpetrated by economic actors.418
Corruption has stultified growth and economic development in Nigeria, what with the sub-
optimal allocation of scarce resources, recruitment of personnel by both public and private
concerns is predicated increasingly on patronage rather than merit. This leads to high level
of despair and frustration of competent and honest citizens. This in turn results in inequities
and pervasive sense of distrust, anger and frustration in the general population; efficiency
and productivity is impaired, while the legitimacy of the legal, economic and political order
417 N. Imam, „Building Collapse-NSE Advocates Death Sentence For Defaulters,‟ Daily Trust 21
September, 2009. Available at http://allafrica.com/stories/200909210852.html 418 M. Eboh, „Expert Blames Shareholders for Corporate Governance Failure,‟ Vanguard 26 October
2009. Available at http://allafrica.com/stories/200910261849html; I. Ogidefa, Corporate Governance:
An Appraisal of Disclosures in Nigerian Banks, 8 August 2008. Available at
http://biacovering.com/accounting /corporate-governance-an-appraisal-of-disclosures-in-nigerian-
banks; I. R. Akintoye et al., ‘Corporate Governance and Merger Activity in the Nigerian Banking
Industry: Some Clarifying Comments,’ 19 International Research Journal of Finance and Economics
126-137 (2008); J. G. Donli, „The State and Future of The Banking Industry in Nigeria.‟ Available at
http://www.ndic-ng.com/pdf/tsafobin.pdf
207
is eroded. Development is further curtailed by outright despoliation of funds by dominant
political and bureaucratic elites who siphon funds abroad where they would be insulated
from seizure. Perhaps the most crucial factor which predisposes most developing third
world nations to political and economic cataclysm is the outflow of vital capital through
despoliation. It results in poor infrastructural development, degenerate education and health
sectors, a shrinking real sector and the perpetuation of poverty.419
Perhaps one of the most important allure of corrupt and opportunistic behaviour is the
instant rewards that accrues to perpetrators whether individual or corporate entities who
gives or accept gratification for services which is incumbent and obligatory for them to
render in the normal course of duties. The taker usually subverts the formal rules of
transaction to favour the giver of graft thereby conferring undue advantages on the giver
over and above other actors in the transaction. This genre of corruption is particularly
prevalent in contract competitive bid procedure. For example Halliburton, the international
oil services company was involved in a bribery scandal purported to involve unnamed
Nigerian officials. This observation however fails to adjust for the long term effect of
419 J. Woo, „The Impact of Corruption on a Country‟s FDI Attractiveness: A Panel Data Analysis,
1984-2004.‟ Available at
http://www.allacademic.com/meta/p_mla.apa_research_citation/2/5/3/0/8/p253081_index.html; J. H.
Dearden, „Corruption and Economic Development,‟ 18 October 2000. Available at
http://www.edpsg.org/Documents/Dp18.doc+the+impact+of+corruption+on+economic+development&
cd=4&1. A tradition of authoritarian regimes is seen as lacking the checks and balances necessary to
avoid corruption. There is no tradition of the separation of powers, of an independent and critical press,
or of an independent judiciary. Even where there is the panoply of representative democratic
government, where political control is based upon clientalism, political patronage or corporatism,
corruption is likely to take root. A social structure characteristized by a high degree of racial, tribal,
religious or geographical divisions may be particularly vulnerable to political clientalism, where the
ruling political elite buys its support from the groups that will sustain its powers. The position of such
groups will be reinforced by the process of corruption that gives them continued privileged access to
society‟s resources and thereby sustains their importance to the elite that wishes to maintain control.
However the conflict over the distribution of national resources in such a clientalist political system
may in the long run become acute and lead to political and social disintegration, particularly in States
which legitimacy is not beyond question. Further, the marginalization of the formal legal system is the
inevitable by-product of the emergence of such a political mechanism which offers privileged access,
thereby undermining its legitimacy beyond the activities of the privileged elite groups. P. Mauro,
„Corruption and Growth,‟ 110 Quarterly Journal of Economics 681-712 (1995).
208
corruption on the polity and the overall economy. In a study of queuing systems Rose-
Ackerman argues that „payoffs to those who manage queues can be efficient since they give
officials incentives both to work quickly and favour those who value their time highly.‟ To
her the functionality of such illegal payoffs can be optimized by appropriate legislation.420
Contrary to that view, the dysfunctional impact of entrenched systemic corruption on the
social economic order are far reaching and very untoward. Among other things, it affects
the citizens‟ perception of social justice and equity and undermines economic efficiency.421
According to Buscaglia, a person‟s perception of how equitable a social system is has a
tremendous impact on his or her motivations to undertake productive activities. Aside from
the negative impacts of corruption on the efficient allocation of resources, it also impacts on
the individual‟s perception of how equitable a social order is. For one, the social conditions
of the preponderance of the citizenry in a typical developing third world nation is such that
they do not have the financial wherewithal with which to give illegal rewards to corrupt
officials even where they are willing to acquiesce. Secondly, the efficacy of a piece of
legislation in constraining human behaviour in a desired direction is contingent on the
extent to which the law corresponds or incorporates the basic norms of social behaviour of
the society. If the legislation is not an abstraction of such norms then it would invariable be
inefficacious.422
420 U. Myint, „Corruption: Causes, Consequences and Cures,‟ 7 Asia-Pacific Development Journal 32-
58 (2002); S. Rose-Ackerman, Corruption and Government: Causes, Consequences, and Reform,
Cambridge, Cambridge University Press, 9,27,39 (1999). 421 Ibid. 422 E. Buscaglia, Judicial Corruption in Developing Countries: Its Causes and Economic
Consequences, Stanford, Hoover Institution Press, passim (1999).
209
Every human society is hierarchical and based on work reward causation. The position of
any member of the society on the hierarchy assuming there is social equity is predicated on
the society‟s perception of the member‟s contribution within the social domain. Thus where
an individual‟s relative financial status is on the ascendancy without a commensurate
change in his economic productivity, there will be a groundswell of resentment of other
citizens which could degenerate to social conflict. Inequitable rise in financial status of
perpetrators of corruption is a negation of a reasonable man‟s perception of social equity.
Similarly, where there is perceived injustices in the allocative process of social-wealth by
certain groups within a polity, social conflict and political instability will ensue. For
example the crisis in Nigeria‟s oil rich Delta region was catalysed by minority ethnic
nationalities perception of injustice in the allocation of oil wealth to their disadvantage.423
The ethical dimension of pervasive systemic official corruption is that it has an untoward
long-term impact on efficiency. Those members of society who have a perception of
exclusion in the distribution of social-wealth or who perceived the provision of social
services as inequitable either for lack of financial resources or refrain from paying bribe
because they consider it unethical to engage in illegal transaction suffer a sense of
alienation. This sense of alienation deriving from inequities in the allocative process of
social wealth is a veritable source of mistrust, diatribe and conflict among various groups in
the society. Pervasive systemic official corruption generates inequitable social structure
423 M. Noland, The Arab Economies in a Changing World, Washington D. C., Peterson Institute for
International Economics, 30 (2007); A. Jega, Identity Transformation and Identity Politics Under
Structural Adjustment in Nigeria, Stockholm, Nordic Africa Institute, 48 (2002); Y. Kim, The
Resource Curse in a Post-Communist Regime: Russia in Comparative Perspective, Aldershot,
Ashgate Publishing, 35 (2003).
210
characterized by a skewed allocative process of social wealth which is generally perceived
to be incongruous with universalizable notions of social rights and obligations.424
Buscaglia demonstrates that perception of inequitable resource allocation inhibits the
motivation to create wealth by members of society shut out by the perverse allocative
process. A typical individual who has been precluded from deriving the benefit of a social
service on account of lack of capacity to gratify corrupt officials will progressively get
disinclined to seek such services from the public sector. Perhaps in no other area of the
public domain is this issue made more manifest than the judicial sector. it has triggered a
compensatory and adjustive social behaviour which manifest in collective and most times
individual self help in form of community based vigilante committees; alternative dispute
resolution and extra legal and informal mechanism of economic relationship. Expectedly,
these informal and extra legal mechanisms have an inherent limitation which impairs their
adaptation as substitutes, alternatives of parallels of the formal legal system.425
The dysfunctionality of these informal and extra legal mechanisms has been proved by
Hernando de Soto to result in high transaction cost and ultimately a steep reduction in
productivity. He highlights the long term negative impact of systemic official corruption on
the social political and economic milieu. According to him, increasing pervasive perception
of inequities in the distribution of social wealth will inevitably result in fall in productivity
in the overall economy because the preponderance of the citizenry perceive that the
allocative process is not predicated on rational and objective criteria but by illegality.
424 E. Buscaglia, Law and Economics in Developing Countries, Stanford, Hoover Institution Press, 94
(2000). 425 Ibid.
211
Consequently, the work/reward causation is completely disrupted, distorted and inverted
leading to increasing rent-seeking in opportunistic and non-productive activities which may
yield immediate pay offs for people engaged in such activities but has a devastating impact
on long term productivity, wealth generation and efficiency.426
426 H. de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere
Else, New York, Basic Books, 153 (2003).
212
CHAPTER FOUR
4.0 THE IMPACT OF CORRUPTION ON ALLOCATION AND QUANTUM OF
PUBLIC EXPENDITURE
This chapter examines both the allocation and quantity effect of systemic official corruption
in the public sector. Enshrined culture of corruption in the public sector has the untoward
effect of eroding and diminishing the quantum of actual public expenditure. It also impacts
negatively on the allocative process adopted for public budgeting. The combined effect of
despoliation and attendant corruption induced inefficiency in resource allocation is to
substantially reduce financial resources and spending for the provision of social services
like health and education. The share of such social services in total public spending
progressively shrink while public and communication and industry rise disproportionately
mainly because they provide convenient rationale for hurried disbursement and movement
of huge sums of financial resources and also because it is more difficult to track such funds
in these sectors.427
4.1 CORRUPTION AND PUBLIC EXPENDITURE
The main purpose of the State is the provision of social goods and services and the
enhancement of the well being of its citizenry. In the fulfilment of this social compact, the
State intervenes by strategically allocating financial resources to redress inefficiency of the
market caused by information asymmetry, lack of rationality and imperfect competition
which results in suboptimal allocation of resources with the resultant stultification of
development. It is also the function of the State to intervene from time to time when there is
427 P. Mauro, „Corruption and Composition of Government Expenditure,‟ 69 Journal of Public
Economics 263-279 (1998).
213
perceived present or future perturbation in the economy with a view to stabilizing the
economy and redressing inequities in the distribution of wealth. The State also has the
responsibility of providing public goods and services.428
However, where the body politic is characterized by corruption pandemic the State‟s
capacity to deliver on the social compact is undermined. Corruption leads to very untoward
consequences in the economy as it distorts decision making in the public sector. Ironically,
it is in developing poor third world nations like Nigeria where the crisis of
developmentalism is most acute and where rational, efficient and effective State
intervention is most required are deep in the mire of corruption and malfeasance far beyond
the capacity of mere tokenism at reform and reconstruction.429
According to Tanzi, pervasive official corruption is indicia of weak, undifferentiated and
inorganic law, legal institutions and other institutions of State. Thus, there is a convergence
of opinions in the literature that greater control of the transparency of rules, regulations and
adjectival laws regarding State decision making be established pursuant to curtailing the
wide latitude for discretion and amplitude which politicians and bureaucrats enjoy.430
The long term untoward impact of corruption on efficiency and equity is the same
irrespective of the level and magnitude of perpetration. Thus, it is immaterial whether
428 C. M. Fisher, Resource Allocation in the Public Sector: Values, Priorities, and Markets in the
Management of Public Services, New York, Routeledge, 60 (1998). 429 Note 251 supra.
430 V. Tanzi, Public Spending in The 20
th Century: A Global Perspective, Cambridge, Cambridge
University Press, 23, 152, 167, 204 (2000).
214
corruption is perpetrated in the form of bribery or outright despoliation of funds of which
officials and politicians are temporary custodians. Corruption distorts the economy because
economic actors who pay illegal fees gain undue advantage over and above other
competitors. Enshrined official systemic corruption also induces officials to make
procedural rules legitimizing their illegal and opportunistic practices. Grand corruption
distorts both the allocative process in government budgeting and the pattern of expenditure
of revenue. The overall effect is that the States decision making process at all levels is
distorted and totally at variance with rational criteria. Decisions are driven by opportunistic,
rent seeking and cynical motives of dominant political group whose perception of power is
to serve the end of capture and despoliation of public financial resources for purely
individual enrichment.431
4.2 CORRUPTION AND INSTITUTIONAL INERTIA
The impact of corruption on institutional static and dynamics is perhaps the most crucial
factor which induces institutions to atrophy as bureaucrats tend to weigh the present cost
and benefit of eradication of corruption and institutional reforms in terms of the illegal rents
which may cease to accrue to them from illicit practices. Public officials perceive that major
and far reaching institutional reforms aimed among other things at enhancing efficiency,
curtailing waste and eradicating corruption would water down their influence and thereby
displace them from their pre-reform dominant positions with which they wielded power in
the structure for personal gains. Several studies have established congruence between
institutional inertia, well orchestrated resistance to change and reform and the perception of
what will be the long-term benefit of reform and change in the minds of the dominant group
and individuals who are supposed to drive the reforms. Such benefits include but not limited
431 E. Buscaglia, Law and Economics in Developing Countries, Stanford, Hoover Institution Press, 94
(2000).
215
to career mobility and accelerated promotions, higher wages and greater influence and
power. There is a tendency on the part of officials to discount this long term and
imperceptible benefits of reform whilst concomitantly dwelling on the short-term and
immediate cost of reform to them in terms of perceived loss or substantial reduction in the
illegal rents accruing to officials.432
The conflict of interests underscored by non-proportional relationship between the short-
term perceived loss of illicit income by officials and the long term premium of reform and
change arguably constitute the greatest inhibition of the conceptualization of reform policies
in Nigeria.433
According to Buscaglia, institutional inertia in undertaking reforms emanates from the long-
term nature of the dividends of reforms which though remotely appertains to officials do not
accrue immediately in the same manner that illegal rents accrue directly to corrupt officials.
According to him efforts to reform judiciaries in developing nations have been resisted
because officials perceive enhanced career stability, independence of the judiciary and
professional prestige as too remote and intangible benefits to trade off the assured
immediate illicit income accruing from illegal and opportunistic practices.434
432 J. Lambsdorff, The New Institutional Economics of Corruption, New York, Routledge, 190
(2004); E. Buscaglia, Law and Economics in Developing Countries, Stanford, Hoover Institution, 97
(2000); R. Harris, Political Corruption: In and Beyond the Nation State, New York, Routledge, 59
(2003); G. T. Abed, Governance, Corruption, and Economic Performance, Washington D. C.
International Monetary Fund, 51 (2003). 433 Ibid. 434 Ibid.
216
The foregoing arguably represents the most plausible explication of the stultification of far
reaching initiatives in the public sector in Nigeria, particularly reform of the justice sector.
Public sector reforms aimed at enshrining the rule of law, due process, transparency,
accountability, operational efficiency and effectiveness in governance and economic
reforms have been consistently resisted, frustrated, undermined and sabotaged by
entrenched interests who perceive that reforms would displace them from their „strategic‟
positioning in the State structure, thereby curtailing their opportunistic and parasitic
existence and behaviour in the bureaucracy. Resistance to change will be particularly acute
where the dominant individuals and or groups who are responsible for implementation of
reforms will be so displaced with the prospect of losing illegal rents from opportunistic
conducts.435
The only way out of this quagmire is to implement reforms in phases. The first phase should
focus on enhanced short term conditions of service with substantial increase in
remuneration, enshrining of meritocracy and well defined career paths for officials.
Immediately accruing short-term benefits will serve as compensation for the curtailment of
illegal rents hitherto accruing to officials prior to reforms. The subsequent phases of
reforms should be dedicated to the long term components of reforms which will address the
core issues of efficiency in service delivery and husbandry of resources.436
4.3 THE ECONOMICS OF LEGAL RELATIONSHIP
435 Ibid. 436 Ibid.
217
In this segment, our preoccupation is to examine the economics of legal relationship; we
assume that in a typical market economy variegated actors which include individuals,
juridical entities like firms, the State and regulatory agencies all engage in a myriad of
economic exchanges which gives rise to legal relationships. We also aver that markets, that
is, the economy as integrated system is governed not only by the invisible hands of market
forces, rules and standards. We then, argue that this complex order restrains, channels and
moderates human behaviour in paths which will engender trust, transparency and facilitate
the evolution of enduring rational practices which will have long term positive impact on
economic stability, growth and development.437
As a corollary of the foregoing we attempt the aggregation and deaggregation of individual
actors in the economy, critically examine the ethical value inherent in such conducts and the
impact they have on confidence and trust building. We submit that where the ethical content
of behaviours of preponderance of actors are rational, positive and universalizable, the
resultant rules and institutions which evolve as a result of the constellation of those positive
and enduring values would engender efficiency in the over all economy. When the ethical
value of conducts is negative and unwholesome, the converse of that outcome obtains. The
economy is characterized by institutional failures, inefficiency and the gradual and
progressive erosion of trust and confidence of economic actors. In this segment, we are
deliberately focusing on the breakdown of norms in the private sector and the far reaching
implications it portends for economic growth and development. This is a departure from the
tendency to concentrate on institutional failures and inertia, corruption, wrong economic
437 S. Batie, Alternative Institutional Structures: Evolution and Impact (The Economics of Legal
Relationships), New York, Routledge, 187, 203 (2008); F. Buckley, Just Exchange: A Theory of
Contract, New York, Routledge, 1, 3, 22,35, 51, 102, 116, 136, 157 (2004); G. Miller, The Legal and
Economic Basis of International Trade, Westport, Praeger, 11 (1996).
218
choices and gross inefficiency in the husbandry of economic resources in the public sector as
the only factors for lack of growth and development. While the focus on the public sector is
not without merit, we strongly submit that a robust analysis would be that which dwells in
equal measure on the dynamics of legal relationships in the private sector that is the market,
and their implications for growth and development.438
4.4 MARKET VERSUS STATE REGULATION
In a typical market economy, characterized by institution of private property and free
markets, devoid of micro intervention by the State, it is assumed that the invisible hands of
market forces efficiently allocate resources to optimality. Be that as it may, the price
mechanism of the market can only operate within well defined institutional and legal
parameters. Thus the efficiency of a market, that is the economy, is a function of the extent to
which its rules, standards and institutions are organic as to be able to consistently channel the
behaviours of actors in the economy in ways that would guarantee efficiency of the
economy.439
The basic assumption of the price theory of demand and supply, in which hypothetical
economic actors exchange goods and services at equilibrium prices is a fiction which distorts
438 F. Cafaggi, Legal Orderings and Economic Institutions, New York, Routledge, 105,118, 163
(2007). 439 R. Boyer, States Against Markets: The Limits of Globalization, New York, Routledge, 31,84
(1996); J. Board, Transparency and Fragmentation: Financial Market Regulation in a Dynamic
Environment, New York, Palgrave Macmillan, 8, 12, 25, 34, 179, 254 (2002).
219
the fact that there are other variables which complement prices in the allocation of resources
in a market economy.440
The control of behaviour of economic agents by rules, standards, prices and institutions is
effected through a single evolutionary process. Integral to that process is the self regulatory
predisposition of the market.441
The standard rationale for the intervention of the State in the economic sphere is the
rectification of market failures. It is instructive to take cognisance of the causative factor of
market failures, which is a combination of the markets own inherent inanities and weak State
regulatory laws and institutions. For one, internally, market inefficiency could result from
information asymmetry, which leads to imperfect competition, poor corporate governance,
manipulation of statutory books and records, pursuit of personal short term gains and
objectives and other opportunistic behaviours, lack of transparency and the attendant erosion
of trust and confidence of economic agents in the system. Similarly, erosion of the capacity
and effectiveness of State regulatory agencies, laws and institutions, such as the courts which
function is to enforce contracts, property rights and generally serve as the bastion of rule of
law and due process, by gross inefficiency, corruption , wrong economic choices, and lack of
capacity for innovation of State can also induce or cause market failures.442
440 T. Cleaver, Economics: The Basics, New York, Routledge, 26 (2004); G. Reisman, Capitalism: A
Treatise on Economics, Ottawa, Jameson Books, 151 (1996). 441 E. Balleisen, Government and Markets: Toward A New Theory of Regulation, Cambridge,
Cambridge University Press, 13, 52, 92 (2009). 442 M. S. Fridson, Unwarranted Intrusions: The Case Against Government Intervention in the
Market Place, Hoboken, NJ., John Wiley & Sons, 119 (2006); J. B. Tailor, Getting Off Track: How
Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis,
Stanford, Hoover Institution Press, 1, 15, 25, 31, 45 (2009); B. Fleckenstein, Bailout Nation: How
220
State intervention could be salutary, but more often than not, it leads to further distortions,
especially where they are motivated by powerful political and economic vested interests.
Such interventions result in short term behaviour of State to seek rents for its self or make
laws that would favour targeted groups or individuals in the economy. The cumulative and
long term effect of the foregoing is pervading market inefficiency resulting from sub- optimal
allocation of resources.443
The purpose of State regulation is to use its coercive powers and full plenitude to effect
fundamental changes in the allocation of resources. Thus where State intervention is
capricious, arbitrary and motivated by the promotion of purely short term vested interests, the
complex market structure of market based institutions, rules and standards which together
induce market efficiency would be seriously compromised.444
There is a modicum of self-regulation and State regulation in every economy. Thus State
regulation could have any of the following effect, it could be configured to disparage, distort,
compromise or enhance, facilitate and complement market generated regulations.
Accordingly, State intervention could induce efficiency and high productivity, inertia and
under capacity utilization, low level of investment, and the vicious circle of unemployment,
financial crisis and deepening recession.445
Greed and Easy Money Corrupted Wall Street andShook the World Economy, Hoboken, NJ., John
Wiley & Sons, 7,51, 117 (2009). 443 Ibid. 444 Ibid. 445 Ibid.
221
4.5 THE EVOLUTION OF INSTITUTIONS
For most of human history, the greatest proportion of institutions which have facilitated
human survival have not been product of conscious human design, which contrived and
established them. The list of such institutions include; law, religion, the State and language;
economic phenomenal like capital, markets, competition, money and other complex social
structures. The foregoing evolved as a result of human actions, but not by conscious design
of finite entities.446
While law is a product of a gradual, progressive and inexorable evolutionary process,
legislation which intendment is the regulation of the economic sphere is a product of human
design and contrivance, and prone to malfeasance.447
The examination of economic successes, failures and uncertainties reveals how purely private
profit motives creates market-based rules in an economic system through the process of
evolution. The emulation of efficiently run enterprises generates a modicum of rules of
behaviour. Good entrepreneurial and corporate practices evolve over time in this manner.
Thus enterprises emulate good corporate policies such as accounting orthodoxy, prudence,
management accountability and good corporate citizenship practices.448
446 M. Casson, Institutions and the Evolution of Modern Business, New York, Routledge, 9, 44, 107,
151 (1998); D. G. North, Institutions, Institutional Change and Economic Performance, Cambridge,
Cambridge University Press, 3, 73, 107 (1990). 447 R. Nobles, A Sociology of Jurisprudence, Portland, Hart Publishing, 43, 49, 91, 163 (2006); C.
Schubert et al., Evolution and Design of Institutions, New York, Routledge, 3,9,11,25,100 (2006); A.
C. Hutchinson, Evolution and The Common Law, Cambridge, Cambridge University Press, 1, 23, 42,
57, 125 (2005). 448 K. Lux, „The Failure of the Profit Motive,‟ 44 Ecological Economics 1-9 (2003).
222
It is in the nature of man to seek to attenuate as much as possible the limitation which
uncertainty imposes on human action. He seeks to predict the future pursuant to electing
between alternative lines of actions. However, since the variability of possible future
outcomes is as yet to be unravel by human kind, individuals, whether biological or juridical
are most inclined to follow well trodden paths to emulate patterns of behaviour underlying
previous corporate successes.449
The foregoing represent the evolutionary process of the emergence and crystallization of
commercial law, and contrary to the bandied view in certain quarters that the State should
constitute the only source of law, modern commercial law evolved historically, out of the
practices of merchants, the lex mercatoria controlled the conduct of merchants without the
coercive power of the State, because those laws evolved out of the felt needs of the merchant
community for rules of engagement and standardization. The converse of that well ordered
communitarianism would be state of affairs in which individual actors pursued their differing
private short term goals through unwholesome practices ins disparagement of the long term
sustainability of the system. Thus the fear of loss of reputation and business motivates all
actors to adopt good practices, of honesty and transparency in business. Where that basic
honesty is lacking there will be a pervading state of normlessness, increases transaction cost
and stultifies economic growth and development.450
449 C. F. Bauam, „The Impact of Macroeconomic Uncertainty on Firms‟ Changes in Financial
Leverage,‟ January 16, 2009. Available at http://fmwww.bc.edu/ec-p/wp688.pdf; C. Keane, „The
Impact of Financial Performance on Frequency of Corporate Crime: A Latent Variable Test of Strain
Theory,‟ 35 Canadian Journal of Criminology 33-54 (1993); R. Lensink, „Capital Market
Imperfections, Uncertainty and Corporate Investment in the Czech Republic,‟ 33 Economics of
Planning 53-70 (2000). 450 M. Pryles, „Application of the Lex Mercatoria in International Commercial Arbitration.‟ Available
at http://www.arbitration-icca.org/media/0/ 12223880790810/application_of_the_lex_mercatoria.pdf;
O. Volckart et al., „Are the Roots of the Modern Lex Mercatorial Really Miedieval?‟ 65 Southern
Economic Journal 427-450 (1999).
223
Where law and indeed the institution of property crystallized through unconscious acts over
time in an evolutionary process, they are more readily internalized and because they are
diffused into the social cultural fabric of the society, they invariably predate State
legislation.451
4.6 SELF REGULATION
To illustrate self regulation, it is pertinent to recap on what will be the behaviour of a typical
Nigerian whose car was stopped by the red light at an intersection at 2.00 a.m. in the
morning, while the city was asleep and there were no law enforcement agents in sight to
compel the right behaviour? Would he run through the red light or obey and wait for the
amber and then the green light to come on? The motorist compliance quotient is not
dependent on his or her personal idiosyncrasies, but rather on the pervasive value of
obedience to laws in his or her social cultural milieu. This would determine the level to
which he has internalized norms of lawful behaviour even when not under immediate threat
of sanction or coercion.452
The level of internalization, in turn is dependent on whether laws had crystallized through an
evolutionary process as to engender non-deterministic compliance.453
451 D. Schmidtz, „The Institution of Property,‟ 11 Social Philosophy and Policy 42-62 (1994); P.Stein,
Legal Evolution: The Story of an Idea, Cambridge, Cambridge University Press, 23,51,69,99 (2009). 452 P. D. Spencer, The Structure and Regulation of Financial Markets, Oxford, Oxford University
Press, 99, 233 (2000); A. Iannuzzi, Industry Self Regulation and Voluntary Environmental
Compliance, Boca Raton, Fa., CRC Press, 22 (2002); J. O‟ Brien, Private Equity, Corporate
Governance and the Dynamics of Capital Market Regulation, London, Imperial College Press,
55,91,155,213,339 (2007); I. Ayres, Responsive Regulation: Transcending the Deregulation Debate,
Oxford, Oxford University Press, 101 (1995); B. Morgan, An Introduction to Law and Regulation:
Text and Materials, Cambridge, Cambridge University Press, 280 (2007). 453 Ibid.
224
Every legal and political order requires a modicum of self regulation by legal subjects to
make the legal order effective. Laws are not worth more than the grammage of the paper on
which they are written, where the predisposition of subjects of the law to self induced
obedience is low, or absent.454
It has been found that, there is a greater prospect for rule of law and due process to pervade a
society, particularly at the economic sphere where basic honesty is taken for granted as a way
of life, and that economic actors in their commercial interaction and exchanges would
normally not lie, cheat or steal when not under immediate threat of detection and sanction.455
Thus the greatest challenge of developmentalism in Nigeria is how to prevent or curtail the
pervading opportunistic behaviour in the economic sphere from disparaging, long term social
outcomes, which would benefit the overall economy and catalyse growth and development.
What then is the inbuilt mechanism of the market other than legislation and regulation which
will serve as a rein on opportunistic behaviour?456
Economic relationships in a market are by their nature routine and recurrent over a long
range of time. Where an actor is in the habit of behaving opportunistically in recurrent
454 R. Baumeister, Losing Control: How and Why People Fail at Self Regulation, London, Academy
Press, 6,8,10,15 (1994). 455 T. R. Machan, Business Ethics in the Global Market, Stanford, Hoover Institution Press, 1, 63
(1998); P. Ulrich, Integrative Economic Ethics: Foundations of a Civilized Market Economy,
Cambridge, Cambridge University Press, 11,13,43,79,147 (2008). 456 M. Nissanke, „Institutional Analysis of Financial Market Fragmentation in Sub-Saharan Africa: A
Risk-Cost Configuration Approach.‟ August 2006. Available at
http://www.wider.unu.edu/publications/working-papers/research-papers/2006/en_GB/ rp2006-
87/files/78091787149576033/default/rp2006-87.pdf; J. G. Lambsdorff, „Making Corrupt Deals:
Contracting in The Shadow of The Law,‟ 48 Journal of Economic Behaviour and Organization 221-
241 (2002).
225
transactions, it will sooner than later run out of opportunities to cheat, lie, be dishonest or
misrepresent facts in ways that disparages expectations of other actors in the market. Thus
what impels cooperative and non-opportunistic behaviour of economic actors is the resultant
erosion of confidence of other actors and loss of trust and credibility which will invariably
impair the opportunist‟s prospects of participating in the long run in future economic
exchanges in the same market. Economic actors are naturally most inclined to engage the
services of enterprises and individuals who have established a culture of integrity in business
over a long span of time. This is not only true at the level of private actors, where corruption
characterizes the body politics of a nation it progressively ceases to be foreign direct
investment destination as advances in communication technology have made it possible to
disseminate information about the structure and nature of markets across the globe.457
The experience of Nigeria in the wake of the upsurge in advance fee frauds perhaps provides
a classical example of the long term negative impact which pervading fraudulent and
opportunistic behaviour can have on an economy. Aside from increasing transaction cost in
Nigeria‟s domestic economy, it has more than any other thing disparaged opportunities for
Nigerian businesses to engage in complex commercial transaction in international markets.458
The prospect and apprehension of loss of good will a quantifiable and invaluable asset in
markets, which investment perspective is long term impels reasonable economic actors to
cultivate cooperative and non- opportunistic behaviour and demonstrates how markets
457 Ibid. 458 H. Glickman, „The Nigerian „419‟ Advance Fee Scams: Prank or Peril?‟ 39 Canadian Journal of
African Studies 460-489 (2005).
226
develop inbuilt control devices for channelling the behaviours of variegated actors in the
economy along paths that would engender development inducing outcomes.459
4.7 THE PARADOX OF ABUNDANCE AND WANT IN OIL-BASED ECONOMIES
After the ascendancy of oil as the linchpin of the Nigerian economy in the 70s, there were
high expectations that the exploitation of oil would greatly enhance and increase the well
being of Nigerians. Oil resources was regarded as critical to Nigeria‟s development, and that
the steady stream of revenue it provides will be instrumental in the breaking of the vicious
circle of poverty that afflicts Nigeria. It was generally, believed that oil wealth will be used to
create jobs, build schools, provide affordable health-care for all, housing and sow back
proceeds in agriculture.460
Over forty years later, every expectation of Nigerians hinged on the stupendous petroleum
endowment have been disparaged and rudely shattered by the stark reality of the oil era in the
chequered economic history of Nigeria. In hind sight, it would seem that Nigeria‟s oil wealth
can impact positively on poverty alleviation if the present rentier structure of the oil industry
is dismantled and there is greater transparency in the management of oil revenue.461
Thus, the Nigerian experience since the ascendancy of oil is the converse of the high
expectations of the transformative impact of oil wealth. Nigerians have witnessed pervasive
459 Ibid. 460 M. L. Ross, „The Political Economy of the Resource Curse,‟ 51 World Politics 297-322 (1999). 461 T. L. Karl, The Paradox of Plenty: Oil Booms and Petro-States Los Angeles, University of
California Press, 3,44,116,138,189 (1997); R.Torvik, „Why Do Some Resource-Abundant Countries
Succeed While Others Do Not?‟ 25 Oxford Review of Economics 241-256 (2009).
227
poverty and witnessed declining living standard below the pre-1965 level. Nigeria‟s
development failure has been very abysmal and catastrophic and calamitous, as its real per
capita income has plunged in a free fall to levels below the pre-1960 levels.462
The deficit existing between high expectations from oil wealth and its abysmal performance
in delivering on the expectations is stupendous. Nigeria like the preponderance of its peers in
the group of poor but oil rich developing countries of the world, has underperformed relative
to other developing countries who do not have the bounty of nature, such as oil on virtually
every economic indicators. Its performance is abysmal relative to the high magnitude of
streams of oil revenue accruing to it. Poverty is still pervasive without any prospect of
remittance.463
The foregoing has been a veritable recipe for conflicts in Nigeria, as the State‟s dependence
on oil revenue has increased over time; the Nigerian economy has failed because of many
years of mismanagement by authoritarian military regimes and inept and corrupt
politicians.464
Nigeria provides a classical example of a nation in which oil has been an unmitigated source
of poverty and deprivation rather than well being. With Africa‟s largest reserves and
exploitation dating back to the 60s. Human development has stalled since the discovery of oil
in commercial quantity, with poverty level rising astronomically. Going by the report
prepared by the World Bank on Nigeria, the proportion of households living below the UN‟s
462 Note 1 of chapter one supra. 463 Ibid. 464 Note 5 of chapter one supra
228
US$1 per day absolute poverty line has grown from 27 per cent in 1980 to 66 per cent in
1996. While the devastation is most felt among the rural poor, the incidence of poverty in
towns and cities has risen from 17 per cent to about 58 per cent. Nigeria‟s wealth is
concentrated in the hand of 10 per cent of the population who control 40 per cent of its
wealth while the poorest 20 per cent of the population control a negligible 4.4 per cent. While
the global average of malnutrition in children is under 26.5 per cent, the rate in Nigeria is
37.7 per cent.465
The foregoing granted, in spite of the congruence established between abundance of oil
resources and pervasive poverty in Nigeria and most developing oil-based economies,
exploitation of petroleum resources can yield positive outcomes where it is efficiently and
optimally managed and where its husbandry is carried out in an environment of organic
formal rational laws and differentiated institutions. Norway, for example, was able to escape
the resource trap because its institutions had attained considerable differentiation before the
ascendancy of natural gas in the economy. Norway‟s per capita income is one of the highest
in the world and it tops the United Nations Development Programmes list of top economic
performers based on several economic indicators.466
A quintessential case of the paradox of abundance and want, Nigeria has a proven reserve
approximated at 30 billion barrels, with net earnings of $350 billion in 40 years, and is the
world‟s fifth largest producer of oil. The Nigerian State is overwhelmingly dependent on oil
revenue. Oil account for 85 per cent of revenue accruing to the federation account, constitutes
465 Note 297 supra. 466 Note 296 supra.
229
over 95 per cent of export earnings and over 45 per cent of Gross Domestic Product (GDP). It
is however paradoxical that Nigeria‟s stupendous oil wealth has not in any way translated to
well being or alleviated the poverty trap in which the preponderance of Nigerians are
emasculated. Over 80 per cent subsist on less than a dollar per day, whilst 75 per cent lack
sanitation and clean water, with high maternal and infant mortality rate Nigeria, saddled with
a behemoth inefficient and inept public sector, literacy rate is below the world average of 35
per cent, only about 20 per cent of the population have access to health services.467
The level of profligacy and inefficiency in the husbandry of oil wealth is so great that
corruption has been institutionalized and pandemic. The State has been appropriated by
political and economic cabals and run as a private estate of these groups. Because oil
revenues accrue directly to the State, the capture of power is synonymous with the capture of
oil resources and accruing revenue.468
The major conduit for oil revenue to the State is the State oil corporation, the Nigerian
National Petroleum Corporation (NNPC), established in 1977 as the apex State agency in the
petroleum sector. Its functions amongst other things include partnering with transnational oil
corporations (TNOC). The NNPC engages in joint ventures with TNOCs on the basis of a 60
to 40 per cent sharing ratio. The NNPC receives the proceeds from sale of NNPC‟s crude,
which is held in an account domiciled in the Central Bank of Nigeria (CBN). Proceeds are
subsequently shared between the three tiers of government, that is, the federal government,
State and local government without throughput.469
467 Note 297 supra. 468 Note 6 of chapter one supra. 469 Nigerian National Petroleum Corporation: Company History. Available at
http://www.fundinguniverse.com/company-histories/Nigerian-National-Petroleum-Corporation-
Company-History.html
230
Aside from the untoward fiscal impact of direct accrual and sharing of proceeds among tiers
of government without through put, there is opacity and lack of accountability in the
management of oil revenue at the three tiers of government. Consequently, oil revenues are
subjected to despoliation; there is no intertemporal planning model for the expenditure of
revenue pursuant to ensuring fiscal sustainability and allocative justice amongst
generations.470
Politicians and bureaucrats at all levels of government however, subject allocations to
despoliation while a negligible proportion is spent on ill-conceived projects that are not
inspired by altruistic intentions. It would seem that there is no rein on local government and
State government finances and expenditure. Reports have shown that the late General Abacha
converted about $5 billion of public funds to his privy purse in the course of his absolutist
rule.471
With the ascendancy of oil as the linchpin of the Nigerian economy and its more than
proportionate share of GDP and total revenue accruing to the Nigerian government come the
total eclipse of the productive or real sectors of the economy such as manufacturing and
agriculture which experienced a downward plunge of productivity and dwindling shares of
GDP. The deluge of foreign exchange and attendant over value of the Naira resulted in
470 E. Ahmad, Oil Revenue Assignment: Country Experiences, Washington D.C., International
Monetary Fund, 3 (2002). 471 J. Bennett, „Conflict Prevention and Revenue-Sharing Regimes,‟ May 2002. Available at.
http://www.unglobalcompact.org/docs/issues_doc/Peace_and_Business/RevenuesharingRegimes.pdf;
B.Pinto, „Nigeria During and After the Oil Boom: A Policy Comparison with Indonesia,‟ 1 World
Bank Economic Review 419-445 (1987).
231
absorption problems which usually characterizes an oil-based economy. The condition
known generally as the dutch disease in the literature, occurs when an extractive industry
particularly hydrocarbons grows in dominance in an economy, first observed in the
Netherlands after the discovery of natural gas. Exports become less competitive in the
international market, inflationary pressures increase as the economy is awash with foreign
exchange earned from crude sales, making imports cheaper, other sectors of the economy,
particularly manufacturing and agriculture shrink progressively and atrophy. Concomitantly,
the overall economy contracts as a result of the enclave nature of oil industry, it is not
dependent on local human capital input, it is technology driven while requiring capital
outlays of very high magnitude.472
Thus, there is no nexus between the Nigerian oil industry and the over all economy, its local
content level is low, while crude is sold with no value added. The mix of the foregoing
conditions creates the outcomes which have been associated with resource rich nations; the
resource trap, unemployment, conflicts and wars and pervasive poverty.473
The volatility of the international oil industry characterized as it were by booms and busts
increases the element of uncertainty, instability and inconsistencies in the planning and
execution of economic programmes. The proportion of the population living below the
poverty line increased from 27 per cent in 1980 to 75 per cent in 1997 while per capita
income fell from $800 in 1980 to $300 in 2008.474
472 Ibid.; T. A. Oyejide, The Effects of Trade and Exchange Rate on Agriculture in Nigeria,
Washington D.C., International Food Policy Research Institute, 6 (1986). 473 Ibid. 474 Note 1 of chapter one supra.
232
Nigeria‟s economic woes are intertwined with political turbulence, anarchy and a state of
normlessness in the body politik. Many years of neglect and progressive impoverishment of
ethnic minorities in the Niger Delta has engendered restiveness of these communities who are
host communities to oil operations. The long spell of military rule interspersed with short
lived civilian interregna has been a veritable source of instability of the government at the
centre. Ecological dislocations caused by oil spillages have resulted in the loss of livelihood
of host communities. Poverty, despair and desperation have driven the region‟s youths to
embrace violence as a mean of extracting compensation from transnational oil corporations
operating in the region. The resort to militancy of the Niger Delta youths has in turn led to
repression and human right violation by successive governments at the centre.475
The communities are demanding for a greater share of the wealth generated from their
territory while the government primary concern is how to protect installations and personnel
of oil companies from the violence unleashed by militants. The activities of militants have
resulted in considerable drop in production by about 40 per cent in 2003-2008. the oil
companies have adopted a strategy of turning further offshore to deep water operations as a
means of avoiding the disruptive condition offshore. About 50 per cent of Nigeria‟s oil is
derived from offshore fields.476
475 G. J. Frynas, Oil in Nigeria: Conflict and Litigation Between Oil Companies and Village
Communities, Hamburg, Lit Verlag Munster, 8,24,34,42,54,149 (2000); A. Ikelegbe, „The Economy of
Conflict in the Oil Rich Niger Delta Region of Nigeria,‟ 14 Nordic Journal of African Studies 208-
234 (2005). 476 Ibid.
233
The anarchy and turbulence characterizing the Nigerian State is a function of the acrimonious
contest between political elites to capture political power in furtherance of personal
objectives underscored by greed and rapacity which is set ultimately to capture resources on
the one hand and on the other by increasing dissent of oil producing communities who are
demanding for greater share of the revenue accruing from the export of oil.
The responses of successive governments varied from military campaigns in the region and
killing of minority rights activist and leader, Mr. Ken Saro-Wiwa by the military dictator
Sani Abacha; to Byzantine manoeuvres of the Obasanjo administration in conceding 13 per
cent derivation of the revenue accruing from oil producing States to the federation account.
Oil producing States received about $150 million in 1999 and about $1.5 billion in 2002 far
in excess of their respective statutory allocation of revenue from the federation account. The
inundation of the finances of oil producing States by additional derivation funds however, has
not translated to growth and development of this group of States. Their administration at both
the State and the local government levels is characterized by profligacy, lack of transparency,
gross inefficiency in the husbandry of resources and corruption.477
The Federal Government had adumbrated that offshore fields are without the fiscal
jurisdiction of littoral States and as such they are not entitled to a share of the revenue
derived offshore in 2002. The Supreme Court of the Federation of Nigeria sustained this
argument and held that offshore fields are without the jurisdiction of States. The ruling of the
Supreme Court generated so much controversy fuelled by rapacity of a rentier State and the
political elites in the Niger Delta who were apprehensive of a decrease in the share of the
477 Ibid.
234
rents available for despoliation. The Obasanjo administration set aside the ruling of the
Supreme Court while concomitantly opting for a political solution to the impasse by bringing
offshore fields within the ambit of the fiscal jurisdiction of the oil producing littoral States.478
In a similar vein, the Yar-Adua administration established in 2008, a Niger Delta Ministry
which in conjunction with the already existing Niger Delta Development Commission will
address the peculiar development needs of the region. Sceptics however have expressed
doubts as to the ability of the new ministry to solve the Niger Delta crisis. They fear that the
inertia, culture of waste, mediocrity, inefficiency and the canker worm of corruption which
characterizes the Nigerian State and public sector will infect and undermine its capacity to
deliver on its mandate to spearhead and over see the economic development of the region.479
The mounting violence and anarchy characterizing the Nigerian State has had a rather
untoward impact on the economy which debt profile had been marked by a huge debt burden
and overhang. Considerable proportion of revenue accruing to the federation account was
dedicated to debt servicing. The Obasanjo administration admirably renegotiated these debts
and fully amortized them. It is the view of both national and international community of
opinion that the single stroke which will avert the looming economic disaster is the
enshrining of greater transparency in governance and efficiency in the husbandry of revenue
accruing from the exploitation of oil resources and diversification of the economy.480
478 Attorney-General of the Federation v. Attorney-General of the 36 States, [2002] Vol. 6 M. J. S.
C.1]. 479 A. Walker, „Doubts Over Niger Delta Ministry,‟ 11 September 2008, BBC News. Available at
http://news.bbc.co.uk/2/hi/africa/7609904.stm 480 E. O. Adegbite, „The Impact of Nigeria‟s External Debt on Economic Development,‟ 3
International Journal of Emerging Markets 285-301 (2008). In 2006, Nigeria settled its Paris Club
debt, thus setting it self off the path of highly indebted African Countries whose debt overhang persist.
The Obasanjo Administration secured an $18 billion debt relief for Nigeria from the Paris Club of
creditors, which was predicated on the condition that it pay off her $36 billion foreign debt. The nation
also paid off the debt owed the London Club to the tune of $2.15 billion. Thus for the settlement of the
Paris and the London Clubs of Lenders, Nigeria paid off $20 billion.
235
Nigeria is bedevilled by subdued but nonetheless devastating species of resource conflicts.
The contentions of variegated vested interests in the sharing of national patrimony is a
subdued expression of a distributional conflict associated with both paucity and abundance of
resources, the lack of capacity to innovate, the greed and rapacity of powerful rent-seeking
groups and the grievances of marginalized groups. Resource conflicts in Nigeria is
complicated by the fact that oil, a non-renewable resource constitutes a high proportion of its
GDP, hence, it is prone to conflicts resulting from bids to capture the resource by competing
elites and groups.481
For one, the transformation of nature into tradable products is a profoundly political
phenomenon, entailing the definition of property rights, the organization of labour and the
allocation of revenue. It is not impossible that this process is peaceful and cooperative, but
history has shown that it is invariably conflictual and violent, manifesting in physical force or
through coercion and domination. The nature of ensuing conflict and attendant violence
would vary with whether resources involved production or extraction. If it is extractive
resource, conflict and violence will be in the form of struggles or battles for State or
territorial control. Thus, natural resources motivate conflicts to secure State control or
galvanize groups to secession.482
481 P. Collier, Justice-Seeking, Civil War, Washington D.C., World Bank, passim (1999); F. Stewart,
The Origins of Humanitarian Emergencies: War and Displacement in Developing Countries,
Oxford, Oxford University Press, 65 (2000). 482 R. M. Auty, Political Economy of Resource-Abundant States, Helsinki, World Institute for
Development Economics Research, 79 (1999); R. Auty, Resource Abundance and Economic
Development: Improving the Performance of Resource –Rich Countries, Helsinki, World Institute for
Development Economics Research, 63 (1998); A. H. Gelb, Oil Windfalls: Blessing or Curse?’ Oxford,
Oxford University Press, 93 (1988); I. de Soysa, „The Resource Curse: Are Civil Wars Driven by
Rapacity or Paucity?‟ in M. Berdal, (ed.), Greed and Grievance: Economic Agendas in Civil Wars,
New York, Lynne Rienner, 57 (2002).
236
Resources motivate secession in resource-endowed regions. The likelihood of political
secession increases when „outsiders‟ are perceived to extract „local‟ resources without
sharing the wealth equitably, and when local population are displaced by extractive industry
or suffer from its environment costs. The distribution of oil wealth fuelled the Biafra
secession and rebellions and militancy in the Delta region of Nigeria, Aceh in Indonesia and
Cabinda in Angola, to name a few examples of conflicts in oil rich regions.483
While most secession does have an indigenous political base, some are also motivated by
domestic or external actors manipulating local political identities and symbols to further
economic interests. The secession of Katanga in Democratic Republic of Congo (DRCongo)
is apposite in this regard. Belgian and British/American transnational interests contrived this
region in order to secure a hold on the copper mines. At independence, the quasi-autonomous
status of Katanga was employed by ethnic nationalities in the region to undermine Kinshasha.
The apprehension of secession would invariably lead to brutal repression by the central
government as in Southern Sudan where there is conflict over control of oil and grazing land
in the south.484
Thus, aside from their effect upon the likelihood and course of conflict, natural resources
wealth, invariably hinders successful political and economic reform and rapid transition to
sustainable rapprochement, growth and development. Entrenched interests associated with
the capture of rents together with the difficulty of undoing perverse economic impact
483 Ibid. 484 Ibid.
237
associated with many years of wrong economic choices stultifies political consensus for
reforms.485
In view of the foregoing, we submit that Nigeria would need to embark on radical reforms of
its institutions, work towards consensus building in the resolution of resource conflicts which
has characterized the Nigerian polity since independence, embark on socio-economic
innovation and diversification of the economy, which will result in a more even distribution
of economic and political power across the society.486
4.8 THE NATURE OF THE OIL-BASED ECONOMY
The oil revolution of the 1970s profoundly affected politics in the major oil exporting
countries. Unprecedented oil revenue gave their governments‟ access to enormous resources,
without having to tax their societies. The nature of the oil-based economy is such that it
concentrates great power and wealth in the hands of the governments, and its effect on the
rest of the economy as a whole is mediated through the governments, in their decisions on
how to spend oil revenues.487
The relationship between State and society in such an economy is much different from the
western notion of the modern State economy. Because of the oil boom, the rulers of these
States have been concerned with how to spend money rather than how to extract it from
485 Ibid. 486 Ibid. 487 M. O. Ilori, „Developing a Manufacturing Based Economy in Nigeria Through Science and
Technology,‟ 22 Technovation 51-60 (2002).
238
society through taxation. Oil revenues enabled the rulers to build large bureaucratic
apparatuses, to distribute benefits to society and to control political behaviour. The direct
accrual of oil proceeds to the State, unmediated by the domestic economy meant that the
personal interests of many more people came to be vested directly in the State and political
elite.488
The State became stronger relative to its potential domestic competitors and constituencies
than it had been in the past. That strength however, was of a particular nature. Citizens did
not have to pay for these increased services through taxation. The State did not have to
engage in the kinds of political bargains with society, worked out over centuries and with no
small amount of violence which produced representative governments in the west. The terms
of exchange, from the point of view of the rulers, were simple: citizen would receive
substantial material benefits in exchange for political loyalty, or at least political quiescence.
The States became detached from their local socio-economic realm by virtue of rent and they
acquired relative autonomy from society, which gave them the ability to pursue national
goals without accountability. The connection between State and society in this situation are
unidirectional and they all run from top down. This historical anomaly has given rise in the
literature to new category to describe these States: the „distributive,‟ „allocative,‟ or „rentier‟
State.489
4.9 THE CHALLENGES TO THE RENTIER STATE AND THE EVOLUTION OF
CIVIL SOCIETY
488 P. Alizadeh, The Economy of Iran: The Dillema of an Islamic State, London, I. B. Tauris,
29,63,145 (2001). 489 G. Howes, „Explaining the Dynamics of the Southeast Asian Political Economy: State, Society, and
the Search for Economic Growth,‟ 45 World Politics 629-660 (1993).
239
The group of oil exporting countries number amongst the poorest before the ascendancy of
oil. Their share of world production rose substantially after World War II, which made them
most important sources for energy exports. All other traditional economic activities gave way
to the oil industry and its revenues, creating what is known in the literature as the „dutch
disease.‟ The post-World War II period can rightly be termed the oil era. Paradoxically,
although these revenues and the „rentier‟ dynamics strengthened the States and the position
of the ruling class, the oil boom also brought oil-dependence, as well as social and economic
upheavals. The latter‟s longer term effects, began to upset the „traditional‟ political order,
calling into question its survival; especially once oil revenues no longer kept pace with
expanding populations and growing expectations.490
Oil and gas revenues account on average for about 75 per cent of total government revenue of
oil based-economies. As they dependent exclusively on oil revenues as the main source for
public funds, fluctuation of oil prices has complicated their efforts at long term planning. Oil
is not only the main source of national income in these economies, but it is also the main
motor for their transformation. Besides the obvious impact on government finances and the
balance of payments, changes in oil earnings have broader implication for domestic
economic activity. Non-oil economic activity is heavily influenced by domestic government
expenditure which itself is dependent on oil revenue. Moreover, most large scale economic
activities in the public domain (petrochemicals and oil-based basic manufacturing) are
closely linked to developments in the oil sector.491
4.10 THE RENTIER STATE AND THE INTERNATIONAL OIL INDUSTRY
490 K. Mahdi, Neo-Liberalism, Conflict and an Oil Economy: The Case of Iraq,’ 29 Arab Studies
Quarterly 47 (2007). 491 Ibid.
240
The oil industry is an international industry characterized by high international geo-political
sensitivity and volatility. In this industry the major actors are non-State entities, the
transnational oil corporations and under developed petro-States. Who are „rentier‟ States par
excellence. They are overwhelmingly dependent on externally generated revenues. That fact
yields the following outcomes. For one, oil is a strategic energy resource upon which the
survival of the industrialized economies is predicated making rentier petro-States prone to
exogenous manipulations in furtherance of purely strategic vested interests aimed at the
capture and monopoly of supply sources. Super powers using the agency of their private
transnational oil corporations compete in the rush for oil, in the process, they employ a
combination of stratagem, ranging from financing wars in resource rich regions to sponsoring
of coup d’tats, wooing and patronizing authoritarian regimes to outright invasion and take
over of oil fields.492
On the other hand, internally, the rentier petro-State has an untrammelled insular existence
from an incapacitated, weak and inarticulate civil society which has been progressively
weakened and ineffective as a bulwark and rein on the rentier States natural inclination for
governance failures. The failure of the civil society to act as a counter veiling force derives
from the fact that externally earned revenue from crude sales reduces the exigency for
taxation, the lack of pressure to explore internal sources of revenue affords the rentier State
considerable fiscal autonomy and thus less accountability for its stewardship than its peers
who are not so endowed with an internationally strategic energy resource and so have to
resort to more traditional means of finance. The sum effect of the foregoing is the
492 T. L. Karl, The Paradox of Plenty: Oil Booms and Petro-States, Los Angeles, University of
California Press, 44,71,92,138,189 (1997); H. Beblawi et al., The Rentier State: Nation, State and
Integration in the Arab World, New York, Routledge, 83 (1987).
241
stultification of the progressive evolution of perhaps initially authoritative but effective, to
liberal and then democratic State.493
The overwhelming dependence of the rentier State on rents from external sources is a proof
of its susceptibility to external manipulations and intense pressure. Since the ascendancy of
oil as a vital energy resource, its husbandry has been characterized by considerable geo-
political intrigues and manipulations. This is as a consequence of the strategic importance of
oil to the industrialized economies, which are largely driven by fossil fuels procured mostly
from underdeveloped, very poor but oil endowed petro-States of the South. The intense
exogenous pressure resulting from the international political economy of oil on the petro-
State coupled with scarcity and or abundance leads to resource conflicts and bloody wars
associated with contests to capture oil resources. Thus congruence has been established
between oil resources and wars.494
The strategy of the west amongst other things include breaking the ranks of any oil cartel and
preventing the domination of production by one petro-State, whilst concomitantly building
and facilitating the capacity of their transnational oil corporations to compete effectively in
the international oil industry. With the full support of their governments and stupendous
financial resources and technology, transnational oil corporations are able to relate with
petro-States from a position of high relative bargaining strength above their host countries.
They are able to capitalize on their relative strength by creating a regulatory environment
which will enhance and facilitate the consummation of their vested corporate interests rather
493 D. A. Yates, The Rentier State in Africa: Oil Rent Dependency and Neo-Colonialism in the
Republic of Gabon, New York, Africa World Press, 11,200,217 (1996). 494 O. Noreng, Crude Power: Politics and the Oil Market, London, I.B. Taurus, 150 (2002).
242
than for the economic wellbeing of the people, growth and development of the nation in
which they operate if any thing, undermining those goals is a necessary and sufficient
condition for the maximization and optimalization of the transnational oil corporations
benefit.495
Conformist petro-States have always been favoured by both private and public international
financial institutions and donor agencies as reward for conforming but most importantly
because petro-States have the peculiar advantage of being able to borrow against future rents
from their proven stupendous oil reserves.496
In contrast to their less fortunate peers who can not provide security against which they can
borrow, petro-States enjoy less stringent borrowing terms and conditions, making the
borrowing option most attractive to governments of petro-States. However borrowing is at a
great cost both in the short term and in the long term.497
For one, as a device used by governments in petro-States to obviate the necessity for taxation
as both alternative and complementary source of public finance, it further provides insulation
for the government to avoid accountability. Secondly, borrowing is ruinous of a resource
based economy, because not only is the present mortgaged due to lack of innovation in
governance but the future is also mortgaged as debt burden will have to be borne by the post
495 H. Shambayati, „The Rentier State, Interest Groups, and the Paradox of Autonomy: State and
Business in Turkey and Iran,‟ 26 Comparative Politics 307-331 (1994). 496 A. F. Darrat., „Imppact of External Price Shocks on the Oil-Based Developing Economies,‟ 17
Journal of Economic Studies 44 (1990). 497 S. Edo, „The External Debt Problem in Africa: A Comparative Study of Nigeria and Morocco,‟ 14
African Development Review 221-236 (2002).
243
oil-epoch generations when oil would have petered out and there is no more easy petro-funds
to cover gaps in public finance. Thus borrowing against future rents is akin to selling the
family „silver‟ or patrimony. The ability of the petro-State to manage the intricate relations of
power between it and transnational oil corporations would determine the proportion of the oil
rents derived from oil accruing to it vis-à-vis the transnational oil corporations. Nigeria‟s take
from her joint operation agreements is 60 per cent, while Chad received meagre 7 per cent in
the beginning of its oil concessioning.498
The domination of the oil industry by transnational oil corporations is further reinforced by
the nature and structure of oil operations, which are dependent as it were on very high capital
outlay and complex technology the magnitude and proportion of which petro-States are
unable to muster and deploy in production. Thus they are left with no option but to be
dependent on transnational oil corporations for the development and exploitation of their oil
resources. A relationship of convenience soon develops between the petro-State and the
transnational oil corporation which obligates it to negotiate with external forces that control
the flow of the external rents from oil rather than entering a social compact with its people. In
the power matrix created for this unequal exchange, all actors are most amenable to
authoritarian rule in the petro-State albeit without a convergence of purpose. Whenever the
agitations of the population of petro-State for more State control or a greater share of rents
become very strident, the oil State is caught between exogenous and endogenous centrifugal
forces pulling at opposite directions. Petro-State governments have learnt in hindsight from
the fate that befell rulers else where of the need to strike a precarious balance in order to
498 J. Hanson, „Optimal International Borrowing and Lending,‟ 64 American Economic Review 616-
630 (1974); P. Hartland-Thunberg, „Causes and Consequences of the World Debt Crisis,‟ in P.
Hartland-Thunberg , (ed.), Banks, Petrol Dollars and Sovereign Debtors, Lanham, MD., Lexington
Books, 1-22 (1986).
244
survive and perpetuate their strangle hold on political power. For Nigeria, Bolivia and
Venezuela, this balance has become even most precarious as their civil societies are
becoming even more articulate and active and the States are tending more and more towards
libertian and democratic ideals even as negotiations for greater rents remains the only means
for increasing government revenue.499
The dependence on external rents has led to two mutually reinforcing evolutionary outcomes.
Overwhelming dependence on external rents with concomitant lack of internal accountability
has resulted in the gradual and progressive atrophy and inertia of institutions of State in
petro-States. In the midst of all the decay and lack of State capacity characterizing petro-
States they have evolved organic and efficient technocracies in the critical institutions such as
national oil corporation and powerful petroleum ministries crucial for the maximization of
rents from the international oil industry.500
Petro-States have generally evinced gross lack of innovation at the domestic plane to build
and shore up State capacity, evolve efficient meritocratic bureaucracies which will efficiently
generate revenues from their people, administer internally all encompassing fiscal regimes,
while ultimately creating workable mechanisms for the efficient husbandry and equitable
allocation of resources.501
499 T. L. Karl, The Paradox of Plenty: Oil Booms and Petro-States, Los Angeles, University of
California Press, 44,138,189 (1997); H. Macartan., Escaping the Resource Curse, New York,
Columbia University Press, 250 (2007). 500 Ibid. 501 Note 296 supra.
245
In contrast to the lack of innovativeness at the domestic plane and driven by their peculiar
fiscal imperative, rentier States have evinced uncommon astuteness and dynamism in the
establishment and nurturing of the international oil cartel, Organization of Petroleum
Exporting Countries (OPEC). They have been able to achieve greater State control and take
of rents through legal instrumentality.502
Overwhelming dependence on externally derived revenue from rents collected from
transnational oil corporations produce distributional injustices and skewed and profligate
expenditure of revenue. The fiscal autonomy afforded the rentier State by the steady flow of
externally derived revenues gives it the leeway to capriciously allocate revenue in most
inequitable manner pursuant to dispensing patronages to favoured individuals and groups in
the petro-State; embarking on white elephant projects of low economic salvage value purely
for the purpose of despoliation and misappropriation of funds as it is more nebulous to track
spending on such projects due to their high external and technological content; military
spending is also a top priority, for similar reason, it is easier to cover massive frauds in
defence contracts, but most importantly, defence funds are deployed to build formidable
machinery of State coercion and brutal repression of opposition. Most contracts awarded are
never executed but payments are made to phantom contractors.503
The foregoing skewed allocation modality of oil revenue is not only ruinous of the economy
but progressively erodes State capacity. It leads to distortion of the work/reward causality in
502 Ibid. 503 M.Katz, Lifting the Oil Curse: Improving Petroleum Revenue Management in Sub-Saharan
Africa, Washington D.C. International Monetary Fund, 3,9,23,52 (2004); J.M. Davis, Fiscal Policy
Formulation and Implementation in Oil Producing Countries, Washington D.C. International
Monetary Fund, 13, 153 (2003).
246
the population, bureaucrats in the public sector and the organized private sector. Rent
seeking, indolence, dishonesty and corruption becomes the norm and instrumentality of
wealth creation. Pervasive inefficiency and gross mismanagement of resources permeates the
public sector, as recruitment and career growth is not indexed to capabilities and productivity
but on patronage and nepotism. The moral fabric of the society has been destroyed by official
and private systemic corruption. Religion which would have provided a platform of moral
rectitude is not spared by the malaise and canker worm of corruption.504
The rulers perpetuate themselves in power with the stupendous oil wealth at their disposal;
they are able to survive financial turbulence by resorting to borrowing against future rents to
cover gaps in finance. The people are totally alienated from the State, and are unable to
connect and assert a proprietary right to question how public funds are allocated and utilized.
They are disarticulate and unmobilized, and jostle to have their share of the rents.505
Contrary to the general façade of strength presented in the oil State, there is an inverse
relationship between abundance of wealth and economic growth and development, as
overwhelming dependence on rents destroy the economy progressively. The flurry and frenzy
of public sector spending mask the gross lack of productivity of oil-based economies. Oil
crowds out other enduring and productive economic endeavours, the State is characterized by
lack of innovation and is preoccupied strictly with the allocation of rents. While the State is
saddled with a behemoth and inefficient bureaucracy, it equally lacks State craft. The petro-
State is most politically inclined to suboptimal allocation of rents, since the usual constraints
imposed by cyclical scarcity is removed by the deluge of easy money. It is scarcity and
necessity which impels and drives innovation, the opportunity which the boom-burst circle
504 Note 296 supra. 505 Ibid.
247
provides for innovation is lost because borrowing against future rents is done by the rulers
during bursts to cover gaps in public finance.506
The petro-State is progressively afflicted by debilitating governance deficiencies. It suffers
from acute information asymmetry; lack of rein and monitoring mechanism of the economy
and lack of citizen input (participation).507
One of the untoward consequences of dependence on rents is the total neglect of taxation as a
means for generating public finance with attendant atrophy of institutions for tax
administration. There is lack of feed back mechanism which evolves from the consistent
discharge of tax obligations by citizens. The information asymmetry characterizing the fiscal
regime in the petro-State, is further reinforced by the acute opacity which characterize
transaction in the entire international oil industry. On the one hand, petro-States lack the
capacity and knowledge to verify actual production for fiscal purposes, on the other, citizens
also do not have information on the state of finances of the State as the management of and
allocation of rents is characterized by total lack of transparency.508
The inefficiency of the bureaucracy and the concentration of power at the centre and in the
executive stultify the States ability to evolve effective checks and balances in the tax system.
The inevitable outcome is a monitoring deficiency. For one, there is no motivation to
generate internal revenue hence economic producers are disinclined to comply with
506 Ibid. 507 Note 296 supra. 508 R. S. de Oliveira, Oil and Politics in the Gulf of Guinea, New York, Columbia University Press,
266 (2007).
248
regulations. In the oil sector, fiscal regulations are flouted because transnational oil
corporations have the latitude and capacity to stall or obviate regulations in the petro-State
and their State of nationality.509
Petro-States are characterized by the gradual and progressive disenfranchisement and
incapacitation of civil society. Thus there is no countervailing force which can provide
effective check on misrule. This is why the participation deficiency plagues most oil rich
nations. The people are totally alienated, lacking the spirit of proprietary rights in national
resources, hence they have no sense of indignation necessary to question and call the State to
account for stewardship. This is further reinforced because rents accruing from oil afford the
State an untrammelled and independent existence as it can dispense with taxing them. Petro-
States are generally disinclined to explore taxation as alternative or complementary source of
revenue, as it would engender the need and necessity to be accountable. The inter play of the
foregoing leads to the cultivation of enshrined rentier culture which is inimical to economic
growth and development.510
The foregoing enumerated deficiencies individually and collectively stultify efficiency in the
husbandry of petroleum resources and impacts in a rather untoward manner on
accountability, capacity building in the tax system and transparency in the allocation and
expenditure of rents. Equally these deficiencies frustrate the concerted crusade to bring
transnational oil corporations to account for their operations with respect to the quantum of
crude lifted and sundry payments to the host State, but most importantly, to be accountable
509 Note 338 supra. 510 Ibid.
249
for ecological dislocations resulting from exploration for and exploitation of hydrocarbon in
oil rich regions of the petro-State. The reversal of these difficiencies is a necessary and
sufficient condition for good governance in oil-based economies and the international oil
industry.511
4.11 STATE FAILURE AND MARKET FAILURE AS THE COSTS OF
CORRUPTION
Information asymmetry is the common thread which passes through revenue generation and
allocation modality in the oil State and the international petroleum industry. Transnational oil
corporations distort, manipulate and conceal information regarding the quantum of crude
lifted the expected yield of a well through the span of its active life and above all, the sundry
payments to the State. On their part, petro-States are even most opaque about their takes and
the expenditure and allocation of the revenue. The bidding system for oil blocks and
concession is shrouded in secrecy; the contract paradigm has failed. It is characterized by
manifold misrepresentations and malafides. Rentier States have the penchant for withholding
and concealing even the most innocuous information about rents derived from exploitation of
oil resources. Seismic and geological data on the magnitude of oil reserve, the rate of
exploitation of wells, sundry earnings from oil, and the expenditure and allocation of accrued
revenue are completely shrouded in secrecy. Secrecy is guaranteed by incorporating
confidentiality clauses in contracts with transnational oil corporations. These secrecacy
devises are instrumentality to conceal massive frauds and render despoiled funds untraceable
while concomitantly ensuring that there is no effective institutional framework for oversight
of the allocative process of oil money.512
511 Ibid. 512 Ibid.
250
The unholy alliance between the dominant actors in international oil, that is oil States and
transnational oil corporations facilitates and creates an environment in which opacity can
thrive. Distorting and manipulating information is elevated to an art form at the highest
official hierarchies of both the oil companies and government. This type of opportunistic
behaviour particularly has great allure for all the actors in the international oil industry
because of the immediate determinable premium which is derivable from such pattern of
behaviour. In the short run for instance, information asymmetry enable the transnational oil
corporations to over invoice costs of production, distort and doctor their statutory books and
reports to conceal the magnitude of their profits, reduce their assessable tax, thereby reducing
considerably the profit tax payable to governments, whether officials can be bribed to
enhance entry and competiveness and finally the extent to which they can undermine
environmental and human rights standards.513
The short term premium which oil States envision to derive from opacity impacts on choice
of contractual framework which will govern its relationship with oil companies, the
magnitude of accruing rents and whether such received revenues can be tracked and the
extent to which they are ready to compromise on safety practices, and environmental
standards.514
Information asymmetry is a total negation of the efficient market model in which all actors
have access to the same undistorted and unmanipulated set of information which gives the
true state of affairs of institutions within the market. Thus where opacity characterizes a
513 Ibid. 514 Ibid.
251
market or industry, it is a sure recipe for market failure, governance failure and ultimately,
State failure. For the petro-State it simply spell‟s doom, as it produces a festering ground for
graft and corruption of the highest magnitude. Oil funds are simply subjected with impunity
to outright despoliation. In the long run the nation is the most hurt, as its revenues are
drastically reduced. What asymmetry of information does is to facilitate dismantling of every
oversight mechanism which will compel accountability on the part of both the petro-State
and the transnational oil corporations. The absence of monitoring devices makes it possible
for huge sums of oil funds to pass unaccounted for from hand to hand both at the
international and municipal planes.515
Thus, the information deficit created by opacity at all levels of the international oil industry
and in the rentier State results in colossal market failures and State failures. In effect, it would
seem that the lack of commitment to the curtailment of the opportunistic behaviour pattern
characterizing the international oil industry is borne out of the fact that actors see corrupt
practices as a means to pursuing their interests and maximizing their personal and private
benefits.516
Since market failures and State failures are mutually reinforcing, the pervasive opportunistic
behaviour made possible by information asymmetry has created a lose-lose scenario for all
actors as information available to economic agents, be they firms, nations and brokers is so
515 N. Shaxson, Poisoned Wells: The Dirty Politics of African Oil, London, Palgrave Macmillan,
1,9,83,189 (2008). 516 Ibid.; H. Macartan, Escaping the Resource Curse, New York, Columbia University Press, 220
(2007).
252
distorted that decisions based on this information, which impact on future price structure
have no nexus with real and actual economic conditions.517
4.12 THE RELATIONSHIP BETWEEN ENERGY RESOURCES AND THE
RENTIER STATE
We appropriate the rentier State model to explicate the relationship of the Nigerian State with
Nigeria‟s stupendous petroleum and natural gas resources. The political economy of oil
impact on both the socio-economic and political structure of Nigeria. A rentier State can be
characterized as a State which depend overwhelmingly on externally generated revenues, or
rents such as oil revenues rather than being reliant on the appropriation of its population‟s
productive surplus in terms of taxes. A rentier State structure emanates in an economy in
which income derived from rents dominates the distribution of national income and the
State‟s plenitude in both the economic and political spheres is far reaching and
overwhelming. Since the rent, which is the income derived from the bounty of nature
constitutes a more than proportionate share of the GDP, and the economy lacks through-put,
the economy is bereft of a productive base. The terms distributive State and allocative State
are often used as stylistic variants of the term rentier in the literature, where the source of
State revenue, that is, rent is understated and its function in the distribution of and allocation
of resources is underscored.518
517 T. Dunning, Crude Democracy: Natural Resources Wealth and Political Regimes, Cambridge,
Cambridge University Press, 185 (2008). 518 H. Beblawi, The Rentier State, New York, Croom Helm, 49, 63, 83,138 (1987).
253
Aside from its rentier economy, Nigeria like most of its peers in the group of poor but oil rich
nations has a colonial legacy, the process of consolidation of State structure after
independence was stultified by a long spell of military dictatorship. Oil and natural gas
contribute 75 per cent of its GDP while oil constitutes 85 per cent of exports. The State
invests itself with property in petroleum and gas resources, revenues from oil and gas accrues
directly to the State and it has monopoly in the distribution of revenue. The State is
characterized by a behemoth bureaucracy, inefficiency in the husbandry of resources,
corruption pandemic and fiscal indiscipline in the expenditure of oil revenue, weak
institutional structures and generally reneges on the social compact to provide steady
electricity supply, affordable housing, portable water and food security.519
Nigeria‟s rentier State structure; its oil-based economy and its colonial legacy and very long
spell of military rule have combined to stultify growth and development. For one, as earlier
adumbrated colonialism and its attendant exploitation constitute a brake on economic growth
and development. The colonial State was an instrument of economic exploitation. The
colonial economy was structured to complement the economy of the metropolis as source of
raw materials for its industry, thus at independence, the post-colonial State inherited a very
weak economy with out industrial base. Post colonial efforts at nation building have
generally failed because of a combination of factors. The military incursion into governance,
the ascendancy of oil as major foreign exchange earner and the attendant erection of a rentier
State structure and rentier economy stultified industrialization and efforts to grow a modern
State economy. The rentier State and the rentier economic structure upon which it is based is
aversed to long term perspective economic strategic planning. It is more predisposed to
embarking on short term expenditure of revenue accruing from petroleum resources, due to
519 Note 6 of chapter one supra.
254
the pervasive corruption pandemic, oil revenues are subjected to despoliation, the capacity of
the State to innovate is too low to effect economic transformation.520
Secondly, in order to consolidate its authority in Nigeria, the colonial State systematically
dismantled and weakened traditional relations of power and institutions pursuant to staving
resistance of the people. Thus, the first task of the post colonial State ought to have been the
conscious rehabilitation and rebuilding of those traditional institutions, while concomitantly
dismantling the colonial State structure and its enshrined relations of power as a condition
precedent to nation building, growth and development.521
It is regrettable that the post-colonial Nigerian State preserved the colonial State structure,
thus the post-colonial State remains an instrument of oppression in the hands of the political
elite, whether military of civilian. Several outcomes derive from the foregoing. Analogous
to the axial and vertical relation of power under the colonial State, the people are totally
disenfranchised and alienated. With oil revenues accruing directly to the post-colonial
Nigerian State, it has an inexhaustible source of revenue, other than taxation of the surplus
production of the citizenry to guarantee it an untrammelled and independent existence from
civil society. The State progressively became non-accountable to the people, and
increasingly repressive, particularly under military dispensations. It deliberately weakened
civil society, through a mix of repression and dispensation of State patronage. It rewards
and or punishes through operant reinforcement acts or commissions of individuals and
groups which facilitates the perpetuation of existing relations of power and or punishes acts
520 Ibid.; D. A. Yates, The Rentier State in Africa: Oil Rent Dependency and Neocolonialism in the
Republic of Gabon, New York, African World Press, 232 (2005). 521 R. M. Grier, Colonial Legacies and Economic Growth, 98 Public Choice 317-335 (1999).
255
and omissions which it perceives as disparaging the status quo. The post colonial State like
its predecessor colonial State regards organized civil society, and social institutions as
veritable sources of opposition to its tyranny, hence the unremitting war of attrition it wages
on such groups and institutions. The over all effect is that the evolution of a strong civil
society which will constitute a check on misrule, compel accountability and ensure that the
people are the ultimate legitimizing force is aborted. However, because of the reciprocal
nature of the dialectic relationship between civil society and the State, in which, the inputs
of the former into governance tends to strengthen State capacity and effectiveness in the
provision of social goods and services, the unintended long term consequence of
progressive destruction of civil society by the State is that the State suffers atrophy,
institutional inertia and generally lacks the capacity to effectuate and effectively manage
economic resources thereby reducing its capacity to innovate and diversify the economy for
growth and development.522
Financial autonomy deriving from steady revenue inflows from crude sales creates a
disincentive in the Nigerian rentier State to diversify its revenue base and explore taxation
as alternative and or complementary source of public finance of development efforts. The
behaviour of the Nigerian rentier State is a deliberate strategy to reduce pressures on it to
account for its stewardship, and seek legitimacy from the people. Reliance on taxation
engenders the need for representation and democratization, rule of law and due process,
transparency in governance and accountability. Another factor which facilitates the creation
of a buffer or insulation from accountability between the State and civil society is its total
lack of leverage on the sector. The Nigerian oil economy is disarticulate as there is no nexus
522 W. Rodney, How Europe Underdeveloped Africa, Washington D .C. Howard University Press,
passim (1981).
256
between the oil sector and other sectors of the economy. The oil sector is an economic
enclave within the Nigerian economy which is completely detached from the domestic
economy. There is no forward and backward integration between the oil sector and other
sectors of the economy; it is dominated by transnational oil corporations, characterized by
large investment outlays, technology driven and not dependent on Nigerian labour for its
human resource inputs. The States overwhelming dependence on foreign direct investment
in the oil sector, and the oil majors amenability to authoritarian State structures, makes the
rentier State structure antithetical to democratization, rule of law and due process,
constitutionalism, good governance and transparency. In Nigeria, the rentier State structure
and the direct accrual of oil revenue to the State fuels political instability as competing
political elites seek to capture power with a view to capturing oil resource. The greed and
rapacity of the political elite fuels the resource conflict which characterizes the Nigerian
body politic and inspired the long spell of military rule.523
Infact the Nigerian military created the rentier State structure in Nigeria, as a device to
capture resources pursuant to despoliation of resources. The rentier State structure
determines State-society relation in Nigeria. The Nigerian State has consistently sought and
has attained financial autonomy, while it concomitantly weakened the institutional base of
civil society in order to perpetuate and preserve the rentier State structure.524
The dilemma in which the Nigerian rentier State finds itself is that while the State remains
axially and vertically stronger than the society, it is prone to economic shocks and
instability; conversely, greater civil society buy-ins and input into policy formulation and
523 K. Omeje, „The Rentier State: Oil-Related Legislation and Conflict in the Niger Delta, Nigeria,‟ 6
Conflict, Security and Development 211-230 (2006). 524 K. Omeje, State-Society Relations in Nigeria: Democratic Consolidation, Conflicts and Reforms,
London, Adonis & Abbey Publishers, 190 (2007).
257
governance are both necessary and sufficient precondition for sustainable growth and
development, political and economic stability.525
525 P. M. Lewis, „Civil, and Other Societies,‟ 6 Journal of Democracy 172-176 (1995).
258
CHAPTER FIVE
5.0 CASE STUDY: NIGERIA
Our preoccupation in this chapter is the examination of the domestic economic responses of
Nigeria to the inundation of its revenue by external receipts from exportation of oil between
1970s and 2009. The direct accrual of revenues derived from the export of oil to the State in
Nigeria underscores crucial issues of law and State policy.526
The study is predicated on the assumption that there is no State intervention and that the
macroeconomics of expansion in export and resultant deluge of foreign exchange and
attendant changes in relative prices of both traded and non-traded goods are well defined.
This underscores the problematic of the „dutch disease‟ which has been subjected to ample
explication in the literature to analyse the economies of petro-States. In the second phase of
our analysis, we posit that the dutch disease paradigm can be augmented by employing
capital inputs such as land and other capital goods into the model with a view to enhancing
its predictive value.527
In the third phase the overwhelming presence and regulatory role of the State in the economy
is brought to bear on the analysis, hence we argue that State policies can impact the supply
526 D. Rimmer, The Overvalued Currency and Over Administered Economy of Nigeria, 84 African
Affairs 435-476 (1985). 527 E. R. Larsen, „Escaping the Resource Curse and the Dutch Disease? When and Why Norway
Caught up with and Forged Ahead of Its Neighbours,‟ 65 The American Journal of Economics and
Sociology 605 (2006); M. Paldam, „Dutch Disease and Rent Seeking: The Greenland Model,‟ 13
European Journal of Political Economy 591-614 (1997).
259
dynamics of the economy sectorally. The foregoing phases of analysis shall constitute the
bases of our examination of alternative economic strategies of a typical oil-exporting
economy such as Nigeria.528
We premise our argument in phase one of our analysis on macroeconomic literature which
assumes that given only two sectors of an open small economy, that is the traded and non-
traded goods sectors; with the traded goods sector characterized by high export value while
the non-traded goods sector is characterized by very low export value and generally insulated
from international trade on account of transport cost. While the dynamics of international
demand and supply, determine the price of traded goods, through international trade, the
relative prices of non-traded goods are determined by the domestic price mechanism. For a
typical oil-based economy like Nigeria, non-traded goods will include, bridges, public
utilities and so on.529
Consequent upon the ascendancy of oil in Nigeria as the major foreign exchange earner, with
the resultant increase in revenues accruing to the State from export of oil resources; the
inundation of external earnings by oil revenues assuming the economy was hitherto in
equilibrium, the dutch disease paradigm states that there will be a shift in relative prices to
the advantage of non-traded goods. The foregoing is a function of the expansion in export
which leads to increase in supply of foreign currency relative to the supply of the Naira,
which induces a fall in the prices of foreign currency relative to the Naira, making foreign
528 M. Feridun, Nigerian Economy: Essays on Economic Development, Morrisville, NC., Lulu Press,
Inc., 3,14 (2005). 529 G. O. Odularu, Nigeria-U.S. Trade Relations in the Non-Oil Sector, Boco Raton, Fa.,
Dissertation.com, 3,11,21,27 (2008).
260
exchange cheaper with attendant increase in the demand for imports. In turn the increased
demand for imports leads progressively to the running down of foreign exchange reserves
which ab initio was a function of the expansion in export of oil. The relative lower price of
imports implies a fall in the relative price of traded goods in the Nigerian economy.
Conversely, the increase in the relative price of non-traded goods would invariably lead to
higher output of non-traded goods and a corresponding reduction in the output of the
Nigerian traded goods sector, which is being substituted by imports. The foregoing outcomes
is a function of the higher price of non-traded goods which translates to a higher real wage in
terms of traded goods and thereby a fall in output and employment in the domestic traded
goods sector and a lower real wage in terms of the non-traded goods sector thereby catalysing
an increase in employment and out put in the domestic non-traded goods sector. The outcome
deriving from the foregoing is that the greater proportion of labour in the domestic economy
will progressively gravitate away from traded towards the non-traded sector, leading,
assuming full employment, to a steep deep in the output of the domestic non-oil traded real
sector, such as agriculture and manufacturing.530
The inundation of foreign exchange reserves by expansion in export of oil also impact on
income which invariably catalyse unprecedented growth in aggregate expenditure on both
traded and non-traded goods. This triggers a vicious circle of expansion in aggregate
expenditure on traded goods, induces greater imports, and further depletion of foreign
reserves.531
530 P. Lewis, „From Prebendalism to Predation: The Political Economy of Decline in Nigeria,‟ 34 The
Journal of Modern African Studies 79-103 (1996); N. Budina, Nigeria’s Growth Recoord: Dutch
Disease or Debt Overhang? Washington D.C., World Bank, passim (2007). 531 Ibid.
261
The combined impact of expansion in aggregate expenditure coupled with changes in relative
prices results in equilibrium for both external and internal sphere; increase imports accounts
for external balance while internal balance leads to equilibrium in the domestic non-traded
goods sector.532
The domestic traded goods sector dwindling output is a function of the lower profitability of
investing in the production of such goods given the relative fall in their output and the
consequent rise in the real wage in terms of traded goods. Aside from output price relative to
wage, capital input prices also impact tremendously on profitability. Furthermore a
distinction must be drawn between the traded and non-traded contents of inputs, thus, the
traded and or non-traded contents of inputs would also determine profitability in the different
sectors of the economy. The higher the non-traded capital content of inputs in the cost of
production of a sector, the higher the adverse effect of real appreciation on value added in
that sector. The deliberate introduction of factor inputs and their relative prices represents the
second phase of our analysis.533
Arguendo, in the manufacturing real sector, the rise in the relative prices of non-traded
goods, all things being equal, will result in considerable pressure on those industries whose
inputs are overwhelmingly based on domestic resources far much more than those whose
inputs have greater imported components. This outcome is a function of the fact that
532 S.P. Schatz, „The Nigerian Economy Since the Great Oil-Price Increases of 1973-74,‟ 29 Africa
Today, 33-42 (1982); R. Ohr, „International Trade in Oil: Effects on the Balance of Payments and
Exchange Rates,‟ 19 Inter Economics, 123-128 (1984). 533 S.U.R. Aliyu, „Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in
Nigeria: An Empirical Investigation,‟ 11 Research Journal of International Studies 4-15 (2009).
262
domestic resources invariably do have higher proportion of non-traded goods which relative
prices are far higher than intermediate imported inputs.534
The role of the State and its implications for sectoral output is at this juncture, brought to bear
on the analysis. For this purpose, certain assumptions are made regarding the probable
behaviour of the State under an export boom scenario. Assumptions regarding probable State
behaviour are not however cast in granite, variation may occur. The analysis underscores the
pitfalls and the dangers implied in sudden upward surge in external transfers of financial
resources from abroad. Where such inundation is not efficiently managed, the outcome spells
doom for the nation.535
There are two distinct forms of State intervention in the economy. These are the „planning
mode‟ and the „crisis mode‟ of state intervention. The State‟s intervention in the planning
mode is a perspective plan and long-term. While State intervention in the crisis mode is
haphazard and lacks coordination; usually predicated on previous developments rather than
futuristic. Crisis mode interventions are short-term and have the potentials for undermining
or outrightly negating the goals and objectives set in the planning mode.536
534 N. Manson, „The Impacts of Trade Liberalization on Poverty in Nigeria: Dynamic Simulations in a
CGE Model,‟ 2006. Available at. http://www.csae.ox.ac.uk/conference/ 2007-ED:A-
LaWBiDC/papers/126-Manson 535 E. Cerutti, „Bolivia: The Hydrocarbons Boom and the Risk of Dutch Disease,‟ 2008 IMF Working
Paper, WP/08/154. Available at. http://www.imf.org/external/pubs/ft/wp/2008/wp08154.pdf 536 H. Papaconstantinou, Free Trade and Competition in the EEC: Law, Policy and Practice, London,
Routledge, 1,18 (1988); D.M. Trubek, „The Political Economy of the Rule of Law: The Challenge of
the New Developmental State,‟ 1 Hague Journal on the Rule of Law 28-32 (2009); N.M.K. Lam,
„Government Intervention in the Economy: A Comparative Analysis of Singapore and Hong Kong,‟ 20
Public Administration and Development 397-421 (2000).
263
The study posits that the mode of State intervention impact the output of the economy in both
the traded and non-traded goods sectors hence the need to highlight it in the analysis of
sectoral output sensitivity to external shocks.537
In addition to the foregoing mode of State intervention, the study also highlights form and
content of State intervention. The form consists of the procedure that the government
employs to reach its policy decisions, regarding, for instance the spending appraisal
procedure adapted or not for electing between alternative spending proposals. The content of
intervention refers to the type of policies adopted. Policy areas will include among others,
fiscal and monetary policy; sectoral distribution of investment policy; land-use policy; credit
policy; pricing policy for food crops; tariff policy and consumer subsidy policy.538
At the aggregate level, the rate of expansion in domestic expenditure is a function of the
growth in money, the growth in money is a function of the government budgetary
expenditure in petro-States, changes in money can be regarded as indicating changes in
aggregate expenditure. The composition of aggregate expenditure would depend upon the
changes in relative prices of traded and non-traded goods. Therefore, from changes in
government expenditure and its monetary consequences, the expected changes in relative
prices of traded and non-traded goods can be derived.539
At the sectoral level, the land Use policy affects the agricultural output by impacting on both
the incentives to invest on the land and access to credit by small scale farmers; credit policy
537 Ibid. 538 L. C. B. Pereira, „Economic Reforms and Cycles of State Intervention,‟ 21 World Development
1337-1353 (1993). 539 D.J. Mitchel, „The Impact of Government Spending on Economic Growth,‟ 2005. Available at
http://www.heritage.org/research /budget/bg1831.cfm
264
affects availability, price and access to technology and start-up capital, thus affecting the
level of output; the tariff policy affects incentives in the domestic traded goods sectors and
thereby their level of output; pricing policy for foods and export crops affects the output of
these sectors. In an oil-based economy like Nigeria, the stupendous financial resources at the
disposal of the State put it in good stead to ensure effectiveness of the foregoing policies. The
sectoral allocation of public investment and the types of projects undertaken, particularly in
infrastructure, would impact the cost of production, and therefore output, in various sectors of
the economy.540
The fact that oil revenues accrue directly to the Nigerian State result in an overwhelming role
of the State in the Nigerian economy resulting in growth of government budgetary
expenditure, comprising both recurrent and capital expenditure. The pattern of government‟s
capital expenditure is overwhelmingly centred on physical and human infrastructure and on
sundry services such as defence which are normally not provided by the private sector. By
their nature, States are not run as enterprises, so their services are non-traded because they
have no exchange value in international trade. Besides, State spending on infrastructure
strictly yields non-traded goods primarily and may subsequently remotely impact on the
output of traded goods sectors. Thus public expenditure in the construction of hospitals,
roads, dams, bridges and building complexes have little immediate impact on output of the
traded sector. Thus the inundation of State revenue by external transfers from exportation of
oil and attendant increase in government budgetary expenditure in a petrol economy
invariably will lead to increased investment in traditional public sector sphere of investment,
that is, capital expenditure on non-traded goods. The foregoing is reinforced by the oil boom
540 M. Nili , „Addressing the Growth Failure of the Oil Economies: The Role of Financial
Development,‟ 46 The Quarterly Review of Economics and Finance 726-740 (2007).
265
induced removal of the foreign exchange constraints, which naturally induces a pattern of
public expenditure which favours non-traded goods such as infrastructures that are deemed to
be constraints for the attainment of economic goals of the State.541
The study examines the sectoral allocation of public investment. It dwells on the allocative
process between traded and non-traded goods and specific industry allocation in the traded
goods sector. The tendency of the petro-State for investing in the non-traded goods sector is
significant in several respect, for one, it induces the gravitation of private investments
towards the non-traded goods sector during the oil-boom; secondly, it represents a multiple
leakage of investment from traded sector thus making an untoward impact on output in the
traded sector.542
The study focuses on the allocative process of public sector investment in the traded goods
sector. For the purpose of analysis, the study attempts to determine among the probable
investment strategies that could be adopted by the State. These include but not limited to the
unimodal and or a bimodal development strategy. While the cumulative and progressive
modernization of the entire sector is the objective of the unimodal strategy, the bimodal
strategy is ad hoc, uncoordinated modernization programme which channels resources to the
highly commercial and high capital outlay sub-sectors which results in a convoluted pattern
of public sector investment. That observable pattern of investment is equally replicated in
respect of the non-traded goods sector. For instance, investment in the development of
541 M. Katz, Lifting the Oil Curse: Improving Petroleum Revenue Management in Sub-Saharan
Africa, Washington D.C., International Monetary Fund, 9,23,36,46,52 (2004). 542 J. Amezegar, Managing the Oil Wealth: OPEC’s Windfalls and Pitfalls, New York, I.B. Tauris,
48,116,169,204 (2001).
266
Nigerian roads infrastructure evince a consistent preference for the development of extensive
network of modern motorways to the neglect of rural feeder roads, this pattern has very
untoward consequences for agriculture and rural development in Nigeria. Perhaps the one
single stroke which will get Nigerians back to work is the opening up of Nigeria‟s rural areas
where preponderance of the producing population resides. Thus, the adoption of bimodalism
in the agricultural sector would invariably result in drastic fall in output of the sector thereby
resulting in high opportunity cost for the overall economy. A bimodal strategy in the
agricultural sector shuts out the preponderance of small scale agricultural producers who can
neither muster the magnitude of the financial resources at the disposal of the large scale
urban commercial producers.543
At this juncture, a recap of our basic assumptions regarding the probable responses and
behaviour of the Nigerian State suffices. With the removal of the foreign exchange
constraints on the public sector spending by the inundation of foreign reserves by external
receipts from revenues accruing from export of oil, the State evinces a proclivity to embark
on „public sector‟ oriented capital expenditure, that is investments in non-traded goods
sectors particularly infrastructural development.544
Related to the foregoing is the adoption of the bimodal investment strategy for the traded
sector typified by the tendency to reallocate public sector investments and credits to heavy
543 W.H. Buiter,‟Macro-Economic Responses by Developing Countries To Changes in External
Economic Conditions, NBER Working Paper No. W1836, 1986. Available at
http://paper.ssrn.com/SO13/papers.cfm?abstract=341804; B. Pinto, „Nigeria During and After the Oil
Boom: A Policy Comparison with Indonesia,‟ 1 World Bank Economic Review 419-445 (1987). 544 A. von Lazar, „Oil and Development Planning: Implications for Nigeria,‟ 4 Energy Policy 330-342
(2003); Y. Kalyuzhnova et al., „Prudential Management of Hydrocarbon Revenues in Resource-Rich
Economies,‟ United Nations Discussion Paper Series No. 2005.4, 2005. Available at
http://www.unece.org/oes/disc_papers/ECE_DP_2005-4.pdf
267
industries in both agriculture and manufacturing. The immediate effect of this is the
substitution of labour intensive processes with automation which are based on foreign
technologies. This convoluted pattern of investment in the traded goods sector results in
direct and overwhelming State intervention in production, for example the gigantic steel
complexes built by Nigeria, which till date have never rolled out any steel.545
The avalanche of foreign exchange most likely will result in the removal of tariffs on imports
as the rising tide of demand for imports coupled with lack of foreign exchange constraints
provides the necessary financial muscle to settle the rising import bills.546
The stupendous financial resources at the disposal of the State induces it to subsidize food
and energy in the metropolis while the bulk of the populace reside in remote rural settlements
completely untouched by the seeming well being resulting from the export boom.547
The State structure becomes unwieldy, inefficient, with more recourse being had to crisis
mode State regulation. Allied to that is the lack of the absorptive capacity of the economy to
545 Daily Trust, November 12, 2003; A. Ibiam, Nigeria: Which way Forward for Steel Industry?
Thisday 29 December, 2008. 546 N. Okonjo-Iweala, „Managing Natural Resources Revenue: Lessons from Nigeria‟s Experience.‟
Available at
http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/0,,content
MDK:21632297¬menuPK:208955¬pagePK:2865106¬piPK:2865128¬th 547 Nigeria: The Economy. Available at
http://www.mongabay.com/reference/countrystudies/nigeria/ECONOMY.html
268
convert and adjust the product mix, price, demand and supply dynamics of a boom economy.
The impact of the foregoing has been ruinous.548
The traded goods sector perhaps bear the greatest brunt of the distortionary economic
dynamics of an oil induced export boom. The removal of pre-oil boom foreign exchange
constraint induces a frenzy of importation which undermines agriculture and manufacturing.
The deluge of foreign exchange, the inflationary pressure on non-traded goods occurs within
a narrow temporal framework far beyond the absorptive capacity of the economy. A vicious
circle is set in motion which ensnares Nigeria in overwhelming dependence on a single easy
source income which is not sustainable because of the wasting nature of oil.549
This segment of the study, explores the probable far reaching measures that can be adopted to
avert the long term economic danger of oil dependence. A possibility is to adopt the
Washington Consensus approach which prescribes the curtailment of State regulatory role in
the economy, while market forces are given full rein to convert and adjust dynamics of the
price mechanism, which will lead to equilibrium and by necessary implication and as a
matter of course to diversification in the traded goods sector of the economy before the oil
peters out. It is expected that the accumulated stock of non-oil assets will provide a solid
economic base in the post oil-epoch.550
548 N. Budina, „Managing Oil Revenue Volatility in Nigeria in Nigeria: The Role of Fiscal Policy.‟
Available at http://sitesources.worldbank.org/INTDEBTDEPT/Resources/468980-
1207588563500/4864698-1207588597197/AFR1427460Ch10.pdf 549 M. Katz, Lifting the Oil Curse: Improving Petroleum Revenue Management in Sub-Saharan
Africa, Washington D.C. International Monetary Fund, 30 (2004). 550 J. Williamson, „The Washington Consensus as Policy Prescription for Development.‟ Available at
http://www.iie.com/publications/papers /williamson0204.pdf; J. Clift, „Beyond the Washington
Consensus.‟ Available at http://www.imf.org/external/pubs/ft/fandd/2003/09/pdf//clift.pdf
269
In contradistinction to the non-intervention paradigm, a model wherein a tolerable modicum
of State intervention is adopted while concomitantly providing sufficient space for market
forces to induce diversification away from oil to non-oil traded goods sector pursuant to
creating a buffer against the vagaries and uncertainties of intermittent oil price shocks but
most importantly, the long term danger implied in the total depletion in the post oil-epoch.551
The assumption of the Washington Consensus model is that private actors in the economy
making rational choices premised on information accessible to all actors will, subject to
constraints of market forces allocate resources away from oil and non-traded goods to non-oil
traded goods. The model also assumes that there is an efficient capital market from which
private economic actors can source start-up capital. This model suffers a major limitation
because the theory of an efficient market which is embedded in the Capital Asset Pricing
Model is at variance with reality in markets. For one there is uncertainty and information
asymmetry which distorts facts, hence the market value of shares are far from their intrinsic
value. Secondly, while the foregoing is a fundamental foible of every market, it is
particularly acute in the case of the Nigerian capital market, fraught as it were with
opportunistic behaviour by actors and poor regulatory framework.
551 T.I. Palley, „Toward a New International Economic Order: Goodbye Washington Consensus, Hello
Washington Alternative.‟ Available at
http://www.thomaspalley.com/docs/articles/economic_development/new_intl_economic_order.pdf
270
Thus rather than channel financial resources to the traded real sector in Nigeria, the capital
market perpetuates the oil-boom phenomenon of bias towards non-traded sector investments,
the focus of investors is short term profitability in the service sector and the oil sector.552
This trend portends dire consequences, as Nigeria is inexorably inching towards full
depletion of its oil reserves without any perspective economic strategy. Nigeria will be
saddled with a behemoth non-traded goods sector which will inevitably collapse when the
flow of external receipts from oil exports abate with resultant constraints on foreign exchange
reinforced by the non functionality of the traded sector.553
The foregoing is compounded by the fact that once resources are committed to investment in
non-traded sector, particularly in infrastructure they are trapped and can not be reallocated to
the traded sector. Thus, it is, contrary to certain community of opinion impracticable as it is
improbable for market forces to reallocate resources from such public sector investment in
infrastructure to the traded sector, because once sunk, the resources can not be salvaged.
They are terminal investments with no throughput in terms of input, output, turnover and
profitability. In other word, they do not have traded multiplier effects.554
552 M. Hudson, „The End of the Washington Consensus.‟ Available at
http://www.thirdworldtraveler.com/Economics/End_Washington_Consensus.html 553 R.R. Cooke, Oil, Jihad and Destiny: Will Declining Oil Production Plunge Our Planet into
Depression? New York, Opportunity Analysis, 1,5,39,85,107,121,125,136 (2007); P. Roberts, The
End of Oil: On the Edge of a Perilous New World, New York, Mariner Books,21,44,143 (2005). 554 G. Guthrie, „Regulating Infrastructure: The Impact on Risk and Investment,‟ October 7, 2005.
Available at http://papers.ssrn.com/SO13/papers.cfm?abstract_id=757014; B.L. Barham, „Sunk Costs,
Resource Extractive Industries, and Development Outcomes,‟ 10 Research in Rural Sociology and
Development 159-186 (2005).
271
The long gestation, huge capital outlays of investment in the traded sector constitute major
constraints on the adoption of non-interventionist paradigm. Thus a modicum of tolerable
intervention is in order to enable the government to deploy resources strategically to develop
the traded goods sectors.555
The short term profit motives of private actors, long gestation and huge capital outlays of
investment in the traded sector precludes the unqualified adoption of non-intervention
paradigm. The foregoing nature of private sector investment inhibits the possibility of market
forces induced reallocation of resources to the traded sector. A modicum of benign State
intervention which by no means discounts the role of the market and the private sector will
facilitate the creation of a buffer against the vagaries and uncertainties of the post-oil epoch
when Nigeria would have reached full depletion of its oil.556
The solution lies in adopting an intertemporal planning model and perspective economic
strategy for Nigeria which when combined with coordinated and planned expenditure of
revenues will guarantee the accumulation of sufficient stock of traded non-oil assets against
full depletion. Such planned expenditure pattern will insulate the economy against
inflationary pressure, particularly in the non-traded sector, and the rise in exchange rates is
astutely managed such that the real traded goods sector will not suffer on account of import
substitution. Furthermore, the State must embark on balanced public investment strategy. It
must avoid overwhelming investment in non-traded goods sector; investment should be more
towards the traded goods non-oil assets, which have high salvage value and international
555 A. Bennett, How Does Privatization Work? London, Routledge, 63, 148 (1997). 556 Ibid.
272
exchange value. The crucial and fundamental crisis of developmentalism bedevilling Nigeria
is how to transit from the state of mere ground rents collector from transnational oil
corporations to a modern State economy, which is diversified away from oil dependence.557
5.1 CONCEPTUAL FRAMEWORK
The study examines and dwells on the impact which the oil boom has made upon the traded
goods sector of the Nigerian economy adopting an economic model which explicates the
relationship between the oil revenue induced growth in domestic expenditure, the steep rise
in real exchange rate, which indicates the rise in relative price of non-traded goods, change in
the product mix, demand and supply and the attainment of both internal and external
equilibra. The peculiar crisis of developmentalism bedevilling Nigeria has been characterized
in the literature as the dutch-disease.558
The study also examines the impact which the deluge of external receipts from oil export has
made upon policies, perspective strategies and projects of the Nigerian State. It also dwells
on the implications of the direct accrual of oil revenue to the Nigerian State.559
The study highlights the untoward effect of the lack of perspective planning model and the
dysfunctionality of the crisis mode pattern of planning. For the purpose of analysis, the
economy is divided into traded and non-traded goods sectors.560
557 K.S. Deffeyes, Beyond Oil: The View From Hubbert’s Peak, New York, Hill and Wang, 3 (2006). 558 B. Pinto, „Nigeria During and After the Oil Boom: A Policy Comparison With Indonesia,‟ 1 World
Bank Economic Review 419-445 (1987); M. N. Uwakonye, „The Impact of Oil and Gas Production On
the Nigerian Economy: A Rural Sector Econometric Model,‟ 5 International Business and Economics
Research Journal 61-76 (2006). 559 D. Rimmer, „The Over-Valued Currency and Over-Administered Economy of Nigeria,‟ 84 African
Affairs 435-446 (1985).
273
The distinction between traded goods and non-traded goods sectors underscores the fact that
traded goods have an exchange value which is determined exogenously on the platform of
international trade and include imports and exports. Conversely, non-traded goods have
negligible or no exchange value determined internationally, they are not demanded in
international markets.561
Thus for the non-traded goods to transform to traded good, the domestic price which
encapsulates all over head costs of production and a profit margin must be equal or lesser
than the international price of the goods. Conversely, for the goods to be imported, the
international price vis-à-vis the domestic price must be lesser or equal to the domestic
price.562
By introducing factor inputs into the model, certain outcomes are discernable. From the
perspective of labour wage relations, a lower real wage in terms of non-traded goods will
induce greater employment in the sector. Conversely growth in real wage in the traded goods
sector induces contraction of employment in the sector. The overall effect of the foregoing,
all things being equal is a gravitation of labour from traded to non-traded sector resulting in
an untoward contraction of output in the non-oil traded goods sector.563
560 I.O. Marcellus, „Development Planning in Nigeria: Reflections on the National Economic
Empowerment and Development Strategy (NEEDS) 2003-2007,‟ 20 J. Soc. Sci., 197-210 (2009). 561 M. Baxter, „Non-traded Goods, Non-traded Factors, and International Non-diversification,‟ 44
Journal of International Economics 211-229 (1998). 562 S. B. Deloach, „Do Relative Prices of Non-traded Goods Determine Long-run Real Exchange Rate?‟
30 The Canadian Journal of Economics 891-909 (1997). 563 Ibid.
274
The foreign exchange deluge from external receipts of oil revenues in turn induces a rise in
demand for domestic non-traded goods with a concomitant rise in demand for import
substituted traded goods. A corollary of this, given the removal of the foreign exchange
constraint is the rise in demand for imports. Thus the rise in domestic demand for non-traded
goods with the increased demand for imports result in both domestic and external equilibra.
External equilibrium is reached by means of running down of foreign exchange reserve,
which in turn increases the rate of foreign exchange appreciation, thus leading to the rise in
the relative price of imports and subsequent fall in their demand. Conversely, the rise in
demand for domestic non-traded goods induces a rise in their relative prices which
progressively will reach equilibrium through the dynamics of the price mechanism.564
The study equally introduces money as the determinant of aggregate expenditure into the
model. This is important, because the demand and supply for both traded and non-traded
goods depend on their relative prices. Relative prices in turn are affected by the growth and
or contraction in money. Increase in the stock of money induces spending.565
Thus in the case of increase in external receipts from oil exports, the study treats it like a
short term increase in the output of the traded sector. Hence to reach external equilibrium,
growth in money will have to be marched by growth in expenditure.566
564 N. Hashemzadeh, „The Dynamics of Current Account and Budget Deficits in Selected Countries of
the Middle East and North Africa,‟ 5 International Research Journal of Finance and Economics,
111-129 (2006). 565 R. Vaez-Zadeh, „Oil Wealth and Economic Behaviour: The Case of Venezuela,‟ 36 IMF Staff
Papers 342 (1989). 566 F. G. Fadil, „Money, Income and Sterilization: Tests For Causality in the Oil Economy of Kuwait,‟
21 Applied Economics 1305-1324 (1989); D.Suleman, „An Empirical Investigation Between Money
Supply, Government Expenditure, Output and Prices: The Pakistan Evidence,‟ 17 European Journal
of Economics, Finance and Administrative Sciences 60-68 (2009).
275
However, the growth in money, resulting from the export boom and the concomitant deluge
of external receipts from the export of petroleum is not derived from national productivity
per se. Indeed, the export boom results in a lower level of domestic production of traded
goods because of the rise in the cost of production occasioned by the increase in the prices of
non-traded goods. Consequently, the fall in domestic production of traded goods is invariably
substituted by higher imports, since there is no foreign exchange constraint the mounting
import bills are paid for by external receipts. This further leads to the running down of
accumulated revenues.567
The role of capital inputs in the macroeconomic matrix can not be over emphasized. This is
because, the cost of capital inputs invariably impact on the cost of production in the various
sectors. For the purpose of analysis, a distinction is made between traded and non-traded
capital inputs. Traded capital inputs in a non-industrial nation like Nigeria, include machinery
and variegated technologies. Non-traded goods normally would include land and nationally
sourced raw materials. Thus an increase in the relative price of non-traded goods, would lead
to a corresponding rise in the cost of production, for an industry which has a high non-traded
content of its inputs.568
Conversely, a fall in the relative price of traded goods would lead to a corresponding fall in
the cost of production in the sectors which have a high traded content of inputs. Thus the
567 Note 33 supra. 568 A. F. Darrat., „The Impact of External Price Shocks on the Oil –based Developing Economies,‟ 17
Journal of Economic Studies 60 (1990).
276
relative prices of both traded and non-traded inputs would invariably impact on the cost of
production and thereby the output of the different sectors.569
It suffices at this juncture to introduce the role of the State into the model. The pattern of
public expenditure of oil revenues in Nigeria and most oil-based economies is a function of
the direct accrual of revenues derived from the export of oil directly to the State. Hence the
impact of State expenditure of oil revenue on the economy is crucial to our analysis. In fact,
it is arguably the major source of the crisis of developmentalism bedevilling Nigeria and
most oil-based economies. We had dwelt considerably on the role, mode and types of State
intervention in the economy. We distinguished between the planning mode and the crisis
mode. A recap of the nature of the two modes suffices. In the planning mode, the State charts
a long term strategic course of growth and development, the ambit of which it confines its
regulatory role, public sector spending, lending and stimulation of the overall economy.570
Conversely, the crisis mode intervention is uncoordinated haphazard and shorter horizon. The
crisis mode intervention is prevalent in resource-based economies which are invariably in
transition and prone to external shocks and boom/bust circles occasioned by huge infusion of
external receipts into the domestic economy from the export of oil.571
569 R. E. Looney, „Diversification in a Small Oil Exporting Economy: The Impact of the Dutch Disease
on Kuwait‟s Industrialization,‟ 17 Resources Policy 31-41 (1991). 570 S. P. Schatz, „Pirate Capitalism and the Inert Economy of Nigeria,‟ 22 The Journal of Modern
African Studies 45-57 (1984); I. R. Akintoye, „Optimising Macroeconomic Investment Decisions: A
Lesson From Nigeria,‟ 22 European Journal of Scientific Research 469-479 (2008). 571 Ibid.
277
Because State interventions invariably have tremendous impact upon policy consistency, cost
of production, output and the incentive to invest in the economy, they are central and crucial
to the explication of the peculiar crisis of developmentalism bedevilling Nigeria.
So much for mode of State intervention. We will attempt to dwell on the types of State
intervention by distinguishing between its form and content.572
The entire process of policy formulation correspond the form of State intervention. The form
in public spending policy includes among other things the entire allocative and
implementation process of resources. In this regard, the pertinent question is, what is the
investment appraisal method adopted for choosing between alternative public sector
investment proposals? For one, as a result of the removal of foreign exchange constraints
induced by the deluge of external receipts from the export boom, there is the temptation and
real danger of lapsing into uncoordinated spending pattern, fiscal indiscipline and profligacy
in the expenditure of revenues accrued from oil exports, despoliation and wrong economic
choices. Many white elephant projects are hurriedly conceived and embarked upon, but never
completed owing to external shocks and cessation in steady flow of State revenues from oil.
The lack of intellectual input in governance, institutionalization of mediocrity in the
bureaucracy results in distorted conception and implementation of policies.573
Meritocracy is sacrificed in favour of a culture of patronage aimed at strengthening sectional
control of State power. The State evolved a rentier State structure which proclivity for rent
572 Ibid. 573 T. L. Karl, „The Perils of the Petro-State: Reflections on the Paradox of Plenty,‟ 53 Journal of
International Affairs 60 (1999).
278
seeking underscores and motivates every act of State. There is increasing tendency of the
rentier State to seek to perpetuate itself through the instrumentality of dispensation of
patronage, in employment, consumer subsidies and the award of lucrative contracts to
cronies. The capture of the apparatus of State is synonymous with the capture of resources.574
In itself, the content of State intervention connotes the types of policy adopted or not
adopted. Policy areas for our purpose include fiscal and monetary policy; public investment
policy in the various sectors; land use policy; credit policy; consumer subsidy policy; tariff
policy and so on.575
The land use policy would invariably impact on the incentive to invest on the land and also
access to credit by small scale farmers. As a non-traded input of production, the price of non-
rural and urban land would rise in response to the inundation of the foreign exchange
reserves by external receipts from the boom in export of oil. The growth in money as a result
of increased foreign exchange earnings results in expansion in government budgetary
expenditure on non-traded goods and services such as the construction of roads, buildings
and so forth. The bulk of these projects are land-intensive, the increased demand for land for
public works and small and medium scale agricultural production in sub urban areas results
in the appreciation of the value of land and corresponding rise in the price of land. The rentier
State structure with attendant rent seeking proclivity of the State motivates the redefinition of
property rights as the State evinces greater tendency to appropriate land for mineral resources
574 Ibid. 575 M. S. Marzouk, „Economic Diversification and Food Self-Sufficiency in an Oil-based Economy:
The Economics of Establishing an SCP Industry in Kuwait,‟ 24 The Journal of Developing Areas 351-
366 (1990); P. Collier, Economic Policy Options for a Prosperous Nigeria, London, Palgrave
Macmillan, passim (2008).
279
extraction, it vest property in the land and its appurtenant natural resources endowment in
itself. Thus State policy on land use would invariably constitute incentives and or
disincentives to invest on the land.576
Another aspect of State intervention which impacts the price mechanism is fiscal and
monetary policy. The role of the State is very significant in this respect in oil-based
economies because of the direct accrual of oil revenues to the State. State responses to the
increased foreign exchange earnings would determine the rate of expansion and composition
of expenditure. Thus there is a need to examine State responses to the increased foreign
exchange earnings as such responses would result in either increase or decrease in domestic
expenditure.577
That granted, the State may respond to huge surplus of receipts vis-à-vis payments on the
balance of payments by injecting such surpluses into the domestic economy, with attendant
impact on the relative prices and the expansion of various sectors of the economy.578
On the other hand, the State may elect to slow down or curtail the growth of money. Through
a process of sterilization, negative monetary and fiscal impact is avoided by strategically
investing in non-oil assets overseas. By means of this process external receipts are converted
576 Ibid. 577 M.J. Ibrahim, „Growth Prospects of Oil and Gas Abundant Economies: The Nigerian Experience
(1970-2000),‟ 35 Journal of Economic Studies 170-190 (2008). 578 Ibid.
280
to capital outflows in the current account thus insulating the economy from untoward impact
of radical infusion of surplus foreign exchange into the economy.579
The crucial point is the direct accrual of external receipts to the State in an oil-based
economy, and this is significant in several respects, for one there will be through-put if the
external receipts were derived as income on factor inputs in the productive process rather
than as rents from external sources. Secondly, since the receipts are not derived from
productive process and as earnings on factor inputs, the need to sterilize such funds before
reabsorption into the domestic economy as external receipts from investments abroad would
not arise as they are already absorbed in the normal run of the productive process.580
The State may also respond by operating a fixed exchange rate while concomitantly
maintaining a high rate of aggregate expenditure by increasing public sector expenditure
which by virtue of the removal of foreign exchange constraints can be carried out without the
usual financial inhibition which restrains unfettered public spending. The increased spate of
public spending is not financed by the traditional source of public finance, that is, taxation,
but through external receipts from the export of oil. As a consequence of increased public
spending, the inflationary pressure on the domestic economy rises above inflation abroad in
579 J. Wakeman-Lin, P. Matheieu and B. van Selm, „Oil Funds and Revenue Management in Transition
Economies: The Cases of Azerbaidjan and Kazakhstan.‟ Available at.
http://www.earthinstitute.columbia.edu/cgsd/stp/oil%20managementGeneral%20Documents/Azerbaidj
an_and_Kazakhstan/P; F. G. Fadil, „Money, Income and Sterilization: Tests for Causality in The Oil
Economy of Kuwait,‟ 21 Applied Economics 1305-1324 (1989); M. Mehrara, „The Asymmetric
Relationship Between Oil Revenues and Economic Activities: The Case of Oil-Exporting Countries,‟
36 Energy Policy 1164-1168 (2008). 580 N. Okonjo-Iweala, „Point of View: Nigeria‟s Shot at Redemption,‟ 45 Finance and Development
48 (2008). Available at. http://www.imf.org/external/pubs/ft/fandd/2008/12/Okonjo.htm;
N.Konstantinidis, „The Political Economy of Resource Rent Distribution,‟ 2009. Available at.
http://www.ibei.org/admin/uploads/publications/29/ang/WP_IBEI_19.pdf
281
response to the increase in the relative prices of non-traded goods. The growth in domestic
expenditure would in turn lead to rise in imports, because of the combined effect of removal
of foreign exchange constraint, rising wages and the lower prices of imports vis-à-vis the
products of import substituting sectors of the economy. Increased wages and attendant
increase in imports progressively, drains the foreign exchange reserves leading to eventual
equilibrium.581
The last option, which serves to complement either of the first two options, is to remove trade
barriers like tariffs and imports restrictions. Consequently, removal of restrictions would lead
to a fall in the relative prices of imports with a corresponding rise in the demand for imports.
The increased demand for imports will have to be financed by the accumulated foreign
exchange, thus resulting in equilibrium.582
Most very poor oil-based economies like Nigeria have not only employed the means of the
appreciation of the exchange rate as a response to the increased foreign exchange earnings,
but have evinced a preference for establishing a fixed exchange rate whilst simultaneously
increasing public expenditure.583
We must reiterate the significance of the direct accrual of oil revenue to the State. As the sole
recipient of such funds the State can decide to spend the fund in which ever way it chooses. It
581 P. K. Narayan, „The Government Revenue and Government Expenditure Nexus: Empirical
Evidence From Nine Asian Countries,‟ 15 Journal of Asian Economics 1203-1216 (2005). 582 K. Ajayi, „The Political Economy of Globalization and Possibilities For Regional Economic
Development in Africa,‟ 13 J. Soc. Sc. 109-118 (2006). 583 N. Okonjo-Iweala, „Nigeria‟s Economic Reforms: Progress and Challenges.‟ March 23 2007.
Available at. http://www.brookings.edu/papers/2007/0323globaleconomics_okonjo-iweala.aspx
282
may engage in direct importation, embark on massive domestic public spending or better still
sell foreign exchange to private actors, who will then import.584
The problematic of the foregoing adjustment modalities is underscored by the distortionary
impact of such oil revenue financed high rate of public spending. For one, the increased
revenue from oil is neither a function of nor a reflection of domestic productivity. Thus the
increased public spending financed by such external receipts represents domestic deficit
expenditure, in view of being unearned external receipts from rents. The impact of such
deficit spending can be ruinous if not properly managed. The easy source income soon
undermines traditional means of budget finance, that is taxation.585
5.2 SECTORAL ALLOCATION OF INVESTMENTS
As earlier argued, the macro economic responses of the State in a poor developing but oil
endowed economy is significant and central to our analysis because of the direct accrual of
oil revenues to the State. The fact that the State is the sole recipient of external transfer of
receipts from export of oil means that it can allocate the stupendous financial resources at its
disposal the way it deems fit. Thus whether oil revenue will facilitate or hinder growth will
depend entirely on not only the expenditure pattern of such revenues but most importantly,
the allocation of public expenditure between sectors and within individual sectors.586
584 G. Weszkalnys, „The Curse of Oil in The Gulf of Guinea: A View From Sao Tome and Principe,‟
108 African Affairs 679-689 (2009). 585 N. Hashemzadeh and L. Wilson, „The Dynamics of Current Account and Budget Deficits in
Selected Countries of the Middle East and North Africa,‟ 5 International Research Journal of
Finance and Economics 112 (2006). 586 A. Esanov, M. Raiser and W. Buiter, „Nature‟s Blessing or Nature‟s Curse: The Political Economy
of Transition in Resource Based Economies.‟ European Bank For Reconstruction and Development
Working Paper No. 65, November 2001. Available at http://www.nber.org/ wbuiter/curse.pdf
283
Traditionally, public investment tends to be towards non-traded goods, particularly
infrastructural development. Thus with the foreign exchange constraint removed by the
deluge of external receipts from the boom in oil export, the State has unfettered access to
funds to finance at a very large scale infrastructural projects which have large capital
outlays.587
The first macroeconomic response of a poor developing economy to the increase in foreign
exchange earnings is the rise in the demand for import substituted traded goods, because of
the removal of foreign exchange constraint. Thus public financial resources are freed for
investment in the non-traded sector, also private investment which is oriented towards short-
term profitability gravitate towards investments in the non-traded sector.588
This mode of sectoral allocation of spending will progressively undermine the domestic
traded-goods sector because of the tendency of the State to reallocate resources from traded
to non-traded sector. The inherent danger of this pattern of public investment is underscored
by its implications for post oil-boom scenarios, when the oil would have totally depleted,
with the economy left with no alternative revenue source to sustain the inflow of a steady
stream of revenue it may be saddled with a behemoth non-traded sector which is ill-adjusted
to the dynamics of the post-oil epoch.589
587 R. A. Brealey, I. A. Cooper and M. A. Habib, „Investment Appraisal in the Public Sector,‟ 13
Oxford Review of Economic Policy 12-28 (1997); D. Holtz-Eakin, „Public-Sector Capital and the
Productivity Puzzle,‟ 76 The Review of Economics and Statistics 12-21 (1994). 588 B. Pinto, „Nigeria During and After the Oil Boom: A Policy Comparison with Indonesia,‟ 1 World
Bank Economic Review 419-445 (1987). 589 Ibid.
284
The development strategy adopted by the State would determine the pattern of resource
allocation within both the traded and non-traded sectors of the economy. Thus intra-sectoral
as contradistinguished from inter-sectoral allocation of resources is predicated on either of
two development strategies, that is, unimodal or bimodal strategy. Unimodal entails gradual
development of the overall economy in an evolutionary process which organically evolves
institutions and adapts technologies which are compatible with a holistic development of all
the sectors. Under unimodalism, the role of the State in the economy strictly entails creating
the enabling environment for growth and development and providing a holistic regulatory
framework for the whole economy. The State precludes itself from micro participation in the
economy, while providing ample opportunities for a private sector led growth and
development.590
What distinguishes unimodalism from its converse, bimodalism is the difference in State
response to the sudden export boom and rise in external receipts. Bimodalism entails a
tendency on the part of the State to undertake micro management of the economy, convoluted
pattern of public sector investment, particularly in ill-conceived long term capital projects
which have large capital outlays. Bimodal development strategy is haphazard and
uncoordinated; it is non-evolutionary, involving the whole sale transplant of foreign
institutions and technologies which are not adaptive to domestic conditions. One of the
outcomes of bimodal strategy is that preponderance of the population is shut-out from the
bourgeoning formal sector which is oriented towards large-scale capital intensive economic
activities. Thus an informal sector which enjoys an untrammelled parallel existence with the
formal sector thrives, with its own code of conducts and rules of economic relationship.
590 USAID, „Improving The Policy, Regulatory and Enforcement Environment For Private Sector-Led
Trade and Investment,‟ AGCI Component I Brief-January 2009. Available at.
http://www.usaid.gov/locations/sub-saharan_africa/initiatives/jan09_trade_pr_AGCI_brief.pdf
285
Perhaps, the most crucial challenge of developmentalism in Nigeria is how to rein in the wild
and untamed economic capacity of a large informal sector, characterized as it were by
opportunistic behaviour of its actors, very high transaction cost, information asymmetry
which increases vagaries and uncertainties of economic activities.591
Successive administrations in Nigeria have consistently responded to the increase in foreign
exchange receipts resulting from oil boom by adopting a bimodal strategy, which invariably
impact the traded goods sector in an untoward manner. The State assumes direct micro roles
in the economy by embarking on large scale capital intensive investment in both
manufacturing and agriculture ostensibly to fast track economic growth and development.
However these projects are usually as a matter of course ill conceived and badly executed, it
would seem that such behemoth projects have great allure for the inept and corrupt Nigerian
political elites and bureaucrats because it is the best way to justify very large disbursements.
Most disbursements are made for phantom projects.592
5.3 LAND USE POLICY
One of the outcomes of the increase in revenues from oil export is a more than proportionate
rise in the price of urban and sub urban land. As a non-traded factor input of production,
steep rise in the value of land would lead to a corresponding increase in the cost of
production, particularly for agriculture and certain industrial activities in which land is the
dominant input.593
591 E. Buscaglia and W. Ratliff, Law and Economics in Developing Countries, Stanford, Hoover
Institution Press, 9-27 (2000). 592 World Bank, Angola: Oil, Broad-based Growth, and Equity, Washington D.C. World Bank
Publications 5,14,39 (2007); G. G. Moser, S. Rogers, R. H. van Til and R. Kibuka, Nigeria:
Experience With Structural Adjustment, Washington D.C. International Monetary Fund, 20 (1997). 593 World Bank, Land Policies For Growth and Poverty Reduction, Washington D.C., World Bank
Publications, 12 (2003); M. Dobb,
286
As a result of the rentier structure of the Nigerian State, and its concomitant rent seeking
behaviour, it has alienated all lands from all customary owners whilst investing State
Governors with ownership of all lands in the State. The Land Use Act 1978 provides for 99
years lease after which ownership reverts to the governor.594
This land use policy is not fortuitous; it is perhaps the crux of the Nigerian question. The
Nigerian State used its legislative powers to redefine property rights in Nigeria, pursuant to
resource control. In itself, the land use policy is fundamentally significant, because land can
not be characterized simply in terms of the earth surface, but encompass the appurtenant
variegated minerals buried in its subjacent depth. Since ownership of subjacent minerals
inheres in the owner of the superjacent surface, it is logical for the Nigerian rentier State to
appropriate for it self all lands in the Federation in order to capture resources. Thus there is
the spectre of nationalization, attachment and seizure of land in Nigeria which is a
disincentive to investment on land. The oil rich Niger Delta region of Nigeria has particularly
borne the brunt of the land use policy under the Nigerian Land Use Act 1978. Farm lands,
fishing ponds are appropriated by the government pursuant to allocation as oil blocs. Aside
from the trauma of alienating the people from their lands, oil operations invariably results in
severe ecological dislocations.595
594 Land Use Act Cap. L. F. N. 595 R. T. Ako, „Nigeria‟s Land Use Act: An Anti-Thesis to Environmental Justice,‟ 53 Journal of
African Law 287-304 (2009).
287
5.4 TARIFF POLICY
Perhaps the most ruinous aspect of the Nigerian economy is the adoption of free trade, which
main feature is the removal of trade barriers such as tariffs on imports. In no other area is the
untoward impact of globalization felt than in trade. Thus the Nigerian market has become a
veritable dumping ground for all sorts of substandard goods which are far cheaper than the
output of domestic import substituting industry.596
The non-competitive price of the output of the domestic traded sector is partly due to the
higher transaction cost which is a function of the steep rise in price of non-traded goods
which makes them less competitive at international prices. Thus, the lower comparative price
of imports to Nigerian goods confers a comparative advantage on the export from
competitors. Thus there is a need to shield domestic traded sector from international
competition by means of tariff. The macro-economic response to increase in revenue and
foreign exchange is unfettered consumption of imported products. Tariff barriers increase the
relative price of imports thereby making them less competitive.597
5.5 CREDIT POLICY
Interest rates in Nigeria are very high ranging from between 35 per cent to 45 per cent. Small
and medium scale businesses are thereby starved of vital start-up funds and accessibility to
new technologies which would ensure efficient and optimal production.
596 V. Thomas and J. Nash, „Reform of Trade Policy: Recent Evidence From Theory and Practice,‟ 6
World Bank Research Observer 219-240 (1991); A.O. Adewuyi, „Trade Policy Reform and Technical
Efficiency in Nigeria‟s Manufacturing Sector.‟ Available at.
http://www.unidep.org/Release3/Conferences/AES_2006/IDEP-AES-06-02.pdf 597 Ibid.
288
Lending policies of banks in Nigeria tend to favour short-term investments which have huge
capital outlays, high turnover and profitability. The preferred lending policy of banks
precludes firms in the traded goods sector from availing themselves of financial
intermediation services which the bank should have offered. Nigerian banks prefer short-term
opportunistic operations such as foreign exchange speculation.598
5.6 CONSUMER SUBSIDIES
Subsidies can be used as a veritable tool for reducing inflationary pressures caused by the
increase in the price of an essential commodity, which would impact adversely on the cost of
production of the different sectors. In Nigeria, petroleum products and agricultural inputs are
ostensibly subsidized. There is however an inherent danger in using subsidies to lower prices,
as it could result in inefficient allocation of resources and wasteful if not properly
managed.599
The subsidization of fertilizer and other agricultural inputs has led to inefficient allocation of
resources as the fertilizers are sold to middle men who collude with officials. The ultimate
beneficiaries of the subsidy, small-scale farmers buy at a prohibitive price because of the
mark-up by middle men.600
598 M. A. Adebiyi and B. Babatope-Obasa, „Institutional Framework, Interest Rate Policy and the
Financing of the Nigerian Manufacturing Sub-sector.‟ Available at
http://www.commerce.uct.ac.za/Research _Units/DPRU/DPRU-
Conference2004/Papers/Institutional_Framework_Interest_Rate_Policy_Obasa_Adebiyi.pdf 599 S. Gupta, M. Verhoeven, R. Gillingham, C. Schiller, A. Mansoor, J. P. Cordoba, Equity and
Efficiency in the Reform of Price Subsidies: A Guide For Policy Makers, Washington D.C.,
International Monetary Fund, 2, 13 (2000). 600 E. Wesley, and F. Peterson, A Billion Dollars A Day: The Economics and Politics of Agricultural
Subsidies, New York, Wiley-Blackwell, 17, 205 (2009).
289
The State may employ food crop pricing policy to depress the prices of domestic staples by
embarking on massive food importation, which against the backdrop of the increased revenue
from oil boom is invariably the response of the government in an oil-based economy like
Nigeria, since the foreign exchange constraint is absent. Similarly, the State may induce
lower prices for food crops by subsidizing agricultural production.601
Conversely, the government may engage in strategic purchase of major staples during gluts,
thereby ensuring that prices do not fall below a level that would constitute a disincentive for
future production. Food crops, particularly grains could be released from the strategic
reserves pursuant to curtailing rising prices of food crops. The foregoing food crop pricing
mechanisms are however ill-adapted in Nigeria due to a myriad of factors, ranging from
dominance of small scale subsistence farming, lack of modern storage facilities, lack of
technical competence of agricultural agencies and above every other consideration lack of a
well defined and focused food crop pricing policy.602
5.7 THE MACRO IMPACT OF OIL REVENUES ON AGGREGATE EXPENDITURE
Our purpose in this segment is to examine the macro economic impact of the rise in the
foreign exchange earnings of Nigeria as a result of the oil boom of the 70s and 80s. We also
dwell on the crucial role of the State in the expenditure of revenues as oil revenues accrued
directly to it. The steep rise of oil prices from the 70s through to the early 80s resulted in an
unprecedented increase in oil earnings from the 1973 figure of $3.6 billion to about $25.3
billion in 1980, representing about 600 per cent rise. While the proportion of oil in total
export earnings rose from 58 per cent in 1970 to a staggering 97 per cent in 1980. Thus
601 M. Kherallah, Reforming Agricultural Markets in Africa, Baltimore, International Food Policy
Research Institute, 75, 86 (2002). 602 Ibid.
290
government revenues rose steeply from N1,695 million to N10,912 million between 1973 and
1979, representing a compound growth of 30 per cent per year between 1973 and 1979. The
proportion of petroleum profit tax and mining rents and royalties mainly from oil
explorations rose from 60 per cent in 1973 to 80 per cent in 1979. While annual non-oil
revenues growth in the same period was 16 per cent. Export duties deeped from N41 million
in 1970 toN0.2 million in 1979.603
Unfortunately, the increase in external receipts from the oil export boom and the attendant
appreciation of the Naira was not capitalized upon to shore up Nigeria‟s foreign reserves.
Rather the State responded by higher expenditure on both foreign and domestic goods.
Imports rose at 32 per cent between 1973 and 1980 while export grew at 28 per cent in the
same period. Total current account payments, encompassing payments for services rose at
24.7 per cent per annum. Infact total current account payments were generally greater than
total exports for the period under review. Tariffs barriers were generally removed or relaxed.
It is clear from the foregoing that the Nigerian State responded to the increase in foreign
exchange earnings and attendant balance of payment surplus by stimulating higher levels of
domestic expenditure by increasing State expenditure.604
The foregoing explication of the growth in government budgetary expenditure with its
monetary consequences makes it incumbent to dwell considerably on the nature and structure
of government expenditure which catalysed those changes. The nature and pattern of
603 M. Katz, lifting the Oil Curse: Improving Petroleum Revenue Management in Sub-Saharan
Africa, Washington D.C., International Monetary Fund, 31 (2004); International Monetary Fund,
Annual Report, 1983, Washington D.C. International Monetary Fund Publications, 393 (1983). 604 Ibid.
291
government spending and the magnitude of spending both have a combined effect on the over
all economy.605
5.8 THE NATURE OF GOVERNMENT EXPENDITURE
The index of government budgetary expenditure rose steeply in 1972-3 from a base of 100 to
1,205 in 1977/78 this is indicative of the States response to the sudden growth in foreign
exchange earnings resulting from the boom in oil export. This response is characterized by
uncoordinated urgency to spend revenues. Most of the external receipts from oil export were
held in liquid form with the banks. An unprecedented wage and salary increase to the public
service was carried out through the Udoji salary awards. Wages rose steeply by 100 per cent
and 130 per cent at the top and bottom of the scale respectively with effect from 1 January
1975. The index of federal current expenditure rose from 100 in 1972/3 to 443 in 1975/6
while current expenditure share of total federal expenditure rose from 33 per cent to 60 per
cent between 1974 and 1975.606
Perhaps the most effective way the government effectuated its spending was to embark on ill-
conceived projects in the non-traded sector. Project appraisal procedures were fraught with
corruption. Between 1972/3 and 1975/6, the index of federal capital expenditure rose from
100 to 335. Due processes such as competitive open bidding for capital intensive high cash
outlay projects were abandoned. State agencies and bureaucrats performance was evaluated
on the basis of their plan implementation ratios.607
605 Ibid. 606 G. G. Moser, S. Rogers, R. H. van Til, and R. Kibuka, Nigeria: Experience With Structural
Adjustment (Occassional Paper, International Monetary Fund), Washington D.C., International
Monetary Fund Publications, 20 (1997). 607 M. Sturm, F. Gurtner, and J. G. Alegre, Fiscal Policy Challenges in Oil-Exporting Countries: A
Review of Key Issues, Frankfurt, European Central Bank Publications, passim (2009).
292
The avalanche of foreign exchange and the frenetic pace at which it was being run down soon
resulted in absorptive crisis, as poorly developed infrastructure and paucity of human capital
resulted among other things in congestion at the ports in 1975. Accumulated foreign
exchange reserve was completely run down by 1976 while the expenditure index rose to
1,000 marks resulting in balance of payment and budget deficit by 1979.608
The low salvage value, non-traded and irreversibility of public investment further
compounded the problem. The deficits grew unabated. The General Obasanjo government
introduced austerity measures in 1979 which include contractionary monetary policies,
increased tariffs, greater import controls, resort to internally generated taxes and
diversification of the economy, more rein on inflationary pressures.609
The lessons of the oil price shock and the balance of payment and budget deficits were lost
on the Shagari administration which embarked on the most profligate expenditure of
increased revenue from the rise in oil price from $19 to $34 between 1979 and 1980. Many
ill-conceived capital projects were hurriedly embarked upon of which the Federal Capital
Territory project at Abuja is the most ruinous of the economy. Other ill-conceived projects at
this period include large irrigation projects and steel complexes which to date have not rolled
out any steel. The steep growth in public expenditure coupled with the sharp fall in oil prices
608S. P. Schatz, „Pirate Capitalism and the Inert Economy of Nigeria,‟ 22 The Journal of Modern
African Studies 45-57 (1984). 609 M. N. Oluba, „How Years of Fiscal Deficits Emasculated the Nigerian Economy,‟ 5 Economic
Reflections 1-7 (2008).
293
from 1982 resulted in the reduction of the nation‟s foreign reserves to a paltry N900 million
which can only discharge only one month of import obligation.610
Rising relative prices of traded and non-traded goods increased inflationary pressure, very
large balance of payments and budgetary deficits led to economic crisis and a groundswell of
negative appraisal of the gross mismanagement of the economy and a huge debt overhang
increased public despair and mistrust of government‟s management of the economy, the
polity was heated up resulting in the ouster of the Shagari government in 1984 in a coup
de’tat.611
Aside from underscoring the dire need to diversify Nigeria‟s oil based economy, which is
reliant as it were on a single easy source income which is not sustainable due to the
exhaustible and non-renewable nature of petroleum resources and its susceptibility to price
volatility, the foregoing perhaps provides an insight into the economic cost implications of
political instability. The inefficiency characterizing the husbandry of Nigeria‟s oil resources;
the lack of coordination, fiscal indiscipline, profligacy and the hurry to run down revenues
are all effects of political instability resulting from failures of laws, legal institutions and key
institutions of State. Hence there is congruence between economic stability and political
stability.612
610 Ibid. 611 S. Othman, „Classes, Crises and Coup: The Demise of Shagari‟s Regime,‟ 83 African Affairs 441-
461 (1984). 612 Ibid.
294
It suffices to examine the pattern of capital investment and distribution of public investment
in the period under review that is 1970-4, 1975-9, 1980-9, 1990-9, 2000-9. Pattern of public
spending from the 1975 base year has been uniform and consistent, which underscores the
consistency of development policies and its budgetary implications. A marked departure from
the pre-oil boom pattern of public expenditure is discernable in the post oil-boom. The post
oil boom pattern is underscored by greater share of transport, communications and power,
with a progressive fall in the share of education, concomitantly, agriculture, manufacturing
and mines, and health have all had reduction in share of investment. Significantly though,
infrastructure and services share in both periods have very high share. In fact physical and
social infrastructure and social services constitute 80 per cent of public investments in the
post-oil boom period, comprising of heavy investment in transport especially roads,
communications, education, administration, defence and security. As earlier adumbrated,
investments in infrastructure are of low salvage value and are non-traded. The foregoing only
serves to confirm our observation that public investment are invariably directed towards the
production of non-traded goods. Concomitantly the private sector in an oil-based economy
also tends to allocate resources away from traded to non-traded goods because of the short
term opportunistic profit orientation in a developing economy.613
The foregoing trend cumulated in the Nigerian government approval in 1981 and 1982 share
of capital expenditure of 2.5 per cent and 10.6 per cent to Abuja and steel respectively. In
itself, the Abuja project was conceived by the General Muritala regime and was originally
envisaged for execution over an initial thirty years period such that the cost can be evenly
spread out over the period to avoid its distortionary impact on the economy. The
613 I. R. Akintoye, „Optimising Macroeconomic Investment Decisions: A Lesson From Nigeria,‟ 22
European Journal of Scientific Research 469-479 (2008).
295
prioritization of the project with attendant allocation of considerable proportion of resources
to its execution perhaps is a quintessential instance of the misapplication of public resources
to the production of non-traded goods, a tendency which is reinforced by the direct accrual of
oil revenue to the State in Nigeria.614
The skewed pattern of investment allocation is equally replicated within the sectors. For
example of the 20 per cent allocated to agriculture and industry, considerable proportion is in
capital intensive large-scale projects. The build-up of the steel industry accounts for about
half of industry‟s allocation with small scale industries allocation less than 5 per cent.615
614 Ibid. 615 Ibid.
296
CHAPTER SIX
6.0 OVERVIEW OF PETROLEUM ECONOMY DEVELOPMENT MODELS
6.1 INTRODUCTION
Oil based economies have had to grapple in the last three decades with developmental issues
crucial to national survival, and perhaps the most fundamental of these issues is that of
converting their economies to modern and dynamic economies. Of great concern to this
group of nations is how to transit from the state of gross collectors of ground rents from
transnational petroleum corporations to integrated economies propelled by revenues realized
from the exploitation of their natural resources, such that they are able to attain sustainable
growth and development by means of linkages between their oil sectors and the non-oil
sectors of their economies. Importantly, even though the oil sector remains the linch pin of
the economies of this group of nations, the lack of forward and backward integration of the
oil sector vis-à-vis non oil sectors nullifies the over all economic premium derivable from the
exploitation of their oil resources.616
The foregoing submission is made at a great risk of being reduced to an absurdity. It is
however a platitude to posit that resource based economies should have built in stabilizers,
such as most oil-based economies lack, against the vagaries and uncertainties of the post oil
epoch when the oil would have been fully depleted, and adopt a model of planned
expenditure of their oil revenues. The crucial issue is not the magnitude of the monetization
of the economy, a phenomenon, which in itself constitutes an albatross to these economies;
616 U. Bellema, C. Ajayi and K. N. Eloji, „The Nigerian Content Policy in the Oil and Gas Industry:
Implications for Small to Medium-Sized Oil-Services Companies.‟ Available at.
http://www.iaabd.org/2009_iaabd_proceedings/track 7i.pdf
297
but the reckless fiscal indiscipline which is being practiced, obliviously of the wasting nature
of petroleum resources. The high dependence of these economies on their oil resources is
manifested by the large share of oil in total export earnings.617
That granted, by linkage it is meant a reciprocal relationship between all sectors of the
economy, in which the expansion of a given sector, provides opportunities for other sectors to
develop their output, either by using the given sectors inputs in a forward linkage, or by
providing their outputs to be used as an input into the given sector‟s production in a
backward linkage. If it is the case that the backward linkages of the petroleum sector are
machinery, transport equipment, services and technologies and so forth, then, the pertinent
question would be, to what extent are these inputs for the petroleum sector derived
endogenously? For most oil exporting countries, the high rate of reliance on imported inputs
negates the seeming linkages between their oil sectors and non-oil sectors of their economies.
For the petroleum sector in Nigeria to be able to catalyse sustainable growth of the economy,
it must have both high backward and forward linkages. The linkages must be total, if oil is to
have the desired impact on the overall economy. The stunted and truncated growth of other
key sectors of the Nigerian economy, such as agriculture and manufacturing, characterized by
under capacity utilization is symptomatic of low forward linkages between key sectors of an
oil-based economy.618
Oil-based economies are not oblivious of the challenges and opportunities in the global
business environment, even though they have not in most cases mustered the political will to
617 B. Najman, R. Pomfret and G. Raballand, The Economics and Politics of Oil in the Caspian
Basin: The Redistribution of Oil Revenues in Azerbaidjan and Central Asia, New York, Routledge,
30, 64,97 (2007). 618 T. L. Karl, The Paradox of Plenty: Oil Booms and Petro-States, Los Angeles, University of
California Press, 44 (1997).
298
effect the far reaching changes needed to transform their economies. They have responded
haphazardly with a plethora of models of petroleum economic development. It is therefore
the preoccupation in this chapter to highlight models of petroleum development with a view
to extrapolating in due course, a paradigm of petroleum development for oil-based
economies.619
6.2 COMMERCIALIZATION
Commercialization as contradistinguished from privatization has been the most adopted
option of change, also called corporatization. It is the fundamental process of turning a
bureaucracy into a going concern; of establishing profit and loss statements and insulating
national oil companies (NOCs) from day-to-day interference by governments and their
ministries. Examples abound, from establishment of AGIP in 1926, to the restructuring of
Mexico‟s PEMEX. We posit that the only way that NOCs can spearhead an oil led growth in
oil-based economies is for them to begin to behave much more like privatively owned
transnational competitors, in certain cases the goal is outright privatization.620
Commercialization demands as necessary and sufficient conditions, the insulation of the
NOC from micro management by the government and second, major transformation of the
corporate objective. Insulation may be achieved by creating holding company to stand
between the government and operating subsidiaries, in the style of Venezuela‟s PDV, change
entails adopting result oriented management style, processes and operations, delegation of
619 M. Humphreys, Escaping the Resource Curse, New York, Columbia University Press, 150 (2007). 620 C. W. Stern and M. S. Deimler, The Boston Consulting Group on Strategy: Classic Concepts and
New Perspective, Hoboken, NJ., John Wiley & Sons, 354 (2006).
299
authority and establishment of performance standards. Rationalization and optimization of
operations are key elements of change. Rationalization is shedding of underperforming non
core investment which constitute a dead weight. Optimization seeks to increase the
profitability of the core investment and mainstay of the enterprise. Optimization underscores
planning which will facilitate the adaptiveness of the corporation to change in market
trends.621
Integration is another key strategy which can improve financial performance and reduce risk.
It is the process whereby the corporation is structured as to make the output of a strategic
business unit the input of another strategic business unit and the output of the latter yet the
input of another in a linkage so as to create a relation of forward and backward integration.
By linkage it is meant, a reciprocal relationship between all strategic business units in which
the expansion of a given unit engenders opportunities for another unit to develop its output,
either by using the given units inputs in a forward linkage or by providing their outputs to be
used as an input into the given units production in a backward linkage.622
Globalization is yet another strategy linked to integration which is the external expansion of
the NOC without the national borders. Thus when oil gained ascendancy as a major energy
resource and as the mainstay of the Nigerian economy, it ought to have embarked on
integration of the oil sector by consciously establishing linkages between the oil sector and
other sectors of the economy. This can be achieved by greater value added to crude oil rather
than whole sale exportation without through put. Greater value added is attained through
621 A. Megatelli, Investment Policies of National Oil Companies, Westport, Praeger, 15, 30, 46 (1980). 622 L. G. Hrebiniak, Making Strategy Work: Leading Effective Execution and Change, Upper Saddle
River, NJ., 31, 65, 103, 141 (2005).
300
diversification within the oil sector by optimizing fully the derivable variegated by-products
of crude oil which will become inputs in agriculture and manufacturing. The next
fundamental process is to diversify away from oil to non-oil traded sectors of the economy by
establishing linkages first between the diversified and integrated oil sector and other sectors
of the economy, and then generally between the various sectors.623
Another major error in perspective economic strategy is the failure of Nigeria to globalize the
operations of the Nigerian National Petroleum Corporation. The process of globalization
requires a major transformation of the NOC through technical capacity building and
enhanced competitiveness pursuant to its becoming a competent and efficient global player.
Globalization can be effected by buying and integrating horizontally downstream in strategic
world markets in Europe, United States of America, South America, Asia and the African
sub-region. It could subsequently integrate vertically, by investing in non-oil sectors in these
markets. Market synergies can be attained in this manner as Nigerian crude will feed its
refineries in these major markets, thus increasing the scope of profitability, price stability and
economy of scales. Further more, proceeds from such global operations should be funnelled
and ploughed back into a port folio of non-oil assets abroad which will serve as a buffer
against vagaries and uncertainties engendered by the high volatility of the international oil
industry.624
6.3 PARTICIPATION AND NATIONALIZATION: THE NEED FOR STATE
PARTICIPATION IN THE OIL INDUSTRY
623 B. Parker, Introduction to Globalization and Business: Relationships and Responsibilities, New
York, Sage Publications, 5, 27, 57 (2005). 624 Ibid.
301
In view of the fact that NOCs are a subset of public enterprises, a cursory look at the nature
of public enterprises is being taken as part of the general overview. In command economies,
such as the former Warsaw Pact Nations and a few of its relics after the dissolution of the
Soviet Union, virtually all economic activities are controlled by the State whilst in the free
and or mixed economies of the west, certain industries are deemed of strategic importance
and State control becomes an imperative.625
As a quintessence of the free/mixed economy, the real cause of public enterprise in the
United States of America are many and varied, according to Wilcox:
Productive activities of the greatest magnitude have
been undertaken because they were deemed essential to
the prosecution of warfare and to national defence. This
was the origin of he atomic energy and synthetic rubber
plants built during World War II. It explains the great
ship building programme undertaken during both World
Wars. Other activities were inaugurated for the purpose
of pulling the country out of the great depression, this
was the beginning of the Reconstruction Finance
Corporation and other lending agencies. Some
enterprises are designed to conserve the nations
resources.626
625 K. Khan, „Some Legal Considerations on the Role and Structure of State Oil Companies: A
Comparative View,‟ 34 International and Comparative Law Quarterly 584-592 (1985); V. V.
Ramanadhan, The Nature of Public Enterprise, London, Palgrave Macmillan, passim (1984). 626 C. Wilcox, Public Policies Toward Business, Springfield, Richard D. Irwin, 500 (1975).
302
It is important to note that public enterprise in all its forms still plays an insignificant role in
free/mixed economies, partly due to what has been characterized as „creeping communism‟
by western economists and politicians. Perhaps the greatest obstacle to a further extension
of public ownership and operation lies in the state of public opinion in the west. Public
enterprise is generally viewed with suspicion; this is due to the perceived and demonstrated
ability of private enterprise to render satisfactory service at an acceptable rate.627
That granted, in a developing economy, the foregoing scenario may not be replicable. For
one, the magnitude of investment needed may be such that individuals can not muster, and
the State may have to mobilize public resources for the purpose of investing strategically in
certain sectors of the economy as a basis for sustainable growth and development.628
Furthermore this type of State intervention is often emotively characterized as „economic
nationalism.‟ It is doubtful however whether a nascent economy can afford to allow market
forces direct its economy without a rein on them. The crucial issue therefore, is establishing
what would be tolerable level of State participation in the economy, and whether State
enterprise when so established where necessary, is effectively run and do not constitute a
dead weight on tax payers. Such enterprise must be able to pay its way and must not
constitute a drain on scarce resources. That point is particularly significant in a world faced
by the spectre of dwindling resources, global recession and ecological dislocations. There is
627 Ibid. 628 M. Howard, Public Sector Economics For Developing Countries, Kingston, University Press of the
West Indies, 2, 10, 13 (2001).
303
an ever increasing need for efficient husbandry of resources that are non-renewable and
constitute wasting assets.629
How then, without the reward of profit or the penalty of bankruptcy are efficiency and
progress to be attained? How, when there is a monopoly, even though it is government
monopoly is the interest of the tax payer and the consumer to be protected? And, how given
the inconsistency of productive efficiency and public accountability, is the inevitable
conflict between efficiency and accountability, to be resolved?630
As a corollary to the foregoing, the United Nations Organization has highlighted and
underscored the right of developing nations to economic self reliance and development. The
United Nations Resolution on Permanent Sovereignty over Natural Resources 1962, G.A
Resolution 1803 (XVII) is one of such affirmative actions of the United Nations
Organization aimed at addressing the issue of the economic development of the developing
nations. the resolution amongst other things vests rights in peoples of permanent
sovereignty over natural wealth and resources to nationalize, expropriate or requisition on
grounds of public utility, security or the national interest which are recognised as overriding
purely individual or private interest.631
However, there are exceptions to acts of States in the exercise of permanent sovereignty
over natural resources that are confiscatory in nature. In Texaco v. Libya, it was held, the
recognition by international law of the right to nationalize is not sufficient ground to
629 Ibid. 630 Ibid. 631 B. Barton, A. Lucas, L. Barrera-Hernandez, and A. Ronne, Regulating Energy and Natural
Resources, Oxford, Oxford University Press, 272 (2006).
304
empower a State to disregard its commitments, because the same law recognises the power
of State to commit itself internationally, especially by accepting the inclusion of
stabilization clauses in a contract entered into with a foreign private company. On the basis
of the circumstances of adoption and by expressing an opinio juris communis, Resolution
1803 (XVII) according to the arbitral tribunal reflect the state of customary law existing in
this regard, the consensus by a majority of States belonging to the various representative
groups indicate without slightest doubt universal recognition of the rules incorporated in the
resolution; that is, with respect to nationalization and compensation, the use of the rule in
force in the nationalizing State, but all these in conformity with international law.632
The arbitrator, having found no justification for Libya‟s acts, held subsequently that the
appropriate remedy was restitution in integrum as claimed by the concessionaires (Texaco
Overseas Petroleum Company) so that Libya was legally bound to perform the contracts. In
fact the claimants subsequently accepted an offer of compensation in full settlement of their
claim.633
Contradistinguished from the Texaco v. Libya case, in the Aminoil case, the tribunal arrived
at the conclusion that the „take over‟ of Aminoil‟s enterprises was not inconsistent with the
contract of concession, provided always that the nationalization did not possess any
confiscatory character.634
632 Texaco v. Libya, 53 I.L.R. 389 (1977); 17 I.L.M. 1 (1978). 633 Ibid. 634 Aminoil Case, 21 I.L.M. 976.
305
To be taken along side Resolution 1803 (XVII) is the Charter of Economic Rights and
Duties of States 1974, General Assembly Resolution 3281 (XXIX). The Charter declares
inter alia; that every State has and shall freely exercise full permanent sovereignty including
possession, use and disposal over all its wealth, natural resources and economic activities,
to regulate and supervise the activities of transnational corporations within its national
jurisdiction, to nationalize, expropriate or transfer ownership of foreign property in which
case appropriate compensation should be paid by the State adopting such measure.635
The Charter underscores the aspirations of the emergent developing nations and their call
for a new international economic order. General Assembly Resolutions are not as such
legally binding upon member or non-member States in the manner of legislation enacted by
national parliaments. Although some publicists have argued that General Assembly
Resolutions might be seen as informal treaties or as indicating general principle of law, in
fact, the most common view is that they contribute in some way to formation of custom.636
It is generally agreed that General Assembly Resolutions may serve as a convenient
statement of a custom already established by State practice of the accepted kind or may at
once or gradually cause a State to march in step in their practice so as to create one. General
Assembly Resolutions may also contribute to custom more directly as a form of „collective
State practice‟637
635 B. H. Weston, „The Charter of Economic Rights and Duties of States and the Deprivation of
Foreign-Owned Wealth,‟ 75 American Journal of International Law 315 (1981). 636 Ibid. 637 Ibid.
306
International courts and tribunals have not doubted that General Assembly Resolutions are
State practice and hence evidence of custom. Moreover, they have tended to give
considerable weight to them as such. Most strikingly, the judgment of the International
Court of Justice in the Nicaragua case relies almost exclusively upon General Assembly
Resolutions when stating the law on the use of force and intervention, with just a few
general reference to State practice of a more traditional kind. Notable is also the Court‟s use
of General Assembly Resolutions on self determination in the Western Sahara case and the
reliance by various arbitral tribunals on General Assembly Resolution 1803 on the rule on
expropriation in Texaco case and Aminoil case.638
Perhaps the most important reason for State participation in the oil industry is security of
source of supply coupled with the need for realisation of State policy to control resources.
The need for security of source of supply was particularly acute during the 1973 oil crisis.
Western nations saw the crisis as striking with lethal effect at the very heart of capitalism
and acted with the concerted spontaneity which the situation called for, as a matter of fact
Henry Kissinger, the then, United States Secretary of State threatened invasion of the Gulf
States. That underscores the desperation of the situation in which the western nations found
themselves. They actually conceived the invasion of the Gulf States and had far reaching
plans to take over the oil fields should that remain the only option left in the resolution of
the crisis.639
638 Ibid. 639 Ibid.
307
Petro-Canada, for example was to be Canada‟s window on the industry, it was to ensure
security of source of supply, whilst promoting government policy of Canadian ownership of
national resources and to corporate alongside private sector companies.640
ENI in Italy was involved in locating foreign source crude for local consumption. In 1972
as part of the concerted effort to control resources, six Gulf States initiated negotiations on
the participation issue. The Gulf States demanded an immediate 20 per cent government
participation rising gradually to 60 per cent.641
The participation agreements and accompanying nationalizations were significant in several
respects. First they kept, the momentum building toward acquisition of greater oil exporting
country ascendancy. The demand for participation also put paid to any illusion the oil
companies might have harboured about stability and sustenance of the status quo. By
gaining an equity interest in the companies producing operations, the oil exporting countries
further increased their control over industry operations.642
Most significantly, by resisting the companies demand that compensation be paid for the
value of the oil reserve that the companies returned to the exporting countries, the countries
established the claim that national sovereignty means control over the resources within
one‟s territory, irrespective of the fact that contracts signed in an earlier period had ceded
such control to companies. Nonetheless, despite these gains through adoption of a model of
640 Ibid. 641 Ibid. 642 Ibid.
308
participation and nationalization, the exporting countries acknowledge their continued
dependence upon the international oil companies for technological assistance and aid in the
marketing of their oil.643
6.4 LEGISLATIVE FRAMEWORK
The legislative framework is a very important sovereign instrument which the State could
annex to promote petroleum activities. Legislation reflects and gives legal sinew to the
broad policy adopted by the State and incorporates the appropriate legal mechanisms to be
employed by it to secure such policy objectives. Such objectives of State in devising a
legislative framework should not only provide a legal regime which strictures petroleum
exploration and development, but should equally meet the fundamental requirement of oil
companies as high risk investors.644
Basically, a legislative framework should ensure amongst other things the following policy
objectives; rapid and thorough exploration; efficient development of commercial
discoveries; production operations which provide maximum ultimate recovery consistent
with good oil field practices; maximization of the States share of the financial benefits
generated by petroleum operations both directly through its share of the economic rent and
indirectly through generation of employment and utilisation of national goods and services,
as well as downstream projects subject to their economic feasibility; meeting the domestic
energy needs and assisting in reducing the foreign exchange debt generated by the high cost
of imported petroleum; accessing state of the art technology; transfer of appropriate
technology and know how and training of nationals at all levels of skill within the industry;
643 Ibid. 644 G.Etikerentse, Nigerian Petroleum Law, London, Macmillan Education, 243-280 (2004).
309
access to and utilization of all petroleum data; including evaluation and interpretation
generated by the petroleum operation and lastly environmental and safety concerns.645
The foregoing represents the fundamental policy objectives of State which the act of
legislation animates. Accordingly, it is discernable that a legislative framework could take
the form of general petroleum legislation; individually negotiated contracts and a third
option which is an amalgam of general petroleum legislation and individually negotiated
contracts.646
Under the general petroleum legislation paradigm, the overall relationship between the State
and the TNOCs is legislatively determined by statutes and or rights granted in accordance
with legislation. Legislation envisages in an exhaustive manner every possible condition
within which rights to explore and or exploit petroleum resources may be granted under
standard form licences or leases. The fiscal regime, encompassing royalties, taxes and other
payments due to the government are also etched out in legislation.647
There is the ad hoc dispensation, which permits negotiation of specifics such as the
dimension of the demised area, issues of State participation; the percentage interests to be
held by the State and the TNOC, the management structure and control of operations.648
645 Ibid. 646 Ibid. 647 Ibid. 648 Ibid.
310
The ad hoc paradigm within the ambit of legislative framework, leaves virtually all the
terms and conditions to be determined by individually negotiated agreements entered into
under the enablement of statutes. The act of legislation within that framework merely
spell‟s out the parameters for grant of licences whilst leaving specific details to be
negotiated. Various legal instruments which States can have recourse to as contractual
forms include, concession agreements; service contracts; production sharing contracts; joint
ventures and so forth.649
6.5 THEORIES OF NATIONALIZATION
Nationalization, expropriation or the conversion of private property to public property by
the sovereign gained considerable currency in the hey days of communism, coupled with
the inundation of comity of nations by the emergent and nascent nations. With that
development, nationalization transcends the mere isolated cases of taking the assets of an
alien within the context of a specific public need. Nationalization for our purpose,
encompass all sovereign acts within the purview of its law to expropriate private enterprises
in the public interest.650
In the era of the cold war, the acute bipolarity of world real politik precipitated a theoretical
divide between capitalism and socialism on the one hand, and the north and south on the
other. In the political theory of the former Warsaw Pact Nations, ownership of the forces of
production resides in the sovereign. Contradistinguished from the socialist paradigm, in
capitalist economies ownership of forces of production reside in the individual. The
emergent developing nations on their part reserve to themselves the right to expropriate
649 Ibid. 650 T. Anderson, Multinational Investment in Developing Countries: A Study of Taxation and
Nationalization, New York, Routledge, 3,23,91, 99 (1991).
311
forces of production whether foreign or indigenous within the purview of their own
municipal laws. In contrast, developed nations underscore the need to stricture such
expropriation where it affects foreign nationals within internationally accepted minimum
standards at international law. The divergence of views and lack of consensus on
expropriation necessitate consideration of certain theories of expropriation for the purpose
of clarity.651
6.5.1 MARXIST/SOCIALIST THEORY OF NATIONALIZATION
In his „Critique of Political Economy,‟ Marx dwells considerably on what he characterizes
as „material production,‟ with individuals producing in society and hence socially
determined production by individuals as the point of departure. For Marx‟s theory of
production to stand vis-à-vis the capitalist theory of production it is inevitable for Marx to
establish a holistic perspective as contradistinguished from the individualistic perspective
adopted by Smith and Richardo, both custodians and prophets of the capitalism. Within the
Marxist perspective of production, the further back we go in social evolution, the more does
the individual and hence also the producing individual dependent and belonging to a larger
whole. First to the family as a unit of production then to the clan in rudimentary setting; and
later the organic community. As far as Marx is concerned, man can only be individuated
within a society. In that regard he was quite amenable to Rousseau‟s contrat social which
establishes a relationship and connection between naturally independent subjects by means
of a contract. Private property within the Marxist schema presupposes an antithesis of non-
property as a condition whilst positing that history points more towards common property
as the original form which in the shape of communal property plays a significant role for a
long time.652
651 Ibid. at 91. 652 K. Marx, Das Kapital, London, Gateway Editions, 75 (1999).
312
Although Marxist theory is concerned with much more than the interpretation of history, a
particular approach to historical explanation has always been central to it. The Marxist
paradigm has been characterized as the „materialist conception of history,‟ or as „historical
materialism.‟ The Marxist model of historical process is perhaps best presented in the words
of Marx in this classic formulation:
In the social production of their life, men enter into
definite relations that are indispensable and independent
of their will, relations of production which correspond to
a definite stage of development of their material
production forces. The sum total of these relations of
production constitutes the economic structure of society,
the real foundation, on which rises a legal and political
superstructure and to which correspond definite forms of
social consciousness. The mode of production of
material life process in general. It is not the
consciousness of men that determines their being, but on
the contrary, their social being that determines their
consciousness. At a certain stage of their development,
the material productive forces of society come into
conflict with the existing relations of production, or
what is but a legal expression of the same thing with the
property relations within which they have been at work
hitherto. From forms of development of the productive
313
forces these relations turn into their fetters. Then begins
as epoch of social revolution. With the change of the
economic foundation the entire immense superstructure
is more or less rapidly transformed. In considering such
transformations a distinction should always be made
between the material transformation of their economic
conditions of production, which can be determined with
the precision of natural science, and the legal, political,
religious, aesthetic or philosophic – in short, ideological
forms in which men become conscious of this conflict
and fight it out. Just as our opinion of an individual is
not based on what he thinks of himself, so can we not
judge of such a period of transformation by its own
consciousness, on the contrary, this, consciousness must
be explained rather from the contradictions of material
life, from the existing conflict between the social
productive forces and the relations of production.653
As far as Marx is concerned, the general nature of a society is contingent upon its
„economic structure,‟ or its mode of production of goods and services. The economic
structure constitutes the foundation or the base, whilst the political and legal institutions and
the dominant ideologies are the superstructure. The economic base encompass two
elements: the forces of production or productive forces and the relation of production
together forming the mode of production; the former being the material objects; raw
653 K. Marx, Capital: A Critique of Political Economy, Penguin Classic, 125 (2004).
314
materials and tools and the labour force employed in the production of goods and services,
the latter being the manner of cooperation between men in the production process. The
forces of production and the relation of production are closely connected, since different
forces of production require different forms of cooperation for their exploitation. The
relations of production in turn determine the character of the legal and the political
institutions of society, since the legal system gives formal expression to the rules of
behaviour needed to maintain the existing economic system and the political system is
controlled by those who dominate the process of production and provides the coercive force
needed to ensure that the existing economic system is maintained. The economic, legal and
political systems in turn determine the character of the dominant ideas, or ideology, since
ultimately they can only be maintained if they are felt to be right, and it is the dominant
ideology which provides this legitimacy by presenting the existing form of society as being
in conformity with divine justice, reason, or whatever is the fashionable idiom, for example,
ideas of individual liberty serve to legitimise a free market economy.654
The nature of societies derives according to Marx from different modes of production.
Using European history as a backdrop, he identified three major forms of society down to
his own day each based on a different mode of production, first, the ancient society of
classical Greece and the Roman Empire based on slavery; second, the feudal society of
medieval Europe, based upon serfdom in agriculture and the guild system in manufacturing;
and third, the capitalist society which emerged in Europe from the seventh century onwards,
which was based upon wage labour. Marx equally posited that the capitalist society would
654 Ibid.
315
inevitably evolve into a „socialist society,‟ which would be based upon communal
ownership.655
The Marxist perspective on nationalization derives from socialist concept of a society as
deriving its nature from its mode of production. The socialist society by that schema
evolved organically from the capitalist society, and since its mode of production is based on
communal ownership of the forces of production, private ownership of forces of production
is therefore a contradiction in terms in such a society, and where such forces of production
are still privately controlled, it follows as a matter of course that they be expropriated
without compensation for the general interest of the society.656
6.5.2 CAPITALIST PERPECTIVE OF NATIONALIZATION
In sharp contrast to the Marxist paradigm of nationalization, the capitalist perspective vest
ownership of forces of production in the individual, as an inalienable right. Nationalization,
requisition, attachment within this schema can only be based on grounds or reasons of
public utility, security or the national interest which are considered as taking precedence
over and above strictly individual or private interests, whether expatriate or indigenous. The
owner shall duly and properly be paid appropriate compensation in accordance with the
rules in force in the State taking such measures in the exercise of its sovereignty and in
accordance with international law.657
655 Ibid. 656 Ibid. 657 B. Gerrard, A Theory of the Capitalist Economy: Toward a Post-Classical Synthesis, New York,
Blackwell, passim (1989).
316
Public enterprise is sometimes had recourse to in capitalist economies and where it occurs,
the economy is characterized as being free and mixed. Certain industries are deemed of
strategic importance and State control become imperative.658
6.5.3 THE THIRD WORLD PERSPECTIVE OF NATIONALIZATION
Where a developing country adopts the communist ideology, outright expropriation of
forces of production is unconditionally had recourse to as a matter of course. The group of
developing nations characterized as non-aligned whilst not adopting the Marxist paradigm
of nationalization, remain unamenable to the position of developed nations, who though
generally agree that expropriation is tenable, albeit in accordance with an „international
minimum standard,‟ of compensation set international law; maintain that the circumstances
and conditions of expropriation are matters to be left largely to the expropriating State to
regulate in its discretion under its law.659
The third world perspective is hinged on the consideration that the scenario in developed
free economies may not be replicable in developing economies. For one, the magnitude of
investment needed may be such that individuals can not muster, and the State may have to
mobilize resources for the purpose of investing strategically in certain sectors of the
economy as basis for sustainable growth and development. Contrary to the emotive
characterization of this type of State intervention as „economic nationalism,‟ it is doubtful
as earlier argued, whether a nascent economy can afford to allow market forces direct its
economy without a rein on them. The crucial issue therefore, is establishing what should be
the tolerable level of State participation in the economy; and State enterprise, when so
658 Ibid. 659 A. Casse, International Law, Oxford, Oxford University Press, 503 (2004).
317
established where necessary, should be effectively run and do not constitute a dead weight
on tax payers.660
To emergent and nascent developing nations, nationalization is an affirmation of self
determination, it is regarded in certain quarters as a necessary and sufficient condition of
sovereignty, since sovereignty will be mere abstraction and superfluous without
concomitant control of the forces of production. Expropriation must be had recourse to,
especially where such forces of production are controlled by the erstwhile colonial power or
its nationals. Entire industries are nationalized as a gesture of self determination aimed at
dismantling what is regarded as vestiges of colonialism or better still what has been
characterized as neo-colonialism.661
The essence of neo-colonialism is that the State which is subject to it is, in theory,
independent and has all the trappings of international sovereignty. In reality its economic
system and thus its internal policy is directed from the outside. Neo-colonialism literally
means a new form of colonialism, a form of socio-economic domination from without that
does not rely on direct political control. It appeared at about a decade after the end of the
Second World War, the old colonial dominance had finally collapsed. The weakness of
European powers, the emergence of the United States and the nationalist movements in the
third world combined to bring about a swift end to empires. By the mid 1960s most colonies
had won their independence and by the mid 1970s the world was virtually free of colonies.
Many of the new sovereign States took their places in the United Nations. However to view
660 Ibid. 661 E. Manela, The Wilsonian Moment: Self-Determination and the International Origins of Anti-
Colonial Nationalism, Oxford, Oxford University Press, 19,137 (2007).
318
a seat at the UN as tantamount to end of economic subjugation of the third world would
betray ignorance of the intricate process of sustenance of economic hegemony.662
Colonialism is a political device, employed to transform and control the colonies in the
interests of the capitalist expansionism of colonial power. That process involved the
establishment of international law and regulations covering prices, currency dealings and
banking systems. Once in place, these dispensations and the capitalist penetration they
facilitate were strong enough to withstand the granting of token formal political
independence to the colony. The economic status quo is however sustained and seemingly
immutable. In same vein, the loss of political ascendancy by Europe in world real politik to
United States of America resulted in concomitant increase in global economic power of
capitalist enterprises, from the US. The transnational corporation backed by their States of
nationality spearheaded post World War II economic growth and development of western
economies. Unencumbered by the pristine empire system of influence, the TNCs
established subsidiaries outside their States of nationality, especially in developing
economies.663
The emergence and ascendancy of the TNCs as units of economic exploitation represents
the most potent device of neo-colonialism, as TNCs increase their economic grip on the raw
materials and human capital of third world nominally independent countries. The TNCs
have the capacity to mobilize resources of stupendous magnitude across international
662 B. C. Smith and C. Smith, Understanding Third World Politics: Theories of Political Change and
Development, Bloomington, London, Indiana University Press, 13 (2003). 663 G. J. Branwen, Explaining Global Poverty: A Critical Realist Approach, New York, Routledge, 13,
87 (2006).
319
boundaries. They use their octopi and highly integrated structure to control production from
the primary phase of extraction of raw materials through the processing phased to the
finished product. The capacity of the TNCs for undermining the economic growth and
development of third world countries can not be overstated for a large proportion of global
production is accounted for by a few TNCs. That trend is set to extend into the new
millennium, when they are expected to control more than two third of the world‟s fixed
assets. Neo-colonialism is not especially without its institutional and ideological
legitimizing criteria which are both legal, political and military; amongst which are
concepts like globalization, free trade and the constitution of politico-economic blocs like
the European Union (EU) and military and defence pacts, which are all aimed at easing and
facilitating the mobilization of resources across international boundaries.664
Western economic hegemony, evolving as it were from merchant capitalism, through to
direct colonialism and contemporaneously, neo-colonialism represents the different form of
economic subjugation of third world nations by the developed industrial nations of the west.
The under development of the third world nations is attributed in certain quarters to the
foregoing historical reality and the expropriation of the assets of TNCs became fashionable
amongst third world nations as a means of redressing the perceived injustices of the unequal
exchange underlying the relationship between third world nations and TNCs.665
6.5.4 PUBLIC INTERNATIONAL LAW OF NATIONALIZATION
In the Amoco case, nationalization is generally defined in international law as the transfer of
an economic activity from private ownership to the public sector. It is realized through the
expropriation of the assets of an enterprise or of its capital stock, with a view to maintaining
664 N. M. Jensen, Nation-States and the Multinational Corporation: A Political Economy of Foreign
Direct Investment, Princeton, Princeton University Press, 1, 23 (2006). 665 R. Peat, E. Hartwick, Theories of Development: Contentions, Arguments, Alternatives, New York,
The Guilford Press, 16 (2009).
320
such enterprise as a going concern under State control. Modern nationalization often brings
into State ownership a number of enterprises in a particular industry. It may result therefore,
in taking of private property of much greater magnitude than the traditional expropriation
for reasons of public utility, and is also of a very different nature, since it is always linked to
determined political choices. For these reasons, and because it applies to going concerns
taken as such, modern nationalization raises specific legal problems, notably in relations to
the issue of compensation.666
As part of the efforts to reconcile the plethora of theories of nationalization being
articulated by different nations in accordance with their underlying political philosophy,
fears, hope and aspirations; the United Nations Organization highlighted and underscored
the right of developing nations to economic self reliance and development. The formulation
of the international law of nationalization as encapsulated in the United Nations Resolution
on Permanent Sovereignty over Natural Resources 1962, G.A. Resolution 1803 (XVII) is
however universalizable as it also takes into consideration the aspirations of developed
nations. The General Assembly declared:
The rights of peoples and nations to permanent
sovereignty over their natural wealth and resources must
be exercised in the interest of their national development
and the well being of the people of the State.
In cases, where authorization is granted the capital
imported and the earnings on that capital shall be
governed by the terms thereof by the national legislation
in force, and by international law. The profits derived
666 Amoco Case, 53 I. L. R. 297 (1974); Iran-U.S.C.T.R. 187.
321
must be shared in the proportions freely agreed upon, in
each case, between the investors and the recipient State,
due care being taken to ensure that there is no
impairment for any reason, of that State‟s sovereignty
over its natural wealth and resources.
Nationalization, expropriation or requisitioning shall be
based on grounds or reasons of public utility, security or
the national interest which are recognised as over riding
purely individual or private interests, both domestic and
foreign. In such cases the owner shall be paid
appropriate compensation in accordance with the rules
in force in the State taking such measures in the exercise
of its sovereignty and in accordance with international
law. In any case where the question of compensation
gives rise to a controversy, the national jurisdiction of
the State taking such measures shall be exhausted.
However, upon agreement by sovereign States and other
parties concerned, settlement of the dispute should be
made through arbitration or international adjudication.
Foreign investment agreements freely entered into by or
between, sovereign States and international
organizations shall strictly and conscientiously respect
the sovereignty of peoples and nations over their natural
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wealth and resources in accordance with the charter and
principles set forth in the present resolution.667
However, there are exceptions to acts of States in the exercise of permanent sovereignty
over natural resources that are confiscatory in nature. In the Texaco case, it was held, the
recognition by international law of the right to nationalize is not sufficient ground to
empower a State to disregard its commitments, because the same law recognises, the power
of the State to commit itself internationally especially by accepting the inclusion of
stabilizing causes in a contract entered into with a foreign private company.668
Contradistinguished from the Texaco case,669
in the Aminoil case,670
the tribunal arrived at
the conclusion that the take over of Aminoil‟s enterprises was not inconsistent with the
contract of concession.671
In the Amoco International Finance Corp. v. Iran, the claimant Swiss company, a wholly
owned subsidiary of Standard oil, a US company, entered into a 1966 joint venture
agreement (the Khemco agreement) with NPC, an Iranian company controlled by the
Iranian government, to form Khemco, an Iranian company jointly owned and managed by
the contracting parties, to process and sell Iranian natural gas, each contracting company
having a 50-50 per cent stake in Khemco‟s profits. In 1980, the Khemco agreement, which
667 I. L. R. 389(1977); 17 I. L. M. I (1978); UN Doc.A/C.2/SR. 835, para.10, UN Doc.A/C2/L670. 668 Ibid. 669 Texaco case, I. L. R. 389 (1977); 17 I. L. M. I (1978). 670 Aminoil case, 21 I. L. M. 976; 54 B.Y.I.L. 213 (1983). 671 Ibid.
323
by its terms was valid for 35 years, was declared null and void by the Iranian government
following the 1979 Iranian revolution and in implementation of Iranian legislation (the 1980
single Article Act) that was intended to complete the nationalization of the Iranian oil
industry. The claimant sought compensation for the loss of its interests in Khemco arising
under the Khemco agreement as a result of the 1980 nationalization.672
The tribunal in considering the particular grounds upon which the claimant argued that
nationalization was unlawful in international law, including grounds of discrimination and
absence of public purpose, the claim that expropriation was in breach of „stabilization
clauses‟ in the contract was rejected inter alia:The tribunal held that it finds it difficult, in
the absence of any other evidence, to draw the conclusion that expropriation of a concern
was discriminatory only from the fact that another concern in the same sector was not
expropriated. Reasons specific to the unexpropriated enterprise, or to the expropriated
enterprise, or to both, may justify such difference of treatment. Furthermore, as observed by
the arbitral tribunal in Kuwait v. American Independent Oil Company (Aminoil )673
– a
coherent policy of nationalization can reasonably be operated gradually in successive
stages. In the present case, the peculiarities discussed by the parties can explain why IJPC
was not treated in the same manner as Khemco. The Tribunal declines to find that
Khemco‟s expropriation was discriminatory.674
A precise definition of the „public purpose‟ for which an expropriation may be lawfully
decided has neither been agreed upon in international law nor even suggested. It is clear
672 Note 51 supra. 673 Note 55 supra. 674 Note 57 supra.
324
that, as a result of the modern acceptance of the right to nationalize, this term is broadly
interpreted, and that States, in practice, are granted extensive discretion. For the reasons set
forth above, the tribunal finds that Amoco‟s right and interests under Khemco agreement,
including its shares in Khemco, were lawfully expropriated by Iran. The next issue
therefore, relates to the rules to be applied in determining the compensation to be paid in
such circumstances.675
According to the Court in the Chorzow factory case, an obligation of reparation of all the
damages sustained by the owner of expropriated property arises from an unlawful
expropriation (as on the facts in the Chorzow factory case ). The rules of international law
relating to international responsibility of States apply in such cases. They provide for
restitution in integrum restitution in kind or, if possible its monetary equivalent. If need be,
„damages for loss sustained which would not be covered by restitution should also be
awarded.‟ On the other hand, a lawful expropriation must give rise to „payment of fair
compensation or of the just price of what was expropriated.‟676
For the foregoing reasons, the tribunal awards as follows: the shareholding interest of
Amoco International S.A. in Kharg Chemical Company Limited was lawfully expropriated
by the government of the Islamic Republic of Iran as of 24 December, 1980. The
government of the Islamic Republic of Iran shall pay to the claimant a compensation
675 Ibid. 676 Chorzow Factory Case, P.C.I.J. Reports, Series A, No. 17, 46-48; 48 B.Y.I.L. (1978).
325
measured at 50 per cent of the going concern value of Khemco as of 31 July 1979, without
the addition of future lost profits beyond such value.677
The Amoco case is significant in several respect, it upheld the rule that the legal nature of an
act of expropriation by a State is contingent on its being carried out for a public purpose as
contradistinguished from the position in the Liamco case that non discrimination is a
requisite for the validity of a lawful nationalization, and therefore a purely discriminatory
nationalization is illegal and wrongful. The Liamco case is at variance with General
Assembly Resolution 1803, which affirms the need for a public purpose. The 1974
Declaration on the Economic Rights and Duties of States, quite amenable to the aspiration
of developing States is silent on the need for a public purpose.678
In the BP case, Libya had nationalized the property rights and assets under an oil
concession contract of British Petroleum, a British company in which the British
government then held 49 per cent of the shares. The British government contested the
nationalization and made representation to Libya that its action contravened international
law, that for one, an act of nationalization is not legitimate in international law unless it is
for a public purpose related to the internal needs of the taking State, and it must be followed
by payment of prompt, adequate and effective compensation. Nationalization measures
which are arbitrary or discriminatory or which are motivated by considerations of political
677 Note 51 supra. 678 Ibid.
326
nature unrelated to the internal well being of the taking State are, by a reference to those
principles, illegal and invalid.679
The arbitrator held: the BP nationalization law, and the actions taken thereunder by the
Respondent do constitute a fundamental breach of the BP concession as they amount to a
total repudiation of the agreement and the obligations of the Respondent thereunder, and, on
the basis of rules of applicable systems of law too elementary and voluminous to require or
permit citation, the tribunal so holds further, the taking by the Respondent of the property,
rights and interests of the claimant clearly violates public international law as it was made
for purely extraneous political reasons and was arbitrary and discriminatory in character.
Nearly two years have now passed since the nationalization, and the fact that no offer of
compensation has been made indicates that the taking was also confiscatory.680
There is no consensus as to the quantum and the modalities for effecting compensation for a
lawful expropriation, with the developed and developing States diametrically at cross
purposes on what should be the universal rule of compensation. The classical position of
developed nations was articulated in a representation made by the then US Secretary of
States, Hull,681
on behalf of US and other foreign oil interests regarding the 1940
expropriation of the assets of TNCs by the Mexican government:
The right to expropriate property is coupled with and
conditioned on the obligation to make adequate effective
679 BP case, 53 I. L.R. 297 (1974). 680 Ibid. 681 See Third Restatement of US Foreign Relations Law, Vol. 2 (`987), para. 712, Reporters Notes,
p.207, US Department of States Legal Adviser‟s Memorandum, 22 I.L.M.1406 at p. 1407, n 42 (1983).
327
and prompt compensation. The legality of an
expropriation is in fact, dependent upon the observance
of this requirement.682
Britain in its submission in the Anglo-Iranian Oil Co. case, relied entirely on the rule
formulated by Hull, whilst conceding that a taking of the assets of aliens could be prima
facie legal on grounds of public interests, security and so forth, but may constitute sheer
outlawry at international law when it is confiscatory and unaccompanied with compensation
which is adequate, prompt, and effective. Britain interpreted „adequate‟ compensation to
mean the value of the undertaking at the moment of dispossession, plus interest to the day
of payment as per the Permanent Court of International Justice in the Chorzow Factory
Claim for Indemnity Merits case. Prompt compensation is construed as immediate payment
in cash on the day of the effective taking. Britain is however amenable to deferred payment
where the total amount to be paid is fixed promptly, allowance for interest for late payment
is made, the guarantees that the future payments will in fact be made are satisfactory, so that
the person to be compensated may, if he so wishes raise the full sum at once on the security
of the future payments.683
The payment is effective, when the entity being compensated can elect to dispense the
payment as it deem fit. It must be in convertible currency and transferable from the country.
The position of developing States on compensation has found eloquent expression in Article
682 Ibid. 683 Anglo-Iranian Oil Co. Case, I.C.J. Pleadings, 105-106, UN Doc. A/C. 2/SR. 858, para.41.
328
2 paragraph 2(c) of the 1974 Charter of Economic Rights and Duties of States 1974,
General Assembly Resolution 3281 (XXIX), it provides inter alia:
To nationalize, expropriate or transfer ownership of
foreign property in which case appropriate
compensation should be paid by the State adopting such
measures, taking into account its relevant laws and
regulations and all circumstances that the State
considers pertinent in any case where the question of
compensation gives rise to a controversy, it shall be
settled under the domestic law of the nationalizing State
and by its tribunals, unless it is freely and mutually
agreed by all States concerned that other peaceful means
be sought on the basis of the sovereign equality of States
and in accordance with the principle of free choice of
means.684
The formulation in the 1974 Charter ipso facto does not stipulate that compensation ceases
to be one of the necessary and sufficient conditions upon which the legality of an act of
expropriation is hinged. To the contrary it underscored the duty in part of the nationalizing
State to pay appropriate compensation albeit at the behest of the State within the purview of
its municipal law in accordance with demands of equity and natural justice. The none
inclusion of the rider requiring „the payment of appropriate compensation in accordance
684 446, UN Doc. A/C 2/SR 1649 (1974).
329
with international law‟ by no means preclude the act of compensation from being strictured
by minimum international standard, according to Jimenez de Arechaga:
If a nationalizing State, in application of its laws in its
appreciation of the circumstances, were to offer
compensation which was not considered „appropriate‟
by the other interested State (and not just by the
individual party), the subjective determination by the
host State would not be final. The State of nationality of
the expropriated owner would become authorized under
the existing rules of international law to take up the case
of its national and to make a claim on its behalf, based
on the host State‟s non-compliance with the
international duty to pay appropriate compensation.685
The position of developing States as encapsulated in Article 2(2)(C) of the 1974 Charter has
not by any means supplanted the Hull formulation, to which developed States are amenable.
That consideration is without prejudice to the fact that Hull‟s formula may have at one time
been construed as stating a customary rule of compensation of general application. However
it does not contemporaneously evidence customary practice of preponderance of States and
therefore can not be a customary rule of compensation of general application.686
685 11 N.Y.U.J.I.L.P. 179 at p. 183-187 (1978). 686 Note 69 supra.
330
Nationalization and the resultant problematic of compensation engender a number of issues:
There is the perspective that contracts between a State and a foreign corporation for the
exploitation of mineral resources situated in the State are governed by public international
law. As a result of this it is argued that the terms of such contracts can not be unilaterally
changed by the legislation of the State. Such a change, going by that perspective amounts to
a breach of contract, and a violation of international law. That law would provide remedies
against such a violation, since expropriation of assets invested within the terms of such
contracts would be a major breach , the conclusion is drawn that, at international law, a
foreign, corporation whose property is nationalized by a host State has a right to claim
restitution, or in the alternative, „prompt, adequate and effective compensation.‟687
The foregoing argument amounts to gross ideological representation, and mostly
adumbrated by western international lawyers, and aimed at affording the stability of
contracts between transnational corporations and host governments. That view is however
out moded and ante-deluvian, in the light of contemporary thinking on such crucial issues as
economic self determination and the permanent sovereignty over natural resources. The
maxim pacta sunt servanda is often pleaded out of context in issues of nationalization, it
requires States to fulfil treaty obligations they had undertaken, granted that the act of
acceding to a treaty by two or more sovereign implies the subsumption of their sovereignty
reciprocally in that arrangement. However a contract between a sovereign and transnational
corporation is not analogous to a treaty; treaty law is an inter State system, jus inter gentes
and should any sovereign consent to be placed on the same legal pedestal as a transnational
corporation, its behaviour would amount to a flagrant derogation of status of sovereignty
and infra dignitatus. Granted that such a contract between a transnational corporation and a
687 Ibid.
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sovereign State could be assimilated to treaties, the relevant rule is clausula rebus sic
stantibus, any of the parties could resile from the agreement on the ground of changed
circumstances. A State may well argue that the contract is invalid because its developmental
goals have changed; and since the State is the only determinant of the economic goals it had
set for itself, it would not be easy to refute such rationalization of expropriation. The
doctrine of intertemporality further lends credence to that rationalization of expropriation;
granted that a right had been created by the abrogated contracts, the future validity of the
contracts would be contingent on the subsistence of the circumstances which gave rise to
the contract creating the rights. It is not the case that such contracts, involving the destiny of
a nation are immutable and frozen, and where those circumstances change, it is not a
contradiction to deem the contracts as extinguished.688
According to legal positivism, international law regulates only agreements between States.
Such an agreement being a voluntary limitation of sovereignty mutually agreed upon by two
sovereigns were binding. That positivist position was upheld by the Permanent Court of
International Justice in the Serbian Loans case where the issue was whether loans raised by
the Serbian government in France through the issue of bonds to French citizens was
governed by French law, or by Serbian law. Claiming jurisdiction on the ground that a
dispute existed between two sovereign States; the Permanent Court of International Justice
in the course of its judgement, observed that a contract which is not a contract „between
States as subjects of International law is based on the national law of some country.‟689
688 Ibid. 689 Serbian Loans Case (1929), P.C.I.J. Ser.A., No. 20.
332
6.6 PETROLEUM DEVELOPMENT MODEL FOR THE 21ST
MILLENIUM: AN
OIL BASED ECONOMY PERSPECTIVE
Our main concern in this segment is to sift through the plethora of models with a view to
extrapolating from them a model for petroleum development for the new millennium for oil
based economies. The need for conceptualizing and developing such a model can not be
overstated against the back drop of the rapidly changing world characterized by
multipolarity; complexity; free trade; information technology driven growth; economic and
political unions and increasing globalization on the one hand, and the rather wide gap in
knowledge of the subtleties and complexities of international oil betrayed by developing
countries endowed with petroleum resources but lacking the requisite technology and the
financial and human resources for their exploitation. For oil based economies, complexity is
engendered by sourcing strategic investment finance and fiscal regimes; alternative terms of
contracts; the seeming change to the status quo existing between transnational oil
companies and the State and concomitant dynamism characterizing shift in negotiation
leverage of parties and the wide price and production swings. The effect overall is that the
host country is faced with a daunting maze of legal, contractual and policy options.690
6.6.1 VERTICAL INTEGRATION
For our purpose, we have elected to explicate and predicate our analysis of the complexity
presented by petroleum development in the light of the rather hierarchical and vertical
integration of international oil, whereby exploration, development and exploitation
represent the upstream end while refining, distribution and marketing of refined products
690 T. L. Karl, „Oil-Led Development: Social, Political, and Economic Consequences, CDDRL
Working Papers No. 80, January 2007. Available at http://iis-
db.stanford.edu/pubs/21537/No_80_Terry_Karl_Effects_of _oil_Development.pdf
333
represents the downstream segment of the industry. An insight into the vertical structure of
the international oil industry will suffice.691
It is incumbent on us to attempt a critical analysis of vertical integration as an international
petroleum strategy as contradistinguished from horizontal integration, as international oil
evolves inexorably into the new millennium. The change in the status quo existing between
governments and TNOCs and the attendant ascendancy of OPEC in the decade following
the 1973 oil crisis and the spate of nationalizations which it engendered actually resulted in
the emergence of national oil corporations as important actors in the industry.692
As a strategy, vertical integration holds a great deal of prospects for governments and their
NOCs. Accordingly, attempts shall be made to isolate some of the assumptions underlying
the premise on which the adoption of vertical integration is based, with a view to
determining their internal precision. The attempt by OPEC to induce concentration and
control of the international oil industry has largely failed, what with the vertical integration
of NOCs of OPEC members serving to render the industry less concentrated globally. That
in itself represents an unintended consequence of adoption of vertical integration. The
transnational oil majors hitherto were the top producers, whereas, increasingly national oil
companies now constitute the top producers. On the other hand, concentration in the
industry has, to considerable degree, been on the decline, whilst the only indicia of
concentration in the industry is reserves, with the middle east accounting for the greater
share of world reserve. Vertical integration represents the direction which governments and
their NOCs ought to take. Major TNOCs, have tended more towards deintegration in
response to the complexity, multipolarity, shift in world real politik and market;
691 R.M. Grant, Contemporary Strategy Analysis, Chichester, John Wiley & Sons, 347, 401 (2010). 692 Ibid.
334
technological developments, resulting in the distinct and autonomous operationalization of
the different aspects of the international oil business as independent entities or strategic
business units which are going concerns in their own right rather than units of a hierarchical
and axial structure.693
Arguments adumbrated for vertical integration in contradistinction to horizontal integration
are hinged not on control but on optimization and stability. In that regard, vertical
integration is envisioned to ensure reduction in profit volatility through offsetting
movements at different ends of the business; throughput at the production and refining
stages, which lowers the risk and therefore the cost of capital investment; improved timing
of investments at all stages in the chain; better logistics and allowance for creation of
market outlets which might not otherwise be viewed as economically viable. In that regard,
the position in certain quarters which albeit runs against the grain of current trends in which
reciprocal relation between upstream and downstream segments have negated long held
conventions in the industry that integration is salutary in that it stabilizes earnings. It is
doubtful whether that view would not flounder when ex ante ranged against past trends of
performance in the international oil industry.694
For one, whilst the crude business is commodity oriented, with prices responding sharply to
changes in market conditions, while costs alter slowly in response to investment patterns
and technology. Since 1973, crude prices have become more volatile as measured by short
term fluctuations; and earnings were more influenced by a few episodic shifts in the world‟s
693 L.G. Hrebiniak, Making Strategy Work: Leading Effective Execution and Change, Upper Saddle
River, NJ., Wharton School Publishing, 40, 103 (2006). 694 C. W. Stern and M. S. Deimler, The Boston Consulting Group on Strategy: Classic Concepts, New
Perspectives, Hoboken, NJ., John Wiley & Sons, 281, 302 (2006).
335
supply curve. In summation, upstream margins are driven by long investment cycles and are
influenced by OPEC.695
The downstream segment on the other hand is ruled by margin. With changes in crude oil
prices reflected immediately they occur in the short run. Over the past decade, swings in
crude oil prices have resulted in more than proportionate positive changes in the prices of
products within two months. During this brief adjustment period, the upstream and
downstream margins are offsetting. In the longer term, refining margins follow the
investment cycle more closely than the crude price, and are responsive to utilization levels,
with changes in the rate of utilization resulting in more than proportionate change in margin
at full capacity utilization. From the host producing country perspective, upstream margins
have been significantly greater than refining margins on a per barrel basis. The result over
all is that in the short run, asset ownership is not a necessary and sufficient condition for
stability in earnings, whilst owning refinery assets could erode earnings from exploration
and production all at the cost of owning a low yield asset.696
The foregoing granted, vertical integration must however not be evaluated strictly on the
criteria of cost and return and swings in margins. It must be seen from a developing country
perspective where wholesale non value added exportation of primary extractive products
result in lack of conversion and linkages in an oil based economy. Vertical integration has
695 T. James, Energy Markets: Price Risk Management and Trading, Hoboken, NJ., John Wiley &
Sons, 73,57 (2007). 696 J. M. Davis, R. Ossowski, A. Fedelino and IMF, Fiscal Policy Formulation and Implementation in
Oil Producing Countries, Washington D.C., International Monetary Fund, 383, 416,426 (2003).
336
far reaching macro implication for a developing economy, if properly implemented it could
catalyse an oil sector led growth and development.697
If it is the case that vertical integration flounders from a strictly risk averting perspective,
wherein, then, does its value as a strategy lies? Integration must be seen within the ambit of
its specificity as a strategy rather than as an all encompassing strategy. Vertical integration
as a strategy has its antecedents in the formative years of the international oil industry.
However, the scenario today differs considerably, requiring different applications.698
Perhaps the most important reason to integrate is cost-cutting. TNOCs had recourse to
integration on a global scale with a view to cutting cost and thereby increasing operational
margins, by feeding cheap crude from their unequal concessionary relationships with
developing producer nations to refineries strategically located in major markets. The gains
of that strategy however petered out in the 1970s, when the producer nations seized the
initiative and insisted on earning more from the exploitation of their oil resources, coupled
with the fact that the configuration of the refineries could not be altered on the short run to
utilize crude from other sources. That consideration perhaps underlied the 1973 oil crisis
and the resultant swing in prices.699
697 G.S. Day and D.J. Reibstein, Wharton on Dynamic Competitive Strategy, Hoboken, NJ., John
Wiley & Sons, 76 (2004). 698 A. D. Chandler, Strategy and Structure: Chapters in the History of the American Industrial
Enterprise, Cambridge, Ms., The MIT Press, 91, 163, 170 (1969). 699 Ibid.
337
That granted, if it is the case that security of sources of supply of crude is a sufficient but
not necessary condition for integration, and NOCs control vast reserves of crude, then,
integration should be adopted as a strategy. However, since integration in oil context
implies a reciprocal relationship and linkage between the upstream and downstream
segments of the oil industry, the NOCs must have efficiently configured refineries which
can process the abundant feedstock optimally.700
Aside from the foregoing, integration will be salutary when it is predicated on the
development of new markets, and the concomitant logistic support to service such markets,
especially in the emerging gas markets. The strategy in that regard should be to integrate
downstream on the gas utility circle, by establishing ventures in pipelines, natural gas
intensive industries such as electricity and petrochemicals and distributive systems.701
The strategic value of integration can not be overstated; its adoption however must be based
on a larger concern to establish a nexus between the oil producer host nation oil sector and
non-oil sectors with a view to achieving sustainable growth and development.702
6.6.2 EXPLORATION AND DEVELOPMENT
Without prejudice to the primary and implied exploration and development policy of
promotion of rapid and thorough exploration; efficient development of commercial
discoveries and production operations which provides for maximum ultimate recovery
consistent with good oil field practice, a futuristic exploration and development strategy
must surmount the limitation engendered by the wholesale adoption of standard exploration
700 Ibid. 701 Ibid. 702 Ibid.
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and development instruments by developing oil producing nations. Such uniformity of
application without regard to other crucial issues of risk, flow of investment finance and
fiscal regimes, perhaps underscored the rather sub optimal level of exploration and
development in certain oil producing nations.703
For one, governments must come to terms with the fact that private international capital is
needed to fill gaps in investment and upfront finance. Contractual instrumentation which
fails to take due cognisance of the dynamics of risk sharing vis-à-vis investment payoffs
will constitute an investment disincentive, perceived lop-sided risk sharing on part of
TNOCs deters exploration. Contractual arrangements should be such that they are brought
under the rubric of institutional frameworks that responds to changes in the industry and
ensure a half-way-house and reconciliation of conflictual interests.704
There is a marked congruence between tax rates and rate of exploration and development.
Where sundry tax rate is high, there will be a corresponding low rate of investment by
private domestic and international capital and vice versa when tax rates are low and
progressive. A caveat must however be entered, host countries may justifiably be
circumspect on the adoption of progressive tax regimes as they unduly cause a more than
disproportionate share of the economic risk to devolve on the host government. The
adoption of a progressive tax regime is above every other consideration fraught with
political risks, in view of the fact that revenues accruing to the government under the
703 K.W. Blinn, C. Duval, H. Le Leuch, A. Pertuzio, J. L. Weaver, O. L. Anderson, R.D. Bishop, and J.
P. Bowman, International Petroleum Exploration and Exploitation Agreements: Legal, Economic
and Policy Aspects, London, Barrows Company, 5,10 (2009). 704 I. Lerche and J. A. Mackay, Economic Risk in Hydrocarbon Exploration, San Diego, Ca.,
Academic Press, 3,10,21,31,55, 137,187 (1999).
339
progressive dispensation remain rather low in the early stage of operation with tax returns
subjects to manipulation by TNOCs. Such scenarios will always as a matter of course
engender nationalistic call for reviews and abrogation.705
In view of the foregoing, exploration and development agreements and fiscal regimes
should be restructured with a view to more equitable sharing of risks between the TNOCs
and governments and cognisance duly taken of the long gestation of exploration and
development operations. There is a need to hinge terms on certain indicia of the
international oil industry in view of the characteristic swings in prices, demand and supply
in the global oil market.706
6.6.3 DOWNSTREAM OPERATIONS
Corporate profitability and growth in the upstream segment of the petroleum industry
without a concomitant development of the downstream segment of the industry will result
in a truncated and convoluted development of the industry and will prevent linkages, with
attendant lack of nexus between the oil sector and other non-oil sectors of the economy. It is
instructive to emphasize that non-integrative petroleum development upstream, without
corresponding development of the downstream segment is ruinously depressive of an oil
based economy. The wholesale exportation of crude without value added result in the
multiplier effect of the exploitation of the oil resources occurring without the economy of
the exporting country. Downstream operations within the domestic market and by extension
the international market will serve as an interface in this linkage, within which a wide range
of economic activities and opportunities will be spurned off, leading to conversion and
705 J. M. Davis, R. Ossowski, A. Fedelino, and IMF, Fiscal Policy Formulation and Implementation
in Oil Producing Countries, Washington D.C., International Monetary Fund, 1, 45, 82, 204 (2003). 706 Ibid. at 82.
340
growth in the economy. The expansion in the oil sector will create opportunities for other
sectors in an infinite linkage. Structurally, the downstream segment should be seen as a
profit centre in its own right.707
Downstream operations in the early phase should be restricted to developing the domestic
refining capacity and developing the necessary infrastructural support to facilitate
distribution and marketing. A globalization strategy could be embarked upon after the
consolidation of the domestic refining and marketing capacity by investing downstream into
refineries in international markets.708
6.7 INSTITUTIONAL FRAMEWORK OF PETROLEUM DEVELOPMENT
Perhaps the most crucial issue in petroleum development in oil based economies is the
problem of reconciling control and autonomy of the National Oil Company (NOC), as a
State enterprise and instrument of strategic policy, whose activities are circumscribed by
broad State objectives and as trustees of national fund, the NOC though a creation of
Statute, must abide by rules of financial accountability, budgeting and auditing required of
corporations. Control measures must however be configured in a manner that will not
undermine the autonomy of the corporation. It is the aim of accountability to provide a
review of the working decision making and profitability of the corporation, there is the need
for operational autonomy and an ex post facto investigation of the corporation‟s activity in a
given year should as a matter of course evaluate the decision making process and its
707 S. Ariweriokuma, The Political Economy of Oil and Gas in Africa: The Case of Nigeria, New
York, Routledge, 19 (2009). 708 Ibid.
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implications for the operations of the corporation. By so doing the corporation would have
independence of operations and free to take decisions based on rational criteria and exist
separately from the State. That dispensation whilst ensuring that measure of autonomy
necessary to facilitate the corporations operation also importantly ensures that its policies
and funds are subject to control and scrutiny of the State and the public.709
The State must be circumspect in its exercise of control and when necessary such control
should be limited to defining the parameter which prescribes the operations of the
corporation. It must be seen in its activity to be in consonance with the public interest. That
consideration does not detract from the fact that the State through its supervisory ministry
of petroleum and mineral resources as the trustee of the nation is ultimately in charge of the
corporation.710
State supervision, when excessive, emasculates management and stifles its initiative and the
board is unable to take decisions with clarity. The board may not in all honesty take
decisions objectively when there is looming and brooding presence of the State through the
superintending function of the petroleum ministry.711
There is an ideological dimension to the foregoing, it is not contradictory to conceive of
State interest as being at variance with public interest, and that is, public interest could be
709 A. Megateli, Investment Policies of National Oil Companies, West Port, Praeger, 46 (1980). 710 F. Parra, Oil Politics: A Modern History of Petroleum, New York, I.B. Tauris, 89 (2004); T.L.
Karl, The Paradox of Plenty: Oil Booms and Petro-States, Los Angeles, University of California
Press, 139, 189 (1997). 711 P. Stevens, National Oil Companies: Good or Bad?- A Literature Survey. Available at
http://www.dundee.ac.uk/cepmlp/journal/html/Vol.14_10.pdf
342
supplanted by narrow State interest. In itself, that ideological dimension, accentuates the
dysfunctional outcome of excessive State control.712
Constituent instruments of NOCs confer considerable degree of supervisory power on the
Petroleum Minister, this derives from the consideration that the NOC is wholly financed by
the State with a view to giving definition to its policy in the petroleum sector. The
ministerial province of control, far reaching, is exercised in appointing the board of
directors; in circumscribing the board‟s powers in the national interest and directing its
operations; has the right of approval and or veto over crucial corporate finance matters. On
the whole, the minister has the mandate to fulfil a supervisory role in the national interest
and strictures management appointments, budget and guarantees borrowing. By virtue of
powers conferred on him by the constituent instrument,713
the Petroleum Minister could hire
and dismiss Directors. That dispensation induces a control which ensures the loyalty of
appointees. There is no security of tenure on the whole; the minister has the mandate to
fulfil a supervisory role in the national interest and strictures management appointments,
budgets and guarantees borrowing. There is no security of tenure and the Board so
appointed is in a rather untoward manner prone to arbitrary ministerial interference. The
dispensation renders rational decision making process a futility, over-riding political
consideration distorts rational criteria.
712 M. Katz, and International Monetary Fund, Lifting the Oil Curse: Improving Petroleum Revenue
Management in Sub-Saharan Africa, Washington D.C., International Monetary Fund, 47 (2004). 713 NNPC Act, 1977 Cap 320, Laws of the Federation of Nigeria.
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CHAPTER SEVEN
7.0 A RE-APPRAISAL OF THE PRIVATE CONTRACT PARADIGM
7.1 INTRODUCTION
In this chapter we argue the thesis that the private contract paradigm; the notion of
stabilization and internationalization of petroleum international agreements flounders in the
face of considerations of sovereignty and proprietary rights of the host country over the
natural resources in its jurisdiction. The study posits that the stipulation of applicable law
may not guarantee the stability of expectations under a Petroleum International Agreement
(PIA). A choice of law will be otiose in the face of a fundamental change, which wily-nily
alters the expectation under the agreement.
The study adumbrates that the right to development emanates from the right to life. If the
right to development were denied as emanating from peremptory norms of international law
by any curious syllogism, then, it could be posited that genocide, which is the premeditated
denial of the right to life of nations, is not an act of outlawry at international law. It is from
the right to self-determination that the right to development emanates. It will be
contradictory to ascribe the right to self determination of peoples as a peremptory norm of
international law while concomitantly understating the importance of the right to
development of the people which affirmatively defines their future through invocation of
the right to self determination.
The study posits that stabilization clauses in petroleum international agreements between
Host Countries (HCs) and Transnational Oil Corporations (TNOCs) which, among other
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things, stipulate that the contracting State shall not modify, abrogate the contract, subject
the contract to a law other than that of the contracting State, independent arbitration of
disputes arising from the contract and periodical review of terms cannot insulate the
transnational oil corporation against the exercise by the State of the permanent sovereignty
over its natural resources.714
The study submits that transnational investments involving
State entities by their nature are inarbitrable.
Petroleum international agreements are instruments, which govern the long-term
relationship between a State subject of international law and international oil companies.
The relationship between parties in a PIA is predicated on the consideration that they
associate symbiotically in an alliance of resources with a view to mutually optimizing their
714 The view is, however, rife among Western scholars that private entities, such as transnational
petroleum corporations have international legal capacity to bring actions for claims against a Sovereign
State when it breaches its contractual obligation to the private entity. Article 42(1) of the ICSID
Convention 1965, for example, attempts to create the capacity for direct action of investors against host
States. According to this Article, “The Tribunal shall decide a dispute in accordance with such rules of
law as may be agreed by the parties, “But,” in the absence of such agreement, the Tribunal shall apply
the law of the contracting State party to the dispute(including its rule on the conflict of laws) national
law as may be applicable.” See Amco v. Indonesia, Resubmitted Case: Award, 31 May 1990,ICSID
Reports, Vol. 1, 569, at 580 no. 40. See also the highly controversial use made by the ICSID Tribunal
in SPP (me) v. Arab Republic of Egypt Case, award of 20 May 1992, ICSID Reports, Vol. 3, 189
Dissenting opinion at 249-355. In that case, President of the ICSID Tribunal, Rosalyn Higgins, in her
analysis of the meaning of Article 42 (1) of the Washington (ICSID) Convention of 1965, stated thus
“Thus international law is fully applicable and to classify its role as “only” “supplemental and
corrective” seems a distinction without a difference. In any event, the Tribunal believes that its task is
to test every claim of law in this case first Indonesian law and then against international law.” The
persistent attempt by the West “to make the world safe for capital” is not without precedents. Kelsen
emphasizes in the Pure Theory of Law, that “the tendency of [ contemporary] international law to lay-
down direct rules of obligation and authorization of individuals must necessarily be reinforced to the
same degree as it increasingly extends to subjects of areas that were previously governed by State law
alone.” In writing these lines, Kelsen was probably not thinking of international investment law, but
there is no escaping the fact that his thought applies perfectly to the development of this law. Under
this schema, it is argued that it is possible to consider a subject of international law any person capable
of entering into disputes directly with another subject of international law as such and, possibly, of
bringing that subject before an international court (provided consent is given in one form or another).
Nothing can be farther from the truth than the foregoing posturing; strictly speaking, private entities
such as transnational petroleum corporations have no legal capacity at international law. The provision
for “international arbitration” in a petroleum international agreement by no means confers international
status on the agreement. On the same footing, inclusion of an “internationalization clause” in no way
brings the agreement under the purview of international law. See C. Leben, “Hans Kelsen and the
Advancement of International Law,” (2004) European Journal of International Law, available at
http://www.ejil.org/journal/vol.9/No.2/art1-02.html#TopofpPage
345
benefits from the exploitation of natural resources of the HC party to the PIA. Contrary to
that consideration of symbiosis, there may be no guarantee that, consequent upon a high
magnitude of investment exposure by an international oil company in the exploration and
exploitation of oil resources of the host State, it may not take unilateral steps which
disparage the vested interest of the international oil company.
It is in view of the foregoing that international oil companies evince apprehension of the
spectre of unilateral acts of States, which may erode their correlative rights under the
agreement, and seek to contrive devices to avert the danger of variation of terms and or
outright abrogation of the PIA.715
Perhaps the mostly resorted to device by TNOCs to avert
that danger was the “stabilization” clauses that are intended to insulate the international oil
company from subsequent unilateral variations of terms and changes in the municipal laws
of the host State. A frequently used device is to endeavour to remove the PIA from the
purview of the municipal laws of the host country and bringing it under the ambit of norms
of international law.716
Legally, the notion of internationalization of PIAs is contemporaneously and theoretically
passable, but flounders in the face of considerations of sovereignty and proprietary rights of
the host country.717
With the advent of the doctrine of sovereignty over natural resources
and the new international economic order, international norms, which impinge on
internationalization, are rather indeterminate. In the interface between political and
economic dependency and nationhood, these norms are still evolving and there is a sharp
715 S.K.B. Asante, “Restructuring Transnational Mineral Agreements,” (1979) 73 AJIL 335. 716 S.K.B. Asante, “Stability of Contractual Relations in the Transnational Investment Process,” (1979)
28 ICLQ 401,408.
717 A.A. Fatuoros, “International Law and the Internationalized Contract,” (1980) 74 AJIL 134;
C.Dugue, “Dispute Resolution in International Project Finance Transactions,” (2001) 24 Fordham
Int’lL.J. 1272,1272-73.
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divide between the formalism of developed countries, which seek to protect capital and
sustain the status quo and the doctrine of the new international economic order of the
nascent and emergent nations of the South.718
The efficacy of “internationalization” clauses will remain indeterminate in as much as there
is no rapprochement regarding the basic norms of international law, which regulates the
relationship between international oil companies, and host States.719
The crucial issue is not whether these clauses fail to stipulate what the applicable law is, but
that the evolving norms from which they draw their authority are in themselves yet to reach
an organic state.720
Furthermore, internationalization clauses are redundant in view of the rapid development of
legal infrastructure of host countries, which is organic enough to provide an internationally
acceptable framework for petroleum international agreements.721
The parties to petroleum
international agreements would do well to take cognizance of the fact that a stipulation of
applicable law may not guarantee the stability of expectations under the agreement. A
choice of law will be superfluous in the face of a fundamental change, which wily nilly
alters the expectations under the agreement.
It is illusory and self-deluding, to overstate the stabilizing authority of the proper law of a
PIA. Such notions of stability are based on the erroneous assumption of frozen contracts,
under which terms remain sacrosanct and immutable irrespective of the effluxion of time
718 J.Weston, “The Charter of Economic Rights and Duties of States and the Deprivation of Foreign-
Owned Wealth,” (1981) 75 AJIL 437. 719 M. Somarajah, “The Myth of International Contract Law,” (1981) 15 JWTL 187; In spite of the
seeming potential advantage to investors and sponsors of direct foreign investments,
internationalization clauses and international arbitration provisions have not been very effective in
resolving investment disputes arising between host States and transnational oil corporations. See M.
Kantor, “International Project Finance and Arbitration with Public Entities: When is Arbitration a
Fiction?” (2001) 24 Fordham Int’l L.. J. 1122,1125. 720 Ibid. 721 Note 4 of chapter one supra.
347
and fundamental changes in circumstances, which necessitate variation of the term of the
contract.722
Applicable law can only apply and operate within the logic of the instant
circumstances in which it subsists; it cannot stand immutably for all time.
In a petroleum international agreement, the host country has the leeway to reserve the right
to fundamentally alter its law, and international oil companies seek to insulate themselves
from the vagaries of such changes to no avail. Where the petroleum international agreement
is entirely regulated by the law of the host country, it may be feasible to secure the
commitment of the State party to the agreement to perform the agreement in good faith, and
providing adequate buffer against changes in its law. Such devices will, in due course be
the subject, of elaboration in the study.
Allied to the inorganic state of the proper law of petroleum international agreements, that is,
the law chosen by parties as the governing law of the contract between them inter se, is the
important consideration that it is impracticable to envision all possible circumstances and
outcomes. Supervening circumstances may render the performance of the contract so
onerous as to necessitate the extinction of the agreement or fundamental variation of its
terms. Peremptory norms of international law, and municipal law acknowledge the doctrine
that those supervening circumstances, which render performance onerous or impossible, are
enough grounds for non-performance or outright abrogation.723
722 S.R. Chowdury, “Permanent Sovereignty and its Impact on Stabilization Clauses, Standard of
Compensation and Patterns of Development Cooperation,” in K. Hossain and S.R. Chowdhury (eds.) ,
Permanent Sovereignty Over Natural Resources in International Law, New York, St. Martins Press,
45-53 (1984). 723 H.S. Zakariya “Changed Circumstances and the Continued Validity of Mineral Development
Contracts,” in K. Hossain (ed.), Legal Aspect of the New International Economic Order, New York,
Frances Printer, 32-40 (1984).
348
Because of the complexity implied in contractual relationship at the international plane,
municipal rules may be deficient in providing a definitive solution to the special problems
emanating from international contractual relationship. Removal of PIAs from the purview
of municipal law rather than being a panacea only compounds the problem. International
rules aimed at stricturing PIAs are themselves inorganic and still evolving and
indeterminate lacking the authority to stricture the variegated expectations of parties to
PIAs.
While the proper law of PIAs is not completely discountenanced by parties, they seek
additional buffers against unilateral changes in the terms of the relationship by
complementing such adjectival law with special provisions addressing supervening
occurrence that may disrupt expectations and the intended and unintended consequences of
such disruptions should they be enacted.
The objective in this study is to highlight the multiplicity of scenarios regarding issues of
stability and underscore certain stability stipulations in current usage, and certain
developments, which gives a great cause for concern to parties to PIAs., amongst which are
the recurrent problem of impossibility of performance occasioned by supervening
circumstances and disequilibria in relationships occasioned by events, which render the
possibility of performance onerous. Before the study causes analysis to bear on the
available devices in use for achieving stability in PIAs it is pertinent to explore the legal
nature of State contracts as a backdrop to the entire study.
7.2 THE LEGAL NATURE OF STATE CONTRACTS
There are as many definitions of contract as there are publicists; the common thread that
runs through most characterization is the consensual basis of a contract. There is the need
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for an antecedent agreement between the contracting parties, intended to give rise to
enforceable rights and obligations. The sine qua non for all contracts, therefore, is an
agreement, a consensus ad idem, the meeting of the minds with identical intentions.724
Contract has been variously defined as an agreement, upon a sufficient consideration to do
or not to do a particular thing.725
An agreement between two or more parties, competent for
that purpose, upon sufficient consideration, to do or not to do a particular thing, which
lawfully may be done or omitted.726
A contractual relation is established where one party,
for a sufficient consideration offers to do or not to do a particular thing and this offer and
acceptance must be equally binding upon both parties to the agreement and must be to do a
particular thing.727
So much by way of general characterization. A distinction must be made between
agreements made between States subject of international law, and as between States with
individuals and or corporations.728
The incursion of the State into the world of commerce has been precipitated by a myriad of
factors.729
In the former Warsaw Pact nations and its relics, the State had a monopoly over
domestic economy and international trade. The proliferation of nascent and emerging
economies, the considerable development and sophistication assumed in international trade,
due to technology changes in communication, the world became in a way a global village.
724 G.H. Trietel, The Law of Contract,London, Steven/Sweet and Maxwell, 1-6 (1990); P.H. Frey,
Essentials of Contract Law, New York, Thomson Delmar, 7-15 (2001). 725 Central, R. Co. v.Mauser, 241 Pa 603, 88A 791, 49 L.R.A. (N.S.) 92.; T.D. Crandall, D.J. Whaley,
Cases, Problems and Materials on Contracts, New York, Aspen, 5-17 (2004). 726 Smith v.Martin, 94 Ore. 132, 185 p.236; M.A. Chirelstein, Concepts and Case Analysis in the Law
of Contracts, New York, West Publishing, 4-9 (2004). 727 Warrington v. Reese, 7 Boyce Del. 390, K108 A. 33; R.E. Bearnett (ed.), Perspectives on Contract
Law,New York, Aspen6-14, (2005). 728 G.R. Delaume, Law and Practice of Transnational Contracts, New York, Oceana Publications ix
(1988). 729 See I’ Congresso Del Partido, [1983] I A.C.244 (House of Lords).
350
Increasing tendency on the part of the State to view certain industries as of strategic
importance and thereby necessitating the strategic mobilization of resources by the State in
such areas.730
The preoccupation in this study is with petroleum international contracts as a genre of State
contracts. PIAs derive their nature as State contracts by virtue of the dominion, which
States have over the natural resources within their territories. That dominion has been
affirmatively conferred by several resolutions of the United Nations Organization notably,
the United Nations Resolution on Permanent Sovereignty over Natural Resources 1962, GA
Resolution 1803 (XVII) and the Charter of Economic Rights and Duties of States 1974, G.
A. Resolution 3281 (XXIX). The Charter declares, inter alia:
Every State has and shall freely exercise full permanent
sovereignty including possession, use and disposal over
all its wealth, natural resources and economic activities.
(1) Each State has the right:
(a)To regulate and exercise authority over foreign
investment within its national jurisdiction in accordance
with its laws and regulations and in conformity with its
national objectives and priorities. No State shall be
compelled to grant preferential treatment to foreign
investment.
730 C. Wilcox, Public Policies Toward Business, Illinois, Richard D. Irwin Inc., 500 (1996).
351
In that connexion, ownership of mineral resources in situ has been vested in the State in
most oil producing nations; in effect PIAs in these nations fall within the classification of
State contracts.731
A common thread runs through all contracts, whether private and or
public. In view of this common contractual basis of private and indeed public contracts, a
controversy has raged, between jurists as to whether a distinction could be made between
State contracts and civil contracts. That controversy in itself derives from the intrinsic
nature of the State as a sovereign entity, subject of international law in contrast to
individuals and juridical entities like corporations, non-subject of international law, which
invariably falls within the juridical authority of municipal or domestic law. At best, where
such private entities come within the purview of international law, their capacity is derived,
a function of their citizenship of a sovereign nation.732
In the Mavrommatis Palestinian Concession Case, it is true that the dispute was between a
private person and a State that is, between Mavrommatis and Great Britain. Subsequently,
the Greek government took up the case. The dispute then entered a new phase; it entered
the domain of international law and became a dispute between two States. It is an
elementary principle of international law that a State is entitled to protect its subjects, when
injured by acts contrary to international law committed by another State, from which they
have been unable to obtain satisfaction through ordinary channels.733
By taking up the case
of one of its subjects and by resorting to diplomatic action or international judicial
proceedings on his behalf, a State is in reality asserting its own rights to ensure, in the
person of its subjects, respect of the rules of international law.734
731 F.A. Mann, “The Law Governing State Contracts.” (1974) B.Y.I..L. 21; A.F.M. Mamoruzzaman,
“State Contracts in Contemporary International Law: Monist Versus Dualist Controversies,” (2001) 12
EJIL 309-328. 732 Ibid. 733 Mavrommatis, Case P.C.I.J. Reports, Series A, No. 2, p.12. 734 Ibid. at 13.
352
The question, therefore whether the dispute originates in an injury to a private interest,
which in point of fact is the case in many international disputes, is irrelevant in this regard.
Once a State has taken up a case on behalf of one of its subjects before an international
tribunal, in the eyes of the latter the State is sole claimant.
It is, therefore, problematic to assimilate State contracts to the run of the mill contracts,
which arise, between private individuals and corporations. The problem of the incursion of
the State into the world of commerce has been obviated by the distinctions made between
acts of State, which constitute the exercise of its sovereignty; acts iure imperii in contrast to
acts iure gestionis or acts in commercio.735
The increasing assumption by the State of
commercial and industrial activities, both in the domestic and the international sphere, is a
phenomenon which in many respects necessitates a revision of traditional legal thought.
The need for a new perspective is underscored by those distinctions which jurists are apt to
make regarding State contracts within the purview of international law. These distinctions,
particularly hold great fascination for jurists who hold fast to legal dualism of international
law, to the effect that a distinct dichotomy exists between international public law and
private law. That position is not wholly unamenable to the drift of thought of legal monists.
Going by these distinctions, the relationship between States or other international persons
come within the purview of public international law in contrast to the relations between
private entities and or between a private person and a foreign State which is constricted by
certain municipal regimes and or an adjectival law, mutually agreed by parties.736
735 Note 16 supra, at 244. 736 A. Amerasinghe, “State Breaches of Contracts with Aliens and International Law,” (1964) 23
A.J.I.L. 76, T.T. Griffiths, “Arbitrating International Oil and Gas Disputes: Practical Considerations,”
in G. Kronman, D. Folto and T. O‟Connor (eds.), International Oil and Gas Ventures: A Business
Perspective, Houston, AAPG, 187-198 available at http://www. interabitration.net/pdf/amr 18000.pdf;
T. Waelde, A. Kolo, “Renegotiation and Contract Adaption in the International Investment Projects:
353
In the Brazilian Loans case, France espoused the claim of its nationals who held bonds of
certain Brazilian government loans, governed by Brazilian laws. The crucial issue was the
interpretation of these loans, the International Court of Justice ruled that it had jurisdiction
under Article 38 of its Statute to decide cases such as the one before it involving disputes
between States, which turned not upon international law but the interpretation of municipal
law.737
Germany espoused the right of German nationals in the Chorzow Factory case, indemnity
merits. The case concerned the expropriation by Poland of a factory at Chorzow contrary as
the Court had held to the Geneva Convention 1922 between Germany and Poland on
Upper-Silesia. The Court ruled upon a claim by Germany for an indemnity for the damage
caused by the illegal expropriation.738
According to Sir Fischer:
When the debt is from State to State, we have at once a
relationship within the sphere of international law;
where the contract from which the debt arises is between
a State and a foreign individual, the matter becomes one
of international law in the strict sense only if and when
the State of the individual makes his cause its own and
addresses itself diplomatically to the contracting
State.739
Applicable Legal Principles and Industry Practices,” 2006, available at
http://www.dundee.ac.uk/cepmlp/journal/html/vol5/article 5-3a.html 737 Brazilian Loan Case, P.C.I.J. Series A, pp.41-42, 121. 738 Chorzow Factory Case, P.C.I.J. Reports, Series A, No. 17, pp.46-48. 739 See generally J.F. Williams, Current International Law and the League of Nations, New York,
Harper Press, 216 (1928); C.Moerb, “International Operations: Contracts with Government and Basic
354
It is, therefore, not within the jurisdiction of municipal courts and or tribunals to enforce an
international right or duty since such transactions are within the purview of certain other
laws other than those, which domestic courts administer. Irrespective of the conceptual
justification of these distinctions the realities of global economy and real politik have,
perhaps, blunted the sharp edges of these distinctions. According to Friedmann:
It is submitted that all the customary rules touching
international State responsibility are in fact, based upon
a particular division of the spheres of State and
individual. These rules presuppose that the State has
traditionally certain functions, broadly speaking; the
conduct of foreign policy, the control of the armed
Concepts of International Operatiing Agreements,” (2006), Lewis Marburge’s Internet Oil and Gas
Newsletter, available at http://www.mosburgoil-gas.com/html/body_moerb_11_96_5a.html; ICSID
arbitrations have no finality, one of the most persistent problems in international arbitration has been
the diffuculty of ensuring the finality of arbitral awards. Although there has been a marked trend in
recent years recognizing the autonomy of arbitration in international cases, national courts continue to
review awards under a variety of standards. In the celebrated Pyramid Resort Case, Arab Republic of
Egypt v.Southern Pacific Properties (Middle East) Cour d’ appel, Paris Judgement July 12,1984,
(1985) 23 ILM, 1048, in its decision, which was confirmed by the French Cour de Cessation on
January 6,1987, the Paris Cour d’appel ruled that the Egyptian State was not a party to the arbitration
agreement between the investor and the Egyptian General Organization for Tourism and Hotels, in that
case, a French court set aside an ICC award on the same day that leave to enforce the award was
granted by a court in the Netherlands, in Southern Pacific Properties (Middle East), Ltd.v.Arab
Republic of Egypt, District Court, Amsterdam, Judgment of July 12, 1984, (1985) 24 ILM, 1040; In
Klockner Industrie-Anlagen Gmbh, Klockner Belge, S.A. and Klockner Handelsmaatschappij B.V.
v.United Republic of Cameroon and Societe Camerounaise des Engrais ICSID Case No. ARB/81/2
and Amco Asia Corp.., Pan American Development, Ltd. And P.T. Amco Indonesia v. Republic of
Indonesia, ICSID Case No. ARB/81/1, the awards were annulled by an ad hoc Committee organized
under Article 52 of the Convention on the Settlement of Investment Disputes (ICSID). In each case,
after extensive briefing and hearings, the Committee concluded that the arbitrators had exceeded their
powers by failing to apply the proper law and had failed to state sufficient reasons to justify their legal
conclusions. There is no appeal from the decision of an ad hoc Committee annulling an award. Under
the ICSID system, the only option is to resubmit the case for arbitration de novo by a new tribunal. The
losing party in that proceeding will be entiltled in its turn to request annulment of the award by a new
ad hoc Committee and so forth ad infinitum. See the Convention on the Settlement of Investment
Disputes Bet\ween States and Nationals of other States, Mar. 18, 1965, 17 U.S.T. 1270, 575 U.N.T.S.
159. The ICSID Convention, along with the text of the World Bank Executive Directors‟ Report
thereon is reproduced at (1965) 4 ILM 524. The foregoing demonstrates the non-arbitrability of
disputes in State contracts with private entities.
355
forces and certain functions of executive government…
The increase of State control operates upon these rules
with different effects, according to the nature of the
matter. It extends the privilege of State immunity in
foreign countries to spheres not contemplated when
international practice on this practice crystallized. This
practice granted the State almost complete immunity
before foreign courts, on the tacit assumption that
commerce was as a matter of course in the hands of
individuals subject to civil liability. When States began
to own merchant fleets, to operate railways, to buy
goods abroad, when further State banks, State
subsidized commercial undertaking, public corporations,
appeared in international transactions, this assumption
became questionable. Since this development started far
back in the nineteenth century, this problem has, by
now, received some attention in court practice and
theory. The necessity of adjusting legal principles to
new social conditions gradually leads to a qualification
of State immunity as a corollary to State activity in
spheres formerly occupied by the individual.740
740 See W. Friedman, The Changing Structure of International Law, London, Steven, 235 (1964); M.B.
Feldman, “The Annulment Proceedings and Finality of ICSID Arbitral Awards,” (1987) 2 ICSID
Review 85; http://www.gsblaw.com/resource/pub_result.asp?ID=1447533202002; R.J. Weintrab,
“Comments on the Roundtable Discussion of Choice of Law,” 2006, available at
http://review.law.mercer.edu/old/48206.htm
356
On the one hand, there are what prima facie bear semblances of transactions under
municipal law, which come within the purview of inter-state, arrangement. On the other,
there are those that are inter-state arrangements, prima facie regulated by public
international law, which are commercial and thereby come under the ambit of municipal
law. It is not inconceivable that transactions between national persons are, at least, partially
governed by those supranational principles of law, which are the tools of public
international law, and those transactions between international persons are governed by a
national system of law. Where there is the problem of choice of law, the intention of the
parties to the contract will determine the “proper law” of the contract in terms of the branch
of law that is applicable to the contract. State contracts, which are commercial in nature,
and contracts of private law can be readily assimilated to ordinary contracts than State
contracts, which involve the exercise of sovereignty or public law.741
The differences between State contracts and other contracts are attributable to the
prerequisite for the formation of the contract. The making of certain State contracts may be
prohibited while others cannot come into existence without prior legislative or
administrative approval; each State possesses its own rules regarding the conditions which
must be met for the validity in form and substance of its contracts. The subject matter of a
State contract possesses a public character and invariably relates to public property or to the
performance of public service. Certain State contracts especially PIAs entail the grant to
the party contracting with the State of special powers and privileges. The consideration that
741 Note 16 supra at 244.; H.H. Perritt,Jr., “Resolving Claims When Countries Disintegrate:The
Challenges of Kosovo,” 80 Chic-Kent L.Rev. 119 (2005). Available at
http.//pbosnia.Kentlaw.edu/claimsare-wl-published.htm; J. Marrin, “International Dispute Resolution,”
7 November 2006, available at http://www.mondaq.com/article.asp?articleid=44022&hotopic=1; L.W.
Newman, D. Zaslowsky, “International Litigation, Arbitration Against Foreign States-Enforcement of
Awards,” 5 International Litigation and Arbitration Newsletter 1066 (2005)
http://www.bakernet.com/newsletters/newsletter_full.asp?nlid=30&editionid=1066
357
one of the contracting parties to State contract enjoys the attributes of sovereignty and
public personality affects some incidents of the contract.
7.3 THE PROPER LAW OF PETROLEUM INTERNATIONAL AGREEMENTS
A consideration of the proper law of State contracts brings the study to the nebulous world
of the conflict of laws. The quest for the proper law of PIAs is fraught with problems
because of the diversity in the laws and concepts which stricture them and the differences
between legal systems. The proper law of Petroleum International Agreements connotes a
configuration of variegated concepts, principles; legal systems, statutes, which have a nexus
with the subject matter of the PIA, and which governs the relationships thereto. In that
connexion, it may be impossible to establish an all-encompassing single sui generis proper
law of PIAs. That consideration engenders the conflict of laws problem inherent in PIAs
due to the nature of the legal relations entailed in PIAs, involving as it were sovereign State
or States‟ and a consortium/consortia of Transnational Oil Companies. These variegated
vested interests lead to conflict of law problems.742
Perhaps the most important of conflicts principles that determines the proper law of all
contracts, PIAs inclusive, is the freedom of parties to choose the law applicable to their
contract. Secondly, in the absence of such agreement the law most connected with its
742 J.W. Yackee, “ A Matter of Good Forum: The (Down-Sized) Hague Judgments Convention and
Conditions of Formal Validity for the Enforcement of Forum Selection Agreements,” (2003) 53 Duke
L.J. 1179. The Hague Judgment Convention represents the concerted attempts by the major capital
exporting countries to remove the enforceability of agreements between State entities and private
transnational corporations from the jurisdiction of the State party to Petroleum International
Agreements. Such Forum Selection Clause grant a given court or courts exclusive jurisdiction over
future contractual disputes.
358
characteristic feature should govern a contract. The proper law of a PIA, therefore is the
law which the parties there to have elected at the out set as governing their relationship
under the contract. Prima facie, interstate relations are regulated by international law of
treaties while contractual relationship between individuals are regulated by relevant
municipal law. Some jurists have steered a middle course in that regard. State contracts,
which are internal as between State and entities within its territorial jurisdiction and may
include the civil law of the State, which is applicable to all contracts in general. the public
law of the contracting State, if the contract is one of public law and involves the exercise of
sovereignty.743
A special statute, which may regulate a particular class of State contract
such as mining or petroleum international agreements, may be made by the State or by State
agencies.
Still other contracts may be governed by a composite structure of legal principles, which
amalgamate the national law of the contracting State and the principles of law common to
the parties in a PIA, and the general principles of law recognized by civilized nations.
State contracts encompassing PIAs vary in accordance with the nature of the contract as
with the legal system in force in the State concerned. In France, State contracts are treated
as administrative contracts. In the United States, the problem of public contracts must be
discussed against a background of constitutional limitations designed to protect vested
rights. In England, no formal distinction is made between public contracts and contracts of
private law or the law applicable to these two classes of contracts. In the Middle East
certain countries adopt administrative laws whilst some do not. In the former,
administrative law regulates State contracts. In the latter group of countries, there does not
743 R.W. Jennings, “State Contracts in International Law,” B.Y.I.L 701. (1961).
359
exist any general theory applicable to public contracts, and except for constitutional or
legislative provision relating to specific contracts, such as PIAs, these contracts are
generally regulated by the ordinary principles of law, which govern other agreements.
Some jurists suggest that the difference in the nationality of contracting parties may bear on
the law applicable to PIAs.744
The paper must, however, again make a distinction between
contracts, which a State makes with aliens in contrast to that which it makes with its
nationals. The study‟s major concern is with the former, and it involves legal implications,
which as a matter of course do not pertain to contracts made with nationals.
It is not uncommon to view State contracts with alien individuals or corporations, such as
PIAs as international contracts. In a similar vein, disputes arising from such contractual
relations are said to be subjected to „international arbitration.‟ However, strictly speaking, it
may be difficult to characterize such relations, which are not between States subjects of
international law as international contracts.745
At international law, individuals whether natural and or juridical have never been
recognized as having the capacity to make treaties, whether with States or with other
international persons with treaty-making capacity. The question has in recent years been
discussed in the context of large municipal law companies and States, particularly PIAs for
the exploitation of oil.
744 Ibid. at 704. 745 See J.E.S. Fawcet, Legal Aspects of State Trading , London, Stevenson, 79 (1956); A.D. Haines,
“Choice of Court Agreements in International Litigation:Their Use and Legal Problems to which They
Give Rise in the Context of the Interim Text, Hague Conference on Private International Law
Preliminary Document No. 18, February 1, 2001.
360
The nearest that the International Court of Justice has come to considering the question was
in the Anglo-Iranian Oil Company case. In which it rejected an argument to the effect that a
contract between Iran and the Anglo-Iranian Oil Company was a treaty because of the part
played by the United Kingdom government in its negotiations. The Court stated that it is
nothing more than a concessionary contract (PIA) between a government and a foreign
corporation.746
France espoused the rights of French holders of Norwegian bonds in the Norwegian Loans
case. Norway objected to the Court‟s jurisdiction, the Court upheld the objection, finding
that it is without jurisdiction to adjudicate upon the dispute, which has been brought before
it by the application of the government of the French Republic.747
The expatriate status of
the party contracting with the State does not confer international status on the contract. But
it is feasible for its breach by the contracting State to, under certain circumstances, give rise
to international claim by the State of which the expatriate is a national against the
contracting State. The foregoing consideration is, perhaps, what invariably obtains in
contractual dispensations where the parties consensually elect to remove the contract from
the purview of municipal law of the contracting State and brought under the ambit of corpus
of law other than the national law of the contracting State.748
That granted, international arbitration strictu senso could only subsist between two or more
sovereign States entities, which are subjects of international law. That consideration
746 Anglo-Iranian Oil Co. Case, [1952] I.C.J. Reports 93. 747 Norwegian Loan Case, [1957] I.C.J. Reports 9. 748 K.P.Berger, “Transnationalization of International Investment Contracts in the Oil and Gas Industry:
Contribution of the Central Transnational Law Database, (2005) 1 Ogel, 145-55; K.P. Berger,
“Transnationalization of International Investment Contracts with Particular Reference to the Natural
Resources Industry, 22 Journal of Energy Resources Law 51-58 (2004); P. Bernardini, “Development
Agreements with Host Governments,” in R. Pritchard (ed.), Economic Development, Foreign
Investment and the Law,London, Kluwer Law International, 161-174, (1996); P.Berdini, “Investment
Protection Under Bilateral Investment Treaties and Investment Contracts,” 2 The Journal of World
Investment 235-247 (2002).
361
precludes arbitration as between States and multinational corporations from being
characterized as an international arbitration. The terms of the contract may spell out an
arbitration modality, which is amenable and adapted to norms of international law, such
adaptations, however would not have conferred an international status on such arbitral
process. Granted that the expatriate status of the party contracting with the State by no
means internationalize the contract. The divergent interests and separate citizenship and
legal capacity of the parties may impact considerably on the determination of applicable
law, the contract could be placed under the purview of a legal structure at the mutual behest
of the contracting parties. According to Jennings:
The proposition that the will or intention of the parties
expressed in a State contract can determine the adjective
law of the contract as other than the local law, or create
an obligation in the State to submit to arbitration or limit
the States right to expropriate or give the contract an
international character that it might otherwise not
possess – all these propositions assume that international
law is in any case directly relevant to the legal regime of
State contracts. For how can a term of contract itself
affect the legal status of the contract in international law
unless there is first, the possibility in principle of some
points of connexion between the contract itself and
international law? It is only if this point of connexion
with international law already exists that escape out of
the State‟s regime becomes possible as a result of one of
362
these devices. Even the contract where the parties have
chosen international law as the proper law of the
contract depends it is submitted, upon the prior validity
of this general proposition; for how can the parties
choose that international law be the proper law in any
sense that is significant within the international law
system unless there was first a point of contact with
international law whereby this choice of law may
become an obligation existing in and effective in
international law? If it is said that this result depends
merely upon the application of a universally accepted
principle of private international law concerning the
choice of law of a contract, this is merely to assert that
this principle of private international law is also a
principle of public international law. This is not to
suggest, of course, that all of these devices for giving
this or that international character to a State contract are
equally effective. But it is to submit that if anyone of
them is effective; it follows that it has ceased to be
possible to assert that the State contract is per se
something, which exists, only in the municipal sphere.
And if there is any point of direct contact between
international law and the State contract, the theory that
the remedy for the alien contractor is for a distinct tort
363
entirely independent of the contract is no longer
tenable.749
In spite of the lack of unanimity on whether a breach by a State of its contract with a private
entity constitutes an international wrong, which attracts the remedies available at
international law. International law, acknowledges the responsibility, rights and duties of
State to the espousal of claims of its nationals against another State. It is, however, hesitant
and equivocal in providing the competent platform to adjudicate upon them. The
jurisdiction of the International Court of Justice can only be exercised over a State at its
behest and where it withholds that consent it cannot be impleaded at the Court on the issue.
Understandably, States are rather circumspect on surrendering their sovereignty to the
jurisdiction of the Court, that consideration perhaps, explains why the preponderance of
claims by States on behalf of their nationals have failed in the face of the plea against the
competence of the Court.750
In the Interhandel case, Switzerland brought claim against the United States of America for
the restitution of the assets of Interhandel a Swiss Company in the United States. The
United States had taken the property in 1947 on the ground that Interhandel was German,
and so enemy controlled. Switzerland disputed this and, after several attempts to negotiate,
749 Note 30 supra, at 705; J. Harb, “France, A Striking Decision of the Supreme Court on French
Jurisdiction to Appoint Arbitrators: The Decision in National Iranian Oil Company v. The State of
Israel,’ 5 International Litigation and Arbitration Newsletter 1066 (2005). Available at
http://www.bakernet.com/newsletters/newsletter_full.asp?nlid=30&editionid=1066 750 Note 34 supra; B.M. Cremades and D.J.A. Cairns, “Contract and Treaty Claims and Choice of
Forum in Foreign Investment Disputes,” in N. Horn and S. Kroll (ed.), Arbitrating Foreign Investment
Disputes: Procedural and Substantive Legal Aspects,The Hague, Kluwer Law International, 325-351,
(2004); D.W. Leebron, „A Game, Theoretic Approach to the Regulation of Foreign Direct Investment
and the Multinational Corporation,‟ 60 University of Cincinnati Law Review 305 (1991); R.D. Bishop,
International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea (2006) available
at http://www. Kslaw.com/library/pdf/00000001.pdf; M. Pistis, “The Rome Convention: Different
Appraches,” 2006 available at http://www.mondaq.com/article=40212&searchresuls=1; D. Hellinger,
“Nationalism, Oil Policy and the Party System,” 2004, available at http://www.personal
.umich.edu/mmmarteen/svs/lectures/Lasa2000/hellinger.htm
364
in 1948 asked the United States to return Interhandels property, on July 26, 1948, the
United States refused to do so. After unsuccessful court proceedings in the United States in
1957, Switzerland instituted proceedings under the optional clause.751
France espoused the rights of French holders of Norwegian bonds in the Norwegian Loan
case. Norway objected to the Courts jurisdiction; the Court upheld the objection, finding
that it is without jurisdiction to adjudicate upon the dispute, which has been brought before
it by the application of the government of the French Republic.752
In a similar vein, the espousal of the rights of the Anglo-Iranian Oil Company failed on the
grounds that Great Britain had no locus standi in the case, which was a concessionary
contract between Anglo-Iranian Oil Company Limited and Iran. The fact that United
Kingdom played an active role in negotiating the contract does not confer on it the status of
treaty.753
The foregoing underscores the conundrum in the resolution of the problem of the proper
law of petroleum international agreements. The complexities and problems emanating from
such State contracts with private foreign entities have not been envisaged by international
law. On its part, municipal law is too parochial to be acceptable as proper law. What
remains in the circumstances is to seek a third option, by steering a middle course through
the strait by eclectically assimilating certain aspects of the legal realities of both parties to
751 Interhandel case [1950] I.C.J. Reports 6. 752 Note 34 supra. 753 Note 33 supra.
365
the contract through their anticipation of probable problems that could arise from the
contract, and establishing the due process for the resolution of such problems.754
The Texaco Overseas Petroleum Company and California Asiatic Oil Company v. Libya
case, arose when in 1973 and 1974, Libya nationalized all the properties, rights, assets and
interests of the two claimants United States companies under certain concession contracts
made between Libya and the claimants for the exploitation of oil in Libya. Each contract
(clause 16) provided that:
The contractual rights expressly created by this
concession shall not be altered except by mutual consent
of the parties.
Each also indicated the law of the contract (clause 38):
This concession shall be governed by and interpreted in
accordance with the principles of law of Libya common
to the principles of international law and in the absence
of such common principles then by and in accordance
with the general principles of law, including such of
754 D. Suratgar, „Consideration Affecting Choice of Law Clauses in Contracts Between Governments
and Foreign Nationals,‟ 2 A.J.I.L. 273 (1962); E. Gallard, “Treaty Arbitration and Jurisdiction over
Contracts Claim: The SGS Cases,” in T. Weiler (ed.), International Investment Law and Arbitration:
Leading Cases from ICSID, NAFTA, Bilateral Treaties and Customary International Law, London,
Cameron 325-346 (2005); J. Gill and M.Gearing, “Contractual Claims and Bilateral Investment
Treaties: Comparative Review of SGS Cases, 21 Journal of International Arbitration 397-412 (2005).
366
those principles as may have been applied by
international tribunals.755
The contracts provided for the reference of any dispute arising under them to two
arbitrators, one of whom shall be appointed by each party, and an umpire who shall be
appointed by the arbitrators in the event of either party failing to appoint an arbitrator, a sole
arbitrator was to be appointed by the President of the International Court of Justice. Libya
did not participate in the proceedings at any stage, except by way of memorandum to the
President of the International Court of Justice objecting to the proceedings.
The arbitrator held that the concessions were internationalized contracts and that the law
applying to them was that chosen by the parties in clause 38. In the following extracts, the
arbitrator indicated more fully when a contract between a State and an alien may be
characterized as an internationalized one, and what the consequences of such a
characterization are. He then considered whether the contracts are binding under the
applicable law and whether the Libyan nationalization measures in breach of the contracts
can be justified.
According to the arbitrator, the internationalization of contracts entered into between States
and foreign private persons could result through reference to the general principles of law in
its proper law clause and provision for international arbitration. Economic development
agreements are of long duration, entails close co-operation between the State and the
contracting party and demands permanent installations as well as the acceptance of
extensive responsibility by investors, stressed the need to protect investor against the
755 Texaco Case, (1978) 17 I.L.M. 1.
367
modification of national law of host country or against any government action which may
lead to the abrogation or rescission of the contract. Hence the insertion as in the present
case of so-called stabilization clauses. These clauses tend to remove all or part of the
agreement from internal law and to provide for its correlative submission to sui generis
rules or to a system, which is properly an international law system.
The recognition by international law of the right to nationalize is not sufficient ground to
empower a State to disregard its commitments, because the same law also recognizes the
power of a State to commit itself internationally especially by accepting the inclusion of
stabilization clauses in a contract entered into with a foreign private party.756
In the Aminoil case in 1948, Aminoil, an American company was granted by Kuwait an oil
concession of 60 years duration. In 1977, Kuwait terminated the concession by Decree Law
No. 124 and transferred to itself the company‟s concession assets against compensation to
be assessed by a Kuwaiti Compensation Committee. Aminoil declined to co-operate with
the committee, contesting instead the legality of the Decree Law. The parties referred the
case to arbitration under a special arbitration agreement, which provided in Article 111(2):
The law governing the substantive issues between the
parties shall be determined by the tribunal, having
regard to the quality of the parties, the transnational
character of their relationship and the principles of law
and practice prevailing in the modern world.
756 Ibid. B. Montembault, „The Stabilization of State Contracts Using the Example of Oil Contracts: A
Return of the Gods of Oympia?‟ 6 International Business Law Journal 593-643 (2003); M..S.
Perera, „Stable Investment Contracts in the Developing World,‟ 14 Sri Lanka Journal of International
Law 97-106 (2002).
368
Interpreting Article 111(2), the tribunal decided that it was required to apply Kuwaiti law of
which international law with its rules governing the legality of an expropriation formed a
part. The tribunal rejected Aminoils claim that nationalization did not satisfy the
international law requirements the existence of which the tribunal did not question.757
The foregoing jurisdictional considerations regarding State contracts invariably have an
impact on the espousal of the rights of the contracting parties. Without prejudice to the lack
of consensus on the jurisdictional issue of State contracts, certain modicum of practice can
be delineated; excepting where parties elect to subject disputes to arbitration, it is within the
competence of a State, deriving from territoriality to enforce its contracts with a private
entity and or corporation in its own courts, and at its behest in a competent foreign court.
Contrary to that consideration, a contracting party may be permitted by the proper law to
sue the State in its own court but may in principle be precluded from bringing an action
against it in other courts. Where the State is impleaded in other court, it is not improbable
that international law will come to play where the State is impleaded on account of the
private entity by its country of nationality. International law may frustrate such a
proceeding as was exemplified in the Anglo-Iranian Oil Company case and or moderate it
with due cognizance to the sovereignty of the State. In that regard a dichotomy must be
757 Aminoil Case (1983) 21 I..L.M. 976; (1983) 54 B.Y.I.L. 213; T.W. Walde and G.Ndi, „Stabilizing
International Investment Commitments: International Law Versus Contract Interpretation‟ 31 Texas
International Law Journal 215-267 (1996); T.Walde, „Is the Treatment of the “Umbrella” or Pacta
Sunt Servanda Clause in the SGS v. Pakistan Jurisdictional Decision (2003) Correct? A Case
Comment,‟ 1 Ogel 5 (2003); Al Faruque Abdullah, „The Rationale and Instrumentalities for Stability
in Long-Term State Contracts: The Context for Petroleum Contracts,‟ 7 The Journal of World
Investment and Trade 85-112 (2006); I. Adjenughere, „Construction of Arbitration Clause in Nigeria:
A Recent Case,‟ 1 Ogel 4 (2003).
369
established between actions brought against the State in the International Court of Justice
and those brought against it in a foreign municipal court.
The Statute of the International Court of Justice unequivocally bars private entities and
corporations from having recourse to an international tribunal in an action against the
contracting State. Article 34 of the Statute of the International Court of Justice provides:
1. Only States may be parties in cases before the Court.
2. The Court, subject to and in conformity with its rules,
may request of Public International Organizations,
information relevant to cases before it, and shall receive
such information presented by such organizations in
their own initiative.
3. Whenever the construction of the constituent
instrument of a Public International Organization or of
an International Convention adopted there under is in
question in a case before the Court, the Registrar shall
notify the Public International Organization concerned
and shall communicate to it copies of all the written
proceedings.758
It has been opined in certain quarters that the infrastructure of the Court be made accessible
for the resolution of disputes emanating between States and private entities and corporations
758 See Statute of the International Court of Justice.
370
and public international bodies with a caveat that the contracting State acquiesces under an
ad hoc dispensation.
At international law, a State can not be impleaded in a foreign court other than its own, on
account of private entities and corporation contracting with it, that stance at international
law derives from the tenet of equality of States and the sovereign immunity of a State from
the legal jurisdiction of another State. However, the incursion of the State into the world of
commerce has engendered quite a considerable furore in international legal circles and the
problem of whether the State‟s immunity could be waived without its consent in the
settlement of disputes arising from its breach of contracts with private entities and
corporations. State practice has tended to depart increasingly from the traditional absolute
immunity doctrine, gravitating towards the principle of restrictive immunity.
Countries of the Western Hemisphere have embraced restrictive immunity as a function of
the distinction between acts iure imperii and acts iure gestionis. In refusing to uphold a plea
of immunity in such cases proffered against the State in their national courts, this group of
States has provided a convenient rationale. By availing themselves of the principle on the
strength of which, when a State enters into a transaction with a private entity or corporation
which is not prima facie an act of sovereignty, it has by implication consented to waiver of
immunity. That distinction has not been without opposition as Fawcett opined that:
The various distinctions made between acts iure imperii
and acts iure gestionis, sovereign and non-sovereign
acts, and the public and private capacity of the State are
not adequate for classifying State trading contracts, for
371
the lines of demarcation between the political and
economic activities of the State have become blurred.759
The bulk of this practice consists of municipal court decisions. Lord Wilberforce in I
Congreso Del Partido basing his decision on Phillipine Admiral (owners) v. Wallem
Shipping (Hong Kong)760
Trendtex Trading Corporation v. Central Bank of Nigeria held
that:
The limitation under the so-called “restrictive theory”
arises from the willingness of States to enter into
commercial, or other private law transactions with
individuals. It appears to have two main foundations:
(a) It is necessary in the interest of justice to
individuals having such transaction with States to allow
them to bring such transactions before the courts.
(b) To require a State to answer a claim based upon
such transaction does not involve a challenge to or
inquiry into any act of sovereignty or governmental act
of that State, nor, any interference with its
sovereignty.761
It will suffice to review some landmark judicial decisions. The doctrine of State immunity
was justified by Marshall, C. J., in the Schooner Exchange v. McFaddon on the basis of the
equality, independence, and dignity of States and the invocation of the maxim par in parem
759 Note 32 supra, at 76. 760 [1976]2 W.L.R. 214 at p. 233; [1976] 1 A11 E.R. 78 at 95-96. 761[1977] 1 All E.R. 881; [1977] Camb. L.J. 211; (1977) 26 I.C.L.Q.674.
372
non habet imperium, Marshall amalgamated the doctrine with that of the absolute
jurisdiction of the territorial sovereignty by assuming the latter‟s implied consent to
immunity from its courts jurisdiction.762
The move away from absolute to restrictive immunity is now well established in the
practice of many States, State practice does not suggest that sovereign immunity should be
abolished altogether. Contradistinguished from the foregoing, is the position, which takes
cognizance of the rights of private entities who conduct transactions with the sovereign.
The premise of the decision in the Schooner Exchange held sway when immunity meant
personal immunity of a sovereign, not the public immunity of the State, and the
phenomenon of State trading before the advent of socialism was not pronounced.
In the claim against the Empire of Iran, the Court rejected a plea of State immunity in
respect of a contract claim by a local firm for the cost of repairs to the heating system in the
Iran Embassy in Cologne.763
In I Congresso Del Partido, the (English) House of Lords held in a contractual context, that
the courts must look not only to the nature of the contract, but also to the nature of the
breach. If a contract is an act iure imperii, there is immunity; if it is an act iure gestionis, a
defense of immunity may still succeed if the act in breach of contract is an act iure imperii.
The court had to consider whether at any stage in the case the State had acted as a sovereign
and hence should not be impleaded. The House of Lords unanimously adopted this
762 7 Cranch 116 (1812) US Supreme Court. 763 45 I.L.R. 57 (1963) West German Constitutional Court.
373
approach, the majority considering that the act in breach of contract was an act iure
gestionis and the minority classifying it as an act iure imperii.764
In a similar vein, the restrictive immunity doctrine was upheld in the Trendtex Trading
Corporation v. Central Bank of Nigeria case. In 1975 the CBN issued a letter of credit in
favour of the plaintiff, a Swiss company that had secured a contract with the Nigerian
government to supply it with cement for the construction of an army barrack in Nigeria.
When, under instructions from the Nigerian government, which was taking step to extricate
itself from the Nigerian cement scandal created by its predecessor government, (huge
quantities of cement had been ordered from different sources far more than Nigeria needed
or the port of Lagos could handle. The new Nigerian government took steps similar to
those taken in this case against suppliers in other cases; leading to comparable court
proceedings in the US and the then Federal Republic of Germany).765
The doctrine of
restrictive immunity was upheld against the defendant‟s claim of State immunity in those
cases also. The Bank refused to honour the letter of credit; the plaintiff brought an action
against the Bank in the English High Court. The Bank successfully claimed sovereign
immunity. The appeal of the plaintiff was allowed in this case, the Court of Appeal looked
not only to Nigerian law but also to the functions of the Bank and its relationship with the
government when deciding whether it should be classified as a department of government.
It unanimously ruled that all evidence point to the fact that the CBN engages in purely
commercial activities, and so precluded from sovereign immunity.766
In Noah, G. Ishola v. His Excellency the British High Commissioner to Nigeria, the plaintiff
instituted an action in the Supreme Court of Nigeria asking for a declaratory judgement
764 98 L.Q.R. (1982). 765 I.L.M. 469 (1977). 766 Ibid.
374
against the British High Commissioner in Nigeria. The Court held that it has no original
jurisdiction to hear the case, having regard to the provisions of section 212 of the
constitution of the Federal Republic of Nigeria, 1979 and to the fact that the National
Assembly has not conferred any such jurisdiction on the Court pursuant to sub-section (2)
of the said section. Not only that it is also provided in sub-sections 1(2) and (3) of the
Diplomatic Immunities and Privileges Act (No. 42 of 1962) that such an action against a
foreign envoy in Nigeria shall be void.767
In African Reinsurance Corporation v. Abate Fantaye, the Appellant is an International
Organization of African Unity (O.A.U). The Respondent brought an action against the
Appellant in the High Court of Lagos State of Nigeria claiming damages for the wrongful
termination of his contract of employment. At first, the appellant entered a conditional
appearance but later appeared order to reply to an application for interim injunction brought
by the Respondent. Subsequently, the appellant brought an application to set aside the writ
of summons. The trial Judge held that though the appellant was an international
organization and, therefore, was immune from legal process, by taking some steps in the
action; it had waived its immunity. Hence, the High Court had jurisdiction over the matter.
The Supreme Court held (unanimously allowing the appeal) that in Nigeria, the applicable
law in respect of diplomatic immunities and privileges is the Diplomatic immunities and
Privileges Act 1962, No. 42. Diplomatic immunities are claimable by organizations
declared by the Minister of External Affairs to be organizations, the members of which are
sovereign powers (whether foreign powers or commonwealth countries or the governments
thereof). Where the evidence before the Court shows that the Defendant is a department of
767 [1980] A.N.L.R. 208-209.
375
a sovereign State albeit itself a corporate body, then the action is one between the plaintiff
and the foreign sovereign State, or the part of the foreign sovereign State represented by the
departmental body concerned. The immunities under the first schedule to the Diplomatic
Immunities and Privileges Act 1962 include immunity from suit and legal process. The
Appellant, being an international organization enjoys immunity from suit and legal process,
both by virtue of sections II and 18 of the 1962 Act, and exhibit AR5 (certificate issued by
the Minister of External Affairs.) In the case, of Kramer Italo limited v. Government of the
Kingdom of Belgium and the Embassy of Belgium, Lagos, Nigeria, the plaintiff instituted an
action against the defendants claiming the sum of N670,552.07 arising from contract in
writing dated the 30th
day of January, 1979 whereby the second defendant commissioned
the plaintiff to build for it a residence for the Belgian Ambassador at Eleke Crescent,
Victoria Island, Lagos. The claim is for reimbursement for additional costs incurred as a
result of the extended period on site and the second defendant‟s variation instructions.
Agoro, J. upheld a plea of sovereign immunity by the defendants. However the subsequent
appeal of Kramer Italo Ltd. was not allowed, as the Court of Appeal decided that it lacked
jurisdiction to entertain the action of the appellant as against the second respondent because
the Belgian envoy and the several members of the staff comprising the Belgium Embassy
were immune from the suit and legal process, pursuant to the provisions of section 1 of the
Diplomatic Immunities and Privileges Act 1962. 768
The foregoing Nigerian cases show how far behind Nigeria is on the issue of sovereign
immunity and restrictive/absolute sovereign immunity debate. The pervading opinion is
that a State will by no means derogate its sovereignty by going into a business venture.
768 [1986] 1 N.W.L.R. (Pt. 14) 113 C.A.; Kramer Italo Limited v. Government of the Kingdom of
Belgium and the Embassy of Belgium, Lagos, Nigeria (1989), 1 CLRQ. 126.
376
However, the State must be prepared to subject itself to the codes of the market place when
it goes into the market place, especially where the activity is of a private nature involving
the rights and obligations of private legal entities.
The foregoing consideration brings us to the questions, which have often been asked
regarding petroleum international agreements. How stable are State contracts? Do
stabilization provisions ensure that the expectations of either of the parties are not willfully
disrupted? To what extent are the contractual rights secured by the agreements?
Rights conferred by private contracts are protected by the law, which regulates the rights,
and obligations of the parties to the contract and the municipal courts enforce and uphold
those rights.
That scenario is, however, not replicated under State contracts, the State towers over and
above the corporation. Under a State contract, it is placed on a pedestal at international law
from which it can by legislative and or executive fiat abrogate, expropriate, nationalize,
attach, requisition and confiscate the assets of a private transnational corporation. That
consideration is without prejudice to the fact that international law frowns upon acts of
State which are confiscatory in nature.
In view of the foregoing, it is doubtful whether a State contract can be fully secured and
insulated from the erosion of the rights of the corporation under a petroleum international
agreement. International law has elaborately provided the leeway for the State to alter the
terms of the contract where it views the contract as disparaging public interests.
377
Stabilization clauses in petroleum international agreements between host countries and
transnational oil corporations which among other things stipulate that the contracting State
shall not modify, abrogate the contract and subject the contract to a law other than that of
the contracting State; independent arbitration of disputes arising from the contract and
periodical review of the terms, have proved inadequate as an insulation against the exercise
by the State of the permanent sovereignty over the natural resources within its territory.
These issues and some of the special problems, which they engender, will be the subject of
analysis in this study. However, the legal nature of PIAs requires further elucidation before
we cause our analysis to bear upon them.
Keith W. Blinn et al., have, perhaps, provided an apt explication and characterization of the
legal nature of an oil concession. That characterization is being adopted in the study with a
view to syllogistically moving from the foregoing general consideration of State contracts
as a holistic notion to the particular and specific notion of petroleum international
agreements as a genre of State contracts. In themselves, PIAs can be distinguished as to
their object, type and legal nature. PIAs may regulate various transactions and all sorts of
legal relationships. They may confer rights in personam and or rights in rem since it is the
case that ownership of petroleum in situ resides in the State. The intrinsic nature of the PIA
is a hybrid of both public and private law elements.
The characterization by Keith w. Blinn et al., of the concession suffices:
A concession consists basically in granting of certain
rights called mineral rights to an individual or an entity
authorizing him or it, to explore for and, in case of a
378
discovery, to produce and exploit the mineral(s) object
of the concession. Those rights entail the ownership of
the mineral(s) so found and until recently, the discoverer
was the rightful owner of the reserves of said mineral(s).
This is still the case in many countries like the United
States where oil legislation follows closely traditional
mining legislation. In most countries especially in
Europe, the Middle East and other Third World
Countries, the reserves are however considered as
constituting inalienable natural resources, and the
concessionaire acquires the ownership of the production
at the well-head. In fact, through a subtle process, the
mining rights of the concessionaire have been converted
into a mere authorization to explore and produce, the
minerals remaining the property of the State until
produced (jus ad rem versus jus in rem). The
counterpart of the rights so granted to the holder of the
concession consists in an obligation for the latter to pay
to the granting authority – i.e., the HC – a royalty which
is an agreed upon percentage of production.769
In view of the fact that the contracting State, grantor of an oil concession is engaging a
private entity and or corporation in the concessionary dispensation, certain private law
elements are discernable as a function of the commercial nature of the transaction. Such
769 K.W. Blinn, C. Duval, H. Le Leuch and A. Pertezio, International Petroleum Exploration and
Exploitation Agreement: Legal, Economic and Policy Aspects, London, Euromoney Publications, 249
(1986).
379
transactions of the State between it and private entities falls under the rubric of acts iure
gestionis as distinguished from acts which are strictly an exercise of its sovereignty that is,
acts iure imperii.
An oil concession therefore is a contract between the State and a concessionaire, which
confers the right to search for, produce, own, export and sell petroleum won from the
concession area over a specified period of time. On its part, the concessionaire furnishes a
consideration in cash and in kind to the grantor.
The traditional concession is out-moded and contemporary concessions have composite
petroleum investment agreements, which are aimed at greater host country participation as
exemplified by the Participation Agreement; Joint Venture Agreement; Production Sharing
and Service Contracts.
The public law elements in PIAs derive from the consideration that in the Gulf States and
other OPEC member nations, including Nigeria, the State has permanent sovereignty over
the natural resources within its territory. They are inalienable natural resources within its
territory; the concessionaire acquires the ownership of the production at the wellhead.
Iranian offshore agreements of (1965) expressly state in its Article 23 that the petroleum
produced is owned by the party at the wellhead. The NIOC-ERAP agreement of 1966
constitutes the only exception in that regard. It does not confer upon the partner in the joint
venture any right of ownership of a part of the oil which is discovered and produced, but
gives it only the right to purchase from NIOC a portion of the oil produced. Oil in situ in
Nigeria is owned by the State, ownership pass to the MNOC at the wellhead.
7.4 LEGAL FRAMEWORK OF PETROLEUM INTERNATIONAL AGREEMENTS
380
The theoretical framework of the law regulating petroleum exploration, exploitation and
development in the bulk of OPEC member countries is an amalgam of legal holism and
individualism. Holistically, the PIA is cast in a statutory or standard form; which lays down
the terms on which rights to explore for and exploit petroleum resources may be granted
under standard form licences or leases. Within that holistic framework, royalty, taxes and
other payments to be made are spelt out.
Contrary to that holistic framework, the dispensation is individualistic in view of the ad hoc
dispensation which permits the negotiation of specifics such as the dimension of the
demised area, issues of State participation, the equity interest to be held by the host country
and the international oil company, the management structure and control of operations. The
oil concession embodies the terms and conditions negotiated and agreed upon between the
parties. This form of concession is found in countries which legal systems have not evolved
sufficiently to encompass petroleum legislation, which envisages and prescribe ex ante, the
form and conditions of the contract. The sum effect of that scenario is that parties have the
latitude and are unconstrained to include in their contract any term upon which they reach
agreement and each PIA has distinct conditions inherent in it.
The holistic framework is adhered to in countries whose legal system is sufficiently organic
as to encompass petroleum legislation which prescribes the framework of the contractual
relationship between the host country and the international oil company. Under the holistic
framework, the form, terms and conditions of the contract are cast immutably by law, and
save for fiscal and other competitively offered rents by the international oil company, such
terms embodied in legislation are held sacrosanct not subject to negotiation. For variations
381
of such legislation to be valid, another legislation will have to be enacted, with the latter
legislation overriding the antecedent legislation lex posterior derogat legi priori.
In Nigeria, the Petroleum Act, 1969 set out in its section 2(i), the legal requirements,
pursuant to the ultimate grant of the Oil Mining Lease. It also vests the powers in the
Petroleum Minister to grant licenses for the exploration and prospecting for petroleum
resources under the powers conferred by section (1) (a) of the Petroleum Act. The Minister
also has power to grant an oil exploration license which in itself is a non-exclusive permit,
granted to the international oil company to carry out seismic surveys in acreages over which
no grants like oil prospecting licenses and or oil mining leases have been made.770
The Libyan Petroleum Law of 1955 provide in Article 9 that the Petroleum Commission
(now the Ministry of Petroleum Affairs)
may grant concessions in the form set out in the second
schedule of the law and not otherwise, provided that
concessions may make such minor nondiscriminatory
variations as may be required to meet the circumstances
of any particular case.
The amendments made on July 3, 1961 provided that variations made in the concession
agreement shall not have the effect of reducing the benefits and privileges envisaged by the
law in favour of the commission (now the Ministry of Petroleum Affairs). All the oil
concessions granted in Libya have followed the statutory and or standard form.
770 A. Oyebode, Law and Nation-building in Nigeria,, Lagos, Centre for Political Research, 231-241
(2005).
382
A statutory or standard form of contract for PIAs also exists in Algeria, Tunisia and
Morocco. The Sahara Petroleum code of 1958 prescribes in Article 26 the basic conditions,
which an oil concession should include and Article 27 provides that a model convention
approved by decree dated January 6, 1961, which was subsequently replaced, by another
decree dated September 16, 1961.
A model convention for oil concessions exists in Tunisia and its form was laid down by the
decree of December 13, 1948. The Petroleum Code of Morocco 1958 provides in Article
23 that the conditions upon which a concession is granted are fixed by decree.
Oil concessions granted by Iran are cast in what may be described as an administrative
form. The Iranian Petroleum Act does not itself prescribe the form of oil agreements, but
states in Article 5 that NIOC shall invite persons to submit their proposals for oil
exploitation in a specified agreement form to be prepared by NIOC in accordance with the
provisions of the Petroleum Act. The form and conditions of the oil agreement are
published at the time of making the invitation for bids. The legislation of the U.A.R. also
prescribes the conditions and framework of mineral concession.
The Egyptian Law of Mines and Quarries of 1953, as amended in 1956, requires the
Ministry of Commerce and Industry to undertake the operations of exploration and
exploitation of mineral resources, either by itself or through others in accordance with the
conditions laid down in the law. Article 35 of the Law of Mines and Quarries of 1956
prescribes that the Ministry of Commerce and Industry shall lay down a form of contract for
the exploitation of mineral resources, which shall be issued by decision of the Council of
Ministers.
383
In countries with highly evolved and organic constitutions, legislative ratification of PIAs is
paramount for it to take effect. In countries where no constitution exists or under
suspension, concessions are granted under the purview of a law or a decree having de facto,
the force of law. In countries where a distinction cannot be made between the person of the
ruler and the State such as in certain emirates or Sheikdoms in the Arabian Gulf, the
concession is cast in the form of an agreement with the ruler.
The original concession agreement concluded with Bahrain, Qatar and Abu Dhabi were
with the sheik or ruler and his heirs or successors. It is of interest in that regard that Article
10 of the supplemental agreement concluded on December 31, 1964 between the ruler of
Qatar and Qatar Petroleum Company with respect to the „expensing‟ of royalties contained
a provision stating that references in the previous agreements between the parties and the
„Sheik‟ shall be construed as references to the government.
In host countries that have evolved organic petroleum legislation, a concession is granted by
the Executive Council or a body so designated within the purview of an enabling law
without thereby having recourse to legislative confirmation and or ratification. The other
scenario, which may obtain is a dispensation within which the concession is granted by
executive arm of State albeit by precedence duly and properly confirmed and or ratified
before it can take effect.
By virtue of Article 50 of the Egyptian Law of Mines and Quarries, 1956, the power to
grant concessions reside in the Commerce and Industry Minister. In Iran, the National Oil
Corporation is vested with authority to negotiate petroleum international agreements within
384
the purview of a Petroleum Act and by due precedence forwarded to the Council of
Ministers for its confirmation, and onward transmission to the legislature for its approval.
For the agreement to take effect, a Royal assent must be given. The dispensation remains
intrinsically stable after the 1979 revolution albeit with new institutions filling in the role of
the Shah.
The Nigerian Petroleum Act, 1969 vested the Nigerian National Petroleum Corporation
with the power to negotiate agreements, which must be duly approved by the Petroleum
Minister and duly, forwarded through the Petroleum Minister to the Federal Executive
Council for final confirmation.
It has been the preoccupation in the preceding paragraphs to gain an insight into the
intrinsic and legal nature of petroleum international agreements. The startling discovery in
that regard is the rather eclectic legal nature of PIAs. Private commercial law elements are
organically grafted upon public law elements which derives from the consideration that the
subject-matter of the PIA pertain to an inalienable resource of a nation which can only be
expropriated at its behest within the purview of its legislation enacted to that effect.
The paper equally attempted to make a distinction, between the holistic frameworks of
international oil as distinguished from the ad hoc dispensation. However, that distinction
does not in any way disparage the validity of the contract so concluded, nor is either of the
two dispensations in any way organically superior to the other. Invariably, the contract can
only be consumated if and only if there is a consensus ad idem. The State concedes certain
rights and privileges which has the effect of stabilizing the contractual relation, while the
385
international oil corporation furnishes consideration in terms of royalties, bonuses, tax and
or in kind.
Both the private and public law elements inherent in State contracts ought not disparage
themselves. Rather they should afford a symbiosis of divergent interests in an organic
relationship, which derives its differentiation from the complexities, and the realities of
global economy. That complexity necessitates the pooling of resources for the mutual
benefits of the parties thereto.
7.5 PETROLEUM INTERNATIONAL AGREEMENTS AND APPLICABLE LAWS
This segment dwells on yet specificity, the applicable laws of petroleum international
agreements as a subset of State contracts. PIAs are adapted eclectically to laws and a
plethora of legal theories. A search for a deus ex machina of PIAs which is immutably
given and enacted as to require a catholic application to all concessions irrespective of their
subject-matter; identities and legal capacities of the parties to the contract and their
divergent vested interests is an exercise in futility.771
It is inconceivable to find homogeneity of applicable laws of PIAs and indeed State
contracts. There is a plethora of legal theories advanced as being applicable to PIAs, there
is no unanimity in the applicable laws of PIAs debate. Some jurists and publicists adhere to
the lex contractus, while others favour the national law of the contracting State and the
general principle of law recognized by civilized nations. The most appropriate procedure in
771 K.C. Carlstone, „International Role of Concession Agreement,‟ 52 Northwestern University Law
Review 128 (1957); P.H. Grey, M.A. Frey, Essentials of Contract Law, New York, Thomson Delmar,
16-17 (2001); E.E. Smith, International Petroleum Transactions, Aurora, Rocky Mountain Mineral
Law Foundation, Chap.3.
386
that regard shall be to consider each legal doctrine in its merits and determine their
applicability or otherwise to PIAs.772
7.5.1 THE LEX CONTRACTUS
The underlying assumption of the lex contractus is that the law of the contract is unique and
sui generis in itself. That assumption is based on the consideration that the law of contract is
the only province of the law in any legal system wherein in a manner of speaking the parties
have the latitude and amplitude to make their own rules. The relationship is based on a prior
agreement between the contracting parties, which will give rise to enforceable rights, and
obligations. The basis of all contracts, therefore, is an agreement, a consensus ad idem.
Against the backdrop of that basic assumption, the lex contractus suggests that the terms
and conditions of the PIA constitute the law that governs the relationship between the
parties. Save for where the contract disparages the general public interest and or illegal by
virtue of its being prohibited, the statute imposes conditions to be complied with, the
absence of which makes the contract illegal or if it violates the rules of common law.
Except in the foregoing cases, the contract is not amenable to extraneous legal provisions
that seek to oust its terms.
772 A. Farmanfarma, „The Oil Agreement Between Iran and the International Oil Consortium,‟ 34
Texas Law Review 54 (1955); see generally, State Contracts, UNCTAD Series on Issues in
International Investment Agreements Switzerland, United Nations, 2004; S.N.S. Cheung, Transaction
Cost, Risk Aversion, and the Choice of Contractual Arrangements, New York, Garland, 15 (2003);
Z.A. Alqurashi, Arbitrating International Petroleum Disputes: An Analysis of Key Substantive Law
Issues, Dillenburgsingel Leidschendam, OGEL, Chapters, 2,3,4 and 5 (2005); W.P. Heere, From
Government to Governance: The Growing Impact of Non-State Actors on the International and
European Legal System, The Hague, Asser Press, 49, 202-239,244-257 (2004); M. Graziadei,
Commercial Trusts in European Private Law, Cambridge, Cambridge University Press, 406-429
(2005); A.A. Asouzu, International Commercial Arbitration and African States: Practices,
Participation and Institutional Development, Cambridge, Cambridge University Press, 267-305,
439(2005); E.K. Bankas, The State Immunity Controversy in International Law: Private Suits Against
Sovereign States in Domestic Courts, Berlin, Springer Verlag, 307, 82, 85, 210 (2006).
387
Where PIAs are subject to ratification by a legislative body and or any other body so
designated, the custom is that once so ratified and having force of law the contract becomes
assimilated to the laws of the contracting State and acquires the force and effect of law, it
takes on a life of its own.773
As a matter of fact, in countries where no legislation exists to regulate contractual
relationship between the host country and the transnational oil corporation the PIA fills the
vacuum and regulates the entirety of the legal and fiscal relations between the prospector,
the operator and the State.774
Where there exists a corpus of petroleum legislation regulating exploration and
development, PIAs once reached in accordance with the provisions of such laws thereafter
take on a life of their own, and assume a uniqueness as the law of the parties thereto. Such
agreements constitute the law, because it exhaustively regulates the relationship between
the parties.
The Petroleum Act merely lays down the general principles under which agreements may
be made. It describes the varieties of authorized relationships; but once an agreement is
made and ratified by the legislature, and or a body competent and so designated, the
773 R.D, Bishop, Foreign Investment Disputes: Cases, Materials and Commentary, The Hague,
kluwer Law International, 13-150 (2005); S. M. Schwebel, Justice in International Law, Cambridge,
Cambridge University Press, 171-196, (2004). 774 F. Rouhani, International Agreements and Contracts in the Field of Petroleum, London, Maxwell,
pp.9-10 (1980); E.E. Smith, International Petroleum Transactions, Aurora, Rocky Mountain Mineral
Law Foundation, Chapter 3-5 (2006); T. Waelde and A. Kolo “Renegotiation and Contract Adaptation
in the International Investment Projects: Applicable Legal Principles and Industry Practices,” 2006,
available at http://www.dundee.ac.uk/cepmlp/journal/html/vol5/article5-3a.html;
C.Moerbe,”International Operations: Contracts with Government and Basic Concepts of International
Operating Agreements,” (2006) Lewis Marburge’s Internet Oil and Gas Newsletter,available at
http://www.mosburgoil-gas.com/html/body_moerb_11_96_5a.html; R.D. Bishop, “International
Arbitration of Petroleum Disputes: The Development of a Lex Petrolea, 2006, available at
http://www.Kslaw.com/library/pdf/00000001.pdfsoft
388
Petroleum Act recedes to the background with the agreement standing sui generis as the
applicable law.775
That granted, the idea that PIA can exist in a vacuum without having any nexus with a
national law may not be tenable without contradiction, as a matter of fact the jury is still out
as to whether State contracts can be denationalized. While some jurists posit, that every
international contract is necessarily contingent upon the law of the contracting State, others
view the contract as sui generis. In that connexion even the oft cited examples of
denationalized contracts between States and certain supranational bodies like the World
Bank may not be as autonomous as certain theorists would have us accept. Section 7.01 of
the World Bank‟s Loans Regulation No.3 provides, inter alia:
The rights and obligations of the Bank and the Borrower
under the Loan Agreement and the Bonds shall be valid
and enforceable in accordance with their terms
notwithstanding the law of any State, or political
subdivision thereof to the contrary.776
We only need to consider the fact that the World Bank in itself as one of the Bretten-Woods
institutions was created through treaty by States and that States in accord have acceded to
775 I.L.R. Vol. 27, p.168; J. Barcelo, A Global Law of Jurisdiction and Judgments: Lessons from the
Hague, The Hague, Kluwer, 15-19 (2002); L.A. Mistelis, Pervasive Problems in International
Arbitration, The Hague, Kluwer, 46,1-67,71-85(2006); J.M. Lookofsky, Understanding the CISG in
the USA: A Compact Guide to the 1980 United Nations Convention on Contracts for the
International Sale of Good, The Hague, Kluwer, ,11, 13, 22, 28 (2004); P. L. Landolt, Modernised EC
Competition Law in International Arbitration, The Hague, Kluwer, 109 (2006); G. Petrochilos,
Procedural Law in International Arbitration, Oxford, Oxford University Press, 225-339 (2004). 776 A. Broches, „International Legal Aspects of the Operations of the World Bank,‟ 98 Hague
Academy 345-346(1959);R.J. Weintrab, „Comments on the Roundtable Discussion of Choice of Law,‟
2006, Available at http://review.law.mercer.edu/old/48206.htm
389
the various protocols setting up these institutions, and through accession and ratification,
that the regulations of these institutions have been assimilated to the respective laws of all
accenting States, the foregoing therefore at best, represents a wrong analogy.
Wherein, then, lies the autonomous contract? The State signatories to these protocols have
merely pooled their collective wills by so doing, and the policies and regulations of these
institution bears the spark of the respective wills as expressed in laws of such States. Lord
McNair eloquently lent voice to the foregoing submission:
It is often said that the parties to a contract make their
own law, and it is of course, true that subject to the rules
of public policy and ordre public, the parties are free to
agree upon such terms as they may choose.
Nevertheless, agreements that are intended to have a
legal operation (as opposed to a merely social operation)
create legal rights and duties, and legal rights and duties
can not exist in a vacuum but must have a place within a
legal system which is available for dealing with such
questions as the validity, application and interpretation
of contracts and generally, for supplementing their
express provisions. Often such contracts may give some
indication of the legal system within which they or some
part of their provisions are intended to operate.777
777 Lord J. McNair, „The General Principles of Law Recognized by International Persons,‟ B.Y.I.L,
211(1957) ; G. Letterman, Unidroit’s Rules in Practice: Standard International Contracts and
Applicable Rules, The Hague, Kluwer, 103 (2000); S.K.Khalilian, The Law of International
Arbitration, North Vancouver, Pacific Arbitration Network, 403 (2004); S. Amos, A Systematic View
390
Mann provides a most damning critique of the position that a contract can constitute the law
for the parties thereto in isolation of the legal order:
The idea that contracting parties are at liberty not only to
choose the legal system applicable to their contract, but
also to create their own legal system which is
independent, exhaustive and sovereign and to which
municipal systems of law and public international law
are inferior that idea is doctrinally so unattractive, so
impracticable, so subversive of public international law,
so dangerous from the point of view of legal policy and
so unnecessary that its novelty will not cause surprise.
It hardly requires emphasis that every legal relationship
in general and every contract in particular must of
necessity be governed by a system of law and is
otherwise unthinkable. Of course, in words of the code
civil, les conventions legalement formeestiennent lieu de
loi a, ceux quiles ont faites but freedom of contract does
not exist independently of the legal system which grants
it or confer any measure of sovereignty upon the
contracting parties. Nor can contracts either in law or in
of the Science of Jurisprudence,,London, Adamant Media Corporation, 383 (2005); P.S. Berman, The
Globalization of International Law, Aldershot, Ashgate, 64 (2005); P.Hay, Conflict of Laws, St. Paul,
West Group, 5,478,492,713 (2004); E. M. Gallaudet, A Manual of International Law, London,
Adamant Media, 125 (2005); D.Campbell, Comparative Law Yearbook of International Business,
The Hague, Kluwer, 393 (2005); E.S. Fruehwald, Choice of Law for American Courts: A
Multilateralist Method, West Port, Greenwood Press, 113 (2001).
391
fact regulate the parties‟ relationship exhaustively.
Contracts are written against the background of a system
of law, its jus cogens, its rules of construction and so
forth.778
The divergences of opinion on the question whether a contract can exist in vacuo and in
isolation of both international legal order and or national laws are at best axiomatic. As far
as PIAs are concerned, they cannot be otherwise in view of the eclectic adaptativeness of
PIAs. While it is true that contracting parties‟ in agreement have considerable leeway to
elect the terms and considerations which will regulate their relationships, it is equally
indubitable that the municipal law of the contracting State, especially where the locus of the
subject-matter of the contract falls within its jurisdiction of application cannot be
circumvented and obviated. The rights and duties afforded by the contract can only be
enforced holistically within the framework of a legal order, whether national and or
international and or an amalgamation of the national laws of the contracting parties and
public international law.
7.5.2 MUNICIPAL LAW OF THE CONTRACTING STATE
Allusions had been made to the eclectic adaptiveness of PIAs to various legal orders. The
pertinent question is not whether that puts paid to the applicable law problematic but the
rather strong case which could be made and which is indeed strictly applied and propagated
778 F.A. Mann, „The Proper Law of Contracts Concluded by International Persons,‟ 11 B.Y.I.L.,50
(1959); H.H. Perritt,Jr., „Resolving Claims When Countries Disintegrate: The Challenges of Kosovo,‟
80 Chic-Kent L.Rev.,119 (2005) ; available at http://pbosnia.Kentlaw.edu/claimsare-wl-published.htm;
P.G. Foy, „Effectiveness of NAFTA‟S Chapter Eleven Investor-State Arbitration Procedures,‟ in
Canadian Council on International Law (ed.), The Measure of International Law: Effectiveness,
Fairness and Validity (Proceedings of the Annual Conference of the Canadian Council on
International Law), The Hague, Kluwer Law International, 34-97, (2004).
392
in many circles, for the applicability of the national law of the contracting State. Such
views are informed by the consideration that it is inconceivable as it is illogical to conceive
of a PIA as not being adapted to the national law of the contracting State. Such views are
hinged on the consideration that, it is in the intrinsic nature of State contracts that the
national law of the contracting State constitutes the adjectival law of the contract. Such
views are not amenable to a half-way-house resolution of the problem. National laws take
precedence over and above other laws that may bear on the contract, it towers so loftily
above them as to eclipse them and obliterate their identities.
So an apt redefinition of the problem in that regard will be, whether national law solely
constitutes the applicable law of PIAs? The underlying assumption of the foregoing is to be
found in State practice and International Court of Justice decisions. Presently, no
assumption pointing to the strict application of the municipal law of the contracting State
can be sustained without contradiction and where the national law has a bearing on the
contract; it will invariably not be without precedent in practices widely acceptable as
assimilable to contracts of that nature generally.779
In that connexion, the applicability of the national law of the contracting State derives from
universalizable principles and practices rather than any intrinsic attributes of the State party
to the contract.780
779 G.R. Delaume, „What is an International Contract? An American and Gallic Dillema,‟ 28 I.C.L.Q.
258 (1979) T. Buergenthal, Public International Law, St Paul, West Group, 70-75 (2002); R. C.
Maxwell, „Oil and Gas Law at the End of Its Great Era‟ in L. MacDonnel., (ed.), Natural Resources
Policy and Law: Trends and Directions, Washington D.C., Island Press, 94, (1993). 780 F.Aubrey, „The Formation of International Contracts, with Reference to the Uniform Law on
Formation‟ 14 I.C.L.Q.1011-1015 (1965); J.Harb, „France, A Striking Decision of the Supreme Court
on French Jurisdiction to Appoint Arbitrators: The Decision in National Iranian Oil Company v. The
State of Israel,‟ 5 International Litigation and Arbitration Newsletter 1066 (2005).Available
at.http://www.bakernet.com/newsletters/newsletter_full.asp?nlid=30&editionid=1066; D.B. Hollis, „A
Comparative Approach to Treaty Law and Practice,‟ in D.B. Hollis, (ed.), National Treaty Law and
Practice: Dedicated to the Memory of Monroe Leigh, Denvers, Brill Academic Publishers, 13-58
393
That granted, the fact that certain laws other than the laws of the contracting State and the
rules of private international law may impinge considerably on the PIA does not detract
from the consideration that the law of the contracting State is, in principle, the governing
law of contracts which performance is envisaged to occur in the sphere of operation of its
laws that is, its territory. As a matter of fact, it is the national law, which provides the rules
that animates the contract and enforces the rights and duties provided therein.
If parties freely and voluntarily enter into contracts, the national courts will enforce them. It
is within the competence of the national law and its institutions to enforce such contracts.
But above every other consideration, the courts of a State will not enforce a contract that in
the eye of its law is illegal ab initio. Even though all the elements required for the formation
of a valid contract are present. The national law may stipulate that a contract is illegal if it is
prohibited by statute or if the contract is not prohibited, the statute imposes conditions to be
complied with, the absence of which makes the contract illegal or if it violates the rules of
national law.781
Article 83 of French code of civil procedure prohibits the conclusion of arbitration
agreement between the State and private parties.
(2005); P.Allot, „The International Court and the Voice of Justice,‟ in V. Lowe (ed.), Fifty Years of the
International Court of Justice: Essays in Honour of Sir Robert Jennings, Cambridge, Cambridge
University Press, 17-39 (1996). 781 G. Delaume, „ICSID and the Transnational Financial Community,‟ 1 I.C.S.I.D. REV. FILT. 19
(1986); G.F. Miller, „Choice of Law as a Precommitment Device,‟ in F.H. Buckley (ed.), The Fall and
Rise of Freedom of Contract, Durham, Duke University Press, 357 (2004); D. Lieberman, „Contract
Before „Freedom‟ of Contract,‟ in H.N.Scheiber (ed.), The State and Freedom of Contract, Stanford,
Stanford University Press, 89 (2003), H.N. Scheiber, „Economic Liberty and the Modern State,‟ in
H.N. Scheiber (ed.) , The State and Freedom of Contract, Stanford, Stanford University Press, 122
(2003); R. Romano, „Corporate Law as a Paradigm for Contractual Choice of Law‟ in F.H. Buckley
(ed.), The Fall and Rise of Freedom of Contract, Durham, Duke University Press, 370 (2004); J.G.
Collier, Conflict of Laws, Cambridge, Cambridge University Press, 5-60 (2001).
394
Article 5 of Sahara Petroleum Code (1958) and Article 10 of the Petroleum Code of
Morocco (1958) forbid the grant of a search permit for hydrocarbons to other than
commercial corporations or juristic persons. Syrian Decree No. 133 of 1964 prohibits the
grants of a concession for the exploitation of mineral or petroleum resources to a non-
juristic person.
State practice in the Middle East and Nigeria requires that a law approve the grant of a
concession for the exploitation of natural resources or a contract for a public loan. That
policy is rationalized by the consideration that the subject-matter of the contract is an
inalienable resource of the State, which expropriation can only be at its behest. It stipulates
the validity of the contract in form and substance, what it leaves to the design of the other
party are the conditions which are incidental to the contracts, albeit to be negotiated and
secured consensually by the parties. The national law also regulate those domestic
relations, which are crucial to the performance of the contract, labour relationship, safety,
environment, custom formalities, currency regulation, repatriation of profits and so forth.
Since it is not possible for the parties to envisage every probable complexity that may
emanate from the contract, the national law serves as a buffer and make up for the lapses in
the structure of the contract. The supplementary role of the municipal law comes to play,
except where the contract expressly precludes it from fulfilling that role.
To the foregoing connexion, there are reservations on the applicability of municipal law of
the contracting State where there is a conflict between the national law of the contracting
State and the spirit of the contract. Article 43 of the Iranian offshore concessions 1965
provides:
395
The provisions of the Mining Act of 1957 shall not be
applicable to this agreement, and any other laws and
regulations which may be wholly or partly inconsistent
with the provisions of this agreement shall to the extent
of any such inconsistency be of no effect in respect of
the provisions of this agreement.
In the same vein, Article 37(1) of the concession granted by the U.A.R. to Phillips (1963)
stipulates inter alia that:
The EGPC and Phillips shall be bound by law No. 66 of
1953, as amended by law No. 86 of 1956, and by the
executive regulations thereof to the extent that said law
and regulations are not contrary to or inconsistent with
the provisions of this agreement.
The U.A.R. concessions of 1963 and 1964 granted to Pan American also embodied such
reservations regarding the applicability of the national law.
The foregoing consideration pertains to conflicts of the conditions of the agreement with a
historical legislation, in which case the terms of the agreement takes precedence over and
above the legislation. That practice most probably is founded on the principle, lex posterior
derogat legi apriori, the latter legislation takes precedence over a prior legislation. The
foregoing may present no problem. The crucial issue will however, arise where the
reservation envisions the ouster of a prospective legislation as distinguished from an
396
enacted legislation. The reservations in such cases are anticipatory and are fraught with the
possibility of being superfluous, for international law is amenable to the consideration that
the State can elect to repudiate the contract, where the circumstances have changed
considerably as to make the terms of the contract onerous and disparaging of the public
interest.782
The lex contractus belongs in a pristine world order wherein the European powers engaged
their vassals in an unequal relationship, which cannot be said to be contractual. In the strict
sense, such relations lacked fundamental elements of validity. The so-called “possessions”
lacked legal capacity to contract, because they were still at their most rudimentary pedestal
of evolution when these contracts were concluded. These early concessions were nothing
but contracts of subjugation, which provided that the government shall not modify or
abrogate the concession and that no alteration shall be made therein except by mutual
consent of the parties. These contracts were void ab initio. Such stipulations were
embodied in AIOC‟s concession of 1933; KOCs concession of 1934; the consortium‟s
agreement of 1954. Iran‟s offshore agreement of 1965 and Kuwait‟s concession to Arabian
Oil Company of 1958. The Libyan Petroleum Law among other things stipulates in Article
24 that no regulation issued for the implementation of the law shall be contrary to, or
inconsistent with, the provisions of this law or adversely affect the contractual rights
expressly granted under any permit or concession.
Article 16 of the Libyan concessions also stipulate, that the contractual rights expressly
created by the concession shall not be altered except by mutual consent of the parties
thereto.
782 75 A.J.I.L. 437(1981); 24 I.C.L.Q. 542 (1975).
397
The foregoing stabilization clauses and statutes are aimed at stabilizing expectations. They
have, as experience show, not provided adequate insulation against supervening legislation,
which is the exercise of the sovereign will of the sovereign State. The foregoing brings us to
the grey zone of the law of nations. What international law seeks to do in such
circumstances is to steer a course between the straits.
On the one hand, it recognizes the sovereignty of the State over the natural resources within
its territory on the other it acknowledges the need to allow equity come to play in such a
way as to attenuate the untoward incidence of the legislation on the private entity and or
corporation.
A review of cases pertaining to conflict between legislation and terms of prior concession in
the Middle East will suffice. Consequent upon its disillusionment with the fiscal package of
the AIOC concession of 1933, Iran promulgated the Oil Nationalization Act of 1951, which
effectively led to the expropriation of AIOC‟s assets and installations, thus abrogating the
concession. In the resultant furore generated by that legislation, AIOC sought to maintain
the sanctity of its concession. It contested the measure taken by Iran and maintained that it
cannot be altered or nullified by subsequent legislation and sought arbitration of the dispute
in accordance with the provisions of the concession.
Upon Iran‟s refusal to arbitrate the dispute, the British government took up the espousal of
AIOC‟c cause. It formally caused the International Court of Justice to be seised of the case
and brought an action against the government of Iran. The British government asked for a
declaration that Iran was under a duty to submit the dispute to arbitration in accordance with
the terms of the concession and alternatively seek various other declarations and remedies.
398
The court, however, found that it was not within its competence and jurisdiction to be seised
of the case. Great Britain, however, sought a political solution to the issue it failed to
secure a juridical solution, by mobilizing other western powers to impose sanction against
Iranian oil. The embargo was very effective that it paralyzed the Iranian economy. Iran,
subsequently, prostrate from the effect of the embargo, capitulated and agreed to the
settlement of the dispute by the agreement reached in 1954 between NIOC and a
consortium of transnational oil companies.783
In Texaco v. Libya, it was held, the recognition by international law of the right to
nationalize is not sufficient ground to empower a State to disregard its commitments
because the same law recognizes the power of the State to commit itself internationally,
especially by accepting the inclusion of stabilization clauses in a contract entered into with
a foreign private company.
In contrast to the Texaco v. Libya case, in the Aminoil case, the tribunal arrived at the
conclusion that the “take over” of Aminoil‟s enterprises was not in 1977 inconsistent with
the contract of concession, provided always that the nationalization did not possess any
confiscatory character.784
The grant in 1954 of a right of priority for transportation by tankers of the oil produced in
Saudi Arabia to Mr. Onassis by the Saudi government generated a furore between it and
ARAMCO. ARAMCO objected to the Onassis concession on the ground that it was in
conflict with ARAMCO‟s concession.
783 Note 33 supra; United Nations Conference on Trade and Development, State Contracts (UNCTAD
Series on Issues in International Investment Agreement),New York, United Nations, 3-45 (2004). 784 Note 42 supra.
399
Egypt nationalization of the Suez Canal concession in 1956 generated considerable furore
with the western world, threatening a conflagration. The dispute was, however, resolved on
the basis of restitutio in integrum. Egypt paid compensation to the stockholders of the
nationalized company on the basis of current prices existing on the eve of nationalization.
The Iraqi Law No. 80 of 1961 is another subsequent legislation, which eroded the rights of
the concessionaire. The government of Iraq withdrew unexploited acreages from the
concessions granted to the IPC group of companies. The withdrawn acreages approximated
to about 90 per cent of the IPC group concession. New terms were introduced in respect of
any unexplored areas retained by IPC. The blocks in question covering 0.4 per cent of the
territory of Iraq, contained 60 per cent of the country‟s 1961 proven oil reserves of 27,225
million barrels. The government said it expected the companies to expand production from
their redefined concession areas – and that it would make suitable arrangements for new
exploration in the compulsorily relinquished areas. In that connexion, the companies were
required to submit to the government within three months all technical records, which they
possessed regarding these areas.
The companies declared that Law No. 80 constituted a breach of contract on the part of the
Iraqi government and called for the issue to be put to international arbitration in accordance
with the dispute settlement procedure laid down in their concession agreements. The
British and the United States of America governments made representations to Iraq in 1962
calling for resumption of negotiations with IPC and expressing support for the companies‟
request for arbitration. Progress in the talks had been hampered by successive changes of
governments in Iraq. A draft agreement in 1965 which envisaged the return to the IPC
400
group of an area equal to its reduced concession area and the involvement of all the IPC
shareholder companies except Exxon in a new joint venture exploration in which the Iraq
National Oil Company would hold a one third interest was overtaken by events. According
to Jennings:
There is nothing in the structure of international law and
nothing in the relationship between international law
and municipal law that inhibits the recognition of
international law remedies, which relate directly to the
contract. It is precisely because one of the parties‟ is a
sovereign State, able by its sovereignty to change the
proper law of the contract that international law is
apposite to the situation. It is, to put it in another way, a
situation to which the international standard of State
conduct must apply. This is not to suggest that
international law will supplant the proper law as the
system in which the contract has its being; if only
because the will of the parties, according to which the
municipal law was made the proper law of the contract,
must be respected. But the local municipal law, when
functioning, as the proper law of a State contract, just as
in other situations must conform to any requirements
laid down by international law governing the conduct of
States. International law is therefore relevant to the
contractual situation as an adjectival law.
401
Thus, a termination or alteration of the contract by a
change made in the proper law, though it cannot in the
nature of things amount to a breach of contract in the
proper law, may nevertheless amount to a breach of
international law. The claim may be delictual in form
but it may still be a remedy in respect of the contract.785
Reservations are also often made as regard the application of a law other than that of the
contracting State, or as to the complementarity of such law where there exists a lacuna in
the national law of the contracting State. The lacuna may be such that its principles and
rules fail to regulate adequately the relationship or fail to envision the complexities, which
may arise under a concession.
The Franco-Algerian Agreement on Hydrocarbons, 1965 anticipated problems, which may
arise as a result of lacuna in the national law of the contracting State. Article 46(4) of the
agreement and Article 174 of the protocol annexed thereto envisaged the case of silence or
lacuna in the applicable law and provides in such event that international arbitration
tribunal can have recourse to general principles of law.
Where all probable lapses and lacunae in the national law of the contracting State are not
envisioned in the concession, a legal void is created, which may dog the search for
applicable law of the concession.
The Arbitrator of the dispute between the Sheik of Abu Dhabi and Petroleum Development
Company (1951) in determining the proper law of the contract stated:
785 Note 30 supra.
402
What is the proper law applicable in construing this
contract? This is a contract made in Abu Dhabi, and
wholly to be performed in that country. If any
municipal system of law were applicable, it would prima
facie be that of Abu Dhabi. But no such law can
reasonably be said to exist… and there is not in this
region any settled body of legal principles applicable to
the construction of modern commercial instruments.
In the arbitration between ARAMCO and the government of Saudi Arabia, the arbitration
tribunal observed that the regime of mining concessions and consequently also of oil
concessions has remained embryonic in Moslem law.786
In the arbitration between the ruler of Qatar and International Marine Oil Company, (1953)
the Arbitrator came to the conclusion that the law of Qatar was applicable, after pointing
out that Islamic law, being the law administered in Qatar, was appropriate law. He observed
that there is no settled body of legal principles in Qatar applicable to the construction of
modern commercial instruments and that the law does not contain any principle that would
be sufficient to interpret this particular contract.787
7.5.3 THE PRINCIPLES OF LAW COMMON TO THE PARTIES
786 Aramco Case, 27 I.L.R. 114 (1957). 787 Ruler of Qatar v. International Marine Oil Company Ltd, 23 I.L.R. 116 (1957).
403
Parties to a PIA can elect consensually to regulate their relationship with principles of law
uniformly adhered to by them. In the arbitration case of Posts and Telegraphs of Republic
of Czechoslovakia v. The Radio Corporation of America, (1932), it was held:
The agreement is subject to the ordinary rules of the
civil law and this condition is not altered by the fact that
one of the contracting parties‟ happen to be a public
authority (a State).
Even if the agreement should be considered a public law
agreement, the State cannot repudiate the obligations,
which it contains without showing that public interests
of vital importance could suffer if the agreement should
be upheld under the rules of the civil law. But this is not
the fact in the present case. When a public institution
enters into an agreement with a private person or a
private company it must be assumed that the
government has intended by this agreement to benefit its
citizens. But that these expectations sometimes prove to
fail in not giving the country as large a profit as was
expected; cannot be considered sufficient reason for
releasing that public institution from its obligations as
signatory of said agreement.788
788 Czechoslovakia v. R.C.A, 19 Texas Law Review 55 (1936) ; American Law Institute, UNIDROIT
Principles of Transnational Civil Procedure, Cambridge, Cambridge University Press, 32 (2005); J.P.
Mallor, Business Law: The Ethical, Global and E-Commerce Environment, New York, McGraw Hill,
2-25 (2003); S. Grundmann, “General Standards and Principles in European Contract Law,” in S.
Grundmann, (ed.), General Clauses and Standards in European Contract Law: Comparative Law, EC
Law and Contract Law Codification (European Context), The Hague, Kluwer, 1-21 (2005); S.
404
Such a dispensation was had recourse to in the consortium‟s agreement with Iran in 1954.
Article 46 of the agreement stipulated in part:
In view of the divergent nationalities of the parties‟ to
this agreement, it shall be governed and interpreted and
applied in accordance with principles of law common to
Iran and the several nations in which the other parties to
this agreement are incorporated and in the absence of
such common principles, then by and in accordance with
principles of law recognized by civilized nations in
general, including such of those principles as may have
been applied by international tribunals.789
The NIOC‟s agreement with AGIP (1957) also incorporated the provision for the
application of principles common to the parties thereto.
Geeroms, Foreign Law in Civil Litigation: A Comparative and Fundamental Analysis, Oxford, Oxford
University Press, 24 (2004); M.E. Roszkowski, Business Law: Principles, Cases and Policy, New
York, Stipes, 16-30 (2004); E.Brunet, Arbitration Law in America: A Critical Assessment, New
York, Cambridge University Press, 34 (2006); S. K. Khalilian, The Law of International Arbitration,
Vancouver, Pacific Arbitration Network, 63-79 (2003); S. Issacharoff, Civil Procedure, New York,
Foundation Press, 67 (2005); L.Niglia, The Transformation of Contract in Europe, The Hague, Kluwer
International, 25 (2002); H. Fox, The Law of State Immunity, Oxford, Oxford University Press, 48
(2004); J. Bell, Judiciaries Within Europe: A Comparative Review, Cambridge, Cambridge University
Press, 75 (2006); I. Fletcher, Remedies Under Security Interests, London, Springer, 81 (2002).
789 A. Farmanfarma, „The Oil Agreement Between Iran and the International Oil Consortium: The Law
Controlling, 34 Tex. L. Rev. 259 (1955).
405
The Kuwait-Arabian Oil Company Concession (1958); the Kuwait-Shell Concession
(1961); the Hudramaut-Pan American Concessions (1961) and the U.A.R. – Pan American
concessions of (1963). The only foible of this rule is its reference to principles which
themselves may be ill defined, full of contradictions and vague.
In the case of the Consortium agreement with Iran, it was necessary to determine the
common thread which runs through nine systems of law, which include Roman law
generally adhered to in the Netherlands and Islamic law which form the basis of the civil
code of Iran. The rule is salutary in harmonizing the expectations of parties with divergent
notions of legal realities.790
7.5.4 THE GENERAL PRINCIPLES OF LAW RECOGNIZED BY
CIVILIZED NATIONS
The evolution of the general principles of law recognized by civilized nations as corpus of
legal rules at the international plane was perhaps catalyzed by their incorporation in Article
38 of the Statute of the Permanent Court of International Justice as one of the sources of
international law. Article 38 among other things provides:
1. The Court shall apply:
(a) International Conventions, whether general or
particular establishing rules expressly recognized by
790 The NIOC-AGIP Agreement of August 24, 1957, Petroleum Legislation, Middle East Vol. 10 ,
which is referred to in the Saphire Award contained both a reference to cases of force majeure. “If
recognized as such by principles of International Law (Article 37 ( c ) and choice of governing law
reading as follows, “In view of the difference in the nationality of parties to this agreement, the latter
shall remain valid and must be interpreted and applied according to the principles of law common to
both Iran and Italy and in the absence of such principles in accordance with the principles of law
recognized normally by civilized nations, namely those which have already been involved (sic) by
international tribunals.
406
the contracting State.
(b) International custom, as evidence of a general
practice accepted as law as law
(c) The general principles of law recognized by civilized
nations.
(d) Subject to the provisions of Article 59, judicial
decisions and teachings of the most highly qualified
publicists of the various nations, as subsidiary means for
the determination of rules of law.
2. This provision shall not prejudice the power of the
Court to decide a case ex aequo et bono, if the parties
agree thereto.
That Statute has been preserved in toto and incorporated in the present Statute of the
International Court of Justice, which is the successor-institution to the Permanent Court of
International Justice. The doctrine has been assimilated to the national laws of the bulk of
nations. The rules typified by the general principles of law have been characterized
variously as „Transnational Law,‟ „Common law of nations‟ and „A modern law of nature.‟
Irrespective of the nomenclature employed in their characterization the same thread runs
through these characterizations. These principles are viewed in certain quarters as sui
generis, and beyond being parochially viewed as general principles of international law and
or municipal law. These principles cannot be ingratiated with any specific legal system,
whether international and or municipal but all contain elements of these principles.
407
Hudson, in lending his voice to the discourse on the general principles of law in Article 38
of the Statute of the Permanent Court of International Justice, stressed that this Article gave
the Court the leeway to avail itself of principles universal to various systems of municipal
law and or widely accepted by jurists at the municipal plane, thus affording the
development of international law on the bases of broad-based strains of legal thought in the
world.791
According to Mann:
If one party to a contract is an international person,
particularly a State, there exists ipso facto a sufficient
connection with super-national rules of law, which, on
any view of the proper law theory, may enable and
justify the parties to delocalize their contract and to
submit it to what may be called public international law,
i.e., to internationalize it. They may do this in order to
make applicable the provisions of a treaty giving rise to
their transaction or those general principles of law
recognized by civilized nations with which publicists are
conversant and which though by no means fixed or easy
791 P. C. Szasz, „The UN System as a Source of Law: General Law Making Processes,‟ in C.C. Joyner
(ed.), The United Nations and International Law, Cambridge, Cambridge University Press, 27-64
(2004); I. Brownlie, Principles of Public International Law, Oxford, Oxford University Press, 1-30
(2004); K.F. Murphy, The United States and the Rule of Law in Internaitonal Affaires, Cambridge,
Cambridge University Press1-73, (2004); K. Kittichaisaree, International Criminal Law, Oxford,
Oxford University Press, 10 (2001); D.J.Bederman, International Law Frameworks, New York,
Foundation Press, 1-36 (2001); F. F. Martin, International Human Rights and Humanitarian Law:
Treaties, Cases, and Analysis, Cambridge, Cambridge University Press, 22-70 (2006); I. F. Dekker,
„The Completeness of International Law and Hamlet‟s Dillemma: Non Liquet, the Nuclear Weapons
Case, and Legal Theory,‟ in I. F. Dekker, (ed.), On the Foundation and Sources of International
Law, London, Asser, 5-29 (2003); F. Kalshoven, Belligerent Reprisals, Leiden, Brill Academic
Publishers, 1-11 (2005); O.Spiermann, International Legal Argument in the Permanent Court of
International Justice: The Rise of the International Judiciary, Cambridge, Cambridge University
Press, 3-77 (2005); K. Zweigert, An Introduction to Comparative Law, Oxford, Oxford University
Press, 7-48 (2002).
408
to ascertain, are yet not so vague as to render a
submission to them void for uncertainty.792
The general principles recognized by civilized nations have been had recourse to in PIAs.
The AIOC‟s concessions (1933) provided that an arbitral award under the agreement shall
be based on the juridical principles contained in Article 38 of the statute of the Permanent
Court of International Justice.
Such principles include the general principles of law recognized by civilized nations.
The Qatar Concession granted to Anglo-Persian Oil Company (1935) alluded to the „legal
principles familiar to civilized nations.‟
The supplemental agreement made between the ruler of Qatar and Qatar Petroleum
Company in 1964 incorporated a provision regarding the general principles of law:
The parties based their relations with regard to this
agreement on the principles of goodwill and good faith.
Taking account of their different nationalities, this
agreement and other related agreements between them
shall be given effect and must be interpreted and applied
in conformity with the principles of law normally
recognized by civilized states in general including those
which have been applied by international tribunals.793
792Note 65 supra. 793 L. Marquis, International Uniform Commercial Law: Towards A Progressive Consciousness,
Hampshire, Ashgate, 17-59 (2005); C. Beyani, „The Legal Premises for the International Protection of
Human Rights‟ in I. Brownlie, (ed.), The Reality of International Law: Essays in Honour of Ian
Brownlie, Oxford, Oxford University Press, 21-36 (2003); T. Buuergenthal , Public International
Law, St Paul, West Group, 18-34 (2002); P.W. Birnie, International Law and the Environment,
Oxford, Oxford University Press, 10-27 (2002); H. Steiner, International Human Rights in Context:
Law, Politics, Morals, Oxford, Oxford University Press, 58 (2004).
409
The consortium‟s agreement with Iran (1954) provided that the agreement shall be
governed by the principles of law common to the parties and in their absence by the
principles of law recognized by civilized nations.
The Kuwait-Arabian Oil Company Agreement (1958), the Kuwait – Shell Agreement
(1961) also included provisions for the application of the principles of law common to the
parties and, in their absence, imports the general principles of law, normally recognized by
civilized States, including those which have been applied by international tribunals.
7.5.5 PUBLIC INTERNATIONAL LAW
International law qua international law pertains to that corpus of law which regulate the
conduct of States in the comity of nations. The subjects of international law are sovereign
States. The acts and conducts of States belong in the public realm, and the law which
strictures these acts and conducts derives its nature from that public identity of the
sovereign subjects of international law.
Stricto sensu, public international law strictures relationships between sovereign States, it is
not applicable to contracts between a State and a private party.
It regulates inter State relationship. According to Mann:
Contracts between international persons particularly
States, are, in general subject to public international law.
This principle, which is not open to doubt, implies, of
course, the existence of a body of public international
law capable of being applied to contractual
arrangements between international persons. No
410
international lawyer will experience any difficulty on
this score. While he is conscious of the rudimentary
character of international law in many respects, he will
fill gaps by invoking the general principles of law
recognized by civilized nations, as directed by Article
38 of the Statute of the International Court of Justice. In
order to find these principles he will resort to provide
law on a comparative basis. It is at this point that the
methodological problem raises its head: how is the
process of comparison to be operated so as to lead to the
ascertainment of general principles?794
The foregoing should be considered alongside Suratgar‟s position:
Amongst the more forceful doctrinaire justifications of
the choice or application of public international law is
certainly that based upon the generally accepted
principle of the freedom of contract. More open to
doubt are the suggestions that public international law is
applicable in such cases even in the absence of an
express choice, through the operation of the doctrine of
794 Ibid; T. Buergenthal, Law Public International, St. Paul, West Group, 2-34 (2006); I. Brownlie,
Principles of Public International Law,Oxford, Oxford University Press, 3-41 (2005); M. Shaw,
International Law, Cambridge, Cambridge University Press, 65-142 (2003); J. Pauwelyn, Conflict of
Norms in Public International Law: How WTO Law Relates to Other Rules of International Law,
Cambridge, Cambridge University Press, 89-147 (2003); G. Von Glahn, Law Among Nations: An
Introduction to Public International Law, London, Longman, 2-22 (2006); T.J. Lawrence, A
Handbook of Public International Law, London, Adamant Media, 10-45 (2006); A. S. Winer, A
Basic Course in Public International Law Research, New York, University Press of America, 13-30
(2005); O. Casanovas La Rosa, Unity and Pluralism in Public International Law, New York,
Springer, 5-35 (2001).
411
the “proper law” of the contract whether determined by
a subjective or an objective process. In the case of an
express choice, it must be questionable whether a choice
of public international law does not involve all the rules
of such a system including that restricting its application
to interstate relations. As far as the implied choice
suggestion is concerned, it would seem that much less
justification would thus exist for rejecting the traditional
solutions based upon the presumption in favor of the
application of the municipal law of contracting State.795
795 Note 41 supra, at 274 ; C. Brolmann, The Institutional Veil in Public International Law:
International Organisations and the Law of Treaties, London, HartPub, 6-25 (2007); A. Boyle, The
Making of International Law, Oxford, Oxford University Press, 3-45 (2007); D.H. Ott, Public
International Law in the Modern World, London, Ashgate, 6-48 (2008); W. Simons, The Evolution
of International Public Law in Europe Since Grotius, New York, William S. Hein, 4-47 (2004); M.
Evans, International Law Documents, London, Blackstone Press, 26-53 (2003); A. Oxford, „A
Jurisprudence of the Limit,‟ in A. Oxford (ed.), International Law and its Others, Cambridge
University Press, 1-34 (2006); B. Conforti, Law and Practice of the United Nations, Leiden, Brill
Academic Publishers 37,121-122 (2004); P. Cobbett, Leading Cases and Opinions on International
Law, London, Adamant 61 (2005); G. Petrochilos, Procedural Law in International Arbitration,
Oxford, Oxford University Press, 1, 47, 225 (2004); E.K. Barnkas, The State Immunity Controversy
in International Law: Private Suit Against Sovereign States in Domestic Courts, New York,
Springer, 6 (2006); T. E. Holland, Studies in International Law, London, Adamant, 105 (2005); A.A.
Asouzu, International Commercial Arbitration and African States: Practice, Participation and
Institutional Development, Cambridge, Cambridge University Press, 16 (2005); P.V. Bossche, The
Law and Policy of the World Trade Organization: Text, Cases and Materials, Cambridge, Cambridge
University Press, 57 (2005); C.J. Tam, Enforcing Obligations Erga Omnes in International Law,
Cambridge, Cambridge University Press, 26 (2005); E. Pettersmann, „Constitutionalism and WTO
Law: From a State-Centred Approach Towards a Human Rights Approach in International Economic
Law,‟ in D. L.M. kennedy, (ed,), The Political Economy of International Trade Law, Cambridge,
Cambridge University Press, 34 (2002); A. C. Cutler, Private Power and Global Authority:
Transnational Merchant Law in the Global Political Economy, Cambridge, Cambridge University
Press, 7 (2003); L. Gullifer, „Quasi-security Interests: Functionalism and the Incidents of Security,‟ in
I. Davies, (ed.), Issues in International Commercial Law, Aldershot, Ashgate, 3-30 (2005); J.
Westlake, Chapters on the Principles of International Law, London, Adamant, 10-125 (2005); N.
Horn , Arbitrating Foreign Investment Disputes: Procedural and Substantive Legal Aspects, The
Hague, Kluwer, 8 (2004); C. F. Amerasinghe, Evidence in International Litigation, Leiden, Brill
Academic Publications, 5-50 (2005); A. Anghie, Imperialism, Sovereignty and the Making of
International Law, Cambridge, Cambridge University Press, 29 (2005); C. Buhring-Uhle, Arbitration
and Mediation in International Business, The Hague, Kluwer, 12,34,42 (2006); R.E. Scott, The
Limits of Leviathan: Contract Theory and the Enforcement of International Law, Cambridge,
Cambridge University Press, 6 (2006); D. F. Donovan ,’Mitsubishi After Twenty Years: Mandatory
Rules Before Courts and International Arbitrators,‟ in L.A. Mistelis, (ed.), Pervasive Problems in
International Arbitration, The Hague, Kluwer, 37 (2006); J.L. Goldsmith, The Limits of International
Law, Oxford, Oxford University Press, 23-135 (2005).
412
The Libyan Petroleum Law of 1955 was amended in 1965 to provide that the contract shall
be governed by, and interpreted in accordance with the principle of law in Libya, which are
consistent with principles of international law, and in their absence, in accordance with the
general principles of law including those applied by international tribunals.
Article 13 of the Iranian Petroleum Act (1957) defined “force majeure” as meaning,
occurrences which are recognized as such by the principles of international law. Inspite of
the paucity of the adaptation of principles of international law in the foregoing respect, there
is an elaborate recourse to general principles of law in PIAs, arbitral tribunals have relied on
the authority of these general principles in the resolution of disputes.
At this juncture, it is necessary to enter a caveat, to the effect that not withstanding the
adaptativeness of PIAs and State contracts to certain sources of public international law, a
contract between a State and a private party is not within the purview of public international
law. International law is stricto sensu applicable as between States and international public
organizations subjects of international law.
The choice of international law as the applicable law of PIAs has no juridical value; the
rights and obligations provided in PIAs between a State and a private individual and or
corporation cannot be enforced at international law.
The incursion of the State into the world of commerce has engendered the distinction
between act iure imperii and acts iure gestionis, State practice has tended to depart
increasingly from the traditional absolute immunity doctrine gravitating towards the
principle of restrictive immunity.
413
It is, however, doubtful whether a State contract can be fully secured and insulated from the
erosion of the rights of the corporation under a PIA. There is a marked departure from the
doctrine of pacta sunt servanda, which seeks to preserve the sanctity of contracts. A
fundamental change in circumstances which makes the terms of the contract onerous for the
State party may justify alterations of terms and or outright abrogation of the contract, that is,
clausula rebus sic stantibus.
International law has elaborately provided the leeway for the State to alter the terms of the
contract where it views the contract as disparaging public interests. However, such
measures by State must not be of a confiscatory or discriminatory nature. Stabilization
clauses in PIAs between host countries and international oil corporations, which among
other things stipulate that contracting State shall not modify, abrogate the contract; subject
the contract to a law other than that of the contracting State; independent arbitration of
disputes arising from the contract and periodical reviews of the terms have proved
inadequate against the exercise by the State of permanent sovereignty over the natural
resources within its territory.
Certain State contracts are regulated strictly by the national law of the contracting State. Yet
there is another category of State contracts which evince no concordance with the national
law, but rather regulated by an amalgamated configuration of orthodox provisions and legal
concepts that incorporates national laws and norms of international law and the general
principles of law recognized by civilized nations.
In view of the complexities and confounding juridical problems engendered by global
economic exchanges, the norms of international law have more than ever been ranged
414
against the spectre of the problems of international economic relations. Questions have been
asked as to the continuous ability of the international legal order to provide the framework
within which this myriad of issues can be resolved.
National law equally comes under no less a test as to its capacity to provide a framework for
the resolution of the complex issues emanating from international economic relations and
reconciling the disparate and conflictual interests entailed in such exchanges between States
and private entities.
It is doubtful whether international law on its own can provide the framework for the
resolution of the special and complex problems of transnational contracts nor is the national
law any more adequately equipped to address those problems. These complexities, coupled
with the long gestation and the stupendous resources involved in PIAs calls for an organic
legal framework that would be eclectic and dynamic enough as to be able to address those
complex issues as they emerge.
7.6 A PERSPECTIVE ON STABILITY OF PIAs VIS-À-VIS THE RIGHT TO
ECONOMIC DEVELOPMENT
So much by way of a general consideration of the legal nature of petroleum international
agreements. At this juncture, it is pertinent to dwell on some of those devices which parties
to PIAs resort, to avert the danger of variation of terms and or outright abrogation of the
PIA. These devices include; stabilization clauses; internationalization clauses; force
majeure clauses; and hardship clauses. The paper submits that these clauses aimed at
stabilizing expectations under PIAs are of doubtful efficacy. In that regard, the paper shall
attempt to examine whether there is indeed a correlation between recourse to these clauses
415
in PIAs and stability of expectations under PIAs.796
The study is however obliged to dwell
on the right to development with a view to establishing its legal basis and range it against
the notion of stability of PIAs.
There is an evolutionary nexus between the right to development and sovereignty, which
derives from peremptory norms of international law, the right to development, permanent
sovereignty over natural resources, the right to self determination and State sovereignty all
constitute links in this chain. The chain is as strong as its weakest links; the links are
reciprocally reinforcing, weakness of one results in the weakness of all.797
At the core of the existence and being of a State, is the permanent sovereignty over its
natural wealth and resources, which is a basic constituent of the right to self-determination
and by necessary implication, the right to development. To disparage that right is to strike
lethally at the very heart of State sovereignty.
796 D.N. Smith and L.T. Wells, „Conflict Avoidance in Concession Agreements,‟ 17 Harvard Journal
of International Law 51(1976); H. G. Schermers, International Institutional Law: Unity Within
Diversity, Leiden, Brill Academic Publishers, 597-605 (2004); P.Capps, Asserting Jurisdiction:
International and European Legal Approaches, London, HartPub, 5-95 (2003); P.North,
International Civil Procedure, The Hague, Kluwer International Law Publications, 22 (2003); J.H.
Jackson, Sovereignty, the WTO and Changing Fundamentals of International Law, Cambridge,
Cambridge University Press, 18-54 (2006); S.R. Bond, „How To Draft An Arbitration Clause
(Revisited)‟ in C.R. Drahozal., (ed.), Towards A Science of International Arbitration, The Hague,
Kluwer, 65-78 (2005); C. Buhring-Uhle, „A Survey On Arbitration and Settlement in International
Business Disputes: Advantages of Arbitration,‟ in C. R. Drahozal, (ed.), Towards A Science of
International Arbitration, The Hague, Kluwer, 25-42 (2005); O. A. Hathaway, Foundations of
International Law and Politics, New York, Foundation Press, 15 (2004); M. Sornarajah, The
International Law on Foreign Investment, Cambridge, Cambridge University Press, 7 (2004); C.F.
Amerasinghe, Local Remedies in International Law, Cambridge, Cambridge University Press, 33
(2004); G. Pring, „The Emerging International Law of Public Participation Affecting Global Mining,
Energy, and Resources Development,‟ in D.N. Zillman , (ed.), Human Rights in Natural Resources
Development: Public Participation in the Sustainable Development of Mining and Energy
Resources, Oxford, Oxford University Press, 11-76 (2002); N. Kouladis, Principles of Law Relating
to International Trade, New York, Springer, 2 (2006); A. Lowenfeld, International Economic Law,
Oxford, Oxford University Press, 4 (2002); M. Rubino-Sammaratano, International Arbitration Law,
The Hague, Kluwer, 1-25, 47,81 (2001); R. Phillimore, Commentaries Upon International Law,
London, Adamant, 85 (2005); A.P. Rubin, Ethics and Authority in International Law, Cambridge,
Cambridge University Press, 14 (2004). 797 I. Bunn, Right to Development and International Economic Law, London, Hart Publications, 15-
260 (2008)
416
Therefore, permanent sovereignty over the natural resources in situ in the territory of a State
is a condition precedent, necessary and sufficient for its being a sovereign and independent
State properly so called. A corollary to the foregoing, is that large scale brazen,
transgression of the permanent sovereignty of States over their natural resources through
unequal and fraudulent contractual and trade terms will invariably lead to severe economic
and social dislocation in these States, and constitute clear and present danger to world peace
and collective security.
It is not a platitude to say that economic conflict engendered by prolonged exploitation of
resources of developing States constitutes a threat to peace and security of the world as
distinct from political and military conflicts which in themselves are not causes but effects
of other antecedent conditions which, as history of human conflict have shown are
economic.
Thus, where economic hardship of untoward magnitude would result from the strict
discharge of a contractual obligation owing to a party under an economic development
agreement, the States right to development overrides the sanctity of such contractual terms
and provides an unqualified cause for variations.
The expropriation of the assets and operations of transnational corporations (TNCs) on
grounds of overriding national interest is perhaps the ultimate espousal of State sovereignty
and the right to development. It facilitates the integration of TNCs into the national
economy, and restructuring them in the light of the economic aspirations of the
nationalizing State. It suffices to position that development; especially all encompassing
development of developing States is a phantom notion, a mythical ideal. The study cannot
417
but highlight the ideological representations implied in the discourse regarding development
and development law within the context of arbitration of economic development
agreements.
Perhaps the most resorted to stabilization device under PIAs is the stabilization clause.
Stabilization clauses are incorporated in PIAs because of their rather long gestation, which
necessitates the need for certain built in mechanism of stability, which will deter the State
from willfully disparaging the interest of the private party to the PIA. Transnational oil
corporations are particularly wont to insist on the incorporation of stabilization clauses in
the PIA, where the adjectival law of the contract is the national law of the contracting State.
The TNOC by so doing seek to insulate itself from the vagaries of the dangers of wilful,
unilateral and arbitrary alteration by the State of its laws in such a manner as to disparage
the interests of the TNOC and disrupt its expectations fundamentally.798
Stabilization clauses may take either of two forms. They may be aimed at rendering the law
of the host State immutable and or frozen at the time the legal relationship subsists between
the TNOC and the host country or at the time the agreement was signed and consummated.
Under this dispensation, the adjectival law of the agreement is defined and embodied in the
agreement and frozen as it were at the time of signing the contract.799
A contractor (TNOC) who enters into a long-term agreement may reasonably expect a fairly
clear definition of its rights at the commencement of the contract.
Certain measures, therefore, become necessary so as to determine whether the contract will
reach maturity, or whether its terms would be truncated. The national law of the contracting
798 Note 3 of chapter one supra, at 593. 799 See F.A. Mann, „The Law Governing State Contracts,‟ 20 B.Y.I.L. 60 (1944).
418
State may become inapplicable by reason of its inconsistency with the terms of the
agreement made between parties thereto. In that connexion it is necessary to distinguish
between forms of incongruity which stabilization clauses seek to address. These are present
inconsistency emanating between a PIA and a prior legislative provision and those
inconsistencies that derive from the incongruity of a PIA with a subsequent legislation.800
In the case of present inconsistency, it is clear, at least with respect to a PIA, which receives
legislative approval and thereby acquires the force of law that in the event of conflict
between the terms and conditions of such PIA and any prior statutory provisions, the former
will prevail. That rule suffices in itself to permit that the terms and conditions of the PIA
takes precedence over and above any prior statutory provision, which is incongruous
C.F. Amerasinghe, „State Breaches of Contracts with Aliens and International Law,‟ 58 A.J.I.L,881-
913 (1964); There is a renascence of enonomic nationalism among oil producing States, particularly,
Latin American States. On May Day, May 1, 2006, President Evo Morales of Bolivia ordered the
military to occupy Bolivia‟s natural gas fields, after nationalizing the industry and threatening to
expel any transnational oil corporation that failed to recognize state control, available at http://www.
En.epochtimes.com/news/6-5-3/41111.html; on May 1, 2007, Venezuela stripped the world‟s biggest
transnational oil corporations of operational control over massive Orinoco Belt Crude projects. The
measure represents a vital move in President Hugo Chavez‟s nationalization drive. The May Day
takeover came exactly a year after Bolivian President Evo Morales, an ally of President Hugo
Chavez of Venezuela startled investors by ordering troops to seize his country‟s gas fields, thus
accelerating Latin America‟s struggle to reclaim resources. According to Chavez, the take over
marked an end of an era of US prescribed policies that opened up the largest oil reserves in the
western hemisphere to European investment. Venezuela has consistently sought to export its doctrine
of „Full Sovereignty over Oil‟ to other OPEC member countries. In a speech delivered by the
Venezuelan Minister of Energy and Petroleum, Rafael Ramirez Carreno, at the Third OPEC
International Seminar , „OPEC in a New Energy Era: Challenges and Opportunities,‟ September,
2006, he underscored Venezuelan policy regarding stability of PIAs, „However, we believe that in
our experience there is also to be found a message to the large oil consuming countries and the
multinational oil companies; namely, that there can not be stability in the international oil market if
there is no stability within oil producing countries, which in turn presupposes political and social
stability, justice, and a truly national and fair distribution of the oil rent.” Available at
www.pdvsa.com/index.php?tpl=interface.en/design/biblioteca/readdoc.tpl.html&newsid_obj_id_=29
90&newsid_temas+110; on Tuesday 23 October, 2007, the Nigerian Presidential Adviser on Energy
Rilwanu Lukman announced Nigeria‟s plan to review existing Joint Venture Agreements with
transnational oil corporations, available at BusinessAfrica Online,
http://www.businessafrica.net/news/west_africa/871045.htm, 2007.
419
therewith.801
It is not, however, uncommon to find certain PIAs incorporating provisions
which envisage future conflicts between the terms and conditions of PIAs and statutory
provisions. Article 43 of the Iranian Offshore Concessions (1965) provides:
The provisions of the Mining Act of 1957 shall not be
applicable to this Agreement, and any other laws and
regulations which may be wholly or partly inconsistent
with the provisions of this Agreement shall, to the extent
of any such inconsistency, be of no effect in respect of
the provisions of this Agreement.
In a similar vein, Article 37(1) of the concession granted to Phillips (1963)802
by the U.A.R.
provides as follows:
The EGPC and Phillips shall be bound by Law No. 66 of
1953 as amended by Law No. 86 of 1956, and by the
executive regulations thereof to the extent that said law
and regulations are not contrary to or inconsistent with
the provisions of this Agreements.
The inconsistency between a PIA and a subsequent statutory provision can sometimes be
problematic. Certain agreements and statutes stipulate that no future legislation or
regulatory provisions shall affect the rights granted by the PIA. Several PIAs contain
stipulations that the State shall not modify or abrogate the PIA and that no alteration shall
801 R.W. Jennings, „State Contracts in International Law,‟ 12 B.Y.I.L 181 (1961). 802 F. Rouhani, International Agreements and Contracts in the Field of Petroleum, London, Maxwell,
9-10, (1980).
420
be made therein except by mutual consent of parties. Such stipulations were embodied in
AIOC‟s concession (1933). KOC‟s concession (1934); the consortium‟s agreement (1954);
Iran‟s offshore agreements (1965) and Kuwait‟s concessions to Arabian Oil Company
(1958) and Shell (1961).
The foregoing provisions are affirmations of the principle implied in the maxim, pacta sunt
servanda. The Libyan Petroleum Law provides in Article 24 that no regulation issued for
the implementation of the law:
Shall be contrary to or inconsistent with, the provisions
of this law or adversely affect the contractual rights
expressly granted under any permit or concession.
Article 16 of the Libyan concessions also declares that:
The contractual rights expressly created by this
concession shall not be altered except by mutual consent
of the parties.
Subsequent amendments made to the Libyan Petroleum Law after its promulgation did not
apply to concessions already granted except to the extent of changes, which were made by
mutual agreement. Although the amendments made to the Libyan Petroleum Law on July
3, 1961; November 9, 1961 and April 26, 1962 did not affect previous concessions, yet they
embodied inducements for concessionaires to amend their agreements in accordance with
the provisions of the amended laws.
The Iranian Petroleum Act states in Article 11 that:
421
No changes adverse to the conditions, privileges or
circumstances provided in, or recognized by, any
agreement as of its date or of its renewal, shall be
applicable to such agreement during the period of its
existence or renewal.
Furthermore, Article 16 of the same act declares that:
Any laws or regulations, which are wholly or partly
inconsistent with this act, shall be of no effect to the
extent of that inconsistency.
The practice of the U.A.R. in that regard is somewhat similar. The U.A.R.‟s concession to
Phillips stipulated in Article 45:
This agreement shall be governed by the provisions
herein contained, which can only be amended by
agreement between the contracting parties.
The foregoing contractual and statutory provisions are designed to protect conventional
rights against supervening legislation. In the event that there are no such stabilization
clauses either contractual and or statutory, or where in spite of their being expressly
provided for, subsequent legislation is promulgated by the contracting State such as to
disparage the rights under the PIA and generally at variance with the terms and conditions
422
of the agreement. The scenario which is enacted thereafter, present a hydra headed problem
both at the international and municipal plane.803
On one hand, international law provides considerable leeway for the State to take unilateral
steps to review and or outrightly abrogate agreements between it and Transnational Oil
Corporations when it finds the spirit of such relation tangential to its long-term survival as a
sovereign entity.804
While international law on consideration of equity, justice and good
reason also frowns at revisions of terms and conditions of contracts and or outright
abrogation of agreements, which are discriminatory and confiscatory in nature.805
Iraq presents another typical case of a subsequent legislation eroding rights granted under
PIAs. By virtue of Law No. 80 of 1961, the government of Iraq withdrew unexploited
acreages from the concessions granted to IPC group of companies. The areas so withdrawn
exceeded about 99 per cent of the total area of the concessions.
Often, stabilization clauses are aimed at “freezing” the laws of the contract while at the
same time or in isolation the host country incorporate provisions assuring the Transnational
Oil Corporation that legislation subsequent to the PIA shall not in any way destabilize
expectations.
In Sapphire International Petroleum Ltd. v. National Iranian Oil Company, arbitral award
of March 15, 1963,806
the Swiss arbitrator held that an agreement relating to a joint venture
arrangement between the National Iranian Oil Corporation an agency of the Iranian
government and Sapphire Petroleum, Ltd., an Ontario company, was in the absence of an
803 J.E.S. Fawcett, „Legal Aspects of State and Trading,‟ 45 B.Y.I.L 50 (1948). 804 See Texaco Case, (1977) 389 I.L.R.; (1978) 17 I.L.M. 1. 805 Aminoil Case, 21 I.L.M. 976; Anglo-Iranian Oil Co. Case, [1952] I.C.J. Reports 93. 806 Saphire International Petroleum Ltd. v. National Iranian Oil Company, Arbitral Award 35 I.L.R.
136 (1963)
423
express stipulation of applicable law, but in view of the general provisions according to
which the parties undertook:
To carry out the terms and provisions of this Agreement
in accordance with the principles of mutual goodwill
and goodfaith and to respect the spirit as well as the
letter of the said terms and provisions.807
The provision removed the contract from the application of Iranian law. In effect, no such
removal could have been intended since the agreement was not silent on the subject and
made a careful assessment of the role of Iranian law in relation to the respective rights and
obligations of the parties. Thus the agreement provides that:
No general or special legislation or administrative
measure or any other act whatsoever of, or emanating
from the government or any government authority in
Iran (whether central or local) or from first party shall
annul this Agreement, amend or modify its provisions,
or prevent or hinder the effective performance of its
terms.
Such annulment or modification shall not take place
except by agreement of the parties.808
It provided that:
807 Ibid. 808 Ibid.
424
The provisions of the Mining Act of 1957 shall not be
applicable to this Agreement, and any other laws and
regulations which may be wholly or partly inconsistent
with the provisions of this Agreement shall, to the extent
of any such inconsistency, be of no effect in respect of
the provisions of this Agreement.809
Under the circumstances, reference to the Iranian law, though perhaps formulated in a
somewhat negative fashion was, nonetheless, present. Neither one of the above quoted
provisions could be construed as a clear exclusion of Iranian law (since to the extent that
Iranian law, even subsequent to the making of the contract, was compatible with the terms
of the agreement, Iranian law continued to be applicable), or as a clear submission to
Iranian law (since to the extent that Iranian law continued to apply; new provisions of
Iranian law could not impair the rights of the foreign contracting party).
In the final analysis, the clauses in question, whether they are construed as “incorporating”
or “stabilizing” the provisions of Iranian law, nevertheless, point to Iranian law as the
proper law of the contract.
A distinction must be made, to the effect that; stabilization clauses are normally
circumscribed to a considerable degree, with caveats, defining their scope. The usual
practice is to isolate and underscore the specific aspect of the host State‟s legislation, which
impinges on the terms, and condition of the contract.
In the furore between AGIP Spa and the government of the People‟s Republic of the Congo,
the investment agreement between the parties contained a stabilization clause freezing
809 Ibid.
425
Congolese law at a material time. Subsequently, the Congolese government nationalized
AGIP. The dispute was submitted to an ICSID arbitral tribunal, which held that the
measures of nationalization were contrary to the stabilization clause and that, consequently,
AGIP was entitled to damages.810
In contradistinction to the AGIP Spa Case, a different modality was used in the resolution
of the Aminoil/ Kuwait Arbitration. In 1948 , the ruler of Kuwait granted a 60-year oil
concession to Aminoil, a United States corporation.811
The concession agreement contained
a stabilization clause (Article 17), which provides:
The Sheik shall not by general or special legislation or
by administrative measures or by an other act whatever
annul this Agreement… No alteration shall be made in
the terms of this Agreement by either the Sheik or the
company except in the event of the Sheik and the
company jointly agreeing that it is desirable in the
interest of both parties to make certain alterations,
deletions or additions to this agreement.812
In 1961, a supplemental agreement, amending the 1948 concession was concluded. It gave
additional financial advantages to Kuwait by increasing the payments to be made by
Aminoil, it also included a “renegotiations” clause providing for consultation between the
parties in the event of changes in the terms of concessions in the Middle East (Article 9
based on the “Abu Dhabi formula”). In the early 1970s; Kuwait sought to obtain additional
810 21 I.L.M. 726 (1982). 811 21 I.L.M. 976 (1982). 812 Ibid.
426
payments from Aminoil and in 1973 Aminoil accepted a draft agreement, but the agreement
was never formally executed. The terms of this agreement were modified unilaterally by
Kuwait on several occasions and to its advantage. Negotiations followed but were
unsuccessful. In 1977, Kuwait promulgated a decree-law terminating the concession
agreement. In 1979, the parties agreed to submit their dispute to an ad hoc arbitral tribunal.
Acknowledging at the out set that restitutio in integrum was not a realistic solution, the
parties agreed to limit their respective claims to compensation and damages. Aminoil
claimed that the concession agreement had been wrongfully terminated in violation of
international law, (alleging that it was confiscatory and discriminatory) and of the
stabilization clause. Kuwait argued that since the stabilization clause had been agreed upon
when Kuwait was still a “colonial” entity, the clause had no effect. This argument did not
succeed since the tribunal found that Kuwait had reconfirmed the clause after attaining full
independence. The arbitrators, however, did not agree as to the exact significance of the
stabilization clause. The majority held that the clause did not cover nationalization,
whereas the third arbitrator took the opposite view.
The majority considered that a limitation on the sovereign rights of a State could not be
presumed and that the language of the stabilization clause was not specific enough to
include nationalization. According to the majority, the stabilization clause was intended to
protect Aminoil against confiscatory measures. Since after the nationalization, Kuwait had
made an offer for compensation, the nationalization was not intended to be confiscatory and
was consequently, outside the scope of the stabilization clause. The majority also
considered that as a result of the many readjustments of the arrangements between the
parties, including those of a financial nature, the original concession had in effect been
427
transformed into a kind of association with the result that the original stabilization clause
had lost its former absolute character.
The minority arbitrator did not accept this reasoning. First, he held that there was nothing
in the stabilization clause to warrant the view that it should be narrowly construed. The
object of the clause was not to protect Aminoil against confiscatory measures. Its object
was to protect Aminoil against any measure terminating the concession before its time.
Second, the arbitrator noted that the primary purpose of the stabilization clause was not to
obtain compensation if the clause was breached but rather to guarantee Aminoil against
such a breach. Third, the changes that took place in the contractual arrangements between
the parties, regardless of whether they were voluntary on the part of Aminoil or due to the
force of circumstances, were changes that were to take place within the framework of a
continuing concession. In other words, it was change not termination that Aminoil agreed
to. Under the circumstances, the changes agreed to do not affect the continuing force of the
stabilization clause.
There have been divergent views on the interpretation of the stabilization clause by both the
majority and minority. Without prejudice to that lack of unanimity, it is being submitted
that nationalization carries a different import other than stabilization clauses and the rule of
international law stricturing them allows for that distinction, they cannot be construed as
meaning one and the same thing without contradiction. Nationalization as a distinct notion
needs a distinct and special treatment.
428
In the TOPCO Awards, Libya in 1973 and 1974 nationalized all of the properties, rights,
assets and interests of two claimant United States companies under certain concession
contracts made between Libya and the claimants for the exploitation of oil in Libya.813
The arbitrator held that the reference to the general principles of law in its proper law clause
is always regarded to be a sufficient criterion for the internationalization of a contract. The
arbitrator next applied the law of the contracts in clause 28 and held that the concessions
were binding. According to the arbitrator, because both Libyan and international law
accepted that the contracts were binding, pacta sunt servanda. Concluding that in respect
of the international law of contracts, nationalization cannot prevail over an internationalized
contract, containing stabilization clauses, entered into between a State and a foreign private
company.
The arbitrator then considered whether resolution concerning natural resources and wealth
adopted by the General Assembly justified Libya‟s conduct. Having found no justification
for Libya‟s acts held that the appropriate remedy was restitutio in integrum, as claimed by
the concessionaires, so that Libya was legally bound to perform the contracts. In fact, the
claimants subsequently accepted an offer of compensation in full settlement of their claim.
Municipal law governs most contracts between States and aliens normally, but not always
the municipal law of the contracting States. However, some particular concession contracts
for the exploitation of natural resources are governed by other legal rules indicated usually
in a choice of law clause in the contract. The contract in the Texaco case, which is also
known, as the TOPCO case was typical of the latter kind of contract.
813 17 I.L.M. 3. (1978)
429
The arbitrator no doubt draws on western notions and a theory adumbrated by western
jurists that such a contract may qualify as an internationalized contract or economic
development agreement with the result that the contracting State is deemed to have
surrendered the power to expropriate contrary to its terms, by virtue of the contract‟s
stabilization clause. Nothing, however can be farther from the truth than that position, it
has been impugned and questioned by a considerable number of western jurists and
completely unacceptable to developing countries, when ranged against the award of the
tribunal in Aminoil case, that the take over of Aminoil enterprise was not in 1977,
inconsistent with the contract of concession, provided always that the nationalization did
not possess any confiscatory character. The Aminoil awards remains the locus classicus of
nationalization and underscores the new thinking that a nation State can expropriate a
foreign concern when such measure is necessitated by public interest, security and
legitimate aspiration of the nationalizing State to economic development.
Stabilization clauses cannot, in the strict sense, forbid nationalization. The only
consequence they have when embodied in a contract of concession (PIA) is to merely
prohibit any measures that would have a confiscatory character. It is difficult to achieve
absolute stability in petroleum international agreements. For one, the volatility of the
international oil industry precludes the reaching of immutable contracts whose terms remain
frozen in time. The subject-matter of PIAs constitutes an inalienable natural resource upon
which the HC exercises sovereignty.
The interplay of a combination of macro economic variables of price, demand and supply
on one hand and the geo-politics of international oil, on the other, all engender a
configuration in an intricate matrix, which render the international oil industry highly
430
dynamic. A sudden shift in the price structure could trigger far-reaching fundamental
changes in supply and erode margins. Political upheavals of cataclysmic proportions in
host countries will invariably impact on the sanctity of PIAs.
It is generally acknowledged that relief for non-performance may be granted if, without
fault on the part of the obligor, the performance is frustrated by supervening events.
Frustration may result from physical or material impossibility to perform, such as the
destruction of the subject-matter of the contract or from legal impossibility, such as
subsequent illegality. Frustration could be from a fundamental change of circumstances,
which would destroy the purpose of the contract and make performance pointless or
fundamentally different from what the parties had envisaged. Assuming that frustration
occurs, it is not simply considered as a cause of excuse for the non-performing party. It
releases both parties from further performance and puts an end to the contract. That is
subject to the proviso that the obligor establishes that the events relied upon as a cause of
excuse were unforeseeable, insurmountable and external, in the sense that they would make
performance impossible for everybody and not the obligor alone.
Any event that has the potential for altering the economic expectations of parties in a PIA is
enough cause or excuse for the host country to alter the terms of the contract and or
abrogate the contract.
The Soviet – Israel Oil Arbitration illustrates the nature of the foregoing consideration: In
July 1956, the Soviet oil-exporting agency agreed to sell oil f.o.b. Black Sea ports to an
Israeli company. The seller had applied to the Ministry of Foreign Trade for an export
licence, which, however, was refused, following the outbreak of the Israeli-Egyptian
431
conflict.814
Thereupon, the seller informed the buyer that the contract was cancelled
because the denial of a licence constituted force majeure under clause 7 of the contract,
which reads, inter alia,
Force Majeure. Neither of the parties shall be liable for
any damage or non-compliance with the terms of this
contract or any part of these terms, if this damage or
non-compliance is due to one or more of the following
events preventing one or the other party from
performing his duties under the contract in whole or in
part: natural disasters, fire, flood, warlike acts or
demands of the government or other authoritative
agency of the country under whose flag the chartered
tanker belongs (but excluding the government and
authoritative agencies of the State of Israel), and any
other cause of whatever nature beyond the control of the
non-performing party.815
In subsequent proceedings before the Soviet Foreign Trade Arbitration Commission, the
buyer argued among other things that since the refusal of an export licence was not
mentioned in the foregoing provision, it could not be invoked by the seller as an excuse for
non-performance. This argument, which finds a solid basis in contract practice in
international trade, did not succeed. In the opinion of the Arbitration Commission, the
814 27 I.L.R. 631 (1958). 815 Ibid.
432
denial of a licence, though not specifically listed in the force majeure clause, was,
nevertheless, covered by the catchall provision at the end of the clause.
In contrast, in an ICC award, an African State enterprise (X) had purchased oil from an
Algerian State oil corporation (Y).816
The sales contract contained a force majeure clause
reading as follows:
The parties shall not be responsible for losses or
damages of whatever nature, arising from any delay or
failure to perform the obligations set forth in the
contract as a result of force majeure; provided, however,
that there would be no fault or negligence on the part of
the party invoking force majeure. For the purposes of
this contract, force majeure includes inter alia;
compliance by the seller or the buyer with any provision
or measure resulting from a statute or regulation enacted
by any public authority (of the seller‟s country) or from
an international agreement to which (the seller‟s
country) would be a party.817
Oil was delivered but no payment was made because the Central Bank of the country of X
refused to grant to X the necessary foreign exchange licence. X relied on the force majeure
clause and claimed that the denial of the licence was a cause of excuse under that clause.
That contention did not succeed. The arbitral tribunal found that both X and the Central
816 6 B.Y. Comm. Arb. 147 (1981). 817 Ibid.
433
Bank operated under the control of their government whose Head of State had been
responsible for initiating the negotiations and had been intimately involved in their
conclusion. In other words, the tribunal found that neither entity was truly independent
from the government. Furthermore, the tribunal also held that X was not itself blameless
for the situation. According to the arbitral tribunal:
As the defendant did not succeed in proving that the
three conditions for force majeure (externality,
unaviodability, and unforseability) have been met, it
cannot invoke the exoneration clause provided for in
article 18.1 of the contracts concluded on February 14,
1974 and January 28, 1975. For Defendant it is not a
case of force majeure that the Central Bank did not
provide it with the necessary foreign currency for the
payment of the invoices. Moreover, the Defendant itself
is not without fault. It did not, as was warranted by the
circumstances, take the precaution of obtaining from the
Central Bank the assurance that it would receive this
currency. In this way the Defendant made a relatively
grave mistake which should be attributed to it, and not
to its bank. Indeed, in view of the exceptional
importance of the amounts to be paid, it is Defendant
who should have made arrangements that the payments
in U.S. $ could be effectuated within the contractual
time limit. Therefore, in principle, (Defendant) should
434
be held responsible for any damage resulting from the
non-performance or belated execution of its obligation
to pay for the products which (claimant) delivered
regularly.818
Stability must be viewed within the purview of certain factors. The nature of the subject-
matter of the PIA, as inalienable resource of the host country; the legal capacities of the
parties thereto, the nature of the HC as a subject of international law and the lack of legal
capacity of the TNOC at international law to espouse its rights at the international plane and
finally, PIAs are strictly speaking economic development agreements, because they regulate
the exploitation of a vital resource which invariably constitute the mainstay of the host
country and whose husbandry is crucial to the survival of the nation. The HC can alter
within the constraints of norms of international law, qualify, vary and make distinctions
regarding the terms of the PIA in accordance with the principle clausula rebus sic stantibus
when such terms have become onerous and disparaging to its survival. It can within the
purview of international law abrogate, repudiate and outrightly nationalize the assets of the
TNOC if it deem its further association with it as constituting an albatross to its economic
growth, development and survival as a sovereign nation.
As a corollary to the foregoing, the United Nations Organization highlighted and
underscored the right of developing nations to economic self-reliance and development.
The United Nations Resolution on Permanent Sovereignty over Natural Resources 1962, G.
A. Resolution 1803 (XVII) is one of such affirmative actions of the United Nations
818 13 I.C.L.Q. 398 (1964).
435
Organization aimed at addressing the issue of the economic development of developing
nations. The General Assembly declared, inter alia:
The rights of peoples and nations to permanent
sovereignty over their natural wealth and resources must
be exercised in the interest of their national development
and of the well being of the people of the State
concerned.
In cases where authorization is granted, the capital
imported and the earnings on that capital shall be
governed by the terms thereof, by the national
legislation in force, and by international law. The
profits derived must be shared in the proportions freely
agreed upon, in each case, between the investors and the
recipient State, due care being taken to ensure, that there
is no impairment, for any reasons, of that State‟s
sovereignty over its natural wealth and resources.
Nationalization, appropriation or requisitioning shall be
based on grounds or reasons of public utility, security or
the national interest, which are recognized as overriding
purely individual or private interests, both domestic and
foreign. In such cases the owner shall be paid
appropriate compensation in accordance with the rules
436
in force in the State taking such measures in the exercise
of its sovereignty and in accordance with international
law. In any case where the question of compensation
gives rise to a controversy, the national jurisdiction of
the State taking such measures shall be exhausted.
However, upon agreement by sovereign States and other
parties concerned, settlement of the dispute should be
made through arbitration or international jurisdiction.
Foreign investment agreements freely entered into by or
between sovereign States shall be observed in good
faith, States and international organizations shall strictly
and conscientiously respect the sovereignty of peoples
and nations over their natural wealth and resources in
accordance with the character and the principles set
forth in the present resolution.
However, there are exceptions to acts of States in the exercise of permanent sovereignty
over natural resources that are confiscatory in nature. In Texaco v. Libya, it was held the
recognition by international law of the right to nationalize is not sufficient ground to
empower a State to disregard its commitments, because the same law recognizes, the power
of the State to commit itself internationally especially by accepting the inclusion of
stabilization clauses in a contract entered into with a foreign private company. On the basis
of the circumstances of adoption and by expressing an opinio juris communis, Resolution
1803 (XVII), according to the arbitral tribunal reflect the state of customary law existing in
this regard, the consensus by a majority of States belonging to the various representative
437
groups indicate without slightest doubt universal recognition of the rules incorporated in the
resolution, i.e. with respect to nationalization and compensation, the use of the rule in force
in the nationalizing State, but all this must be in conformity with international law.
The Arbitrator, having found no justification for Libya‟s acts, held subsequently that the
appropriate remedy was restitutio in integrum as claimed by the concessionaire (Texaco
Overseas Petroleum Company) so that Libya was legally bound to perform the contracts. In
fact, the claimants subsequently accepted the offer of compensation in full settlement of
their claim.
Contrary to the decision in Texaco v. Libya case, in the Aminoil case, the tribunal arrived at
the conclusion that the „take over‟ of Aminoil‟s enterprises was not inconsistent with the
contract of concession, provided always that the nationalization did not possess any
confiscatory character.
To be taken alongside Resolution 1804) (XVII) is the Charter of Economic Rights and
Duties of States 1974, General Assembly Resolution 3281 (XXIX). The Charter declares,
inter alia:
Every State has and shall freely exercise full permanent
sovereignty including possession, use and disposal over
all its wealth, natural resources and economic activities.
1.Each State has the right:
(a) To regulate and supervise the activities of
transnational corporations within its national jurisdiction
and take measures to ensure that such activities comply
438
with laws, rules and regulations and conform to its
economic and social policies.
(b) To nationalize, expropriate or transfer ownership of
foreign property in which case appropriate
compensation should be paid by the State adopting such
measures, taking into account its relevant laws and
regulations and all circumstances that the State
considers pertinent in any case where the question of
compensation gives rise to a controversy, it shall be
settled under the domestic law of the nationalizing State
and by its tribunals, unless it is freely and mutually
agreed by all States concerned that other peaceful means
be sought on the basis of the sovereign equality of States
and in accordance with the principle of free choice of
means.819
The Charter in itself underscores the aspirations of the emergent developing nations, and
their call for a new international economic order. General Assembly resolutions are not as
such legally binding upon member or non-member States in the manner of legislation
enacted by national parliaments. Although some publicists have argued that General
Assembly resolutions might be seen as informal treaties or as indicating general principles
of law, in fact, the most common view is that they contribute in some ways to formation of
custom.
819 75 A.J.I.L. 437 (1981); 24 I.C.L.Q. 542 (1975).
439
It is generally agreed that General Assembly resolutions may serve as a convenient
statement of a custom already established by State practice of the accepted kind or may at
once or gradually cause a State to march in step in their practice so as to create one.
General Assembly resolutions may also contribute to custom more directly as a form of
„collective State practice.‟
International courts and tribunals have not doubted that General Assembly resolutions are
State practice and hence evidence of custom. Moreover, they have tended to give
considerable weight to them as such. Most strikingly, the judgement of the International
Court of Justice in the Nicaragua case820
relies almost exclusively upon General Assembly
resolutions when stating the law on the use of force and intervention, with just a few general
references to State practice of a more traditional kind. Notable is also the Courts use of
General Assembly resolutions on self- determination in the Western Sahara case821
and the
reliance by various arbitral tribunals on General Assembly Resolution 1803 on the rules on
expropriation (Texaco case;822
Aminoil case823
).
It is not contradictory to extend the notion of impossibility of performance to cases of
impracticability. Where the causes of impossibility results from economic hardships rather
than physical and or legal, the HC may qualify, revise and or alter the terms of a PIA when
such changes become necessary for the economic development of the HC. Economic
hardship suffered by the HC may be enough justification for a review or outright abrogation
of the contract. That position is based on the consideration that, when such a scenario is
enacted, insistence by the transnational oil company upon continued performance would be
820 II Yale J.I.L.104 (1985). 821 [1971] I.C.J. Report 131. 822 I.L.R. 389 (1977). 823 21 I.L.M.976 (1979).
440
contrary to the requirement of good faith, which is a general principle of contract law.
Economic hardship may thus result in the adjustment of the contract.
The foregoing scenarios may enact in a PIA, after the conclusion of the contract.
Unforeseeable economic, political, legislative or administrative and technical measures may
disrupt the equilibrium of the relations between the parties, rendering performance of the
contract very onerous for the HC. It reserves the right to revise, qualify and repudiate when
necessary the terms of the contract. It is, therefore, submitted that, it is inconceivable to
have immutable PIAs whose terms are frozen in time. Stabilization clauses, which are
contrived to freeze the HC‟s laws; or remove the PIA from the purview of the municipal
law of the HC are otiose. Such expectations of stability are based on mythical notions of the
sanctity of contracts, which are pristine and outmoded. It is in the mutual interest of parties
to PIAs to allow for a high degree of anticipatory flexibility and adaptiveness in their PIAs..
441
CHAPTER EIGHT
A RE-APPRAISAL OF THE INSTITUTIONAL FRAMEWORK FOR ENERGY
RESOURCE MANAGEMENT IN NIGERIA
8.0 THE IMPORTANCE OF THE OIL INDUSTRY TO THE NIGERIAN
ECONOMY
The importance of petroleum to Nigeria can only be fully comprehended by considering the
significance of its contribution to its Gross Domestic Product (GDP). Petroleum remains
the linchpin of the Nigerian Economy providing almost 90 per cent of the Nation‟s export
earnings and over 80 per cent of the revenue accruing to the government. The role of the
government has gradually progressed in the oil industry, from a regulatory one to direct
involvement in oil exploration. Hitherto government preoccupied itself with the collection
of royalties and other dues from multinational oil companies and provided the legal regime
stricturing activities.824
By 1971, oil had assumed a greater ascendancy both in the domestic economy and global
economy. In furtherance of the objective of increased state participation in oil operations,
the Nigerian National Oil Corporation (NNOC) was established in 1971 as a state enterprise
ennobled by statute to engage in oil exploration, production, refining and marketing. In
1972, it was granted rights over all areas not covered by existing oil concessions and over
any areas in which existing concessions were relinquished. With that development, all
824 S. A. Khan, Nigeria: The Political Economy of Oil, Oxford, Oxford University Press, passim
(1994); T. Falola, and A. Genova, The Politics of the Global Oil Industry: An Introduction, West
Port, Praeger, 196, 202 (2008).
442
future agreements with Multinational Oil Companies in respect of new exploration areas
were based on joint ventures.825
In 1971, ERAP/SAFRAP agreed to the acquisition of a 35
per cent state interest in SAFRAP as a precondition for the resumption of the company‟s
production operations in Nigeria.826
The Nigerian National Oil Corporation acquired a
331/3 per cent interest in the operation of AGIP/Phillips consortium. A 35 per cent state
participation agreement in the upstream interests of the Shell/BP consortium was reached in
1973 allowing for an option for the state to take 51 percent majority control by 1982.827
Prior to that dispensation, Nigeria had earlier acquired a 60 percent interest in the
consortium‟s Nigerian refining operations in 1972.828
In 1974, Nigeria concluded an
agreement to increase the level of state participation in the operations of SAFRAP,
AGIP/Phillips and Shell/BP to 55 percent. Mobil and Gulf in whose operations there had
hitherto been no state interest also agreed to 55 per cent state participation.829
A similar
agreement was also reached with Texaco/Chevron partnership in 1978, which was
backdated to 1975.830
The level of state participation in all the foreign concessionaire
companies was raised to 60 percent in 1978 in line with a broader indigenization policy of
foreign concerns.831
Of Nigeria‟s estimated 1985 production of 1,475,000 barrels per day
(bpd) about 750,000 (bpd) was produced from fields in the Shell concession area (joint
venture area) and a total of about 700,000 (bpd) representing 47.1 percent from the other
main joint venture areas as follows:
Gulf Oil of Nigeria (Chevron) 13.5%
Mobil Oil 12.8%
825 J. Evans, OPEC, Its Member States and the Energy Market, London, Longman, 271 (1986). 826 G. A. Adams, „Joint Ventures in Nigerian Oil Industry-What are They?‟ 2 NAPETCOR 3-7 (1981). 827 Note 814 supra at 272. 828 O. Akanle, „International Contract Negotiation (1),‟ 2 The Gravitas Review of Business Law and
Property Law 92-98 (1989). 829 NNPC, „Progress of Public Sector Participation in the Nigerian Oil Industry,‟ 12 NAPETCOR 1-20
(1978). 830 Ibid. at 3-7. 831 Note 6 supra.
443
Agip/Phillips 9.4%
Elf Nigeria 6.7%
Texaco/Chevron 4.7%
Most of the balance was produced by Ashland Oil under a production sharing contract
representing a theoretical state off-take entitlement of 1,032,500 (bpd) in 1985 if total
production was divided on a straightforward pro-rata basis. In actual terms however, it was
in 1984 that such a basis was used to determine the respective off-take entitlements of
NNPC and its various joint venture partners.832
Until 1980 each foreign company‟s equity
entitlements was defined as the applicable share i.e. 40 per cent in most cases of a
predetermined allowable production volume from a joint venture area, the validity of this
entitlement being unaffected by any shortfall in the final production total. The strict pro-
rata division of actual production, as adopted in 1980, worked against Nigeria‟s interests
when the subsequent transition to a buyers market led to frequent fluctuations in the volume
of NNPC‟s off-take.833
8.1 THE SOVEREIGN AS AN ENTREPRENEUR
The international oil industry as a business venture involves transnational mobilization of
financial and technological resources globally. International oil is high-risk global industry
with long investment gestation. The most visible actors in this industry are transnational oil
companies (TNOCs) who have octopi operations cutting across international boundaries.
The transnational oil companies essentially are not risk averse and are essentially
entrepreneurial driven.834
832 Ibid. 833 Ibid. 834 M. Woo-Cumings, The Developmental State, New York, Cornell University Press, 32, 182 (1999).
444
The TNOCs have lost considerable grounds since the change in the status quo occasioned
by the ascendancy of the oil producing nations. The relationship between the TNOCs and
host countries (HCs) has been redefined and all sorts of arrangements like joint operation
agreement (JOA), participation agreement (PA), and production sharing contract (PSC) and
so on, have been adopted to facilitate these relationships.835
A working definition of the term entrepreneur will suffice at this juncture. An entrepreneur
is an individual or corporate entity who takes calculated risks, by investing and mobilizing
resources with a view to some future benefits. An entrepreneur therefore, is essentially
someone who undertakes an enterprise, especially a commercial one, often at personal risk.
That definition may rule out most governments.836
The strongest criticism of governments
in the commercial area is that they are not accountable and have unfettered access to
taxpayer money and are not liable to bankruptcy as a prize for failure.837
That granted, it is not contradictory to conceive a sovereign as being involved in a business
venture, it is by no means infra dignitatus for the sovereign to go into the market place and
engage both sovereigns and non-sovereigns alike in commerce.838
The sovereign can
engage in commerce through an “alter ego or organ”. In some countries the government
departments conduct all their business through their own offices, even ordinary commercial
dealings without setting up separate corporations or legal entities which are under the
835 Y. M. Ibrahim, Big Oil: The Producer Axis for OPEC’s Richest, Natural Allies of Size, December
3, 1998, The New York Times. Available at http://www.nytimes.com/1998/12/03/business/big-oil-the-
producer-axis-for-opec-s-richest-natural-allies-of-size.html?pagewanted=1
836 J. Prokopenka, Entrepreneurship Development in Public Enterprises, Geneva, International
Labour Office, 21 (1991). The constraints to the efficacy of public enterprises and entrepreneurship
development within the public sector as a whole include, Government control of public enterprises, soft
budget constraints, and the negative government performance loop, the bureaucratic organisational
structure of public enterprises and practice of entrepreneurship, irrespective of the nature of the
ownership of the means of production. 837 Ibid. 838 C. Wilcox, Public Policies Toward Business, Springfield, Richard D. Irwin, 500 (1975).
445
complete control of the department, but which enter into commercial transactions, buying
and selling goods, owning and chartering ships, just like any ordinary trading concern.839
The major concern, why it is so doubtful to conceive of the sovereign as going into the
market place emanates from the nature of contracts on the one hand, the State as a subject
of international law, as contradistinguished from entities which are non-subjects of
international law on the other.840
The notion of the sovereign as an entrepreneur engaged in
a business venture would have confounded many a jurist prior to the 1920s when the
doctrine of absolute immunity reached a crescendo.841
Since the socialist States and others have come to engage in trading activities (acts iure
gestionis) as well as exercising the public functions traditionally associated with States (acts
iure imperii); as a result, many States now follow in their practice a doctrine of restrictive
immunity by which a foreign State is allowed immunity for acts iure emperii only. The
bulk of these practices consist of municipal court decisions.842
A 1982 study shows that the
courts of the great majority of states, in which the matter has been considered in recent
years (most Western States) now favour the doctrine of restrictive immunity. The same
study also considers state practice in the form of national legislation and treaties.843
Legislation, such as the United States Foreign Sovereign Immunities Act 1976;844
and the
United Kingdom State Immunity Act 1978 invariably applied the restrictive immunity
doctrine as do the two main multilateral treaties on the subject viz.: the 1926 Brussels
Convention for the unification of certain rules relating to the immunity of state owned
839 E. K. Bankas, The State Immunity Controversy in International Law: Private Suits Against
Sovereign States in Domestic Courts, Berlin, Springer,1 (2005). 840 See Jurisdictional Immunities of States and Their Properties, UN Legislative Series; UN Doc.
St./LEG/SER.B/20 on National Legislation, court decisions and other materials from a cross section of
States. 841 M. N. Shaw, International Law, Cambridge, Cambridge University Press, 625 (2003). 842 Ibid. 843 15 I.L.M. 1388 (1976); 73 A.J.I.L. 200 (1979); 71 A.J.I.L. 399 (1977); 35 I.C.L.Q. 302 (1985). 844 Ibid.
446
vessels,845
and the 1972 European Convention on State Immunity.846
The 1926 convention
places “seagoing vessels, cargoes owned by them, and cargoes and passengers carried on
government vessels” on the same footing as private vessels (articles 1 and 2).847
Article 3
then states the following exception:
The provisions of the two preceding articles shall not be
applicable to ships of war, Government Yachts, patrol
vessels, hospitalships, auxiliary vessels, supply ships
and other craft owned or operated by a state, and used at
the time a cause of action arises exclusively on
governmental and non commercial service, and such
vessels shall not be subject to seizure, attachment or
detention by any legal process, nor to judicial
proceedings in rems.848
Lord Wilberforce in I Congreso Del Partido849
basing his decision on Philipine Admiral
(owners) v. Wallem Shipping (Hong kong)850
and Trendtex Trading Corporation v. Central
Bank of Nigeria 28
held that:
“The limitation under the so called “restrictive theory”,
arises from the willingness of states to enter into
commercial, or other private law transactions with
individuals. It appears to have two main foundations:
845 Cmnd. 7800 176 L.N.T.S. 199; 3 Inl. Leg. 1837 in forcc 1936, 28 parties to the Convention and to
its 1934 Protocol; 176 L.N.T.S. 215. 846 U.K.T.S. 74 (1979); Cmnd. 77 42; 11 I.L.M. 470 (1972) in force 1976. 847 M. Sornarajah, „Problems in Applying the Restrictive Theory of Sovereign Immunity,‟ 31
International and Comparative Law Quarterly 661-685 (1982). 848 Ibid. 849 I’ Congresso Del Partido [1983] 1 A.C. 244 House of Lords. 850 (1976) 2 W.L.R. 214 at 233; [1976] 1 All E.R. 78 at 95, 96.
447
(a) It is necessary in the interest of justice to individuals
having such transactions with states to allow them to
bring such transactions before the courts.
(b) To require a state to answer a claim based upon such
transaction does not involve a challenge to or inquiry
into any act of sovereignty or governmental act of that
state. It is, in accepted phrases, neither a threat to the
dignity of that state, nor any interference with its
sovereignty.851
The 1972 European Convention allows immunity except in certain listed categories of
cases. The extensive bilateral treaty practice strongly supports a restrictive immunity
approach as well. Most of the States that now follow the restrictive immunity doctrine are
from the west; States in the developing world have not embraced the doctrine.852 The
view of the former Warsaw Pact Nations before its desolation was that the restrictive
immunity doctrine can not apply to socialist states since in the political theory of such
states all governmental acts are sovereign so that the distinction between acts iure imperii
and act iure gestionis has no meaning. These differences are conflictual necessitating a
compromise between the two approaches. The International Law Commission in its draft
articles on jurisdictional immunities of states and their properties has attempted a
compromise that is biased towards the restrictive immunity doctrine.853 O’Connel
positioned that with the prevailing opinions:
851 Note 26 supra. 852 Note 24 supra. 853 11 Y. B. I. L. C. 7 (1986).
448
The most that can be said of customary international law
is that it enjoins immunity from the judicial process only
in respect of governmental activities that pertain to
administration and does not compel it in respect of other
activities which are more truly commercial than
administrative.854
A review of some judicial decisions will be pertinent for the purpose of clarity; the doctrine
of state immunity was justified by Marshall, C. J. in the Schooner Exchange v. McFaddon
on the basis of the equality, independence, and dignity of states and the invocation of the
maxim par in parem non habet imperium, Marshall amalgamated the doctrine with that of
the absolute jurisdiction of the territorial sovereignty by assuming the latter‟s implied
consent to immunity from its courts jurisdiction.855
The move away from absolute to restrictive immunity is now well established in the
practice of many states, state practice does not suggest that sovereign immunity should be
abolished altogether. Ranged against the arguments in favor of state immunity are the
arguments, which bother on the rights of private entities who conduct transactions with the
sovereign. The premise of the decision in the Schooner Exchange held sway when
immunity meant personal immunity of a sovereign, not the public immunity of state; and
the phenomenon of state trading before the advent of socialism was not pervading.856
854 D. P. O‟Connel, International Law, London, Stevens & Sons, 841 (1970). 855 7 Cranch 116 [1812] U.S. Supreme Court. 856 Ibid.
449
In the claim against the Empire of Iran; the court rejected a plea of state immunity in respect
of a contract claim by a local firm for the cost of repairs to the heating system in the Iran
Embassy in Cologne.857
In, I Congresso Del Partido; the (English) House of Lords, held, in a contractual context,
that the courts must look not to the nature of the contract, but also to the nature of the
breach. If a contract is an act iure imperii, there is immunity; if it is an act iure gestionis, a
defense of immunity may still succeed if the act in breach of contract is an act iure imperii.
The court had to consider whether at any stage in the case the state had acted as a sovereign
and hence should not be impleaded. The House of Lords unanimously adopted this
approach, the majority considering that the act in breach of contract was an act iure
gestionis and the minority classifying it as an act iure imperii.858
In a similar vein, the restrictive immunity doctrine was upheld in the Trendtex Trading
Corporation v. Central Bank of Nigeria case. In 1975 the CBN issued a letter of credit in
favor of the plaintiff, a Swiss company, for the price of cement to be sold by the plaintiff to
an English company which had secured a contract with the Nigerian government to supply
it with cement for the construction of an Army Barrack in Nigeria. When, under
instructions from the Nigerian government, which was taking step to extricate itself from
the Nigerian cement scandal created by its predecessor government, (huge quantities of
cement had been ordered from different sources far more than Nigeria needed or the port of
Lagos could handle. The Nigerian government took steps similar to those taken in this case
against suppliers in other cases, leading to comparable court proceedings in the US and the
then Federal Republic of Germany.859
The doctrine of restrictive immunity was upheld
against the defendants‟ claim of state immunity in those cases also. The Bank refused to
857 45 I.L.R. 57 (1963), West German Constitutional Court. 858 98 L.Q.R. 44 (1982). 85932 I.L.M. 469 (1977).
450
honor the letter of credit; the plaintiff brought an action against the Bank in the English
High Court. The Bank successfully claimed sovereign immunity. The appeal of the
plaintiff was allowed, in this case, the Court of Appeal looked not only to Nigerian Law but
also to the functions of the Bank and its relationship with the government when deciding
whether it should be classified as a department of government. It unanimously ruled that all
evidence point to the fact that the CBN engages in purely commercial activities, and so
precluded from sovereign immunity.860
In Noah, G. Ishola v. His Excellency the British High Commissioner to Nigeria, the plaintiff
instituted an action in the Supreme Court of Nigeria asking for a declaratory judgment
against the British High Commissioner in Nigeria. The Court held that it has no original
jurisdiction to hear the case having regard to the provisions of Section 212 of the
constitution of the Federal Republic of Nigeria, 1979 and to the fact that the National
Assembly has not conferred any such jurisdiction on the court pursuant to sub-section (2) of
the said section. Not only that it is also provided in sub-sections 1(2) and (3) of the
Diplomatic Immunities and Privileges Act (No. 42 of 1962) that such an action against a
foreign envoy in Nigeria shall be void.861
In African Reinsurance Corporation v. Abate Fantaye, the Appellant is an International
Organization of African Unity (O.A.U.). The Respondent was employed by contract to
work with the Appellant. The Respondent brought an action against the Appellant in the
High Court of Lagos State claiming damages for the wrongful termination of his contract of
employment. At first the Appellant entered a conditional appearance but appeared to reply
860 [1977] Q.B. 529 (Court of Appeal). 861 [1980] A.N.L.R. 208-209.
451
to an application for interim injunction brought by the Respondent. Subsequently the
Appellant brought an application to set aside the writ of summons.
The trial Judge held that though the Appellant was an International Organization and
therefore immune from legal process, but by taking some steps in the action it has waived
its immunity. Hence the High Court had jurisdiction over the matter.862
The Supreme Court held (unanimously allowing the appeal) in Nigeria, the applicable law
in respect of diplomatic immunities and privileges is the Diplomatic Immunities and
Privileges Act 1962, No. 42. Under the Diplomatic Immunities and privileges Act 1962,
No. 42, diplomatic immunities can be claimed by organizations declared by the Minister of
External Affairs to be organizations, the members of which are sovereign powers (whether
foreign powers or Commonwealth countries or the government or governments thereof).
Where the evidence before the Court shows that the defendant is a department of a
sovereign state, albeit itself a corporate body, then the action is one between the plaintiff
and the foreign sovereign state, or the part of the foreign state represented by the
departmental body concerned. The immunities under the first schedule to the Diplomatic
Immunities and Privileges Act 1962 include immunity from suit and legal process. The
appellant, being an international organization enjoys immunity from suit and legal process,
both by virtue of sections 11 and 18 of the 1962 Act, and exhibit AR5 (certificate issued by
the Minister of External Affairs). Where a sovereign or international organization enjoys
immunity from suit and legal process, waiver of such immunity is not to be presumed
against it. Indeed, the presumption is that there is no waiver until the contrary is
established. Thus, waiver of immunity by a sovereign or international organization must be
expressly and positively done by that sovereign or international organization. A conditional
862 [1986] 1 N.W.L.R. 113 C.A., 113-133.
452
appearance, before a court, even if a submission to jurisdiction, is clearly an appearance
under protest. Before the enactment of the Diplomatic Privileges and Immunities Act No.
42 of 1962 the Common Law of England as propounded in Grisby v. Jubwe (14 W.A.C.A.
634) was in force in Nigeria. Under the principles of customary international law, a foreign
sovereign can not be impleaded in the court of another sovereign in any legal proceedings
either against his person or for the recovery of specific property or damages, neither can his
property in his possession be seized or detained by legal process.863
Immunity from process can be claimed not only from the inception of an action but even
after the claimant had taken steps in the suit. Thus, immunity can be claimed even after the
conclusion of proceedings. There is no difference in principle between the sovereign and
immunities accorded a state and those of institutions. The law confers diplomatic immunity
against legal process, confers an equal immunity against the continuation of pre-existing
and hitherto properly constituted proceedings. Any legal proceedings brought against a
person, body or authorities entitled to diplomatic immunity are proceedings without
jurisdiction and therefore null and void, unless and until there is a valid waiver which could
bring the proceedings to life and invest the court with jurisdiction. Article 48 of the
agreement establishing the appellant which enables legal proceedings to be instituted
against the Appellant where it has agreed to be sued, is only an enabling provision, enabling
the appellant, when it so desires, and acting through its appropriate officers, to expressly
waive its immunity and submit to legal process. In the instant case, by the combined effect
of Articles 48 and 53 of the agreement establishing the appellant, there can be no waiver, in
absence of any evidence that the Board of Directors of the Appellant, has on the appellant‟s
behalf, expressly so resolved. In the instant case, the fact that the appellant deals in
863 Ibid.
453
mercantile transactions does not mean that it cannot claim immunity, since the cause of
action before the Court is based on wrongful termination of a contract of employment. It is
an established rule of International Law that no action in personam can be brought against a
foreign sovereign state or department, even when it is involved in a commercial venture.
The appellants never submitted to jurisdiction of the court having entered a conditional
appearance, and subsequently filed an application to set aside the writ of summons on the
ground of their immunity from legal process. The treaty establishing the appellant being an
agreement between African states and the respondent not being a party to it, he (the
respondent) cannot seek either to rely on it or benefit therefrom. Under the rules of
municipal law, only parties to a contract can seek to enforce its terms and not a third party
who is a stranger and not privy to it. Treaties do not constitute part of the law of the land
merely by virtue of Section 12(1) of the 1979 constitution; they will have the force of law,
only after, or to the extent that the Federal Government36 has enacted them into law.864
In the case; Kramer Italo Limited v. Government of the Kingdom of Belgium and the
Embassy of Belgium, Lagos, Nigeria, the plaintiff instituted an action against the defendants
claiming the sum of N670,552.07 arising from a contract in writing dated the 30th
day of
January, 1979 whereby the second defendant commissioned the plaintiff to build for it a
residence for the Belgian Ambassador at Eleke Crescent, Victoria Island, Lagos. The claim
is for reimbursement for additional costs incurred as a result of the extended period on site
and the second defendant‟s variation instructions. Agoro, J., upheld a plea of sovereign
immunity by the defendants. The subsequent appeal of Kramer Italo Ltd. Was not allowed,
the Court of Appeal lacked jurisdiction to entertain the action of the appellant as against the
second respondent because the Belgian envoy and the several members of the staff
864 Ibid.
454
comprising the Belgian Embassy are immune from suit and legal process pursuant to the
provisions of section 1 of the Diplomatic Immunities and Privileges Act 1962. The
foregoing Nigerian cases show how far behind Nigeria is on the issue of sovereign
immunity and brings us full circle in the restrictive/absolute sovereign immunity debate.
The pervading opinion is that a state will by no means derogate its sovereignty by going
into a business venture. However, the state must be prepared to subject itself to the codes of
the market place when it goes into the market place; especially where the activity is of a
private nature involving the rights and obligation of private legal entities.
In the same vein, a State will be acting entrepreneurial when it evinces certain behavior or
meets the criteria for entrepreneurship; that is, calculated risk taking and the mobilization of
resources for the purpose of creating wealth.865
To the extent that the state takes calculated
risks of a purely commercial nature, it could be characterized as an entrepreneur. Contrary
to the stereotypes on the incursion of the state into the international petroleum industry
amongst which are that, multinational oil companies are always entrepreneurial; whilst
governments are seldom if ever successful entrepreneurs. Governments with varying
degrees of help from multinationals produce seventy per cent of the world‟s oil. The former
USSR was not only the biggest producer in the world but was also a substantial exporter of
technology to the West, a reliable and expert supplier of gas to Western Europe and a very
sophisticated trader of gas oil and crude.866
China produced some 125 million tones of oil onshore in 1986 and trades and barters
petroleum products and crude oil, not just in the Far East markets but as far afield as
865 Kramer Italo Lmited v. The Government of Belgium and the Embassy of Belgium Lagos, Nigeria
(1989), 1 CLRQ 126; S. Bird, „The State Immunity Act of 1978,‟ 13 International Lawyer 619
(1979); D. W. Bowett, „The State Immunity Act 1978,‟ 37 C.L.J. 193 (1978); G.R. Delaume, „The
State Immunity Act of The United Kingdom,‟ 73 A.J.I.L. 185 (1979); R. Higgins, „Execution of State
Property: United Kingdom Practice,‟ 10 N.Y.I.L. 35 (1979). 866 M.A. Al-Sahlawi, „The Future Role of Oil in the Global Energy Mix,‟ 18 OPEC Review 297-308
(1994).
455
America; neither position was reached by involving or relying on the MNOCs. Experience
in the United Kingdom suggests that State companies and agencies can make good
entrepreneurs (For example, British Gas and the British National Oil Corporation).867
The overall experience suggests that the capability of the State as an entrepreneur is
contingent on availability of funds, freedom to invest and take risks and top quality and
therefore Independent-minded management, a climate that favors innovation and risk
taking, or which is not averse to risk. The degree of distinction between government and its
agencies is also important in assessing State performance. For the purpose of this study,
these distinctions can be simplified as follows: the State as an all embracing term, covering
national government, State or local government; agencies to promote specific activities,
such as State oil and gas companies with particular responsibilities for exploration,
production; transport and refining.868
The scope for entrepreneurial activity is constrained by other factors; notably the
availability of resources, not just capital but technology and trained personnel and
management and infrastructure. Many developing countries are desperately short of all
these.869
8.1.1 THE NEED FOR STATE PARTICIPATION IN THE OIL INDUSTRY
In view of the fact that NOCs are a subset of public enterprise, a cursory look at the nature
of public enterprise will be taken as a backdrop to the overall study.40
In command
economies, such as the former Warsaw Pact nations and a few of its relics after the
867 Ibid. 868 O. G. Austrik, The Norwagian State as Oil and Gas Entrepreneur: The Impact of the EEA
Agreement and EU Gas Market Liberalization, Oslo, VDM Verlag, 145 (2009). 869 Ibid.
456
desolation of the Soviet Union, virtually all economic activities were controlled by the state
whilst in the free and or mixed economies of the West certain industries are deemed of
strategic importance and state control becomes imperative.870
As a quintessence of the free/mixed economy, the real causes of public enterprise in the
United States of America are many and varied, according to Wilcox:
Productive activities of the greatest magnitude have
been undertaken because they were deemed essential to
the prosecution of warfare and to national defense. This
was the origin of the atomic energy and synthetic rubber
plants built during World War II. It explains the great
ship building programmes undertaken during both
World Wars. Other activities were inaugurated for the
purpose of pulling the country out of the great
depression; this was the beginning of the Reconstruction
Finance Corporation and other lending agencies. Some
enterprises are designed to conserve the nation‟s
resources.871
It is important to note that public enterprise in all its forms still plays an insignificant role in
free/mixed economies, partly due to what has been characterized as “creeping communism”
by Western Economists and Politicians. Perhaps the greatest obstacle to a further extension
of public ownership and operation lies in the state of public opinion in the West. Public
870 R. Pirog, „The Role of National Oil Companies in the International Oil Market,‟ August 21, 2007.
Available at http://www.fas.org/sgp/crs/misc/RL34137.pdf 871 Note 15 supra.
457
enterprise is generally viewed with suspicion; this is due to the perceived and demonstrated
ability of private enterprise to render satisfactory service at an acceptable rate.872
That granted, in a developing economy, the foregoing scenario might not be replayable. For
one, the magnitude of investment needed may be such that individuals cannot muster, and
the states may have to mobilize resources for the purpose of investing strategically in
certain sectors of the economy as a basis for sustainable growth and development.873
Furthermore this type of State intervention is often emotively characterized as „Economic
Nationalism‟. It is doubtful however whether a nascent economy can afford to allow
market forces direct its economy without a rein on them. The crucial issue therefore, is
establishing what should be the tolerable level of State participation in the economy, and
whether State enterprises when so established where necessary, are effectively run and do
not constitute a dead weight on tax payers. Such enterprise must be able to pay its way and
must not constitute a drain on scarce resources. That point is particularly significant in a
world faced by the spectre of dwindling resources, global recession and ecological
dislocations. There is an ever increasing need for efficient husbandry of resources that are
non-replenishable and constitute a wasting asset. How then, without the reward of profit or
the penalty of bankruptcy are efficiency and progress to be attained? How, when there is a
monopoly, even though it is a government monopoly is the interest of the taxpayer to be
protected? And how given the inconsistency of productive efficiency and political
872 J. B. Heath, „Public Enterprise in Britain Today,‟ in G.R. Reddy (ed.), Government and Public
Enterprise, London, Routledge, 115 (1983). 873 L. P. J. Papanek, „The Efficiency of Public Enterprise in Less Developed Countries,‟ in G.R. Reddy
(ed.), Government and Public Enterprise, London, Routledge, 88 (1983).
458
accountability, is the inevitable conflict between efficiency and political accountability, to
be resolved?874
As a corollary to the foregoing, the United Nations Organization has highlighted and
underscored the right of developing nations to economic self-reliance and development.
The United Nations Resolution on Permanent Sovereignty over Natural Resources 1962, G.
A. Resolution 1803 (XVII) is one of such affirmative actions of the United Nations
Organization aimed at addressing the issue of the economic development of the developing
nations.875
The General Assembly declared inter alia:
The rights of peoples and nations to permanent
sovereignty over their natural wealth and resources must
be exercised in the interest of their national development
and of the well being of the people of the state
concerned.
In cases where authorization is granted, the capital
imported and the earnings on that capital shall be
governed by the terms thereof, by the national
legislation in force, and by international law. The
profits derived must be shared in the proportions freely
agreed upon, in each case, between the investors and the
recipient state, due care being taken to ensure, that there
is no impairment, for any reason, of that state‟s
sovereignty over its natural wealth and resources.
874 Ibid. 875 17 U.N. GAOR Supp. (No. 17) at 15, U.N. Doc. A/5217 (1962).
459
Nationalization, expropriation or requisitioning shall be
based on grounds or reasons of public utility, security or
the national interest which are recognized as overriding
purely individual or private interests, both domestic and
foreign. In such cases the owner shall be paid
appropriate compensation in acceptance with the rules in
force in the state taking such measures in the exercise of
its sovereignty and in accordance with international law.
In any case where the question of compensation gives
rise to a controversy, the national jurisdiction of the state
taking such measures shall be exhausted. However,
upon agreement by sovereign states and other parties
concerned, settlement of the dispute should be made
through arbitration or international adjudication.
Foreign investment agreements freely entered into by, or
between sovereign states shall be observed in good faith.
States and international organizations shall strictly and
conscientiously respect the sovereignty of peoples and
nations over their natural wealth and resources in
accordance with the charter and the principles set forth
in the present resolution.876
876 Ibid.
460
However there are exceptions to acts of States in the exercise of permanent sovereignty
over natural resources that are confiscatory in nature. In Texaco v. Libya, it was held, the
recognition by international law of the right to nationalize is not sufficient ground to
empower a state to disregard its commitments, because the same law recognizes, the power
of state to commit itself internationally especially by accepting the inclusion of stabilization
clauses in a contract entered into with a foreign private company. On the basis of the
circumstances of adoption and by expressing an opinio juris communis, Resolution 1803
(XVII), according to the arbitral tribunal reflect the state of customary law existing in this
regard, the consensus by a majority of states belonging to the various representative groups
indicate without slightest doubt universal recognition of the rules incorporated in the
resolution, that is, with respect to nationalization and compensation, the use of the rule in
force in the nationalizing state, but all this in conformity with international law.877
The Arbitrator, having found no justification for Libya‟s acts, held subsequently that the
appropriate remedy was restitutio in integrum as claimed by the concessionaire (Texaco
Overseas Petroleum Company) so that Libya was legally bound to perform the contracts. In
fact, the claimants subsequently accepted an offer of compensation in full settlement of
their claim.878
Contradistinguished from the Texaco v. Libya case, in the Aminoil case, the tribunal arrived
at the conclusion that the “take over” of Aminoil‟s enterprises was not inconsistent with the
contract of concession, provided always that the nationalization did not possess any
confiscatory character.879
877 53 I.L.R. 389 (1977); 17 I.L.M. 1 (1978). 878 Ibid. 879 Aminoil case, 21 I.L.M. 976 (1983).
461
To be taken alongside Resolution 1803 (XVII) is the Charter of Economic Rights and
Duties of States 1974, General Assembly Resolution 3281 (XXIX). The charter declares
inter alia:
Every state has and shall freely exercise full permanent
sovereignty including possession, use and disposal over
all its wealth, natural resources and economic activities.
2) Each state has the right:
(a) To regulate and exercise authority over foreign
investment within its national jurisdiction in accordance
with its laws and regulations and in conformity with its
national objectives and priorities. No state shall be
compelled to grant preferential treatment to foreign
investment.
(b) To regulate and supervise the activities of
transnational corporations within its national jurisdiction
and take measures to ensure that such activities comply
with laws, rules and regulations and conform to its
economic and social policies.
(c) To nationalize, expropriate or transfer ownership
of foreign property in which case appropriate
compensation should be paid by the state adopting such
measures, taking into account its relevant laws and
regulations and all circumstances that the state considers
pertinent in any case where the question of
compensation gives rise to a controversy, it shall be
462
settled under the domestic law of the nationalizing state
and by its tribunals, unless it is freely and mutually
agreed by all states concerned that other peaceful means
be sought on the basis of the sovereign equality of states
and in accordance with the principle of free choice of
means.880
The charter in itself underscores the aspirations of the emergent developing nations, and
their call for a new international economic order. General Assembly Resolutions are not as
such legally binding upon member or non-member states in the manner of legislation
enacted by national parliaments. Although some publicist have argued that General
Assembly Resolutions might be seen as informal treaties or as indicating general principles
of law, in fact, the most common view is that they contribute in some way to formation of
custom.881
It is generally agreed that General Assembly Resolutions may serve as a convenient
statement of a custom already established by state practice of the accepted kind or may at
once or gradually cause a state to march in step in their practice so as to create one. General
Assembly Resolutions may also contribute to custom more directly as a form of „collective
state practice.‟
International Courts and Tribunals have not doubted that General Assembly Resolutions are
state practice and hence evidence of custom. Moreover, they have tended to give
considerable weight to them as such. Most strikingly, the judgment of the International
880 GA Res. 3281 (xxix). Available at. http://www.un-documents.net/a29r3281.htm; 29 UN GAOR,
Supp. (NO. 31) 50, un Doc. A/9631 (1974); 69 AJIL 484 (1975); 14 I.L.M. 251 (1975). 881 B. H. Weston, „The Charter of Economic Rights and Duties of States and the Deprivation of Foreign
–Owned Wealth,‟ 75 American Journal of International Law 437 (1981).
463
Court of Justice in the Nicaragua case relies almost exclusively upon General Assembly
Resolutions when stating the law on the use of force and intervention, with just a few
general reference to State practice of a more traditional kind.882
Notable is also the Courts
use of General Assembly Resolutions on Self Determination in the Western Sahara Case883
and the reliance by various arbitral tribunals on General Assembly Resolution 1803 on the
rules of expropriation (Texaco Case,884
Aminoil Case885
).
Perhaps the most important reason for State participation in the oil industry is security of
source of supply coupled with the need for realization of state policy to control resources.
The need for security of source of supply was particularly acute during the 1973 oil crisis;
Western nations saw the crisis as striking with lethal effect at the very heart of capitalism
and reacted with the concerted spontaneity which the situation called for, as a matter of fact
Henry Kissinger, the then, United States Secretary of State threatened invasion of the Gulf
States. That underscored the desperation of the situation in which the Western Nations
found themselves, they actually conceived the invasion of the Gulf States and had far
reaching plans to take over the oil fields should that remain the only option left in the
resolution of the crisis.886
Petro – Canada, for example was to be Canada‟s window on the industry, it was to ensure
security of source of supply, whilst promoting government policy of Canadian ownership of
national resources and to cooperate alongside private sector companies.
ENI in Italy was involved in locating foreign source crude for local consumption. In 1972
as part of the concerted effort to control resources, six Gulf States initiated negotiations on
882 11 Yale J.I.L. 104 (1985). 883 [1071] I. C. J. Reports 16-31. 884 I.L.R. 389 (1977). 885 21 I.L.M. 976; 54 B.Y.I.L. 213 (1983). 886 Energy Economist, September 1996 pp. 20-25.
464
the participation issue. The Gulf States demanded an immediate 20 percent government
participation rising gradually to 51 percent.887
The participation agreements and accompanying nationalization were significant in several
respects. First they kept the momentum building toward acquisition of greater and greater
oil-exporting country power. The demand for participation also put paid to any illusions the
oil companies might have harbored about stability and sustenance of the status – quo. By
gaining an equity interest in the companies producing operations, the oil exporting countries
further increased their control over industry operations.888
Most significantly; by resisting the companies demand that compensation be paid for the
value of the oil reserves that the companies returned to the exporting countries, the
countries established the claim that national sovereignty meant control over the resources in
one‟s country, irrespective of the fact that contracts signed in an earlier period had ceded
such control to the companies. Nonetheless, despite these gains through the participation
agreements the exporting countries acknowledged their continued dependence upon the
international companies for technological assistance and aid in the marketing of their oil.889
8.1.2 MODES OF STATE PARTICIPATION IN THE OIL INDUSTRY:
PUBLIC SECTOR PARTICIPATION IN THE NIGERIAN OIL INDUSTRY
A national oil company is an agent of State participation and the primary rationale for its
establishment is for it to mobilize State policy both municipally and internationally. It
implements the participation policy of the State vis-à-vis Trans-national Oil Companies.
887 The Baker Institute Energy Forum, „The Role of National Oil Companies in International Energy
Markets.‟ Available at. http://www.rice.edu/energy/research/nationaloil/index.html 888 Ibid. 889 Ibid.
465
Oil remains the linchpin of oil based economies and it has been a political issue ever since
the first oil crisis of 1973/1975. It was however in the mid-seventies that countries realized
that oil, a crucial energy resource, having been available abundantly and inexpensively, had
become relatively expensive and could become scarce.890
The establishment of a national oil company is not without precedent; in fact the notion of a
national oil company is central to international petroleum. In India, the government
establishment is active in almost every important sphere of the oil industry. From
exploration and production, to refining, pipeline transportation, and marketing. The only
important sectors of the oil industry, which have been left untouched by the government,
are ocean transport and coastal shipping.891
Article 6 of Pertamina Law, No. 8 of 1971
effective 1st January, 1972 defines its functions as operating in the field of oil and natural
gas exploitation, refining and processing, transportation and marketing.892
The Nigerian National Oil Corporation (NNOC), established in April 1971 as a State
enterprise empowered to engage in oil exploration, production, refining and marketing was
in February 1972 granted rights over all areas not covered by existing oil concessions and
over any areas in which existing concessions were relinquished.51
All future agreements
with foreign oil companies in respect of new exploration areas were based on joint venture;
production sharing or service contracts with the State corporation.893
In order to eliminate an unnecessary overlapping of state interests the NNOC and the
Federal Ministry of Petroleum Resources was merged in April 1977 to form the Nigerian
890 K. Kahn, „Some Legal Considerations on the Role and Structure of State Oil Companies: A
Comparative View,‟ 34 International and Comparative Law Quarterly 584-592 (1985). 891 B. Dasgupta, The OiL Industry in India, London, Frank Cass and Co. Ltd., 242 (1971). 892 S. Carlson, Indonesia Oil, Colorado, Westview Press, 14 (1972). 893 NNPC Act Cap 320 Laws of the Federal Republic of Nigeria 2004.
466
National Petroleum Corporation (NNPC). Legislation was passed in 1983 to reconstitute the
NNPC as a holding company controlling operating subsidiaries, namely the National
Petroleum Development Company, the National Gas Company, the National Refining
Company and the National Marketing Company.894
8.1.3 LEGAL INSTRUMENT OF STATE PARTICIPATION: THE
PARTICIPATION AGREEMENT/JOINT OPERATION AGREEMENT
Lee Adler, in his characterization of the joint venture adopted the term „Symbiotic
Marketing,‟ though not universalizable, the characterization does succeed in uniting two
very important ideas; namely the harmonious living together of dissimilar organisms, and
the marketing concept. Moreover, the notion conveys an analysis of business activity that
goes deeper than mere trade relationships, since it concentrates on the alliance of resources
between two independent organizations in order to mutually improve their market growth
potential. Looked at in this perspective, it is easy enough to go along with Adler‟s
enthusiasm for the organic analogy typified by his concept of „Symbiotic Marketing.‟895
Whilst the national oil company is the agent of State participation in the oil industry, the
Participation and or Joint Operation Agreement represents the instrumentality of State
participation with the Transnational Oil Companies. It is necessary from the onset, to make
an important distinction. The Participation Agreement (PA) and or Joint Operation
Agreement (JOA) are not legal instruments existing in a vacuum, but rather a
superimposition on an already existing structure of contractual dispensation. It is not
possible in that regard to conceive of a PA/JOA as a legal instrument of international
894 Ibid. 895 L. Adler, „Symbiotic Marketing,‟ 44 Harvard Business Review 59-71 (1966).
467
petroleum without first, comprehending the antecedent legal instrument which is the
necessary and sufficient condition for its adoption as a (composite) dispensation. The
adoption of a PA/JOA, as a rule is contingent on the existence of a contractual structure, for
example, a mining lease or production – sharing contract which terms still subsist parallel to
that of the JOA.896
In itself, the JOA evolved symbolically within the backdrop of
increasing nationalism of host countries and the attendant disillusionment with the
concessionary instrument of international oil.897
Keith W. Blinn et al highlights the legal
nature of the PA/JOA thus:
This kind of agreement has often been misunderstood as
being a separate type of PIA. A participation agreement
merely accompanies other petroleum arrangements by
associating the HC, either directly or through its
National Oil Company with the IOC in the rights and
obligations of the underlying PIA. In a participation
agreement, the Joint Venturers share risks, costs and
production according to the terms stipulated in the PIA.
Therefore, participation agreement, far from being a
substitute for a PIA merely adds new elements to it.898
8.1.4 APPOINTMENT OF OPERATOR
The Trans-national Oil Company (TNOC) is designated the operator of the concessions and
contract area under the Nigerian PA and assumes the duties and obligations of operator, and
shall have the rights of the operator.899
896 Note 67 supra. 897 Ibid. at 100. 898 Ibid. 899 O. Akanle, „International Contract Negotiation,‟ 2 Gravitas Review of Business and Property Law
92-98 (1989).
468
Article 2.2 of the JOA between the NNPC and the TNOCs provides inter alia:
The operator shall conduct all joint operations with
utmost good faith and in a good and workman like
manner in accordance with good industry practice and
the applicable regulations shall apply to all operations
hereunder.
The operator or its affiliate shall not be liable for any
loss or damage which results from joint operations
unless such loss or damage result from willful
misconduct on the part of its Directors or supervisory
staff, provided;
That under no circumstances shall the operator or its
affiliates be liable to non-operator for reservoir damage
or pollution or for any consequential losses or damages
whatsoever or however occurring including, but not
limited to lost production or lost profits. The above
shall not relieve operator from exercising utmost
diligence in accordance with good oil field practices in
selecting, training and supervising its employees,
contractors and agents
The foregoing betrays Nigeria‟s relative weakness in this dispensation. That is without
prejudice to the fact that the constituent instrument of the NNPC in Section 9 provides for a
Directorate of Petroleum Resources which role is to superintend over the entire oil industry
469
and to the fact that Article 3 of the PA provides for an „operating committee‟ for the
purpose of providing orderly overall supervision, control and direction of all matters
pertaining to the joint operation. Its activities include:
(i) The approval, revision or rejection of all
proposed programmes and budgets.
(ii) The determination of the selection, scope, timing
and locations, testing, completion, plugging and
abandonment of all wells and facilities for joint
operations and of any change in the use or status
of any such wells and facilities.900
The operating committee consists ten (10 No.) persons appointed by the parties. NNPC six
(6 No.), TNOC four (4 No.). The NNPC appoints the chairman of the committee whilst
the TNOC appoints the secretary. Petroleum discovered under this dispensation is jointly
owned with off take allocations based on each party‟s equity interest in the operation. The
cost of operation is jointly borne by the parties proportionately to their equity interest. In
effect the state has under the dispensation a stake both in the assets, and liabilities of the
operations.901
A caveat must be entered with respect to the Directorate of Petroleum Resources.
Structurally it has the potential for effectively discharging its brief as a monitoring device,
for one it has the right calibre of personnel to actualize its statutory role, it is however
armstrung by extraneous constraints from political forces, with the resultant corruption and
graft which such meddlesomeness breeds in the high echelons of a public corporation and
900 See standard Nigerian Participation Agreement. Available at http://www.napims.com/dynamic.html 901 Ibid.
470
its sub-units. Within that scenario, when ranged against the TNOC it set out to monitor, the
Directorate may not be able to act with the latitude and amplitude required of such a body.
Institutionally, it must operate at a high level of competence and high moral pedestal if it is
to fulfill its statutory role. Its operational efficiency must be at par with that of the
TNOC.902
8.2 THE NIGERIAN PETROLEUM POLICY AS DISTILLED FROM
LEGISLATION, WHITE PAPERS, AND OFFICIAL STATEMENTS
Policy could be characterized as an administrative guide to action, which strictures conducts
of individuals and groups within an organic organization in the acquisition, annexation and
utilization of resources with a view to achieving set objectives. A policy is a plan of action,
especially one made by a government, political party and business concern.903
Going by
that characterization, a policy is an administrative devise, which serves as a reference point
and generally point directions as regards certain embodiments of total strategy. So much by
way of characterizations, for our purpose, policy will be considered entirely as an act of
State.904
8.2.1 THE SEARCH FOR A POLICY FOCUS
Arbitrariness, inconsistency and instability typify Nigeria‟s effort at achieving a policy
focus, a goal which has eluded it because of its unstable polity and partly because of
902 See 27 OPEC BULLETIN 18 (1996). In 1996, Global Inspection Services (G.I.S) was appointed as
a result of an enquiry into the activities of the State owned Nigerian National Petroleum Corporation,
which found a loss of $1 billion yearly in oil receipts, equivalent to an average loss of 150,000.00 b/d
of oil. G.I.S. supervised operations at four of Nigeria‟s export terminals viz: The Brass Terminal of
Agip; Forcados (Shell); Penington (Texaco) and Escravos (Chevron) while Robinson International was
responsible for scrutinizing exports through Bonny (Shell); Qua Iboe (Mobil), Anton (Ashland) and
Odudu (Elf). 903 F.C. Mish, (ed.), Meriam-Webster‟s Collegiate Dictionary, Springfield Ms., Merriam-Webster
Incorporated, 960 (2003). 904 Ibid.
471
volatility of the international petroleum industry. At the time of its overthrow in 1983, the
Shagari government had accepted a Nigerian quota ceiling of 1,300,000 bpd within the
framework of OPEC‟s market stabilization programme, it faced growing political pressure
within Nigeria for it to withdraw from OPEC if an increased ceiling could not be obtained.
The new Military regime while rejecting the possibility of withdrawal, argued vigorously
within OPEC for a larger Nigerian quota, and having obtained an increase valid only for the
months of August and September 1984, later announced that it considered the agreed
September ceiling of (1,450,00) bpd to be „to all intents and purposes permanent‟. That
policy was defended on the grounds that no early solution was in sight for the special
economic difficulties of Nigeria.905
NNPC had an overall stake of 70 percent in Nigerian productions, representing a theoretical
State off take entitlements of 1,032,500 bpd in 1985 if total production was divided on
straightforward pro-rata basis. In practice however, it was only between 1980 and 1984 that
such a basis was used to determine the respective off-take entitlements of NNPC and its
various joint-venture partners. Until 1980, each TNOC‟s equity entitlements was defined as
the applicable share, that is, 40 percent in most cases of a predetermined allowable
production volume from the joint-venture area concerned, the validity of this entitlement
being unaffected by any shortfall in the final production total, for example because of a
failure by NNPC to lift the full balance of the allowable total. The strict pro-rata division of
actual production as adopted in 1980, worked against Nigeria‟s interests when the
subsequent transition to a buyers market led to frequent fluctuations in the volume of
NNPC‟s off-take, which now dictated the overall pattern of production. In October 1984 the
government not only re-introduced the system of reference to an „allowable‟ production
905 Bloomberg Financial Markets Commodities News Oil Buyer‟s Guide, December 2, 1996.
472
volume to calculate the foreign equity entitlement but also gave foreign equity holders the
right to purchase, on equity terms any crude lifted on NNPC‟s account which the state
corporation was subsequently unable to sell to a third party.906
Nigeria‟s equity terms were based from late 1974 on an 85 percent tax rate and a 20 percent
royalty rate i.e. the revised middle eastern formula adopted by OPEC from 1974, these rates
being applied in conjunction with posted prices in such a way as to establish an official post
– tax profit margin on foreign oil companies exports of equity crude. The amount of the
margin was subject to periodic readjustment in the light of market developments. Following
an increase in 1983, the official profit margin on equity crude was deemed to be $2 per
barrel, and subsequent changes in Nigeria‟s official selling prices were accordingly
accompanied by posted – price adjustments which held the tax – paid cost of $2 below the
official selling price. Realized profit margins on equity were, however, subject to
considerable variation because of the use of a fixed tax allowance amounting to $2 per
barrel from 1983 in respect of production costs, whereas actual production costs varied
from field to field and were often well above $2 per barrel in offshore fields, and because
there was often a discrepancy between the market value of Nigerian crude and the official
selling price against which the notional profit margin was allowed.907
In 1985 the TNOCs pressed for a revision of the established fiscal arrangements in order to
reverse a decline in realized margins on equity crude. An initial round of negotiations was
held with the Buhari/Idiagbon led Junta, which was anxious to ensure a high volume of
equity sales in view of the disappointing outcome of several of its attempts to expand
NNPC‟s own exports through counter-trade, that is, barter and semi-barter deals.
906 J. Evans, OPEC, Its Member States and the Energy Market, London, Longman, 285 (1986). 907 Ibid.
473
The government was also conscious of the need to provide foreign equity holders with
adequate incentives to maintain a healthy flow of new investments into exploration and
development work, which was of particular importance because of the small average
reservoir size in the Nigerian oil fields. Negotiations were reopened by the Babangida
government soon after the coup, the main TNOC proposal at this point being that the
official selling price e.g. $28.65 per barrel for 36.7o crude , should replace the posted price
which was $29.94 for the same grade as the effective tax reference point, thereby raising the
official equity profit margin from $2 to $3.14 per barrel. By the end of 1985, however, the
context of negotiations had been radically altered by the break down of OPEC‟s official
pricing system and the spread of netback selling and the main features of an agreement
worked out during the first quarter of 1986 were that the tax-reference point should vary in
line with the monthly netback value of Nigerian crude under a formula which provided an
official equity profit margin of $2 per barrel on a netback value of $23, with higher values
e.g. $2.85 on a $30 netback; that a minimum margin of $2 per barrel should be guaranteed
on netback values of less than $23; and that there should be a substantial increase
(reportedly to $5 per barrel) in the tax allowance for production costs. At the same time the
NNPC‟s foreign partner companies undertook to market, at a profit margin equal to 50
percent of the prevailing official margin on equity crude, any state owned crude which
NNPC was unable to sell under its own netback contracts. NNPC was required to give 45
days notice of the volume involved.908
In a rear acceptance of failure of government policies and progress in the Nigerian oil
industry, General Abacha capitulated admitting the collapse of the various arrangements
aimed at effective State participation in his 1996 budget speech, he attributed the lack
908 Ibid.
474
lustre performance of State in the petroleum industry to lack of technical capability of its
agency, the NNPC; limited indigenous participation; poor community relations and the
State‟s inability to participate fully and effectively in the management of joint-venture
operations. He revealed that, the NNPC has not been able to meet its cash-call obligations
in all its joint-ventures as at when due, with arrears as at 31st December 1994 standing at
approximately US $500 million and N4.5 billion. Cash calls in 1995 were $1.75 billion and
N18 billion.909
As a corollary to the foregoing, the petroleum Minister unfolded the „New Deal‟ Policy, in
August 1996; in itself, according to the government, the „New Deal‟ policy was aimed at re-
orientation of the upstream sector of the petroleum industry. The policy was hinged on the
consideration that the government and people of Nigeria were not getting their fair share out
of the joint venture arrangements for petroleum exploration and production.910
The government alleged the lack of necessary accountability and transparency that should
complement the trust implicit in these joint venture arrangements; some joint venture
operators blatantly ignore calls on them for justification of details of expenditure items.
Presently, the joint venture accounts from which payments are made have the operator
companies providing the sole signatories; expatriates quotas have been exceeded in defiance
of indigenization policy; due to that fact, the average unit production cost for Nigerian
fields has been progressively on the rise. The head office costs charged to Nigerian
operations is about the highest in the world. The government observed that, after thirty-five
years of oil production in the country, overall Nigerian participation in the industry is
909 See text of the 1996 Budget Speech delivered by Late General Sanni Abacha. Available at
http://www.budgetoffice.gov.ng/search.html?zoom_query=1996%2Bbudget&zoom_page=3&zoom_pe
r_page=10&zoom_and=0&zoom_SC 910 Petroleum Economist, November, 1996, Vol. 63 No. 11.
475
dismally low. The TNOCs have perpetrated tax evasion and other sharp practices on a
massive scale; there is large-scale degradation of the environment in their various areas of
operation and finally the TNOCs are said to be sitting on extensive acreages to the
exclusion of independent investors.911
The administration subsequently decided on the following to redress these anomalies and
inequities. Two types of escrow accounts are to be opened with regards to cash calls and
management of joint ventures, into which cash call contributions, will be lodged. The one
will be for foreign exchange currency and is to be opened with an overseas bank. It would
also be operated through the Central Bank. Local currency accounts will be opened with
local commercial banks.912
There would be established in the office of the Honourable Minister of Petroleum
Resources, a monitoring unit, which shall vet all invoices and claims to be debited to the
cash call escrow accounts. In a similar vein, all contracts in the oil industry shall be
awarded to only Nigerian-registered companies and the appropriate withholding tax for
each contract must be paid in the currency of payment stipulated in the contract. Besides,
the recent engineering policy, which spells out a „national interest content,‟ would be
enforced to the letter. The government promulgated a decree empowering it to recover all
marginal fields and allocate them to investors who are genuinely interested in exploiting
them. Hence forth, any joint venture operator without the approval of the National
Petroleum Investment and Management Services (NAPIMS) shall engage no expatriate. No
wages shall be sanctioned in the case of any expatriate whose engagement did not meet
NAPIMS‟s prior approval. Further to that, Nigerian employees should not be disengaged
911 Ibid. 912 Ibid.
476
unless the written approval of the Ministry of Petroleum Resources has been obtained. In
other words, the Regulation on Employment of Nigerians, which was enacted in 1972 under
the powers vested in the Honourable Minister in Section 9(1) C of Petroleum Decree No. 5
of 1969 is reinstated with immediate effect. The operating permits of the major oil service
companies will be reviewed. The government is arranging to launch the National Oil Spill
Contingency Plan. The oil companies are expected to put in place strategies and
programmes to combat environmental degradation and such programmes should be visibly
reflected in their annual budgets, as one of their efforts to save the communities and mother
earth.913
The foregoing policy pronouncements can hardly be faulted, for one its an admission of 35
years of dismal showing of the State in a strategic industry, which remains the linch pin of
the Nigerian economy, secondly its an indication that the State is not in any illusion
regarding its relative position of weakness in all these arrangements with the Transnational
Oil Companies. That much can be said of that display of nationalism by the Abacha led
Junta; industry watchers were quick to point out that successive governments in Nigeria
have been known to package near perfect policies which paradoxically failed to secure and
deliver policy objectives.914
The State in Nigeria, has never want for good policies which conceptual foundation are
impeccable, however there is always as a rule, a lag between policy conceptualization,
formulation and implementation in Nigeria, by the time policies go through the corruption
ridden and sub-efficient mill of State bureaucratic structure they are so prismically refracted
as to be rendered ineffective. One is tempted to position that the inanities, which have
913 Ibid. 914 Ibid.
477
perennially afflicted, the Nigerian Petroleum Industry derives without exceptions from the
foibles of the State itself. One imagines if it was not time enough for the State to take a
critical look at itself. The actualization of this laudable policy package will to a great extent
hinge on the sincerity and transparency of the state. Now transparency and sincerity of
purpose have not been through the years, the forte of governments in Nigeria, in hind sight
the military government of Abacha, proved not to be an exception.915
It is important to mention that, there is not one single comprehensive and integrated
document on the „Nigerian Petroleum Policy.‟ Without prejudice to that limitation, the
Nigerian Petroleum Policy could be found embedded in legislation, statements from
governments and white papers, which span three decades. It is highly feasible to distil
Nigerian Petroleum policies from such body of legislation, official pronouncements, white
papers and acts and conducts of State.916
The legislative framework is a very important sovereign instrument, which the State could
annex to promote petroleum activities. Legislation reflects and gives legal sinew to the
broad policy adopted by the State and incorporates the appropriate legal mechanisms to be
employed by it to secure such policy objectives. Such objectives of State in devising a
legislative framework should not only provide a legal regime which strictures petroleum
exploration and development but should equally meet the fundamental requirements of oil
companies as high risk investors.917
915 Ibid. 916 S. Ariweriokuma, The Political Economy of Oil and Gas in Africa: The Case of Nigeria, New
York, Routledge, 56-100, 110,125,142 (2009). 917 L. Atsegbua, „Acquisition of Oil Rights Under Contractual Joint Ventures in Nigeria,‟ 37 Journal of
African Law 10-29 (1993).
478
Basically a legislative framework should ensure amongst other things the following policy
objectives viz: rapid and thorough exploration; efficient development of commercial
discoveries; production operations which provide maximum ultimate recovery consistent
with good oil field practices; maximization of the State‟s share of the financial benefits
generated by petroleum operations, both directly through its share of the economic rent and
indirectly through generation of employment, and utilization of national goods and services;
as well as downstream projects subject to their economic feasibility. Meeting the domestic
energy needs and assisting in reducing the foreign exchange debt generated by the high cost
of imported petroleum; accessing state of the art technology, transfer of appropriate
technology and know-how and training of nationals at all levels of skill within the industry;
access to and utilization of all petroleum data, including evaluation and interpretation
generated by the petroleum operations and lastly, environmental and safety concerns.918
The foregoing represent the fundamental policy objectives of State which the act of
legislation animates, accordingly it is discernable that Nigeria has adopted a legal
framework which in itself as an instrument of policy, is an amalgam of general petroleum
legislation and individually negotiated contracts. There is a body of legislation which lays
down terms on which right to explore for and or exploit petroleum resources may be
granted under standard form licenses or leases, within that general legislative framework,
royalty; taxes and other payments to be made are stipulated. On the other hand, there is the
ad-hoc dispensation, which permits negotiation of specifics such as the dimension of the
demised area, issues of state participation, the percentage interests to be held by Nigeria and
the TNOC, the management structure and control of operations. Within the backdrop of
aforementioned broad fundamental policy objectives, an attempt shall be made to review
918 Ibid.
479
the „Nigerian Petroleum Policy,‟ as it impinges on the regimes of (i) the exploration and
development and production phases; (ii) the structure of ownership and management; (iii)
marketing, and (iv) fiscal dispensation.919
8.2.2 THE REGIME OF THE EXPLORATION AND DEVELOPMENT AND
PRODUCTION PHASES
The implied Nigerian policy on the exploration and development phase is the promotion of
rapid and thorough exploration; efficient development of commercial discoveries;
production operations which provide for maximum ultimate recovery consistent with good
oil field practices.920
From the onset, it is necessary to make a distinction. The first right which is granted to the
oil company is the exploration license which in itself aims at affording the oil company a
general acquaintance with the geo-structures of Nigeria. Under the pre-1969 legislation,
exploration licenses remain valid for many years depending on negotiated agreement
between the Oil Company and the State; on the contrary licenses are valid for one year
under the 1969 Act:
An oil exploration license shall apply to the area
specified therein which may be area on which a
premium has not been placed by the Minister, and shall
authorize the Licensee to undertake exploration for
petroleum in the area of the license, excluding land in
respect of which the grant of an oil prospecting license
919 Ibid. 920 S. Tordo, D. Johnston and D. Johnston, Petroleum Exploration and Production Rights: Allocation
Strategies and Design Issues, Washington D.C., World Bank Publications, 1-125 (2010).
480
or oil mining lease has been approved by the Minister
and land in respect of which an oil mining lease is in
force.
(2) An oil exploration license shall not confer any
exclusive rights over the area of the license and the grant
of an oil exploration license in respect of any area shall
not preclude the grant of another oil exploration license
or of an oil prospecting license or oil mining lease over
the same area or any part thereof.
(3) An oil exploration license shall terminate on the
31st December next following the date on which it was
granted, but the Licensee shall have an option to renew
the license for one further year if:
(a) He has fulfilled in respect of the license all
obligations imposed upon him by this decree or
otherwise.
(b) The Minister is satisfied with the work done
and the reports submitted by the Licensee in pursuance
of the license and
(c) An application for renewal has been made
at least three months before the date of expiry of the
license.
(4) An oil exploration license shall not confer any right to
the grant of oil prospecting license or an oil-mining
lease.
481
On expiration of an exploration license the MNOC may
on application to the Petroleum Minister be granted an
oil prospecting license which gives it the exclusive right
to explore, prospect and dispose of petroleum within the
area covered by the license.
(5) The holder of an oil-prospecting license shall
have the exclusive right to explore and prospect for
petroleum within the area of his license.
(6) The duration of an oil-prospecting license shall
be determined by the Minister, but shall not exceed five
years (including any periods of renewal).
(7) The holder of an oil prospecting license may
carry away and dispose of petroleum won during
prospecting operations (subject to the fulfillment of
obligations imposed upon him by or under this decree
including any special terms or conditions imposed under
paragraph 34 below) or by the PPT Act 1959 or any
other law imposing taxation in respect of petroleum.921
Barring the exploration license, which merely gives the international Oil Company the right
to acquaint itself with the geo-structures of the country, the oil-prospecting license and the
oil-mining lease confer on the Oil Company the exclusive right to dispose of petroleum won
from the concession area.
921 Petroleum Act 1969, Cap.350 Laws of the Federation of Nigeria 1990; Cap.10 Laws of the
Federation of Nigeria 2004.
482
An oil mining lease may be granted only to the holder of an
oil prospecting license who has –
(a) satisfied all the conditions imposed on
the license or otherwise imposed on him by this Decree,
and
(b) Discovered oil in commercial quantities.
(8) For the purposes of paragraph 8 above, oil
shall be deemed to have been discovered in commercial
quantities by the holder of an oil prospecting license if
the Minister upon evidence adduced by the Licensee, is
satisfied that the Licensee is capable of producing at
least 10,000 barrels per day of crude oil from the
licensed area.
(9) The term of an oil-mining lease shall not exceed
twenty years but may be renewed in accordance with this
Decree.
(10)Subject to this Decree and any special terms or
conditions imposed under paragraph 34 below, the Lessee
of an oil mining lease shall have the exclusive right within
the leased area to conduct exploration and prospecting
operations and to win, get, work, store, carry away,
transport, export or otherwise treat petroleum discovered in
or under the leased area.922
922 Ibid.
483
It is necessary to enter a caveat at this juncture; to the effect that none of the Nigerian oil
mining leases granted to TNOCs is currently wholly standing on its own, their terms have
been renegotiated, allowing for the participation of Nigeria. State participation was
upwardly reviewed to 55 percent in 1974 and 60 per cent in 1979. The exception is Phillips
oil mining lease, which it assigned to an indigenous oil company, Dubri Oil Company
Limited.
The Pre-1969 Act lease made a distinction between onshore (Land) territory and offshore
(continental Shelf) territory. The onshore lease was granted for a term of thirty years,
which was renewable on expiration, for another thirty years term. Whilst the offshore lease
was granted for a term of forty years which was renewable on expiration for another forty
years term, at such terms, conditions and covenant as of the old term. Apart from the rather
long term, thirty years for onshore areas and forty years for onshore area it amounted to a
grant in perpetuity without any provision for the periodic relinquishments of agreed
portions of the demised area. Contra-distinguished from the foregoing, the 1969 Act agrees
of no distinction between onshore and offshore territory, but provides in its paragraph 10 of
schedule 1 for a primary term not exceeding twenty years, with relinquishment of one-half
of the leased area after ten years.923
The foregoing brings in relief the different regimes of the exploration, development and
production stage, much as one would have wished to be amenable to the inherent simplicity
of the oil mining lease, its lack of depth and scope and failure to stricture the exploration,
development and production phases of operations rendered it unacceptable, the oil mining
lease lacked built-in mechanisms for ensuring rapid and thorough exploration, the TNOC
923 Ibid.
484
was not under an obligation to submit a minimum work programme inspite of which it was
given exclusive rights of exploration and development.924
The scenario affected the pace of exploration in a rather untoward manner in Nigeria,
concession holders in the face of budgetary constraints diverted their resources to other
countries whilst holding firm to their Nigerian concessions thereby displacing TNOCs who
were ready to commit their resources towards exploration, development and production
activities in Nigeria. The only pretence at stricturing the exploration, development and
production stages were offered by clause 19 of the oil mining lease (1969).
The Lessee shall using suitable up-to-date equipment,
machinery and methods and conducting its operations
hereunder in accordance with good oil field practice,
carry out a programme for searching for, boring for,
winning, getting, working and if it shall have erected a
refinery in Nigeria refining the petroleum won and
saved from the leased area.
The clause was too open-ended, it was tenuous and did
not mandatorily require the oil company to draw up a
production programme under the superintending
consideration of the national oil company or other
agencies responsible for the monitoring of exploratory,
development and production operations of oil
companies.925
924 Ibid. 925 Ibid.
485
It merely required in a rather hesitant manner that the oil company observed good oil field
practices, it is in that respect a mere moralsuation which left the international oil company
both undetermined and at its free will to flare up, associated gases a practice which was
known to be common with major concession holders. (International oil companies have
found it more profitable to circumvent such legislation as Associated Gas Reinjection Act
No. 99 1979926
and the Associated Gas Reinjection (continued flaring of gas) regulations
Act 1984927
aimed at curbing that practice, by paying stipulated fine, than embarking on gas
reinjection method which could entail considerable investment in appropriate technology.928
The preoccupation in this paragraph has been to highlight and isolate those provisions of the
1969 oil mining lease which impinge on the exploration and development phase with regard
to the implied policy of promoting rapid and thorough exploration, efficient development of
commercial discoveries; production operations which provide for maximum ultimate
recovery consistent with good oil field practice.929
8.2.3 THE STRUCTURE OF OWNERSHIP AND MANAGEMENT
The Petroleum Act 1969930
is clear as to the ownership of petroleum won from the demised
area. It confers ownership on the holder of the prospecting license and mining lease,
contradistinguished from that, the oil mining lease was bereft of any provision for an
926 Associated Gas Re-injection Act 1979 No.99, Cap. A25 Laws of the Federation of Nigeria 2004. 927 Associated Gas Re-injection (Continued Flaring of Gas) Regulations Act, Cap.26, Laws of the
Federation of Nigeria, 2004. 928 In the case Gbemre v. Shell Petroleum Development Comapany Nigeria Limited and Others
(2005) AHRLR 151 (NgHC 2005), the Court held that Section 3(2) (a) and (b) of the Associated Gas
Re-Injection Act and Section 1 of the Associated Gas Re-Injection (Continued Flaring of Gas)
Regulations Act 1984, under which gas flaring in Nigeria may be allowed are inconsistent with the
applicant‟s rights to life and or dignity of human person enshrined in Sections 33(1) and 34(1) of the
Constitution of the Federal Republic of Nigeria, 1999 and Articles 4, 16 and 24 of the African Charter
on Human and Peoples Rights (Ratification and Enforcement Act, Cap. A9, Vol. 1, Laws of the
Federation of Nigeria, 2004, and therefore unconstitutional, null and void by virtue of Section 1(3) of
the same constitution. 929 Petroleum Economist, November, 1996, Vol. 63 No. 11. 930930 Petroleum Act Cap. 350 Laws of the Federation of Nigeria 1990; Cap.P10 Laws of the Federation
of Nigeria, 2004.
486
ownership dispensation, in that regard, recourse will be had to the provision of the petroleum
Act. Importantly, ownership passes at the well head to the transnational oil company or lease
holder. Paragraph 7 of the Act provides inter alia:
The holder of an oil prospecting license may carry away
and dispose of petroleum won during prospecting
operations, subject to the fulfillment of obligations
imposed upon him by or under this Decree (including
any special terms or conditions imposed under
paragraph 34 below) or by the Petroleum Profit Tax Act
1959 or any other law imposing taxation in respect of
petroleum).931
When taken alongside paragraph 34 referred to above, that provision renders the issue of
ownership discernable. Paragraph 34 provides:
If he considers it to be in the public interest, the Minister
may impose on a license or lease to which this schedule
applies special terms and conditions not inconsistent
with this Decree including (without prejudice
to the generality of the foregoing) terms and conditions:
(a) participation by the Federal Government in the
venture to which the license or lease relates, on terms to
931 Petroleum Act 1969, Cap.350 Laws of the Federation of Nigeria 1990; Cap. P 10 Laws of the
Federation of Nigeria, 2004; Petroleum Profits Tax Act Cap. P13, Laws of the Federation of Nigeria,
2004.
487
be negotiated between the Minister and the applicant for
the license or lease, and
(b) special provisions applying to any natural gas
discovered.932
Given the foregoing provisions it is then mandatory to attempt an appraisal of the mining
lease with a view to discerning the structure of ownership under the Petroleum Act.
Basically the oil mining lease was bereft of any provision for an ownership and
management dispensation, it by implication reinforces the provision of paragraph 7 of the
Petroleum Act, from which the mining lease derives its pedigree. The lease gave the Lessee
an unfettered ownership right. As a corollary to that exclusive right of ownership; the
TNOC had plenary powers in decision-making which impinged on every phase of
operation. Clause one of the mining lease granted ownership of petroleum at the well head
unto the Lessee, the clause reads in part:
In consideration of the rents, royalties, covenants and
agreements herein reserved and observed, the Minister
doth hereby grant unto the Lessee all or under the
submarine area described in the schedule hereto
(hereinafter called “the leased area”) and also the rights
powers and licenses to be exercised in connection with
the said petroleum and the leased area.933
It is important to consider clause two of the oil-mining lease alongside clause one, which
stipulates inter alia:
932 Ibid. 933 Ibid.
488
The Lessee shall have the exclusive right in and upon
the leased area to mine, bore, quarry, dig, search for,
win, get, work, store, carry away, export, refine, or
otherwise treat and dispose of petroleum within or under
the leased area or the products thereof (the aforesaid
being hereinafter, referred to as (“the operations
hereunder”) without interruption, claim or disturbance
from or by the Minister or any other person, subject to
the reservations, exclusions and restrictions set out in
clause 6 to 16 inclusive hereof.934
The foregoing clauses taken severally and collectively, divested Nigeria of ownership and
management rights in that dispensation it amounts to actual alienation. That unequal
exchange was grounded on the fallacious premise that since it was the case that the oil
company solitarily provided for the upfront investment finance for the operation and the
mobilization of requisite technology and the payments of ground rents, profits tax, and
royalties then it followed without contradiction that it enjoyed exclusive rights of
exploitation, ownership and control of the petroleum resources won from the concession
area.935
That argument, which was mostly adumbrated by Western analysts and apologists, was
illogical, for one there is no justification for the unequal exchange. Natural resources, in situ
are by their nature unquantifiable in terms of a book value, even though they are
934 Ibid. 935 Ibid.
489
exhaustible. That consideration must be borne in mind in determining an equitable
consideration for the granting of a lease. Such a consideration would be inadequate when
reduced to mere payments of a fixed royalty and tax rate. The injustice of that transaction is
further brought to the fore when the average life span of individual wells in the concession
area could be 10 – 30 years and could be longer, with re-injection for ultimate recovery.936
Besides, the ecological cost to Nigeria from the exploration activities in the concession area
is enormous; the magnitude of which cannot be reduced to pecuniary values. The preceding
consideration not only shows that the term of the lease as regards ownership was not only
lop-sided, but runs against the grain of fairness.
The re-negotiation of these leases with the various leaseholders was inevitable
subsequently, agreements with transnational oil companies were based on joint venture,
production – sharing and service contracts with the State owned corporation, the NNPC.
None of the Nigerian oil mining leases granted are currently wholly standing on their own;
their terms have been re-negotiated, allowing for the participation of Nigeria. State
participation was upwardly reviewed to 60 percent in 1979. The joint-operations
agreements provide for amongst other things a joint-management committee whilst the
TNOC is the designated operator of the joint venture.937
8.2.4 MARTKETING DISPENSATION
The logic of paragraph 7 of the Petroleum Act 1969938
which vests in the Lessee the right to
win petroleum and dispose of petroleum as it deemed fit may have removed the marketing
of petroleum from the purview of governmental control:
936 Ibid. 937 Note 47 supra. 938 Petroleum Act Cap.350 Laws of the Federation of Nigeria 1990; Cap. P10 Laws of the Federation
of Nigeria, 2004.
490
The holder of an oil prospecting license may carry away
and dispose of petroleum won during prospecting
operations subject to the fulfillment of obligations
imposed upon him by or under this Decree.939
In a similar vein, clause 2 of the oil-mining lease also vests in the Lessee the right to get
petroleum and dispose of petroleum as it deemed fit, viz.:
The Lessee shall have the exclusive right in and upon
the leased area to mine, bore, quarry, dig, search for,
win, get, work, store, carry away, export, refine or
otherwise treat and dispose of petroleum within or under
the leased area or the products thereof without
interruption, claim or disturbance from or by the
Minister or any other person subject to the reservations;
exclusions and restrictions set out in clauses 6 to 16
inclusive thereof.940
As a consequence of that frailty of the 1969 Act and the mining lease the TNOCs for a
season, had full latitudes to dispose of crude oil won as they deemed fit up till 1965, the
bulk of refined products were imported from international affiliates of the international oil
companies. That scenario was ruinously depressing of the Nigerian economy for the
multiplier effects of the exploration activities in Nigeria occurred elsewhere.
Clause twenty (20) of the oil mining lease, provides that:
The Minister may at any time and from time to time
request the Lessee to consider with the Minister the
939 Cap 3 L.F.N., 1990; Cap 10 L.F.N. 2004. 940 Ibid.
491
desirability and economic feasibility of the following
matters:
(a) The erection of a refinery capable of, or
increasing the capacity of any existing refinery or of the
use of existing facilities for refining crude oil won or
recovered, by the Lessee under this lease for the purpose
of meeting, as may be agreed by the parties, the need of
Nigeria and of other African states or African countries
to which Nigeria may wish to export motor gasoline,
Kerosene and fuel oil of the general quality in current
use.
(b) The provision of capital for the foregoing.
(20)(2) Consistent with the exercise of reasonable
commercial judgment and after due regard to the
Lessee‟s potential production and market position
the Lessee shall use its best endeavors to comply
with the Minister‟s wishes in this respect.941
The foregoing left participation of the TNOC in the development of domestic refining
capacity at its behest; it had not to all intents and purposes borne any mandatory incident for
the TNOC. That consideration is without prejudice to the fact that the NNPC has a fully
integrated subsidiary; the Pipeline Product Management Company (PPMC), which from all
intents and purposes is the marketing concern of the corporation. Even though refineries
were opened at Port Harcourt in 1965 and in Warri in 1978, in Kaduna in 1980, Nigeria‟s
941 Ibid.
492
pattern of products demand did not correspond to the output pattern of local refining
industry, and significant volumes of products were imported in exchange for crude oil
(NNPC‟s 1986 exchange contract with CPP, provided for the monthly supply of 120,000
tonnes of gasoline and kerosene in return for 200,000 tonnes of crude). Thus Nigeria fell
into the habitual trading-off of its equity crude from its various arrangements with
transnational oil companies without any added value.942
That practice, when it entails crude/product exchange as contradistinguished from
crude/crude (that is, exchange of the Nigerian lighter crude for crude of higher gravity
needed as input in the refining of certain products) runs against the grain of all tenets of
developmental economics, and is bound to stunt the growth of the petroleum sector as a
fully integrated industry in Nigeria.943
8.2.5 FISCAL DISPENSATION
The Petroleum Profit Tax Act 1959 (as amended) (hereinafter PPT Act) is not ambiguous as
to its intendment, which is the taxation of the incomes of companies engaged in crude oil
production, and liquefied natural gas operations. Paragraph 8 of the Petroleum Profit Tax
Act provides:
There shall be levied upon the profits of each accounting
period of any company engaged in petroleum operations
during that period a tax to be charged, assessed and
payable in accordance with provision of this Act. 9(1)
subject to any express provisions of this Act in relation
942 Ibid. 943 S. Thomas, S. Canagarajah, Poverty in a Wealthy Economy: The Case of Nigeria, Washington
D.C., International Monetary Fund, 6,8,17,25 (2002).
493
to any accounting period, the profits of the period of a
company shall be taken to be the aggregate of:-
(a) The proceeds of sale of all chargeable oil sold by
the company in that period.
(b) The value of all chargeable oil disposed of by
the company in that period, and
(c) The value of all chargeable natural gas in that
period as determined in accordance with the forth
schedule to this act.
(d) All income of the company of that period
incidental to and arising from any one or more of its
petroleum operations.944
The 28th
item in section 2 of the PPT Act spells out clearly those operations that constitute;
„Petroleum Operations.‟
The winning or obtaining and transportation of
petroleum of chargeable oil in Nigeria by or on behalf of
a company for its own account by any drilling,
extracting or other like operations or process not
including refining at a refinery; in the course of business
carried on by the company engaged in such operations
and all operations incidental thereto and any sale of or
any disposal of chargeable oil by or on behalf of the
company.945
That definition strikes out down stream operations like transportation of crude oil to a
consignee who did not itself win or obtain it by drilling. Also removed from the purview of
the PPT Act, going by that definition, is the operations of a contracting geophysical/seismic
oil drilling company; the profits of a company that purchases crude oil from the Nigerian
944 Petroleum Profit Tax Act Cap.P13, Laws of the Federation of Nigeria, 2004. 945 Ibid.
494
National Petroleum Corporation (NNPC) or even that portion of the income of a company
normally engaged in Petroleum operations, the source of which is traceable to an
undertaking other than its petroleum operations, will not be the subject of the PPT Act,
excluded in a similar vein is the incomes of petroleum refining companies and the
operations of companies that deal in petroleum products.
Paragraph 15(1) of the PPT Act as amended provides inter alia:
The chargeable profits of any company of any
accounting period shall be the amount of the assessable
profits of that period after the deduction of any amount
to be allowed in accordance with the provisions of this
section.
Whilst paragraph 16(1) provides inter alia:
The assessable tax for any accounting period of a
company shall be an amount equal to 85 percent of its
chargeable profits of that period. 17(1) the chargeable
tax for any accounting period of a company to be
charged, assessed and paid by the company under the
provisions of this Act shall be the amount of its
assessable tax for that period after
the deductions allowed by this section.946
The dispensation under the PPT Act as amended is such that it does not take into
consideration the vertically integrated nature of transnational oil companies; by virtue of
Act No. 33 of 1977 the basis of evaluation under the PPT Act 1959 (as amended) Cap. P13,
946 Ibid.
495
Laws of the Federation of Nigeria, is the posted price of Nigeria crude of varying gravity
Free On Board (F.O.B.) Nigerian Port. That dispensation failed to take into account the
incomes of subsidiaries of the transnational oil companies who nevertheless were fed
Nigerian crude and other Nigerian refined products at transferred prices, in effect royalty
payment and profit tax payments to Nigeria depended wholly on the amount of profit made
by the producing company. Amongst other effects, that consideration gave the international
oil company the impetus to invest in downstream operations elsewhere, without the fiscal
jurisdiction of Nigeria, thus eliminating what could have been the due of Nigeria in such
operations had they been established in Nigeria.947
It must be conceded that the 85 percent tax rate under the PPT Act is high and an upward
review may lead to fiscal distortions and investment disincentive.948
8.2.6 THE MEMORANDUM OF UNDERSTANDING (MOU)
An analysis of petroleum fiscal policy legislation in Nigeria will not be complete without a
consideration of the Memorandum of Understanding (MOU) on incentives for encouraging
investments in exploration and development activities and enhancing crude oil exports.
Viewed from the macro economic perspective, the MOU is predicated on the consideration
that the low level of capital formation in Nigeria, deriving from low incomes and savings
falls far too short of the magnitude of investment required for the exploitation of the
country‟s oil resources. Oil exploration is a high-risk investment with long gestation which
947 Ibid. 948 Ibid.
496
entail‟s the mobilization of critical skills and technology and stupendous financial
resources.949
As a corollary of the foregoing consideration foreign capital is needed to make up for the
shortfall in capital formation. Within that backdrop, Nigeria entered into a memorandum of
understanding on incentives for enhancing crude oil exports and encouraging investment in
exploration and development activities and in the area of enhanced oil recovery and gas
utilization activities. The first ever MOU took effect from 1st January 1986, essentially the
1986 MOU had its focus as the guaranteed notional margin of $2.00 per barrel of crude
produced by an oil company. Resulting from the need to reversing a decline in realized
margin on equity crude; another MOU was made between the producing companies and
Nigeria on 25th
July 1991. The highlights of which accords a minimum guaranteed notional
margin of $2.30 per barrel, after tax and royalty to the company on its equity crude and a
minimum of $1.15 per barrel, after tax and royalty on the NNPC equity crude which it lifts
under the MOU. With the caveat that, the technical cost of operations must not exceed the
notional fiscal technical cost which at present, is $2.50 per barrel.950
Secondly, any company whose capital investment cost in any one calendar year is equal to
or surpasses $1.50 per barrel on average will be compensated. The compensation will be
calculated by an increase of the guaranteed notional margin from $2.30 per barrel to $2.50
per barrel in respect of equity crude and $1.25 per barrel in respect of NNPC crude. Also
the notional fiscal technical cost shall be increase to $3.50 per barrel.951
949 Y. Wei and V.N. Balasubramanyam, Foreign Direct Investment: Six Country Studies, London,
Edward Elgar Publishing, 7 (2005). 950 K. Omeje, „Oil Conflict in Nigeria: Contending Issues and Perspectives of the Local Niger Delta
People,‟ 10 Political Economy 321-334 (2005). 951 Ibid.
497
Thirdly, if the actual technical cost of operations in one calendar year exceeds $3.50 per
barrel on average and such increase is as a result of capital investment costs (which is equal
to or more than $1.50 per barrel) a company which ensures such shall enjoy some tax offset.
Accorded the oil company is the reserves additions bonus, which is aimed at ensuring that
any company whose additions to the oil and condensate enjoys some relief, which will be
an offset against its petroleum profit tax liability for the year.952
The revised 2000 MOU provides for a 35 per cent tax inversion rate to encounrage unit cost
efficiency. It further provides for a guaranteed notional margin of $2.50 /bbl after tax and
royalty to the company in its equity crude and a minimum of $1.25/bbl after tax and royalty
on the NNPC crude which it lifts under MOU. The minimum guaranteed notional margin is
premised on the fact that the Technical Cost (TC) of operations is not more than the
notional fiscal technical cost, which is presently $4.00 /bbl. If in any one calendar year, a
company‟s capital investment cost (T2) exceeds $2.00/bbl on average, the minimum
guaranteed notional margin shall be increased to $2.70/bbl for the company‟s equity crude
and $1.35/bbl for NNPC‟s equity crude.953
In the short run the MOU may seemingly have a salutary effect on the oil industry in
Nigeria in terms of the upsurge in upstream activities which may be catalyzed by it, and in
its stimulation of the marketability of Nigerian crude. The most crucial consideration
however, would perhaps be the long run implications on the oil industry. The provision for
two technical notional costs of $2.50 and $3.50 per barrel as contradistinguished from the
single notional technical cost of $2.00 per barrel under the antecedent MOU, is rather
fraught with problems in view of the technical lapses which may be occasioned by that
952 Ibid. 953 Ibid.
498
dispensation. For one thing, the Oil Company could exploit these loopholes to arrive at a
high TC, and earning a reward instead of a reprimand.954
Besides there is no infrastructure with which declaration of reserves by the oil companies
could be empirically replicated with a view to providing a rational bases for the tax credit
for the additions to the reserves which the oil company enjoys under the MOU.955
8.2.7 STATE PARTICIPATION
There was a major shift in policy in 1971 which was informed by the need to optimize
Nigeria‟s share of the economic and social benefits derivable from the exploitation of its
natural resources. The Nigerian National Oil Corporation (NNOC) was established in 1971
with responsibilities to carry out oil exploration, production, refining and marketing. It was
granted the lease over all acreages that were not under lease and all relinquished acreages.
Subsequent agreements with TNOCs were based on joint-venture; production-sharing and
service contracts with the state owned corporation, to the effect that none of the Nigerian oil
mining leases granted is currently wholly standing on its own, their terms have been
renegotiated allowing for the participation of Nigeria. The legal instrument of participation,
for example, the JOA provides for a joint management committee whilst designating the
TNOC the operator.956
That scenario marked a departure from the old concessionary regime in which the TNOCs
had unfettered ownership and control over production. From all intent and purposes
therefore, the NNOC was established not only to engage the TNOCs in partnership, but to
954 Ibid. 955 I n his 1997 Budget speech, General Sanni Abacha revealed that the oil industry suffered from poor
infrastructural facilities; lack of indigenous technology and low indigenous participation in the oil
industry. 956 Note 47 supra.
499
penetrate and engage them in competition in those segments of the petroleum industry
which have high entry barriers, for example, upstream operations and ultimately to develop
and nurture an indigenous technology which will lead to total indegenization of the oil
industry.957
The NNPC was established in 1977 in yet another policy shift as the successor corporation
to the NNOC, it has ever since undergone a series of reorganizations, aimed at improved
performance. Its new mission statement characterizes it as a commercial integrated
international oil company engaged in exploitation; production; processing; transportation
and marketing of crude oil, gas, and so forth; oriented towards efficiency, profitability and
financial autonomy in its operations, whilst seeking to maintain leadership role in Nigeria
long-term growth and economic development through fostering of new gas and petroleum
based industries. Given that policies are administrative guides to executive actions,
establishing certain criteria of decision making, the Nigerian Petroleum Policy is also
discernable from the NNPC‟s mission statement, which in itself gives the reason for
existence of the NNPC. Policies encapsulated in the statement include: the corporation is
expected to generate enough revenue to pay its way and declare profits to the government
treasury. It must be run strictly in accordance with commercial principles and practices.
Operational efficiency ensured through elimination of bureaucratic bottlenecks,
management to cut cost of operations, streamline and review the accounting and
information system with a view to monitoring finance operations.958
957 Ibid. 958 Ibid.
500
The NNPC has not fulfilled those policy objectives enunciated in its mission statement
owing mostly to its being a politically sensitive organization a fact which negates
corporatization, which is the organic state the NNPC sought to attain.959
8.3 THE NATIONAL OIL AND GAS POLICY AND THE ENABLING
LEGISLATION FOR OIL AND GAS INDUSTRY: THE PETROLEUM INDUSTRY
BILL 2009
The quest for an integrated National Oil and Gas Policy is not without precedent. As earlier
demonstrated, successive administrations have attempted to articulate and chart a policy
focus for the Nigerian oil industry. The ongoing effort to reposition the oil industry through
legal and institutional reforms was initiated by the Obasanjo administration. The
administration constituted the Oil and Gas Sector Reform Implementation Committee
(OGIC), which was inaugurated on the 24th
of April, 2000. The Committee‟s terms of
reference required it to make recommendations for restructuring of the oil industry. The
vision statement articulated for the oil industry underscores the objective of the National Oil
and Gas Policy inter alia:
To maximize the net economic benefit to the nation
from our oil and gas resources and to enhance the social
and economic development of the people while meeting
the nation‟s needs for fuels at a competitive cost,
accomplishing all in an environmentally acceptable
manner.
Maximization of the net economic benefit shall entail
increased value addition to the economy through further
959 Ibid.
501
commercial processing of the crude oil and natural gas
produced. Nigeria shall consequently not be content to
simply extract its natural resources for sale as raw
products. Amongst others the economic benefits shall be
maximized through appropriate fiscal regimes, sustained
profitability of the industries, development of additional
commercial activities, and the development of improved
direct linkages between the oil sector and the other
sectors of the economy, including an active local content
policy.960
These are however avowal of very lofty ideals which in isolation avails nothing in terms of
concrete change and transformation. The vision statement for what ever it is worth is a
rehash of familiar verbiage which has been enunciated through the years by successive
governments in white papers, policy pronouncement and so forth regarding intended reform
of the oil and gas industry.961
Thus there have been surfeits of efforts to reform and transform the oil and gas industry
which have yielded no concrete results in terms of efficiency, profitability and optimization
of economic benefits to the nation from the exploitation of its oil resources. The foregoing
submission is however without prejudice to the enabling legislation which is envisaged to
provide the legal and institutional sinew for the implementation of the policy. That granted,
the policy encapsulates objectives for the upstream sector, that is, exploitation and
production; fiscal regime; mid stream regime and downstream regime.962
960 See the Oil and Gas Industry Reform Implementation Committee Report. 961 Ibid. 962 Ibid.
502
8.3.1 EXPLORATION AND PRODUCTION
The policy objective in the upstream end of the oil industry among other things seeks to
secure Nigeria‟s ownership of its oil resources and its firm control of the oil and gas
industry. Section 1 of the draft Petroleum Industry Bill 2009 provides:
Property and sovereign ownership of petroleum within
Nigeria, its territorial waters, the Continental Shelf, the
Exclusive Economic Zone and the extended continental
shelf shall vest in the sovereign State of Nigeria for and
on behalf of the people of Nigeria.963
The vesting of property in petroleum and natural gas in the State and the Nigerian people by
a piece of legislation is superfluous if the gross lack of technical capacity of the National
Oil Company is not reversed and there is no rapid development of indigenous technical
capacity in the oil and gas industry. Nigeria‟s aspiration to firmly control its oil and gas
resources will be elusive for as long as the indigenous technical capacity in requisite
technologies is lacking.964
It is perhaps in view of the foregoing that the new Petroleum Industry Policy and Bill seek
to incorporate review provisions in subsequent contracts with transnational oil companies
pursuant to the renegotiation of their fiscal regimes.965
The new policy and law seek to create an autonomous National Oil Company to replace the
Nigerian National Petroleum Corporation (NNPC). The new entity shall be fully capitalized
with government revenue based strictly on royalties, taxes, rents and dividends. Section 136
of the draft Petroleum Industry Bill provides:
963 The Petroleum Industry Bill 2009. Available at http://www.nassnig.org pdf 964 Ibid. 965 Ibid.
503
The Nigerian National Petroleum Company Limited
(„The National Oil Company‟), shall be a limited
liability company and shall be the successor company to
the assets and liabilities of the Nigerian National
Petroleum Corporation(„the Corporation‟)……
Ownership of the National Oil Company shall be vested
solely in the Federal Government of Nigeria at the time
of incorporation.966
The attempt to transform the Nigerian National Petroleum Corporation is not without merit,
however, as a politically sensitive institution of State in the oil and gas sector, it will take
more than a change in nomenclature to transform the NNPC into a modern organization,
which is a going concern able to pay its way and declare profits into the national treasury.
The crucial question is how can the NOC be insulated from political control and to what
extent is the State willing to entrust the micro-management of the company to the right
calibre of managers who will chart the desired course for the company and achieve the
goals and aspirations of the State and people of Nigeria in the oil and gas industry.967
Concomitantly, the bill provides amongst other things for the establishment of a National
Petroleum Directorate that will initiate and formulate policies; a National Petroleum
Inspectorate that will replace the Department of Petroleum Resources (DPR); the National
Petroleum Assets Management Agency to replace National Petroleum Investment
Management Services (NAPIMS), and the Petroleum Products Price Regulatory Authority
966 Ibid. 967 A. Megateli, Investment Policies of National Oil Companies, Westport, Praeger, 46 (1980).
504
to replace the Petroleum Products Price Regulatory Agency (PPPRA); the National Frontier
Exploration Services; National Petroleum Training Institute; Petroleum Equalisation Fund
and Petroleum Technology and the National Research and Development Centre.968
As earlier adumberated, change of nomenclature of existing institutions and proliferation of
new ones in themselves do not translate automatically to efficiency and high economic
performance. Corporatization of institutions in the oil industry must be complemented by
the sincere embrace of best practices in the international oil industry.969
To complement the corporatization of the Nigerian National Petroleum Corporation, the bill
provides in Section 246 for „Incorporated Joint Ventures‟:
(1) With effect from the commencement of this Act, the
interests held by the Nigerian National Petroleum
Corporation in respect of the joint ventures for the
exploration and production of petroleum in Nigeria
shall be vested in the National Oil Company.
(2) Within twelve months from the commencement of
this Act, each joint venture for the exploration and
production of petroleum in Nigeria shall be
incorporated as a limited liability company.
(3) Each joint venture company shall be owned by the
parties to the existing joint ventures, in proportion to
their existing participation interests, with the
exception of the participating interests held by the
968 Note 135 supra. 969 Ibid.
505
Nigerian National Petroleum Corporation which
shall henceforth be held by the National Oil
Company.
(4) Terms and conditions of each incorporated joint
venture, shall be agreed upon by the parties.970
Section 247 of the draft bill further provides:
The objectives for the incorporation of joint ventures is
to create independent entities capable of being
financially self-sufficient.971
The foregoing can not be faulted, for one it will solve the problem of cash call constraints
on the part of the State. The experience under the extant joint venture dispensation is
underscored by the inability of the State to meet its cash call obligations in all the joint
ventures. Success of the incorporated joint ventures would however be, dependent on the
fiscal discipline of the State and the political will to run the National Oil Company as a truly
going concern, able to pay its way, have a profit and loss account; a balance sheet and able
to consistently declare profit into the national treasury from its operations.972
The bill has received negative reviews from variegated stakeholders. The oil producing
federating units fault the vesting of sole ownership of petroleum resources in the Federal
Government. They are demanding that the rights of individuals and institutions of State to
own shares in the National Oil Company be enshrined in the new law on the basis of the
970 Ibid. 971 Ibid. 972 G. U. Nwokeji, „The Nigerian National Petroleum Corporation and the Development of The
Nigerian Oil and Gas Industry: History, Strategy and Current Directions.‟ Available at.
http://www.rice.edu/energy/publications/docs/NOCS/Papers/NOC_NNPC_Ugo.pdf
506
possessory rights of the land dwellers/host communities of the petroleum producing
region.973
Specifically, they demand that the bill should provide for a 25 per cent revenue sharing for
the producing States and communities on a „carry and free holding‟ basis in a ratio of 10 per
cent to the producing communities to ensure respect for the component parts of the
federation, fair play and equity.974
Transnational Oil Corporations fault the fiscal regime of the bill as a disincentive to new
investments. They reason that the multiple tax regimes; high royalties as being proposed in
the bill would impact negatively on gas and deep water operations and majority of the
projects proposed in these areas will not pass investment criteria.975
Section 429 of the draft
bill provides for a tax regime as follows:
(1) The assessable tax for any accounting period of a
company engaged in petroleum operations shall be
an amount equal to eighty-five per cent of the
chargeable profit of that period.
(2) The assessable tax of any accounting period of a
company engaged in upstream gas operations shall
be an amount equal to forty-five per cent of the
chargeable profit of that period, with the exception
of upstream gas operations in a production sharing
973 E. Ugwuanyi, Petroleum Industry Bill Stirs Controversy, 27th October, 2009. Available at. http://the
nationonlineeng.net/web2/articles /23267/1/Petroleum-industry-Bill-stirs-controversy/Page1.html 974 Ibid. 975 Ibid.
507
contract area or a deep offshore contract area for
which the tax rate shall be thirty-five per cent of the
chargeable profit of that period.
(3) Where a company engaged in petroleum operations
has not yet qualified for treatment under paragraph
7(4) of the Tenth Schedule to this Act, its assessable
tax for any accounting period during which the
company has not fully amortized all pre-production
capitalized expenditure due to it less the amount to
be retained in the book as provided for in paragraph
7 of the Tenth Schedule to this Act, shall be 65 to 75
per cent of the chargeable profit for that period.
(4) Where a company carries on petroleum operations
by production sharing contracts or any similar
arrangement in the deep offshore and inland basin,
the assessable tax for any accounting year on the
profits derived from the contract areas shall be an
amount equal to 50 per cent of its chargeable profits
from the contract area.
(5) Where a company transfers, or disposes of gas to a
gas utilization project in Nigeria as defined under
Section 28 G or Section 39 of the Companies
Income Tax Act, Cap. I Law of the Federation of
Nigeria 2004, the assessable tax from the sale,
508
transfer, or disposal of the gas shall be at a rate equal
to that specified in Subsection (2) of this Section.
(6) Where a company sells, transfers or disposes of gas
to any other person outside Nigeria, the assessable
tax from the sale of gas shall be an amount equal to
the tax rate specified in subsection (2) of this
section.976
Section 430 further provides:
(1) The assessable tax for any accounting period of an
indigenous company that is engaged in petroleum
production and with an aggregate production of not
more than fifty thousand barrels of oil or gas
equivalent per day shall be 60 per cent of the
chargeable profit for that period.977
To the extent that the fiscal regime aims at capturing every aspect of petroleum operation
for tax purposes, its logic can not be assailed without contradictions. It redresses the
inanities of the fiscal regime under the extant dispensation, which fails to take cognizance
of the integrated nature of the international oil industry. Again it must be reiterated that the
eighty-five per cent tax rate is high and any attempt to exceed that ceiling would constitute
a disincentive to new investments.978
976 Note 135 supra. 977 Ibid. 978 Ibid.
509
The draft bill seeks to encourage the development of small fields with significant low tax
incentives having a bottom level of 5 per cent royalty scale, based on daily oil production.
This provision ostensibly would encourage indigenous participation in the oil and gas
industry. Section 272 provides amongst other things:
(1) Where an oil field within an existing license or lease
is designated as marginal by either the licensee,
lessee, the Inspectorate or the Directorate, the
Ministry may direct that the said marginal field
should be awarded to another company other than
the licensee or lessee.
(2) A field that has not been operated for ten years is
deemed to be marginal.
(3) The award of any marginal field shall be:
(a) through an open and transparent process; and
(b) by the Minister in consultation with the Directorate
and the Inspectorate.979
Furthermore, a local content provision is incorporated which require all projects and
procurements have Nigerian content, Section 8 of the bill provides:
(1) The Federal Government shall at all times promote
the involvement of indigenous companies and
manpower and the use of locally produced goods
979 Ibid.
510
and services in all areas of the petroleum industry in
accordance with existing laws and policies.
(2) Where any contract for work or services is
considered to be within the capabilities of Nigerian
companies, in accordance with any law relating to
Nigerian content, the tender list shall be restricted to
Nigerian companies.980
The foregoing provision seek to boost utilization of local goods and services as input in oil
production pursuant to establishing linkages between the oil sector and other sectors of the
economy. This provision should however be complemented by purposive actions to develop
indigenous technical capacity in every aspect of oil production, shore up the value added of
local goods and services so that they are competitive in terms of international minimum
standards and prices.981
8.3.2 DOWNSTREAM REGIME
The total deregulation of the downstream segment is being proposed in the policy reform
and law pursuant to redressing the inefficiency and perennial product shortages
characterizing the sector. Deregulation is also intended to withdraw huge petroleum
subsidies which supposedly guarantees domestic supplies at the current pump price of
=N=65 per litre. It is also envisioned, that deregulation would create favorable conditions
for inflow of direct foreign investment in new and already existing refineries.982
The extant
dispensation according to the government discourages investors to commit their financial
980 Ibid. 981 Ibid. 982 Ibid.; Guardian Newspapers. Available at.
http://www.ngrguardiannews.com/news/article05/indexn3_html?pdate=210110&ptitle=Govt%20decen
tralise%20fuel%20supply.%20
511
resources to refinery projects because the refineries are constrained to source crude at
international market prices while compelled to sell refined product at State controlled
prices. Section 378 provides for pricing principles in the downstream sector thus:
In the exercise of its powers to regulate prices charged
for downstream gas and the revenues earned by
downstream gas licensee, the authority shall at all times
be guided by the following principles:
(a) gas prices shall be disaggregated into the
component elements of the supply chain, including
the costs of wholesale gas, transportation,
distribution and supply;
(b) the prices charged for each licensed activity
shall reflect the costs incurred for the efficient
provision of that activity;
(c) prices charged shall permit a reasonable
return for licensees on their investments, and
(d) prices shall not discriminate between
customers with similar characteristics, such as
similar size or a similar consumption profile.
Section 379 provides for approval and publication of charging structure:
Subject to price or revenue regulations issued pursuant
to this Act all licensees in the downstream gas sector
shall:
512
(a) propose tariffs and tariff methodologies for
the approval of the Authority, prior to the
application of such charges;
(b) impose tariffs in accordance with such
approval; and
(c) publish such tariffs in a manner that ensures
that the customers of such licensees are able
to identify and calculate the full extent of all
charges for which they will become liable.983
Subsidization of products in itself in no way undermines efficiency of the downstream
sector. The practice is embraced all over the world for a wide variety of products,
particularly agriculture pursuant to having a rein on supply and prices of food. Equally, it
would not amount to inefficient allocation of financial resources if petroleum products are
subsidized provided that such funds are not mismanaged by the relevant State agencies
charged with its management as has been the case in Nigeria. Subsidization of petroleum
products which are key input in production does not in itself amount to suboptimal
allocation of resources as the government is arguing, besides it is one removal of subsidies
too many in Nigeria. Successive administrations have justified increases in pump prices of
products by adducing the waste which subsidies on products constitute. It would seem that
there is no end to subsidy removals in the country. Besides nothing in the foregoing
provisions suggest total deregulation as being canvassed by the government, as it still
regulates pricing of products. Arbitrary increases in pump prices of petroleum products has
far reaching effect on productivity and heightens inflationary pressure on goods and
983 Note 135 supra.
513
services in every sector of the economy further compounding the already high over head
cost of doing business in Nigeria. The high relative cost of doing business in Nigeria is
responsible for the massive capital flight out of Nigeria.984
That granted, it must be reiterated that policy in itself is a mere guide to actions, economic
choices and conduct of all economic actors. Considerable political will and visioning is
required of the political leaders who will drive the far reaching reforms, while a high level
of buy-ins are needed on the part of bureaucrats. Concomitantly there must be a high degree
of self regulation by all actors in the industry if the new policy and legal framework is to
facilitate the attainment of the desired goals and objectives which informed the articulation
of the new Oil and Gas Industry Policy.985
8.4 THE NIGERIA EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE
(NEITI)
The Nigeria Extractive Industries Transparency Initiative (NEITI) is an offshoot of the
global Extractive Industries Transparency Initiative (EITI) process, a global voluntary
initiative promoted and launched by the then British Prime Minister Mr. Tony Blair, in
2002. Its principal objective is „to strengthen governance by improving transparency and
accountability in the extractive sector‟986
it seek to support improved governance in
resource-rich countries through the verification and full publication of company payments
and government revenues from oil, gas and mining. The whole process represents a new
initiative and global effort to stem the resource curse and dutch disease associated with
resource rich countries like Nigeria. The global EITI was only launched in 2002 while the
Nigerian NEITI was launched in 2004. The international EITI board was appointed only in
984 Ibid. 985 Ibid. 986 http://eitransparency.or/eiti/summary
514
2006 for the EITI Secretariat. The entire process is still nascent at the international plane
and in Nigeria, thus we have elected to be circumspect about our evaluation of its
performance thus far and most importantly, about its potentialities in the long run to rid the
Nigerian extractive industries of pervasive inefficiency and corruption characterizing it.
Another fundamental limitation which an appraisal of the NEITI process and Act suffers is
that it addresses stricto sensu, the revenue side of the extractive industry transparency
problematic. The most critical problem is the expenditure pattern of oil revenue, which is
the major thrust of this study‟s thesis. Whether oil resources will hinder or promote growth
and development would depend on the allocative process of oil revenue and the pattern of
its expenditure. The pattern of expenditure of oil receipts is entirely determinable by the full
plenitude of State sovereignty, and by virtue of the direct accrual of oil revenue to the State,
it alone can determine how best to utilize and spend such revenue. It is difficult to cure the
opacity which characterize governance in most resource rich States, what with the restraint
placed on access to vital information by the Official Secret Act in Nigeria.
The foregoing limitation derives from the fact that global EITI itself, evolved from the
efforts of the Publish What You Pay (PWYP) coalition of non-governmental organizations,
like the London-based Global Witness (GW), THE Open Society Institute, Oxfam GB and
Transparency International UK, among others. The PWYP initiative emanated from the
revealing work conducted by Global Witness in Angola, which report titled, „A Crude
Awakening‟ was published in 1999. The report represents an expose on the opaque system
of oil resource governance established by a highly secretive political elite, who lived a
completely untrammeled existence from the society and totally unaccountable. The report
underscored the long term danger which this state of affairs portends. The focus of the
515
report is revenue transparency in contradistinction to expenditure in Angola. The findings
of the full report holds true for Nigeria. Consequently, the NEITI process may
understandably suffer the limitations of its progenitor. The study covers these gaps by
establishing a legal paradigm for the perspective strategic expenditure of Nigeria‟s oil
revenue and a painless transition after the oil epoch to the post-oil epoch when there will be
no more easy oil money.
8.4.1 THE NIGERIA EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE
ACT 2007
The NEITI process emerged in 2003 within the ambience of the all encompassing reform
environment created by the administration of former President Olusegun Obasanjo. The
tempo of reform flagged down in mid 2006 in the twilight of the administration, thereafter,
the zeal which characterized that period has ebbed considerably, this is without prejudice to
some measure of continuity by successive governments of the ruling Peoples‟ Democratic
Party under which platform President Olusegun Obasanjo governed for eight years from
1999 to 2007. The NEITI Bill was signed into law in 2007.
Section 2 of the Act spells out its objective thus:
(a) To ensure due process and transparency in the
payments made by extractive industry
companies to the Federal Government and its
agencies;
(b) To ensure accountability in revenue receipts
of the Federal Government from extractive
industry companies;
516
(c) To eliminate all forms of corrupt practices in
the determination, payments, receipts and
posting of revenue accruing to the Federal
Government from extractive industry
companies.
The foregoing removes the allocative process and expenditure pattern of revenues from the
purview of the Act. Section 4 of the Act provides for the appointment of an independent
auditor for the purpose of auditing the total revenue which accrued to the Federal
Government for each financial year in order to determine the accuracy of payments and
receipts.
Section 5 provides that the governing body of NEITI shall be National Stake Holders
Working Group (NSWG). The NSWG shall be responsible for the formulation of policies,
programmes and strategies for the effective implementation of the objective and discharge
of the functions of the NEITI. The NSWG is constituted by civil society entities, which in
itself is a limitation, given the fact that civil society have been progressively emasculated by
successive dictatorships in the past and the space for dissent is only just undergoing some
modicum of expansion under the ongoing democratic dispensation. There is the need to
bolster the capacity of civil society as a counter-poise to call the State to account.
The tender for the 1999-2004 audits that is central to the purpose for the existence of
NEITI was won by the Hart Group/S.S. Afemikhe and Co., and S.S. Afemikhe Consulting
Ltd. Of Nigeria. Another shortcoming of the NEITI technical procedure is the appointment
of the 15 member NSWG in 2007 by the President.
517
The NEITI audits have been widely commended as setting the benchmark under the EITI
principle, it is considered to have looked deeply into the conduct of government and
industry practices in Nigeria than any country has ever attempted987
The audits entailed three main processes; a Financial Audit which tracks cash flows from
specific actors in the entire value chain pursuant to understanding the role and performance
of each actor and the final recipient, the Nigerian State; the Physical Audit, tracked the oil
and gas industry refined product flows. The operators were required to provide a „mass
balance‟ indicating the volume of all liquids received in their gathering facilities and
flowing to export terminals and off-take points. The Process Audit evaluated the
management processes of major agencies and departments in the five main areas of
business, and the processes employed in upstream licensing, crude oil marketing, refining
and product imports and for budgeting, capital and operating expenditures.
The implementation of the audits „remediation‟ recommendation, that is, measures for
solving identified problems has been largely at abeyance and at best haphazard.
Recommended remediation measures includes, developing a revenue-flow interface among
government agencies; improving Nigeria‟s oil and gas metering infrastructure; developing a
uniform approach to cost determination; building human and physical capacities of critical
government agencies; and improving overall governance of the oil and gas sector.
The foregoing recommendations are most apt in the context of the problems entailed in oil
resource management in Nigeria. The political will and commitment to implement them
however lags behind the panoply of legislation and processes established to address those
987 www.goldwyn.org/April%2024%202006%20press%20release.pdf
518
identified problems. The foregoing perhaps proves that laws and policies aimed at
enhancing efficiency and transparency in Nigeria‟s oil sector may not be the magic wand to
solve the myriad of problems of development in the Nigerian oil-based economy. For laws
and policies to serve as instrumentality for effecting the far reaching and major changes
desired, a cure must be sought for the lag between the orthodoxy of economic paradigms,
economic policy based on these paradigms, the institutional framework of policy
implementation and the law which purpose it is to effectuate economic policies. A rentier
State structure may not be an ideal ambience for the type of change envisaged. Perhaps the
most optimal path in the change process is to first purposively dismantle that structure by
the adoption of a true federal constitution.
Section 16 of the Act provides that the President on the NWSG‟s recommendation, may
suspend or revoke the operational license of any extractive industry company that fails to
perform its obligation under the Act; it provides further that:
If any extractive industry company commits an
offence against this Act, every Director or other
persons concerned in the management of the
company commits the offence and is liable on
conviction to not less than 2 years imprisonment
or a fine not less than =N=5 Million (unless the
person can prove it was exercised without his
consent or connivance and all due diligence was
performed).
519
On its face value, the provision from all intent and purposes provides sufficient legal sinew
to compel compliance, the Act however is bereft of a mechanism for application of these
punitive measures where the company fails to comply. The Act has not invested NEITI with
the power of prosecution, perhaps the EFCC is expected to cover that gap, as an anti-graft
agency.
It would seem that the initial reform zeal which propelled the NEITI has stalled
considerably; this is without prejudice to the fact that the future holds the possibility for the
rekindling of that initial zeal, as a second NEITI report including the 2005 data was
concluded in 2007, and published in 2009. The initiative is not entirely dormant but seems
spent. Perhaps, the expectation of a swift change to a rentier State structure which NEITI
process entails is a bit outlandish. Oil in a petrol-State like Nigeria provides the political
class with ample financial resources to muster untrammeled political power which they can
deploy to break the ranks of civil society and weaken the resolve of the citizenry to hold
them accountable. Again, perhaps it is too early in the process to expect swift changes,
reforms have a reasonable gestation, before they can yield the desired outcomes. These
processes must be complemented by vibrant, articulate civil society which has a high
capacity to organize and mobilize the citizenry and an independent press emboldened by a
freedom of information law.
8.5 THE FISCAL RESPONSIBILITY ACT 2007
The avowed intendment of the Fiscal Responsibility Act, 2007 is to improve
intergovernmental fiscal coordination; promote fiscal macro-economic stability; promote
fiscal prudence and sound financial management; ensure transparency and strengthen
520
accountability, and provide a conducive climate for generating growth and reducing
poverty.
Section1 of the Act provides for the establishment of the Fiscal Responsibility Commission
(the Commission), while Section 2 invest the Commission with the power to compel any
person or government institution to disclose information relating to public revenues and
expenditure; and cause an investigation into whether any person has violated any provisions
of the Act.
Section 3(a) further provides that the Commission shall monitor and enforce the provisions
of the Act and by so doing, promote the economic objectives contained in Section 16 of the
Constitution.
Section 11 of the Act spells out the Medium Term Expenditure Framework thus; the Federal
Government after consultation with the States shall, not later than six months from the
commencement of this Act, cause to be prepared and laid before the National Assembly, for
their consideration a Medium-Term Expenditure Framework for the next three financial
years; and thereafter, not later than four months before commencement of the next financial
year, cause to be prepared a Medium-Term Expenditure Framework for the next three
financial years.
The Act focuses on a rather short term horizon, of three years, which is too short to provide
a framework for a Perspective Strategic Plan for the overall economy, particularly for the
planned and calibrated expenditure of oil revenues. Such perspective economic strategy will
not only entail coordinated expenditure of oil revenues during the life time of oil resources,
521
that is in the oil epoch, but incorporates transitory strategy for a painless transition to the
post-oil epoch.
The Act in view of the foregoing represents a mere manual for the preparation of annual
budgets within a three years budgetary planning horizon. Such budgets, will still remain
statements of income and expenditure without inducing throughput, which only occurs in
the normal course of productive processes of goods and services in the economy.
Furthermore, the Act has not addressed the deficit budgeting which an oil receipt income
side represents. The reality in resource endowed oil States such as Nigeria, is that oil
revenue represents unearned rents, or external receipts from without the national economy,
thus, when public expenditure and investments are indexed and based on such receipts, they
constitute deficit budgeting. The inundation of the income side of the budget by such
receipts distorts the real picture, as they are unearned, they have not accrued from the
productive capacity of the national economy. Where economic expansion is based on such
rents, it results in cyclical macro-economic volatility which characterizes most rentier-
economies like Nigeria.
The foregoing limitations are what the study addresses; first, by means of thorough macro-
economic analysis of the Nigerian economy from the base years preceding the oil boom
epoch of the 70s till date. The macro-economic model is subsequently invoked in the legal
paradigm for the perspective strategic management of the overall Nigerian oil-economy.
The Act is however salutary, to the extent that it serves the supplementary role to stricture
micro-budgetary monitoring of public finances whilst complementing a broader and long
522
term perspective strategy for the overall economy and the enabling law for such perspective
strategy.
A fundamental deficiency of the Act, which negates its intendment is that its imperative
force to bind States federating units and Local Governments pursuant to compelling fiscal
responsibility is weak. This is understandable given the federal constitution of Nigeria.
Section 20 of the Act does not mandatorily compel States and Local Governments to apply
the Medium Term Expenditure Framework, it merely provides that States and Local
Governments may adopt the provisions of part three of Medium Term Expenditure
Framework with such modification as may be appropriate and necessary.
Section 41 provides that government at all tiers shall only borrow for capital expenditure
and human development, provided that, such borrowing shall be on concessional terms with
reasonable long amortization period subject to the approval of the appropriate legislative
body where necessary, and Government shall ensure that the level of public debt as a
proportion of national income is held at a sustainable level as prescribed by the National
Assembly from time to time on the advice of the Minister.
The foregoing provision of the Act again betrays the lack of understanding of the nature of
Nigeria‟s oil-economy. In contrast the study‟s point of departure, is that ipso facto, and ab
initio, Nigeria has been living on borrowed time since the ascendancy of oil in the 70s, and
since it became the highest contributor to federally generated revenue. Oil revenue financed
macro-economic expansion, we must reiterate is deficit budgeting for reasons earlier
adumbrated. Borrowing is usually done to cover gaps in public finances as a result of
cyclical boom/bust characteristic of an oil-based economy. Such borrowings are however
523
done against future oil earnings and at compound interest rates. The ruinous impact of such
debt on macro-economic stability informs while the study prescribes as one of several
planning constraints, an indefinite moratorium on borrowing. Borrowing more than any
other thing, underscores profligacy and lack of coordination in public expenditure pattern in
Nigeria. Its prescription as a finance option by the Act negate its core and fundamental
intendment of compelling fiscal responsibility and macro-economic stability.
Section 48 of the Act provides that the Federal Government shall ensure that its fiscal and
financial affairs are conducted in a transparent manner and accordingly ensure full and
timely disclosure and wide publication of all transactions and decisions involving public
revenues and expenditures and their implications for its finances.
This provision of the Act may not be able to cure the opacity which characterizes public
finances and affairs in Nigeria where the Official Secret Act is still in force, and there is no
Freedom of Information Law, coupled with the voicelessness of a civil society that has been
deliberately and progressively weakened vis-à-vis a political elite which has access to
stupendous financial resources and can deploy such financial resources to induce its desired
political outcomes.
The foregoing submission is however without prejudice to the provision of section 49 of the
Act which provides for the publication of the audited accounts of the Federal Government
not later than six months following the end of the financial year, and the provision of
section 51 which provides for the enforcement of the provision of the Act by any person
which shall have legal capacity by obtaining prerogative orders or other remedies at the
Federal High Court, without having to show any special particular interest.
524
This provision is arguably the most significant rule in the Act, it puts paid to the mistiness
regarding the justiciability of part II rights of the Constitution of the Federal Republic of
Nigeria 1999, consequently, by virtue of this provision a breach of socio-economic rights
guaranteed by section 16 of the Constitution is actionable at the suit of any Nigerian citizen
without prove of standing. Nevertheless, the latitude provided by the provision for bringing
the State to account may be underutilized, where civil society in Nigeria continue to lack
capacity and unable to organize properly; inarticulate and unable to mobilize and galvanize
the people to provide a counter-poise against misrule and generally compel accountability
of those who hold in temporary trusts, the wealth of the nation.
8.6 PUBLIC PROCUREMENT ACT 2007
The study dwelt considerably on the impact of corruption on allocation and quantum of
public expenditure; corruption and public expenditure in chapter four. It reveals the
untoward cost of corruption in public expenditure. The study is mindful of the fact that an
intertemporal strategic perspective plan for the overall Nigerian economy which it
establishes, will be negated by unchecked sippage of public financial resources through
procurement abuses. Consequently, a review of the Public Procurement Act, 2007 suffices.
The Budget Monitoring and Price Intelligent Unit was set up in 2001 by the administration
of Chief Olusegun Obasanjo as part of the Administrations multi-pronged reform efforts.
The unit estimated it saved Nigeria =N=260 billion during its first year of operation. The
Public Procurement Act 2007 was enacted to provide legal enablement to this reform. The
Act amongst things; creates a legal framework and set up institutional apparatus for
instilling transparency, accountability, and equitable access to public sector procurement;
harmonize extant procurement policies and practices; establish the 12-member National
525
Council on Public Procurement, with the Minister of Finance as chairman; create the
Bureau of Public Procurement (BPP) as an independent regulator of public procurement.
The Bureau is the administrative organ of the public procurement mechanism and the
secretariat of the Council. It implements policies, regulates and audits procurement
processes, and investigates abuses. It is envisaged to be an autonomous regulatory agency
which reports to the National Assembly through the Presidency.
Section 1(1) of the Act provides for the establishment of the National Council on Public
Procurement and its membership. The functions of the Council spelt out in section 2 of the
Act includes, to consider, approve and amend the monetary and prior review thresholds for
the application of the provisions of the Act by procuring entities; consider and approve
policies on public procurement; approve the appointment of the Directors of the Bureau;
approve changes in the procurement process to adapt to improvements in modern
technology and so forth.
The major flaw of the foregoing provisions is the overwhelming dominance of members of
the executive arm in the Council, thus placing its control in the hands of political forces.
This may impair its capacity to carry out its oversight functions. The Council should in
addition include the Senate President as its Chairman; the Speaker of the House of
Representatives; Chairman Senate Committee on Appropriation and Chairman House of
Representatives Committee on Appropriation.
Section 3(1) provides for the establishment of the Bureau of Public Procurement
(hereinafter, the Bureau). The Bureau‟s objectives spelt out in section 4 of the Act are; the
harmonization of existing government policies and practices on public procurement and
526
ensuring probity, accountability and transparency in the procurement process; the
establishment of pricing standards and benchmarks; ensuring the application of fair,
competitive, transparent value-for-money standards and practices for the procurement and
disposal of public assets and services; and the attainment of transparency, competiveness,
cost effectiveness and professionalism in the public sector procurement system.
Section 6(1) invests the Bureau with the powers to enforce the monetary and prior
thresholds set by the Council for the application of the provisions of the Act by the
procuring entities; issue certificate of „No Objection‟ for the contract awarded within the
prior review threshold for all procurements within the purview of the Act; and from time to
time stipulate to all procuring entities the procedures and documentation prerequisite for the
issuance of Certificate of „No Objection‟ under the Act.
Section 15(1) provides for the Act‟s scope of application, it is applicable to the Federal
Government of Nigeria and all procurement entities; all non Federal entities deriving at
least 35 per cent of the funds appropriated or proposed to be appropriated for any type of
procurement described in the Act from the Federation share of Consolidated Revenue Fund.
This provision of the Act is not applicable to work and services involving national defense
or national security, unless the President‟s express approval has been first sought and
obtained.
The exclusion of defense and security procurements is a major limitation of the Act, for
defense and security expenditure represents the most exploited conduit for despoliation of
public funds, as it is used to justify huge disbursements. Aside from the foregoing, financial
resources deployment in defense and security are most difficult to track.
527
Sections 17-19 stipulates among other things, approving authority, modalities for
procurement planning and procurement implementation.
Section 24(1) of the Act provides that procurement of goods and services shall be based on
open competitive bidding. Section 33 (1) provides that the successful bid shall be that
submitted by the lowest cost bidder from the bidders responsive as to the bid solicitation.
Section 34 (1) provides that a procuring entity may grant a margin of preference in the
evaluation of tenders, when comparing tenders from domestic bidders with those from
foreign bidders or when comparing tenders from domestic suppliers offering goods
manufactured locally with those offering goods manufactured abroad.
Section 35(1) pegs mobilization fees at a level not more than 15% of contract value
accompanied with an unconditional bank guarantee or insurance bond issued by an
institution acceptable to the procuring entity.
Section 36 provides that the provision of a Performance Guarantee shall be a precondition
for the award of any procurement contract upon which any mobilization fee is to be paid,
provided however it shall not be less than 10% of the contract value in any case or an
amount equivalent to the mobilization fee requested by the supplier or contractor which
ever is higher.
Section 37 provides that payment for the procurement of goods, works, and services shall be
settled promptly and diligently, any payment due for more than sixty days from the date of
the submission of the invoice, valuation certificate or confirmation or authentication by the
528
Ministry, Extra-Ministerial Office; government agency; parastatal or corporation shall be
deemed a delayed payment and shall attract interest at the rate specified in the contract
document.
Section 38 provides that every procuring entity shall maintain a record of the
comprehensive procurement proceedings.
Section 53 provides that the Bureau may review and recommend for investigation by any
relevant authority any matter related to the conduct of procurement proceedings by
procuring entity, or the conclusion or operation of a procurement contract if it considers that
a criminal investigation is necessary or desirable to prevent or detect a contravention of the
Act.
Section 54 provides that a bidder may seek administrative review for any omission or
breach by a procuring or disposing entity under the provisions of the Act or any regulations
or guidelines made under the Act or the provisions of bidding documents. Section 55
provides that open competitive bidding shall be the modality for the disposal of public
property.
Section 58 provides that any natural person not being a public officer who contravenes any
provision of the Act commits an offence and is liable on conviction to a term of
imprisonment not less than 5 calendar years but not exceeding 10 calendar years without an
option of fine.
529
Similarly, any person who while carrying out his duties as an officer of the Bureau, or any
procuring entity who contravenes any provision of this Act commits an offence and is liable
on conviction to a cumulative punishment of a term of imprisonment of not less than 5
calendar years without any option of fine and summary dismissal from government
services; while any legal person that contravenes any provision of this Act commits an
offence and is liable on conviction to a cumulative penalty of a debarment from all public
procurements for a period not less than 5 calendar years; and a fine equivalent to 25% of the
value of the procurement in issue. This provision has not envisaged the possibility of hiding
behind the corporate veil to perpetrate fraud and abuse procurement process. Legal entities
are not abstract entities, ownership of such entities should be established with a view to
extending the punishment to operate against their persons.
CRITIQUE
The philosophy and national objectives which animates the Act cannot be faulted. For one,
an intertemporal strategic economic plan for the overall economy such as established in this
study may not attain the set goal of deploying oil revenues to accumulate non-oil stock of
capital assets upon which a solid economic base could be built in the post-oil epoch when
the entire stock of oil wealth would have been exhausted and there is no more easy income
from oil. Consequently, the Act is salutary to the long term objectives of coordinated and
planned expenditure of oil revenues, diversification of the overall economy away from oil
dependence to tradable non-oil real sectors; careful and calibrated development of economic
infrastructure and provision of social goods and services and above other consideration, the
attainment of a painless transition to a non-oil economy at full depletion of oil in the post-
oil epoch.
530
The Act holds the potential for checking the sippages through abuse of procurement
processes of vital public financial resources which could have been utilized for the
provisions of public capital assets, goods and services.
It is however too early in the existence of the Act to expect it to cure all the identified ills of
public expenditure in Nigeria. For one, the reformist zeal of the Obasanjo era which created
the favourable ambience in which most of the ongoing reforms were initiated has ebbed
considerably. A high degree of reformist visioning such as exhibited by Chief Obasanjo is
required, considering the fact that economic and political power elites with vested interests
in the status quo are often charged with the implementation of reforms. The reforms which
the Act is effectuating are radical and will require buy-ins from the highest echelons at this
embryonic stage.
There is a need for capacity building of the Bureau; the acquisition of new skills and
innovative processes in data management, price intelligence and the procuring industries
should be developed. There should be unrestrained access to information, to restrict access
to information to „unclassified‟ information negates the core intendment of the Act. The
term is too vague. All information pertaining to the public domain must be made accessible.
Another setback which the Act may suffer is the rather slow pace of its adoption at the State
and Local Government level. This is a major setback considering the pervasive corruption
which characterize public expenditure at those tiers of government. The entire national
objective which the Act is set to achieve may negated if the Act is not replicated by all the
States and Local Governments of the Federation.
531
8.7 THE NIGERIAN OIL AND GAS INDUSTRY CONTENT ACT 2010
The intendment of the Nigerian Oil and Gas Industry Act is to increase indigenous
participation in the Nigerian Oil and Gas sector. The Act is envisaged to induce the much
desired nexus between the enclave Nigerian oil sector and the non-oil sector.
The fundamental objectives which inform the enactment of the Act are however not without
precedent. Regulation 26 of the Petroleum (Drilling and Production) Regulations made
pursuant to section 9 of the Petroleum Act988
is a precursor to the Nigerian Content Policy,
as it prescribes that a licensee of an oil prospecting license and a lessee of an oil mining
lease must submit an employment plan for Nigerian employees within twelve months of the
grant of a license or the grant of a lease, respectively. The foregoing objectives have been
incorporated in the various contractual forms between the Nigerian National Petroleum
Corporation, and Trans-national Oil Companies. The objectives are also embedded in the
National Content Directives. The major purpose of the Nigerian Content Directives (NCD),
issued by the Nigerian National Petroleum Corporation is to ensure the implementation of
the Nigerian Content Policy.
The purpose of the Nigerian Content Directives was the attainment of linkages between the
oil sector and the non-oil sector of the Nigerian economy through increased utilization of
Nigerian goods and services in the oil sector.
The National Content Directives however lacked the imperative force of a law it
nevertheless signify a desideratum to increase local content value in the provision of
material, services and equipment to the oil and gas industry to 70 per cent by 2010.
988 Cap p10 LFN 2004.
532
All contractors to the NNPC Joint Venture Operations were required to comply with the
directives. It is hoped that the Act would surmount the limitations of the National Content
Directive in enforcement of content requirements. Hitherto, compliance level with the
requirement set forth in the directives was generally low.
The stated objectives of the Act in its preamble include:
….to provide for the development of Nigeria
Content in the Nigerian Oil and Gas Industry; for
Nigerian Content Plan; for supervision;
coordination, monitoring and implementation of
Nigerian content and for matters incidental
thereto.
The Act is however silent on its applicability to pre-existing contracts. It is hoped that the
Nigerian Content Monitoring Board which has the responsibility for providing guidelines
for the implementation of the provisions of the Act will address this lacuna.
The Act defines Nigerian Content in its section 41 as:
The quantum the quantum of composite value
added to or created created in the Nigerian
economy by a systematic development of capacity
and capabilities through the deliberate utilization
of Nigerian human, material resources and
services in the Nigerian oil and gas industry.
533
It is envisaged that the Act will have a binding effect on all operations and transactions in
the oil industry and to sensitize all actors and regulatory agencies in the oil sector of the
imperativeness of utilization of Nigerian content as input in their production process.
Section 3(1) of the Act stipulates that first consideration be accorded Nigerian Independent
Operators, subject to the meeting of certain conditions as may be specified by the Minister.
While the Act defines „Nigerian companies as companies registered under the Companies
and Allied Matters Act (CAMA) and with at least 51 per cent equity holding by Nigerians
in section 109. It does not define the term „first consideration‟ nor specify criteria for
according „first consideration‟ it would seem that the Board is required to set out such
criteria.
Section 14 of the Act stipulates the consideration of Nigerian content during the evaluation
of a bid. It provides that where bids are within 1 per cent of each other, the bid with the
highest level of Nigerian content should be selected provided it is at least 5 per cent higher
than its closest competitor in terms of its Nigerian content provisions.
By virtue of section 16 of the Act, the award of contracts shall not be based solely on the
principle of the lowest bid. The Act stipulates that an indigenous company which has the
capacity to execute a project shall not be disqualified in the bidding process provided its
quoted value is not 10 per cent higher than the lowest bid. The Act further provides that the
operator shall also forward for the approval of the Board all proposed projects, contracts
and subcontracts and purchase orders which value is in excess of US$1,000,000.00.
534
Section 34 provides for the incorporation of labour clause, compelling the minimum
percentage of Nigerian labour in all projects or contracts with a total budget exceeding $100
million. The Act makes it mandatory for all operators, project promoters and contractors
engaged in the Nigerian oil and gas industry to carry out all fabrications and welding
activities in Nigeria pursuant to building indigenous technology capacity.
Operators are also required to incorporate an „Employment and Training Plan‟ (E&T Plan)
in their Nigerian Content Plan. The E & T Plan must provide an outline of the hiring and
training needs of the operator/project promoter and major contractors, with a breakdown of
skills required and anticipated shortage in the Nigerian labour force; and a time frame for
employment opportunities for each phase of project development and operations to enable
members of the Nigerian workforce prepare for such opportunities.
The Act requires operators/project promoters to report to the Board on their E & T
activities on a quarterly basis to enforce compliance with the provision. Section 38 provides
for the mandatory submission of Research and Development Plan (R & D Plan) to the
Board by the operator. The R & D Plan must include among other things; outline of a
revolving three (3) to five (5) year plan for oil and gas related research and development
initiatives to be undertaken in Nigeria, together with a breakdown of the expected
expenditures that will be made in implementing the R & D Plan; and provide for public
calls for proposals for research and development initiatives associated with the operators
activities.
Section 46 of the Act requires operators to submit annual reports to the Board detailing their
technology transfer initiatives and results. In the same vein section 43 provides that the
535
operator encourage and facilitate the formation of Joint Ventures and the execution of
licensing agreements between Nigerians and foreign contractors and service or supplier
companies.
Sections 50-52 provides for the domestic provisions of insurance, legal and banking
services except where it is impracticable to do so. The Act permits the operators to explore
offshore insurance with the written approval of the National Insurance Commission where
there is evidence of exhaustion of local capacity. The act is however silent as to the criteria
for determining the impracticability of each situation. It would seem that the Nigeria
Content Development and Monitoring Board (the Board) is required under the Act to set out
such requirements.
Section 107 of the Act provides for the mandatory contribution of one per cent of contract
value of the operations of all operators in the upstream segment to the Nigerian Content
Development Fund (the Fund) established under the Act.
CRITIQUE
The Act no doubt has the potentials for inducing the desired forward and backward linkages
between the Nigerian oil sector and the non-oil sectors of the Nigerian economy provided
that the required measure of buy-ins of all stake holders in secured and the Nigerian State
and people are willing to muster the political will and purposiveness to enforce and compel
compliance with the rules in the Act.
The enactment of the Act has however elicited misgivings about the Act. There is a wide
spread concern with the difficult and impossible threshold provided in section 11 (1) for
536
Nigerian content in Schedule A of the Act, it is impossible at the present level of technical
capacity of indigenous companies to fill. Similarly, the allowance of a mere five per cent
management positions to expatriates to protect offshore investors interests will constitute
Foreign Direct Investment disincentive, for Transnational Oil Companies.
A counterpoise to the foregoing, which represents the view point of the foreign investment
community is the view adumbrated by indigenous concerns that the lack of local capacity
resulted from the continuous and prolonged under-utilization of local expertise in the past.
Another factor which may inhibit the attainment of the capability threshold for indigenous
actors in the industry, is their incapacity to mobilize the magnitude of financial outlays
which investment in oil explorations entails. Financial institutions in Nigeria are not
inclined to financing long term investment, consequently, there is a need to complement
theses requirements with deliberate and benign State intervention to guarantee long term
loans to indigenous upstream operations at reasonable interest rates.
It is expected that the Act will address the lack of linkages between the oil sector and the
non-oil sectors of the Nigerian economy and create about 300,000 jobs over the period of
the next five years, these however represent aspirations and goals which though attainable
may nevertheless be elusive without the national purposiveness of the Nigerian State,
people and all actors in the overall economy. The Act must be complemented with strong
regulatory capacity building to ensure substantial compliance.
In the context of this study, the Act provides a much desired legal instrumentality for
effectuating the strategic integration of the Nigerian oil industry which the study prescribes
537
and which is in tandem with the larger perspective strategy for the overall Nigerian oil-
economy and the post-oil economy set forth in the legal charter being proposed by the
study.
8.8 OVERVIEW OF ONGOING ISSUES IN THE NIGERIAN OIL INDUSTRY
An appraisal of the Nigerian National Petroleum Corporation (NNPC) would amount to a
truncated and futile effort when it fails to dwell considerably on certain unfolding
developments of contentious proportions in the Nigerian petroleum industry. In view of the
foregoing consideration, unfolding developments in both the upstream and downstream
segments of the Nigerian oil industry are dwelt upon as an exercise to bridge the gap
between theoretical concerns which in themselves, are abstractions of aspects of realities.989
Development regarding the management of joint ventures has more than any other
consideration betrayed the institutional failings of the Nigerian oil industry. With the
Federal Ministry of Finance and the Federal Ministry of Petroleum Resources joining issues
as to which of the two bodies has the prerogative of administering joint venture cash calls,
coupled with over a decade of inefficiency in the husbandry of resources and
institutionalization of corruption in the upper echelons of State; and the NNPC‟s lack of
strategic reserve of funds with which to meet cash call obligations in all the joint ventures,
collectively led to the failure of the joint operation agreement as a legal framework in the
Nigerian oil industry, and may disparage the strategic goals set for the millenium.990
989 A.A. Ikein, The Impact of Oil on a Developing Country: The Case of Nigeria, New York, Praeger,
passim (2010). 990 A. Boateng and K.W. Glaister, „Performance of International Joint Ventures: Evidence From West
Africa,‟ 11 International Business Review 523-541 (2002).
538
An offshoot of the foregoing development in the upstream of the Nigerian oil industry is the
view of divestment of upstream activities. The controversy in that respect centres on
whether the State should sell its equity and adopt the legal framework of the production
sharing contract or outright wholesale divestment. Whilst divestment in itself may not be
the panacea which will solve all the problems bedeviling the Nigerian National Petroleum
Corporation, for its protagonists its attraction perhaps lies in the institutional failings of the
NNPC. It is the view in certain quarters that, the inanities of the oil industry are the logical
outcome of the overwhelming involvement of the State in the oil sector and that the first
step towards efficiency and optimization is to curtail State control.991
As a corollary to the foregoing, the State evinced its preference for the production sharing
contract which certain industry operatives consider a far more organic instrument from the
host country‟s point of view as contradistinguished from the joint venture, under which
Nigeria was making huge financial contributions in cash calls without a commensurate say
in how these were invested. A total of $2.05 billion earmarked as joint venture cash calls
in 1995, the same as in 1994. The strongly held view of people, who fall within this side of
the divide in the discourse on whether Nigeria should divest its upstream operations, is that
the nation should give up its stake.78
On the other side of the divide are those who hold
strongly to the view that divestment will amount to mortgaging the future of Nigeria and
putting her destiny in the hands of foreigners. There is a third alternative based on the
assumption that the present parlous state of the NNPC and the resultant crisis in the oil
industry is the worst possible scenario imaginable, which steers a middle course out of the
conundrum, that the call for divestment has merit in the light of the failure of the joint
venture dispensation to secure those socio-economic objectives which informed its
991 C. Obi, „Nigeria‟s Oil in Global Energy Security: Critical Issues and Challenges, in R.Beri and U.
K. Sinha (eds.), Africa and Energy Security: Global Issues, Local Responses 123 (2009).
539
adoption. This school of thought however entered a caveat that there should be a phased
divestment whilst complementary measures should be taken to ensure that the divested
equity devolves on bonafide Nigerian citizens, whilst precluding foreigners from acquiring
these shares.992
In itself the underlying principles of the production sharing contract is found in the
consideration that the ownership and control of national resources inheres in the State, the
status of the transnational oil company under the dispensation is strictly that of a risk taking
contractor, entitled to recoup its costs in the event of commercial production, and a
proportion of production as remuneration. The host country retains full control and is
responsible for the micro management of operations. Contradistinguished from the
foregoing, the joint venture implies an alliance of resources by equals whose assets and
liabilities in the venture is proportionate to their equity holding; the transnational oil
company is in charge of micro management of operation.993
The main foible of the Nigerian joint venture which protagonist of divestment emphasize is
the lack of say in crucial investment decisions and the fact that micro management remains
in the hands of the TNOC. That is without prejudice to the fact that the joint venture
embodies a provision for a joint management committee, chaired by Nigeria, it may well be
that there is nothing fundamentally legally wrong with the joint venture, the dispensation
has failed because of the disparity in the technical input and capability of the parties.
Except that disparity is redressed and a conscious and affirmative measure is taken by
Nigeria to cover the technical gap existing between the NNPC and the transnational oil
companies, the adoption of the production sharing contract over and above the joint venture
992 Ibid. 993 See Deep Offshore and Inland Basin Production Sharing Contracts Act 1999, Cap 10 Laws of the
Federation of Nigeria, 2004.
540
will be mere symbolism and bound to fail to secure those objectives which informed its
adoption. The downstream segment of the Nigerian oil industry is characterized by
perennial petroleum product scarcity throughout the country. The crisis, beginning in
January 1997, was unprecedented. The blame for that scarcity of petroleum product has
been placed understandably at the door steps of the Nigerian National petroleum
Corporation and by implication the Military government whose management of the crisis
betrayed insensitivity, the crisis paralyzed the national economy and disparaged
productivity. The crisis has become recurrent, as the nation is only barely emerging from
yet another product scarcity which began at the end of 2009 and persists into the first
quarter of the year 2010.994
There is also the argument in certain quarters which consider divestment as alienating the
national patrimony and retrogressive and that it amounts to mortgaging Nigeria‟s future and
putting her destiny in the hands of foreigners, rather than divest, this group prescribe
improvement and enhancement of the monitoring and supervision of the activities of the oil
sector.995
The two positions represent two extremes, which necessitates the exploration of a middle
course. A necessary consideration in that regard is that divestment should be
complemented, by a total overhaul of the oil industry, by making it mandatory for
producing companies to be quoted on the Nigerian Stock Exchange whilst causing a
statutorily ascertained proportion of Nigeria‟s equity in all the joint ventures with
994 S. Akpoghomeh and D. Badejo, „Petroleum Product Scarcity: A Review of the Supply and
Distribution of Petroleum Products in Nigeria,‟ 30 OPEC Review 27-40 (2006). 995 S. Onwuka, „Nigeria: NNPC TO Divest Interests in Joint Ventures,‟ Daily Champion Newspaper,
20 January, 2010. Available at. http://allafrica.com/stories/201001200736.html; Mismanagement:
Audit Report Indicts Presidency, National Assembly, CBN, NNPC and so forth. Available at.
http://www.elombah.com/index.php?option=com_content&view=articles&id=2668:mismanagement-
audit-report-indicts-presidency-nation
541
multinationals to devolve on Nigerian citizens who are willing and able to buy into these
operations. The exercise should be carried out in tranche considering the large outlays
involved, with State holding reduced progressively to between 20 – 30 per cent in the next
six years.996
The latter submission as an apologia for sustaining the status-quo floundered in the light of
the government‟s appointment of two independent pre-shipment inspection agents in 1996
over and above the statutory department of petroleum resources which role is to monitor
shipments. Global Inspection Services (GIS) was appointed as a result of an inquiry into
the activities of the Nigerian National Petroleum Corporation, which found a loss of $1
billion yearly in oil receipts, equivalent to an average loss of 150,000 b/d of oil. GIS
supervised operations at four of Nigeria‟s export terminals – The Brass terminal of Agip,
Forcados (Shell), Penington (Texaco) and Escravos (Chevron) while Robinson International
was responsible for scrutinizing exports through Bonny (Shell), Qua Iboe (Mobil), Antan
(Ashland) and Odudu (Elf). The foregoing represent a negation by no other an entity than
the State itself, of the position that is being currently promoted in certain quarters that the
status quo be sustained whilst the NNPC enhanced its supervision and monitoring of
activities. The inability of the Department of Petroleum Resources (DPR) to fulfill its
statutory role of superintending over the oil industry must not be viewed as an isolated
issue, but should be viewed against the backdrop of the institutional foibles of the NNPC
and by implication the State, in the direction of affairs in the Nigerian oil industry.997
996 E. E. Okafor,‟Rethinking African Development: A Critical Overview of Recent Developments in
the Petroleum Sub-Sector in Nigeria,‟ 15 J. Soc. Sci. 83-93 (2007). 997 G. Omoh and H. Igbikiowubo, „Nigeria: $6.2 Billion Oil Investments at Risk,‟ Vanguard
Newspaper 24 November, 2008. Available at. http://allafrica.com/stories/200811240002.html; the new
measure to monitor oil exports came into effect on the first of November, 2008 and was communicated
by the Federal Government to all banks, Nigeria Customs Service, Nigerian National Petroleum
Corporation, Department of Petroleum Resources, all oil companies, and the public. The notice
confirmed the appointment of Messrs Cobalt International Services Limited for the Pre-shipment
Inspection of oil export in Nigeria with effect from November, 2008.
542
The country presently has four refineries at different stages of their useful life, ranging from
about twenty to forty-two years. These refineries require regular maintenance to ensure full
capacity utilization. The plants in addition require mandatory bi-annual turn around to
comply with minimum standards of safety and technical integrity. Whilst authorities of the
Ministry of Petroleum Resources blame the system collapse of the four refineries on poor
funding which armstrung the NNPC from carrying out mandatory overhaul of the Kaduna
Refinery since 1992, Warri Refinery since 1994 leaving all the plants run down and
decrepit, operating in sporadic fits and sub-optimal capacity utilization with far reaching
implication for domestic product availability.998
Whilst the average national demand for gasoline is between 18 million litres per day and 22
million litres per day, the combined output of all the refineries based on the current level of
domestic crude oil allocation of 250,000 barrels per day is about 13 million litres per day
granted that all the refineries are in operation, since the refineries are operating below
installed capacity, the current output of gasoline is below 13 million litres per day.999
The authorities of the Ministry of Petroleum claimed to have made a case for funds to be
released for necessary maintenance of refineries and pipeline network for distribution of
crude oil and product through out the country which embodied an estimated maintenance
cost of $843 million and N13 billion for rehabilitation over an 18 months period whilst the
Federal Government approved $200 million for refineries rehabilitation and $3 million for
pipelines and depot maintenance in the 1997 budget; aside from these sums falling far too
short of the original estimated cost submitted by the NNPC, it alleged that to date releases
998 O.A. Jesuleye, W. O. Siyanbola, S. A. Sanni and M.O. Ilori, „Energy Demand Analysis of Port-
Harcourt Refinery, Nigeria and its Policy Implications,‟ 35 Energy Policy 1338-1345 (2007). 999 Ibid.
543
have not been effected by the Federal Ministry of Finance as duly and properly directed.
Whilst the Federal Ministry of Finance claimed to have effected the release of $2.055
billion plus N123.3 billion to NNPC.1000
The foregoing claims and counter claims by the two agencies of State betrays only one
thing, a total collapse of the system and thus further reinforcing the need identified by those
who positioned that a curtailment of the overwhelming involvement, which does not
correspond to effective control of the oil industry by the State, will be the first step in the
right direction towards the resolution of the conundrum characterizing the downstream
segment of the industry. The privatization of the refineries is an alternative, which is
gaining currency in the most unlikely quarters of State bureaucracy and the public.1001
Most of the cases being made for commercialization, privatization, government control,
autonomy of NNPC‟s management, funding of NNPC and future roles of the transnational
oil companies can not be considered in isolation, each alternative in itself has legal; fiscal;
social and political ramification which can not be understated. Thus, whilst fostering
greater indigenous and foreign private sector involvement in the oil industry, the NNPC
must be strengthened for it to be able to play its regulatory role and compete alongside
private investors as a going concern. That granted, there is a need for major structural
changes to the NNPC as presently constituted which will address conclusively, problems of
low exploitation activity; product scarcity in the downstream segment; under capacity
utilization of refineries; autonomy for the NNPC management; adequate funding and
accountability. The finer details of all these shall be addressed in statutory provisions.
Above every other consideration, the situation whereby Nigeria has not articulated an
1000 Ibid. 1001 Ibid.
544
integrated policy should be reversed by the articulation of proactive energy policy, which
will guide successive administrations and industry operators and afford a set of targets and
criteria.1002
8.9 THE CONSTITUENT INSTRUMENT OF THE NNPC
The role ascribed to the NNPC as a tool for mobilizing State policy at both the municipal
and international plane coupled with the responsibility for negotiation of contracts and
partnership with investors in joint-venture development makes gaining an insight into its
constituent instrument an imperative. The NNPC Act was promulgated in 1977, it amongst
other things stipulates the following:
i. The responsibilities of the NNPC, it defines
purpose for its existence.
ii. Financial provisions; budget and operating fund.
iii. Control and accountability.
iv. Ministerial control.
An insight into the NNPC form, structure, accountability and control reveals its strength and
or weakness vis-à-vis the TNOCs whose operations cut across international borders and are
capable of mobilizing resources globally and operating efficiently. The pertinent question
then is how equipped statutorily is the NNPC in ensuring that expectation of the State is not
wilfully disparaged and short-changed in its relationship with the TNOCs. Perhaps the
appropriate procedure for determining the strength and or weakness of the NNPC vis-à-vis
the TNOCs is to dwell at length on its form, structure, accountability, and control.1003
1002 Ibid. 1003 NNPC Act No. 33 of 1977, Cap.320, LFN, 1990.
545
A caveat must be entered in that regard. The NNPC has been going through a continuous
process of metamorphosis since it was brought into being by the promulgation of the
constituent instrument Decree No. 33 of 1977. In 1980 the senate passed NNPC Bill into
law, the Bill sought to make provision for the reorganization of the corporation and the
Department of the Petroleum Inspectorate. Under the dispensation, the board of directors
of NNPC will be responsible for the appointment of managing director. A Minister of
cabinet rank shall be the chairman of the board responsible for the execution of the policies
of the corporation.
The NNPC is charged with the responsibilities stipulated in section 4 of the NNPC Act
1977. The responsibilities include the following:
Exploring, prospecting for, working, mining and
disposing of petroleum and its derivatives, refining of
petroleum, purchasing and marketing petroleum.
Providing and operating petroleum and petroleum
products and natural gas pipelines systems, tankers-
ships, storage depots other facilities for carriage, storage
of crude oil, natural gas and their derivatives.
It shall be the commercial objectives of the enterprise to
amongst other things; maximize the nations overall
benefits from upstream petroleum operations through
cost effective supervision of federation accounts
interests in all joint-venture hydrocarbon exploration
and production operations and maximizing on a long
546
term basis, revenues from disposal of equity crude,
natural gas, and natural gas liquids.
Ensure timely and adequate supply of petroleum
products throughout the country safely at a minimum
cost.
Purchase equity interests in strategically located
refineries and marketing outlets abroad with a view to
locking in sizeable and reliable market for Nigerian
crude oil and thereby adding to its value.1004
The crucial issue deriving from the foregoing is the problem engendered by the
juxtaposition of national purpose and the corporate purpose, where these cross purposes are
complementary, it is salutary, but where they are contradictory, they become a great source
of confusion. By virtue of the enabling Act, the NNPC‟s activities and decisions are
executed with that larger State purpose in focus, whilst as a quasi corporate concern it
envisages running according to rational models of management; its constituent instrument,
whilst making it a mega-corporation, ironically also constitutes an albatross to its achieving
that corporate purpose which informed its creation as an agent of the State. The inherent
contradiction is best fathomed by making an important distinction, considering that national
purpose could be subjectively derived by political forces that determine what criteria to be
used in the identification and adoption of a national purpose. When such asymmetrically
derived purpose is given full rein at the national level it eclipses the rational corporate
1004 Ibid.
547
purpose and ultimately defeats the broad policy objectives underlying the establishment of
the Corporation.1005
Success or otherwise of the NNPC in realizing those broad corporate objectives set out for it
by statute must be hinged on its internal organization, considering that its structure
prescribes the exercise and division of power and authority and gives its form for its day-to-
day operations.
The affairs of the corporation, subject to part II of this
Decree shall be conducted by a Board of Directors of the
Corporation which shall consist of a Chairman and the
following other members, that is:-
(a) The Permanent Secretary, Federal
Ministry of Finance;
(b) The Permanent Secretary, Federal
Ministry of Economic Development;
(c) The Managing Director of the
Corporation; and
(d) Three persons to be appointed by the
Federal Executive Council, being persons who by reason
of their ability, experience or specialized knowledge of
the oil industry or of business or professional
attainments are capable of making useful contributions
to the work of the corporation.
1005 Ibid.
548
The Chairman shall be a Commissioner in the
government of the Federation who shall be known and
styled as the Federal Commissioner for Petroleum.
The supplementary provisions set out in schedule 1 to
this decree shall have effect with respect to the tenure of
office of the members of the Board (other than the
Chairman). Proceedings of the Board, certain duty of
the members thereof and other matters mentioned
therein.
There shall be appointed by the Federal Executive
Council a
Managing Director of the Corporation who shall be the
Chief Executive Officer of the Corporation and shall
subject to part II of this Act, be responsible for the
execution of the policy of the corporation and the day-
to-day running of the corporation‟s activities and its
associated services.1006
The NNPC‟s structure assumes a hierarchical form, which places a Minister at the
apex as the Chairman of the board. It is attached to the Ministry of Petroleum Resources,
with overall supervision and direction exercised by a Council of Ministers. The council
establishes oil policy. The Minister for Petroleum Resources may make proposals to it
while the board is responsible for management and administration. Its action is subject to
approval by the council. This structure implies a rigid control by political forces. The
1006 Ibid.
549
Board is not autonomous and independent. It undertakes its duties within the ambit of
broadly defined governmental and sectoral policy. The constituent instrument is not clear in
establishing the dividing line between the corporation and the state policy-making
prerogative. That ambiguity in the definition of power of the Board, vis-à-vis the State
results in the emasculation of the board; because the dividing line between the board and the
Minister is blurred, that constitutes a veritable source of conflicts. The constituent
instrument does not give the board a clear mandate hence no definition of its role in view of
the failure of the State to delegate authority.1007
BUDGET AND OPERATING FUND
The financial provisions of the constituent instrument in sections 6 – 7 of the NNPC Act
1977 among other thing provides:
The corporation shall keep proper accounts and proper
records in relation thereto in a form, which shall
conform to the best commercial standards.
1. The corporation shall soon as may be
after the end of the financial year to which the
accounts relate cause its accounts to be audited
by auditors appointed by the corporation with the
approval of the Federal Executive Council.
2. The auditors shall on the completion of
the audit of the accounts of the corporation for
each financial year prepare and submit reports
setting:
1007 Ibid.
550
(a) General observations and
recommendations of the auditors on the financial
affairs of the corporation for the year and on any
important matters which the auditors desire to
bring to the notice of the corporation; and
(b) Detailed observations and
recommendations of the auditors on all aspects
of the operation of the corporation for that year.
3. The Corporation shall maintain a fund
which shall consist:
(a) such moneys as may from time to
time be provided by the Federal Government for
the purposes of this Decree by way of grants or
loans or otherwise however; and
(b) Such moneys as may be received
by the corporation in the course of its operations or in
relation to the exercise by the corporation of any of its
functions under this Decree, and from such fund there
shall be defrayed all expenses incurred by the
corporation.
4. The corporation shall submit to the
Federal Executive Council not later than three months
before the end of each financial year estimates of its
expenditure and income relating to the next following
financial year.
551
6 (i) Subject to the other provisions of this section,
the corporation may from time to time borrow by
overdraft or otherwise however such sums as it
may require in the exercise of its functions under this
Decree;
7 The Corporation shall not without the approval of the
Federal Executive Council, borrow any sum of money
whereby the amount in aggregate outstanding on any
loan or loans at any time exceeds such amount as is for
the time being specified by the Federal Executive
Council.
8 Notwithstanding subsection (2) above, a person lending
to the corporation shall not be bound to inquire whether
the borrowing is within the power of the corporation or
not.
9 Where any sum required as aforesaid:
is to be in currency other than Naira; and
is to be borrowed by the corporation otherwise than
temporarily, the corporation shall not borrow the sum
without the prior approval of the Federal Executive
Council.
10 For the purposes of this section, any money borrowed by
the corporation from a subsidiary thereof or by any such
other subsidiary thereof shall be disregarded.
552
11 The Federal Executive Council may issue to the
corporation such directives as it may think necessary as
to the disposal of any surplus funds of the corporation,
and subject to any such directions, the corporation may
invest its funds and maintain a general reserve.1008
By virtue of the provisions of sections 6 – 7 of the constituent instrument setting it up, the
NNPC, typically of chartered and statutory corporations which normally are not subject to
the provisions of the Companies and Allied Matters Act 1990, was established with no
assignment of rights, no equity base and loan funding was to be approved by higher
authority i.e. the Federal Executive Council, it was directed to maintain a fund of such
moneys given by the Council by way of grants and loans for performing its functions. The
corporation was also dependent on annual appropriation for its working budget and to
submit to high authority, estimates of its expenditure and income for the next financial year
in the three months preceding year‟s end96
. As regards profit, the Executive Council had
power to make directions as to how surplus funds should be dealt with.1009
That financial dispensation though typical of statutory corporations perhaps underlies the
bases for the spate of reorganizations being currently carried on by a bulk of National Oil
Companies. That financial dispensation could be assailed on the consideration that, the
traditional statutory corporation is out – moded, and if State oil companies are to justify
their existence and be able to cope with the challenges of the current international business
environment then, they must be adaptive to some of the characteristics of the non-statutory
1008 Ibid. 1009 Ibid.
553
corporations, that is, TNOCs without thereby losing their nature as statutory corporations
established with a view to achieving certain social economic objectives.1010
That granted, the corporation is constrained by the non-assignment of assets, rights or
property and non-assurance of its equity capital. However, one must hasten to concede that
the principle of ultra vires must apply without reservations, what animates and gives a
statutory corporation its distinct nature is its constituent instrument. According to Farrar:
A company or other body that owes its existence to
statutory authority has power only to do those things
authorized by the statute or by its constitution set up
under the statute, and anything it purports to do outside
these limits is void and of no effect even though desired
by all its members. This is the ultra vires doctrine and it
affects all parliamentary and registered companies.1011
The financial dispensation spelt out in the constituent instrument of the NNPC may
preclude it from loan funding; borrowing is very essential in the light of its insufficient
financial base and as supplementary financing from the open independent market. Such
advances attracts interest charge, and safe with state guarantee, the corporation may not be
able to have recourse to loan capital to cover gaps in its finance, where the state guarantees
lending to the corporation, it makes it slip even further into dependence and unable to carry
out its operations with the degree of autonomy necessary for it to succeed as an enterprise.
Until the equity capital of NNPC is assured, the basis to determine the profit of NNPC is
1010 Ibid. 1011 J. H. Farrar, Farrar’s Company Law, Oxford, Oxford University Press, 33 (1998).
554
flawed. In this connection, it is being suggested that the Federal Government should either
capitalize all the existing assets of NNPC as grant, equity or loan.1012
As a corollary to the foregoing consideration, these discernable alternatives offer
themselves for consideration with a view to achieving the broad national and corporate
purpose for the establishment of the NNPC. The corporation should have absolute control
of its own funds in order that it will be self perpetuating and autonomous.1013
No idle money must be allowed to accumulate; a proportion of profits should be ploughed
back into the corporation whilst dividends are paid to the national treasury as returns on
invested capital. Re-employed profit should aim at providing running capital and sustain
perspective planning and investment.
The mandate of the corporation should transcend that of merely managing and developing
the petroleum sector; the present dispensation of draining the corporation‟s reserves and
profit makes it merely a conduit for tapping revenue. For it to be able to mobilize State
policy for a sustained economic growth, its performance must be evaluated using the
criteria of wider socio-economic and political objectives.
CONTROL AND ACCOUNTABILITY
As a State enterprise and instrument of policy whose activities are circumscribed by broad
State objectives and as trustees of the people‟s fund, the NNPC though a creation of statute
1012 Note 172 supra. 1013 Ibid.
555
must abide by rules of financial accountability, budgeting and auditing required of
corporations. Section 18 of its constituent instrument provides inter alia:
The Corporation shall prepare and submit to the Federal
Executive Council through the Commissioner, not later
than 30th
June in each financial year a report on the
activities of the Corporation during the immediately
preceding financial year and shall include in such report
a copy of the audited accounts of the corporation for that
year and the auditors report thereon.1014
The provision is inadequate as a means of ensuring accountability, it further underscores the
excessive control of the State on the corporation; considering that the corporations annual
reports are made to the Federal Executive Council as contradistinguished from the public to
which the Council, by extension owes its mandate.1015
It is the aim of accountability to provide a review of the working decision-making and
profitability of the corporation; there is the need for operational autonomy and an ex-post-
facto investigation of the corporation‟s operations at year-end. Such findings should be
published rather than being subjected to the official secret act. Hierarchically, the ultimate
decision making organ of the corporation is the Federal Executive Council, the Petroleum
Minister who also doubles as the Chairman of the corporation‟s Board reports to the
council, and decisions percolate down the hierarchy.1016
1014 Ibid. 1015 Ibid. 1016 Ibid.
556
That granted, an investigation of the corporation‟s activity in a given year should as a
matter of course evaluate the decision making process and its implications for the
operations of the Corporation. By so doing the Corporation would have independence of
operation and free to make decisions based on rational criteria and exist separately from the
state. This dispensation whilst ensuring that measure of autonomy necessary to facilitate
the corporation‟s operation also importantly ensures that its policies and funds are subject to
control and scrutiny of the public.1017
The State must be circumspect in the exercise of control and when necessary such control
should be limited to defining the parameter which prescribes the operations of the
corporation. It must be seen in its activity to be in consonance with the public interest.
That consideration does not detract from the fact that the State through its supervisory
Ministry of Petroleum and Mineral Resources, as the Trustee of the public is ultimately in
charge of the corporation. State supervision, when excessive, emasculates management,
and stifles its initiative and the Board is unable to take decisions with clarity. The Board
may not in all honesty take decisions objectively when there is looming and brooding
presence of the State through the superintending function of the Petroleum Ministry.1018
There is an ideological dimension to the foregoing, it is not contradictory to conceive of
State interest being at variance with public interest, and that is, public interest could be
supplanted, by narrow State interest. In itself, that ideological dimension accentuates the
dysfunctional outcome of excessive State control.1019
1017 Ibid. 1018 Ibid. 1019 Ibid.
557
MINISTERIAL CONTROL
The NNPC Act 1977 gives a considerable degree of supervisory power to the Petroleum
Minister, this derives from the consideration that the corporation is wholly financed by the
state with a view to giving definition to its policy in the Petroleum Sector. The Minister‟s
province of control, far reaching, is exercised in appointing the Board of Directors, in
circumscribing the Board‟s powers in the national interest and directing its operation. The
Minister has the right of approval and or veto over crucial corporate finance matters. On
the whole, the Minster has the mandate to fulfill a supervisory role in the national interest,
and stricture management appointment, budgets and guarantee borrowing. By virtue of the
powers conferred on him by the constituent instrument of the NNPC, the Petroleum
Minister could hire and dismiss Directors. That dispensation induces a control, which
ensures the loyalties of appointees. There is no security of tenure and the Board so
appointed is in a rather untoward manner prone to arbitrary ministerial interference. The
dispensation renders rational decision taking processes a futility, over-riding political
consideration distorts rational criteria.1020
8.10 STRUCTURAL REFORM OF THE NNPC
National Oil Companies are responding to the challenges and opportunities in the global
business environment. One of such responses is the spate of reforms that have been carried
out in many oil exporting countries.1021
Commercialization as contradistinguished from privatization has been the most adopted
option of change, also called corporatization, it is the fundamental process of turning a
1020 Ibid. 1021 S. L. Eller, P. Hartley and K. B. Medlock, „Empirical Evidence on the Operational Efficiency of
National Oil Companies.‟ Available at
http://www.rice.edu/energy/publications/docs/NOCs/Papers/NOC_Empirical.pdf
558
bureaucracy into a going concern, of establishing profit and loss statements and insulating
the company from day-to-day interference by governments and their ministries. Examples
abound, from establishment of AGIP in 1926, to the recent restructuring of Mexico‟s
PEMEX.1022
Governments are insisting that state companies begin to behave much more like privately
owned competitors, in some cases the goal is outright privatization.1023
COMMERCIALIZATION OF THE NNPC
Commercialization demands as necessary and sufficient conditions, the insulation of the
company from micro-management by the government and second, major transformation of
the corporate objective. Insulation may be achieved by creating holding company to stand
between the government and operating subsidiaries, in the style of Venezuela‟s PDV,
change entails adopting result oriented management style, processes and operations,
delegation of authority and establishment of performance standards.105
Rationalization and
optimization of operations are key elements of change; rationalization is shedding of under-
performing non-core investments which constitute a dead weight. Optimization seeks to
increase the profitability of the core investment and the mainstay of the enterprise.
Optimization underscores planning which will facilitate the adaptiveness of the corporation
to changes in market trends.1024
Integration is another key strategy, which can improve financial performance and reduce
risk. It is the process whereby the corporation is structured as to make the output of a
strategic business unit the input of another strategic business unit and the output of the latter
1022 A. Afuah, Business Models: A Strategic Management Approach, New York, McGraw Hill/Irwin,
84 (2003). 1023 Ibid. 1024 A. Megateli, Investment Policies of National Oil Companies, Westport, Ct., Praeger, 46 (1980).
559
yet the input of another in a linkage so as to create a relation of forward and backward
integration, by linkage, it is meant; a reciprocal relationship between all strategic business
units in which the expansion of a given unit engenders opportunities for another unit to
develop its output, either by using the given units inputs in a forward linkage, or by
providing their outputs to be used as an input into the given unit‟s production in a backward
linkage. Globalization is yet another strategy linked to integration, which is the external
expansion of the NOC without the national border.1025
As a corollary to the foregoing consideration, the mission statement of a new NNPC was
issued, inter alia:
NNPC is a commercial integrated international oil
company engaged in exploitation, production,
processing, transportation and marketing of crude oil,
gas, etc. It is oriented towards efficiency, profitability
and financial autonomy in its operations while seeking
to maintain leadership role in Nigeria long-term growth
of economic development through start up and fostering
of new gas and petroleum based industries.1026
The NNPC structure under the commercialization dispensation is composed of a group
management team, headed by a Group Managing Director (GMD) who controls Managing
Directors of the eight fully owned subsidiaries. The strategic business units have boards of
directors with full responsibility for administrative management of their respective SBUs
1025 M. Joyner, Integration Marketing: How Small Businesses Become Big Businesses and Big
Businesses Become Empires, Hoboken, NJ., John Wiley & Sons, 55, 57 (2009). 1026 Blackwell Energy Research, Oil and Energy Trend Vol. 21 No. 11, November 1996.
560
but are not fully autonomous in financial matters and are limited in authority with regard to
dispensing funds. The NNPC Group Headquarters has overall control in financial matters
over the SBUs.1027
By virtue of the provisions of the privatization and commercialization Decree No. 25 of
1988; the Nigerian National Petroleum Corporation (NNPC) was amongst the public
enterprises slated for full commercialization:
A commercialized NNPC is expected to generate
enough revenue to cover its operating expenses and
capital expenditures as well as the generation of
surplus/profit for dividend payment to the government
as shareholders. The broad objectives for the
commercialization of the NNPC are:
(a) To orientate NNPC towards a new
horizon of profit improvement and viability through the
enforcement of strict commercial principles and
practices;
(b) To remove bureaucratic bottlenecks in
decision making procedures and administration and
enhance general operational efficiency;
(c) To evolve an effective cost conscious
and good oriented management and staff whose future is
linked with the fortunes of the NNPC; and
1027 D. O. Adeyemo, „A Review of Privatization and Public Enterprises Reform in Nigeria,‟ 4
Contemporary Management Research 401-418 (2008).
561
(d) To undertake a comprehensive review of
the accounting and information system in the NNPC
system with a view to installing and maintaining,
produce promptly and accurately the necessary data for
monitoring their financial operations.1028
The foregoing represents NNPC‟s attempt at renewing its search for purpose and stem it‟s
drifting; as a mission statement, it provides a vision and may point the direction for the
corporation in subsequent years, that redefinition of mission is important though, it
represents an attempt by a discredited corporation to define an optimal course for itself.
Granted that the NNPC was commercialized in 1992 through a process initiated by the
promulgation of the Privatization and Commercialization Decree No. 25 of 1988, the
crucial issue is whether political forces are ready to fully relinquish their grip on a
corporation that contributes about 80 percent of Government revenue.1029
The NNPC is a politically sensitive organization, owing partly to the fact that the
government constitutes the sole shareholder but most importantly to the unstable Nigerian
polity and a social order which lacks focus, orientation and characterized by a warped work
ethics of indolence, nepotism and institutionalization of corruption. Until the tendency of
seeing government enterprise as big business to be captured by the dominant group in
whatever context that can be imagined in Nigeria is totally curtailed, no amount of
rationalization and adaptation of tested models elsewhere will work in Nigeria. Recent
large scale frauds in the NNPC attests to that, in all cases government has been implicated,
1028 Privatization and Commercialization Act 1988 Cap 320 LFN 2004; J. Afeikhena, „Pivatization and
Enterprise Performance in Nigeria: Case Study of Some Privatized Enterprises.‟ Available at
http://www.aecafrica.org/documents/RP175.pdf 1029 Ibid.
562
barely two years after commercialization and articulation of a new mission statement the
NNPC was rocked by unprecedented large scale fraud and it is absolutely insolvent and
unable to meet and honour its short-term and long-term obligations as they fall due. The
present state of the NNPC is a negation of its new mission statement, and renders it mere
verbiage. Previous Governments from all intents and purposes were not sincere about the
reformatory commercialization exercises they embarked upon; whilst they seemingly
carried out the rationalization of the corporation, they had in their actions disparaged the
corporation.1030
8.11 TOWARDS A VIABLE AND EFFICIENT NNPC
The preoccupation in this segment is to highlight those lacunae in the NNPC constituent
instrument, which inhibits its potentialities and viability as a going concern, which should
not only pay its way; but also pay dividends to the national treasury.
Our proposals will focus on these broad provisions of the NNPC constituent instrument, the
NNPC Act 19771031
viz.:
i. Structure and organization
ii. Budget and operating fund
iii. Control and Accountability
iv. Ministerial control.
STRUCTURE AND ORGANIZATION
A national oil company can assume so many structures depending on the peculiar needs of
the country. The internal organization of the NNPC is a critical determinant of the
1030 G. U. Nwokeji, „The Nigerian National Petroleum Corporation and the Development of the
Nigerian Oil and Gas Industry: History, Strategies and Current Directions. Available at
http://www.rise.edu/energy/publications/docs/NOCs/Papers/NOCs/NNPC_Ugo.pdf 1031 NNPC Act 1977 Cap. 320, Laws of the Federation of Nigeria, 1990.
563
realization of the corporate purpose, which informed its establishment. The NNPC present
structure, like that of most OPEC member States is a hierarchical form, which places a
Minister or a top-ranking official on the Board. The Corporation is attached to the Ministry
of Petroleum Resources, with overall supervision and direction exercised by a Council of
Ministers. Like in Saudi Arabia, the Petroleum Minister heads the board.1032
One is amenable to a legal framework where the NNPC is the commercial arm of State
policy, wholly staffed by experts from outside the government bureaucracy. The cabinet,
advised by a national energy advisory body, formulates policy that outlines the operation
for bodies such as the National Oil Company. The Petroleum Ministry should only
preoccupy itself with regulatory aspects of operations of the NNPC. The board of directors
of the NNPC should represent a cross section of interests which should include oil workers
union; communities in oil producing areas, however such appointees must be highly
knowledgeable and qualified people in the industry, who should be able to provide the
corporate and strategic planning which chart the corporations future and secure its financial
and entrepreneurial success.1033
The legal framework being envisaged for the NNPC will grant it autonomy and
independence, whilst it undertakes its responsibility within the precincts of broadly defined
governmental and sectoral policy. Essentially, the constituent instrument should be clear in
establishing the dividing line between the NNPC and State policy-making prerogatives.
1032 V. Marcel and J. V. Mitchell, Oil Titans: National Oil Companies in the Middle East, Baltimore,
Brookings Institution, 122, 145, 170, 235 (2005). 1033 U. Idemudia, The Quest for the Effective Use of Natural Resource Revenue in Africa: Beyond
Transparency and the Need for Compatible Cultural Democracy in Nigeria, 56 Africa Today 2-24
(2009).
564
The board must have a clear mandate. That granted the following provisions are
necessary:1034
(1) There should be an assembly, which shall be
charged with the overall direction and administration
of the NNPC. (This body is analogous to the Annual
General Meetings of Public Limited Liability
Companies). The Minister of Petroleum Resources
shall preside at the assembly, which shall meet once
annually. The assembly should in addition to the
Petroleum Minister and other Ministers whom the
Presidency so designate as representing its
overwhelming sole shareholding in the Corporation
include representatives of Oil Workers Union,
representatives of professional bodies such as
Institutions of Engineers; Bar Association;
Accountants, Valuers, Bankers and representatives
of Oil Producing Communities. The Assembly so
constituted will represent the universality of interests
and its decisions, within the constraints of its
ennoblement should be obligatory for the NNPC.
The Petroleum Minister and other Ministers
appointed by the Presidency for the purpose of the
assembly shall represent the State in the assembly.
The responsibilities, which hitherto were held by the
1034 Nigeria: The NNPC Structure, August 24, 2009. Available at
http://www.entrepreneur.com/tradejournals/article/206620421.html
565
council of State, should devolve on the constituted
assembly. The responsibilities of the assembly
amongst other functions shall:
(a) Cause the Annual Report and Accounts of the
corporation to be presented for its consideration,
approval and or disapproval.
(b) Draw up the modalities for the payment of
dividends into the National Treasury from profits
generated from its operation.
(c) The assembly shall decide on the constitution
of the operating companies.
(d) Consider any other matters brought before it,
and so forth.
The assembly shall take precedence over and above all other decision-making organs of the
Corporation; it shall give general direction to the board and chart the strategic course for the
Corporation. Whilst it shall be the prerogative of State through the assembly to establish
policy objectives, the board shall have the prerogative of micro implementation. The board
shall be the administrative organ of the Corporation with the widest latitude and amplitude,
without constraints other than act ultra vires the Corporation‟s constituent instrument.
Members appointed by executive fiat could constitute the board; such appointees would as a
matter of course be screened by a committee of parliament, all candidates to the board must
be so screened. The Presidency shall appoint a maximum of three members; two (2 No.)
members shall be drawn from the senior petroleum workers union, who must be tested
566
technocrats of the industry; four (4 No.) members to be drawn from the cream of
professional bodies such as the institutions of Engineers; Accountants; Bankers and the Bar
Association; representatives of oil producing communities. The board by a simple majority
shall appoint its chairman.
The board of directors shall exercise the ultimate administration of the Corporations
business. The board amongst other things shall viz.:
i. Consider and approve/disapprove and
coordinate investments and operational budgets of the
corporation and its subsidiaries.
ii. Establish internal policies.
iii. Summon assembly meetings.
iv. Present to the Ordinary Assembly, the
Annual Reports and Accounts of its stewardship,
Balance Sheet and Profit and Loss Statement of the
fiscal year.
v. Determine the corresponding provisions
for legal and other reserves, which may be considered
necessary or convenient to establish.
vi. Forward for the consideration of the
assembly, the distribution of profits and payments of
dividends to the national treasury, and so forth.
The foregoing will insulate the Corporation from undue State control. It is imperative that
the new legal dispensation addresses the issue of undue political meddlesomeness in the
567
Corporations operations. In that regard, the following clauses should be incorporated into
the constituent instrument viz.:
i. The Ministers; Ministers of State, the
Secretary to the Government, Directors-General,
and so forth, may not be appointed as directors
whilst substantively in office.
ii. Neither can they be directors of the
Corporation those individuals who are related to
the President of the Republic, or to the Minister
of Petroleum Resources in the third degree of
consanguinity and affinity.
iii. The Chairman and other directors of the
board must be apolitical during their tenure and
may not perform activities as directors of
political organizations whilst in office.
The foregoing clauses provide adequate insulation from political forces, a necessary and
sufficient condition for the corporation to run as a true corporate concern, pay its ways and
exist autonomously from the state. Under this dispensation, there is a clear cut dividing line
between the Corporation and state policy-making prerogative, the definition of the powers
of the assembly, the board and the state is unambiguous devoid of equivocation. The board
so constituted is on a long leash, without encumbrance. The board, under this dispensation
has a clear mandate.
BUDGET AND OPERATING FUND
The NNPC under the present dispensation was established with no assignment of rights, no
equity base and loan funding was to be approved by higher authority, the Federal Executive
Council. It was directed to maintain a fund of such moneys given by the Council by way of
grants and loans for performing its functions. That issue had been dwelt on in preceding
section of the study; it can be reiterated that the dispensation is wrong headed; the company
is a shell without the assignment of assets, rights or property and with no authorized or paid
568
up capital. The Corporation is deprived of its equity base and asked to operate without
reserves whilst depending on discretionary allocations of profit to conduct its activities.1035
Compared to select OPEC NOCs, the NNPC can not be conceived as a going concern. The
National Iranian Oil Company was provided with an initial authorized capital of ten (10
No.) billion rials with 50 percent paid up. The company was required to allocate 2 percent
of its profit to a general reserve account as a back up financing and had been entrusted with
considerable fixed assets.1036
In the same vein, the Qatar National Petroleum Company had
an initial share capital of 100 million rials, which was wholly subscribed by the state. It
also inherited the assets of the National Distribution and National Fertilizer Companies.1037
The following provisions are accordingly being proposed viz.:
i. The Corporations capital shall be in the
amount of =N= X. The said capital shall be totally
subscribed to by the Federal Republic of Nigeria with X
percent paid up.
ii. The part remaining unpaid shall be paid
instalmentally from revenue generated from the
Corporation‟s operation.
iii. The stipulated share capital shall be
represented by X NOS. of shares, in the name of the
Federal Republic of Nigeria. The Corporations shares
shall not be transferred or mortgaged.
1035 Note 172 supra. 1036 NIOC Profile. Available at http://www.mop.ir/subcompanies/nioc/index.asp 1037 Qatar National Petroleum Company Profile. Available at
http://www.eia.doc.gov/emeu/cabs/Qatar/pdf.pdf
569
In addition to the foregoing clauses; the Corporation should have control of its own funds in
order that it will be self-perpetuating and independent. Profits should be ploughed back into
the Corporation at this critical time, whilst dividends could be paid later into the national
treasury after the Corporation would have been brought on an even keel. If the mandate of
the Corporation is to manage and develop the petroleum sector, to drain its reserves, as is
currently the practice is to recognize its purpose primarily as a source of revenue. The
budget should be established at the start and it should not have to make a case for funds
annually. If these preconditions are met, the Corporation will flourish and catalyze real
sustainable growth of the Nigerian economy.
CONTROL AND ACCOUNTABILITY
The present dispensation requires inter alia:
The Corporation shall prepare and submit to the Federal
Executive Council through the Commissioner, not later
than 30th
June in each financial year a report on the
activities of the Corporation during the immediately
preceding financial year and shall include in such report
a copy of the audited accounts of the Corporation for
that year and the auditors report thereon.1038
The provision is sufficient as a control and accountability mechanism, it is however not
necessary. For the provision to be necessary and sufficient, further provisions must be
made viz.:
1038 Note 172 supra.
570
i. The Corporations Annual Reports and
Accounts shall not be subject to the Official
Secret Act and should be accordingly published
in newspaper supplements in five (5 No.) widely
circulated dailies having wide readership. Such
supplements must run for two weeks prior to the
Ordinary Assembly (Annual General Meeting)
and three weeks covering the duration of the
Ordinary Assembly and weeks immediately
following the adjournment of the Assembly.
ii. The Annual Reports and Accounts of
the Corporation shall be forwarded for the
consideration of the Ordinary Assembly as duly
constituted.
MINISTERIAL CONTROL
The Ministers province of control under the present dispensation is too far reaching, and
vertical. Ministerial power is exercised amongst other areas: In appointing the board of
directors. In having a right to limit the exercise of the boards powers and issuing directives
to it and in retaining the right of approval or veto over certain corporate finance matters. In
571
effect, then, the Minister usually has control over senior management appointment, budget
and borrowing and a general supervisory role.1039
Perhaps the unwieldly powers of the Petroleum Resources Minister vis-a-vis the
Corporation‟s board of directors constitutes the most crucial factor militating against the
success of the Corporation. Those powers must be accordingly curtailed and ministerial
control should be horizontally exercised within the ambit and due processes of the
assembly. In that vein ministerial control should be strictly restricted to the following
functions of the assembly:
(i) Consider, approve and or disapprove the board
of director‟s Annual Report and Accounts.
(ii) Appoint the Auditors as provided for in the
relevant code.
(iii) Review the Auditors Report.
(iv) Draw up the modalities for the payment of
dividends into the National Treasury from profits
generated from its operation.
(v) Consider any other matters brought before it,
and so forth.
The foregoing dispensation will further insulate the board so appointed from undue
ministerial control and interference. The board will be able to conduct its affairs by using
rational decision making criteria, and there will be no distorting effect of overriding
political consideration.
1039 Ibid.
572
The NNPC as a state enterprise has the potential for fulfilling its role as a policy maker, a
commercial public corporation and an instrument of the state to promote the economy in the
development and utilization of Nigeria‟s resources, a necessary and sufficient condition
towards the realization of those broad objectives is the granting of true autonomy to the
corporation by the state. It should be made to operate on a very long leash with less
restraint and adequately endowed with resources for effectiveness in its operations as much
as possible it should be insulated from the defects of the Ministry, the culture of waste and
inertia which characterizes the public sector. For the NNPC to be able to relate with
TNOCs from a position of strength, in fulfillment of its obligation to succeed perpetually to
all the States interests in all the mining leases and generally mobilize state policy for a
sustainable growth, it must run strictly according to the tenets of rational corporate model
without losing sight of its role to fulfill larger socio- economic and political objectives.1040
The oil industry no doubt remains the linchpin of the Nigerian economy, what with its
accounting for 90 percent of its export earnings and over 80 percent of revenue accruing to
the government. The significance of oil to national survival perhaps accentuated the need
for the State to evolve from the passive ground rent collector to an active participant in the
oil industry. The overall experience however suggest that the capability of the State to
participate entrepreneurially is contingent on availability of funds; freedom to invest and
take risks and top quality and therefore independent-minded management, a climate that
favors innovation and risk taking or which is not averse to risk.1041
The degree of distinction between government and its agency of participation is also
important in assessing State performance. The scope for entrepreneurial activity is
1040 Note 172 supra. 1041 Ibid.
573
constrained by other factors; notably the availability of resources; not just capital but
technology and trained personnel and management and infrastructure. Nigeria, like many
developing countries is desperately short of all these.1042
The need for State participation in the Nigerian oil industry is underscored amongst other
reasons by the consideration that individuals cannot muster the magnitude of upfront
investment required in the oil industry; the State therefore has to mobilize resources
strategically to develop the oil sector. Besides as a nascent economy Nigeria may ill afford
to allow market forces direct a strategic resource like oil. However, the level of State
participation which is just tolerable must be established and whether state enterprise when
so established where necessary is effectively run and does not constitute a dead weight on
tax payers. Such enterprise must be able to pay its way and must not constitute a drain on
scarce resources. That point is particularly significant in a world faced by the spectre of
dwindling resources, global recession and ecological dislocations. There is an ever-
increasing need for efficient husbandry of resources that are non-replenishable and
constitute a wasting asset.1043
The establishment of a National Oil Company in Nigeria is not without precedent in fact the
notion of a national oil company is central to international petroleum. Whilst the NNPC is
the agent of State participation in the Nigerian Oil Industry, the participation and or joint
operation agreement represents the instrument of State participation with the transnational
oil companies. The legal instrument of participation however betrays the relative weakness
of Nigeria in that dispensation, that consideration is without prejudice to the fact that the
Directorate of Petroleum Resources whose statutory role it is to superintend over the oil
1042 Ibid. 1043 Note 193 supra.
574
industry has structurally, the potential for effectively discharging its brief as a monitoring
device. For one it has the right caliber of personnel to actualize its statutory role, it is
however Armstrung by extraneous constraints from political forces, with the resultant
corruption and graft which such meddlesomeness breeds in the high echelons of a public
corporation and its sub units. Within that scenario, when ranged against the TNOC it set
out to monitor the Directorate may not be able to act with the latitude and amplitude
required of such a body. Institutionally, it must operate at both a high level of competence
and high moral pedestal if it is to fulfill its statutory role. Its operational efficiency must be
at par with that of the TNOCs.1044
Arbitrariness, inconsistency and instability typify Nigeria‟s efforts at achieving a policy
focus, a goal which has eluded it because of its unstable polity and partly because of the
volatility of the international petroleum industry. That scenario perhaps accounts for the
fact that there is not one single comprehensive and integrated document on the Nigerian
Petroleum Policy. The legislative framework is a very important instrument that the state
could annex to promote petroleum activities, it gives legal sinew to the broad policy
adopted by the state. Legal instrumentation in themselves can not however secure policy
objectives without infrastructural base and high technical capability of the state agency, full
and effective indigenous participation and effective state participation in the management of
joint venture operations. For the NNPC to be able to fulfill those policies implied in
legislation and its mission statement it must run strictly in accordance with commercial
principles and practices, its operational efficiency must be ensured through elimination of
1044 Ibid.
575
bureaucratic bottlenecks, the corporation must reduce its political sensitivity to a tolerable
level if it is to attain the organic state of corporatization.1045
The constituent instrument of the NNPC has invested it with functions and powers which
aim at enabling it to fulfill its role as a policy-maker, a commercial public Corporation and
an instrument of the State to facilitate the economy in the development and utilization of its
natural resources. The NNPC is envisaged to be the entrepreneurial arm of State policy in
the Nigerian oil industry; it is part of its brief to offer competition against the TNOCs, it is
expected to, not only pay its way but pay dividends into the government treasury, ultimately
the NNPC is expected to take complete control of the Nigerian oil industry.1046
It is important that the Corporation‟s capacity for growth is limitless; ideally all petroleum
interests should be unified under its control and integrated to cover all aspects of petroleum
development. In themselves participation agreements, as legal instruments of State
participation have a potential for stabilizing expectations of the State vis-à-vis those of the
TNOCs. Government participation in the oil sector will be mere symbolism where the
infrastructure for effective participation is weak or lacking as is the case of the NNPC, and
the State relies wholly on the good faith of the TNOCs as operators in the JOAs. The
purpose of participation may be defeated; no matter how fairly packaged is legal
instrumentation. The present legal dispensation is such that it fails to provide adequate
ennoblement without which the Corporation may not realize those objectives that informed
its establishment.1047
1045 Ibid. 1046 Ibid. 1047 Ibid.
576
The ideal legal framework should redress structural and organizational obstacles, budgetary
and operating funds constraints; ensure control and accountability; and stricture the far
reaching powers and control of the Petroleum Minister. The Corporation should be
autonomous and given the minimal operational restraints, it should be endowed with
adequate resources to function independently. It is imperative that the NNPC should not
suffer the atrophy of the public departments and parastatals. The foregoing represents the
necessary and sufficient conditions for the viability of the NNPC as the entrepreneurial
organ of State in Nigeria‟s petroleum industry.1048
1048 Ibid.
577
CHAPTER NINE
9.0 APPLICATION OF THE LEGAL PARADIGM
In chapter five, we examined the nature and structure of Nigeria‟s oil-based economy
which evinces an overwhelming reliance on a single easy source of income which is
not sustainable because of the wasting, exhaustible and non-renewable nature of
petroleum resources. The Nigerian economy is also totally devoid of perspective
investment strategy and betrays a total lack of coordination, fiscal indiscipline and
profligacy in the expenditure of its oil revenue. Above every other consideration,
Nigeria lacks an intertemporal planning model for the over all economy.1049
In this chapter, our preoccupation is to elucidate and elaborate on the already alluded
long term danger implied in the structure of the Nigerian economy which is
overwhelmingly reliant as it were on a single easy source income. Consequently, we
will endeavour to establish an intertemporal planning model to redress the crisis of
developmentalism caused by the distortionary impact of overwhelming reliance on oil
revenue.1050
The economic expansionary policy adopted by Nigeria in response to the oil boom of
1973/74 was of a magnitude far higher than the limits of the absorptive capacity of the
1049 P. Lewis, „Nigeria‟s Economy: Opportunity and Challenge,‟ 27 A Journal of Opinion 50-53
(1999). 1050 R. M. Auty, Resource Abundance and Economic Development, Oxford, Oxford University Press,
19, 36 95, 315 (2001).
578
Nigerian economy. The government‟s responses to the avalanche of external receipts
which inundated Nigeria‟s foreign exchange reserves were haphazard.1051
Most of the projects were ill-conceived and poorly executed. There was an urgency
and hurry to spend and run down the foreign exchange reserves. The preoccupation in
this chapter therefore, is to address the question, how can Nigeria‟s stupendous oil
wealth be converted given the resources life-span, such that when the resources is
exhausted, Nigeria would have accumulated sufficient stock of non-oil assets which
will generate alternative source of income? Fundamentally, what is the optimal stock
of domestic non-oil assets that can be acquired prior to the exhaustion of its oil
reserves, considering the constraints implied in the process of the transformation of
the oil wealth to non-oil capital? Thus the real concern in Nigeria should not be how
to maximize global oil profit but how to generate sustainable economic growth and
development in its domestic non-oil sectors before its oil reserves reaches full
depletion.1052
Thus the maximization of non-oil domestic capital should be the focus, this is crucial
because the flow of both foreign and domestic non-oil income is an objective function
of the stock of non-oil capital. The most appropriate model, therefore, must
1051 T.L. Karl, The Paradox of Plenty: Oil Booms and Petro-States, Los Angeles, University of
California Press, 44,189 (1997). 1052 N. Budina and S. van Wijnbergen, Managing Oil Revenue Volatility in Nigeria: The Role of
Fiscal Policy, Washington D.C., World Bank Publications, 427 (2008).
579
underscore the dynamics of substitution between renewable and reproducible capital
and wasting and non-renewable resources as the basis of optimality.1053
Within the constraint of intergenerational justice, with the attendant problematic of
capital accumulation in the light of managing a finite reserve of depletable resources,
the oil-boom generation though are free to exploit the pool of natural resources, albeit
optimally, must simultaneously add optimally to the pool of replenishable capital.1054
The studies preoccupation therefore, is to establish a model for the optimal and
coordinated expenditure of Nigeria‟s oil revenue given its exhaustible nature. It also
explores the optimal choice of strategic investment of oil revenue. This is crucial
because of the high magnitude of funds accruing to Nigeria which has evinced a total
lack of coordination, fiscal indiscipline and profligacy in the expenditure of its oil
revenue with out due regard to the fact that its oil reserve is fast approaching full
depletion.1055
In view of the objective to maximize Nigeria‟s stock of non-oil assets, it is instructive
to impose certain restraints. For one, the generation in the post oil epoch must not be
made to bear the burden of debts incurred by the oil-boom generation. Secondly,
1053 C. Groth, „A New-Growth Perspective on Non-Renewable Resources,‟ in L. Bretschger and S.
Smulders (eds.), Sustainable Resource Use and Economic Dynamics, New York, Springer, 127-163
(2007). 1054 J. Thompson, Inter-generational Justice: Rights and Responsibilities in an Intergenerational
Polity, New York, Routledge, 85, 101, 145, 160, (2009). 1055 O. Fagbadebo, „Corruption, Governance and Political Instability in Nigeria,‟ 1 African Journal of
Political Science and International Relations 28-37 (2007).
580
imports must be restricted to the barest minimum of essential inputs for the economy
within the time frame of the perspective plan.1056
The prospect of developing a non-oil traded export sector is explored pursuant to
generating alternative sources of foreign exchange when oil would have reached full
depletion. This introduces an additional sector into the framework of our
macroeconomic analysis, and underscores the significance of the role of foreign
exchange because the non-oil stock of capital will generate a steady inflow of non-oil
revenue.1057
Thus although members of OPEC have one common characteristic, which is their
overwhelming reliance on oil, a non-renewable resource, we have elected to focus our
analysis on Nigeria. We had duly examined and explicated its economic structure and
characteristics as the subject-matter of chapter five. Our analysis in that chapter
reveals a total lack of coordination, fiscal indiscipline and profligacy in the
expenditure of its oil revenue. Since the ascendancy of oil as its dominant foreign
exchange source, Nigeria has chosen a policy path which will take it farther and
farther away from the goal of transforming into a well integrated modern State
economy. This policy path contrary to very high hopes and expectations has led to
waste, economic cataclysm, political turmoil, and instability, and mass
impoverishment.1058
1056 B. Pinto, „Nigeria During and After the Oil Boom: A Policy Comparison with Indonesia,‟ 1 World
Bank Economic Review 419-445 (1987). 1057 Ibid. 1058 Ibid.
581
Successive, governments in Nigeria pursued expansionary policies without being
mindful of the limited absorptive capacity of the economy. These policies have been
simply explosive and distortionary, resulting in balance of payment disequilibria
which forces the economy to careen off course. Because of their limited cognition of
the dynamics of managing a modern State economy, Nigeria‟s military and civilian
leaders could not fathom the imperative of a perspective investment strategy of the
avalanche of oil-receipts. Our analysis shows that successive governments should
have discountenanced the oil-boom of 1973/74 by resorting to the pre-oil boom
expansionary rate while concomitantly investing surpluses abroad and developing
infrastructures in a planned and coordinated mode so as to avoid balance of payment
disequilibria.1059
At this juncture, it suffices for the purpose of analysis to make certain assumptions
based on the examination of the nature and structure of oil based economies which
emerged after the oil-boom of 1973/74. Firstly, we assume that the economy is
composed of the oil sector, non-oil sector and receipts from the nation‟s investments
overseas. The oil sector‟s share of GDP is disproportionately high relative to other
sectors of the economy. The sector is an enclave in the economy which has no nexus
with other sectors of the economy. No linkages and no backward and forward
integration.1060
1059 Ibid. 1060 G. White and S. Taylor, „Well-Oiled Regimes: Oil and Uncertain Transitions in Algeria and
Nigeria,‟ 28 Review of African Political Economy 323-344 (2001).
582
The non-oil sector, that is, the real sector has been undermined by overwhelming
reliance on revenues accruing from the export of petroleum resources. This sector has
shrunk progressively since the ascendancy of oil as major foreign exchange earner,
contributing insignificantly to the national income.1061
Within the frame work of our hypothesis, a third contributor to the national income is
the port folio of foreign investments, financed by surpluses from accrued oil revenue.
Unfortunately, Nigeria perhaps, is the only member of OPEC which has no port folio
of foreign investments; in fact until the year 2000 when the Obasanjo administration
admirably commenced the progressive shoring up of Nigeria‟s foreign reserves, its
reserve could barely cover one month of import bill. Conversely, its debt overhang
stood at $28 billion in 1999. The administration renegotiated and rescheduled the
entire port folio of debts cumulating in an unprecedented amortization of Nigeria‟s
debt thus freeing Nigeria of its accumulated debt burden of over thirty years.1062
Again it is sad to note that vital lessons have not been learned from the untoward
effect of the profligacy and wrong economic choices of the past. The Yar Adua
government is reversing the gains of that unparallel achievement by embarking on
1061 Ibid. 1062 The Debt Management Office (DMO). With a debt stock of $28 billion (as at March 2001),
Nigeria‟s average annual debt service from 1998 through 2000 amounted to about $1.5 billion. Indeed,
the projected debt service between 2001 and 2020 (after rescheduling and without new commitments)
averages more than two billion dollars per annum, a total of about $43 billion for the period. Available
at http://www.nigeriafirst.org/article_431.shtml
583
borrowing in the magnitude of $1.02 billion from the World Bank ostensibly to
develop the power sector and to fight malaria.1063
The domestic non-oil income is an objective function of the magnitude of the
tradeable non-oil capital. Where investment in non-oil capital is skewed, as we had
proved in chapter five, they can not from all intents and purposes yield any economic
premium. For example 25 per cent of sectoral allocation to industry in the 80s and 90s
was dedicated to the development of steel rolling mills which till date have not rolled
out any steel but rather constitute a drain on vital financial resources. The converse of
this ruinous economic choice, which is the dedication of the same proportion of
allocation to growing and developing small and medium scale industries would have
transformed the Nigerian economy and ensured a steady stream of traded non-oil
domestic revenue.1064
The composition of domestic public investments would normally include public direct
strategic investment to develop productive capacity in manufacturing and agriculture;
infrastructural development in transport facilities which indirectly raises productive
capacity. Thirdly, pursuant to the State‟s compact with the citizenry, it is obliged to
1063 K. Aderinokun, Nigeria: Country Secures U.S. $1 Billion World Bank Loan, This Day, 18 June,
2009. 1064 D. A. Omoweh, Political Economy of Steel Development in Nigeria: Lessons From South Korea,
London, African Research and Publications, 125 (2005).
584
enhance their well being by providing affordable shelter, water, hospitals and
schools.1065
We must however enter a caveat regarding our argument that the quantum of
domestic non-oil income is a function of the magnitude of the stock of non-oil capital.
This objective function pertains only to tradeable non-oil public investment in
contradistinction to non-tradeable non-oil public investment in roads, bridges and
other social infrastructure. We are however not oblivious of the remote and indirect
contribution of infrastructure in enhancing productivity. They however, as earlier
adumbrated possess no international exchange value, hence they do not command
international demand, and cannot earn foreign exchange. Infact public investments of
this genre are, within the framework of our analysis, considered sunk and of low
salvage value. Once financial resources are committed to them, they can not be
recouped by way of a steady stream of income.1066
This consideration is particularly germane to an economy dependent on a finite
resource like oil. Revenues accruing from oil export in the first stage should be
carefully funneled into tradeable non-oil investments which will generate immediate
steady stream of non-oil receipts, while concomitantly embarking on carefully phased
1065 F. van der Ploeg, „Structural Reforms, Public Investment and the Fiscal Stance: A Prudent
Approach.‟ Available at
http://www.finanspolitiskaradet.se/download/18.cd1771611927f1f0c6800085509/Van+der=Ploeg.pdf 1066 P. Collier and J.Willem Gunning, „Savings and Investment Decisions in a Poor Oil Economy:
Beyond the Textbook Case.‟ October 2007. Available at http://www/
users.ox.ac.uk/~econpco/research/pdfs/SavingsandInvestmentDecisionsinaPoorOilEconomy.pdf
585
infrastructural development, being mindful of the uni-directional drain on foreign
exchange reserve which public investment in infrastructure constitutes.1067
We can further disaggregate national expenditure, that is, aggregate expenditure into
private and public sector expenditure. The Nigerian economy is characterized by low
level of disposable income and low propensity to save; about 70 per cent of the
population is subsistent rural farmers.1068
The Nigerian economy like most oil-based economies is overwhelmingly dependent
on oil and bereft of a globally competitive traded export sector which can generate
alternative source of foreign exchange. Oil accounts for about 85 per cent of foreign
exchange earnings.1069
When the foregoing is considered with the fact that Nigeria lacks a port folio of
external assets, national accounts would comprise of gross external receipts from oil
less total payments for imports. Where the flow of total receipt is higher than total
payment, there is balance of payment surplus, conversely, where total payment is
higher than total receipts there is balance of payment deficit.1070
1067 N. Usui, „Dutch Disease and Policy Adjustments to the Oil Boom: A Comparative Study of
Indonesia and Mexico,‟ 23 Resources Policy 151-162 (1997). 1068 Note 8 supra. 1069 Ibid. 1070 S. H. Samiei, „Testing for Balance of Payment Constraints: The Case of the Oil Exporters, 17
Journal of Economic Studies 144 (1990).
586
Finally, where total payments equals total receipts, the balance of payment is at
equilibrium. The first and second scenarios typify balance of payment
disequilibria.1071
The legal paradigm being established is predicated on the assumption that the
allocation process of public investment is rational and in accordance with best
practices. The foregoing granted, optimization of post oil epoch stock of non-oil
assets is dependent on the following constraints:1072
Firstly, borrowing must cease from being a finance option in public sector budgeting.
Where economic exigencies makes it imperative to borrow, then borrowing should be
restricted to self-financing projects which have a determinable internal rate of return
and fully amortized before oil resources reach full depletion. This is of particular
importance because a debt overhang which is carried beyond the oil epoch will spell
doom for the post oil economy, as their will be an abrupt seizure of the flow of easy
source income which oil revenues represents.1073
To complicate matters, repayment to full amortization will be at compounded interest
rates. Full amortization is payment of principal and accrued interests. Thus, once
1071 Ibid. 1072 M. Woo-Cumings, The Developmental State, New York, Cornell University Press, 320 (1999). 1073 J. M. Buchanan, Public Finance and Public Choice: Two Contrasting Visions of the State,
Cambridge, Ma., MIT Press, 3, 29, 63, 107, 205 (1999).
587
caught in the debt trap, the nation may perpetually lack the capacity to extricate itself
with attendant mortgaging of national sovereignty which inheres in the people.1074
In hindsight, an exploration of the economic history of Nigeria yields the startling fact
that its balance of payment crisis started in the late 70s at the peak of the oil boom.
So, why, it may be asked, would an economy awashed with a deluge of foreign
exchange find itself in such economic predicament? This economic paradox of
abundance and want is a function of a combination of factors which we had amply
dwelt upon in previous segments. However, we will highlight uncoordinated
expansion, profligacy and fiscal indiscipline as the main cause of this type of
economic failure. The expansionary policies of successive administrations in Nigeria
took a heavy toll on foreign exchange reserves. Allied to this is a series of global oil
price shocks resulting in huge budget deficits. Government‟s response to these crises
is to resort to massive borrowing to cover gaps in finance.1075
1074 „Nigeria Heads for Another Debt Trap, Fiscal Commission Warns.‟ November 7, 2009, Vanguard
Online. Available at http://www.vanguardngr.com/2009/11/07/nigeria-heads-for-another-debt-trap-
fiscal-commission-warns; shortly after the exit of the Obasanjo administration, there is a renewed
frenzy to incure debts by the three tiers of government in Nigeria, this is without prejudice to the
existence of the Fiscal Responsibility Act 2007 enacted by that administration. The Statesw have been
flagrantly violating the law in the area of borrowing by floating bonds and sale of treasury bills which
repayment span ten years. These long term debts are being incurred by administrations whose tenures
lapse in under two years. 1075 W. T. Oshikoya, „Balance-of-Payments Experience of Nigeria: 1960-1986,‟ 25 The Journal of
Development Areas 69-92 (1990); E. O. Adegbite, F. S. Ayadi and O. F. Ayadi, „The Impact of
Nigeria‟s External Debt on Economic Development,‟ 3 International Journal of Emerging Markets
285-301 (2008).
588
With full depletion of oil fast approaching, the moratorium on borrowing is necessary
in order to head off the dangerous path which borrowing entails as there will be no
more easy source income to repay such debts.1076
Secondly, we find it imperative to introduce a constraint which imposes a ceiling of
minimum imports of absolute essential input in production and human services. The
constraint of a minimum import is crucial for attainment of balance of payment
equilibria as it remains the most important determinant of balance of payment
outcomes, that is, surplus or deficit.1077
Where the sum of total external receipts is higher than the sum of total payments for
imports, there is a surplus. Conversely, where total payments for imports far outstrips
total external receipts from exports, then, there is a deficit. Thus it would seem that
the only path to financial sanity is to exercise uncommon national restrain to embark
on an orgy of imports.1078
Indeed, for a nation like Nigeria, which is dependent on only one internationally
competitive export, that is oil, it is sacrilege and a sure path to economic ruination.
Sadly, that path was taken by the Nigerian State in response to the sudden but
1076 Y. Kalyuzhnova and M. Kaser, Prudential Management of Hydrocarbon Revenues in Resource
Rich Economies, Geneva, United Nations Economic Commission for Europe, passim (2005).
Available at http://www.unece.org/ead/misc/kalyuzhnova-kaser.pdf 1077 Ibid. 1078 Ibid.
589
sustained (during the life span of oil resources) avalanche of external receipts from
the export of oil.1079
A third constraint which is crucial in a developing oil-based economy is total
eradication of corruption. We did prove that because the Nigerian State is
characterized by an unconscionable state of the rule of law, the body politic is
characterized by corruption pandemic which combined effect stultify growth and
development as the dominant economic and political group subject revenue accruing
from oil export to despoliation. The resultant mass impoverishment is a combination
of despoliation and cumulative effect of so many years of wrong and disastrous
economic choices. Corruption and wrong economic choices are mutually
reinforcing.1080
The ideals of popular and competitive democracy must be constitutionally embraced
as a fourth constraint. The time tested tenets of democratic governance (in
contradistinction to despotism or other forms of personalistic rule) such as the rule of
law, due process, and separation of powers can only be deployed within a democratic
1079 Ibid; B. Pinto, „Nigeria Duriing and After the Oil-Boom: A Policy Comparison with Indonesia,‟ 1
World Bank Economic Review 419-445 (1987). 1080 P. Hung Mo, „Corruption and Economic Growth,‟ 29 Journal of Comparative Economics 66-79
(2001); G. T. Abed, S. Gupta and International Monetary Fund, Governance, Corruption and
Economic Performance, Washington D.C. International Monetary Fund, 19.135, 159, 225, 439 (2002).
Poor governance and wide-spread corruption cut into government revenues and lead to wasteful
spending, thereby weakening the macroeconomic position of a country. Corruption also impinges on
the effectiveness of the State, and erodes the confidence of the public in its institutions and policies.
590
structure totally devoid of arbitrariness and wide latitude for discretion. It induces
transparency and accountability.1081
Furthermore, because of democratic libertian ideals, the civil society thrives better
under democratic dispensations and is able to provide a counterpoise against the
excesses of the State. The nexus between democracy and growth and development
needs no further elaboration. It was the subject of in-depth analysis in chapter
three.1082
That granted, where the economy expands the size of its domestic non-oil investment,
the income from its non-oil domestic output will rise because the latter is a positive
function of the former. Rising domestic non-oil output will necessitate the importation
of raw material inputs and other intermediate goods; this invariably results in a rise of
the quantum of essential imports. Should this scenario persist, it is most probable that
the nations import requirements will far be in excess of its total external receipts. This
is an expected outcome where oil‟s share of foreign exchange earnings is about 85 per
cent of total external receipts and no income from external assets at the beginning of
boom in oil export.1083
1081 Y. Feng, „Democracy, Political Stability and Economic Growth,‟ 27 British Journal of Political
Science 391-418 (1997); U. K. Heo and A. C. Tan, „Democracy and Economic Growth: A Causal
Analysis,‟ 33 Comparative Politics 463-473 (2001). 1082 Ibid. 1083 I. M. Zaidi, „A Rationing Model of Imports and Balance of Payments in Developing Countries:
Theoretical Framework and an Application to the Philippine Economy,‟ 20 Applied Economics 43-61
(1988).
591
The balance of payment negative disequilibrium is a function of the foregoing. Should
the expansionary fiscal and monetary policy remain out of control, it will certainly
result in dire economic consequences in the long run. There will be huge deficit from
which the nation may not be able to extricate itself before full depletion of its
petroleum resources. Thus the nation has negated the constraint of minimum imports.
The only way to avert the danger implied in the foregoing is to invest in a port folio of
non-oil assets overseas while concomitantly applying a rein on the expansion of the
domestic economy. This will result in the progressive shoring up of foreign
reserves.1084
Sadly, Nigeria did not invest overseas in a port folio of non-oil assets, thus it can not
enjoy the augmentary role which non-oil income from such investments would have
served. Such income would have formed part of the foreign exchange earnings of the
country by inundating its foreign reserves. In the absence of any income from a port
folio of assets abroad, the only recourse to stabilization is to adhere strictly to the
minimum imports constraint in other to stem the drain on external reserves.1085
Immediately the danger of deficit is averted, and the foreign reserve is shored up, the
nation should embark on investing in a port folio of foreign assets which will yield a
steady stream of external non-oil income. Once the nation has a port folio of non-oil
foreign assets, the non-oil receipts will augment and cover financial gaps which may
1084 S. Burnett and R. Ossowski, Operational Aspects of Fiscal Policy in Oil-Producing Countries,
Washington D.C., International Monetary Fund, passim (2002); R. Beck and A. Kamps, Petro-dollars
and Imports of Oil Exporting Countries, Frankfurt, European Central Bank, passim (2009) 1085 Ibid.
592
result from the progressive expansion of the domestic economy and its attendant
increasing imports requirements particularly for essential inputs which the expansion
of the domestic economy would necessitate. Thus the nation can embark on strategic
domestic non-oil investment while concomitantly accumulating a stock of domestic
non-oil capital.1086
However, because the model is intertemporal it progresses in cycles, hence; the nation
would do well to decelerate its domestic non-oil perspective strategic investment in
the early stage of the life span of the resources. The appropriate strategic option is to
invest excess foreign exchange in a port folio of non-oil foreign assets or integrate
forward and backward in strategic international oil markets which will generate a
steady stream of non-oil external receipts. Conversely, after consolidation, substantial
proportion of foreign investment should be gradually recalled with a view to financing
the expansion of the domestic non-oil sector and the accumulation and development
of domestic non-oil assets. Such investments however must be timely.1087
The Nigerian State did not avail itself of this development path but elected in response
to the oil boom of 1973/74 to embark on unprecedented expansionary programme of
the economy far beyond the absorptive capacity of the economy. Perhaps, the major
limitation which inhibits the process of accumulation of domestic non-oil capital is
the deplorable and derelict state of infrastructure. Infrastructural development lagged
far behind the spate of expansion. The cement armada fiasco of the 70s perhaps best
illustrates this point. The Federal Military Government had imported huge quantities
of cement far much more than the facilities at the Lagos ports can handle, the resultant
1086 Ibid. 1087 A. M. Al-Obaidan, G.W. Scully, „The Economic Efficiency of Backward Vertical Integration in the
International Petroleum Refining Industry,‟ 25 Applied Economics 1529-1530, (1993).
593
breaches of terms and conditions of international sale of goods contract, resulted in
successful suits for claims against Nigeria in different jurisdictions all over the
world.1088
The most contemporaneous manifestation of this lag in infrastructural development
perhaps is the deplorable and inadequate capacity of power generation in Nigeria.
There has been a progressive rise in the demand for electricity from 1970s to date.
Unfortunately, there have been no concomitant increases in the power generation
capacity. The frequent voltage collapses and outages have affected productivity in
manufacturing and service sectors resulting in astronomical rise in the cost of
production. This trend has resulted in massive capital flights to neighboring Ghana
and South Africa.1089
Thus the optimal perspective strategy for Nigeria would have been to shore up foreign
reserves abroad at the beginning of the oil boom of the70s and early in the life of the
resources while internal investment should be made where returns on domestic
investment far outstrips the rates obtainable abroad, the nation should invest in
domestic non-oil assets.1090
Tables 1.1 and 2.1 provide numerical evidence of the expansionary and profligate
fiscal policy of the Nigerian State in response to the oil boom and increase in external
receipts from the export of petroleum. The analysis is from the 1970 base year to
2007.
1088 Note 8 supra. 1089 E. K. Ogunleye, „Natural Resource Abundance in Nigeria: From Dependence to Development,‟ 33
Resource Policy 168-174 (2008). 1090 Ibid.
594
Table 1.1
Current Revenue of the Federal Government
(=N=’ million)
Sources 197
0
1971 1972 1973 1974 1975 1976 1977 1978 1979
Total
Federally
collected
Revenue
634.
0
1168
.8
1405
.1
1695
.3
4537
.4
5514
.7
6765
.9
7371
.0
7371
.0
10912
.4
Oil
Revenue
(Gross)
166.
6
510.
1
764.
3
1016
.0
3724
.0
4271
.5
5365
.2
1749
.8
4555
.8
8880.
8
Petroleu
m Profit
Tax &
Royalties
97.7 383.
1
540.
5
769.
2
2870
.1
2707
.5
3624
.9
0.0 3415
.7
5164.
1
Others 68.9 127.
0
223.
8
246.
8
853.
9
1564
.0
1740
.3
1749
.8
1140
.1
3716.
7
Non-oil
Revenue
467.
4
658.
7
640.
8
679.
3
813.
4
1243
.2
1400
.7
1961
.8
2815
.2
2031.
6
Company
Income
Tax
45.8 67.5 80.4 80.8 148.
8
261.
9
222.
2
476.
9
527.
4
575.1
Custom
& Excise
Duties
370.
0
491.
0
481.
1
516.
2
498.
3
760.
7
882.
7
1145
.6
1698
.2
1143.
9
Value-
Added
Tax
(VAT)
- - - - - - - - - -
Federal
Governm
ent
Independ
ent
Revenue
51.6 100.
2
79.3 82.3 166.
3
220.
6
295.
8
339.
3
589.
6
312.6
Sources: (1) Federal Ministry of Finance (2) Central Bank of Nigeria
Table 1.1 Continued
Sources 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
Total
Federall
y
Generat
ed
1523
3.5
1329
0.5
1143
3.7
1050
8.7
1125
3.3
1505
0.4
1259
5.8
2538
0.6
2759
6.7
5387
0.4
595
Revenu
e
Oil
Revenu
e
(Gross)
1235
3.3
8564
.4
7814
.9
7253
.0
8269
.2
1092
3.7
8107
.3
1902
7.0
1983
1.7
3913
0.5
Petroleu
m Profit
Tax &
Royalti
es
8564
.3
6325
.8
4846
.4
3746
.9
4761
.4
6711
.0
4811
.0
1250
4.0
6814
.4
1059
8.1
Others 3789
.0
2238
.6
2968
.5
3506
.1
3507
.8
4212
.7
3296
.3
6523
.0
1301
7.3
2853
2.4
Non-Oil
Revenu
e
2880
.2
4726
.1
3618
.8
3255
..7
2984
.1
4126
.7
4488
.5
6353
.6
7765
.0
1473
9.9
Compa
ny
Income
Tax
579.
2
403.
0
550.
0
561.
5
787.
2
1004
.3
1102
.5
1235
.2
1550
.8
1914
.3
Custom
&
Excise
Duties
1813
.5
2325
.8
2336
.0
1984
.1
1616
.0
2183
.5
1728
.2
3540
.8
5671
.0
5815
.5
VAT - - -- - - - - - - -
Fed.
Govt.
Indepen
dent
Revenu
e
487.
5
1997
.3
732.
8
710.
1
580.
9
938.
9
433.
7
407.
6
540.
5
938.
0
Others - 1224
.1
1170
.0
1.70 6072
.1
Table 1.1 Continued
Source
s
1990 1991 1992 1993 1994 1995 1996 1997
Total
Federal
ly
Collect
ed
Reven
ue
98102
.4
10099
1.6
190455
3.2
19276
9.4
20191
0.8
45998
7.3
523597.
0
59115
1.0
Oil
Reven
ue
(Gross)
71887
.1
82666.
4
164078.
1
16210
2.4
16019
2.4
32454
7.6
4087888
3.0
41681
1.1
PPT &
Royalti
es
26909
.0
38615.
9
51476.7 59207.
6
42802.
7
42857.
9
76667.0 68574.
1
596
Others 44978
.1
44050.
5
112690
1.4
10289
4.8
11738
9.7
28168
9.7
332116.
0
34823
7.0
Non-
Oil
Reven
ue
26215
.3
18325.
2
26375.1 30667.
0
41718.
4
13543
9.7
14814.0 17433
9.9
Coy
Income
Tax
2997.
3
3827.9 5417.2 9534.1 12274.
8
21878.
3
22000.0 26000.
0
Custo
m &
Excise
Duties
8640.
9
11456.
9
16054.8 15486.
4
18294.
6
37364.
0
55000.0 63000.
0
VAT - - - - 7260.8 20761.
0
31000.0 34000.
0
Fed.
Gov.
Indep.
Rev.
1724.
0
3040.4 4903.1 5626.5 3888.2 20436.
4
3407.0 8339.9
AFEM - - - - - - - -
Others 12853
.1
- - - - 35000.
0
3407.0 43000.
0
Table 1.1 Continued
Source 199
8
199
9
2000 2001 2002 2003 2004 2005 2006 2007
Total
Revenue
(Gross)
463
.6
949
.2
1906
.2
2231
.6
1731
.8
2576
.1
3960
.8
5597
.5
6061
.0
5715
.6
Oil Revenue
(Gross)
324
.3
724
.4
1591
.7
1707
.6
1230
.9
2074
.3
3354
.8
4762
.4
5287
.6
4462
.9
Crude
Oil/Gas
Exports
100
.7
514
.0
942.
2
934.
3
496.
3
998.
4
1498
.4
1995
.7
2074
.2
1851
.0
PPT &
Royalties etc.
680 164
3
525.
1
639.
2
392.
2
683.
5
1183
.5
1904
.9
2038
.3
1500
.6
Domestic
Crude Oil
Sales
566 46.
1
96.4 121.
5
304.
2
386.
4
668.
1
856.
9
1171
.8
1094
.6
Other Oil
Revenue
991 0.0 23.0 12.5 38.1 60 48 49 32 168
Less:
Deductions 158
.0
388
.3
734.
1
804.
1
125.
7
563.
5
1263
.3
2513
.6
2746
.0
1837
.1
Oil Revenue
(Net)
166
.3
336
.1
857.
6
903.
4
1105
.1
1510
.8
2091
.5
2248
.8
2541
.6
2625
.8
Non-Oil
Revenue
139
.3
224
.8
314.
5
524.
1
501.
0
500.
8
606.
1
835.
1
773.
4
1200
.8
Companies
Income Tax
333 46,
2
51.1 68.7 89.1 1148 1130 140.
3
244.
9
2753
597
Customs &
Excise Duties
577 87.
9
101.
5
170.
6
181.
4
1955 2172 232.
8
177.
7
2414
Privatisation/
GSM
Proceeds
0.0 0.0 18.1 78.0 19.7 0.0 0.0 0.0 0.0 -
Value-Added
Tax (VAT)
369 47.
1
58.5 91.8 108.
6
136.
4
159.
5
178.
1
221.
6
2896
Tax on
Petroleum
Products
0.0 14.
4
25.5 30.2 0.0 0.0 0.0 0.0 0.0 -
Table 1.1 Continued
Sources 199
8
199
9
2000 2001 2002 2003 2004 2005 2006 2007
Indep.
Rev. of
FG.
114 20.1 38.1 44.4 68.1 54.2 58.9 212.1 33.3 268.7
Educ
Tax
0.0 0.0 7.5 16.2 10.3 0.0 0.0 0.0 0.0 -
Others 114 9.1 14.2 24.2 23.8 0.0 0.0 0.0 0.0 -
Fed.
Collecte
d
Revenue
(Net)
305.
6
560.
9
1172.
1
1427.
5
1606.
1
2011.
6
2697.
6
3083.
9
3315.
0
3878.
5
Fed.
A/C
404.
7
576.
8
1262.
5
1599.
4
1899.
5
2011.
6
2697.
6
3083.
9
3315.
1
3878.
5
Trans. to
Stab.
A/C
0.0 63.1 0.0 17.4 0.0 0.0 0.0 0.0 0.0 -
Trans. to
Fed.
Reserve
A/C
0.0 0.0 0.0 20.4 0.0 0.0 0.0 0.0 0.0 -
Trans. to
FG
Indep.
Rev.
A/C
114 20.1 38.1 44.4 68.1 54.2 58.9 212.1 333 268.7
Trans to
VAT
A/C
369 47.1 58.5 91.8 108.6 136.4 159.5 178.1 221.6 289.6
Deduct.
for 13 %
Derivati
on
Arrears
0.0 0.0 7.5 0.0 0.0 0.0 0.0 0.0 0.0 -
Nat.
Judicial
0.0 0.0 10.0 8.8 0.0 0.0 0.0 0.0 0.0 -
598
Council
Table 1.1 Continued
Sources: (1) Federal Ministry of Finance
(2) Central Bank of Nigeria
Table 2.1
Functional Classification of Recurrent Expenditure of the Federal Government
Year Ad
m.
%
of
T
ot
al
Eco
n.
Ser
vs.
%
of
T
ot
al
Soc.
Com
m.Ser
vs.
%
of
T
ot
al
Tra
nsfe
rs
%
of
T
ot
al
Total %
of
G
D
P
1970 140.
4
19
.6
31.
0
43 2.8 0.
4
541.
9
75
.7
716.
1
13
.8
1971 46 5.
6
32.
6
4.
0
5.2 0.
6
739.
8
89
.9
823.
6
12
.5
1972 498.
3
49
.2
46.
2
4.
6
29.4 2.
9
438.
4
43
.3
1012
.3
14
.0
1973 454.
3
47
.2
52.
4
5.
4
31.1 3.
2
425.
7
44
.2
963.
5
8.
8
1974 555.
4
36
.6
74.
4
4.
9
94.9 6.
3
792.
4
52
.2
1517
.1
8.
3
Source 2008
Total Federally Collected Revenue 7,756,621
Oil Revenue 6,530,626
Non-Oil Revenue 4,458,787
Federation Account 4,433,454
Federal Government Retained Revenue 3,154,370
Total Expenditure 3,201,748
Recurrent Expenditure 1/ 2,078,292
Capital Expenditure 2/ 960,886
Current Surplus(+)/Deficit(-) 1,076,078
% of GDP 4,475
Overall Surplus(+)/Deficit(-) -47,378.5
% of GDP -0.20
Nominal GDP (=N=M) 24,048,480
Financing: 47,378.5
Foreign (net) 367,200.00
Domestic (net) -607341.2
Banking System (net) of which: -1168441.2
CBN (net) -1,174,141.20
Treasury Securities 20,947.90
Other Claims on Federal Government -
Less Federal Government Deposits 1,195,089
Deposit Money Banks 5,700.0
Non Bank Public 561,100
Other Funds 287,519.7
599
1975 105
5.4
38
.6
131
.8
4.
8
287.5 10
.5
126
0.2
46
.1
2734
.9
12
.7
1976 101
0.2
26
.5
141
.8
3.
7
634.6 16
.6
202
8.8
53
.2
3815
.4
14
.0
1977 104
0.4
27
.2
191
.7
5.
0
368.5 9.
6
221
8.6
58
.1
3819
.2
11
.7
1978 133
1.2
47
.5
224
.0
8.
0
407.3 14
.5
837.
5
29
.9
2800
.0
7.
8
1979 999.
5
31
.4
113
.4
3.
6
511.0 16
.0
156
3.3
49
.0
3187
.2
7.
4
1980 191
2.4
39
.9
468
.6
9.
8
807.7 16
.8
161
1.5
33
.5
4805
.2
9.
4
1981 217
5.1
44
.9
499
.4
10
.3
856.0 17
.7
131
6.2
27
.2
4846
.7
4.
7
1982 208
2.1
42
.6
345
.0
7.
1
723.9 14
.8
173
4.7
35
.5
4885
.7
4.
4
1983 256
7.9
48
.6
380
.0
7.
2
904.4 17
.1
142
6.5
27
.0
5278
.8
4.
4
1984 267
7.3
45
.9
326
.9
5.
6
768.0 13
.2
205
5.3
35
.3
5827
.5
4.
7
1985 263
8.2
34
.8
315
.4
4.
2
1132.
2
14
.9
349
0.4
46
.1
7576
.2
5.
2
1986 267
5.7
34
.8
513
.7
6.
7
862.0 11
.2
364
5.5
47
.4
7696
.9
5.
4
1987 604
6.3
38
.6
109
2.9
7.
0
469.0 3.
0
803
8.0
51
.4
1564
6.2
7.
7
1988 577
7.8
29
.8
122
1.2
6.
3
2114.
2
10
.9
102
96.2
53
.0
1940
9.4
7.
1
1989 627
0.5
24
.1
141
9.0
5.
5
4230.
1
16
.3
140
74.6
54
.1
2599
4.2
6.
4
1990 654
0.2
18
.1
161
3.7
4.
5
3396.
0
9.
4
246
69.7
68
.1
3621
9.6
7.
3
1991 695
3.8
18
.2
130
3.4
3.
4
2676.
9
7.
0
273
09.4
71
.4
3824
3.5
6.
7
1992 885
4.5
16
.4
314
0.4
5.
8
1362.
3
2.
5
407
15.0
75
.3
5407
2.2
5.
9
1993 183
66.1
22
.4
465
6.0
5.
7
8807.
4
10
.7
503
14.1
61
.3
8214
3.6
7.
3
1994 205
34.8
23
.9
390
9.9
4.
6
10085
.5
11
.7
513
88.7
59
.8
8591
8.9
5.
9
1995 287
57.9
21
.6
591
7.9
4.
5
13820
.8
10
.4
844
03.1
63
.5
1328
99.7
4.
4
1996 471
22.8
37
.9
584
1.1
4.
7
17687
.2
14
.2
536
40.2
43
.2
1242
91.3
3.
6
1997 613
33.1
38
.7
779
4.0
4.
9
21330
.6
13
.5
681
05.8
43
.0
1585
63.5
3.
7
1998 546
73.5
30
.7
118
62.
1
6.
7
22777
.6
12
.8
887
84.6
49
.9
1780
97.8
4.
3
1999 972 21 204 4. 37748 8. 294 65 4496 9.
600
24.1 .6 51.
2
5 .3 4 238.
8
.4 62.4 4
2000 121
299.
1
26
.3
298
16.
3
6.
5
58802
.4
12
.7
251
690.
7
54
.5
4616
08.5
6.
7
2001 180
810.
0
31
.2
530
11.
1
9.
2
79634
.4
13
.7
265
873.
6
45
.9
5793
29.1
8.
2
2002 331
736.
0
38
.2
659
10.
9
7.
6
18943
1.6
21
.8
280
258.
0
32
.3
8673
36.5
10
.9
2003 307
848.
5
31
.3
960
31.
8
9.
8
10256
5.9
10
.4
477
821.
9
48
.5
9842
68.1
9.
7
2004 306
842.
8
29
.7
587
81.
7
5.
7
13439
0.7
13
.0
532
726.
1
51
.6
1032
741.
3
8.
8
2005 434
671.
8
35
.5
643
08.
5
5.
3
15164
6.6
12
.4
573
103.
1
46
.8
1223
730.
0
8.
8
2006 522
198.
2
37
.6
796
87.
2
5.
7
19416
9.1
14
.0
594
147.
5
42
.7
1390
201.
9
7.
6
2007
Table 2.1 continued
Functions 2008/
1
Administrati
on
731,0
00.0
1.General
Administratio
n
369,6
00.0
2.Defence 68,70
0.0
3.Internal
Security
95,80
0.0
4.National
Assembly
196,9
00.0
Social and
Community
Services
332,9
00.0
5.Education 164,0
699.
5
44 115
.2
7.
2
247.4 15 527.
2
33 1589
.3
7.
0
601
00.00
6.Health 98,20
0.0
7.Other social
and
community
services
70,70
0.0
Economic
Services
313,8
00.0
8.Agriculture 65,40
0.0
9.Construction 94,50
0.0
10.Transport
&
Communicatio
n
67,40
0.0
11.Other
economic
services
86,50
0.0
Transfers 739,7
00.0
12.Public debt
servicing
381,2
00.0
13.Pensions
and gratuities
137,9
00.0
14.Contingenc
ies/subvention
s
-
15.Other
/Other CFR
charges
220,6
00.0
TOTAL\2 2,117
,400.
0
Sources: (1) Federal Ministry of Finance (2) Central Bank of Nigeria.
FIGURE 9.1
602
Total federally-collected revenue declined by 38.4 per cent to 4,844.6 billion in 2009,
and constituted 19.6 per cent of GDP. Non-Oil Revenue share of GDP remain
insignificant contributing 5.6 per cent of GDP IN 2008 AND 6.7 per cent in 2009.
FIGURE 9.2
Gross revenue from non-oil sources rose by 23.7 per cent to =N=1,652.7 billion. A
breakdown indicated that Value Added Tax (VAT) grew by 15.8 per cent to
=N=468.4 billion, while company income tax (CIT) and customs/excise duties
increased by 36.3 and 5.8 per cent, to =N=568.1 billion and =N=297.5 billion
respectively. Other components, education tax and custom levies also rose by 195.6
and 36.4 per cent to =N=139.5 billion and =N=98.5 billion respectively and the
National Information Technology Development Fund (NITDF) rose by =N=7.5
billion. The ratio of non-oil revenue to GDP rose above the level in the previous year.
The contribution of non-oil revenue to total receipts however still remain insignificant
indicating the nation‟s overwhelming dependence on oil.
603
FIGURE 9.3
In 2008, oil revenue was =N=6,530.6 billion representing 83.02 percent of total
federally collected revenue while non-oil revenue was =N=1336.0 billion representing
16.98 per cent of total federally collected revenue for the same year. Of the total
receipts in 2009, oil revenue (gross) accounted for =N=3,191.9 billion (12.9 per cent
of GDP), indicating a decline of 51.1 per cent from the level in 2008.
FIGURE 9.4
604
Recurrent expenditure maintains dominance of general government expenditure at
54.10 per cent in 2009 while capital expenditure is 38.60 per cent in the same year.
FIGURE 9.5
In 2008, recurrent expenditure was 8.9 per cent of GDP while capital expenditure was
4.0 of GDP; in 2009, recurrent expenditure was 8.6 per cent while capital expenditure
was 4.7 per cent. The ratio of capital expenditure to recurrent expenditure remain
insignificant in the two years indicating continuity in the observed trend from the
1973 base year.
FIGURE 9.6
605
At 62 per cent recurrent expenditure dominate federal government expenditure in
2009 while capital expenditure and net lending represents 33 per cent of total federal
government expenditure in 2009.
FIGURE 9.7
A breakdown of Federal Government Recurrent Expenditure in 2009 shows that
administration account for 38 per cent of total; while social and community services
and economic sector trail behind at 17 per cent and 15 per cent respectively. Transfers
accounted for 30 per cent. These figures underscore the need to limit government;
606
State structure as presently constituted is unwieldy. A post oil economy cannot
support such behemoth structure as earlier argued.
FIGURE 9.8
At 27.40 per cent, administration as a component of federal government capital
expenditure is about 62.42 per cent of economic sector as a component of federal
government capital expenditure at 43.90 per cent ideally, administration should not
account for more than 10 per cent of capital expenditure. A cursory look at the
functional classification would reveal that overhead cost at 27.40 per cent is too high;
this has been the trend since the 70s after the first oil boom.
The boom in the export of petroleum resources and the attendant unprecedented
increase in external receipts and inundation of the foreign exchange reserves induced
an expansion of government. A behemoth State structure and bureaucracy evolved
with far reaching budgetary implications as recurrent expenditure account for a more
than proportionate share of public expenditure over and above capital expenditure and
expenditure on human and social services. While administrative overheads rose
progressively from a 1970/71 figure of between 5.6 to 19.6 per cent of total recurrent
607
expenditure to about 40 to 50 per cent from the base year of 1972/73 which represents
the onset of the oil boom and the oil price revolution. This trend persists from the
period immediately following the oil boom era to date.1091
This skewed allocation of financial resources has led to the fostering of a culture of
waste, inefficiency, redundancy and corruption in the public sector. The unwieldy and
behemoth State structure is sustained by the external rents accruing from oil exports
which is susceptible to high volatility and price shocks. A sharp fall in oil prices will
result in budget deficits, which the government responds to by recourse to borrowing
from both public and private international lenders at high compound interest rates,
which wreaks long term havoc on the economy as loan service obligations and
probable full amortization of principal sum borrowed takes its toll on future
income.1092
With Nigeria‟s oil fast approaching full depletion, the behemoth State structure will
inevitably constitute a burden on the post oil epoch economy as there will be no more
easy money to finance such inefficient State structure.1093
The State bureaucracy has grown far beyond the absorptive capacity of Nigeria‟s
fragile oil economy. The parasitic rentier State structure has resulted in increased rent
seeking on the part of the Nigerian State as it struggles to reinvent, sustain and
perpetuate itself.1094
1091 Central Bank of Nigeria, Annual Report, Abuja, Central Bank of Nigeria Publications, passim
(2007). 1092 Ibid. 1093 Ibid. 1094 Ibid.
608
State agencies in Nigeria are veritable cost centres and bottomless holes into which
public finances drain without any commensurate efficiency in the provision of public
services. The dominant role of public corporations such as the Power Holding
Company of Nigeria, NITEL and so forth is the major cause of the inefficiency in the
power and communication sectors and the resultant untoward effect on
productivity.1095
There is an urgent need to reduce and limit government. Particularly
pressing is the need to curtail the overwhelming presence and role of the State in the
economy. The major factor leading to the abysmal performance of the Nigerian
economy is the strangle hold which the State has on key sectors of the Nigerian
economy.1096
Table 3.1
Functional Classification of Capital Expenditure of the Federal Government
Yea
r
Adm. %
of
Tot
al
Econ.
Service
s
%
of
Tot
al
Soc.
Com
m.
Serv.
%
of
Tot
al
Transfe
rs
%
of
Tot
al
Total %
of
GD
P
197
0
70.2 37.4 15.5 8.3 1.4 0.7 100.7 53.6 187.8 3.6
197
1
63.2 36.4 58.2 33.5 13.2 7.6 39.0 22.5 173.6 2.6
197
2
108.8 24.1 132.9 29.4 42.0 9.3 167.6 37.1 451.3 6.3
197
3
133.8 23.7 249.5 44.1 40.4 7.1 142.0 25.1 565.7 5.1
197
4
268.4 21.9 465.9 38.1 358.1 29.3 131.1 10.7 1223.5 6.7
197 747.8 23.3 1314.7 41.0 927.4 28.9 217.8 6.8 3207.7 14.
1095 Ibid. 1096 Ibid.
609
5 9
197
6
795.4 19.7 2231.4 55.2 899.7 22.3 114.8 2.8 4041.3 14.
8
197
7
1013.4 20.2 3124.6 62.4 824.9 16.5 41.7 0.8 5004.6 15.
3
197
8
1112.5 21.4 3017.6 58.0 866.0 16.7 203.9 3.9 5200.0 14.
4
197
9
769.5 18.2 2812.1 66.6 613.3 14.5 24.6 0.6 4219.5 9.8
198
0
1501.1 14.8 5981.1 58.8 2456.
7
24.2 224.5 2.2 10163.
4
20.
0
198
1
720.1 11.0 3629.4 55.3 1299.
0
19.8 918.5 14.0 6567.0 6.4
198
2
385.4 6.0 2542.5 39.6 968.3 15.1 2521.0 39.3 6417.2 5.8
198
3
1098.2 22.5 2290.7 46.9 1026.
5
21.0 470.3 9.6 4885.7 4.1
198
4
2627.7 6.4 656.3 16.0 237.6 5.8 2943.5 71.8 4100.1 3.3
198
5
459.6 8.4 892.7 16.3 1154.
0
21.1 2958.4 54.1 5464.7 3.8
198
6
264.8 3.1 1099.9 12.9 655.4 7.7 6506.7 76.3 8526.8 5.9
198
7
1816.2 28.5 2159.7 33.9 619.1 9.7 1777.5 27.9 6372.5 3.1
610
198 1898.6 22. 2128.7 25. 1726. 20. 2586.8 31. 8340.1 3.0
198
9
261
17.4 3926.3 26.1 1844 12.3 6645.5 44.2 15034 3.7
199
0
2919.9 12.1 3485.7 14.5 2096.
0
8.7 15547.
0
64.6 24048.
6
4.8
199
1
3345.0 11.8 3145.0 11.1 1491.
7
5.3 20359.
2
71.8 28340.
9
4.9
199
2
5118.5 12.9 2336.7 5.9 2132.
6
5.4 30175.
5
75.9 39763.
3
4.4
199
3
8081.7 14.8 18344.
7
33.7 3575.
3
6.6 24500.
1
45.0 54501.
8
4.8
199
4
8785.1 12.4 27102.
8
38.2 4994.
4
7.0 30036.
0
42.4 70918.
3
4.9
199
5
13337.
8
11.0 43149.
2
35.6 9215.
6
7.6 55435.
7
45.8 121138
.3
4.0
199
6
14863.
6
9.4 63581.
1
40.1 8656.
2
5.5 71577.
4
45.1 158678
.3
3.8
199
7
49549.
0
18.4 169613
.1
62.9 6902.
0
2.6 43587.
6
16.2 269651
.7
6.3
199
8
35270.
4
11.4 200861
.9
65.0 17253
.5
3.5 114456
.1
23.0 498027
.6
10.
4
199 42737. 8.6 32358 65. 17253 3.5 11445 23. 4980 10.
200
0
53279.
5
22.3 111508
.6
46.6 27965
.2
11.7 46697.
6
19.5 239450
.9
3.5
200 49254. 11.2 259757 59.2 53336 12.2 76347. 17.4 438696 6.2
611
1 9 .8 .0 8 .5
200
2
73577.
4
22.9 215333
.4
67.0 32467
.3
10.1 0.0 0.0 321378
.1
4.0
200
3
87958.
9
36.4 97982.
1
40.5 55736
.3
23.1 11.3 0.0 241688
.6
2.4
200
4
137775
.8
39.2 167721
.8
47.7 30032
.5
8.5 15729.
8
4.5 351259
.9
3.0
200
5
171614
.1
33.0 265034
.7
51.0 71361
.2
13.7 11500.
0
2.2 519510
.0
3.5
200
6
185224
.3
33.5 262207
.3
47.5 78681
.3
14.2 26272.
9
4.8 552385
.8
3.0
Table 3.1 Continued
Ye
ar
Adminis
tration
%
of
To
tal
Econ
omic
Servi
ces
%
of
To
tal
Social
Comm
unity
Servic
es
%
of
To
tal
Tran
sfers
%
of
To
tal
Total %
of
G
D
P
GDP
20
07
220,900.
0
29.
1
367,9
00.0
48.
5
131,10
0.0
17.
3
39,42
3.0
5.2 759,3
23.0
3.
6
20,853,
580.0
20
08
1/
287,100.
0
29.
9
504,4
00.0
52.
5
152,10
0.0
15.
8
17,30
0.0
1.8 960,9
00.0
4.
0
24,048,
480.0
Sources: (1) Federal Ministry of Finance (2) Central Bank of Nigeria.
612
The drain on public finance which the unwieldy State bureaucracy constitutes is again
betrayed by the huge proportion of total Federal Government capital expenditure
which is allocated to offset administrative over head cost. Administrative cost gulped
between 30 to 40 per cent of total federal capital expenditure between 2003 and 2008.
This state of affairs is unacceptable, as vital financial resources which should have
been deployed to provide social and economic goods and services are misallocated to
finance an inefficient bureaucracy. This distortionary allocative process is arguably
the most significant factor hindering infrastructural development and efficient
delivery of social services such as health, education and shelter.1097
The share of social services in total Federal Government expenditure in the same
period is between 8.5 to 23.1 per cent. Ideally administrative cost should not account
for more than 10 per cent of government capital expenditure.1098
As earlier argued, the overwhelming reliance on oil which constitutes a single easy
source of income has progressively undermined manufacturing which in spite of its
potentials for creation of employment and generation of wealth for all citizens in the
private sector contributed about 4.1 per cent to the national GDP, a steep fall from the
1990 figure of 8.8 per cent.1099
Aside from the Dutch disease syndrome, the deplorable and derelict state of physical
and socio-economic infrastructure; inconsistencies in trade and industrial policies and
1097 Ibid. 1098 Ibid. 1099 UNIDO Development Report 2009. United Nations Statistic Division. Available at
http://www.unido.org/fileadmin/user_media/PMO/idb35_14e.pdf
613
the deficit of both scientific and technological skills of the workforce have combined
to disparage global competitiveness and development of the real sector in Nigeria.1100
The real sector has been progressively crowded out of the economic space by the
dominance of oil as the major source of federally generated revenue. Manufacturing
was the driving force of the Nigerian economy from the pre-independence and the
immediate post independence epoch before the tragic military revolution and the
ouster of the parliamentary government in 1966. Manufacturing grew steadily by 12.2
per cent between 1958-1966/67 while the share of manufacturing in GDP rose from
0.4 per cent in 1950 to 4.82 per cent in 1960; 5.22 per cent in 1961 and 7.02 per cent
in 1965/66.1101
In the period 1960-66 the post independence Nigerian State degenerated leading to
untoward impact on productivity. The manufacturing sector contributed about 4.8 per
cent of GDP in 19601102
The period between 1970 and 1979 witnessed a boom in oil export, with concomitant
expansionary policy adopted by successive administrations. The oil shock of the 80s
led to a reversal of fortunes, oil revenue declined with concomitant huge budget
deficits, resulting in the rapid depletion of external reserves and a huge debt overhang.
The resultant contractionary fiscal and monetary policies aimed at stemming the crisis
disparaged the real sector. The aggregate index of manufacturing decreased by 26 per
cent in 1983 while the average capacity utilization crashed from the 1981 figure of 73
per cent to about 38.2 per cent in 1986. There was a rapid collapse of the industrial
1100 Ibid. 1101 Ibid. 1102 Ibid.
614
sector. The attempt to reverse the decline by means of orthodoxy of economic
paradigms between 1986 and 1999 failed. The Structural Adjustment Policy which
drove these reforms only compounded the problem.1103
There was a respite between 1999 and 2007. The democratically elected government
charted a new direction of liberalization, planning, growth and poverty reduction. The
overall effect of the far reaching reforms in the period was the rising profile of
Nigeria as an emergent economy, propelled by its oil revenue, stable exchange rate
and a predictable and calculable economic environment. From an all time low of 1.1
per cent in 1999 when the military exited, the GDP grew by a steady 5.4 per cent
between 2000 and 2004 and climbed to 6.9 per cent in 2005. Similarly, value added in
manufacturing grew at an average of 8.8 per cent between 2000 and 2004, with
capacity utilization rising from 34 per cent in 1999 to over 53 per cent in 2007.1104
Unfortunately, the gains of that period was not consolidated from 2008 to date,
manufacturing share of GDP remains far below the 5 per cent of the annual average,
its contribution to foreign exchange earnings is negligible and its share of federally
generated revenue and employment is insignificant. Manufacturing accounted for a
mere 4.1 per cent of GDP in 2009. The lack of innovativeness, and intellectual input
in governance has resulted in the failure by the present administration to explore the
infinite potentialities of the real sector as the hob and linch pin of the economy, which
will propel growth and development, reverse the resource curse and catalyze
sustainable poverty reduction.1105
1103 Ibid. 1104 Ibid. 1105 Ibid.
615
Table 4.1: Benchmark Country Assessment
Country MVA
Per
Capita
($)
(2005)
MVA
Per
Capita
($)
(2005)
Manu
facturing
Export
Per
Capita
($)
(2005)
Share
of
MVA
in
GDP
(%)
(2005)
Share
of
Man.
Ex-
Port in
Total
exp
Port
(%)
(2005)
GDP at
Current
prices
($
million)
(2007)
GDP
Per
Capita
(%)
(2008)
China 33.5 495.9 556 34.1 95.1 3,400,351 5,300
Thailand 34.8 888.2 1,498 36.1 87.4 245,351 8,000
Brazil 20.4 748.7 463 20.4 72.8 1,314,199 9,700
Malaysia 29.8 1,430.3 4,753 32.2 85.5 186,720 7,027
South
Africa
18.6 575.9 703 16.3 70.2 283,008 10,600
Nigeria 5 19.1 4 4.1 2.5 173,184 2,200
Sources: UNIDO Development Report 2009; United Nations Statistic Division
Nigeria is trailing far behind its peers in industrialization. Malaysia and Thailand for
example have recorded consistent and appreciable growth in the last three decades with
manufacturing‟s share of GDP rising from12.4 per cent and 15.9 per cent in 1970 to 32.6
per cent and 33.6 per cent in 2000. Nigeria‟s performance in terms of Manufacture Value
Added (MVA) is even most dismal, when compared with Brazil, which had a
Manufacturing Value Added per capita of 748.7 compared to Nigeria‟s 19.1 in 2005.1106
1106 Ibid.
616
Similarly, Nigeria‟s rapidly declining manufacturing sector has resulted in its losing
industrial ascendancy in Sub Saharan Africa. Its share of Sub Saharan Manufacturing Value
Added decreased from16 per cent in 1980 to 4 per cent in 2000, while manufacturing share
of export remain very low, oil constitutes about 75 per cent of export, resulting in
overwhelming reliance on oil export as the most significant foreign exchange earner.1107
Compared to Indonesia which Manufacturing Value Added in 1980 was the same with
Nigeria‟s grew its Manufacturing Value Added by 12, 142 per cent in 2007 in contrast to
Nigeria‟s 431 per cent.1108
While oil‟s contribution to Nigeria‟s exports stood at 95 per cent in 2006 in contrast to
manufacturing 0.8 percent, Brazil and Indonesia who were also oil producing, consume the
bulk of their oil domestically rather than export. Inspite of South Africa‟s comparable
economic woes, its industrialization has progressed at a high rate for three decades at an
average 19 per cent contribution to GDP between 2001 and 2006.1109
TABLE 5.1 Nigeria: Macroeconomic Volatility
1961-2000
Sample Size 1/ Nigeria‟s Rank 2/
Terms of Trade 90 3
Real Exchange rate 84 4
Monetary Growth 125 32
Consumer Prices 114 21
Government Revenue per capita 71 3
Real GDP per capita 87 9
Source: World Bank (2003)
Nigeria‟s economy has also been highly volatile and unstable, most macroeconomic
indicators, terms of trade; real exchange rate; government investment per capita; real per
1107 Ibid. 1108 Ibid. 1109 Ibid.
617
capita GDP growth, display higher volatility than the average for other developing
countries.1110
The volatility stems from the country‟s, heavy dependence on oil as a source of government
revenue and export earnings; highly uncertain policy environment and weak economic
management, including procyclical fiscal policies; fiscal dominance; accommodating
monetary policy, and frequent ad hoc changes to policies, including trade policy, the
exchange rate regime and business regulations; social and political conflicts, and ineffective
financial system and weak State capacity for the implementation of policies.
Macroeconomic volatility invariably has an adverse impact on growth and development.1111
9.1 THE LEGAL PROTOTYPE:
We have duly examined the nature of the Nigerian oil-based economy by means of a macro
economic model in chapter five; the analysis has been accordingly extended in this chapter
in preceding segments. The preoccupation in this segment is the invocation of the foregoing
macro economic analysis in the legal charter for the perspective investment strategy for the
expenditure of Nigeria‟s oil revenue. The Model Law is envisaged to provide the guidelines
which will make subsequent behaviour of the Nigerian State more development appropriate.
The rules in the Law are an objective and rational function of the various strands of legal,
economic, political and social analysis which the study entails. Below is the legal charter
for the effectuation of the economic transformation of Nigeria. The efficacy of the Model
Law in this regard is contingent on the quantum of the political will which the people and
1110 World Bank Development Report 2003. Available at
http://econ.worldbank.org/external/default/main?pagePK=64165259&TheSitePK=64165421&menuPK
=64166093&entityID=000 1111 Ibid.
618
the Nigerian State are willing to muster to deploy it to further the goal of economic
transformation.
A BILL
FOR
AN ACT TO ESTABLISH AN INTERTEMPORAL INVESTMENT STRATEGIC
PLANNING MODEL FOR THE PLANNED AND COORDINATED
EXPANDITURE OF NIGERIA’S PETROLEUM REVENUE PURSUANT TO
ESTABLISHING LINKAGES BETWEEN THE OIL SECTOR AND OTHER
SECTORS OF THE ECONOMY
COMMENCEMENT
BE IT ENACTED BY THE NATIONAL ASSEMBLY OF THE FEDERAL REPUBLIC OF NIGERIA
2 1.-(1) There is hereby established a body to be known as the oil revenue Establishment of
3 intertemporal investment strategic sovereign fund (hereinafter the Sovereign
4 refered to as „the Fund‟) Fund
5 (2) The fund shall be a body corporate with perpetual succession
6 And a common seal.
7 (3) May sue and be sued in its corporate name.
8 (4) May hold and dispose of property whether movable or immo-
9 vable.
10 (5) This Act shall regulate the strategic investment of financial
11 assets of the fund pursuant to accumulating sufficient stock of non-
12 oil assets upon which to build a solid economic base and structure
13 in the post-oil epoch when oil would have been exhausted.
14 2.-(1) The Fund is established for the mobilization of financial Purpose of the
15 Resources for intertemporal strategic investment and accumula- Fund
16 tion of non-oil assets.
17 (2) To invest in diversed port folio of assets abroad where such
18 Investment are profitable.
19 (3) To invest down-stream and mid-stream in strategic oil markets
20 abroad
21 3-(1) There is hereby established for the fund a Board of Directors Establishment
22 made up of the following: composition
23 (a) a Chairman; of the Board
24 (b) one representative from the oil producing states
25 (c) two reprentatives from each geopolitical zone of the federation
26 Appointed on rotational basis;
27 (d) the Minister of National Planning;
28 (e) the Governor of the Central Bank of Nigeria;
29 (f) the Minister of Petroleum Resources
1 (g) the Group Managing Director of the National Oil Company
619
2 (h) the Chairman, Revenue Mobilization, Allocation and Fiscal
3 Commission;
4 (i) the Accountant-General of the Federation, and
5 (j) the Executive Secretary
6 4-(1) The Chairman shall be appointed by the President of the Appointment of
7 Federal Republic of Nigeria subject to the confirmation by the the Chairman and
8 Senate, must be a person with professional competence in financial members
9 Management.
10 (2) Members of the board of directors from each geopolitical zone
11 oil producing States shall be recommended by the State Governors
12 subject to the confirmation of the Senate
13 (3) Each representative must be a person of high integrity and
14 Competent and knowledgeable in accounting, financial manage-
15 ment and banking; and
16 (4) Each member of the board shall be appointed on a part-time
17 Basis, holding office for a single term of 4 years from the date
18 Of his appointment and no more.
19 (5) The Board shall have the responsibility of : Function and
20 (a) administering the provisions of this Act including the supervision, power of the
21 regulation, deployment of the fund financial resources for inter- Board of
22 temporal strategic investment on behalf of the Nigerian People and Directors
23 future generation;
24 (b) Establishing rational investment criteria for the fund with a view
25 to optimizing returns on investment;
26 (c) Conceptualizing and ensuring the implementation of strategic
27 Policy directions
28 (d) undertaking such other activities as are necessary or expedient for
29 the successful management of the fund.
30 5-(1) There shall be paid and credited to the fund; Sources of
31 (a) not less than 25 per cent of the total revenue accruing to the income for the
32 Federation account irrespective of sources Fund
33 (b) not less than 15 per cent of the excess proceeds from the Fede-
34 ration account
35 (c) proceeds from annual appropriation not spent during the budget year;
36 (d) 35 per cent proceeds accruing from the privatization and sale of all
37 Federal Government assets;
38 (e) Penalties charges from gas flaring;
39 (f) funds directed to investment by the Federal Government; and
40 (g) all proceeds or returns from the investment capital of the reserve
41 fund
42 (2) The fund shall be managed an invested as financial assets through:
1 (a) investment in equity holdings not more than 40 per cent
2 (b) bonds and fixed income investments; and
3 (c) investment in strategic markets in Europe, America, Asia
4 and Africa in proportion as deemed appropriate by the board
5 of directors considering countries with developed legislation
6 and differentiated economic regulatory institutions for com-
7 panies, stock exchanges and securities not less than 15 per
8 cent.
9 (3) The fund shall:
620
10 (a) be owned and vested in the Federal Government of Nigeria;
11 (b) be irrevocable and may not make payment mid term;
12 (c) not be used to provide or secure credit to any private or
13 public sector entity or authority what so ever.
14 6-(1) There shall be appointed by the President, subject to the Appointment of the
15 confirmation of the Senate, a Director-General who by reason Director-General and
16 of his qualification, ability, experience and specialized know- other staff of Fund
17 ledge of accounting, financial and investment matters and his
18 professional attainments would in the President‟s opinion be
19 capable of managing thte Fund.
20 (2) The Director-General shall hold office for 4 years and may
21 be reappointed for another term of 4 years and no more as may
22 be stated in his letter of appointment.
23 7-(1) There shall be appointed for the Board of the Fund a Secretary to the
24 Secretary who shall: Fund
25 (a) be appointed by the President and Commander-in-Chief of the
26 Federal Republic of Nigeria;
27 (b) be a person qualified as a Solicitor and Advocate of the
28 Supreme Court of Nigeria; and
29 (c) have not less than ten (10) years post call experience in either
30 Private practice or public service.
31 (2) The Secretary to the Board shall perform the functions of
32 rendering company secretarial services to the board, provide legal
33 advice and such other functions as the Director-General may, from
34 time to time direct.
35 8-(1) The Board shall have powers to: Powers of the
36 (a) appoint such persons as members of staff of the fund as it may Board
37 Deem necessary to assist the fund in the performance of its
38 functions under this Act; and
39 (b) pay to persons so appointed such remuneration (including
40 Allowances) as the Board may determine.
41 (2) The terms and conditions of service (including qualifications,
42 remuneration, allowances, pensions, gratuities and other benefits)
1 of persons employed by the Fund shall be as determined by the
2 Board from time to time.
3 (3) without prejudice to the provisions of Subsection(1) and (2) of
4 this Section, the Board may engage such consultants and advisers
5 as it may require for thte effective discharge of the functions of
6 the fund.
7 9-(1) There shall be established in every State agencies, ministeries, Spending
8 Parastatals, and strategic business units: appraisal
9 (a) a spending appraisal procedure unit which function is to ensure procedure
10 that due process is strictly followed in the allocation and spending
11 of public funds
12 10-(1) Not less than 25 per cent of total annual Federal Capital
13 Expenditure shall be dedicated to investment in non-oil traded
14 goods sector
15 11-(1) The award of contract at every level of government shall be
16 By competitive open and transparent bidding
17 12-(1) The process of electing between alternative decisions shall
621
18 be conducted by adhering to strict procedures and predetermined
19 rules
20 (2) such rules and procedures shall be ascertainable, unambiguous
21 and widely publicized.
22 13-(1) Any act of misappropriation, embezzlement, despoliation Measures
23 and misallocation of oil revenue shall for the purposes of this against
24 Act equate high treason and punishable with life imprisonment. despoliation
25 (2) There shall be established in every State agency, unit an
26 oversight mechanism for the tracking of statutory allocation of
27 oil revenue to such agencies
28 14-(1) Public investment shall have as its aim the cumulative
29 And progressive modernization of the entire sectors.
30 (2) Public investment shall be carried out to induce diversification
31 away from oil to non-oil traded goods sector to create a buffer
32 against intermetent oil price shocks
33 (3) A modicum of benign State intervention shall be conducted to
34 reallocate resources away from non-traded sector to the traded
35 goods sector
36 (4) All public sector investment shall meet rationale investment
37 Criteria and international best practices.
38 (5) Not less than 65 per cent of external receipts shall be held in
39 illiquid form such as bonds, equities and so on.
40 (6) Surplus funds shall not be held in liquid form and allowed to
41 idle beyond one month.
42 15-(1) Higher tariffs shall be charged on imports both as measure Restraint on
1 to conserve foreign exchange and to enhance the competitiveness import
2 of import substituted industries.
3 16-(1) The Statte shall respond to increase in external receipts Responses to
4 from export of petroleum resources by curtailing the growth of increases in
5 money through a process of sterilization. External receipts
6 (2) Negative monetary and fiscal impacts shall be avoided by
7 strategically investing in non-oil assets and downstream in
8 strategic markets overseas.
9 (3) External receipts shall be converted to capital outflows in
10 the current account to insulate the economy from untoward
11 impact of radical infusion of surplus foreign exchange into
12 the economy.
13 17-(1) Interest rates shall not exceed 5 per cent Credit policy
14 (2) Loans to firms in the traded goods sector shall constitute
15 not less than 70 per cent of the total credit exposure of banks
16 18-(1) Reciprocal linkages of all sectors of the economy shall be Diversification
17 enforced by using the output of the oil sector as inputs in non- of the economy
18 oil sectors in a forward linkage and providing its outputs to be
19 used as input in the non-oil sector in a backward linkage.
20 18-(1) The National Oil Company shall integrate horizontally Globalization and
21 in a forward linkage internationally by investing downstream integration of the
22 in strategic markets overseas sector
23 2(a) The oil sector shall be integrated by establishing linkages
24 between the oil sector and other sectors of the economy through
25 greater value added to crude rather than whole sale exportation
622
26 without through-put.
27 (b) Greater value added shall be attained through diversification
28 within the oil sector by optimizing fully the derivable variegated
29 by-products of crude oil which will become inputs in agriculture
30 and manufacturing.
31 (c) The globalization of the National Oil Corporation shall be
32 effected through a process of technical capacity building and
33 enhanced competitiveness pursuant to its becoming a competent
34 and efficient global player.
35 (d) The National Oil Company shall integrate vertically by diver-
36 sifying and investing in non-oil sectors in strategic markets overseas
37 (e) Proceeds from global operations shall be funneled and ploughed
38 back into a port folio of non-oil assets abroad to serve as a buffer
39 against vagaries and uncertainties engendered by the high volatility
40 of the international oil industry.
41 (f) A proportion of operational profit in any given year shall be paid
42 into the national treasury as dividend to the State as the share holder
1 of the National Oil Company
2 19-(1) The maximization of non-oil domestic and foreign Accumulation of non-oil
3 non-oil capital shall be the focus of economic strategy. domestic capital
4 (2) The substitution of wasting and non-renewable resources
5 by renewable and reproducible non-oil capital shall be
6 embarked upon as the basis of optimality.
7 (3) The oil-boom generation shall compensate for its ex-
8 ploitation of the finite reserve of depletable resources by
9 adding optimally to the stock of replenishable capital.
10 20-(1) Not less than 25 per cent of the sectoral allocation Freeing of industry sector
11 to industry shall be dedicated to the growing and deve- allocated financial
12 lopment of small and medium scale industries. resources dedicated
13 to heavy industries to
14 to develop small and
15 and medium scale
16 industries
17
18 21-(1) Revenues accruing from the export of oil in the Investment in tradeable
19 first stage shall carefully be funneled into tradeabel non- non-oil assets versus
20 oil investments which will generate immediate steady investment in non-tradeable
21 stream of non-oil receipts while concomitantly embarking non-oil assets
22 on carefully phased infrastructural development, being
23 mindful of the uni-directional drain on foreign exchange
24 reserves which public investment in infrastructure con-
25 stitutes.
26 22-(1) Borrowing shall cease from being a finance Constraint on borrowing
27 option in public sector budgeting.
28 (2) Where economic exigencies makes it imperative to
29 borrow, then borrowing shall be restricted to self-
30 financing projects which have definable internal rate of
31 return and fully amortizable before oil resources reach
32 full depletion.
33 (3) No oil-boom epoch debt overhang shall be carried
623
34 beyond the oil epoch.
35 (4) Borrowing shall not be resorted to cover gaps in public
36 finance. Consequently, an indefinite moratorium on
37 borrowing is hereby imposed.
38 23-(1) A ceiling of minimum imports of essential input in Restraint on imports
39 production and human services shall be imposed pursuant
40 to attainment of balance of payment equilibria.
41 24-(1) Systemic official corruption in both the public and Total eradication of
42 private sectors shall be eradicated. corruption
1 25-(1) Competitive and representive democracy shall be Enshrining of democratic
2 constitutionally embraced pursuant to inducement of constitutionalism
3 transparency and accountability.
4 26-(1) Foreign reserves shall be shored up during Cyclical fluctuations of oil
5 boom while internal investment shall be made where revenue
6 returns on domestic investment far outstrips the rates
7 overseas as the optimal perspective strategy.
8 27-(1) Contracts between the National Oil Company Abolition of the private
9 and transnational oil companies shall be analysed contract paradigm
10 under an administrative or public contracts paradigm
624
CHAPTER TEN
10.0 CONCLUSIONS AND RECOMMENDATIONS
The study proved by means of formal analysis that without the centrality of law in the body
politik, economic growth and development will remain an illusory national aspiration for
Nigeria. It established a congruence between the collapse of the parliamentary system in
Nigeria in 1966 through degeneration and revolutionary ouster and resultant stultification of
economic growth and development and the disconnect between its stupendous oil resources
and mass impoverishment.
The degeneration of Nigeria‟s first republic and its ouster in 1966 by the military created a
legal void and a rule of law deficit which disparaged the evolution of the Nigerian State and
legal order which would have diffused and induced a highly calculable and predictable
economic environment completely devoid of arbitrariness and very wide latitude for
discretion.
The pervasive corruption which characterizes the body politik and other institutions of State
and the private domain is a function of the rather long spell of capricious rule of the military
and the Nigerian political elites.
Thus, the study demonstrated that economic growth and development can only be
effectuated in Nigeria where conscious efforts are made to create an environment of formal
rational law in which expectations of economic actors are not willfully disparaged,
contractual rights and obligations are enforced dispassionately by the courts, property rights
625
are protected, laws are ascertainable and the administration of civil and criminal justice is
not arbitrary, discretionary and whimsical; human dignity is respected, poverty is eradicated
and there is State legitimacy.
The study submits that several attempts to redress Nigeria‟s crisis of development by means
of economic, political and social orthodoxy failed because of the convoluted evolution of
the Nigerian State, the inorganic state of its laws, the undifferentiated state of its institutions
and its lack of State capacity coupled with inefficiency in the husbandry of resources and
fiscal indiscipline.
The study predicates the capacity of the Nigerian State to catalyse the far reaching changes
that would transform its economy on the growing of resilient institutions and the symbiotic
cooperative interactions between these institutions, civil society, national and international
power centres. Thus, economic performance and, or under performance are contingent on
the extent to which State bureaucracy is characterized by meritocracy, rationality,
transparency and zero tolerance for corruption. Concomitantly, these conditions must be
duly complemented by political elites who are capable of visioning and conceptualizing
those far reaching changes that will transform the economy.
Thus, the study established a congruence between the rule of law and good governance. For
one, the legal order defines the characteristic of governance in the public domain by
structuring the exercise of State‟s powers and the guidelines for the performance of public
functions; compels accountability and transparency and sets rules which serve as standards
by which officials are held accountable for their acts and omissions.
626
The study proved that the unconscionable state of the rule of law, arbitrariness and very
wide latitude for discretion under the degenerate first Republic, successive military
despotism and a corrupt and inept political elites resulted in a latent state of arbitrariness
which resulted in the gross inefficiency characterized by the poor husbandry of Nigeria‟s oil
resources, the abysmal performance of its oil-based economy, the stultification of growth
and development and the mass impoverishment of the citizenry.
Equally, the study demonstrates that ineffectiveness of the law in Nigeria is a function of its
mode of transplantation, as it was borne by the wind of colonialism. Thus, the study
established a congruence between mode and process of transplant of the extant legal order
with the failure to evolve an environment of formal rational law, that is, an economic
environment with pervasive legality in Nigeria.
In its analysis of the impact of corruption on economic efficiency and equity the study
proved that institutionalized official systemic corruption in the public and private domains
results in lack of clarity in the definition and enforcement of laws and the concomitant
stultification of economic growth and development. The study established a correlation
between military dictatorship and systemic official corruption in Nigeria. The foregoing is a
function of the hierarchical nature of military command which is vertical and axial with
very high concentration of organizational power in the hands of few top military brasses
that are not accountable.
The study however constitutes a departure from the tendency to focus exclusively on the
impact of corruption in the public domain. It deliberately focused on the breakdown of
norms in the private sector and the far reaching implications it portends for economic
627
growth and development. Consequently, the study submits that the efficiency of a market,
that is, the economy, is a function of the extent to which its rules, standards and institutions
are organic as to be able to consistently channel the behaviour of actors in the economy in
ways that would guarantee efficiency of the economy through self-regulatory predisposition
of variegated actors in the market. As a corollary of the foregoing, the study proved that a
greater prospect for rule of law and due process pervading a society, particularly at the
economic sphere would obtain where there is a diffusion of basic honesty as a way of life
and that economic actors in their commercial relationships would not normally lie, cheat or
steal when not under immediate threat of detection and sanction.
The study established a correlation between the information deficit created by opacity at all
levels of the international oil industry and colossal market and State failures. It submits that
since market failures and State failures are mutually reinforcing, the pervasive opportunistic
behaviour made possible by information asymmetry has created a lose-lose scenario for all
actors as information available to economic agents are distorted and manipulated to further
private interests.
In its examination of the relationship between the rentier State and energy resources in
Nigeria, the study proved that the direct accrual of oil revenue to the State results in an
overwhelming reliance on a single easy source income that is not sustainable because of the
exhaustible and wasting nature of petroleum resources. The rentier structure of the Nigerian
State derives from its colonial legacy which combined with a long spell of military
dictatorship to stultify the consolidation of a viable State structure. The post-colonial
Nigerian State like its colonial precursor relates axially and vertically with society and vests
rights in oil resources in itself. Thus, the post-colonial Nigerian State system like its
628
predecessor colonial State exerts a brake on development. For one, the colonial economy
was structured to exploit the resources of the variegated ethnic nationalities and to
complement the metropolis, hence the post colonial State inherited an economy without an
industrial base. Consequently, sustainable growth and development elude post-colonial
Nigeria because the rentier post-colonial Nigerian State is averse to long-term perspective
economic strategic planning of the economy.
State capacity to innovate is low, as competing rent seeking elites are content to control
resources rather than innovate for diversification. The predilection of the Nigerian rentier
State for short term expenditure of oil revenue results in pervasive corruption as oil revenue
is subjected to despoliation. The Nigerian rentier State is not accountable as it has a steady
stream of external receipts from the export of oil to afford it an untrammeled existence.
The study proved that the extant contract paradigm is not impacting optimally on the
Nigerian oil economy and that, thus far, the private contract paradigm has been most
ineffective. For one, the private contract framework collapses in the face of consideration
and proprietary rights of the host country over the natural resources in its jurisdiction. Thus,
a choice of law will be otiose in the face of fundamental change which alters expectations
under the agreement. The study proved that pacta sunt servanda can not operate in an
absolute sense because such contracts pertain to a subject-matter which falls in the public
domain. Thus, in contradistinction to the private contract paradigm, the study submits that
contracts with the Nigerian State in its oil industry be analyzed under an administrative or
public contract model.
629
The study has proved by means of formal analysis that the notion of stabilization and
internationalization of Petroleum International Agreements (PIAs) though theoretically
passable, flounders when ranged against considerations of sovereignty and proprietary
rights of the host country. The study demonstrated that the right to development of the host
country is on the highest echelon of the hierarchy of peremptory norms of international law,
and that no derogation from it is permitted. Consequently, the efficacy of stabilization and
internationalization clauses will remain indeterminate and brutum fulmen. The evolving
norms from which they draw their authority are in themselves yet to reach an organic state.
Furthermore, stabilization and internationalization clauses are redundant in view of the
rapid development of legal infrastructure of host countries, which is organic enough to
provide an internationally acceptable framework for petroleum international agreements.
The parties to petroleum international agreements would do well to take cognizance of the
fact that a stipulation of applicable law may not guarantee the stability of expectations,
under the agreement. A choice of law will be superfluous in the face of fundamental
change which wily -nily alters the expectations under the agreement.
It is illusory and self-deluding to overstate the stabilizing authority of the proper law of a
PIA, such notions of stability are based on the erroneous assumption of frozen contracts,
under which terms remain sacrosanct and immutable, irrespective of the effluxion of time
and fundamental changes in circumstances which necessitate variation of the terms of the
contract.
Applicable law can only apply and operate within the logic of the extant circumstances in
which it subsists; it cannot stand immutably for all time as it stood at the time of the
630
agreement. Strictly speaking, in a petroleum international agreement, the host country has
the leeway to reserve the right to fundamentally alter its law, and transnational oil
companies seek to insulate themselves from the vagaries of such changes to no avail.
It is submitted that, it is inconceivable to have immutable PIAs whose terms are frozen in
time and or incorporate stabilization clauses, which are contrived to freeze the HC‟s laws;
or remove the PIA from the purview of the municipal law of the HC. Such expectation of
stability is based on mythical notions of the sanctity of contracts, which are pristine and
outmoded. It is in the mutual interest of parties to PIAs to allow for a high degree of
anticipatory flexibility and adaptiveness in their PIA.
The study demonstrates that the Nigerian National Petroleum Corporation can only
spearhead an oil-led growth in Nigeria if and only if it operate as a going concern and
adopts the behaviour of transnational oil corporations by emulating best international
corporate governance practices. Equally, the study proved that integration and globalization
will combine to increase the efficiency and economic performance of the company by
integrating horizontally downstream in strategic world oil markets in Europe, United States
of America, South America, Asia and the African sub-region. In the same vein, it could
after consolidation in those international markets integrate vertically, by investing in non-oil
traded sectors of these markets.
Thus, the most appropriate model of governance of energy resources is that which enhances
State capacity to participate in the oil industry through purposive enhancement of
indigenous technical capacity upstream, midstream and downstream of the oil industry. The
631
model must induce both forward and backward linkages between the oil sector and other
sectors of the Nigerian economy such that an oil-led growth and development is catalysed
through coordinated and planned expenditure of revenue accruing from the export of oil
resources.
The model must encapsulate a perspective investment strategy of such stream of revenue,
pursuant to accumulating a stock of non-oil assets upon which to build a solid economic
base and structure in the post oil epoch when the oil would have been completely
exhausted.
The study demonstrates that the expansionary responses of the Nigerian State to the
increase in external receipts resulting from the export boom of petroleum resources from the
1970s till date predisposes the Nigerian economy to the dutch-disease which manifests in
the form of a radical shift in relative prices to the advantage of non-traded goods which
have no export value. The deluge of foreign exchange makes foreign exchange cheaper with
concomitant increase in demand for imports. This macro economic outcomes leads
progressively to the fall in the output of the domestic non-oil traded real sector such as
agriculture and manufacturing. By exploring the probable behaviour and responses of the
Nigerian State to the export boom in petroleum resources, the study proved that the State
responds to the removal of foreign exchange constraints on public sector spending by the
inundation of foreign exchange reserves by external receipts from revenue accruing from
export of oil, by embarking on traditional public sector type of capital expenditure, that is
investment in non-traded goods sectors particularly infrastructural development.
632
It is this pattern of State behaviour that results in the dutch-disease syndrome whereby both
public sector and private sector investments gravitate towards the non-traded goods sector
as a function of government expansionary policy. While this trend persists, manufacturing
and agriculture sectors of the economy will shrink progressively. Public sector investment
in infrastructure has little salvage value. In fact, they are sunken investments with no
internal rate of return on investment. By their nature, public sector investments are terminal
investments with no through put of a productive process. They do not generate employment,
and above every other consideration, they have no exchange value in international trade; so,
they cannot earn further and continuous stream of foreign exchange. Thus, the evinced
pattern of State behaviour and responses is ruinous and portends dire economic
consequences as Nigeria nears full depletion of its oil reserves.
The study demonstrates the invocation of the foregoing macro-economic responses and
impacts in the legal prototype set up for the inter-temporal planning model of the over all
economy. The rules in the law are an objective and rational functions of these legal,
economic, political and social strands which have been analytically connected to explicate
Nigeria‟s crisis of development.
The study, however, enters a caveat, to the effect that, the efficacy of the legal prototype
will be contingent on the quantum of the political will which the Nigerian people and State
are willing to muster, the ability of the technocratic and political elites to complement
themselves, where the latter evinces a high capacity for visioning of the far reaching
changes needed to catalyse the economic growth and development of Nigeria, the former
must buy into these visions and provide the intellectual input which are necessary and
sufficient conditions of efficiency of a modern State economy.
633
The study has established the centrality of law in economic development of Nigeria by
conceiving of a legal paradigm that is adaptive to oil-based economies, which when
combined with planned expenditure of her oil revenues would establish linkages in her
economy and catalyze economic growth and sustainable development. It has demonstrated
the infinite possibilities in the deployment of law to further economic goals of the State
whose major purpose is the efficient and optimal husbandry of human capital and natural
resources for economic growth and development.
The study provides an insight into the long-term problem facing Nigeria‟s oil-based
economy, given the exhaustible nature of her oil resources and proffers a planning model by
examining the perspective investment strategies of a typical oil-based economy. It
established congruence between the rentier State structure, the rent-seeking behaviour of the
rentier State and mass impoverishment in Nigeria. The study underscores the limiting nature
of informal rules or extra-legal rules of economic relations.
This work demonstrates the application of the law and economics methodology to the
economic problems bedevilling a developing oil based economy that is, Nigeria. At the
foundation of this application is the institutional approach to economic development which
emphasizes the success or failure of key institutions in facilitating development. It examines
various facets of development from an institutional perspective and emphasizes the crucial
role played by the legal system in the economic development of nations.
The work draws attention to the danger of overwhelming dependence on an easy income
which involves a long-term risk, which would be seldom encountered in other less-
634
developed countries that are not so fortunate as to have a bounty of income and, thus, have
to resort to the more traditional means of finance.
The obvious danger of this reliance is the incongruity which may emerge in the long run
between the mounting requirements of a developing economy for such income and the
country‟s inability to generate sufficient alternative revenue. Therefore, whether oil will act
as a stimulant or a barrier to the economic development of these economies is a question
which in the long run will depend entirely on their expenditure policies, that is, the
allocative process of the oil revenue.
The work proved that economic success is attainable only in an environment of formal
rational law, which diffused governmental and, accordingly, induced a high calculable and
predictable economic environment devoid of arbitrariness and discretion. It analyzes,
connects and synthesizes economic paradigms; economic policies based on these
paradigms, the institutional framework of policy implementation and the law which purpose
it is to effectuate economic policies. It analytically connect the different legal, economic,
political and social strands that are necessary in order to provide a plausible explication of
Nigeria‟s post colonial tragedy.
It traces several themes in the legal history of oil-based economies, which like law itself, is
largely derivative, fundamentally imbedded in the interest, ideas, purposes, and contentions
of political, social and economic power elite.
Following the collapse of the parliamentary system in Nigeria in 1966 through degeneration
and revolutionary ouster, legal institutions were transformed into dedicated instruments of
635
powerful political elites and allowed to sink into deep mire of corruption and malfeasance.
Legal processes have been so devasted far beyond the capacity of mere tokenism at reforms
and reconstruction. The work constitutes a case study over time of legal decay and resultant
stultification of development of Nigeria.
By establishing a nexus between law and development, the research found that, laws, that is
legal prototypes and charters can provide guidelines that can make the subsequent actions
more development appropriate.
By attempting an economic analysis of systemic official corruption, the causes of and
responses to corruption in the body politic and all institutions of the State, the work
highlights corruptions long-term impact on efficiency and equity, and institutional inertia in
Nigeria.
636
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Gersen, J.E., „Timing Rules and Legal Institutions,‟
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Gilson, R.J., „Sovereign Wealth Funds and Corporate
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House, R., „The End of The Globalization Debate: A
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Halpin, A., „Disproving the Coase Theorem?‟ 23
Economics and Philosophy 3 (2007).
Harris, S., „Law, Economics and Accommodations in the
International Labour Market,‟ 10
University of Pennsylvania Journal of
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Hsiung, B., „Economic Analysis of Law: An Inquiry of its
Underlying Logic,‟ 2 Erasmus Law and
Economics Review 1-33 (2006).
Issacharoff, S., „Fragile Democracies,‟ 120 Harv. L.
Rev. 1405 (2007).
Jones, J.R., „Open Markets, Competitive Democracy, and
Transparent and Reliable Legal Systems: The
Three Legs of Development,‟ 83
Chicago-Kent Law Review 25 (2007).
Korhauser, L.A., „Governance Structures, Legal Systems, and
the Concept of Law,‟ 79 Chicago-Kent
Law Review 355 (2004).
Kagan, E., „The Judge,‟ 120 Harv.L. Rev. 1121 (2007).
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Kraus, J.S., „From Langdell to Law and Economics: Two
Conceptions of Stare Decisis in Contract Law
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Krishnan, E., „A Conversation at an Impasse: Assessing the
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U. L. Rev. 116 (2005).
Ladan, M.T., „Human Rights as the Benchmark for Development
Policy,‟ 1 Journal of Economic Social and Cultural
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Listokin, Y., „Interpreting Empirical Estimates of the Effect
Of Corporate Governance,‟ 10
American Law and Economics Review
90-109 (2008).
Leeson, P.T., „How Important is State Enforcement for
Trade?‟ 10 American Law and
Economics Review 61-89 (2008).
________ „An-anghchy: The Law and Economics of
Private Organization,‟ 115 Journal of
Political Economy 1049-1094 (2007).
Levitin, A.J., „Priceless? The Economic Cost of Credit Card
Merchant Restraints 55 UCLA L. Rev.
1321 (2008).
Mialon, H.M., „The Economics of the Bill of Rights,‟
10 American Law and Economics Review
648
1-60 (2008).
Malani, A., „Valuing Laws as Local Amenities,‟
121 Harv. L. Rev. 1273 (2008).
Michaels R., „The True Lex Mercatoria: Law Beyond the
State,‟ 14 Indiana Journal of Global
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Miranda, N., „Concession Agreements: From Private
Contract to Public Policy 117 Yale L.J.
510 (2007).
Mujih, E., „The Regulation of Multinational Companies
Operating in Developing Countries: A Case
Study of the Chad/Cameroon Pipe Line
Project,‟ 16 African Journal of
International and Comparative Law (UK)
83-99 (2008).
Metwally, M.M., „Long-Term Relationship Between Oil
Revenue and Government Expenditure in
GCC Countries,‟ 24 International
Journal of Energy Research 605-613 (2000).
Mashayekhi, A.N., „Public Finance, Oil Revenue, Expenditure
and Economic Performance: A Comparative
Study of Countries,‟ 14 System
Dynamic Review 189-219 (1998).
Ngugi, J.M., „The World Bank and the Ideology of
Reform and Development in International
649
Economic Development Discourse,‟
14 Cardozo Journal of International and
Comparative Law 10 (2006).
Ogus, A., „What Legal Scholars Can Learn From Law
and Economics,‟ 79 Chicago-
Kent Law Review 383 (2004).
Ochoa, C., „From Odious Debt to Odious Finance:
Avoiding the Externalities of a Functional
Odious Debt Doctrine,‟ 49
Harv. In T’L.J. 109 (2008).
O‟Connell, A.J., „Political Cycles of Rule Making: An
Empirical Portrait of the Modern
Administrative State,‟ 94 Va. L.Rev.
889 (2008).
Posner, E.A., „An Economic Analysis of State and
Individual Responsibility Under
International Law,‟ 9 Am Law Econ.
Rev. 72-134 (2007).
Parisi, F., „Functional Law and Economics: The
Search for Value-Neutral Principles of Law
Making,‟ 79 Chicago-Kent Law
Review 431 (2004).
Pincione, G., „Should Law Professors Teach Public
Choice Theory?‟ 79 Chicago-Kent
Law Review 198 (2004).
650
Pellegrini, L., „Causes of Corruption: A Survey of Cross-
Country Analysis and Extended Results,‟
23 Economics of Governance 44
(2007).
Rosenkranz, S., „Can Coasean Bargaining Justify Pigouvian
Taxation?‟ 74 Economica 573-585
(2007).
Raskolnikov, A., „The Cost of Norms: Tax Effects of Tacit
Understandings,‟ 74 The University of
Chicago Law Review 601 (2007).
Robinson, J.A., „Political Foundations of the Resource
Curse,‟ 79 Journal of Development
Economics 447-468 (2006).
Rosser, A., „Escaping the Resource Curse,‟ 11
New Political Economy 557-570 (2006).
_________ „Escaping the Resource Curse: The Case of
Indonesia,‟ 37 Journal of
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Roed, L..E., „Escaping the Resource Curse and the Dutch
Disease: When and Why Norway Caught Up
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65 The American Journal of
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Snyder, F.G., „Law and Development in the Light of
Dependency Theory,‟ 14 Law and
651
Society Review 723-804 (1980).
Smith, T., „Speaking Against Norms: Public Discourse
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Scheines, R., „Causation, Truth, and the Law,‟ 73
Brooklyn Law Review 958 (2008).
Singh, P., „From „Narcissistic‟ Positive International
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Samuel, J., „Is Law Really a Social Science? A View
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Spencer, D.B., „Can Law Manage Competitive Energy
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Todorova, T., „The Coase Theorem Revisited: Implications
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Tiwari, A., „The Doctrine of Public Trust: Changing
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III. CASES
Adamolekun v. Council of the University of Ibadan S.C 378/1966,
[1967] 1 All N.L.R.213.
Adebiyi Adejumo v. H.E. Colonel Mobolaji O. Johnson, Military Governor
of Lagos, S.C. 158/70, [1972] 1 All N.L.R. 81.
African Reinsurance Corporation v. Abate Fantaye, [1986] 1 N.W.L.R.
(Pt. 14) 113 C.A.
AGIP Spa v. The Peoples Republic of the Congo, 21 I.L.M. 726 (1982).
Aghenghen v. Waghoreghor, [1974] 1 All NLR 1.
Aminoil Case, 21 I.L.M. 3 (1983).
Amodu Tijani v. Secretary of Southern Nigeria, (1972), 7 N.L.R.1.
653
Amco v. Indonesia, Resubmitted Case ICSID Reports, Vol. 1, 569,
at 580 no.40(1990).
Amco Asia Corp., Pan-American Development Ltd and P.T. Amco Indonesia v.
Republic of Indonesia, ICSID Case No. ARB/81/1.
Amoco Case, 53 I.L.R. 297 (1974); Iran-U.S.C.T.R. 187.
Anglo-Iranian Oil Co. Case, [1952] I.C.J. Reports 93.
Aoko v. Fagbemi [1961] 1 All N.L.R. 400.
Aramco Case, 27 I.L.R. 114 (1957).
Attorney-General of the Federation v. Attorney-General of the 36 States,
[ [2002] Vol. 6 M.J.S.C.1 ].
Attorney-General of Bendel State v. Attorney-General of the Federation
and Ors., [1981] F.N.R. 179.
BP Case, 531 I.L.R. 297 (1974).
Brazilian Loan Case, P.C.I.J. Series A, pp.41-42.
Central R. Co.v. Mauser, 241 Pa 603, 88A 791, 49 LR.A. (N.S.) 92.
Chief V.O. Onabanjo v. The Special Military Tribunal, Lagos Zone Area
SuitM/106/84.
Chirokee Nation v. Georgia, 21 US580 (1831).
Chorzow Factory Case, P.C.I.J. Reports, Series A, No. 17.
Doherty v. Balewa, [1961] 1 All N.L.R. 604, 93.
Governor of Ebonyi v. Isuama, [2004] 6 N.W.L.R. (Pt. 870) 511.
Grisby v. Jubwe, 14 W.A.C.A. 634.
I Congresso Del Partido, [1983] IA.C. 244 (House of Lords).
Isaac J.A. Boro & Others v. The Republic [1967] N.M.L.R.
Interhandel Case, [1950] I.C.J. Reports 6.
654
Jackson v. Gowon & Others NLJ. Vol. 8 (1967), p.87.
Johnson v. Mcintosh, 21 US 543 (1823)
Kasali v. Lawal [1986] 3 NWLR (Pt. 28), 308.
Klockner Industrie-Anlagen Gmbh, Klockner Belge, S.A. and Klockner
Handelsmaatschappij B.V. v. United Republic of Cameroon and Sociate
Camerounaise des Engrais, ICSID Case No. ARB/81/2.
Kramer Italo Limited v. Government of the Kingdom of Belgium and the Embassy
Of Belgium, Lagos Nigeria, [1989] 1 CLRQ. 126.
Lakanmi & Anor. v. Attorney-General for Western Nigeria (1971), 1 U.I.L.R.
201 (sup. Ct. Nig,).
Liamco Case. Available at http://www.biicl.org/files/3939_1977_liamco v. libya.pdf
Matter of Heff, 197 U.S., 488, 25 S.Ct. 506, 49 L.E.D. 848 (11905).
Mavrommatis Palestinian Concession Case, P.C.I.J. Reports, Series A, No. 2,
p.12.
Miscellaneous Offences Tribunal v. Okorafor, (2001) 18 NWLR
(Pt. 745) 295 at 327.
Momoh v. Fashe (2007), 42 WRN 131 at 144, 148.
Nafiu Rabiu v. Kano State [1981] 2 NCLR, 293.
Nicaragua Case, 11 Yale J.I.L. 104(1985).
Noah G. Ishola v. His Excellency the British High Commissioner to Nigeria,
[1980] All N.L.R., 208-209.
Norwegian Loans Case, [1957] I.C.J. Reports 9.
Ogunlesi & Ors. V. Attorney General of the Federation (1970), LD/28/69.
Ogunola v. Eiyekole & Ors.,[1990] 4 N.W.L.R. (Pt.146) 632 S.C., (1990) 21
NSCL (Pt. 3) 108.
655
Oppon v. Acknie (1887) Vol. 11 (Pt. 1) G & G. 4 Ghana.
Phillipine Admiral (Owners) v. Wallem Shipping (Hong Kong), [1976]W.L.R.
214 at 233; [1976]1 All E.R. 78 at 95-96.
Post and Telegraphs of Republic of Czechoslovakia v. The Radio Corporation
Of America 19 Texas Law Review 55 (1936).
Pyramid Resort Case, Arab Republic of Egypt v. Southern Pacific Properties
(Middle East) Cour d’appel, 23 I.L.M. 1048 (1985).
Ruler of Qatar v. International Marine Oil Company Ltd. 23 I.L.R.
166 (1957).
Salami v. Oke, [1987] 9-11 S.C.43; (1987) 4 NWLR (Pt.63)1.
Saphire International Petroleum Ltd. v. National Iranian Oil Company,
Arbitral Award, 35 I.L.R. 136 (1963).
Schooner Exchange v. McFaddon, 7 Cranch 116 (1812) US Supreme Court.
Senator Chief T.A. Doherty v. Sir A.Tafawa-Balewa, [1961] All N.L.R.
604.
Serbian Loans Case (1929) P.C.I.J. Ser.A., No.20.
Shugaba Abdurahaman v. The Federal Minister of Internal Affairs and
Ors, [1981] 1 N.C.L.R. 25.
Smith v. Martin, 94 Ore.132, 185 236.
Southern Pacific Properties (Middle East) Ltd. v. Arab Republic of
Egypt 24 I.L.M 1040 (1985).
SPP (me) v. Arab Republic of Egypt ICSID Reports (1992), Vol.3, 189.
State v. Nwoga & Okoye, 1 E. C. S. L. R. 17 (1967).
Texaco v. Libya 53 I.L.R. 389 (1977); 17 I.L.M. 1 (1978).
The Claim Against the Empire of Iran 45 I.L.R. 57 (1963) West German
656
Constitutional Court.
Tony Momoh v. Senate of the National Assembly and Ors., [1981]1 N.C.L.R
105.
Trendtex Trading Corporation v. Central Bank of Nigeria [1977] 1 All E.R.
881; Camb. L.J. 211[1977] 26 I.C.L.Q. 674.
United States v. Black Feet Tribe 364 F. Supp. 192.
United States v. Kagema 118 U.S. 375, 6 S.Ct. 1109, 30 L.Ed 228 (1886).
United States v. Nice 241 u.s. 591 (1916).
Warrington v.Reese, 7 Boyce Del. 390. K108A.33.
Western Sahara Case, [1971] I.C.J. Reports 131.
IV. STATUTES
Nigerian Legislation
Armed Forces and Police (Special Powers) Decree No. 24 of 1967
L.F.N. 6 1967.
Associated Gas Reinjection Decree No. 99 of 1979.
Associated Gas Reinjection Continued Flaring of Gas
Regulations 1984.
Constitution (Suspension and Modification) Decree No.1 of 1966.
Constitution (Suspension and Modification) Decree No. 5 of 1966.
Constitution (Suspension and Modification) Decree No.9 of 1966.
Companies Income Tax Act Cap 1 LFN 2004.
Company and Allied Matters Act 1990 Cap 320 LFN 1990.
Criminal Code.
Diplomatic Immunities and Privileges Act (No. 42 of 1962).
657
Federal Military Government (Supremacy and Enforcement of Powers)
Decree, No. 28 of 1970.
Federal Military Government (Supremacy and Enforcement of Powers)
Decree, No. 13 of 1984.
Land Use Act 1978 Cap 202 LFN 1990/Cap L5, LFN 2004.
NNPC Act No. 33 of 1977, Cap 320, LFN 1990.
Petroleum Act, 1969 Cap 350 LFN 1990, Cap 10 LFN 2004.
Petroleum Profit Tax Act 1958 (as amended).
Petroleum Industry Bill.
Privitation and Commercialization Decree No. 25 of 1988 Cap 320
LFN 1990.
Tribunal of Inquiry Decree (Act) 1966.
V. FOREIGN LEGISLATION
Egyptian Law of Mines and Quaries of 1953 as amended 1956.
Iranian Petroleum Act 1957.
Iraq Law No. 80 of 1961.
Kuwait Decree Law Terminating Aminoil Concession Agreement 1977.
Libyan Petroleum Law of 1955.
Libyan Petroleum Law (as amended) 1962.
Petroleum Code of Morocco 1958.
Sahara Petroleum Code of 1958.
VI. INTERNATIONAL INSTRUMENTS
International Convention for the Settlement of Investment Disputes (ICSID) 1965.
658
Statute of the International Court of Justice.
United Nations Resolution on Permanent Sovereignty over Natural
Resources 1962, GA Resolution 1803 (XVII).
United Nations Charter of Economic Rights and Duties of States 1974, GA
Resolution 3281 (XXIX).
VII. FOREIGN AGREEMENTS
Aminoil Concession Agreement, 1948.
AIOC‟s Concession, 1933.
Franco-Algerian Agreement on Hydrocarbon, 1965.
Hudramaut-Pan American Concessions, 1961.
Iranian Offshore Concessions, 1965.
Iranian Offshore Agreements of 1965.
Kuwait Oil Company Concessions, 1934.
Kuwait-Arabian Oil Company Concession 1958.
Kuwait-Shell Concession 1961.
Kuwait/Aminoil Concession, 1948.
NIOC-ERAP Agreement of 1966.
NIOC‟s Agreement with AGIP, 1957.
U.A.R. Phillips Concession, 1963.
U.A.R.-Pan American Concessions of 1963.
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