i

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

ii

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

v

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

vi

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

vii

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

viii

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

ix

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

x

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.

xi

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.

xii

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

xv

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

xvi

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

xvii

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.

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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.

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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.

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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.

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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.

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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.

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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).

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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

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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

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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.

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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).

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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.

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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

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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.

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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

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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

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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

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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

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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.

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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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52 DePaul Law Review 383-400 (2002).

Gersen, J.E., „Timing Rules and Legal Institutions,‟

121 Harv. L. Rev. 543 (2007)

Gilson, R.J., „Sovereign Wealth Funds and Corporate

646

Governance: A Minimalist Response to the

New Mercantilism,‟ 60 Stanford Law

Review 1345 (2008).

House, R., „The End of The Globalization Debate: A

Review Essay,‟ 121 Harv. L. Rev.

1528 (2008).

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

Business Law 210 (2008).

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).

647

Kraus, J.S., „From Langdell to Law and Economics: Two

Conceptions of Stare Decisis in Contract Law

and Theory,‟ 94 VA. L. Rev. 157 (2008).

Krishnan, E., „A Conversation at an Impasse: Assessing the

Value of Contract Economics 11 Auckland

U. L. Rev. 116 (2005).

Ladan, M.T., „Human Rights as the Benchmark for Development

Policy,‟ 1 Journal of Economic Social and Cultural

Rights,’ 1-25 (2002).

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

Legal Studies 468 (2007).

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

Contemporary Asia 38-58 (2007).

Roed, L..E., „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 605-640 (2006).

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

and the Economy of Racialization in the

Workplace,‟ 57 American University

Law Review 523-583 (2008).

Scheines, R., „Causation, Truth, and the Law,‟ 73

Brooklyn Law Review 958 (2008).

Singh, P., „From „Narcissistic‟ Positive International

Law to „Universal Natural International

Law‟: The Dialectics of „Absentee

Colonialism,‟ 16 African Journal of

International and Comparative Law (UK)

56-82 (2008).

Samuel, J., „Is Law Really a Social Science? A View

From Comparative Law,‟ 67 The

Cambridge Law Journal 288-321 (2008).

Spencer, D.B., „Can Law Manage Competitive Energy

Markets? 93 Cornell Law Review

765 (2008).

Todorova, T., „The Coase Theorem Revisited: Implications

for Economic Transition,‟ 35 Atlantic

Economic Journal 189-201 (2007).

Tiwari, A., „The Doctrine of Public Trust: Changing

Forms and Its Indian Face From Judicial

Romanticism to a Call for Codification,‟

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11 Australasian Journal of Natural

Resources Law and Policy 20 (2007).

Volockh, A., „Privatization and the Law and Economics of

Political Advocacy,‟ 60 Stanford Law

Review 1197 (2008).

Weisher, S., „Co2 Emission Allowance Allocation

Mechanism, Allocative Efficiency and the

Environment: A Static and Dynamic

Perspective,‟ 24 European Journal of

Law and Economics 29-70 (2007).

Yackee, J.W., „Conceptual Difficulties in the Empirical

Study of Bilateral Investment Treaties,‟

33 Brook. J. InT’L L 405 (2008).

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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