Sunday, November 24, 2013

Nigeria's Further Failing Electoral Institution

By Olu Akanmu

It is an understatement that the inconclusive Anambra gubernatorial election is a big national embarrassment.  It could not have been imagined before the election, with the overwhelming concentration of electoral resources and security on the said election that we would come this low. INEC could not conduct a controversy-free election in one state, yet it plans to do a presidential election in thirty-six states. Anambra might be the sad prelude to the coming presidential elections in the unfortunate shape of things to come. Free and fair election is the bedrock of a democratic system, where the people as the ultimate sovereign, express their will in the choice of candidates who will govern them. The people do not do this every day but every four years. The election therefore is the only instrument of people’s sovereignty in a democratic state. When elections are compromised, or when they are neither free nor fair, we cannot have “the true government of the people by the people for the people”. The only reason politicians perform and govern well is the fear of being voted out by the people if they misgovern in the next election. If we can therefore not conduct a free and fair election where the people can genuinely express their will, we can say a permanent goodbye to good governance.

While we believe that the controversial election and its outcome would be tested in the law courts, the court of public opinion is already passing its judgment on INEC. The freeness and fairness of an election is a question of justice in which reality and perception must ally. A famous legal maxim based on the principles of natural justice says that “justice must on only be done but it must be seen to have been done”. In the case of Anambra elections, no matter what Jega and INEC say, we say that elections must not only be free and fair, they must be seen to have been fair. If elections did not take place in the stronghold of certain candidates,  and even a key candidate in the elections was disenfranchised from voting because his name could not be found on the voters register, that election cannot be said to be just, free and fair.  It does not matter whether INEC wants to conduct a supplementary election. The mere inconclusiveness of the election as admitted by INEC taints the election fundamentally and no supplementary exercise would adequately make up for it.

A cornerstone of a free and fair election is the freedom to choose a candidate without any form of pressure on the polling day. I should be making my choice of the electoral candidate largely from my own freewill. Hence, the polling station is designed to give voters the privacy to make their choice without any influence. It is also the reason why elections are conducted on the same day, at the same time. It is recognized as an electoral fairness principle that the choice of candidate should not in any way be influenced by the momentum of results of the same election from somewhere else. For the voters in the areas where INEC would want to conduct a supplementary election, it is certain that their choice would be significantly influenced by the electoral momentum from the areas where INEC has announced its inconclusive results. Whatever happens at the supplementary elections on November 30, its outcome cannot therefore be said to be just, free and fair.

We should not be impressed by the attempt of INEC to speak with both sides of the mouth. On one hand, it says that “it regrets shattering the expectations of Nigerians” and that the election was far below the people’s expectations, yet at the same time it argues that a substantial part of the elections comply with the electoral act. What an ambiguity! It is like saying an election is not fair on one hand, yet fair on the other hand. INEC has substantially lost credibility and the confidence of the Nigerian people in its ability to conduct a free and fair election.

A key player in this unfolding sad saga of INEC is its Chairman, Atahiru Jega, whose strong patriotic credentials is being eroded by the day. We all know Professor Jega’s antecedents in civil society and academia. His story might however be confirming very strongly that patriotic individuals without strong institutional support for the implementation of their patriotic objectives might be consumed by the corrupt and decadent institutions they lead. Jega as an individual cannot guarantee us a free and fair election without a strong electoral institution and a system of laws and enforcement institutions that genuinely and uncompromisingly promote free and fair election.  President Jonathan and the National Assembly had chosen largely to ignore the good recommendations of the Uwais panel on electoral reforms.  These include the criminalization of electoral offences and a strong independent electoral offences commission to prosecute electoral crimes and a long ban from politics of those found guilty of election rigging. The sheer impunity with which Nigerian politicians conduct electoral crimes is because the institutional mechanisms to sanction and punish their criminal behavior are virtually non-existent. Other recommendations of the Uwais report include limits and transparency of political party funding to reduce the corrupt influence of moneybags in elections. Had we have implemented the recommendations of the Uwais electoral reform commission; we would not be having the debacle in Anambra state today. In a way, the problem in Anambra state is also due to the lack of genuine will of the part of the President Jonathan and the National Assembly to strengthen our electoral institutions and guarantee for our people the right to a free and fair election.  

The Anambra electoral debacle has exposed the institutional weakness of INEC to the core.  Its public credibility and confidence have significantly nosedived. The expectations of a free and fair election in 2015 might have been put in abeyance. Yet, we must not give up the pressure to reform. We are a nation that has many times pulled back from the falling edge of a cliff. We can still do it now if we all cry out.

Olu Akanmu is a company executive. He publishes a blog on Strategy and Public Policy on

Monday, October 21, 2013

On Legislative Sovereignty and the National Conference

By Olu Akanmu

We note the decision of President Jonathan to send the outcome of the resolutions of the proposed national conference to the national assembly for ratification. The idea of a national conference came to being because of the imperfections of the current legislative arrangements that our legislative institution does not absolutely represent the will of the people. If it was otherwise, a separate body to discuss the will of the people outside the official legislature would not have been necessary. Political exclusion mechanisms in the electoral system through electorate poverty and the use of money to buy votes, poor internal party democracy, thuggery and violence and high cost of political party finance exclude a large portion of society from expressing their will in candidates and the political party of their choice. These political exclusion mechanisms largely limit the playing field to corrupt and overpaid politicians ensuring that we elect into parliament not those we want or trust that will represent our will but those that we are forced to choose from in an electoral pack that may not necessarily represent the breadth of our will.

The political parties, hence our so called elected representatives tend not to be fundamentally different. The opposition parties are as guilty of poor internal party democracy as the ruling party.  The opposition parties in parliament are also as un-transparent in their compensation and allowances as the ruling party. We have not seen any clear non-mainstream legislative agenda from opposition parties or a different legislative behavior that suggests that may have been scioned from a different block. The difference between the ruling political party and the opposition is largely a difference of blue-black and black –blue. Hence, if President Jonathan sends the debate of the national conference for ratification to a legislative institution that only marginally represent the will of the people, how valid for the purpose of creation of a new political arrangement that the people will own, will such legislative ratification be?  There are even fundamental questions about the nature of the federal parliament that has skewed its seats largely in favour of some regions ensuring that when the parliament votes and the legislators close ranks on the basis of their regions and nationalities, the outcome is largely predictable. Hence, the structure of parliament itself, the political arrangement inherited from the British and the military that skewed local government numbers and legislative representation disproportionately in favour of some states and regions would itself be a subject of debate in a national conference. How could a parliament whose structure and composition is in question for fair representation fairly ratify the decision of a conference of the people?

The will of the politicians or the political elites is not necessarily the will of the people. The will of the Northern political elite is not necessarily the will of the Northern people. If so, the privileges that the North elites have had in governance and government more than any other region in the last five decades should have translated to the lifting of our Northern brothers out of poverty. Yet the North remains more underdeveloped than other regions.  People do not eat politics. They want food, shelter, clothing, water, heath, education and good quality of life. Experience in our politics have shown that there is no necessary correlation between having your “son” in government and a guarantee of the improvement in the quality of life of the people. The same applies to the West where the politicians and the political elites are largely concerned about winning elections, running politics like an investment in which they sell their properties, raise cash to buy votes from our impoverished people and make the money back in over-inflated contracts and political rents when they get to government.  The same applies in the South –South. Despite massive federal allocations, we are yet to see a commensurate lifting of our South –South brothers out of poverty with the exceptions of projects whose primary purpose seem to be a channel for self-enrichment of our South-South political elites rather than their people.

We discuss the above to show that the parliament today as largely dominated by our current political elite, do not necessarily represent the will of “we the people”. It at best only does so marginally. It cannot therefore genuinely be the organ to ratify the outcome of a national conference.  It is a waste of time to have a national conference and get its resolution ratified by an institution that at best marginally represents the will of the people. We went through such time-wasting exercise before. The good recommendations of the Justice Uwais panel report on electoral reform to strengthen our democratic institution prescribing that the National Judicial Council nominates the INEC Chairman rather than a President with political interest has been ignored by parliament. The recommendation to set up electoral offences tribunal and prescription of severe jail terms for those who rig elections by the Uwais panel has also been ignored by parliament. These are the wishes and the will of the people. The will of the people that the parliament becomes transparent about is compensation and allowances and declare it publicly has also been ignored by the legislature that should carry out the will of “we the people”. 

The principle of legislative sovereignty in a representative democracy is based on the moral argument that “we the people” who are the ultimate sovereign transfer our sovereignty to a body of our elected representatives who must act or legislate in our interest. If political exclusion mechanisms limit our choices of who should represent us, delinks the parliament from the interest of the people and such elected representative body only marginally and not absolutely act in the interest of “we the people”, such legislative body on such sensitive issue as a national conference should not have absolute legislative sovereignty to ratify the decisions of a conference of “we the people”.

We therefore submit that if we must have a national conference, and it would not be a waste of our time, its decisions must be ratified not by parliament but by a referendum of the people. We support the views other patriots who have championed this position including the former NBA President, Olisa Agbakoba. The national conference must be sovereign or its sovereignty and its decisions ratified only by a people’s referendum. If not, we would be having a talk-shop to discuss all that we heard before, for which we had no structure to resolve due to the weakness of our democratic and legislative institutions.

Olu Akanmu, a company executive publishes a blog on Public Policy on


Saturday, June 15, 2013

The People’s Broadcast on the Nigerian Centenary

By Olu Akanmu

One hundred years of the Nigeria nation is gone. Perhaps another one hundred is ahead. The managers of the Nigerian state have called for celebrations. There will be pomp and pageantry, gala nights and award dinners, lotteries and beauty contests.  A centenary of the Nigeria nation should however call for more sober reflections of hundred years of opportunities lost, potentials unfulfilled and generations wasted. There are far many more things to be sober about on Nigeria than what we have to celebrate. Some will say that we still do have a nation united despite our history of ethnic and political schisms.  These are the politicians talking, the few who are reaping disproportionately economic benefits from the weakness or the “near-failed” nature of the Nigerian state and its weak institutions.  How many unfulfilled potentials can we count?  A state, whose people have been getting doctorate degrees in medicine and law from prestigious universities like Oxford since 1898, yet has some of the lowest quality of university education in Africa, with no Nigerian university among the top 5000 in the world.  The Nigerian state that gave Malaysia its first seeds of palm oil in the 1960s yet now has to import or smuggle palm oil from Malaysia. Groundnut pyramids of Kano are gone, cocoa is gone, and cotton is gone replaced by an oil industry largely on the sea that has done little to create employment for the mass of our youths.

The unfulfilled potential of our resources is even more illustrated by contrasting us with Dubai and the United Arab Emirates who has leveraged its oil resources to diversify and modernize its economy to match the best of the western world. Therefore resources do not necessarily have to be a cause. It could be a blessing if a nation state is blessed with the fortune of good rulers, true statesmen who govern for the common good and put the nation first. Nigeria has however had the misfortune in its hundred years of being a state with few statesmen.  Late Papa Alfred Rewane lamenting the unfulfilled potential of the Nigerian state had to say during his lifetime that “yesterday (at independence), we prayed for a better tomorrow; but today, we now pray for a better yesterday”. A centenary celebration of the Nigerian state therefore has to be more introspective than beauty contests, march pasts and award dinners. It must ask the fundamental question “Why would the next 100 years of Nigeria be different from the last hundred?” Would those who are members of this state in the next hundred years look on this generation with kindness that we laid a foundation for a better centenary or would they refer to us as another generation wasted  just like those before us?  History has a way of defining a mission for each generation depending on the turn of history to which it finds itself. Perhaps, it is not an accident that we happen to be the generation at the centenary of the Nigerian state.  If we therefore reduce a centenary celebration to gala nights, march pasts and beauty contests, we would have missed an historic opportunity to fulfill a generation mission of tilting the ship of the Nigerian state on a new course of progress.

In this essay, we highlight some of the things that must be done to make the next centenary different from the current one. We expect to provoke some sober reflections and challenge more patriots to change the current paradigm of the celebration of the Nigerian centenary.  First we must build a more inclusive society where every citizen matters, have an opportunity to make it and fulfill her God-given potential. Today, the Nigerian state is increasingly becoming an opposite of this. What is the essence of thumping our chest that we are the biggest black nation on earth when the largest majority of our people cannot fulfill their potential or are just barely existing only in number and add no serious value to society? We must deal with the social exclusion mechanisms through institutionalized political and economic  arrangement s that make it difficult to climb the social ladder or even have real choices and voice in the  way society is governed.  In a young country, where the majority of our citizens are below the age of thirty, investment in the youth and their education must be top priority to liberate the potentials of our largest majority. Access to good and quality education is one of the biggest social exclusion mechanisms in Nigeria. The education of the youth must be matched with an inclusive economic arrangement that recognize that they youth must find gainful work to fulfill their potential and add value to society.  So much has been written around this, the need for strong formal vocational and technical education system that produce young graduates that are truly employable in industry or can work as small vocational businesses supporting big businesses in their economic value chain. The German education system in a strong organic link with industry has been built around this principle. It has enabled Germany to keep it youths gainfully employed with one of the lowest unemployment rates in Europe.

Inclusive economic arrangement also implies a more inclusive financial system where many more citizens have access to financial service and all its benefits. Financial services and the banking system are the bedrock and blood of the modern economy. If more than half of our citizens continue to be excluded from this service, they will be unlikely to fulfill their God-given potential and add their best value to society.  Banking penetration and access to credit must improve.  Brazil found its own way to democratize access to financial service and credits for its initially excluded majority and it became one of the strongest economies in the world. Brazil had similar social structures like Nigeria, a very unequal society with extreme wealth on one side of society and extreme poverty and misery on the other. However, by democratizing the financial system , public-private sector housing programs and improving access to property titles as collaterals to access financial credit for the its large majority, it liberated its people from poverty and misery.  In this centenary period, we need to introspect on the progress we have made in building a more inclusive financial system, consolidate the gains made and publicly debate what else are standing in the way to improve the pace of this critical initiative.

On the political front, we must deal with institutionalized political exclusion mechanisms that offer no real democratic choices for the people.  Weak political parties with poor internal democracies exclude the true will of the party rank and file and ultimately true democratic choices at elections.  Unless the party rank and file can freely choose their representatives and present such to the electorate in a free and fair election, we will continue to have a selectocracy rather than a democracy.  Unless the people can find their voice and choose their leaders in a free and fair electoral process, we will have to kiss good governance and responsible government a perpetual goodbye in Nigeria. This is because the only incentive for politicians to act responsibly and govern well is the fear of losing elections. At the turn of this new centenary, we must therefore strengthen our electoral process and the political institutions that will make our elections truly what they are supposed to be, with the plurality of choices that capture the diversity of patriotic ideas in the nation.  To do this, INEC and its future successors and the courts must be able to sanction the breach of internal party democracies.  Other things to be done  to strengthen the electoral process, make INEC  truly independent of the executive including special sanctions for electoral offenses are contained in the Uwais panel electoral reform report. At this historic turn of the Nigeria’s next centenary, we call on President Jonathan and the national assembly to summon the necessary courage to put our democratic process on new progressive trajectory by implementing the Uwais panel report.  

Over the next centenary, we must become a more open and transparent society. Government must become more open to citizens. This will drive accountability of the managers of state resources to the people on whose behest they are supposed to hold their jobs. A more open society also implies a Nigeria state where the people can enforce their right to know and can freely debate the actions of their government. It implies also a strong press, the modern equivalent of the classic Roman forum, where the people can debate or challenge the actions of the state and its managers. We must consolidate on the gains of our checkered history of press freedom and get the Freedom of Information Act to truly work. Currents efforts to use the Freedom of Information Act to enforce better government transparency has not been very successful suggesting that while we need good laws, we will also need strong judicial institutions to get a good law to fulfill its purpose. A more open society will also engender better trust between government and citizens rather than the cynics that citizens have become of government. A more open society is also a critical ingredient for active citizenship which is critical to building strong accountable public institutions.

A more open and accountable society also implies that the incentive to join politics will gradually change from “intent to corner public funds” to true public service.  Our electoral choices will increasingly be based on ideas and perspectives of better public service and delivery of public good. This coupled with the strengthening of judicial institutions that sanction corruption and criminal behavior in governance, will drive a better incentive for our politicians to become true statesmen who serve only for the common good. We must build a more active citizenship where the people believe in their capacity to determine how they are governed. A people who believe that their vote do not count, who live in extreme poverty and misery will probably sell their vote for a bag of rice.  This further compound their poverty and misery as their so called elected representative becomes more irresponsible knowing that it is not performance but a bag of rice that will win them the next election. And the people in this reinforcing feedback loop fall further and further into despair becoming more and more passive as citizens. We must cut this negative reinforcing feedback loop of irresponsible governance and passive citizenship by ensuring that votes begin to count in free and fair elections. That is one more reason why the recommendations of the Uwais panel on electoral reform must be implemented especially at this historic turn of another Nigeria centenary.

The plural and diverse nature of the Nigerian state, the need to build a strong unity in diversity, and the constant political rancor over presidential succession makes it imperative that we must strengthen our federalism. Current political arrangement with a near balkanization of the old regions into largely economically unviable states has turned our intended federalism upon its head to make the political centre so strong and the federating states so weak. Hence, the struggle to control the centre has become a constant do or die affair. What will be our solution to this un-intended consequence of our peculiar federalism? How would we build stronger federating states within the nation? Should the current state structure remain what they are today or would we need to reconsolidate them to more economically viable units?  All questions as such must be put on the table in a sober introspection on Nigeria’s peculiar Federalism over the last century. We must also arrest the increasing astronomical cost of governance. In a next century that will be far more competitive among nation states, where Nigeria will need to play a catch-up for the missed opportunities of the last century, we cannot afford to have governance structures whose costs will weigh down our national development.

With no Nigeria University among the top 5000 in the world at our national centenary, we must rectify this national embarrassment immediately. There are no great societies without great citadels of learning. Nigeria will not be an exception to this history. Our universities before the decay that started in the late 1980s used to boast of some of the best Professors in the world. And Professors were so much appreciated and respected. It is no longer so as our disdain for knowledge has become enthroned and we have become a nation that celebrates mediocrity. At this turn of our national centenary, we must restore the pride and honour of higher education while ensuring that they become more relevant to our national development. We must develop a public-private partnership model to fund higher education including a small taxation on foreign education remittance to fund our universities.  We must also incentivize science and technology training including related vocational education much better as they are far more critical to our national development than other disciplines of higher education.

Business and the private sector must play a more critical role in our national development working closely with government.  Over the next two decades, we must see the emergence of not one but at least ten Nigerian multinationals competing as strong Emerging market multinational corporations (EMNCs), first taking advantage of our strong domestic market as a launching pad into Africa and the rest of the world. This implies the need to promote and give preferences to our local businesses and local content especially where they understand and can manage investment risks better due to their local knowledge.  Just as the Asians had their Tigers in the Samsungs, Daewoos and the Tatas as private sector manifestations’ of their economic development, we must have our own Nigeria Lions competing on a global stage. To nurture Nigerian companies into true EMNCs however, we must ensure that they learn to compete fairly at home to toughen their competitive muscles and sound management practices which they will need to succeed abroad.  We must deal with cronyism which ultimately masks local business incompetence and cost society enormously in waste and corruption. Ultimately, local businesses that succeed on cronyism cannot compete abroad where they may not have their local cronyism advantage.  We must have a patriotic private sector that adopts a greater Nigeria economic development purpose as its reason for being with profits being a bye product of fulfilling this greater purpose. In financial services, telecommunications, oil and gas and manufacturing, working with government, business must support the building of a more inclusive formal economy that improves the quality of life of the majority of our people. 

We conclude our centenary reflections on the challenge of building strong national institutions. We must strengthen the institutions that will enforce the contracts, rule of law and sanction the pervasive impunity in society. At the back of our weak democratic system is the sheer impunity that elections can be rigged, electoral laws can be broken and you can get away with it with the right connections. Elite impunity is also the reason why economic crimes and corruption is committed in public and private sectors because the institutions to enforce sanctions for wrong behavior are weak or have been captured by a narrow cream of elite in their self-interest. To arrest and tame impunity in society, we will need to make the judiciary and law enforcement institutions independent of the executive and the politicians. The constitutional proposal to separate the office of Attorney General from Minister of Justice should be adopted at Federal and state levels. While the Inspector General of Police should report to the President administratively, they should be appointed independently of the executive for a fixed tenure by the National Judicial Council. The Police Service Commission should also report independently of the executive to a special arm of the judiciary.  Corruption must be purged on the bench to ensure that only men and women of honour sit in our hallowed chambers of justice. 

We must also have a stronger, truly independent and more active parliament that proactively makes good governing laws for our institutions, while holding them transparently accountable for the delivery of their social charter on behalf of the people.  All that is necessary should be done to promote active citizenship beyond the good civil society and human right organizations in the nation. They must hold elected officials accountable for their performance along with a vibrant press institutions for free, unimpeded public debate on social governance. Such active citizenship that we had during the Occupy Nigeria movement and petroleum subsidy debate must be revamped and sustained as a critical platform for public accountability and inclusive institution building. Institutional leaders must also adopt a new value system of character, honour and common good as the fiber of new institutional cultures along with the emergence of a non-partisan core of elder statesmen who will serve as moral guardians of society’s value and conscience.

A national centenary is a very serious matter especially when the history of the nation is a litany of missed opportunities and unfulfilled potentials. We need to introspect deeply and change the current paradigm of the celebration of the national centenary to capture the serious historic nature of the occasion. While there should be march pasts and gala nights, there should also be more serious active citizen debate on what we must do to ensure that Nigeria’s next centenary will more positively different and take real actions to make it happen. Then future generations would look at us with kindness that we recognized our place in history and that we fulfilled our historic mission of laying a foundation for a better next centenary.

GOD bless the Federal Republic of Nigeria.

Olu Akanmu.
Lagos. June 2013

Tuesday, January 1, 2013

Rewarding Bad Behaviour in the Capital Market

By Olu Akanmu

It is important to lend additional voice and question the rationale behind the federal government N22.6 billion bail-out of some capital market operators. It is tantamount to rewarding bad behavior and excessive risk-taking at public expense. For the stock broking firms that will benefit from this largesse, if their investments have been profitable and they made a kill in the capital market, they would not have shared their profit with the public. The action of government is therefore tantamount to endorsing the privatization of profits and the socialization of losses if you have the lobby and the political connection to dumb your losses on the Nigerian people. By setting this precedent, the government has further ossified the moral hazard problem in our financial system. If an investor taking an investment risk knows that he can appropriate his gains but can pass his losses to another party, he will take excessive unreasonable risk as he has nothing to lose. This moral hazard problem was at the heart of the misbehaviour of investment bankers in the recent global financial crisis, when they could made huge bonuses if their bets worked out but pass the loss to shareholders if it didn’t. This coupled with the implicit guarantee of their risk by the public especially if they were “too big to fail, essentially a public subsidy of their risk further compounded their bad behaviour. They created a tower of complex financial instruments that had little bearing to their underlying assets, played roulette and casino at public expense, made initial huge gains which they pocketed until their financial derivative instruments fell like a pack of cards.

Where these investment banking businesses shared a common capital base with retail banking as one organic financial institution, essentially leveraging public deposits in their banks to trade, they created assets that wiped off the bank’s capital and public retail deposits in their institutions. Where they were big banks, sometimes with a century of public retail deposits, the financial system was put a systemic risk of collapse and the state have had to intervene to bail them out largely to protect public deposits. This experience has fuelled calls for the full organic separation of investment and retail banking in the financial system. It is difficult to understand how this logic of bail out applies to the stock brokers who will enjoy N23 billion government largesse. A public bail out of a financial institution is justified only if they pose a systemic risk to the financial system should they fail. A systemic risk is the risk that the entire financial system will fail and collapse and it is different from the risk of financial failure of an individual or group within the financial system. The first question to ask is whether the failure of the selected stock broking firms being offered this government largesse can pull down the entire financial system or pose a systemic risk. Certainly not! These stock broking firms are not banks and their size relative to the whole financial ecosystem poses no fundamental systemic risk. What then is the rationale for the bail out?

Two fundamental conditions must exist for the public bail out of financial institutions. They must either be either be “too big to fail, the TBTF test or must be “too interconnected to fail”, the TICTF test. The TCITF test measures whether a group of institutions represent critical connected dependencies with no existing market alternative in size and function such that their failure will pull down the financial system. The   public bail out of a financial institution or a group of financial institutions must pass these two tests to justify the test of a systemic risk. It is difficult to see how the group of stock brokers who will enjoy these N23b public largesse could pass the “too big to fail” or the “too interconnected to fail” test. Their collective size does not pose significant systemic risk to the financial system. In the last three years, since these firms have had to deal with their margin loan challenges, the financial system has carried on. The capital market measured by the Nigeria Stock Exchange All Share Index has witnessed a year to date gain of more than 25 percent. This is because there are alternative market transaction agents whose collective size moderate any potential “too interconnected to fail” effect of the stock broking firms being bailed-out by government. Whither then is the logic of government action?

 Capital market operators specifically stock broking firms operators are no banks. They are capital market transaction agents. They do not warehouse public assets or owe public liability like the banks that hold public deposits that could create a collapse of the financial system if a critical number of them fail. The stock asset that the public buy is not warehoused by the stockbroker but by the public themselves directly and the company from whom the stock was bought with a clearing system maintained by the independent Central Security Clearing System (CSCS). Stock sales are transactions between the company, the stock seller and the stock buyer with the stockbroker acting as intermediary, a broker and a transaction agent. It is the same relationship as that of a real estate agent who collects a fee brokering a deal between a house seller and a house buyer. The real estate agent just like the stock broker should ordinarily not warehouse housing-stock unless he decides to use his market knowledge for additional private gain and become an investor, acquiring his own housing stock. If we stretch the analogy further, would it be right to use state fund to bail out a group of real estate agents who took a bank loan to buy a house and kept, hoping to make a kill when the house stock appreciates, and unfortunately house prices fell?  If the state does that, should the same logic and largesse not be extended to every citizen investor who bought housing stock when house prices fell? Therefore apart from rewarding bad behaviour, the action of government also raises public equity and fairness issues.  For the ordinary retail investor who also lost money on the capital market like the stock broking firms who took margin loans, where and what will be his own bail out? What is good for the goose must also be good for the gander.

It has been argued that the action of the government is not really a bail-out but a forbearance as no cash is being passed to anyone. This is a sematic argument. The simple fact is that the firms who are benefiting from this government goodwill are simply walking away from their loans and their private financial repayment obligations at public expense. AMCON, the Nigeria public Asset Management Company, who bought the bad margin loans from the banks, is going to pick up the cost of this forbearance. Essentially, the taxpayers and the people of Nigeria have picked-up the losses of the bailed-out stock brokers. The more than N2 trillion loss declared by AMCON in its most recent financial report, essentially its purchased loans from banks that cannot be recovered, might have become the biggest subsidy of the excesses of the “rich” at the expense of the poor and the public in Nigeria. Only the rich in Nigeria borrow big time from the banks. When they do not pay back and the public treasury has to pick up the bill, it is essentially passing big time subsidies to the rich when that resource could have been used to build schools, hospitals, roads and infrastructures for the Nigerian people. The sanctions being imposed on the bailed out stock broking firms that they will not participate in future AMCON deals and transactions is nothing but a slap on the wrist. It is not and cannot be commensurate with the size of the issue and its moral and economic implications.
There have also been attempts to justify the bail out of the stock broking firms as a special intervention in the capital market as it has been done recently in aviation and agriculture. Special sector intervention funds in Nigeria have largely not delivered tangible results as they work against market logic. The art of giving public funds to firms at below market rate, below its true market price distorts market mechanisms and leads to scarce resources being allocated to firms that will not best utilize them. Have we seen yet the tangible and visible gains of the recent special intervention funds in agriculture and aviation?  Such intervention funds have largely festered a regime of cronyism capitalism with all its attendant ills, where you get access to funds below market rate if you are connected to government and can even divert them to other more profitable sectors outside the intervention fund. Crony capitalism is becoming a serious problem in Nigeria. A regime of unfair market practices favouring cronies at the expense of the Nigeria people such as the scandals that we have seen in the oil subsidy programs, the non-transparent allocation of oil prospecting licenses and now the targeted subsidy or bail-out to stock brokers who took excessive risk in the capital market. With cronyism becoming a key success factor for business in Nigeria, it is not surprising that every failed business or sector from automobiles, pharmaceuticals and even thriving Nollywood film industry is pressurizing for special intervention funds. The market punishment of bad investment decision, a return of losses for poor risk decisions and vice versa as gains for good investment risk decisions is critical to the effective functioning of markets. It implies that the market must go through a cycle of self-cleansing that we know as boom and bursts and bulls and bears.  Special intervention funds where there are no proven market failures, where it cannot be proven that markets lack the mechanism to self-correct and cleanse itself in its organic cycle of bulls and bear that ensure that resources are efficiently allocated to those who will best utilize them, can only but lead to more imperfect market outcomes.

Government has done very well by intervening and bailing out the banks whose failure truly posed a systemic risk to the financial system. It has however overreached itself in the N23 billion bail-out of selected stock broking firms. The logic and rationale of its decision fails public interest, fairness and social equity tests. If the concern of government is about the liquidity of the capital market, it cannot be addressed by rewarding excessive risk behaviour that could further jeopardize the future health of the financial system. This bail out of selected stockbrokers by government cannot be morally and economically justified. It should therefore be seriously reconsidered.

Olu Akanmu is an executive in the telecommunications industry. He was previously Managing Director, Retail and Consumer Banking at BankPHB. He publishes a blog on Strategy and Public Policy on .