The Privatization Process in Nigeria
BY
FOLA ADEOLA
The sale of government assets or the privatisation of public sector enterprises is not new in Nigeria. Indeed, privatisation was a key element of the structural adjustment programme adopted by the Nigerian government in 1986 to stabilise the economy and position it for sustainable growth. In that first round of privatisation, government’s share-holding in banks, cement companies, oil marketing companies and hotels were divested mainly through offers for sale on the Nigerian Stock Exchange.
What is new in the on-going privatisation process is the courage and determination of the governments to extend to the utilities (power and telecommunications), airways, petroleum refineries and the petrochemical plants what had been done to otherwise strictly private sector concerns. Quite obviously therefore, the scale of therefore, the scale of the ongoing privatisation exercise is by far greater than the previous one.
Privatisation involves the transfer of assets from the state to the private sector. In other words, it entails change of ownership from public to private hands. In Nigeria, public sector enterprises, particularly the utilities, the airways, the petrochemical plants and the refineries, have over the years been seen and used as tools of political patronage. As such, the sector has assumed immense political importance with the result that a change of ownership could have wider ramifications which could be politically expensive. In addition, the level of waste, inefficiency and dependence on the national treasury that characterise most of the enterprises now being privatised, far exceeds those of the enterprises earlier privatised. Furthermore, the sheer sizes of the enterprises relative to the market capitalisation of the local stock market and the need for specialised skills to manage the enterprises profitably, mean looking beyond the shores of Nigeria for investors.
Consequently, quite unlike the first privatisation exercise which was fairly simple in scope and design due to the nature of the enterprises involved, the peculiarities of the ongoing exercise suggest that its design and implementation must meet certain international standards if the exercise is to be successful. This paper therefore seeks to review certain aspects of the design and implementation of the ongoing exercise. In doing this, the paper will examine three broad areas, namely:
i) transparency of the exercise,
ii) timing of sale, and
iii) the deal structure.
TRANSPARENCY
Perhaps the single most important issue in any privatisation exercise is transparency. The importance of ensuring transparency cannot be over-emphasised in an environment that is characterised by suspicion and distrust, and in a country that has the misfortune of being labelled as the most corrupt country in the world. Transparency creates a genera perception of a level playing field which helps to build support for the privatisation process.
In the Nigerian case, the privatisation process has been largely transparent in design and so far, in implementation. This opinion derives from the following:
i) the enabling legislation, the guidelines on the privatisation and commercialisation process and the blueprint of the programme are contained in a privatisation handbook published by the government, which is widely circulated to the general public,
ii) advertisement for expression of interest by core group/strategic investors in the enterprises to be privatised are placed in national and international newspapers. Competition is encouraged in order to secure the best deal. This has led to investors out-bidding one another in order to secure the core investor position, which also translates to higher value for government,
iii) advertisement for expression of interest by professional advisers are also placed in national and international newspapers. Only advisers/contractors that are registered by the Bureau of Public Enterprises (“BPE”) are eligible for consideration as privatisation advisers,
iv) the use of international privatisation advisers, particularly for the more complex mandates - the utilities, the fertiliser companies, the airways and the refineries. The international advisers comprising investment banks, lawyers and other consulting firms are being engaged to undertake strategic review, restructuring and sale preparation for the affected enterprises,
v) the offers are widely published using national newspapers, radios and television. Application forms are also widely distributed using local government offices, state investment companies, post offices, Nigerian Missions abroad, etc in addition to the conventional branch network of banks and stockbrokers, and
vi) allotment of shares is to be guided by government policy of wide geographical spread of ownership. All allotments are also to be published in national newspapers.
Despite the above structures which have been put in place to ensure that the privatisation process is transparent, there has been clamour from certain quarters (including official quarters) that the process is indeed, not transparent. This is not entirely surprising as the process has unfortunately been characterised by conflicting signals, reversal of decisions or even a challenge of the legal and administrative authority for decisions taken. For instance, the legal framework for the programme, the Public Enterprises (Privatisation and Commercialisation) Act of 1999 which was promulgated by the last military government, has been openly criticised by some legislators. In addition, a committee of the lower house has scheduled a public hearing on the choice by the National Council on Privatisation (“NCP”) of a core investor for an oil marketing company.
There is also the problem of striking a balance between political and economic goals. While it is for instance desirable to spread the share-holding of privatised companies amongst Nigerians as widely as possible, there has also been the desire to ensure sound future corporate governance of the privatised companies. The latter has necessitated the need for core investors to be selected for these enterprises through a process of controlled auctions. Under this process, the number of candidates shortlisted will necessarily be limited, since potential core investors must make substantial business investigations before making a bid. Other considerations e.g. track record are also taken into consideration in making a final decision.
This, unfortunately, has been a major source of accusation of lack of transparency for the process. A case in point is a core investor chosen by BPE and approved by the NCP for a cement manufacturing company. Unfortunately, the indigenes of the state where the cement company resides (including the government and top officials of the state) openly and outrightly rejected the core investor for what can be seen as political and ethnic, rather than economical/technical reasons. Professionally, and correctly, if I may add, the government stuck to its decision and instituted a process of ensuring that the sale held.
TIMING OF SALE
In designing an extensive privatisation programme, it is important to begin with the end in mind, which is achieving success of the entire programme. In this regard, it is absolutely important that early sales succeed as this helps to build momentum for the exercise. This suggests that the programme should logically begin with the sale of the easy candidates first.
Due to the political instability that had characterised the country in the past and the unpredictability/lack of continuity of government policies, the Nigerian Economic Summit Group and other well meaning Nigerians had mounted pressure on the immediate past administration to pursue the privatisation exercise to point where it will be irreversible by the incoming civilian administration. More specifically, the NESH had in its 1998 Report recommended that the government should achieve the following goals before the handling over date to the new civilian government:
i) identify strategic investors and sign letters of intent as well as executive bilateral agreements with countries of strategic investors,
ii) pre-qualify potential bidders and evaluate bids as well as prepare bidding documents and transfer contracts,
iii) execute joint venture agreements with selected strategic investors,
iv) contract consultants - technical, legal and financial - and appoint sectoral privatisation advisers, and
v) receive reports from consultants on valuation of affected enterprises.
The government was consequently pressured into awarding mandates for all the enterprises to be privatised without the adequate preparations necessary to carry out the privatisation of these enterprises, particularly the utilities. This would have negatively affected the chances of success of the exercise as a failure of one major sale would have resulted in server lack of confidence on the remainder of the programme. I believe it was in recognition of this that the present administration reversed the initial mandates shortly after assuming office. The programme has now been classified into three implementation phases:
Phase I: Full divestment of shares in oil marketing companies, banks and cement plants that are already quoted on the Stock Exchange.
Phase II: Full divestment of shares in hotels, vehicle assembly plants and other enterprises operating in competitive markets where no regulation of price or market behaviour is of primary concern to government, and
Phase: III Partial divestiture of shares in major public enterprises currently operating in non-competitive sectors. This includes the utility companies - power and telecommunications, the fertiliser plants, the airways and the Petroleum refineries - enterprises operating in monopoly or near-monopoly markets where public interest regulation is necessary.
This classification is quite logical as the phase I of this programme is a mere extension of the first round of privatisation. Most of the companies involved are already quoted on the Nigerian Stock Exchange and are relatively easy to evaluate. Phase II involves more work than phase one, but the enterprises operate in competitive markets which also makes them fairly easy to evaluate.
The success of phases I and II is expected to provide the impetus for phase II to proceed. Here, enormous amount of work requires to be done to prepare the enterprises for sale. This is where the skill and knowledge of international privatisation advisers are required for credibility and transparency.
THE DEAL STRUCTURE
Overall, the sale of government shares under the privatisation programme is being implemented in two stages, namely:
i) Transfer of substantial equity stake plus management control of the enterprise to a strategic core investor, and
ii) Public offer for sale through the Nigerian Stock Exchange.
The sale of government’s shares in enterprises listed in phase 1 of the programme has reached an advanced stage. For the utilities and other enterprises listed in phase III of the programme, the post-privatisation share-holding of the enterprises are to be as follow:
%
Strategic Investor 40
Federal Government 40
Nigerian Individuals & Associations 20
100
As structured by the NCP, the 40% sale to the strategic investor will be concluded first. The strategic investor will then enter into management agreement with the government to manage the enterprises without interference from government. The strategic investor will be given adequate time to add value to the enterprise before arrangements are made to offer the 20% shares to the Nigerian public through the Stock Exchange.
One major gap in the policy design is the total silence on when the 40% government stake in the privatised phase III enterprises will ultimately be divested to ensure full privatisation, or even more importantly, to give a core investor the much needed confidence to turn around the enterprise. A 40:60 government/private sector relationship, even if interim, can be dangerous. Core investors are therefore advised to find ingenious ways of preventing any reversal of commitments on the part of government. In this regard, expectations of value to be added by a strategic investor within a specific time limit should be strictly defined. Based on that, an agreement-in-principle should be reached on when the final 40% government share-holding will be sold and by what means.
Selection Of Core Investor
Although, the government is divesting its shares, it is very keen on ensuring sound future corporate governance for the affected enterprises. In this regard, the government is seeking core investors, who were described in the NCP’s blueprint on privatisation as “formidable and experienced Corporations or Consortia with the capabilities for adding value to an enterprise and making it operate profitably in the face of international competition”.
The NCP expects that a Core Investor must possess
the technical know-how in relation to the enterprises they wish to invest in,
the financial muscle, not only to pay a competitive price for the enterprise they wish to buy into, but also to turn around its fortune, using their own resources without relying on share-holders for funds, and
proven management skills to run the enterprise profitably.
In this regard, each core Investor is expected to prepare a short/medium/long term plan for the development of the enterprise and indicate how it will be financed.
The negotiation between the NCP and Core Investors normally centres around:
i) the price to be paid for the shares,
ii) the terms of payment for the shares,
iii) expected contribution of the Core Investor in the future management
of the enterprise,
iv) level of participation by Nigerian managers and technology transfer programme (if relevant),
v) future development of the enterprise as perceived by the core investor,
vi) funding arrangements for rehabilitation, expansion or diversification of the enterprise (if appropriate), and
vii) Staff welfare, restraining and development plan.
From the above, it can be seen that the highest bidder for an enterprise may not necessarily be chosen as the core/strategic investor. In the interest of the future development of the enterprises, the NCP is not only interested in the price offered by potential core investors, but also their qualification to add value to the enterprise - after all, of what value is a high bid if the assets of the enterprise will be stripped in due course with attendant job loss and ultimate revenue loss to government and to the country?
In other words, the process of identifying and selecting a core investor as well as the negotiation and bidding process suggest a deliberate attempt on the part of government to ensure that the right balance is struck between getting the best deal, in terms of privatisation proceeds and ensuring that the enterprises are profitably and efficiently run after privatisation.
In my opinion, the latter (i.e. profitable and efficient running of the enterprises post-privatisation) is, indeed, by far more important than the former. While the former guarantees a high up-front revenue to government, the latter has the potential of creating a perpetually growing and sustainable revenue flow for government through taxation and dividend. It also holds significant prospect for employment generation. This is without prejudice to the fact that the government must not undersell public assets.
One other issue of concern is the huge level of planned Investment in the utilities prior to sale. Although it can be argued that the proposed investments will significantly increase the values of the enterprises prior to sale, it is also true that the investment will similarly increase the debt of equity profile of the enterprises. Furthermore, if the antecedents of the public sector in making such investments are anything to go by, the investments are better left to strategic investors to undertake.
Overall, the privatisation process in Nigeria has been well conceived, and is being implemented in a professional and transparent manner, albeit at a rather slow pace. The initial policy reversals, following the change of government have, no doubt, affected the enthusiasm of some international organisations who were desirous of participating in the programme either as privatisation advisers or as core investors. But as already mentioned, such reversals were informed mainly by the desire to ensure the success of the entire programme.
I believe that the exercise has been structured and is being implemented in a manner that will achieve success. The final phase of the exercise holds tremendous prospect for the Nigerian economy as it will fundamentally transform the capital market and reform the utilities for efficient services. It also holds significant prospect for genuine, value-seeking investors seeking superior return on investment.
I thank you for listening.