Despite numerous privatisations of public enterprises going back to 1988, more than 100 companies remain state-owned in Nigeria. Most are due for privatisation in the next few years but the fate of just five are proving a crucial test of government’s reform resolve. The five are: the National Electric Power Authority (NEPA), Nigeria Telecommunications (NITEL), the Nigeria Ports Authority (NPA), the Nigerian Railway Corporation (NRC) and the Nigerian National Petroleum Corporation (NNPC) refineries.
All are providers of strategic public services and all are in a deplorable state, incapable of meeting the most basic of service level requirements. Crippled by inefficiency, corruption and under-investment, all represent a serious constraint on economic development.
IMF urges speed
Arising out of its recently concluded Article IV consultation, the IMF urged the Nigerian government to accelerate the privatisation programme and deregulation, citing not just the constraint on development posed by inefficiencies in the state sector but also the ongoing cost to the treasury of keeping these companies running.
The government’s first attempt at privatising NITEL was botched in December 2002 when the preferred bidder, Investment International (London), a Nigerian consortium, failed to pay the bid price of $1.1bn. Analysts later said that the bid price was too high and that background checks on bidders had been inadequate.
However, the Nigerian government is adamant that it has learnt its lessons and the privatisation programme will be completed. Encouragingly, the agency tasked with privatisation, the Bureau of Public Enterprises (BPE), recently received endorsement from the World Bank for its management of the programme. Following an assessment in April, when a number of concerns were flagged, the World Bank was particularly pleased that the BPE exceeded an agreed target and had managed to prepare 10 state-owned enterprises for sale in just four months. The bank said that all of the planned privatisations had been completed with adequate due diligence.
This positive endorsement is crucial to sourcing much-needed extra funds from both the World Bank and the International Development Agency to drive the privatisation process. In 2001, the bank provided a $114m grant to support the privatisation programme.
Oil first on the list
The BPE has indicated that its priority in 2004 will be the rehabilitation and privatisation of the NNPC oil refineries. Steps are also being taken to privatise the heavily indebted national power company NEPA, though this requires complex regulatory reform and unbundling of the company into different operating units. On the privatisation of the ports, 110 expressions of interest have been received in respect of port concessions and 96 companies have been pre-qualified to go into technical and financial bids.
Six investor groups, rumoured to include British Telecom, entrepreneur Richard Branson of Virgin and a Singapore consortium that includes Vodafone, have indicated an interest in the 51% stake in NITEL that could be up for grabs as soon as NITEL is back on the market. A 20% stake will be listed in an IPO in Nigeria this year.
New complexity
BPE director general Julius Bala does not dispute that some of the early transaction momentum has slowed down but stresses that Nigeria’s privatisation programme is at a new stage, involving far larger and more complex deals. Other large and complex state-owned enterprises slated for privatisation include the National Fertiliser Company (NAFCON) and the Aluminium Smelter Company of Nigeria (ALSCON). Dr Bala points out that many of these companies are in a perilous state and some have not been operational for a decade, requiring time-consuming and costly remedial action before they can be sold.
“What we have been doing is to carefully prepare these enterprises for privatisation in such a way that transactions are successful. This is very important given the background of failure over the last two years, including NITEL and NAFCON. They all failed because adequate preparatory work had not been done. So, we have spent a lot of time preparing these enterprises and working closely with the World Bank. There is a lot of work that is being done quietly that has not been brought to the attention of the public,” says Dr Bala.
“We are preparing more than 10 enterprises for privatisation between now and the end of the year,” he says, quashing notions that the BPE’s pace is decelerating.
He also points out that for privatisation to succeed, the emphasis cannot just be on selling the enterprise. In important sectors, particularly those providing basic public services, such as power, telecommunications and transport, it is just as important to develop an effective legal and regulatory framework that ensures competition and minimum levels of service. Policies to deregulate the power sector, for instance, are necessary to avoid transferring a monopoly out of state hands into private ownership. The Power Sector Reform Bill is currently passing through the legislature a second time and, despite delays, is expected to be signed into law this year.
“You cannot begin to legally unbundle NEPA unless you are able to pass the bill. Once the bill is passed then the regulatory commission will be formed and then the unbundling of the various generating and distribution arms will become legal. Only then can the process of privatising this company be put in motion,” says Dr Bala.
Proactive persuasion
To speed up the passage of legislation, the BPE is taking a more proactive approach to winning support from government lawmakers. Recently the leadership of both legislative houses spent time in the UK and Romania meeting with private sector operators of electricity companies, legislators and regulatory agencies. The aim was to build a better understanding of the various elements of a privatised power sector as well as the process of regulatory reform.
A similar approach is being adopted with regard to privatisation of the ports, where lawmakers have been exposed to the poor state of facilities and operations at Nigeria’s various ports. Trips to the US and Mexico, to compare the benefits of private sector concessioned ports, are planned.
“We have laid out specific programmes that will enable us to work very closely with the members of the National Assembly, provide them with information that will help them to understand the sector reforms and thereby enable them to pass the bills. Some have queried the rationale of the whole privatisation exercise while yet others have argued that we are only mortgaging our common heritage,” says Dr Bala.
To bear out the point, the successful development of the telecommunications sector, in which a number of private companies transformed the availability and quality of service in just three years, was based on deregulation alone – a programme that was prepared and driven by the BPE. The failed sell-off of NITEL, though disappointing, has not held back the growth of the sector.
Once the regulatory framework is in place, the BPE intends to avoid problems during bidding in two ways. The first is to ensure that all pre-privatisation issues are resolved before going to market. This includes proper preparation of company accounts and clearly highlighting obligations and liabilities, for instance joint venture contracts and pension commitments. And second, there will be a proper due diligence conducted on bidders, especially Nigerian bidders. This to ensure that enterprises are sold to parties that can meet the sales price, and have the necessary funds to recapitalise the business and sustain operations on an ongoing basis. Potential buyers must also show the required management competencies and experience.
Economic rationale
Dr Bala offers the most compelling rationale for privatisation. Between the late 1970s and early 1990s, the government poured more than $100bn into public enterprises. The return on this investment, he says, has been less than 1%. While this constitutes a staggering waste of resources, the more urgent concern is to eliminate any further drain on public funds.
As the IMF points out, there remains a general impression that vested interests and political influences continue to interfere in the privatisation process. The process needs to be more transparent and fair, which is key to engendering investor confidence, it says. To many commentators, past privatisation failures appear to confirm that.
Dr Bala, who only joined the BPE in July last year, dismisses such talk and asks to be judged on the results of upcoming sell-offs.
