You are on page 1of 37

Bureau of Public Enterprises

Agenda
Public Enterprises Intention vs. Outcomes The Nigerian Case for Privatization Privatization Strategies and Methods Critique of the Privatization Act Institutional Framework and Structure Programme Implementation Status Incidental and Related Matters Key Issues and Challenges Recommendations and Action Points
BPE Presentation to President Olusegun Obasanjo 2

QUOTABLE QUOTES
Nothing is easier than spending public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody Calvin Coolidge

when everyone is to blame, no one bears responsibility Anonymous


Political and personal considerations have been important influences in a variety of parastatals policy matters (investment, tendering, siting, pricing, choice of machinery, employment levels, management appointments, etc.) For example, many decisions have been made to build patron-client linkages of support for those in state power. This has accounted for the politically inspired distribution of contracts and credit, as well as gross over-staffing, inappropriate siting decisions, and unsuitable management selection Robert Tangri [Politics of patronage in Africa]

BPE Presentation to President Olusegun Obasanjo

Public Enterprises in Nigeria


590 public enterprises at end 2000 (160 in economic activities) Over 5,000 board appointments enormous patronage power Control funds of over N1 trillion more than Federal Budget Transfers of US $3bn (1998), $0.8bn (1999), and about $1.4bn (2000) about $4bn in 2001. Accounted for budget deficit of 5% of GDP (1998) and growing Over 55% of non-performing debts (London and Paris Clubs) are PE debts (Hilton $300m, Sheraton $250m, Paper $1bn, etc.) Most government owned industries and businesses operate at sub-optimal levels of capacity and are among the most inefficient in the world. (NEPA, NPA, NITEL, Paper Mills, Steel, Sugar) No government business in Nigeria makes true profit today and none has ever ever made real profit unless managed by Technical Partners (the NITEL, Nigerdock and NAFCON stories)
BPE Presentation to President Olusegun Obasanjo 4

Public Enterprises Visionary Intentions and Horrific Outcomes - 1


$100 billion spent by FGN to establish Public Enterprises (PE) between 1975 and 1995 to:

Balance or replace weak private sector Control commanding heights or strategic sectors of the economy Produce higher investment ratios Transfer technology, management and know-how Generate employment Develop otherwise uneconomic areas or sectors Provide goods and services at lower costs

These returned 0.5% profit and employed about 420,000 people without NICON and CBN, returns are negative.
BPE Presentation to President Olusegun Obasanjo 5

Public Enterprises Visionary Intentions and Horrific Outcomes - 2


There is clear evidence that PE have not served:
Customers (NEPA, NITEL, NNPC, Steel, NAL) Employees ($100bn for 420K jobs, poor pay, near zero pensions

NRC, NITEL, NEPA, Steel, NAFCON, NAL) Shareholders (zero dividends, unremitted revenues and levies NAL, NITEL, NPA, NNPC, LITFC) Nigerian Tax-Payers e.g. NITEL, NPA, LITFC, OSCs

PE have instead become reverse Robin Hood:


Served as platforms for political patronage and promotion of

short-term political objectives to nations long-term detriment Infrastructure of corruption, parasitism and rent-seeking for elites Consumed average of $3bn annually in subsidies from 1992-99 Major stumbling blocks to obtaining debt relief for Nigeria.
BPE Presentation to President Olusegun Obasanjo 6

The Case for Privatization - 1


The case for privatization is the clear evidence that PE have contributed to our economic stagnation and poor image. PE have:
Created economic inefficiency Consistently incurred financial losses Absorbed disproportionate share of credit Contributed to fiscal deficits and imbalances Facilitated and entrenched parasitism and corruption Attracted rapacious military-civilian elites to politics

BPE Presentation to President Olusegun Obasanjo 7

The Case for Privatization - 2


Accordingly, we need to privatize all our PE to: Reduce corruption and parasite mentality Modernize technology in our industries Strengthen capital markets Dismantle monopolies and remove service arrogance Promote efficiency and better management Reduce debt burden and fiscal deficits Resolve massive and perennial pension funding gaps Broaden ownership base and create popular capitalism Generate funds for investment in social sectors Promote transparency in corporate governance Attract foreign investment and positive re-imaging Attract back flight capital in to Nigeria

BPE Presentation to President Olusegun Obasanjo

Privatization: Definition
Privatization is the transfer of ownership and management control of a PE to private shareholders. This means transfer of:
Capital investment responsibility Going-concern/bankruptcy risks Incentives and profit benefits

At one extreme, privatization can consist of just transfer of management responsibility (without transfer of capital and profit risks) or outright sale of assets or shares at the other extreme.
BPE Presentation to President Olusegun Obasanjo 9

Privatization: Policy Guide

BPE Presentation to President Olusegun Obasanjo

10

Privatization: Strategies - 1

Divesti ture

20

BOT/ BOO Conces sioning Leasin g

Duration

10

Manag Manag ement ement contrac contrac t t

Government

Responsibility for investment and Risk

100%

Private Sector (100%)

BPE Presentation to President Olusegun Obasanjo

11

Privatization: Strategies - 2

BPE Presentation to President Olusegun Obasanjo

12

Privatization Act - Critique


No human legislation is perfect, but the Privatization Act No. 28 of 1999 has received commendation from World Bank, USAID and DFID for its comprehensiveness, flexibility and implementation arrangements. However, the Chief Justice of Nigeria has faulted two provisions of the Act, namely:
Ouster of court jurisdiction to undertake judicial review of the decisions of

Public Enterprises Arbitration Panel set up under the Act, and Application of the provisions of the Public Officers Protection Act requiring pre-action notice. This is a standard provision in every law setting up statutory bodies

These criticisms if considered valid by Government can be redressed by Mr. President as the appropriate authority under s. 315(2) of the Constitution by an order published in the Gazzette to bring the Act in line with the Constitution. The National Assembly is only interested in taking over the Privatization Council, replacing the VP and Ministers and making BPE a parastatal of the Legislature. That is unconstitutional.
BPE Presentation to President Olusegun Obasanjo 13

UK Experience - Lessons Learnt


Apart from Chile, no nation has the UKs privatization experience in privatization. The NCP has studied the British privatization programme and present the following lessons learnt:
A central agency with autonomy, unfettered authority and resources

is essential to success. Experiences and mistakes are learned and the agency gets better with time. Stay Focused as opponents are a minority, but are vocal and articulate. Maggie Thatcher had the will to proceed with what she believed no matter what. Get regulatory system right and ensure competitive framework errors in electric power and telecoms privatization are important lessons. Avoid restructuring/rehabilitation and injection of new money before privatization experience showed that it was throwing good money after bad Favour core investor sales where there is need for new investment, technology or management skills.
BPE Presentation to President Olusegun Obasanjo

14

Implementation Framework

BPE Presentation to President Olusegun Obasanjo

15

Privatization Process - 1
Appointment of professional advisers Financial, Legal, Technical, Valuation, PR, Accounting, etc. Technical, Financial and Legal Due Diligence Advertising of Company for partial sale of bloc of shares to qualified strategic/core investors Pre-qualification and preliminary due diligence of prospective core investors Issue of Information Memorandum and Bidding Documents to prospective, pre-qualified core investors Public opening of bids submitted by prospective core investors Negotiations with short-listed bidders (within 20% of highest) or open auction.

BPE Presentation to President Olusegun Obasanjo

16

Privatization Process - 2
Evaluation of Technical and Financial Proposals by BPE and Technical Committee of NCP Presentation of recommendations of TC-NCP to NCP or the VP in event of perceived delays Approval or otherwise of TC recommendations by NCP, and announcement by BPE Filing of application to offer balance of shares to the general public with SEC and the Stock Exchange Opening of public offer for 4-6 weeks, with no further extension 1,000,000 forms printed and distributed throughout Nigeria SGs, LGs, Post Office, SIAs, Traditional Rulers, Newspaper inserts, etc. Share allotment on basis of equality of Federal Constituencies Shares not taken up offered to SIAs/SGs for uptake within 30 days Subsequently, un-subscribed shares offered to Institutional Investors
BPE Presentation to President Olusegun Obasanjo 17

Implementation Status (Phases I and II)


Phase I: Dec 99 Dec 00
Banks, Oil Marketing, Cement - Target $200m All advisers local, core investors mostly foreign Virtually completed, $250m to be raised, $190

million already transferred to Treasury by Dec 00


BPE Presentation to President Olusegun Obasanjo 18

Phase I Enterprises
Enterprises involved in the cement production, petroleum marketing and banking sectors with already active participation from the private sector FGN pre-sale equity holding typically under 45% (with the exception of NOLCHEM: 80%) Shares of Phase I Enterprises already listed and actively traded on the floor of the Nigerian Stock Exchange (NSE) prior to sale Phase I Enterprises: NAL Merchant bank, IMB, Unipetrol, FSB, AshakaCem, AP, CCNN, NOLCHEM, WAPCO, BCC, NigerCem Most enterprises sold typically through a combination of core investor and public offer sale; banks sold only by public offer Typically between 30-60% of equity in enterprise offered to core investors; rest offered to the general public and staff of the enterprises

BPE Presentation to President Olusegun Obasanjo

19

Phase I Performance (Core Investors)


Transparent and internationally recognized selection process to ensure that only qualified core investor groups emerge successful 3 enterprises sold to world-class foreign core investor groups: WAPCO and AshakaCem (Blue Circle Industries of the UK); CCNN (Scancem of Norway) 4 enterprises sold to indigenous firms: Unipetrol (Ocean & Oil), Nolchem (Conpetro), AP (Sadiq Petroleum) and BCC (Dangote Industries Ltd.) Indigenous advisors used by both BPE and successful core investor groups in the execution of all transactions N16.2 billion gross proceeds raised from core investor sales Higher share prices across the board indicate confidence investors and the markets have placed in the abilities of the successful core investor groups
BPE Presentation to President Olusegun Obasanjo 20

217,000 applications received for all offers All offers concluded and SEC approval of allotments received in April 2001 160,000 new shareholders created Many offers were heavily over-subscribed e.g. IMB (432%), Unipetrol (133%) and CCNN (122%) Fair and equitable basis of allotment: allotment done on the basis of equality of federal constituencies with smaller individual applicants taking preference over larger applicants and companies. Allotments evenly distributed amongst the six geo-political zones Approximately N6.8 billion gross proceeds raised to date (N4.9 billion during offer period, N1.9 billion from post-offer sales to state governments and institutional investors). An additional N1 billion in proceeds is expected from sales of the remaining shares
BPE Presentation to President Olusegun Obasanjo 21

Phase I Performance (Public Offers)

Phase I- Share of Total Allotment

BPE Presentation to President Olusegun Obasanjo

22

Post-Privatization Stock Market Performance Phase I Enterprises

BPE Presentation to President Olusegun Obasanjo

23

Gross Proceeds Realized Phase I

BPE Presentation to President Olusegun Obasanjo

24

Phase IIa: July 00 June 02

Implementation Status (Phase IIa)

Selected Banks, Insurance, Hotels, Media Companies, Transport

and Aviation, NITEL Diagnostic reviews of Steel, Oil Palm, Fertilizer, Sugar, Paper Companies, Airports and Seaports Core Investors sales only, (about 51%) to be followed by IPO at a later date.

Phase IIb: Jan 02 - June 03


NIPOST, selected Banks, Mining and Solid Minerals, Tourism

Sites, Stadia Remaining diagnostic review enterprises Core Investors sales only, (about 51%) to be followed by IPO at a later date
BPE Presentation to President Olusegun Obasanjo 25

Phase III: Jan 02 Dec 03


Implementation Status (Phase III)

Power, Petrochemical Refineries and monopoly sector

enterprises Core Investors sales only, (about 51%) to be followed by IPO at a later date. Billions of US Dollars expected to be raised. Advisers yet to be appointed to estimate proceeds after due diligence. IPO for other Hotels, Vehicle Assembly, Sugar, Paper, Steel, Media, Insurance companies for which strategic sales were made in Phase II. First tranche of cross-border IPOs will cover some of the suitable Phase II and Phase III enterprises.
BPE Presentation to President Olusegun Obasanjo 26

Commercialization is:

Implementation Status (Commercialization)

Limited to a handful of companies currently engaged in ecology

and social-related activities:


National Parks: tourism and ecology National Hospital Abuja and Federal Medical Centre, Gombe River Basins: irrigation schemes and rural development NTA, FRCN, Voice of Nigeria and the News Agency of Nigeria Housing sector whose growth is constrained by absence of a virile mortgage money market FHA NSITF: pension fund manager for private sector NNPC: shell company with NAPIMS only after the privatization of its several subsidiaries.

Ultimately, commercialization is simply the first step in preparing

an enterprise for privatization, and not a permanent solution.


BPE Presentation to President Olusegun Obasanjo 27

Privatization Proceeds (pp)


The utilization of proceeds is a major public policy challenge:
Currently, the proceeds are part of the common pool of Federal revenue

sources, and appropriated as such by the National Assembly. Some Governors are arguing that some of the proceeds ought to shared with them (e.g. NEPA, Refineries, etc.) The disappearance of proceeds into the common pool is potentially a problem for government now and in the near future.

It is strongly recommended that PP be used for targeted, clearlyidentifiable projects, as recommended in 1991 by TCPC:
Proceeds should not to be used to finance budget deficits To finance social safety nets like social insurance, pensions and micro-

credit schemes. To finance the expansion of NTA, FRCN, RBDAs and Railways To create special loan scheme for educational loans and scholarships

BPE Presentation to President Olusegun Obasanjo

28

Share Purchase Loan Scheme


Countries that privatized PE devised schemes to increase public participation (Germany Inter-company credits, Poland, Russia and Czech Republic issued Vouchers to citizens). NCP has approved a N10 billion Share Loan Scheme to be implemented through 24 Selected banks. N4 billion will be set aside from Privatization Proceeds. Banks will provide N6 billion. Every Adult Nigerian can borrow up to N10,000 per annum at no more than 10% interest. Loan will be repayable from dividends over 5 years. Share Certificate will be the only collateral; CBN has agreed to provide incentives to participating banks; Loans will be disbursed on the basis of equality of Federal Constituencies reverse poverty indices and other nationally accepted criteria. Modalities will be finalized in September, and Scheme will be launched in October 2001. Scheme will create 1 million new shareholders every year and will be a veritable weapon of poverty alleviation.
BPE Presentation to President Olusegun Obasanjo 29

Competition and Anti-Trust Reforms


Nigeria has no clear competition and anti-trust policy since PE were the monopolies. Private monopoly and collusive practices by profiteers are greater evils than public monopolies, so there is need for legislative intervention. There is need for a clearly-thought out policy on competition and anti-trust to form the basis for subsequent legislation. The development of competition and anti-trust policy is being midwifed by NCP in close collaboration with House of Representatives, USAID and DFID.
BPE Presentation to President Olusegun Obasanjo 30

Un-funded Pensions Problem


Privatization brings to the surface otherwise postponed problems like unfunded pension liabilities:
The transfer of ownership from government to private sector

requires the funding of existing pay-as-you-go system of the Pensions Act. The magnitude of the public sector pensions problem in Nigeria is estimated at between N450-N900 billion. The magnitude of crisis is most evident in the Military and Railways. Even the best PE schemes like in NITEL have unfunded liabilities of N43 billion. NEPA alone has about N50 billion.

NCP is midwifing pension reforms in public enterprises which if successful can serve as a model for the Nigerian public sector. This will result in solutions with minimal recourse to the annual budget.
BPE Presentation to President Olusegun Obasanjo 31

Cross-Debts Crisis
Public Enterprises owe:
Other PE an estimated N300 billion. The FGN (DMO/FMF) over US $15 billion (foreign loans), and The FGN (MOFI) about N300 billion (local loans).

This system-wide problem has crippled many PE, and has led to excusable defaults by all no responsibility, no blame. (NEPA-NGC) NCP is midwifing the reconciliation of all PE debts for final resolution before transfer to private sector with minimal recourse to the annual budget. By the time true tax liabilities, interest and levies due to FGN are established, the reconciliation may be a major source of FGN revenue in 2002.
BPE Presentation to President Olusegun Obasanjo 32

Corporate Governance
NCP initiated Governance audit after sale of African Petroleum, NOLCHEM and UNIPETROL in December 2000; Auditors Reports exposed bank and non-bank liabilities in AP (N26.0 Billion) hidden from auditors and investors since 1996; Findings suggest collusion between banks, the Companies and the NNPC in the case of AP and other Oil Marketing Companies; Corporate Governance Audit will be conducted for all PE before privatization; PE Managers responsible should be tried under the Companies and Allied Matters Act, Investment and Securities Act and the the Anti-Corruption Law.

BPE Presentation to President Olusegun Obasanjo

33

Social Safety Net


Many countries have used the opportunity of privatization to undertake major reforms of labour markets and social insurance. The World Bank, USAID and DFID are assisting BPE to design a social safety net scheme which includes:

Early retirement incentive programmes Training and re-training for re-employment Self Employment programmes and micro-credit, and Micro, small and medium enterprises as downstream consequences of outsourcing and privatization

The NCP will be presented a Social Safety Net proposal in its meeting of September or October, with a pilot scheme for about 500 NITEL workers Foreign donors like USAID and DFID, along with the World Bank and the Japanese Government have indicated interest to support and fund the pilot scheme. Proceeds can be used for a national scheme.
BPE Presentation to President Olusegun Obasanjo 34

World Bank Credit


The FGN signed an IDA Credit of USD114 million at 0.75% interest repayable over 35years with a 10-year moratorium; The credit will be used principally to pay for the following activities: Privatization Support, Institutional Building and consensus building Telecoms Reforms ( Policy, Telecoms Bill, Strengthening of NCC, Radio

Spectrum Development) and Power Sector Reform (Corporate Restructuring, Unbundling and Privatization of NEPA) Lagos State Water Corporation Project

Credit cannot be drawn in Cash but for payment of advisers (Foreign and Nigerian) Up to USD200,000 per assignment can be used under the credit to engage only Nigerian consultants. Foreign consultants are required to use Nigerian counterpart in all cases Use of the IDA Credit to engage consultants boosts the credibility and transparency of the program in the eyes of international investors; It is a sign of confidence in Nigeria and endorsement of the Privatization Program. It is also a cheaper form of funding than CBN Treasury Bills.
BPE Presentation to President Olusegun Obasanjo 35

Bilateral Grants
The Program has attracted Bilateral Donors Support from:

United States - USAID ($8.0m), United Kingdom - DFID ($10 m ) Spanish Government ($3.0 m) German Government

Grants are not given to BPE in cash, but applied by Donors for further:
Institutional Support - to engage Nigerian professionals to work in BPE;

training of BPE staff, Public Awareness and Education and International Marketing; Consensus Building Workshops, Seminars and Study Tours for PE Managers, National Assembly, Labor Unions and other stakeholders; Support for Reforms in Key Priority Sectors Power, Telecoms and Transport and Special Studies - Labor Issues, Pension Reforms, Competition Policy, Cross Debt Resolution, and Environmental issues;

BPE Presentation to President Olusegun Obasanjo

36

Summary and Action Points


There is clear evidence and broad consensus that public enterprises in Nigeria have failed woefully to live up to our expectations. Most rational Nigerians have recognized that privatization is inevitable state capitalism has failed, is outdated and unsustainable The opponents of privatization are merely putting their short term, personal interest (award contracts, dispense patronage, etc.) at the expense of long term national interest. All other supporting policies to make economic reforms successful are being pursued, so Nigeria is sure to succeed BPE is committed to living up to the expectations of our nation and our friends abroad, in the honest, timely and transparent implementation of the public enterprise reform programme

BPE Presentation to President Olusegun Obasanjo

37

You might also like