Presidential Review of the Privatization Programme - Bureau of Public Enterprises of Nigeria

8/6/2019 Presidential Review of the Privatization Programme - Bureau of Public Enterprises of Nigeria

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Bureau of PublicEnterprises


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BPE Presentation to President Olusegun

Obasanjo

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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


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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 atsub-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 TechnicalPartners (the NITEL, Nigerdock and NAFCON stories)


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Public Enterprises Visionary

Intentions and Horrific Outcomes - 1

$100 billion spent by FGN to establish PublicEnterprises (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 about420,000 people without NICON and CBN, returnsare negative.


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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 ofshort-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.


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The Case for Privatization - 1 The case for privatization is the clear evidence

that PE have contributed to our economicstagnation 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


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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


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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 justtransfer of management responsibility (withouttransfer of capital and profit risks) or outrightsale of assets or shares at the other extreme.


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Privatization: Policy Guide


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Privatization: Strategies - 1

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Government Responsibility for investment and Risk

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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 itscomprehensiveness, flexibility and implementation arrangements.

However, the Chief Justice of Nigeria has faulted two provisions of theAct, namely:

Ouster of court jurisdiction to undertake judicial review of the decisions ofPublic Enterprises Arbitration Panel set up under the Act, and

Application of the provisions of the Public Officers Protection Act requiringpre-action notice. This is a standard provision in every law setting upstatutory bodies

These criticisms if considered valid by Government can be redressed byMr. President as the appropriate authority under s. 315(2) of the

Constitution by an order published in the Gazzette to bring the Act inline with the Constitution.

The National Assembly is only interested in taking over the PrivatizationCouncil, replacing the VP and Ministers and making BPE a parastatalof the Legislature. That is unconstitutional.


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UK Experience - Lessons Learnt Apart from Chile, no nation has the UKs privatization

experience in privatization. The NCP has studied the Britishprivatization programme and present the following lessonslearnt:

A central agency with autonomy, unfettered authority and resourcesis essential to success. Experiences and mistakes are learned and theagency gets better with time.

Stay Focused as opponents are a minority, but are vocal andarticulate. Maggie Thatcher had the will to proceed with what shebelieved no matter what.

Get regulatory system right and ensure competitive framework errors in electric power and telecoms privatization are importantlessons.

Avoid restructuring/rehabilitation and injection of new moneybefore privatization experience showed that it was throwing goodmoney after bad

Favour core investor sales where there is need for new investment,technology or management skills.


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Implementation Framework


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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 toprospective, pre-qualified core investors

Public opening of bids submitted by prospective core investors

Negotiations with short-listed bidders (within 20% of highest) oropen auction.


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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 inevent of perceived delays

Approval or otherwise of TC recommendations by NCP, andannouncement by BPE

Filing of application to offer balance of shares to the general publicwith 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


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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


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Phase I Enterprises Enterprises involved in the cement production, petroleum marketing

and banking sectors with already active participation from the privatesector

FGN pre-sale equity holding typically under 45% (with the exceptionof NOLCHEM: 80%)

Shares of Phase I Enterprises already listed and actively traded on thefloor 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 investorand public offer sale; banks sold only by public offer

Typically between 30-60% of equity in enterprise offered to coreinvestors; rest offered to the general public and staff of the enterprises


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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 (DangoteIndustries Ltd.)

Indigenous advisors used by both BPE and successful core investorgroups 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 coreinvestor groups


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Phase I Performance

(Public Offers) 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 applicantstaking preference over larger applicants and companies.

Allotments evenly distributed amongst the six geo-political zones Approximately N6.8 billion gross proceeds raised to date (N4.9billion during offer period, N1.9 billion from post-offer sales to state

governments and institutional investors). An additional N1 billion inproceeds is expected from sales of the remaining shares


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Phase I- Share of Total

Allotment


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Post-Privatization Stock Market

Performance Phase I Enterprises


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Gross Proceeds Realized

Phase I


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(Phase IIa) Phase IIa: July 00 June 02

Selected Banks, Insurance, Hotels, Media Companies, Transportand Aviation, NITEL

Diagnostic reviews of Steel, Oil Palm, Fertilizer, Sugar, PaperCompanies, Airports and Seaports

Core Investors sales only, (about 51%) to be followed by IPO ata 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


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(Commercialization) Commercialization is:

Limited to a handful of companies currently engaged in ecologyand 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 itsseveral subsidiaries.

Ultimately, commercialization is simply the first step in preparingan enterprise for privatization, and not a permanent solution.


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Privatization Proceeds (pp) The utilization of proceeds is a major public policy challenge:

Currently, the proceeds are part of the common pool of Federal revenuesources, and appropriated as such by the National Assembly.

Some Governors are arguing that some of the proceeds ought to sharedwith them (e.g. NEPA, Refineries, etc.)

The disappearance of proceeds into the common pool is potentially aproblem for government now and in the near future.

It is strongly recommended that PP be used for targeted, clearly-identifiable 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


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Share Purchase Loan Scheme Countries that privatized PE devised schemes to increase public participation

(Germany Inter-company credits, Poland, Russia and Czech Republicissued Vouchers to citizens).

NCP has approved a N10 billion Share Loan Scheme to be implementedthrough 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. ShareCertificate 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 inOctober 2001.

Scheme will create 1 million new shareholders every year and will be averitable weapon of poverty alleviation.


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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 profiteersare greater evils than public monopolies, so there is needfor legislative intervention.

There is need for a clearly-thought out policy oncompetition and anti-trust to form the basis for

subsequent legislation.

The development of competition and anti-trust policy isbeing midwifed by NCP in close collaboration with

House of Representatives, USAID and DFID.


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Un-funded Pensions Problem Privatization brings to the surface otherwise

postponed problems like unfunded pension liabilities:

The transfer of ownership from government to private sectorrequires 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 ofcrisis is most evident in the Military and Railways.

Even the best PE schemes like in NITEL have unfundedliabilities of N43 billion. NEPA alone has about N50 billion.

NCP is midwifing pension reforms in publicenterprises which if successful can serve as a modelfor the Nigerian public sector. This will result insolutions with minimal recourse to the annual budget.


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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, andhas led to excusable defaults by all no responsibility,no blame. (NEPA-NGC)

NCP is midwifing the reconciliation of all PE debtsfor 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 amajor source of FGN revenue in 2002.


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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 andthe NNPC in the case of AP and other Oil Marketing Companies;

Corporate Governance Audit will be conducted for all PE beforeprivatization;

PE Managers responsible should be tried under the Companiesand Allied Matters Act, Investment and Securities Act and thethe Anti-Corruption Law.


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Social Safety Net Many countries have used the opportunity of privatization toundertake major reforms of labour markets and social insurance.

The World Bank, USAID and DFID are assisting BPE to design asocial 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 itsmeeting 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 andfund the pilot scheme. Proceeds can be used for a national scheme.


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World Bank Credit The FGN signed an IDA Credit of USD114 million at 0.75% interestrepayable 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 (Foreignand Nigerian) Up to USD200,000 per assignment can be used underthe credit to engage only Nigerian consultants. Foreign consultants arerequired to use Nigerian counterpart in all cases

Use of the IDA Credit to engage consultants boosts the credibility andtransparency of the program in the eyes of international investors;

It is a sign of confidence in Nigeria and endorsement of the PrivatizationProgram.

It is also a cheaper form of funding than CBN Treasury Bills.


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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 InternationalMarketing;

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 Transportand

Special Studies - Labor Issues, Pension Reforms, Competition Policy, CrossDebt Resolution, and Environmental issues;


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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 isinevitable 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 successfulare being pursued, so Nigeria is sure to succeed

BPE is committed to living up to the expectations of our nation andour friends abroad, in the honest, timely and transparent

implementation of the public enterprise reform programme

Presidential Review of the Privatization Programme - Bureau of Public Enterprises of Nigeria

Documents

Transcript of Presidential Review of the Privatization Programme - Bureau of Public Enterprises of Nigeria