Privatisation in Nigeria: The Promise and the Peril – by: Nasir El-Rufai
By: Nasir El-Rufai
“When the government owns, nobody owns. When nobody owns, nobody cares.”
– Atiku Abubakar, 1999
Recently, many of us involved in the design and implementation of the federal privatisation programme between 1999 and 2003 were gratified seeing pictures of Oando’s executives ringing the opening bell upon being listed on the Toronto Stock Exchange. This is the company’s second international listing after Johannesburg some years ago. Oando came into being as a result of the sale of government’s stake in Unipetrol Nigeria to Ocean and Oil Limited – then an up-and-coming oil marketing company owned essentially by three young Nigerians then in their thirties. None of the stories on Oando’s listing and performance ever mentioned it as one of the many successes of the Nigerian privatisation programme.
Instead, what makes the headlines these days are the few controversial privatization transactions like Ajaokuta Steel and the Aluminium Smelting Company (ALSCON) or the handful of companies that failed to be successfully privatised like NITEL and Nigeria Airways as if those defined the successes or failures of the BPE – the implementing agency of the programme. Another idea that seems to be growing in acceptance as the alternative to privatisation and deregulation is “state capitalism”. This refers to the expanding role of State-Owned Enterprises (SOEs or ‘public enterprises’) in the economies of many successful emerging nations like China, Brazil and Singapore. These successful manifestations of the visible hands of government intervention in business are touted as what countries like Nigeria should adopt. Both ideas are misleading or misguided.
Firstly, I believe that there is a need to put on record the case for privatization and public enterprise reforms in Nigeria, and indeed in most of Africa. This particularly became necessary when an attempt was made recently in Abuja, to revise history, discredit the accomplishments of the BPE and give the entire reform programme a bad name through clearly contrived public hearings by yet another Ad-Hoc Senate Committee in August 2011. These hearings chose to ignore history of SOE failures, the financial drains that they had become and the savings that accrued since their divestment, while remaining blind to the fact that two of out every three SOEs privatised were doing well – paying taxes to the Treasury, expanding production and services, improving quality and efficiency, protecting jobs and opening up new employment opportunities. There is nowhere in the world except in Nigeria’s dysfunctional political space where 67 per cent success becomes equated with failure.
Secondly, there is a need to clarify the contextual differences between counties where “state capitalism” has thrived before rushing to adopt the approach as an alternative to privatisation and deregulation for Nigeria and other African countries. The key point I will make is that state capitalism assumes the existence of ‘a minimally-functioning state’ – a competent government that has proven its capacity to deliver basic social services like security, education and healthcare. Such a government could delve into business or establish and run economic enterprises with some degree of success, under certain conditions. It is not a case of all sizes fitting all – what works for China may not work for Nigeria!
Public Enterprises (SOEs): The Expectations and the Outcomes
The active participation of government in business has a long history dating back to hundreds of years. US treasury secretary Alexander Hamilton had proposed interventionist policies in his ‘Report on Manufactures’ presented to Congress in 1791. The British Empire created the East India Company, a monopoly and used its navy to protect it and the fledgling textile industry from cheaper Indian imports. Public enterprises were therefore seen as hybrids, combining the efficiency of commercial entities with the social conscience of government.
From the end of the Second World War till the 1980s SOEs thrived and grew in numbers and size all over the world. Governments sought control of strategic sectors of their economy (‘the commanding heights” argument) and established steel mills, oil and gas, mining and even agro-industrial enterprises. In many of the newly independent nations, the private sectors were weak and entrepreneurial capacity limited. Governments therefore intervened to establish cement plants, banks, insurance companies and vehicle assembly plants, with the intention that ownership will be transferred to the private sector in the future.
Sometimes, the capital required to establish some businesses was beyond the capacity of the domestic private sector, so governments stepped in to establish airlines, railways, airports, seaports and harbours. Other sectors were seen as ‘natural monopolies’ that lent themselves to exploitation of the citizens if allowed to operate under the ownership and control of the private sector. Many of these examples were public utilities like municipal water supply, electricity, telecommunications and postal services.
Several developments globally have forced a rethink of earlier held views on the positive role of state in fostering economic development. By the late 1970s, SOEs had absorbed a large share of governments’ budgets in the form of direct allocations, subsidies and capital investments. As governments ran into severe fiscal problems in the 1980s and loans became increasingly difficult to mobilise at home and abroad, they were forced to consider relatively radical methods for turning the SOE sector around. By then, many governments realised that SOEs were not the ideal hybrids they had been made out to be: only rarely did they combine the strengths of the public and private sectors as originally expected, and occasionally they exhibited the worst of both. SOEs commonly failed to maximize the greater good, or did so at a very high cost. Thus, a programme of radical SOE reform emerged in developing countries resulting in several measures.
Why Privatisation and Commercialisation?
Privatisation is the transfer of ownership of public enterprises (SOEs) to private hands. In reality, this takes many different forms and the term is sometimes used, broadly, to describe any policy changes that enlarge the scope for private enterprise to compete with state-owned enterprises (SOEs), or even commercialisation – measures that might cause SOEs to behave more like private firms while still owned by the government. However, different goals motivated the introduction of privatisation and commercialisation in various countries. Country studies reveal that these goals included (1) improving a government’s cash flow or reducing budget deficits, (2) enhancing the efficiency and performance of the SOE sector, (3) promoting “popular capitalism” through wider share ownership, (4) curbing the power of labour unions in the public sector, (5) redistributing incomes and rents within society, and (5) satisfying foreign donors’ preference for redefining the role of government in the economy.
Clearly fiscal deficits and creditor pressures in the 1980s were the driving force for the Nigerian SOE divestiture programme. In 1999, the BPE was not driven by any ideology other than pragmatism. For us the key question was – “How could we get the SOEs like NITEL and Nigeria Airways to transform from parasitic, unproductive, inefficient and arrogant organisations to tax-contributing, efficient and customer-driven providers of goods and services? Often, transferring their management and ownership to the private sector was not just the best answer, but in our country context, the only one.
There is virtually no SOE in Nigeria today that functions well. While they were created to alleviate the shortcomings of the private sector and spearhead the development of Nigeria, many of them have stifled entrepreneurial development and fostered economic stagnation. They have served as platforms for patronage and the promotion of political objectives as they suffer from operational interference by civil servants and politicians. It was my humble opinion then and now that SOEs in Nigeria have become the “Reverse Robin Hood” – they steal from the poor to give to the rich – contributing to income redistribution in favour of the rich over the poor, who generally lack the connections to obtain the jobs, contracts or the goods and services they are supposed to provide. Some reflection on the coverage of NEPA/PHCN and its successors, inefficiency in providing electricity balanced against government’s monumental investments in the sector speaks for itself. NITEL sucked about $7bn of our resources to provide Nigerians less than 500,000 lines – the most expensive phone system in the world.
It was estimated in the 1990s that SOEs consumed about N200bn of national resources annually, by way of grants subsidies, import duty waivers, tax exemptions, and the like – then about US $10 million per day all year round, for providing little or no service to the citizens. SOEs consumed nearly half of all the revenue made from the sale of crude oil between 1973 and 1995. The Vision 2010 Committee indicated that government investments in SOEs stood at over US $100bn in 1996. The return on investment averaged less than 0.5% per annum. In 1998, Nigerian SOEs enjoyed about N265 billion (then about $3.3 billion) in transfers, subsidies and waivers, which could have been better invested in social sectors.
Moreover, it is more equitable and fair to direct our scarce resources to attacking poverty through investment in health, education and water supply – social programs that will benefit millions of Nigerians, not just a few thousand urban elite that are employed by, or capture the subsidies granted to the SOEs. Government recognised that no creditor will forgive our debt and no donor will offer aid, to enable Nigeria prop up corrupt and inefficient SOEs like NITEL, NEPA or Ajaokuta Steel. That was the stark reality that we faced at the time.
Original Investment and Privatisation Proceeds
Will privatisation of SOEs recover what we invested in what some gullible citizens refer to as our “common patrimony”? Unfortunately, the hundreds of billions of Naira invested in setting up SOEs and keeping them going with annual subventions will never be recovered for a variety of reasons. These include (1) Inflated procurement contracts for buildings, capital equipment and services like the case of ALSCON in which an aluminium smelter was built at four times the international market price. (2) Poor project management leading to time, and cost over-runs like the example of Ajaokuta Steel complex which remained under construction without completion for over 30 years. (3) Diversion of funds by managers of the SOEs appointed by successive governments as evidenced by the findings of a governance audit of African Petroleum (AP) after it was fully privatised. (4) Poor performance and profitability leading to low share prices and asset values exemplified by NICON Insurance, Nigerian Reinsurance and Benue Cement, and (5) Unfriendly political and economic environment to attract quality foreign and domestic investors which would have asset values.
All past attempts at improving SOEs performance have failed. Public Commissions and Study Groups have undertaken various studies on the performance of SOEs in Nigeria. Adebo (1969), Udoji (1973), Onosode (1981) and Al-Hakim (1984) chaired these commissions whose findings of the studies were consistent in finding that SOEs were infested with problems such as (1) Abuse of monopoly powers, (2) Defective capital structures resulting in heavy dependence on the treasury for funding, (3) Bureaucratic bottlenecks, (4) Mismanagement, (5) Corruption, and (6) Nepotism. Privatisation became the last resort – the chemotherapy needed to cure a national cancer!
Privatisation and State Capitalism
While privatisation seeks to divest government of ownership and management control, commercialisation does neither but attempts to incentivise SOEs and their management to conduct business in response to the market and not the dictates of the ministry and ministers. In China, which practices commercialisation as the preferred model, this has been achieved by avoiding monopolies (e.g. three SOEs in telecoms services, three in oil and gas, etc.) and getting them listed on the Stock Exchange. In addition, corrupt SOE directors and managers are simply tried and executed, among other incentives!
One can see that commercialisation which nearly equals ‘state capitalism’ would not be applicable in Nigeria because of several factors. We have weak state capacity, dysfunctional institutions and a political culture that thrives in patronage and complete disregard for competence and merit. Aggravating this situation is a corrupt, yet poor quality bureaucracy that puts its personal interest ahead of any notions of public interest.
We live in a society with many laws and rules but with zero enforcement, an uneven and unpredictable justice system and a culture of impunity in the public service. These factors combine to shatter any hope that what has served China, Singapore and Brazil well can work here. These countries have their best and brightest in public service and politics, driven by a sense of public interest that overrides narrow partisan or personal interests! It is my view that what may work most of the time in our environment of today is getting some non-government entity to put some money in acquiring assets and then work hard not to lose that money!
Process Transparency in Privatisation
Since the re-launching of the programme in 1999, the BPE has carried out over 115 privatisation transactions, out of which 33 were handled under my watch. Most of the enterprises successfully privatized were divested through core investor sales, concessioning or a combination of core investor sales and public offer of shares. A few were disposed of through sale of assets and liquidation. BPE collected gross proceeds amounting to hundreds of billions of Naira – about N57bn was collected from divestitures and transferred to the Treasury by 2003.
The privatisation of SOEs begins with a review of the sector policy to determine whether policy changes are needed for private sector competition and success. Advisers including asset valuers, accountants, lawyers and technical experts relevant to the industry are then appointed usually under the leadership of an investment bank. The BPE’s practice included publicly invite expressions of interests (EOIs) followed by submission of technical and financial bids by the prequalified advisory services firms. Hundreds of foreign and Nigerian professional firms benefitted from BPE’s open and competitive selection process. The transaction advisers then evaluate the firm and prepare transaction documents acceptable to the National Council on Privatisation, including an opinion of the open market value of the SOE.
Expressions of interest are then invited from within Nigeria and abroad from any person, company or consortium wishing to acquire the SOE on “as is, where is” basis. EOIs are evaluated and the prequalified firms then invited to submit technical and financial bids after access to bidding documents, information memoranda and as much access to company data as possible. The bidder that submits the highest price for the company or asset being offered after meeting the technical requirements would be declared the preferred bidder, while the second highest price becomes the reserve bid. Public assets must be sold this way only to comply with the Privatisation & Commercialisation Act 1999 but the Public Procurement Act 2007, and the BPE I knew handled each divestiture in the manner described above.
Sector Reform and Deregulation
When erstwhile monopoly sectors like petroleum refining, telecommunications and electricity were being privatised, the BPE initiated the establishment of sector reform steering committees to oversee its restructuring, de-monopolisation and deregulation. Typically each sector steering committee was chaired by the relevant cabinet minister while the head of BPE was the Committee Coordinator and provided the secretariat.
The Steering Committees worked in a four-step manner to draft a new sector policy, design a fresh legal and regulatory framework for each sector to support privatization, establish a sector regulator or strengthen one (if existing like the NCC) and then open up the sector to licensing new entrants and market-based competition. This is then concluded with the privatisation of the SOEs in the sector to give confidence to the new licensees and entrants that the playing field would be level. This was the process that the BPE steered leading to the enactment of the Communications Act 2003, strengthening the NCC, licensing new entrants and the telecommunications revolution that resulted.
The National Council on Privatisation under the leadership of Vice President Atiku Abubakar also inaugurated other specialised committees that were to resolve challenges that cut across so many issues that impacted upon the implementation of the programme and to suggest lasting solutions to some persistent problems such as pension issues. The committees included those on Pension Reforms in Public Enterprises chaired by Fola Adeola; Cross Debt Determination and Resolution chaired by former BPE chairman and my mentor Hamza Zayyad; and another on Competition and Anti-Trust Reforms. It was the work of the BPE that gave Nigeria the Pension Reform Act 2004, the Petroleum Industry Bill 2009 and the Competition Bill that has been in the national assembly since 2003.
Imperative for Energy Sector Privatisation
As the nation progresses the reforms of the Electricity Supply Industry based on the law the BPE had drafted in 2002, the administration must proceed relentlessly to ensure the timely divestiture of the distribution (Discos), generation (Gencos) and the NIPP power plants nearing completion. The unfortunate ethical slip of former minister Barth Nnaji should provide an opportunity to correct any process violations and not keep the assets under government control. Similar steps should be taken as soon as the Petroleum Industry Bill is passed into law with the necessary modifications to make it work for Nigerians and not those in power today. We have held these assets in government hands for fifty years and Nigerians have not had enough electricity or affordable fuel. Let us try something different if we want a different outcome.
Will the assets be acquired by the rich and powerful in the society? May be. However if the rich buy only 51% of the shares and the balance gets listed on the Nigerian Stock Exchange, every citizen would have the opportunity to share in the expected prosperity. Will the acquisition of the assets lead to exploitation of the poor by the rich? Perhaps – but only in the short-term and if the electricity regulator NERC fails to live up to its responsibility. Will the divestiture lead to greater wealth concentration and widen income inequalities? I doubt anything will be worse than the fraud in the SOEs which favours those in power. In any case, money is fungible and wealth tends to move over time to the best and brightest individuals. How many of the Nigerian super-rich of the 1970s, 80s and 90s still have rich children? The money has moved – it always does, but the quality of services provided by the privatised companies will benefit everyone.
I believe strongly that privatization has been beneficial to Nigeria in many respects. We saved billions of naira in foregone budgetary support to SOEs. The patronage derived from control of hundreds of company directorships and management appointments went a long way in reducing corruption and the entitlement culture amongst our political elite. The privatized companies and their private sector competitors became more efficient in delivering services, became more profitable, paid taxes to the government and expanded job opportunities.