Second in a series on Nigeria culled from the Financial Times Survey, March 30, 2000 PRIVATISATION BY TONY HAWKINS CORNERSTONE OF ECONOMIC REFORM The quality and cost of power, transport and telecommunications are the main obstacles to investment and growth Privatisation is the cornerstone of economic and socio-political reform in Nigeria. Without it, President Obasanjo’s ambitious reform agenda will come to nothing. For this all-important reason, the programme’s slow progress-it is now 18 months since the interim military head of state Abdulsalami Abubacar gave the go ahead-while disappointing, need not be as serious a setback as it might appear. So far, only two relatively minor transactions worth some $35m, have been completed. These involve the repurchase of controlling stakes in the country’s two successful cement companies, West African Portland Cement and Ashaka Cement by Britain’s Blue Circle Industries. In both cases, the federal government has sold its shares to a core investor, and also through the Nigerian Stock Exchange, to the investing public. However, there is much more to privatisation in Nigeria than such straightforward restructuring of ownership. In addition to this central element, three other aspects of the programme is crucial. Privatisation is a vehicle for reviving non-energy private investment in the economy, especially, though not only, foreign direct and portfolio investment. During the 1990s, political uncertainty and an erratic economic policy regime notwithstanding, Nigeria attracted more foreign direct investment (FDI) than any other African country, the bulk of which went into the oil and gas sectors. The two cement privatisations and the sale of the government’s shares in three downstream oil marketing companies will bring in new FDI while also injecting new life into the stock market. More importantly, they will infuse new life and direction into businesses which, because the foreign shareholders did not have control, had tended to drift. Ultimately, new money is less important than management and technology. Second, privatisation is all about sending signals to Nigerians and foreigners alike, that the government is serious about rolling back the frontiers of the state and ensuring greater transparency. “Due process is essential,” says Atedo Peterside, founder and chief executive of the country’s leading investment bank, IBTC. He contrasts the measured due process of the bidding for oil marketing companies with the hasty, now stalled, deal with US energy group Enron, to provide emergency power supplies to the country, which was not part of a competitive bidding process. His criticism is shared for different reasons by Nasir el Rufai, who heads Nigeria’s privatisation agency, the Bureau for Public Enterprises. He argues that had the Enron deal gone through in its original form, it would have put paid to the privatisation of Nigeria’s notoriously inefficient electricity utility, NEPA, for 20 years. The third element relates to the rehabilitation and expansion of Nigeria’s ramshackle infrastructure. Arguably, the quality and cost of power, transport and telecommunications are the main obstacles to investment and growth. There is just no way that the state will have either the funding or skills and technology to establish first-world infrastructure in Nigeria. This will have to be done by the private sector, leaving the government with the key role of establishing efficient and effective supervisory and regulatory authorities to ensure a level playing field in the power and telecoms sectors. Grandiose projections of fiscal impact of privatisation are played down by Mr. El Rufai, who estimates that successive governments have invested some $80bn in the parastatal sector. “We will be lucky to get $20bn of that back,” he says, stressing that the real objective is not the sale of assets for cash that could be used to redeem debt or alleviate poverty, but the creation of a cost-effective and efficient business environment. The detailed programme launched last July, but subject to frequent revision- earlier this month another 37 oil service companies were added to the original list of more than 60 enterprises-is a three-phase affair. The first and easiest phase is the full divestiture of the federal government’s shares in 14 companies in cement, banking and oil marketing industries. This should be completed by the third quarter of 2000, bringing in some $200m. Four consortia are bidding for the largest oil marketing company, National Oil Co of Nigeria, 80 percent of whose shares are being sold. This includes Shell’s 40 percent stake as well as the government’s 40 percent holding. A strategic investor will buy up to 60 percent of the equity with the balance being sold through the stock market. Mobil Nigeria and South Africa’s Engen, controlled by Petronas of Malaysia, are the frontrunners. BP is thought likely to buy African Petroleum, while a Nigerian consortium in association with German interests is favoured to win the bid for Unipetrol. Phase two, starting later this year, will be much tougher. The government has to try and sell its least attractive assets, mostly in the manufacturing sector-three paper manufacturers, three sugar companies and half a dozen vehicle assembly plants along with a number of hotels. Mr. El Rufai says there are no accounts for most of these enterprises, which will make due diligence a nightmare. Nigeria’s large domestic market and the potential for using the country as a platform to penetrate other markets within the Economic Community of West African States (Ecowas) might attract some foreign players. But it is difficult to be optimistic about prospects for the vehicle assembly plants. If they are to be sold it will be for a song unless the government is willing to offer market protection guarantees and other incentives that would have far-reaching implications for industrial policy and tariff protection for the economy as a whole. The final phase-partial divestiture of the government’s stakes in the utilities-is the key to sustained economic recovery. The timetable envisages this task being completed within three years, which looks optimistic given the magnitude of the task on the one hand and the political cycle on the other. It may be, however, that by 2002 privatisation will have built up the necessary political momentum for the timetable to be fulfilled. sidi sanneh ---------------------------------------------------------------------------- To unsubscribe/subscribe or view archives of postings, go to the Gambia-L Web interface at: http://maelstrom.stjohns.edu/archives/gambia-l.html ----------------------------------------------------------------------------