NIGERIA'S PRIVATIZATION PROGRAM: STATUS

UNCLAS SECTION 01 OF 05 ABUJA 002567

SIPDIS


SENSITIVE


DEPARTMENT FOR AF/W AND AF/EPS
DEPARTMENT ALSO PASS AID/WASHDC
AID FOR AFR/AA AND AFR/W


E.O. 12958: N/A
TAGS: EAID ECON EINV ECPS ENRG PGOV NI
SUBJECT: NIGERIA'S PRIVATIZATION PROGRAM: STATUS
REPORT

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Introduction and Overview
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l. (U) Nigeria's National Privatization Program is
being carried out by the National Council for
Privatization (NCP),and is implementing arm, the
Bureau of Public Enterprise (BPE). In phase one of the
program, which ended in 2001, the BPE offered its own
shares to the public in three banks, two cement, and
five petroleum marketing enterprises



2. (U) Phase two started later in 2001 with the
preparation of several major enterprises for sale. The
controlling interest in Nigerdock, Nigeria's premier
shipbuilding and offshore construction yard, was
auctioned in November 2001. However, the winning
bidders were unable to sustain their partnership
agreement, and one of the buyers, an U.S. company, has
withdrawn. NITEL, the state-owned telephone and
telecommunications monopoly, was awarded to the
highest qualified bidder in September 2001, but the
winning core investors were unable to raise the
necessary capital to honor their commitment to
purchase 5.1% of NITEL. Details on the NITEL and
Nigerdock transactions will follow. However, Festac
77, a large hotel in Lagos, was successfully
privatized.



3. (SBU) Currently, there are over 60 public
enterprises designated for privatization, including
flagship state-owned monopolies such as
telecommunication (NITEL),electricity (NEPA),post,
port services, railways, the petroleum refineries, and
the Nigerian National Petroleum Corporation (NNPC)
subsidiaries. The workload of this latter series of
transactions is enormous in terms of preparation,
professional expertise, preparation of the companies,
the due diligence process, the review and analysis of
submitted bids, and the negotiation and closing of
transactions. Progress made with the many enterprises
awaiting privatization demonstrates the Executive
branch's political will to advance privatization and
the improved technical expertise of the BPE
professional staff in shepherding complex
privatization exercises.



4. (SBU) Nonetheless, privatization remains a
controversial move in Nigeria. Among the general
public and even within government, particularly the
National Assembly, support is neither particularly
wide nor deep. Some fear privatization is a ruse
whereby cronies of the Administration are allowed to
purchase government assets at discount rates. Others
are apprehensive privatization will result in the loss
of significant portions of the Nigerian patrimony to
greedy foreigners. Still others question whether
privatization will bring significant benefit given
other growth-adverse dysfunctions in the economy that
privatization cannot address.



5. (SBU) Privatization is viewed cautiously by senior
government officials jealous of their control over
parastatals and by employees who think privatization
as synonymous with workforce reduction. Labor unions,
especially, are opposed to privatization in almost
every sector. Because of this lack of consensus, each
sale faces strong opposition. Every successful sale
will generate additional support and reduce the
decibels of privatization's critics. However, when
sales fall through, even due to circumstances beyond
the control of BPE, as with the NITEL and Nigerdock
bids, the proficiency of BPE and utility of
privatization will be attacked. In short, despite the
BPE's improved capacity and ambitious schedule,
Nigerians will remain divided over privatization until
they see some material benefit. End Introduction and
Overview.


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BPE and USAID
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6. (U) USAID has provided assistance to the BPE since
May 2000, and the Mission expects to continue its
support until November 2002. The primary objective of
the USAID-funded project is to provide technical
assistance and training to the BPE. USAID's assistance
has greatly strengthened BPE's institutional and
professional capabilities and has enabled the
Director-General to transform BPE into an institution
that can carry out transactions in a professional,
transparent manner.



7. (U) USAID-funded assistance has been instrumental
in moving the privatization process forward. BPE has
made progress in public offers and core investor
sales, as well as in due diligence work in the form of
"diagnostic reviews". The importance and early
progress in privatization made by BPE and the
transparency of its procedures led to a $114 million
low interest loan from the World Bank to support
Nigeria's privatization effort.



8. (U) In addition to privatization transactions, the
BPE is helping to develop the legal and institutional
infrastructure needed to insure that newly privatized
firms will operate under more competitive market
structures. BPE is also working on other appropriate
institutional arrangements that will improve the
efficiency of resource use and aid in Nigeria's
economic growth. For example, USAID-funded expatriate
advisors and the core team are working in such areas
as privatization procedures and methods, domestic and
international procurement processes, public awareness,
labor policies, environmental issues, anti-trust
legislation and regulation, pension reform, and legal
and policy reform leading to the eventual
establishment of regulators for electricity,
telecommunications, and transport (Air, Rail and
Ports).





9. (U) Notwithstanding the progress made, the Director
General of BPE recently decided accelerating the pace
of privatization, required steps to increase the level
of accountability within the organization. On July 1,
he re-organized the Bureau into six Departments, each
responsible for the privatization of enterprises in a
given sector of the economy. It is expected that the
result will be a fairly marked increase in the number
of public enterprises privatized.



10. (U) The latest internal plans for BPE call for
over 20 enterprises to be privatized by the end of
2002; it is anticipated that more than 30 will be
privatized in 2003. Following is a synopsis and
evaluation of the major privatizations carried out by
the BPE so far, and the conclusions we have drawn from
their performance.


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Telecommunications (NITEL)
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11. (U) The privatization of NITEL is widely viewed as
unsuccessful because the sale was not consummated.
However, the technical privatization was
professionally managed. The failure was mostly due to
three factors: the financial downturn in the world
telecommunications industry, which prevented major
international bidders from participating,; the lack of
new regulatory legislation for the telecommunications
sector, which has been under review in the National
Assembly for a year; and the inability of the winning
bidder to secure from financial markets the $1.38
billion purchase price their group had committed for
51 percent of NITEL. The Chief of Party of the USAID
project providing technical support to BPE concluded
that with respect to transparency and efficiency of
the privatization process, the privatization of NITEL
was a major success. The procedures followed the
criteria used for selection were publicly advertised
domestically and internationally and were well
understood by all participants. Documentation
requirements were set forth clearly, establishing a
technical threshold that prospective bidders had to
satisfy in order to be pre-qualified to bid. The pre-
qualified investors submitted technical and financial
proposals for review pursuant to selection criteria
which were established and made known well in advance,
so that no accusations of favoritism or corruption
could be leveled at the BPE. Review of the technical
proposals adhered to the highest standards acceptable
in the investment banking profession. The legal and
procedural requirements for bidding were very clearly
and publicly stated and the bid opening was accessible
to the public.



12. (U) It is not unusual for privatization
transactions to fail to close, often due to the
inability of a winning bidder to raise sufficient
capital to close the deal. Despite the setback, BPE
has not surrendered on privatizing NITEL. Next steps
in the NITEL privatization process will be to offer
about l5 percent of the shares to the public in an
Initial Public Offering (IPO) before the end of 2002.
A professional management contractor is being
recruited to run NITEL on an interim basis until the
global telecom market returns to financial health, at
which time a core investor will again be sought.


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NIGERDOCK
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13. (U) The core investor sale of Nigerdock was
successfully concluded with the execution of a Share
Sale/Purchase Agreement concluded December 20, 2001
with Global Energy Company (GEC),the successful core
investor. As part of the terms of the Agreement, a
minimum of 25% of the core investor shares was to have
been sold to Houston-based J. Ray McDermott Inc.
(JRM),a U.S. firm and the foreign technical partner
to GEC.



14. (U) A separate Memorandum of Understanding (MOU)
was executed by GEC and JRM and a transitional period
of six months commenced in January 2002. Recently,
however, J. Ray McDermott withdrew from Nigerdock
claiming that Global Energy did not abide by the
Agreement between them. GEC has taken the case to
court and is currently seeking a new technical partner
to replace JRM. The BPE intends to sell 29% of its
remaining 49% in Nigerdock in an Initial Public
Offering (IPO). It is planned that the issue will
close by the end of 2002 with shares being distributed
early in 2003.


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Electricity (NEPA)
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15. (U) The reform program for the power sector
comprises preparation and adoption of a new
electricity law; creation of a power sector regulatory
agency; creation and operation of a new Electricity
Supply Industry including the unbundling of the state-
owned national electric supply utility, NEPA, into
separate generation, transmission and distribution
entities; privatization of multiple generation and
distribution units as separate limited liability
companies; and, finally, creation of a fund and an
agency to focus on rural energy and assistance to
consumers.



16. (U) Currently, the BPE is at the closing stages of
hiring consultants to undertake these tasks. The
preferred consultants include Credit Suisse First
Boston and the Spanish/Latin American firm, Mereados
Energeticos. At this point, the corporate
restructuring blueprint has been prepared and
preparations for implementation are being made. Also,
the lobbying of the National Assembly to pass the
Electric Power Sector Reform Bill has been
intensified. This is being done along with an enhanced
public communications campaign that includes the use
of various media to win the support of the Nigerian
public and road shows to report on reform efforts and
secure the long-term interest of foreign investors and
operators.



17. (U) By the end of 2002, it is expected that the
following would have been completed with respect to
NEPA: the establishment of 18 new legal/physical
business units and a special purpose entity (to take
over and pay off NEPA's stranded liabilities);
drafting of market rules for the transition stage; a
comprehensive due diligence audit of NEPA; substantial
completion of the physical establishment of the
regulatory agency and the hiring of executive and
senior staff, and a Draft Rural Energy Policy and the
setting up of the Rural Energy and Consumer Assistance
Funds.





18. (U) Although challenging, it is anticipated that
BPE will be able to achieve these objectives and will
then be in a position to complete the restructuring
process and commence the privatization of the
resulting distribution and generation enterprises,
most of which may well be completed by the end of

2003.


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Hotels
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19. (U) The Nicon Hilton (NIRMSCO) and the Sheraton
(Capital Hotels Plc) Hotels are in the very final
stages of privatization with respect to the
controlling interest. For offer is 51% of each, with
the balance to be sold to the public through IPO's.
Potential investors have applied, been short-listed,
performed due diligence, submitted technical proposals
and financial bids and have had their technical
proposals assessed.



20. (U) The next step, the public opening of the bids,
was completed on August 14, and African Properties
Nigeria, Ltd.'s (led by Co-investor Southern Sun
Hotels of South Africa) bid of $ 62 million for the
Nicon Hilton and Hans Gremlin Nigeria, Ltd.'s bid of $
32 million for the Sheraton were declared the winners.
Therefore, both privatizations are at the final stage,
awaiting closing of the sale. One lingering problem
with the Hilton has been the union's insistence that a
new collective agreement should be negotiated prior to
the sale. This is opposed by the BPE which insisted
from the beginning that a new agreement must be signed
with the new owner.


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Conclusion
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21. (U) Amid the up-and-downs of the first two years
of Nigeria's privatization program, the emergence of
BPE as an effective privatization organization is
significant. Any privatization program needs to have a
strong and credible system put into place in order to
be effective. The prospective investors, particularly
international investors, require such procedures in
order to review any potential purchases, or
to even start the expensive and time-consuming due
diligence process. In a country where corruption is
common, Nigeria's privatization program needed this
kind of operational and procedural credibility to
demonstrate its commitment to privatization, and to
attract prospective investors.



20. (U) The BPE appears committed to ensuring
transparency and is following recently established
procurement and privatization procedures that meet
world standards. These procedures govern the selection
of advisors, potential investors and winning bidders.
The transaction process itself is clearly laid out in
writing, with criteria available to the public, as
well as to prospective advisers and investors. BPE has
cause to assert that it runs a privatization program
that can withstand the scrutiny of any investor or
arbiter of standards, procedures, and effectiveness.



21. (SBU) Still, while privatization is one of
President Obasanjo's top economic reform priorities
and BPE has actively pursued it, there is significant
political opposition. Privatization is not viewed as
an unalloyed benefit by many Nigerians, even within
government. After years of military rule, many people
have statist mindsets and look warily at private
sector control over key industries and utilities. Even
among those favoring privatization, the GON program
has its critics. Some complain the program is moving
too fast, selling the wrong companies at the wrong
time, such as with NITEL when the sale took place
after world telecom prices had plummeted. These
critics say that lauding the technical correctness of
a sale offers little comfort when the sale comes at a
bad time economically.



22. (SBU) While the honesty of the actual bid process
may not be hotly disputed, some observers challenge
the selection of enterprises that are being
privatized. BPE has been accused of rushing the sale
of the National Mint because a close relative of
President Obasanjo, in concert with relatives of
Kenyan President Moi, may be interested in the
purchase. Some people also fear that privatization of
the larger parastatals is being rushed in order to
maximize revenues while it would have been more
prudent to follow a more deliberate sequencing that
moved from smaller to large firms, and an even more
measured approach to "national interest" companies
such as NITEL and NEPA. Another profound question is
whether privatization is outpacing other reform
efforts. Without sufficient reform in other areas, the
enabling environment may be insufficient. It is feared
that all privatization may accomplish is to turn a
moribund state company into an equally inefficient
private concern.



23. (U) In the end, Nigerians will judge the utility
of privatization by whether the exercise results in
better performance and a more vibrant economy. As much
as possible, we need to continue working with the BPE
to further enhance its work and to help Nigeria see
that privatization is not just an abstraction, nor a
ploy for foreign control of the economy, but that it
provides real economic benefit, to the Nigerian
people.
JETER