THE ONGOING NITEL - PENTASCOPE SCANDAL

UNCLAS SECTION 01 OF 02 LAGOS 001063

SIPDIS

STATE PLEASE PASS FCC

E.O. 12958: N/A
TAGS: ECPS ECON EINV NI
SUBJECT: THE ONGOING NITEL - PENTASCOPE SCANDAL



1. (U) Summary: Privatization of the Nigerian
Telecommunications Ltd. (NITEL) has faltered for the
second time. Amid great controversy, the GON fired the
Dutch management company, Pentascope, appointed to
shepherd the process. Though the GON terminated the
Pentascope contract in March 2005, the matter still
captures headlines, National Assembly members continue
to target the combative former Bureau of Public
Enterprises (BPE) boss and current Minister of the
Federal Capital Territory, Nasser El-Rufai. Back to
the drawing board, the BPE is reviewing potential
investors in hope of selecting a core investor by
September 2005. Experts say a privatized NITEL possibly
could compete in certain "core services," such as rural
telephony, international gateways, fixed lines and data
support. However, having missed the GSM boat, NITEL
would be swimming against the current in an attempt to
capture a share of the lucrative and expanding GSM
market. End summary.

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NITEL Privatization: Two Strikes, But Still in the
Batter's Box
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3. (SBU) NITEL privatization looked close in 2001 until
the highest bidder, Investors International London
Limited (IILL) was unable to cover its bid. In a quick
move "to save face," the BPE signed a management
contract with Pentascope in 2003. Critics claim the
selection process was flawed while the BPE claims it
selected the best of 14 companies that included:
China's Netcom, India's BSCNL/TCIL and the
multinational consortium, Africa Access/BT Teleconsult.


4. (SBU) Ken Igbokwe, Managing Partner,
PricewaterhouseCoopers (PWC) Nigeria, told us TCIL was
the best in PWC's assessment but Pentascope was also a
commendable choice. However, members of the House
committee on telecom and the existing NITEL board
wanted a non-Indian company and thus selected
Pentascope.


5. (U) Beyond the controversy over its selection
Pentascope stands accused of running NITEL aground, and
of funding recurrent expenditures, including staff
salaries, from monthly bank overdrafts. Critics say in
the two years of Pentascope management, NITEL, lost
naira 100 billion. The BPE counters that losses are
attributable to its constant loss of market share to
private telecom operators and GSM operators. The BPE
also notes that Pentascope was saddled with large debts
previously incurred by NITEL, such as a USD 200 million
debt to ZTE, Motorola and Ericsson.


6. (U) NITEL Lagos Zone officer, Ig Nwangwu, confirmed
NITEL is not in great shape. A 250,000-line expansion
plan has been outstanding since early 2004. However,
since 2001, functional lines have declined from 455,000
to 288,000. Efforts are being made to restore lines
but funding is lacking.

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Political Undertones to the Controversy
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7. (SBU) Some observers allege that political vendettas
have caused this alleged mismanagement to deteriorate
into a scandal that will not go away. Igbokwe of Price
Waterhouse Coopers (PWC) said beleives President
Obasanjo approved the investigation into Pentascope to
needle VP Atiku, who purportedly has a financial stake
in Pentascope. Some claim the Vice President, who as
Chair of the National Council of Privatization,
influenced El-Rufai's decision to grant Pentascope the
management contract. Moreover, El-Rufai is in the
doghouse with some National Assembly members because he
accused two Senators of attempted bribery.

8 (SBU) New BPE boss, Irene Chigbue also referred to
"political obstacles" in NITEL's privatization.
However, Chigbue said the BPE is forging ahead:
"Getting it right this time around should put an end to
the controversy." Chigbue added trying to put NITEL on
better footing before privatizing, is "throwing good
money, after bad." The best thing is to sell as-is,
which the BPE plans to do before 2007.

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NITEL: Is it viable?
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9. (U) Communications Minister, Cornelius Adebayo,
recently declared that a privatized NITEL, leveraging
available infrastructure and network backbone, would
put up a good fight to regain its market share. An
industry operator, Dirk Smet of Starcomms agrees that a
repackaged NITEL could be a formidable competition in
the telecom market, if it focuses on core services like
international gateway, fixed line and data support.
NITEL recently launched its wholesale IP product, which
will provide NITEL users guaranteed bandwidth to the
worldwide Internet via the SAT-3 cable.


10. (U) Comment: The GON has failed to privatize its
major utility companies (telecom, power, oil and gas).
This has buttressed accusations that it lacks the
political will wrestle the vested interests linked to
these parastatals. Given the GON's checkered history in
perfecting sales of these major utilities and NITEL's
chronic impuissance and dwindling market share, a
stampede of potential investors is highly unlikely. The
BPE will be hard-pressed to "get it right this time" by
conducting a competent bidding process that ends in the
selection of a competent and financially capable
investor. It remains to be seen whether the GON lives
up to the BPE's pledge to "get it right this time".

BROWNE