US embassy cable - 02ABUJA2567

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 
------------------------- 
 
 
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withdrawn.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 
------------- 
 
 
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. 
 
 
-------------------------- 
Telecommunications (NITEL) 
-------------------------- 
 
 
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 
--------- 
 
 
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. 
 
 
------------------ 
Electricity (NEPA) 
------------------ 
 
 
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 
------ 
 
 
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 
---------- 
 
 
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