US embassy cable - 02ABUJA3180

UNCLAS SECTION 01 OF 02 ABUJA 003180 
 
SIPDIS 
 
 
E.O. 12958: N/A 
TAGS: EINV, ECON, PREL, PGOV, NI 
SUBJECT: NIGERIA: UPDATES ON ALSCON AND AJAOKUTA 
PRIVATIZATIONS 
 
 
1.  (U) Summary.  The Bureau of Public Enterprise (BPE) has 
confirmed that the GON was going forward with the Aluminium 
Smelter Company of Nigeria (ALSCON) and Ajaokuta Steel 
Company Limited (ASCL).  U.S. manufacturer Aluminum Company 
of America (ALCOA) is one of three companies expressing 
interest in the ALSCON purchase (a 51 percent stake).  The 
other companies are Glencore (a Swiss company) and Russian 
Aluminum.  The BPE has scheduled a late-January selection of 
a core investor from the interested bidders.  Only one 
company expressed interest in the purchase of the Ajaokuta 
Steel Company Limited leading to an extension of the deadline 
to November 21.  End Summary. 
 
 
2. (U) ALSCON, a 2.36 billion dollar capital investment, is 
one of the world,s most expensive smelters.  Located at Ikot 
Abasi, Akwa Ibom State, the company occupies roughly 100 
hectares with direct access to the Imo River. The company was 
incorporated in 1989 but only produced aluminum ingots 
between 1997 and 1999, and never exceeded half of its 
projected 193,000 ton-a-year capacity.  The BPE listed a) 
inadequate working capital; b) the high price of natural gas; 
c) the need to re-dredge the Imo River; d) a hostile local 
community; and e) non-completion of the project as the 
problems which led to the May 1999 closure of the plant. 
 
 
3. (U) Reynolds Aluminum initially served as the plant's 
technical advisor and held a ten percent equity stake until 
the company was bought out by ALCOA.  (The Government of 
Nigeria retains a 70 percent equity interest in ALSCON and 
the German company Ferrostaal AG, a division of the MAN 
group, holds 20 percent.) After ALCOA's initial negotiations 
with the GON proved unsatisfactory, the U.S. company 
announced it would divest itself of its ten percent ownership 
of ALSCON and abandon its role as technical advisor. 
 
 
4. (U) Since ALSCON shut down production in 1999, the GON has 
not stopped investing money in the project.  According to 
Abiodun Wright, the BPE official supervising the ALSCON 
privatization, more than half a million dollars a month is 
spent to maintain a skeleton staff of 700 to keep the 
machinery in working order. Ms. Wright called the 
expenditures necessary to keep the facility in a 
"preservation mode", to make it more attractive to potential 
investors and so that the eventual winning bidder can 
commence operations immediately. 
 
 
5. (U)  ALCOA now seems poised to re-enter the negotiation 
for ALSCON.  "This Day" newspaper quoted a GON source as 
saying ALCOA had decided not to divest but was looking to 
increase its equity in ALSCON.  Recent news articles suggest 
ALCOA may have the inside track of winning the bid. 
 
 
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Ajaokuta Steel Company Limited (ASCL) 
------------------------------------- 
 
 
6.  (SBU) After her update on ALSCON, Wright asked how BPE 
could more effectively advertise to the U.S. to find a core 
investor for the Ajaokuta steel complex.  Earlier in the 
month, the BPE extended the submission date to November 21 
for those interested in a 51 percent stake in the Ajaokuta 
Steel Company. The uncompleted plant has been regarded 
internationally as the quintessential "white elephant" 
project.  The World Bank reportedly advised the GON to 
abandon the dream of producing steel and consider converting 
the complex into an industrial estate or power plant. 
(Comment: Ajaokuta,s technology is several generations 
behind. It is difficult to envision a scenario where the 
plant could be more profitable.  Perhaps because of this, 
only one company has expressed interest in becoming the core 
investor.  End Comment.) 
 
 
7. (SBU) When asked why the GON continued committing funds 
into the Ajaokuta although it was going to be privatized, 
Wright confided that the Ministry of Power and Steel had 
until very recently maintained the hope of running Ajaokuta 
as a State-owned enterprise. 
 
 
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Comment 
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8.    (SBU) Perhaps the general lack of budget resources -- 
as much as BPE's Privatization Act -- led to the Power and 
Steel Ministry's losing its battle to build and run this 
steel city that stretches for miles, costs billions of 
dollars, and never produced a single bar of steel.  Agagu has 
reportedly just resigned as Minister of Power and Steel to 
run for Governor of Ondo State in the Southwest. Before 
leaving, he made a public statement predicting the steel 
plant would be completed soon and that Nigeria would realize 
its goal of becoming a steel-producing industrial nation. 
This appears to be an exaggeration of Ajaokutan dimensions. 
Meanwhile, the Guardian newspaper (Lagos-based) of November 
21 reports that Siemens Limited won a contract worth $390 
million Euros to build a power generating and transmission 
facility at Ajaokuta, as recommended by the World Bank. 
JETER