Restructuring State Owned Enterprises through Privatization Expert Group meeting on NAM Reform: Privatization and Publi

1. Restructuring State Owned Enterprises through PrivatizationExpert Group meeting on NAM Reform: Privatization and Public-Private PartnershipBrunei Darussalam Nasir Ahmad el-Rufai Bureau of Public Enterprises Abuja - Nigeria December 16 - 18, 2002

2. Brunei, December 2002 2 Agenda Public Enterprises � Intention vs. Outcomes The Nigerian Case for Privatization, Efficiency and Productivity Privatization Strategies and Methods Institutional Framework and Structure Programme Implementation Status Key Issues and Challenges

3. Brunei, December 2002 3 �QUOTABLE QUOTES� �Nothing is easier than spending public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody� � Calvin Coolidge �when everyone is to blame, no one bears responsibility� � Anonymous

4. Brunei, December 2002 4 Public Enterprises in Nigeria 590 public enterprises at end 2000 (160 in economic activities) Over 5,000 board appointments � enormous patronage power Control funds of over N1 trillion � more than Federal Budget Transfers of US $3bn (1998), $0.8bn (1999), and about $1.4bn (2000) � about $4bn in 2001. Accounted for budget deficit of 5% of GDP (1998) and growing Over 55% of non-performing debts (London and Paris Clubs) are PE debts (Hilton $300m, Sheraton $250m, Paper $1bn, etc.) Most government owned industries and businesses operate at sub-optimal levels of capacity and are among the most inefficient in the world. (NEPA, NPA, NITEL, Paper Mills, Steel, Sugar) No government business in Nigeria makes true profit today � and none has ever ever made real profit unless managed by Technical Partners (the NITEL, Nigerdock and NAFCON stories)

5. Brunei, December 2002 5 Alternative to Privatization $100 billion spent by FGN to establish Public Enterprises (PE) between 1975 and 1995 to: Balance or replace weak private sector Control commanding heights or strategic sectors of the economy Produce higher investment ratios Transfer technology, management and know-how Generate employment Develop otherwise uneconomic areas or sectors Provide goods and services at lower costs These returned 0.5% profit and employed about 420,000 people � without NICON and CBN, returns are negative.

6. Brunei, December 2002 6 The Evidence of Government Control There is clear evidence that PE have not served: Customers (NEPA, NITEL, NNPC, Steel, NAL) Employees ($100bn for 420K jobs, poor pay, near zero pensions � NRC, NITEL, NEPA, Steel, NAFCON, NAL) Shareholders (zero dividends, unremitted revenues and levies � NAL, NITEL, NPA, NNPC, LITFC) Nigerian Tax-Payers � e.g. NITEL, NPA, LITFC, OSCs PE have instead become reverse Robin Hood: Served as platforms for political patronage and promotion of short-term political objectives to nation�s long-term detriment Infrastructure of corruption, parasitism and rent-seeking for elites Consumed average of $3bn annually in subsidies from 1992-99 Major stumbling blocks to obtaining debt relief for Nigeria.

7. Brunei, December 2002 7 Privatization and Development The case for privatization is the clear evidence that PE have contributed to our economic stagnation and poor image. PE have: Created economic inefficiency Consistently incurred financial losses Absorbed disproportionate share of credit Contributed to fiscal deficits and imbalances Facilitated and entrenched parasitism and corruption Attracted rapacious military-civilian elites to politics

8. Brunei, December 2002 8 Privatization and Efficiency Accordingly, we need to privatize all our PE to: Reduce corruption and parasite mentality Modernize technology in our industries Strengthen capital markets Dismantle monopolies and remove service arrogance Promote efficiency and better management Reduce debt burden and fiscal deficits Resolve massive and perennial pension funding gaps Broaden ownership base and create popular capitalism Generate funds for investment in social sectors Promote transparency in corporate governance Attract foreign investment and positive re-imaging Attract back flight capital in to Nigeria

9. Brunei, December 2002 9 Privatization: Definition Privatization is the transfer of ownership and management control of a PE to private shareholders. This means transfer of: Capital investment responsibility Going-concern/bankruptcy risks Incentives and profit benefits At one extreme, privatization can consist of just transfer of management responsibility (without transfer of capital and profit risks) or outright sale of assets or shares at the other extreme.

10. Brunei, December 2002 10 Privatization: Policy Guide

11. Brunei, December 2002 11 Privatization: Strategies - 1 �

12. Brunei, December 2002 12 Privatization: Strategies - 2

13. Brunei, December 2002 13 UK Experience - Lessons Learnt Apart from Chile, no nation has the UK�s privatization experience in privatization. The NCP has studied the British privatization programme and present the following lessons learnt: A central agency with autonomy, unfettered authority and resources is essential to success. Experiences and mistakes are learned and the agency gets better with time. Stay Focused as opponents are a minority, but are vocal and articulate. Maggie Thatcher had the will to proceed with what she believed � no matter what. Get regulatory system right and ensure competitive framework � errors in electric power and telecoms privatization are important lessons. Avoid restructuring/rehabilitation and injection of new money before privatization � experience showed that it was throwing good money after bad Favour core investor sales where there is need for new investment, technology or management skills.

14. Brunei, December 2002 14 Implementation Framework

15. Brunei, December 2002 15 Privatization Process - 1 Appointment of professional advisers � Financial, Legal, Technical, Valuation, PR, Accounting, etc. Technical, Financial and Legal Due Diligence Advertising of Company for partial sale of bloc of shares to qualified strategic/core investors Pre-qualification and preliminary due diligence of prospective core investors Issue of Information Memorandum and Bidding Documents to prospective, pre-qualified core investors Public opening of bids submitted by prospective core investors Negotiations with short-listed bidders (within 20% of highest) or open auction.

16. Brunei, December 2002 16 Privatization Process - 2 Evaluation of Technical and Financial Proposals by BPE and Technical Committee of NCP Presentation of recommendations of TC-NCP to NCP or the VP in event of perceived delays Approval or otherwise of TC recommendations by NCP, and announcement by BPE Filing of application to offer balance of shares to the general public with SEC and the Stock Exchange Opening of public offer for 4-6 weeks, with no further extension 1,000,000 forms printed and distributed throughout Nigeria � SGs, LGs, Post Office, SIAs, Traditional Rulers, Newspaper inserts, etc. Share allotment on basis of equality of Federal Constituencies Shares not taken up offered to SIAs/SGs for uptake within 30 days Subsequently, un-subscribed shares offered to Institutional Investors

17. Brunei, December 2002 17 Implementation Status(Phases I and II) Phase I: Dec 99 � Dec 00 Banks, Oil Marketing, Cement - Target $200m All advisers local, core investors mostly foreign Virtually completed, $250m to be raised, $190 million already transferred to Treasury by Dec 00

18. Brunei, December 2002 18 Phase I Enterprises Enterprises involved in the cement production, petroleum marketing and banking sectors with already active participation from the private sector FGN pre-sale equity holding typically under 45% (with the exception of NOLCHEM: 80%) Shares of Phase I Enterprises already listed and actively traded on the floor of the Nigerian Stock Exchange (NSE) prior to sale Phase I Enterprises: NAL Merchant bank, IMB, Unipetrol, FSB, AshakaCem, AP, CCNN, NOLCHEM, WAPCO, BCC, NigerCem Most enterprises sold typically through a combination of core investor and public offer sale; banks sold only by public offer Typically between 30-60% of equity in enterprise offered to core investors; rest offered to the general public and staff of the enterprises

19. Brunei, December 2002 19 Phase I Performance (Core Investors) Transparent and internationally recognized selection process to ensure that only qualified core investor groups emerge successful 3 enterprises sold to world-class foreign core investor groups: WAPCO and AshakaCem (Blue Circle Industries of the UK); CCNN (Scancem of Norway) 4 enterprises sold to indigenous firms: Unipetrol (Ocean & Oil), Nolchem (Conpetro), AP (Sadiq Petroleum) and BCC (Dangote Industries Ltd.) Indigenous advisors used by both BPE and successful core investor groups in the execution of all transactions N16.2 billion gross proceeds raised from core investor sales Higher share prices across the board indicate confidence investors and the markets have placed in the abilities of the successful core investor groups

20. Brunei, December 2002 20 Phase I Performance (Public Offers) 217,000 applications received for all offers All offers concluded and SEC approval of allotments received in April 2001 160,000 new shareholders created Many offers were heavily over-subscribed e.g. IMB (432%), Unipetrol (133%) and CCNN (122%) Fair and equitable basis of allotment: allotment done on the basis of equality of federal constituencies with smaller individual applicants taking preference over larger applicants and companies. Allotments evenly distributed amongst the six geo-political zones Approximately N6.8 billion gross proceeds raised to date (N4.9 billion during offer period, N1.9 billion from post-offer sales to state governments and institutional investors). An additional N1 billion in proceeds is expected from sales of the remaining shares

21. Brunei, December 2002 21 Phase I- Share of Total Allotment

22. Brunei, December 2002 22 Post-Privatization Stock Market Performance � Phase I Enterprises

23. Brunei, December 2002 23 Gross Proceeds Realized � Phase I

24. Brunei, December 2002 24 Implementation Status(Phase IIa) Phase IIa: July 00 � June 02 Selected Banks, Insurance, Hotels, Media Companies, Transport and Aviation, NITEL �Diagnostic reviews� of Steel, Oil Palm, Fertilizer, Sugar, Paper Companies, Airports and Seaports Core Investors sales only, (about 51%) to be followed by IPO at a later date. Phase IIb: Jan 02 - June 03 NIPOST, selected Banks, Mining and Solid Minerals, Tourism Sites, Stadia Remaining diagnostic review enterprises Core Investors sales only, (about 51%) to be followed by IPO at a later date

25. Brunei, December 2002 25 Implementation Status(Phase III) Phase III: Jan 02 � Dec 03 Power, Petrochemical Refineries and monopoly sector enterprises Core Investors sales only, (about 51%) to be followed by IPO at a later date. Billions of US Dollars expected to be raised. Advisers yet to be appointed to estimate proceeds after due diligence. IPO for other Hotels, Vehicle Assembly, Sugar, Paper, Steel, Media, Insurance companies for which strategic sales were made in Phase II. First tranche of cross-border IPOs will cover some of the suitable Phase II and Phase III enterprises.

26. Brunei, December 2002 26 Implementation Status (Commercialization) Commercialization is: Limited to a handful of companies currently engaged in ecology and social-related activities: National Parks: tourism and ecology National Hospital Abuja and Federal Medical Centre, Gombe River Basins: irrigation schemes and rural development NTA, FRCN, Voice of Nigeria and the News Agency of Nigeria Housing sector whose growth is constrained by absence of a virile mortgage money market � FHA NSITF: pension fund manager for private sector NNPC: shell company with NAPIMS only after the privatization of its several subsidiaries. Ultimately, commercialization is simply the first step in preparing an enterprise for privatization, and not a permanent solution.

27. Brunei, December 2002 27 Privatization Proceeds (PP) The utilization of proceeds is a major public policy challenge: Currently, the proceeds are part of the common pool of Federal revenue sources, and appropriated as such by the National Assembly. Some Governors are arguing that some of the proceeds ought to shared with them (e.g. NEPA, Refineries, etc.) The �disappearance� of proceeds into the common pool is potentially a problem for government now and in the near future. It is strongly recommended that PP be used for targeted, clearly-identifiable projects, as recommended in 1991 by TCPC: Proceeds should not to be used to finance budget deficits To finance social safety nets like social insurance, pensions and micro-credit schemes. To finance the expansion of NTA, FRCN, RBDAs and Railways To create special loan scheme for educational loans and scholarships

28. Brunei, December 2002 28 Share Purchase Loan Scheme Countries that privatized PE devised schemes to increase public participation (Germany � Inter-company credits, Poland, Russia and Czech Republic issued Vouchers to citizens). NCP has approved a N10 billion Share Loan Scheme to be implemented through 24 Selected banks. N4 billion will be set aside from Privatization Proceeds. Banks will provide N6 billion. Every Adult Nigerian can borrow up to N10,000 per annum at no more than 10% interest. Loan will be repayable from dividends over 5 years. Share Certificate will be the only collateral; CBN has agreed to provide incentives to participating banks; Loans will be disbursed on the basis of equality of Federal Constituencies reverse poverty indices and other nationally accepted criteria. Modalities will be finalized in September, and Scheme will be launched in October 2001. Scheme will create 1 million new shareholders every year and will be a veritable weapon of poverty alleviation.

29. Brunei, December 2002 29 Competition and Anti-Trust Reforms Nigeria has no clear competition and anti-trust policy since PE were the monopolies. Private monopoly and collusive practices by profiteers are greater evils than public monopolies, so there is need for legislative intervention. There is need for a clearly-thought out policy on competition and anti-trust to form the basis for subsequent legislation. The development of competition and anti-trust policy is being midwifed by NCP in close collaboration with House of Representatives, USAID and DFID.

30. Brunei, December 2002 30 Un-funded Pensions Problem Privatization brings to the surface otherwise postponed problems like unfunded pension liabilities: The transfer of ownership from government to private sector requires the funding of existing pay-as-you-go system of the Pensions Act. The magnitude of the public sector pensions problem in Nigeria is estimated at between N450-N900 billion. The magnitude of crisis is most evident in the Military and Railways. Even the best PE schemes like in NITEL have unfunded liabilities of N43 billion. NEPA alone has about N50 billion. NCP is midwifing pension reforms in public enterprises which if successful can serve as a model for the Nigerian public sector. This will result in solutions with minimal recourse to the annual budget.

31. Brunei, December 2002 31 Cross-Debts Crisis Public Enterprises owe: Other PE an estimated N300 billion. The FGN (DMO/FMF) over US $15 billion (foreign loans), and The FGN (MOFI) about N300 billion (local loans). This system-wide problem has crippled many PE, and has led to excusable defaults by all � no responsibility, no blame. (NEPA-NGC) NCP is midwifing the reconciliation of all PE debts for final resolution before transfer to private sector � with minimal recourse to the annual budget. By the time true tax liabilities, interest and levies due to FGN are established, the reconciliation may be a major source of FGN revenue in 2002.

32. Brunei, December 2002 32 Corporate Governance NCP initiated Governance audit after sale of African Petroleum, NOLCHEM and UNIPETROL in December 2000; Auditors� Reports exposed bank and non-bank liabilities in AP (N26.0 Billion) hidden from auditors and investors since 1996; Findings suggest collusion between banks, the Companies and the NNPC in the case of AP and other Oil Marketing Companies; Corporate Governance Audit will be conducted for all PE before privatization; PE Managers responsible should be tried under the Companies and Allied Matters Act, Investment and Securities Act and the the Anti-Corruption Law.

33. Brunei, December 2002 33 Social Safety Net Many countries have used the opportunity of privatization to undertake major reforms of labour markets and social insurance. The World Bank, USAID and DFID are assisting BPE to design a social safety net scheme which includes: Early retirement incentive programmes Training and re-training for re-employment Self Employment programmes and micro-credit, and Micro, small and medium enterprises as downstream consequences of outsourcing and privatization The NCP will be presented a Social Safety Net proposal in its meeting of October, with a pilot scheme for about 500 NITEL workers Foreign donors like USAID and DFID, along with the World Bank have indicated interest to support and fund the pilot scheme. Proceeds can be used for a national scheme.

34. Brunei, December 2002 34 World Bank Credit The FGN signed an IDA Credit of USD114 million at 0.75% interest repayable over 35years with a 10-year moratorium; The credit will be used principally to pay for the following activities: - Privatization Support, Institutional Building and consensus building Telecoms Reforms ( Policy, Telecoms Bill, Strengthening of NCC, Radio Spectrum Development) and Power Sector Reform (Corporate Restructuring, Unbundling and Privatization of NEPA) Lagos State Water Corporation Project Credit cannot be drawn in Cash but for payment of advisers (Foreign and Nigerian) � Up to USD200,000 per assignment can be used under the credit to engage only Nigerian consultants. Foreign consultants are required to use Nigerian counterpart in all cases Use of the IDA Credit to engage consultants boosts the credibility and transparency of the program in the eyes of international investors; It is a sign of confidence in Nigeria and endorsement of the Privatization Program. It is also a cheaper form of funding than CBN Treasury Bills.

35. Brunei, December 2002 35 Bilateral Grants The Program has attracted Bilateral Donors� Support from: United States - USAID ($8.0m), United Kingdom - DFID ($10 m ) Spanish Government ($3.0 m) German Government Grants are not given to BPE in cash, but applied by Donors for further: Institutional Support - to engage Nigerian professionals to work in BPE; training of BPE staff, Public Awareness and Education and International Marketing; Consensus Building � Workshops, Seminars and Study Tours for PE Managers, National Assembly, Labor Unions and other stakeholders; Support for Reforms in Key Priority Sectors � Power, Telecoms and Transport and Special Studies - Labor Issues, Pension Reforms, Competition Policy, Cross Debt Resolution, and Environmental issues;

36. Brunei, December 2002 36 Summary and Action Points There is clear evidence and broad consensus that public enterprises in Nigeria have failed woefully to live up to our expectations. Most rational Nigerians have recognized that privatization is inevitable � state capitalism has failed, is outdated and unsustainable The opponents of privatization are merely putting their short term, personal interest (award contracts, dispense patronage, etc.) at the expense of long term national interest. All other supporting policies to make economic reforms successful are being pursued, so Nigeria is sure to succeed BPE is committed to living up to the expectations of our nation and our friends abroad, in the honest, timely and transparent implementation of the public enterprise reform programme