The Presidency Bureau of Public Enterprises

1. The Presidency Bureau of Public Enterprises A PRESENTATION TO MEMBERS OF “JUST FRIENDS CLUB OF NIGERIA” AT ITS MAIDEN ANNUAL LECTURE ON “THE FEDERAL GOVERNMENT’S PRIVATIZATION AND ECONOMIC REFORM PROGRAMME” BY MR. BENJAMIN EZRA DIKKI, DIRECTOR-GENERAL JUNE 27, 2014

2. Outline • Establishment of PEs • PEs’ Performance • Reviewing Government’s Involvement in Business • Establishment of the BPE • Privatization Policy Objectives • Privatization Strategies • Enterprises Privatized from Inception to Date • Gains of Privatization • Impact of Some privatized Enterprises on the Capital Market • Summary of Results

3. Outline Contd… Reforms Objectives of Reforms Reform Implementation Sequence Reforms Carried out Impact of Reforms on the Economy Outstanding Reforms Bills On-going/outstanding Transactions Conclusion

4. Introduction: Establishment of PEs At Independence, the FGN’s economic development strategy was anchored on the “commanding Heights” economic theory: Government was the chief driver of economic growth. That gave rise to an abnormally large public sector. In the 1960s up to the early 1970s, active state participation in economic activities and nationalization of public utilities was considered the route to development due to the following reasons; : the state was seen as the chief instrument for the promotion of economic growth and industrial advance. Import substitution drive: Government established many commercial enterprises to reduce the levels of imports Perception then that the private sector was weak and not capable of driving economic growth

5. Introduction: Establishment of PEs Cont. After the civil war that ended 31st January 1970, the Nigerian Government pursued a “Reconciliation, Reconstruction and Rehabilitation” policy, equivalent to the George Marshall Plan of 1948 -1952. This policy aided by oil price boom of the early 1970s saw government building massive industrial and infrastructural facilities in Nigeria. Billions of Naira went into construction of refineries, steel plants and rolling mills, establishment of development/industrial banks, oil companies, telecommunications companies, electricity plants, airports, sugar companies,

6. Introduction: Establishment of PEs Cont. • Cement companies, paper mills, fertilizer plants, glass industries, breweries, railways, river basin development authorities, dams, shipping lines etc. • These were managed as government owned companies and enterprises. • This huge government direct investment in the Nigerian Economy was soon followed by an attempt to indigenize the economy • In 1972, the government enacted the Indigenization Decree which stipulated increased participation of Nigerians in companies/enterprises.

7. Introduction: Establishment of PEs Cont… Arising from this economic philosophy and huge oil revenue, the government established PEs in every sector Over $100billion was invested to create over 600 ventures

8. PEs’ Performance Although they employed less than 500,000 workers, they created over 5,000 board seats Substantial part of non-performing debts owed to the London and Paris Clubs were loans to PEs Yet workers were owed salaries, with huge pension liabilities about (N2 trillion). PEs consumed over $3billion annually as subventions, subsidies, etc

9. PEs’ Performance Contd. Tax deductions at source (PAYE, VAT and Company Income Tax) were not remitted to the tax authorities. Despite legalised monopolies, subsidies, exemptions, privileges, treasury support, PEs in Nigeria failed to yield dividends or service

10. Reviewing Government’s Involvement in Business The twin policies of government direct investment in the Nigeria Economy and an attempt to indigenize the economy did not produce the desired economic result Publicly ran enterprise could hardly break-even and became a huge burden on government budget which was then seriously affected by falling crude oil prices in the early 1980s. Nigeria’s economy experienced, “declining growth, increasing unemployment, galloping inflation, high incidence of poverty, worsening balance of payments, debilitating debt burden and increasing unsustainable fiscal deficits…”

11. Reviewing Government’s Involvement in Business Cont. • Disenchanted with poor performance of PEs. the FGN commissioned several studies: • Adebo (1969) • Udoji (1973) • Onosode (1981) and • Al-Hakim (1984) • Findings: PEs were inefficient, corrupt, misuse monopoly powers, depended heavily on treasury, had defective capital structure, and suffered incessant political interference, etc; • In 1985, a Presidential Study Group to review the 1984 Committee report was set up. • The main conclusion of the Committee was the need for radical measures to be taken to solve the problems of the PEs

12. Reviewing Government’s Involvement in Business Cont. • Government policies began to respond to the realities on ground • It was in the light of the fore-going that President ShehuAliyu Shagari introduced the Economic Stabilization Program popularly called Austerity Measures in April 1982. • These measures were continued till 1985 when General Ibrahim Babangida took over and introduced the Structural Adjustment Program (SAP) in June 1986. Its cardinal objective was to: “restructure and diversify Nigeria’s productive base, through the rationalization and restructuring of public enterprises and overhauling of the public sector administrative structure”.

13. Reviewing Government’s Involvement in Business Cont. • These were the prelude to the enactment of the Privatization and Commercialization Decree No. 25 of July 1988 and the inauguration on 27th July, 1988 of the Technical Committee on Privatization and Commercialization (TCPC). • TCPC implemented the First phase of the privatization programme (1988-1992). • The National Council on Privatization (NCP) and the Bureau of Public Enterprises (BPE) have been implementing subsequent Phases (1999 to 2007) and the current Goodluck/Sambo Transformation Agenda (2007 to date).

14. Establishment of BPE: Enabling Law • The Public Enterprises (Privatisation and Commercialisation) Act 1999 established: • The National Council on Privatisation (NCP) • The Bureau of Public Enterprises (BPE) • The NCP: • Determines political, economic and social objectives of the programme • Approves policies • Approves public enterprises to be privatised or commercialised • Issues directives to BPE • The BPE: • Implements Council’s policies and directives • Responsible for implementing the day-to-day privatisation and commercialisation activities

15. Privatization Policy Objectives • A former President succinctly stated the privatisation policy at the inauguration of NCP on 28th August, 2008, as thus: “Privatisation permits governments to concentrate resources on core functions and responsibilities of governance, promoting markets to work efficiently, with provision of adequate security and basic infrastructure, as well as ensuring access to key services like education, health and environmental protection” • This same policy objective informed the privatization exercises that took place in Western Europe, UK, Latin America and other Emerging Markets.

16. Privatisation Policy Objectives Cont. • The privatization programme is a key aspect of Government’s Economic Reform programme as enshrined in the FGN’s Transformation Agenda. • It is designed to: • Diversify the economy; • Strengthen the private sector as Nigeria’s engine of growth and economic driver; • Assist in restructuring the public sector in a manner that will effect a new synergy between a leaner and more efficient government and a revitalised, efficient and service oriented private sector; • Ensure government concentrates resources on core functions and responsibilities of governance;

17. Privatisation Policy Objectives Cont. • To improve efficiency and reduce waste in the public sector; • Modernize technology in our industries; • Dismantle monopolies and service arrogance; • Reduce debt burden and fiscal deficits; • Resolve massive/perennial pension gaps; • Promote transparency in corporate governance, and • Attract foreign direct investments. Through: • Promotion of competition; • Enthronement of sound corporate Governance in public and private sector, and • Institutionalization of social accountability and efficient use of public resources

18. Privatization Strategies The Act provides various strategies for carrying out privatisation. These include: Public Offering Private placement of shares Core Investor sale Concession Sale by willing seller/willing buyer Sale of Assets, and Liquidation

19. Privatization Strategies Contd. Usually, BPE recommends an appropriate sale strategy to NCP for approval, taking cognisance of the peculiarities of each transaction. Privatisation transactions go through series of open and transparent stages of due process comprising: Advertisement for Advisers and Core Investors Due diligence by bidders Due diligence on bidders Painstaking Evaluation of Technical bids Public opening of Financial Bids with live media coverage

28. Transactions handled Cntd

30. GAINS of Privatisation • No treasury allocation to privatised PEs –drain pipe plugged • Proceeds utilised for other socio-economic objectives • New operators pay corporate taxes • New owners are investing heavily: e.g. Ports, Fertilizer companies, Oil marketing companies and Cement plants, etc • Neglected and under utilised assets being more efficiently utilised

31. GAINS of Privatisation Cont. • Eleme petrochemical Company revitalised and producing at over 90% capacity • Cement Companies have been revived, expanded and made profitable: Cement Company of Northern Nigeria, Benue Cement Company, Ashaka Cement Company, West African Portland Cement Company • Banking sector completely revolutionized: no more tally numbers • Insurance companies have been transformed

32. GAINS of Privatisation Cont. • Oil services companies, such as Oando, ConOil, etc have expanded and are now profit driven • Nigerian Truck Manufacturing company that was shut down is back and producing • Agro- allied sector: Notore (NAFCON), Okomu Oil Palm, Sugar companies like Savannah Sugar Company, etc, are now operational • NAHCO that was moribund has more than tripled its share value since privatisation • Federal Palace Hotel that was dilapidated, is now functional and expanding • Remarkable improvement in investments and Ports operations

33. IMPACT OF SOME PRIVATISED ENTERPRIZES ON THE CAPITAL MARKET

34. Summary Of Results From 1999 to 2012, 122 enterprises were privatized The sum of N251.5 billion was realized as gross proceeds and over N147 billion (net) was remitted to the Privatization Proceeds Account with the CBN. 66% of the privatized enterprises are performing well as against 34% that are not doing well The preferred bidders for 15 out of the 18 successor companies (SCs) of PHCN have paid their full bid prizes amounting to approximately $2.5 billion, while labour benefits amounting to over N384 billion were settled before the companies were handed over to the new core investors on November 1, 2013. Kaduna Disco and AfamGenco transactions that were unsuccessful during the first sale are now nearing conclusion, while the NIPPs sale process is moving on smoothly towards conclusion later in the year.

35. REFORMS

36. OBJECTIVES OF REFORMS • The over-riding objective of reforms is to create an enabling environment for private sector investments through: • Institution of sound sector policies • Liberalization of the sector by abrogating monopoly laws • Delineation of the roles of policy formulation from regulation and operations • Establishment of Appropriate Legal and regulatory framework • Setting up of Independent Regulators • Mitigation of risks to encourage private sector investments

37. Reforms Implementation Sequence Comprehensive diagnoses of Sector problems Sector stakeholder engagement and sensitisation through seminar, workshops, etc Identification of the key issues and drivers of the sector Draft sector policy Prescription of appropriate legal and regulatory frameworks Approvals of the policy and legal framework by NCP and FEC Enactment of bill by NASS Implementation

38. REFORMS CARRIED OUT POWER SECTOR REFORMS

39. Nigeria on the World Power Scale • Sources: • World Fact book - http://www.cia.gov/library/publications/the-world-factbook/index.html • * Energy Information Administration – www.eia.doe.gov

40. Power Sector Status Before Reforms By 1999, the Nigerian electric power sector reached, perhaps, its lowest point in its 100 years history with the following statistics: • Of the 79 generation units in the country, only 19 units were operational. • Average daily generation was 1,750 MW. • No new electric power infrastructure was built between 1989-1999. The newest plant was completed in 1990 and the last transmission line built in 1987. • An estimated 90 million people were without access to grid electricity. • Accurate and reliable estimates of industry losses were unavailable, but were believed to be in excess of 50%.

41. Objectives of Power Reform • The need for improvement in the efficiency of the distribution, generation and transmission network • The need to provide our people with the basic and affordable infrastructure to enable them create employment for themselves.

42. POWER SECTOR REFORM TOOLS • Power Sector Policy, 2001; Aimed at ensuring electricity supply by creating a conducive investment environment for private sector investment and managerial expertise • Investor friendly Power Sector Reform Act enacted in 2005 • Breaking the Monopoly: Introduction of a competitive electricity market • PHCN unbundled into six generating companies; eleven distribution companies & one transmission company (6-1-11 configuration). • 18 successor companies corporatized and assets, liabilities and employees of PHCN transferred to the successor companies • Privatization and concession of the Successor Companies. • Regulator: NERC established in 2006

43. Reform tools Contd. • Securitisation arrangement is ongoing to mitigate financial and regulatory risks; • The Nigeria Electricity Bulk Trading Company Plc (NBET) & the Nigerian Electricity Liabilities Management Company (NELMCO) have been established and capitalised to stabilize the market in the interim for 5 to 7 years; • NELMCO to absorb legacy liabilities and stranded assets as the PHCN SCs were companies sold debt free.

44. Design of the Nigerian Electricity Market Nigeria adopted the wholesale completion model as its long run market design The Nigerian electricity market is expected to evolve through the following stages: • PRE –TRANSITIONAL STAGE (Where we are today) This is characterized by higher demand than supply. • TRANSITIONAL STAGE (Where we are about to move into) • Demand will be higher than the supply. • All trading is transacted through contracts -vesting contracts

45. Design of the Nigerian Electricity Market Contd. • The conditions and prices of vesting contracts are negotiated and influenced by market forces. • Transparent and competitive negotiation mechanisms for entering the market (new PPAs) • MEDIUM TERM STAGE • There is no restriction (competition) in entering the market. • There is competition in supplying the market with power. • Contracts will be negotiated based on market forces

46. Design of the Nigerian Electricity Market Contd. • There will be a centralised Merit Order Dispatch by the System Operator, where Generators must submit the dispatch nomination (availability, constraints, costs / prices) which will be guided by (least cost) dispatch. • LONG TERM STAGE Similar to the medium term stage but characterized by more competition and greater freedom by eligible consumers to choose their suppliers

47. Current AT&C losses and purchasers Obligation to reduce losses P Disco ATC&C 5 Year Relative Target (% Successor Bidder Opening Loss Remaining remaining)= (End Company Loss Level Loss)/(Opening Loss) Abuja Kann 35.00% 12.78% 36.51% Benin Vigeo 40.00% 12.19% 30.48% Eko West Power & Gas 35.00% 12.76% 36.46% Enugu Interstate 35.00% 6.70% 19.14% Ibadan Integrated 35.00% 12.71% 36.31% Ikeja NEDC 35.00% 9.99% 28.54% Jos Aura 40.00% 18.09% 45.23% Kano Sahelian 40.00% 13.02% 32.55% Port Harcourt 4Power 40.00% 14.90% 37.25% Yola Integrated 40.00% 17.34% 43.35% • Note: • The final column (red) is what purchasers are contractually obligated to meet over 5 years • Opening loss levels are estimated and may be adjusted following baseline studies • 5 Year required remaining loss levels will be adjusted as per the purchaser obligations in the final column

48. Total Investment to be made in Discos

49. Reforms Carried Out Contd. Telecom Reforms: • BPE championed the reforms that have revolutionized the country’s telecom sector with the enactment of the Telecom Act. 2003 and the licensing of several service providers that have created so many new jobs • From a tele-density of 0.42%, representing 450,000 telephone lines in 2001, the country’s tele-density has grown to 82%, representing 123 million telephone lines as at June 2013

50. REFORMS CARRIED OUT CONTD. • Pension Reforms • Prior to the enactment of the Pension Reform Act 2004 PEs habitually deducted pension contributions from their employees and lumped same with recurrent expenditure and spent it • That created a serious social problem • The reforms midwifed by BPE simply separated the agency that deducted pension contributions from the agencies that manage such contributions • With the establishment of Pension Commission and entrenchment of a stable pension policy in Nigeria, retirees are now guaranteed payment on retirement