NIGERIA: An Alternative Privatisation Model

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Whenever the Federal Government of Nigeria, FGN, announces that some venture or other is to be privatised, there is the feeling that the FGN is about to give away something of substantial value for very little in return. Our suspicions, that a great game is on, are heightened when we observe the relatively short period within which bids should be submitted.

Evaluation of bids, the choice of the preferred bidder and negotiations leading to payments by the preferred bidder always seem to go on endlessly. What we find is that the preferred bidder usually has to borrow from the banks all the amounts they require for their investment in the privatised venture. This factor is at the heart of the problems with the model adopted for privatisation by the FGN.

During the first attempt at privatising Nigerian Telecommunications Plc, NITEL, in 2001, the preferred bidder, Investors Group Nigeria Limited, IGNL, obtained loans from First Bank of Nigeria Plc in order to pay a deposit for the shares of NITEL. However, IGNL was unable to obtain additional loans to cover the full payment for the shares allotted to it and therefore the privatisation of NITEL faltered at this first attempt.

In the current privatisation of electric power sector companies, there are indications that the preferred bidders have foreign technical partners but hardly any foreign financial partners and it would appear that the preferred bidders would seek to obtain loans from Nigerian banks in order to pay for their share allotments.

Ordinarily, privatisation of a venture owned by the FGN would be expected to bring about improved overall performance of the venture. In the first place, a profit motive would be introduced into the venture while the preferred bidder is expected to provide additional resources for day-to-day operations and for capital investment in the venture. Under current arrangements, the preferred bidder pays for the transfer by the FGN to the preferred bidder of existing shares held by the FGN in the privatised venture.

The payment goes to the FGN and none of the payment is retained in the privatised venture. The alternative would be for the FGN to create and offer additional shares in the venture, the preferred bidder would pay for the additional shares and the payment would be retained in the company less any costs paid to the capital market regulators and professional advisers to the share offer.

One example worth considering, if we are to appreciate the need for the adoption of the alternative, is that of Ikeja Hotel Plc, owners of Sheraton Hotel Ikeja and part-owners of the Federal Palace Hotel Lagos, who as core investors purchased from the FGN 51% of the shares of Capital Hotels Plc, owners of Sheraton Hotel Abuja.

Ikeja Hotel Plc borrowed part of the funds used for the purchase. As at its 2010 Annual General Meeting, Ikeja Hotel Plc has paid about N11billion in initial payment, loan interest and loan capital repayments and it is still owing about N5billion for this 51% stake.

The loan was taken in or about October 2002 and the 51% stake is currently worth not more than N5.5billion on the Nigerian Stock Exchange. Over the years, dividends earned on this 51% stake has not exceeded N60million in any year and Ikeja Hotel Plc has used its earnings from Sheraton Hotel Ikeja for loan interest and loan capital repayments. Ikeja Hotel Plc has not paid any dividends to its shareholders during 2011 and 2012 and its current valuation on the Nigerian Stock Exchange is not more than N2.1billion.

Capital Hotels Plc needs injection of capital funds to be spent on the refurbishment of its rooms if it is to attract top international clientele and improve its profitability. Ikeja Hotel Plc has reasonable earnings from its operations at Sheraton Hotel Ikeja but its purchase of 51% stake in Capital Hotels Plc has been a drawback on its overall performance. The shareholders of Ikeja Hotel Plc have to grapple with the effects of their 51% stake in Capital Hotels Plc.

However, in the aviation sector and the oil and gas sector, the Asset Management Corporation of Nigeria, AMCON, has taken up shares in some companies in exchange for loans which the promoters of the companies obtained from Nigerian banks. Nigerian banks should look very carefully at any loan proposals from the preferred bidders of the privatised electric power sector companies.

The preferred bidders must be made to put up a considerable part of the sums required for the shares allotted to them if the banks are to grant them any loans. A situation in which AMCON will have to take over from the banks at a future date any bad loans granted to the electric power sector must be avoided.

There is evidence that the electric power sector companies need substantial capital investment if the companies are to be profitable. The deals for the privatisation of the electric power sector companies have been concluded and we can only wait to observe the overall performance of the companies once the preferred bidders assume management control.

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