1 The Presidency Bureau of Public EnterprisesA 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’ PerformanceReviewing 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 ReformsReform Implementation Sequence Reforms Carried out Impact of Reforms on the Economy Outstanding Reforms Bills On-going/outstanding Transactions Conclusion

4 Introduction: Establishment of PEsAt 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 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 BusinessThe 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 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 Shehu Aliyu 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 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, of the Technical Committee on Privatization and Commercialization (TCPC). TCPC implemented the First phase of the privatization programme ( ). 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 LawThe 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 ObjectivesA 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 StrategiesThe 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

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30 GAINS of PrivatisationNo 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 privatizedThe 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 Afam Genco 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 SequenceComprehensive 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 Generation Capacity (GW)Nigeria on the World Power Scale Country * Generation Capacity (GW) Watts per capita S. Africa 40.498 826 Egypt 20.46 259 Nigeria 5.96 40 (25 available) Ghana 1.49 62 USA 977.06 3,180 Germany 120.83 1,468 UK 80.42 1,316 Brazil 96.64 486 China 623.56 466 India 143.77 124 Indonesia 24.62 102 Sources: World Fact book - * Energy Information Administration –

40 Power Sector Status Before ReformsBy 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 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 ReformThe 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 TOOLSPower 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 ( 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 MarketNigeria 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 lossesSuccessor Company Bidder Opening Loss 5 Year Remaining Loss Level Disco ATC&C Relative Target (% remaining)= (End Loss)/(Opening Loss) Abuja Kann 35.00% 12.78% 36.51% Benin Vigeo 40.00% 12.19% 30.48% Eko West Power & Gas 12.76% 36.46% Enugu Interstate 6.70% 19.14% Ibadan Integrated 12.71% 36.31% Ikeja NEDC 9.99% 28.54% Jos Aura 18.09% 45.23% Kano Sahelian 13.02% 32.55% Port Harcourt 4Power 14.90% 37.25% Yola 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 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

51 REFORMS CARRIED OUT CONTD.DEBT REFORM AND THE CREATION OF THE DEBT MANAGEMENT OFFICE The establishment of Debt Management Office (DMO), was one of the outcomes of the reform works of the Bureau Before the creation of the DMO, PEs and government agencies borrowed arbitrarily without looking at the national picture. How much Nigeria owed then was unknown and most of those debts were owed to the London and Paris Club It was BPE’s efforts at the reconciliation and resolution of the debt crises that led to the creation of DMO

52 REFORMS CARRIED OUT CONTD.PORT REFORMS BPE championed the reforms of the nation’s seaports through the concession of the various port terminals Before the reform, it was practically impossible to carry out meaningful business activities in the ports as it took months to clear goods Ports operations were characterized by long waiting periods, diversion of Nigerian bound vessels to neighbouring countries and very high and duplicated charges to Ports users.

53 IMPACT OF REFORMS ON THE ECONOMY

54 TELECOMS SECTOR GROWTH

55 PERCENTAGE CONTRIBUTION OF TELECOMS TO GDP 2001-2013

56 IMPACT OF PENSION REFORMS ON THE ECONOMYThe banking sector is yet to effectively and efficiently finance the real sector of the economy, bridge the infrastructural gaps and provide affordable housing in Africa, due to the short term nature of its deposit liabilities and cost of funds 20 Pension Fund Administrators (PFAs), seven Closed Pension Fund Administrators (CPFAs) and four Pension Fund Custodians (PFCs) have so far been licensed during the eight year period. A total of 5.32 million contributors have been registered from 180,586 employers as at October 2012 while 55,904 retirees, currently receive their monthly pensions as and when due.

57 IMPACT OF PENSION REFORMS ON THE ECONOMY CONTD..The total value of pension industry assets under the Contributory Pension Scheme is currently over N4 trillion. Investment of long term assets in economic development, is helping in increasing domestic savings and investments, while also helping in the development of the Capital Market by contributing to increase in the volume of intermediated funds, increase in level of trading, modernization and deepening of the capital market Pension funds act as intermediaries to a lot of financial assets, including corporate equities, government bonds, and so on, while also providing long term financial intermediation to the real sector through corporate debt instruments and investment funds

58 IMPACT OF PORTS REFORM ON THE ECONOMYThe benefits of the Ports reform have been divided into two types : Primary benefits : Direct savings in resource costs, such as ships’ time, port labour costs and investment. Secondary benefits: Such as reductions in freight rates and port charges, and fiscal transfers between government and the private sector. These show how the primary benefits are re- distributed within the economy and affect ordinary Nigerians.

59 Impact of Ports Reforms on the Economy Contd..The primary benefits are: Faster ship turn-round times Faster cargo turn-round times Faster truck turn-round time Use of larger ships Increased port capacity, postponing the need for further investment Lower port operating costs Opportunities for inland distribution by rail

60 Impact of Ports Reforms on the Economy Contd..The secondary benefits are: Increased competition Lower port charges Lower freight rates Increased private sector investments Labour force improvements Net financial transfers to the government (including taxes)

61 Impact of Ports Reforms on the Economy Contd..All of these benefits lead in turn to macro- economic effects, measured in terms of: Expansion of trade, and General economic growth

62 REFORMS: CURRENT INITIATIVESTo sustain the gains of past reforms, Seven critical Bills have been targeted for passage into Law. The bills are: Railway Bill Inland Waterways Bill Road Sector Reform Bill National Transport Commission Bill Ports & Harbor Reform Bill Federal Competition and Consumer Protection Bill Postal Bill These bills have been approved by NCP and will soon be presented to the FEC by the Attorney General of the Federation for consideration and approval before transmission to the NASS for enactment.

63 REFORMS & REQUIRED BILLS/LAWS1. Ports and Harbour Authorities Bill:- Repeals Nigerian Ports Authority Act No. 38, 1999 and provides for: The establishment of the Landlord Port Model, whereby the Port Authorities will be landlords on behalf of the Federal Government Private sector participation in the provision of ports services - drives efficiency, safety, accountability, competition, fairness, transparency The Bill is before the FEC for consideration and approval before transmission to the NASS for enactment 2. Nigerian Railway Bill:- Repeals Nigerian Railway Corporation Act 1955: Limits role of Federal Government to procurement of railway services and infrastructure through Concessions Protects rights and interests of licensees, customers and other stakeholders Provides basis for regulation by National Transport Commission

64 Reforms & Required Bills/Laws Contd.3. National Transport Commission Bill: Provides economic regulatory framework for intermodal Transport industry Provides for independent regulator (National Transport Commission) NTC will monitor compliance of government agencies and service providers The Bill is before the FEC for consideration and approval before transmission to the NASS for enactment 4. Inland Waterways Bill:- Repeals National Inland Waterways Act No : Provides the framework for ownership, management, control, operation and development of inland water ways Creates conducive environment for private sector investment & participation

65 Reforms & Required Bills/Laws Contd.5. Federal Competition Commission Bill:- Fosters growth, open economy, puts ‘multiplier to work: Prohibits price fixing, bid rigging, price discrimination, fixing quotas Prevents concentration of economic, political power, ownership Prohibits monopolies/Regulates mergers, takeovers and acquisitions Stimulates economic growth through competition, efficiency, trade and commerce, promotes consumer welfare Liberal access drives increased participation in the economy The Bill is before the FEC for consideration and approval before transmission to the NASS for enactment

66 Reforms Bills to date BPE produced sector-specific policies and reform Bills, and one generic reform bill, including: Power Sector Reform Act Telecommunications Act Solid Minerals Act Petroleum Industry Bill Ports and Harbour Authorities Bill National Transport Commission Bill Federal Roads Authority Bill Roads Fund Bill Nigeria Railway Commission Bill National Inland Water Way Bill Gas Bill Federal Competition Commission Bill Postal Sector Reform Bill Industrial Policy Pension Reform Act

67 ON-GOING & FUTURE TRANSACTIONS

68 CURRENT INITIATIVES On-going transaction/activities include:Housing: Reviewing the policy, legal and regulatory framework to encourage private sector participation The 7 National Parks – Reviewing the policy, legal and regulatory framework to encourage private sector participation The 3 DFIs (i.e. BOI, BOA & FMBN) – Working on creating a mega whole sale DFI like the ones in Brazil and Germany River Basin Development Authorities (RBDAs) The 12 RBDAs – Reviewing the policy, legal and regulatory framework to encourage private sector participation Health Sector Sports Sector

69 Targeted Privatization Contd.The Federal Housing Authority is currently being restructured and commercialized to position it to meet up with its challenges The enterprises pending passage of the PIB in the Oil & Gas sector The Refineries PPMC NGC Other enterprises are: Ajaokuta Steel Company NIOMCO Nitel/Mtel Old Warri Terminal “B”

70 CONCLUSION We are working to expand private sector participation in our economy Nigeria will continue to attract quality foreign investors & capital that will boost technology transfer, economic development, & Forex in-flow Provide assurance and comfort to investors on the viability of recovering their costs and having a reasonable return on their investments; and Redirect funding by Government to other key sectors of the economy that are socially imperative such as health, education, etc. and encourage the private sector to be the engine room for economic growth and development.

71 Thank You