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[email protected] New York, NY, USA

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Forwarded by: LAOLU AKANDE

NIGERIAN PRIVATIZATION SHARE PURCHASE SCHEME
- AVOIDING CRITICAL FLAWS: CASE STUDY ON RUSSIA AND CZECH REPUBLIC

Background:

he on-going privatization program in Nigeria, spearheaded by the Bureau For Public Enterprise (BPE) has been a mixed blessing of sorts. The former Director General Nasir El-Rufai (and his team) had an arduous task of enlightening the public on the rationale behind the exercise. Listening to him speak at a symposium in April 2001 here in New York City, he explained without mincing words that the privatization program is "helping eradicate wasteful spending in the public sector, and checkmating the "kleptomania" of top officials in these organizations as well as engendering accountability and improving efficiency". As at November 2003 over 70 billion Naira (US$550 million) had been generated from the privatization program. Not everyone agrees.

Skeptics argue that the privatization program is a dismal failure, pointing to a multitude of defects in the execution, such as the colossal pension liability in privatized enterprises and more specifically, - the botched attempt to sell NITEL to the Investors International (London) Ltd for $1,3 billion, - the group lost their $130 million deposit to the government in the process. Critics also see the huge debt inherited by SADIK Petroleum, - core investors in African Petroleum (AP), and the on-going squabble in Niger Dock as more symbols of a fatally flawed policy.

Privatization is not and cannot be a magic wand that would cure every economic malaise. However, a high point of that program in Nigerian so far remains the successful public auctioning of GSM and Second National Carrier (SNC) licenses, which have lead to a rapid growth in the telecommunication sector over the last 2 years, - by some estimates, Nigeria had one of the lowest teledensities (ratio of phone lines to inhabitants) in the world before the on-set of this program. That ratio is projected to fall to 1:80 by 2005 as over 1,5 million landlines are commissioned. Now imagine if BPE could replicate this measure of success in the new Privatization Share Purchase Loan Scheme (PSPLS) or the unbundling and privatization of Nigeria Electric Power Authority (NEPA). There could be an immediate demonstrative effect on industrial productivity and the capital market.

Successful implementation of a massive Share Purchase Scheme in tandem with the privatization of white elephant public enterprises such as NEPA, NITEL, Oil Refineries, Steel Rolling Mills, and even NNPC would truly help eradicate unnecessary influence peddling in the public sector. It would also curb political patronage, ease the pressure on public budget, improve productivity and create new "ownership mentality" in the populace.

According to published reports, in 2000 over 52% of US households owned shares in listed companies either directly or through their retirement accounts. Less than 5% of Nigerians own shares in listed companies. So BPE must aim to grow this number as much as possible in the long run as it implements the Share Purchase Scheme.

The Privatization Share Purchase Loan Scheme (PSPLS) was launched in May 2003 as a special program to enable low to middle income Nigerians participate in the on-going privatization process, through offering credit under favorable terms to acquire shares.

Several Key Factors To Address Are:

• What are the concrete qualitative and quantitative targets to be attained by the Denham Consortium in the mid to long-term horizon as consultants for the scheme?

• What is the specific performance metrics embedded in this mandate for the consortium as they forge ahead? How will success or failure be determined?

• How effectively can this scheme be utilized to empower a wide spectrum of the populace as "real owners" of these enterprises, for them to have a say in decision-making or benefit from the long-term financial success of these organizations?

• How would BPE and the Consortium ensure that ownership is adequately dispersed amongst the various ethnic groups and regions in the country, to ameliorate social conflict and avoid the bitter experience of Russia and other Eastern European Countries that implemented similar programs in the early 90s?

• How will NCP/BPE ensure that small investors are protected? For what purpose should the shares acquired be meant? - Investing the shares wisely for "rainy day", relying on the dividends/capital appreciation to establish small businesses in future, or passing on the shares as a legacy to our children (sounds overly generous for most Nigerians) or simply selling the shares and spending the money immediately.

• What role can/should Nigerians in the Diaspora play in adding value and enhancing the capital base of these newly privatized enterprises through the share purchase scheme?

There is no gainsaying that the Denham Consortium (comprising Denham Investment Management, ABSA Bank - South Africa, Oceanic Bank, Emerging Markets Partnership -USA, Interstate Securities, Microsoft Nigeria, Infosoft Nigeria, Afridex, Central Securities Clearing Systems and First Registrars) is qualified enough to implement this scheme, however the experience of Russia and Czech Republic amongst other erstwhile socialist countries must be instructive for Nigeria in this regard.

Similar privatization programs and massive share purchase scheme kicked off in most of these countries after the fall of the iron curtain in the early 90s. In Russia, each and every citizen of all ages was issued so-called " Privatization Vouchers" worth 5000 Rubles or $500 at the prevailing currency rate. These vouchers were meant to be exchanged for an ownership stake in any public enterprise of their choosing, which made a lot of sense technically and politically, except that it was fraught with abuse: -

Structural Deficiencies in Russia and Czech Republic:

• The citizens were not well informed about how and where to invest these vouchers before hand.

• The capital markets in Russia and Czech Republic in the early 1990s were still in embryonic stages and dis-functional at best. People were used to saving but equity investing was still a complex novelty for the society to fully comprehend.

• Public enterprises were initially auctioned off to core investors before average investors could buy into them after being listed in the stock markets.

• Securities regulations and rules of corporate governance of both investment managers and public companies were practically inexistence, but gradually evolving.

In the ensuing chaos, there were large-scale fraud, gross mismanagement and blatant violation of fiduciary responsibilities by mushrooming investment firms, taking advantage of unsuspecting public. Core investors on the other hand scooped up assets at the public auctions for a pittance. - Right now, there are reports that Russia will re-examine the results of the 1990s sell-off of state property that made a handful of tycoons - the so-called oligarchs into billionaires overnight. . For over two years now in the Czech Republic, Victor Kozeny and his bankrupt Harvard Investment Fund (no connection to Harvard University) set up to manage the shareholdings of small investors who invested their vouchers in state-owned companies, is being accused of fraud amounting to $300 million. At one point in the privatization process, Harvard Investment Fund owned controlling stakes in close to a third of all publicly traded companies in the Prague Stock Exchange. In Russia, this so-called "oligarchs" in the media, oil/gas, banking, mining and trading sectors have recently been expanding globally while others have fled to exile.

These are indeed some of the ugly sides of a "noble scheme" So as we embark on this process, it is noteworthy to recognize a few common characteristics between Nigeria and the former Socialist Countries, - endemic corruption/mismanagement, bloated, epileptic and monopolistic public enterprises, underdeveloped capital market/lax regulations.

Nigeria's Unique Advantages:

• A relatively well informed and fast growing investing class exist in Nigeria while shares being traded in a less crime infested capital market, - evidence suggest that "Mafia" crime syndicates had an over-bearing influence in the privatization process and stock markets in Russia during the early 1990s.

• Nigeria possesses a robust and comparatively more advanced capital market with a multitude of experienced players, that are more transparent, better managed and efficiently regulated vis-�-vis the stock markets of Russia or Eastern European Countries in the early 1990s.

• So far, Bureau For Public Enterprises (BPE) under Nasir El-Rufai has had a strong political support from the Presidency, by virtue of its direct subordinated relationship with the National Council on Privatization (NCP). NCP/BPE have been under stringent critics, which it has continued to wither.

• It could be argued that BPE has carried out a sustained public relation campaign, and been relatively more transparent than for instance the Russian Privatization Committee, under the ebullient but controversial Anatoliy Chubais during the hay days.

Overall, our society is less educated, and wealth is concentrated in fewer hands. Far and away, Nigeria is more polarized and rather pluralistic than the former socialist countries during the early 1990s. Which calls for caution and tactfulness on the part of NCP/BPE and the Denham Consortium as they design and implement the share purchase scheme.

So Which Way Forward?

1. This scheme should be critically re-assessed by the National Council on Privatization (NCP), and open to constructive feedback from organized labor and Civil Society. It should be viewed as a serious effort to at least begin to address social inequality, to re-distribute wealth (not withstanding how small), empower more citizens, and maybe building a "new middle class". Most of all, massive public awareness campaign must be initiated at the grassroots with the involvement of NGOs, civil society and community organizations to proceed hand in hand with the technical implementation.

2. Even though the total volume of the share purchase scheme was recently increased from 10 to 20 billion Naira by BPE, at the anticipated loan size of 10,000 to each eligible Nigerian it would reach roughly 2 million citizens at this stage, - what then are the eligibility criteria? who else should be receiving the loan? I strongly suggest that every Nigerian of voting age should be eligible to receive a " Share Purchase Voucher" free of charge rather than as a loan, which can be exchangeable for an ownership stake (Share certificate) in any privatized and economically viable enterprise at the initial offering price. Providing the same 10,000 Naira worth of voucher to approximately 60 million eligible adults or registered voters would amount to 600 billion Naira (US$4,5 billion)

3. Strict guidelines and rules of conduct for private investment firms must be established to protect small investors The program should be administered through the banks and stock brokerage firms with oversight by BPE, Nigerian Stock Exchange (NSE) and Securities and Exchange Commission (SEC). Technical assistance could be received from the UNDP and World Bank. Computerized database of recipients must be maintained as the vouchers are disbursed. If possible the national I.D cards should be utilized to collate figures of eligible citizens.

4. The process should be stretched over 4 to 5 years (as more privatization mandates are completed), through issuing vouchers to 12 million Nigerians a year, at an average rate of 1,0 million vouchers a month to avoid a deluge of the vouchers in the market and enable the capital market absorb the new shares and accommodate increased trading activities A timeframe of 2 years (from date of issue) for investing the vouchers should be stipulated, after which the voucher becomes invalidated. Naturally, the vouchers should not be considered a legal tender for any commercial transaction other than share purchase in newly privatized companies.

5. The secret to growing our capital market, as I always will maintain initially lies in our ability to mobilize domestic savings and financial assets of Nigerians in the Diaspora. Realistically, the Share Purchase Scheme is an excellent opportunity for us to build a vibrant new "Emerging Market", through increased liquidity, higher market capacity and broader ownership base.

6. Marked increase in listed companies and market capitalization in NSE during the mid to late 90s was not the result of any huge influx of foreign portfolio investments, but rather due to the effects of the first and second phases of the privatization effort, - Capitalization jumped from 8 billion Naira in 1988 to 52 billion in 1994 and by the beginning of 2001 capitalization was enhanced by 177 billion Naira (US$1,4 billion).

7. Current market capitalization of the NSE is estimated to be $6-$7 billion with less than 200 listed companies. Adding 17 new business entities after the unbundling/restructuring of NEPA, plus listing of re-structured companies such as Niger Dock, NITEL, NICON Insurance, Nigerian Re-Insurance, Nigerian Hotels, Capital Hotels, Daily Times, Port-Harcourt, Warri and Kaduna Refineries, Onne Fertilizer Plant, Port Harcourt and Kaduna Petrochemical Plants, Ajeokuta Steel Plant, Aladja and Osogbo Steel Rolling Mills, Aluminum Smelting Plant, and other major infrastructures would indeed translate to a palpable boost for the NSE and possibly the Abuja Stock Exchange.

8. Proceeds from the sale of these assets should be used to finance the share purchase scheme, or ploughed back as long-term loans for capital projects and re-structuring of these companies, or utilized to fund the Small and Medium Enterprises (SME) offering ancillary services to these large-scale industries rather than merely paying-down debts or offering gratuities to senior officials who were instrumental in the demise of these enterprises.

9. Nigerians in the Diaspora should be allowed to participate in the share purchase scheme, not through receiving the vouchers free of charge, but by way of an allocation of bloc of shares/quota during the initial public offering (IPO) and be distributed through interested stock brokerage firms according to laid down securities regulations in the US, Canada or Europe.

We should never expect to implement a flawless scheme, none-the-less, if Nigeria remains committed to a creative economic reform package, the Share Purchase Scheme and privatization program (being two of such measures) would provide stimuli for market transformation, like it or not. Sustained effort in a not-too-distant future will set the stage for recovery and spur industrial growth, translating into job opportunities and improvement in living standard, - examples abound in today's: India, China, Malaysia and even Botswana.

Chamberlain S.Peterside, Ph.D. is a New York City based Investment Advisor in a leading Global Financial Institution.