Okoh: It is Impossible for FG to Repossess the Discos

0

The Director General of the Bureau of Public Enterprises, Mr. Alex Okoh, believes the challenges confronting the power sector are being addressed gradually, even as he noted that the key issues facing the sector are lack of liquidity and the absence of a price regime that compensates costs adequately. Obinna Chima presents the excerpts:

The funds from the sale of some assets such as the Yola Disco and Afam Power Plant are expected to partly fund the 2018 budget. What is the update on that transaction as we are almost approaching the end of 2018?

We had estimated that we would reach financial close from the sale of Yola and Afam by November 2018, in time to be able to make our N300 billion commitment to the 2018 budget. However, because of certain delays in the appointment of transaction advisers and the process of executing the sales, the new timeline for the sale of Afam is January 2019 and also Yola Disco is January 2019. So, there is a two months delay on that.

The power sector is still facing a lot of challenges several years after the privatisation exercise. Is it that the investors didn’t carry out the necessary due diligence before purchasing the assets?

In terms of estimating the value of the assets, I believe due diligence was done. So, there is a transaction due diligence which the core investors at that point in time were able to fairly estimate. I think where the issue is, is in terms of technical due diligence and being able to estimate the loss level of those different Disco franchise areas. So, they were not able to estimate the actual aggregate technical commercial losses that the Discos were experiencing at that point in time. Principally, because of labour issues, the unions did not allow that activity to take place. What happened was that the performance agreement provided for a new level to be estimated post acquisition, which the core investors then did a year after, to be able to ascertain the actual loss levels of those assets.

In your opinion, do you think the power sector privatisation was appropriate?

I think that, that debate is essentially academic and not useful at this point in time. What I always say is that the power sector privatisation which led to the privatisation of 11 Discos and about 7 Gencos, is perhaps the biggest privatisation on the continent of Africa. It was a bold initiative that we decided to do the entire sector privatisation at once. With that kind of massive privatisation, it is believed that there would be gaps, there would be challenges and there would be issues. And, we are seeing those issues cropping up. But the important thing is that we have a credible document and a credible process to reset the entire sector on issues around cost recoverability, issues around having a problem passing on the actual cost of power to the consumers, should government then provide subsidy for the actual cost of power? So, all of those issues are being address in the power sector recovery programme that was done in conjunction with the World Bank and it is believed that with time, some of the challenges in the power sector should be resolved. For me, the key issue in the power sector is that of liquidity and liquidity is a function of choice. If the activities of the enterprise is not generating sufficient revenue, relative to the cost of providing that service, then you have a gap right there. And the longer it takes to bridge that gap, the more the quantum of the liquidity challenge that opens up. So, there is a historical liquidity gap that we need to address and when we are able to implement a price regime that compensates costs adequately, then we hope that we don’t keep expanding that gap. But let me use this opportunity to mention that we are also in the process offering up the shares of SAHCOL, through an initial public offering (IPO) SAHCOL was sold 100 percent to the current core investor. But there is a provision in the sales agreement that guarantees that five years, post-sales, we would be able to offer a certain percentage of the shares of SAHCOL to the general public for investment. That also applies to Nigeria Reinsurance. We are also going to do an IPO for Nigeria Reinsurance in the next three or four months. And it is a hybrid offer, because the federal government is offering 20 per cent of its 31 per cent, while the core investor is offering 20 per cent of its 51 per cent. So, a total of 40 per cent shares of Nigeria Reinsurance would be coming into the market very soon. Sometimes next year and precisely, around March, we would also be offering some of the shares of Eleme Petrochemical through an IPO. We personally believe that is a more credible and more democratic way of making what we general regard as national patrimony or common patrimony, available to the generality of Nigerians. So, there can be retail participation in the ownership of these assets. So, if you go to the market and you want to buy 1,000 units of SAHCOL or Nigeria Reinsurance, you can buy. So, in my sense, it creates a better image for the privatisation programme and moves the narrative away from the fact that people are selling national patrimony to friends, private entities and all of that. If you have a sense that people can participate in a common ownership of this assets, compared with the pushback and resistant that the privatisation received in some areas, I think it will be better.

When is the review date for the Performance Agreement in the power sector and part of the agreement states that the federal government has right to repossess these assets at one dollar each, if the investors perform below expectation. Do you foresee the government enforcing the call option?

The review date is January 2020. The assets were handed over to the core investors, the Discos particularly, on November 1, 2013. So, ordinarily, the review date would have been October 31st, 2018. But you will recall that at the point at which the assets were handed over, there were certain assumptions made in the performance agreement which needed verification, that could not be achieved at the point that the acquisition took place, principally establishing the loss revenue for all the Discos as at November 1, 2013. So, the performance agreement provided for a process where the baseline losses would have established post-acquisition. That is, we provided a year, post-acquisition, for that to be provided for that to be concluded by the core investors and would assume ownership and control of the Discos. So, that was concluded in December 2014, which then give the effective date for the performance agreement to be January 1st 2015. So, the expiry date for the current performance agreement for all the Discos, with the exception of Kaduna, which happened a year after. So, Kaduna Disco will be due December 2020, while all the remaining 10 Discos, their performance agreement would be due for review in December 2019. So, that is the state of the agreement. You are also very correct that if the performance expectations are not met, there is a provision that the federal government can acquire those Discos for one dollar. But you can only do that if the default has been entirely as a result of the Discos’ inefficiency. But, what we see in the power sector in the past five years is that the federal government has also been in significant default in terms of the expectations and performance objective that was set out as core responsibilities of the federal government in the performance agreement. Issues around tariff for example, issues around subsidy and others. So, there are lots of expectations that have not been met by the government. So, it will be totally impossible for us to exercise the call option, which is to repossess the Discos for one dollar. So, that is not going to happen because when you are managing a privatisation process, it is important that you maintain the confidence of the private sector, so that they don’t lose faith in the process. The non-performance cannot be attributed to the inefficiency of the Discos and so we would be sending the wrong signals if we attempt to repossess those Discos for one dollar each.   

What is the update on Ajaokuta Steel because recently, we were made to understand that the estimate for the completion of the steel complex is $650 million?

You are right that the estimate for the completion status of Ajaokuta is about 97 per cent, but it is not a percentage issue. It is the value of the funds that is required for the balance of three per cent to be completed, that is the key issue. You estimated it rightly to be around $650 million. So, the issue is, should this amount be coming from the government or does it make sense for us to go back to the original concept of the transaction and get a concessionaire to provide the funding, complete the infrastructure and then put it into production? So, we think that the second option is a better way to go. However, you will recall that there were issues around the legal ownership of Ajaokuta. There is a particular company – Global Infrastructure – which lays claim, not only to Ajaokuta, but also the ancillary assets, including the National Oil Mining Company. So, there are lots of issues around the ownership. But what we decided is that there is an out of court settlement that was entered into between the federal government and this particular company. And the out of court settlement ceded the National Oil Mining Company to Global Infrastructure, gave Ajaokuta back to the federal government, and then provided an avenue for Global Infrastructure to take part in the concession of the Warri old port. So, that out of court settlement is what we are trying to put into effect and then get the asset set for concession. Currently, we have interest on two key companies who approached government to be the concessionaires of Ajaokuta. We have also looked at the strategy of unbundling the about 41 distinct business units in that entire complex. So, the question initially was, is it better to fragment Ajaokuta and concession it along the 41 business unit or is it better to concession as a single entity. We decided that the best and most optimal structure will be the single unit. So, that is the transaction strategy that we have agreed on. Once we are able to resolve these legal issues, then we can begin to engage these interests that have been expressed in Ajaokuta. It is not a very easy problem to resolve, but my estimate is that in the next few months, we should be able to get a clear resolution around Ajaokuta.

In your presentation you talked about challenges and non-cooperation of some ministries, departments and agencies (MDAs) in carrying out your mandate. Can you list some these MDAs?

You don’t come to a public space as a government agency and then begin to expose our dirty linens in public. I think the challenges majorly from the MDAs is because of the fact that they don’t want to lose control of these enterprises. So, you can something appreciate that fact. But the point is that it actually may be destructive in trying to get the best for these enterprises. These are companies, assets, enterprises, that have resided traditionally under the control of MDAs, so, they are usually very reluctant to lose control or see those assets go into private management or other form of structure. Yes, the resistant can be severe sometimes and the way we try to address this, is to bring the MDAs into the transaction process on a collaborative basis. So, we set up what is called project delivery teams for each of those enterprises and we have key stakeholders, including representatives of the ministries on those project delivery teams, so that they can get a sense of common management of the process of divesting government’s interest in any particular enterprise. So, that has helped significantly in reducing the push back from the MDAs. So, it can be very severe sometimes.

The Lagos Chamber of Commerce and Industry (LCCI) recently disclosed that it expressed interest in the Lagos International Trade Fair Complex. What is the update on the privatisation of the asset?

Yes, the Lagos Chamber of Commerce and Industry (LCCI) did express interest in the Lagos trade fair complex, but our position is that we do not want to engage in any transaction or engage in any process that is not transparent, competitive and open. So, we are not averse to the LCCI being a concessionaire for the Lagos International Trade Fair, but they must subject themselves to the open tender process for the selection of the concessionaire of those asset. They actually wrote to the bureau, asking for us to concede the asset to them, but we said no and that if they are interested, when the bid opens they should submit their bids and it will go through an open, competitive and transparent manner. That is because we need to run away from the accusation of selling government’s assets to vested interests or friends of the government. We should be able to maintain the transparency and integrity of our process, so that we are accused of any under hand dealings. Yes, there is a court case currently on the Lagos International Trade Fair Complex, which was instituted by the former concessionaire. The former concessionaire was a serial defaulter in terms of the concession agreement. As of the time we ejected him out of the complex last year, he was owing the federal government, N6.2 billion in unremitted concession fees and I don’t think that any responsible government would continue to tolerate that. But it goes back to the core of the issue – the process of selecting the private sector investor in those enterprises. If your process does not, through transparency, ensure that the best fit, the best qualified, the most competent core investor emerges as the preferred bidder for the asset, then you are going to have challenges.   

Why are we still having issues with the privatisation of Daily Times and Delta Steel?

Incidentally, I was in the bank when Daily Times was acquired, and the financing proposal by this particular company for Daily Times, was actually brought to the bank for us to finance and we saw that the fellow did not have the technical capacity, the competence and even the integrity to acquire that asset. So, when the process is not structure in such a way that it protects issues around competence, integrity and so forth, you are going to have these kind of outcome we have with Daily Times, which for us is one of the said stories of privatisation.

You also disclosed plan to recapitalise the Bank of Agriculture. What amount are you considering?

The current capitalisation of the Bank of Agriculture is negative. It has negative shareholders’ funds right now. So, we want to recapitalise to the tune of N250 billion for the equity of the BOA. Like I mentioned, the Central Bank of Nigeria (CBN) would own 40 per cent of that N250 billion, the private sector investors would own 20 per cent of that and then the farmers’ cooperatives would 40 per cent.