DIVESTING 95 PER CENT OF NNPC: THE MECHANICS

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Monday comment1

Chijioke Mama argues that there exists a strong case for divestment in the state-oil corporation

 In the wee small hours of President Muhammadu Buhari’s administration, the Central Bank of Nigeria reportedly recommended a divestment of 30 per cent equity in NNPC’s Joint Ventures (JV), to raise about USD 75 billion which could be used to attend to deficit infrastructural needs of the country. That alleged proposition came in 2015 when oil price was at its lowest and when portfolio rationalization by oil majors was trending in the global oil and gas community. That argument – on a cursory look – seemed very brilliant for a state-owned oil behemoth, whose owner-country (a largely undiversified hydrocarbon economy) was already battered by plummeting prices and was also at the brink of an economic recession.

It’s now months to the critical 2019 presidential election in Africa’s largest economy; and a major presidential aspirant Mr. Atiku Abubakar has reportedly announced his intention to divest 95 per cent of the country’s interest in the state-owned NNPC if elected president. The proposition has received ambivalent, albeit even superficial opinion, from professional and street constituencies in Nigeria. Believed to be well experienced in the matter of State Owned- Enterprise (SOE) privatization – which he largely handled as a former Vice-President during the tenure of President Olusegun Obasanjo – many observers retort that this is a noble idea for which Mr. Abubakar (if elected) will see to its effective implementation.

Whether this conversation was started to whip up electoral sentiment (among an electorate that hardly appreciates the core mechanics, the intricacies, hidden benefits and complex risks of the proposed transaction) or as an action borne of a genuine conviction that this is the prudent step to take (more likely); all stakeholders must realize that the benefits or losses to this country in the full or partial privatization of NNPC remains a double-edged argument with multiple dimensions and which cannot be approached from single perspective or singular narrative. With respect to the country’s current condition and inherent complexities, it cannot be said in plain and straightforward terms that privatization of NNPC is a good or bad idea. The case is well dependent on the model, the timing and the approach, as well as, the interplay of other equally important considerations, namely; politics, legislative issues and the perceived influence on the lives of average Nigerians.

From a transaction perspective, diverting up to 95 per cent of NNPC will convert future sovereign income streams into a lump sum income, which then faces the all too common tussle of “prudent use of proceeds” against “profligate use of proceeds”. The important variable here is that the political will to use proceeds prudently, often fail in the face of weak institutional ability to prevent mismanagement. Should Mr. Abubakar become president he would have 1460 days from May 29, 2019 to finish a term. I estimate that the NNPC privatization project will require about 760 working days to finish; deduced from the PHCN privatization that took place from, August 15, 2011 to February 21, 2013. It might be longer if we compare it rather to the NITEL/MTEL privatization that took place from 2001 to 2015. I anticipate that this divestment would lead to a significant drop in government revenue, the magnitude of which will be a function of the prevailing oil price, which may then necessitate an increase in the Petroleum Profit Tax, which may go from 85% to between 90% & 91%; as a counter measure to retain equal or near-equal pre-divestment revenue levels.  Add that risk to possible losses in divestment tax holidays & forfeitures, which may be estimated to reach about $22bn from 2019-2015.

Another important consideration in this proposition would be the attractiveness of NNPC to any circumspect foreign or local investor amidst the unfinished reforms of the oil and gas sector in Nigeria; specifically the uncertainty and politics around the Petroleum Industry Governance Bill (PIGB). The PIGB proposes a solution to unbundle NNPC and create a commercial focus, without outright divestment. When then is the right time to divest, relative to PIGB and what are the anticipated complications? These conditions are capable of making NNPC unattractive altogether or lowering its eventual value in the market, depending on how it would be sold.

Furthermore, variations in stakeholder’s perspective that will originate from the foregoing suggest there will not be any stakeholder consensus on the question of “to sell” or “not to sell”, which ushers in the constitutionality/unconstitutionality tussles (someone will go to court!), union actions (PENGASSAN will have a strong opinion) and lengthy legislative actions.

Stakeholders then need to ask the question of context and proper timing. Are these possible fallouts and their possible distraction to governance desirable and tolerable for a nation that has just become the poverty capital of the world and is also siting on a population explosion time bomb, amidst “state of infrastructure” that is the most pathetic among peers? The answer is neither yes nor no. Also, will proceeds trickle to the 36 states or not for squandering? (Most Nigerian governors like meat pie!), and several states are near bankrupt.

If divestment is not exigent or easily navigable are there low hanging fruits in the sector? Deregulating the downstream sector can save huge spends on subsidies which between 2006 and 2011 was about N3.7trn. Figures for recent years – highly contested and sometimes denied – might even be more worrisome. 

If there is a strong case for the privatization of NNPC, it follows the historical reports of widespread inefficiency within the organization. However the case for a water-tight, corruption -free and well-planned approach to the divestment is as strong, if not stronger. We can take cues from Ecopetrol, Columbia, Pakistan Petroleum & Norway’s Statoil. For the average Nigerian the more noble the idea the less benefits received by the ordinary man, who scarcely feels the impacts of our lofty ideas.  We remember SURE-P, recovered Abacha loot and other so-called savings projects.

Lastly, the citizens should bear in mind that even with the most saintly political will, coupled to the right approach to the transaction; it will naturally take a long time before any proposed use of proceeds begins to yield benefits for the ordinary man. That is if we do not read disheartening accounts in the news, how proceeds went unaccounted.

 Mama is a Transaction Advisor, the Founder of Meiracopp Nigeria Limited & a Doctoral Researcher in Business Management